Mexico Justice Often Ensnarls U.S. Investors

Marina del Rey lawyer Edward Benigno leased oceanfront property in lovely Cabo San Lucas seven years ago to build a hotel and restaurant that he imagined would be the first in a small but profitable chain of resorts in Mexico.

Benigno inaugurated his Papagallo restaurant in 1989. But instead of a hotel, the rest of the $6 million intended for his dream project has paid for three sets of Mexican attorneys and lawsuits that never seem to end.

The trouble started when Benigno sublet land to vendors. They soon became squatters. He took them to court and even won the case last January, but thanks to legal delaying tactics, the squatters are still there.

“I am at the end of the economic line,” Benigno said. “I have spent all my money fighting. It’s unjust for the president to let this happen when he invited me here with a new law to invest.”

During five years in office, President Carlos Salinas de Gortari has flung open Mexico’s doors to foreign businesses and changed laws to attract foreign investors. For big business, especially, Mexico has become a great deal. Seeking a North American Free Trade Agreement (NAFTA), the government has bent over backward to help foreign corporations.

But for individual investors and entrepreneurs, Mexico still can be a minefield of red tape, laws and business practices that they don’t understand. And if they encounter problems and turn to the courts here, they find an unfamiliar and often corrupt justice system.

Many see NAFTA, which is facing an uphill battle for approval in the U.S. Congress, as their best chance to muster influence over an unresponsive judicial system. They hope that spotlighting mistreatment of foreign investors will embarrass the Mexican government into resolving their troubles.

Phoenix businessman Charles Harris believes the Mexican legal system is so corrupt that he has offered a $300,000 reward to anyone who can collect an 11-year-old unpaid loan in Mexican court without bribing or unduly influencing the judge.

Americans may come south to buy relatively inexpensive property for a comfortable retirement. They may be adventurers looking to make a fast buck in a growing economy, or average entrepreneurs seeking a good investment. They buy land, take up with Mexican partners, start new companies. While many are quite successful, others lose their fortunes to fraud and the Mexican legal system.

Or, in some cases, to the fact that they’ve left their business sense at the border.

Americans in the United States rarely buy anything bigger than a car without employing an attorney. But in Mexico, they may make major deals without even talking to a lawyer.

“Deals begin like marriage,” said Mexico City attorney Carlos Bernal, who has many foreign clients. “Everything is beautiful at first. Foreigners bring the know-how and Mexicans bring the know-who. Often the foreigner relies on the Mexican partner to make the deals. Perhaps they don’t talk enough beforehand.”

Americans often come to Mexico without the basic preparation to do business, say U.S. officials and Mexican lawyers. Often, they barely speak Spanish and they don’t understand Mexican markets.

“They feel somewhat helpless and decide to trust, in part because the statistics show that, in most cases, Mexicans prove trustworthy,” said a U.S. official who asked not to be further identified.

The official described the case of a mid-size California agricultural company that formed a joint venture with a Mexican business, but without using a lawyer. When it came time to separate, the California company was unhappy with the financial settlement.

“They wanted the U.S. Embassy to send in the cavalry, but the terms were there in the agreement,” the official said.

The U.S. Embassy tells potential investors never to pay bribes, but in practice, entrepreneurs often find they cannot do business without doing so.

Many problems that face Americans begin in the provinces, where the legal system is more capricious. Government officials committed to Salinas’ economic reform program keep a close eye on business practices in the capital, making fraud--and subsequent legal corruption--more difficult in Mexico City.

But officialdom has less control over some of the smaller cities, where the top Mexico City law firms also have less influence. Bernal’s firm, Noriega y Escobedo, is well known in the capital and has trustworthy contacts in other big cities. When it comes to the mid-size and smaller towns, however, Bernal says: “Things are not easy, whether you’re from Los Angeles or Mexico City. . . . I am a foreigner out there.”

In small towns, lawyers may be litigating against their cousins or old law-school buddies. Judges may be family friends. This leads many Americans to believe that they don’t have a chance of winning in Mexican courts.

Phoenix businessman Harris was looking for a way to get his money out of Mexico in 1982 after then-President Jose Lopez Portillo nationalized the banks and prohibited dollar withdrawals.

Harris agreed to lend the American director of a Spanish language school in Michoacan state about $110,000 in pesos--the amount in Harris’ Mexican bank account--for repayment in dollars. He never got a dime back.

“I was very easy to fool. I had four months of Spanish language and zero months of Mexico law,” Harris said.

Harris says he was abducted in 1984, hit over the head and warned to quit trying to collect his money from the school director and his well-connected Mexican wife. He has gone through four lawyers, including one who drew up a fraudulent loan document and another who tried to recover the money for himself.

Although the loan was made in Mexico, Mexican courts have ruled that they have no jurisdiction. The loan papers were drawn up as if they had been signed in the United States, a move one attorney had suggested to help Harris avoid local litigation. U.S. courts, meanwhile, have said they have no jurisdiction over a deal in Mexico.

Harris has given up trying to collect the money himself. He said he believes the task is so impossible that his offer of a $300,000 reward to anyone who succeeds in collecting the loan legally amounts to the original sum plus interest.

Another Arizona businessman, John Freeman, wishes he had given up years ago on his Mexican legal battle, before he spent 25 days in a Mexican jail.

In 1965, Freeman and a Mexican partner homesteaded a volcanic ash mine in Sonora. They applied for a title in the Mexican partner’s name because foreigners could not own land so close to the international boundary.

They still had not received it when another businessman, Jose Roselle, offered to get the deed from Mexico City as a way of settling a $9,000 debt to Freeman.

“He came back in three weeks with the title in his (own) name,” Freeman said.

Freeman filed suit on both sides of the border against the Roselle family. In 1984, a U.S. court ordered the Roselles to sign away their rights to the mine.

But the battle resumed in 1987, when Freeman found a buyer for the property. A well-connected Mexican lawyer filed yet another claim against the land and, Freeman says, pulled strings to have him arrested as a form of harassment.

Freeman was released and charges were dropped, but officials closed the mine until the lingering dispute could be resolved.

Even when Americans do win in Mexican courts, they say it is for the wrong reasons.

Half a dozen U.S. retirees are among 23 families whose lakefront property in the village of Jocotepec, near Guadalajara, has been in dispute for six years. A Guadalajara attorney sued, claiming that he owned the land.

The Americans spearheaded the drive to win the case. Playing on Mexican sensitivities during free-trade talks, they went to the press. On March 31, the judge found in their favor.

“The publicity was what did it,” said homeowner Louise Bayly. She adds that the seller, who was sued separately, lost his case even though “his evidence was just as good as ours.”

* MEXICO CRACKDOWN: Small businesses say they suffer from new trade curbs. D1