In
a major decision interpreting chapter 15 of the Bankruptcy Code, Judge Harlin
Hale has denied recognition of the provisions of the “Concurso” order obtained
by Vitro, SAB in Mexico which would have released the liability of its
non-bankrupt U.S. subsidiaries. The
Court carefully avoided any rulings which would have cast aspersions upon the
Mexican legal proceedings while finding that U.S. law would not recognize the
specific provision. In re Vitro, SAB,
No. 11-33335 (Bankr. N.D. Tex. 6/13/12).
The opinion can be found here.
What Happened
Vitro
S.A.B. de C.V. is a holding company formed in Mexico in 1909. It operates its business through a network
of subsidiaries. It is the largest
manufacturer of glass containers and flat glass in Mexico and its name is
Latin for glass. Vitro borrowed
approximately $1.225 billion in unsecured notes which were guaranteed by
virtually all of its subsidiaries.
Vitro also agreed to repay approximately $2.0 billion to its
subsidiaries under circumstances which raised questions from its third party
creditors.
When
the global recession hit in 2008, Vitro could not pay its debts. In November and December 2010, proceedings were filed in four
different jurisdictions seeking to address the Vitro debts.
1.
On
November 17, 2010, some of Vitro’s American creditors filed involuntary
petitions against fifteen of Vitro’s American subsidiaries in the Bankruptcy
Court for the Northern District of Texas.
Ultimately, four of the debtors consented to relief and an additional
two debtors filed voluntary petitions.
2.
On
December 2 and 9. 2010, Vitro’s American creditors filed suit against Vitro and
49 of its subsidiaries in state court in New York.
3. On December 13, 2010, Vitro filed a a
voluntary judicial reorganization proceeding under the Ley de Concursos
Mercantiles (the “Mexican Business Reorganization Act”) in the Federal
District Court for Civil and Labor Matters for the State of Nuevo León, the
United States of Mexico, seeking approval of a pre-packaged, “concurso”
restructuring plan.
4.
On
December 14, 2010, Vitro filed a chapter 15 proceeding in the Bankruptcy Court
for the Southern District of New York.
While these
filings set up the multinational squabble, this was only the beginning. In Mexico, the pre-pack was rejected based
on a finding that the subsidiaries were not entitled to vote. The initial chapter 15 petition in New York
was withdrawn after this filing. On
appeal, the Mexican court reversed and allowed the subsidiaries to vote. A new chapter 15 proceeding was filed in New
York. However, the New York chapter 15
proceeding was transferred to the Bankruptcy Court for the Northern District of
Texas. The Bankruptcy Court for the
Northern District of Texas granted a preliminary injunction against proceedings
against the Vitro parent but not the subsidiaries. The American creditors sought an order
prohibiting the American subsidiaries from voting upon the Mexican concurso but were rebuffed.
The Mexican concurso was ultimately approved based upon the votes of the
subsidiaries. The concurso provided that the guarantees of the subsidiaries could not
be enforced. Thus, the subsidiaries
were able to vote in favor of a plan which released their guarantees. This set the stage for the Mexican
representative of Vitro to seek an order from the Bankruptcy Court for the
Northern District of Texas recognizing the concurso
and enforcing the order to release the subsidiaries from their guarantees.
To
summarize:
1.
Vitro
borrowed over a billion dollars guaranteed by its subsidiaries.
2.
Vitro
filed a pre-packaged bankruptcy plan in Mexico.
3.
Vitro’s
pre-pack was approved based on the votes of its subsidiaries.
4.
The
Mexican plan released the subsidiaries from liability.
5.
The
Bankruptcy Court for the Northern District of Texas was asked to recognize the
order from the Mexican Court.
The Comity Question
This left the
Bankruptcy Court with a difficult question:
should it enforce the Mexican concurso
as a matter of comity or was there a countervailing rule under American
law? Fortunately for the court, chapter
15 provides some guidance. Under
section 1507(b), an American bankruptcy court may provide “additional
assistance” to a foreign debtor, but only if five conditions are met, including
that American creditors are treated
fairly and the distribution scheme is substantially the same as provided under
title 11. Additionally, section 1506
allows the Bankruptcy Court to decline to enforce the order of a foreign court
if it would be manifestly contrary to the public policy of the United States.”
Whether to
recognize a foreign court order under section 1507(b) is largely a matter of
comity. While comity and comedy sound
very similar they have strikingly different meanings. According to Judge Hale:
Comity should be the Court’s primary consideration when applying § 1507(b). (citation omitted). Comity has been defined as the “recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protections of its laws.” (citation omitted). Granting comity to judgments in foreign bankruptcy proceedings is appropriate as long as U.S. parties are provided the same fundamental protections that litigants in the United States would receive.
. . . “The principle of comity has never meant categorical deference to foreign proceedings. It is implicit in the concept that deference should be withheld where appropriate to avoid the violation of the laws, public policies, or rights of the citizens of the United States.” (citations omitted).
Opinion, pp. 7-8.
In ruling upon the parties’
contentions, the Court divided its ruling into objections it rejected,
objections it sustained and issues it did not reach.
The Court rejected the argument
that it should not enforce the Mexican order because of corruption in
Mexico. While the creditors’ expert
presented evidence of corruption in Mexico in general, it did not connect this
to the specific case. Additionally, the
objecting creditors’ expert on Mexican law testified that in forty years’
practice, he had never bribed a judge.
While the Court’s conclusion appears to be sound, as well as avoiding
offense to America’s neighbor to the south, the implicit suggestion that
corruption should be proved by bringing testimony from a witness who has
personally participated in corruption is a bit unsettling.
The Court also dismissed a number
of arguments based on fairness and compliance of Mexican law on the basis that
these were issues best left to the Mexican court system.
However, in the end, the Court
concluded that American law would not allow a plan of reorganization which granted
wholesale releases to non-debtor parties.
The Court stated:
Generally speaking, the policy of the United States is against discharge of claims for entities other than a debtor in an insolvency proceeding, absent extraordinary circumstances not present in this case. Such policy was expressed by Congress in Bankruptcy Code Section 524, and in numerous cases in this circuit. (citations omitted). This protection of third party claims is described both in terms of jurisdiction and also as a policy. (citations omitted).The Fifth Circuit has largely foreclosed non-consensual non-debtor releases and permanent injunctions outside of the context of mass tort claims being channeled toward a specific pool of assets. (citations omitted).
Opinion, p. 25. The Court ultimately concluded that the
guarantor release provision of the concurso
was contrary to American law and should not be enforced. While the Court’s conclusion may be sound,
it is curious that the Court did not discuss case law out of the Northern
District of Texas allowing a plan to enjoin pursuit of claims against a
non-party who contributes property necessary to the success of a plan which was
approved by the creditors and will pay unsecured creditors 100% of the amount
of their claims. In re Bernard Steinhard Pianos USA, Inc., 292 B.R. 109 (Bankr. N.D. Tex. 2002); In re Seatco, Inc., 257 B.R. 469 (Bankr. N.D. Tex. 2001). Perhaps the
Court felt that those cases were too far different from those of Vitro. However, an acknowledgement of what would
constitute “extraordinary circumstances” would have been welcome.
The bottom line here is that
comity is a good thing, but not when it means an end run around American law as
applied to American creditors of an American subsidiary of a foreign company.
The Fifth Circuit has approved a direct appeal and has temporarily stayed enforcement of the decision.
