The Brazilian Code of Civil Procedure (Federal Law No. 13,105/15) lists in its articles 879 and 880 the events for forced sale of assets of the judgment debtor in the course of lawsuits. These are the award, sale by private initiative, and, further, the electronic or in-person judicial auction. In accordance with the procedural regulations in force, in cases where there is no interest on the part of the judgment creditor in the award of the asset, sale by private initiative is now admitted, in preference to an auction.

This instrument is a novelty introduced by the Code of Civil Procedure to speed up the resolution of disputes and rises judgment creditor’s autonomy, since it can convert the pledged asset into cash, seeking buyers to satisfy his claim. However, the procedures of the sale by private initiative still raises doubts (including practical), due to the existence of legislative gaps, especially in relation to real estate matters. This is due to the fact that the Code of Civil Procedure is silent on important issues for real estate transactions. For instance, the valuation of the property or the nature of the acquisition (original or derived), which may entail the assumption of an encumbrance by the acquirer, among other points highlighted below.

According to the legal rules, the judgment creditor may request award of the asset pledged in the ongoing lawsuit itself. This means that the creditor will replace the obligation to pay in cash with its own pledged asset, appropriating it as a way to satisfy the claim. However, if the judgment creditor has no interest in the award it may request the sale of the property to a third party, which may be done directly or through a real estate broker or an auctioneer accredited by the judicial body (which should not be confused with a purely judicial auction, dealt with starting from article 881 of the Code of Civil Procedure). If there is no interest in sale by private initiative, the sale shall be done through the model of an in-person or electronic auction. Thus, the traditional auction continues to be an option, but applicable secondarily if there is no interest on the part of the judgment creditor in the award of the asset or in a sale by private initiative.

Article 880 of the Code of Civil Procedure establishes that the procedure for disposal by private initiative shall be governed by the judge of the case. This means that the procedure and the practical application of the sale of the asset may vary according to each judge, who shall order: (i) a term for disposal; (ii) the form to give publicity to the sale; (iii) the minimum price; (iv) the terms of payment (v) request for guarantees; and (iv) the brokerage commission, if applicable. The judge will also sign, together with the purchaser and the judgment debtor (if it is present), the letter of sale and the reinstatement of possession order, which will represent the transfer titles of the property, to be recorded with the relevant Real Estate Registry Office, together with the proof of payment of the Real Estate Transfer Tax (ITBI).

Although divestiture by private initiative has preference over judicial auction, the rules governing this process are limited to the provisions of article 880, while auctions, a traditional form of divestiture in lawsuits, has much more robust regulations. There is no clear provision regarding the possibility of secondary application of the provisions dealing with auctions (ee.g., whether the person prevented from participating in a judicial auction, listed in article 890 of the Code of Civil Procedure, cannot carry out the acquisition on their own initiative either) in divestitures on their own initiative, which gives rise to doubts, in addition to making the aforementioned sale almost entirely governed by the judge.

By way of illustration, some of the main shortcomings of private initiative disposal are highlighted:

  • Need/requirement for the judge to make the divestiture offer public (e.g. via public notice) to confirm the existence of interested third parties;
  • Express possibility for the judgment debtor, debtor or interested third party to request disposal, regardless judgment creditor's agreement; and
  • Objective criteria for the judge to establish a minimum sale value (e.g. requirement for appraisal or use of the municipal value plan, in the case of urban real estate).

In general, despite of the existence of various scholarly currents, the Judiciary standing has been bold in this sense, i.e. waiving the public notice as a requirement to the sale (which, in fact, would make the process lengthy and bring it closer to a traditional auction). In addition, requests for disposal by the judgment debtor or third parties, provided that it is with the consent of the judgment creditor, have been allowed. Undoubtedly, the most controversial point, however, is the valuation of the asset attached, for which case law has not yet been settled.

In addition to the points highlighted, from a real estate perspective, one of the main issues concerns the nature of a sale by private initiative. This is because, although it is a judicial sale, it is requested (most of the time) by the plaintiff in the action, and the terms and conditions are settled for by the judge, who directs the entire sale procedure. Given that, one debates whether or not existing propter rem encumbrances and/or debts would be enforceable against the purchaser/bidder of the asset, even if the procedure takes place entirely in a judicial sphere.

In relation to this issue, on February 14 of this year, when the Superior Court of Appeals (STJ) ruled on Special Appeal 929.244-SP (which deals with the enforceability of Real Estate and Urban Territorial Tax (IPTU) debts against the purchaser), it held that such a disposal is comparable to a public auction, given that it is "a joint sale of the asset seized, under judicial supervision, although with simpler procedures.” Thus, according to this decision, the sale by private initiative means an original acquisition of a real estate (i.e. a new property, not related to any issue or debt related to the prior owner), which is why the acquirer receives the property free of encumbrances and debts.

Another point that deserves to be highlighted is the possibility of applying the sale by private initiative in labor actions. In these lawsuits, the Code of Civil Procedure is applied in a secondary manner, but Decree-law No. 5,452/43, the Consolidated Labor Laws (CLT), in article 888, also regulates the matter, only in a different manner. The article stipulates that private disposal is only possible if there are no bidders at the auction.

In this sense, the prevalence of the principle of the specialty of labor law over subsequent supplementary legislation is discussed. The Judiciary has taken the position to allow application of the Code of Civil Procedure, that is, private sale before the auction, focusing on procedural economy and speed in the process, although there is also a current (minority) position that argues for application of the CLT.

Overall, the sale by private initiative aims to give dynamism to legal proceedings, to make the sale of pledged assets more efficient and less bureaucratic. However, the coercive disposal of assets may soon come up against legislative loopholes and divergent views on the application of the suitable legislation. There is a risk of this procedure to be challenged in its validity and, consequently, give rise to undesirable legal uncertainty, especially for the purchaser of property sold under such conditions.