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The Due Dilligence Of the Trustee in Real Estate Projects

On December 9th, 2020, the Civil Decision Chamber of the Superior Tribunal of Bogotá (“Tribunal”) entered a judgment, as an appeal’s court, in the case initiated by Karen Andrea Vargas Ramirez and other (“Plaintiffs”) v. Fiduciaria Bancolombia S.A. (“Trustee”) and others. In this case, the Tribunal partially reversed the judgment entered on September 10th, 2019 by the Delegation for Jurisdictional Functions of the Financial Superintendence of Colombia (“SFC”). Hereafter, we will present the background and arguments that lead the Tribunal to entered such judgment.

The Plaintiffs requested the SFC to order the Trustee and/or the Balsillas de Tolú Trust to (i) reimburse the amount paid by the Plaintiffs as a down payment in the purchase of two real estate units of the real state project Balsillas de Tolú (“Project”); (ii) pay the current banking interest caused from the date initially agreed for execution of the public deed of transfer of the promised real estate, and (iii) a compensation for damages.

The Plaintiffs' alleged that the Trustee was not diligent in the risk analysis performed on the Project. Likewise, the Plaintiffs pointed out that the Trustee did not execute the corrective measures aimed to prevent a breach by the developer. Finally, Plaintiff’s questioned the due diligence carried out by the Trustee on the developer, considering in their opinion, it did not verify the developer’s financial capacity nor its capability to develop the Project.

The SFC entered judgment, in favor of the Trustee considering in its judgment, that the Trustee applied the appropriate procedures to evaluate and assess the risk of the Project, as well as its viability according to the SFC Resolution N. 007 of 1996 (in Spanish, Circular N.007 of 1996).

In its judgment, the SFC established the Trustee’s reviewed the developer’s financial statements, ascertain the existence of two bank loans for the Project’s execution and the urban development and construction licenses, and, finally, carried out due diligence on the property's tradition and the origin of the funds.  Activities which, in the words of the Trustee, made it possible to establish that the Project had a tolerant credit risk rating. This argument was accepted by the SFC

Additionally, for the SFC, the reimburse of the resources invested in the Project by the Plaintiffs was not an attribution of the Trustee but one of the developer, who was not part of the lawsuit.

Based on the foregoing, the SFC did not found any grounds for a Trustee’s contractual breach and insisted that the nature of the Trustee’s obligation was of means and not of results.

Plaintiffs appealed the SFC’s judgment before the Tribunal claiming that the Trustee failed to act with the required degree of diligence for this type of operations. Hence, the Tribunal review the SFC’s judgment and partially reversed it based on the following arguments:

  1. Although the Trustee conducted a financial, real estate and compliance due diligence of the Project and the developer, the Trustee failed to ascertain the professional background, expertise and managerial suitability, skills that, in the opinion of the Tribunal, the Trustee was required to ascertain as part of its duty to foresee the different risks that may affect the business.
  2. The Trustee did not prove the adoption of necessary measures to ensure the compliance of the purpose of the trust, specifically with respect to the delay in the execution of the Project and the transfer of resources to the developer despite such delays.
  3. The Trustee did not protect the trust assets considering the real estate property in which the Project was supposed to be developed, is now abandon and has become a source of insecurity.

Considering the aforementioned, the Tribunal ordered the Trustee to reimburse the Plaintiffs the down payments plus the current banking interests accrued from the date of the bank wire to the Trustee’s bank account.

This holding is relevant for the trust sector since the Tribunal’s establishes a position regarding the scope of the trustee’s obligations in the development of real estate projects. Meanwhile the SFC’s judgment identifies a very different position on the same matter. The foregoing makes this ruling of great relevance for financial and real estate law and will undoubtedly open the space for a deep debate that may impact the trustee’s involvement in real estate projects.

Authors

Portrait of Laura Ospina, LL.M.
Laura Ospina, LL.M.
Associate
Bogotá
Juan Camilo Rodriguez Tinoco
Associate
Bogotá
Portrait of Sara Lucía Vanegas
Sara Lucía Vanegas
Associate
Bogotá