Fifth Circuit Declines to Apply Judicial Estoppel to Inconsistent Creditor Claims in Subsequent Case

The Fifth Circuit has added a new decision to its judicial estoppel jurisprudence, holding that a creditor that submitted claims in different amounts in successive cases was not estopped.   While it may seem that the court is applying the estoppel doctrine in an uneven manner, penalizing debtors but not creditors, the decision faithfully follows the elements laid out by the court.    Wells Fargo Bank, N.A. v. Oparaji (Matter of Oparaji), No. 11-20871 (5^th Cir. 10/5/12), which can be found here.   

What Happened

The Debtor Titus Chinedu Oparaji filed a chapter 13 proceeding on September 2, 2004 (“First Case”).   During the First Case, he fell behind on his mortgage payments to Wells Fargo.   Over time, Wells Fargo filed several amended claims and the Debtor filed several modified plans.   The amended claims filed by Wells Fargo understated the amount of the post-petition arrearages.  When the Debtor failed to complete his plan payments within five years, the First Case was dismissed.

After the First Case was dismissed, the Debtor continued to miss payments to Wells Fargo.  On February 1, 2010, the Debtor filed his second chapter 13 case (“Second Case”).   By this time, the arrearage owed to Wells Fargo had grown to $86,003.25.   The Debtor argued that based on the claims filed in the First Case that the arrearage could not possibly be that high.   The Bankruptcy Court found that Wells Fargo was bound by the claims filed in the First Case under the doctrine of judicial estoppel and the District Court affirmed.

The Ruling

The Fifth Circuit reversed, finding that Wells Fargo had not “asserted a legally inconsistent position that was accepted by the Bankruptcy Court.”   Opinion, p. 6.   

The elements of judicial estoppel are: (1)  a party asserts a legal position that is “plainly inconsistent” with the position taken in another case; (2) the court in the other case accepted the party’s original position; and (3) the inconsistent positions were not taken inadvertently.

The Court found that a creditor who files a post-petition claim in one case is not estopped from asserting a higher claim in a subsequent case.   Under section 1305(a), a creditor may file a post-petition claim but is not required to.   This contrasts with the common scenario where a debtor omits an asset.   While a debtor must list all assets in its schedules, the creditor is not under a duty to amend its proof of claim to include post-petition arrearages.   

The Debtor argued that while Wells Fargo was not required to file a post-petition claim, that once it did so, it was required to include all post-petition amounts.   The Fifth Circuit distinguished the Oparaji case from In re Burford, 231 B.R. 913 (N.D. Tex. 1999).  In Burford, the confirmation order required the creditor to create a payment schedule that would “fully retire the debt.”   However, in this case, the creditor submitted a claim without expressly representing that there were no additional amounts owing.

Because Wells Fargo never asserted that the amount contained in its post-petition claim constituted all the amounts owed, the Fifth Circuit found that it had not asserted inconsistent positions.   As a result, judicial estoppel did not apply.    The Court went further and found that even if Wells Fargo had asserted inconsistent positions, the dismissal of the First Case meant that the parties were returned to their position status quo ante.  

What It Means

Judicial estoppel is meant to prevent parties from gaming the system. While, on the surface, it might appear that Wells Fargo took inconsistent positions, its inconsistency was not legally significant.  Wells Fargo’s only fault was that they did not assert their rights in the First Case as aggressively as they could have.   Had the Debtor completed its plan in the First Case, the parties and the Court would have had a difficult time sorting out which post-petition defaults were included in the plan and which ones were not.   Had the Debtor filed an “all current” motion at the conclusion of its plan and obtained an order, it could have bound Wells Fargo.  However, neither one of these occurred.   The Debtor did not complete its plan and it did not obtain a determination that it was current on its mortgage.   

As a general rule, a dismissed case should rarely, if ever, give rise to judicial estoppel.   By definition, a dismissed case is one in which no party obtains relief (although the debtor enjoyed the benefits of the automatic stay for a period of time).    If a party does not obtain relief, then it is hard to say that the court accepted the party’s position in any meaningful respect.   The real benefit of this case may be for debtors who omit a creditor or an asset in an initial case and then accurately disclose it in a subsequent case.   In that instance, Oparaji should be good precedent that judicial estoppel will not apply.

Pilgrim's Pride Opinion Allows Enhancements in Bankruptcy, Offers Comprehensive Overview of Bankruptcy Fees

The Fifth Circuit has affirmed a $1 million fee enhancement to a chief restructuring officer who achieved results described as “rare and exceptional.”  Matter of Pilgrim’s Pride Corp., No. 11-10774 (5^th Cir. 8/10/12).   The opinion can be found here.   The Court rejected the argument that a recent Supreme Court opinion on fee shifting precluded enhancements and, in the process, set forth a comprehensive framework for allowance of professional fees in bankruptcy.   Curiously, the opinion did not mention the Court’s opinion in Matter of Pro-Snax Distributors, Inc., 157 F.3d 414 (5^th Cir. 1998).

What Happened

When Pilgrim’s Pride Company filed for chapter 11 relief in December 2008, its prospects did not look good.   It had lost about $1 billion the previous fiscal year and was incurring negative cash flow of $300 million a year.   The Debtors anticipated that unsecured creditors would receive, at best, a debt for equity swap, and that equity would be cancelled. 

  

CRG Partners, LLC was engaged as chief restructuring officer.    Just over a year later, the company confirmed a plan which paid all secured and unsecured creditors in full and distributed equity interests valued at $450 million to the pre-petition shareholders.   

After the plan was confirmed, CRG requested that it be allowed compensation of $5.98 million plus an enhancement of $1 million.    The Debtor’s Board of Directors supported the enhancement.   The U.S. Trustee objected to the enhancement on the basis that CRG had already been adequately compensated through its lodestar-calculated fee.   The Bankruptcy Court denied the request for enhancement based on Perdue v. Kenny A. ex rel. Winn, 130 S.Ct. 1662 (2010).   The District Court reversed, finding that Perdue was not binding in the bankruptcy context.

On remand, the Bankruptcy Court approved the enhancement and the U.S. Trustee appealed.    The UST argued that Perdue precluded the enhancement.   The Fifth Circuit rejected the Trustee’s position and affirmed the Bankruptcy Court order approving the additional award.

An Overview of Professional Fees

In reaching its conclusion that enhancements remained viable, the Court of Appeals provided an extensive discussion of the history of awards of professional fees in the Fifth Circuit.   Under the Bankruptcy Act, courts in the Fifth Circuit applied the twelve Johnson factors, which included such requirements as the time and labor required, the novelty and difficulty of the questions, skill required, undesirability of the case and reputation of the attorneys.    In re First Colonial Corp. of America, 544 F.2d 1291, 1298-99 (5^th Cir. 1977), quoting Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 (5^th Cir. 1974).   (Attorneys of a certain level of experience will remember preparing fee applications reciting the twelve Johnson/First Colonial factors even though many of them were usually irrelevant to the specific case).   While Johnson was a civil rights case, the First Colonial court found the factors to be “equally useful whenever the award of reasonable attorneys’ fees is authorized by statute.”     Id. at 1299.   While the same factors might be applicable, bankruptcy courts were advised to make awards at the lower end of the spectrum in light of the “strong policy of the Bankruptcy Act that estates be administered as efficiently as possible.”    Id.

The lodestar method was recommended by another Act case, In re Lawler, 807 F.2d 1207 (5^th Cir. 1987).    Under the lodestar method, the Court determines a reasonable number of hours multiplied by a reasonable rate and then adjusts the resulting fee up or down based upon the other Johnson factors.

When section 330(a) was adopted as part of the Bankruptcy Code, it retained the overall framework of compensation under the Act, but rejected the “economy of the estate” limitation.   This meant that bankruptcy lawyers could be compensated at the same rate as other skilled professionals.   

Section 330(a) was amended in 1994 to include a list of six non-exclusive factors to be considered in awarding compensation and two instances in which the court should deny compensation.    Notwithstanding the statutory definition, the Fifth Circuit found that the prior case law and the statutory provisions provided a complimentary framework.

Following the Bankruptcy Code’s enactment, we made clear that the lodestar, Johnson factors, and §330 coalesced to form the framework that regulates the compensation of professionals employed by the bankruptcy estate.   (citation omitted).   Under this framework, bankruptcy courts must first calculate the amount of the lodestar.   (citation omitted).    After doing so, the courts “then may adjust the lodestar up or down based on the factors contained in §330 and [their] consideration of the factors listed in Johnson.”   (citation omitted).    We have also emphasized that bankruptcy courts have “considerable discretion” when determining whether an upward or downward adjustment of the lodestar is warranted.

Opinion, at p. 8.   

The Court also conducted an historical analysis of fee enhancements in bankruptcy, finding that, although they were extraordinary, they had been allowed under both the Bankruptcy Act and the Code.    The Court noted that 

(I)f enhancements were possible when fees were awarded “at the lower end of the spectrum of reasonableness,” then they surely remained possible after that ceiling was removed and the statutory text was otherwise unchanged.

Opinion, at p. 13.    The Court’s point is that because the Bankruptcy Act allowed enhancements despite the focus on economy of administration that it would be reasonable for enhancements to be allowed under the more liberal provisions of the Bankruptcy Code.

In conclusion, the Court ruled that enhancements were a part of the process of upward or downward adjustment of the lodestar and remained available in extraordinary situations.

In sum, we have consistently held that bankruptcy courts have broad discretion to adjust the lodestar upwards or downwards when awarding reasonable compensation to professionals employed by the estate pursuant to § 330(a). However, this discretion is far from limitless. Upward adjustments, for instance, are still only permissible in rare and exceptional circumstances--such as in Rose Pass Mines and Lawler, where the applicants had provided superior services that produced outstanding results--that are supported by detailed findings from the bankruptcy court and specific evidence in the record.

Opinion, at 15.

Sub Silentio and the Rule of Orderliness 

Having concluded that enhancements remained viable, the Court turned its attention to whether the Supreme Court had “unequivocally, sub silentio overruled our circuit’s bankruptcy precedent.”   Opinion, p. 15.  

 

In Perdue, the Supreme Court rejected a request for an enhancement in a civil rights case.   In interpreting the term “reasonable fees” under 42 U.S.C. §1988, the Supreme Court noted that the courts had initially applied the twelve Johnson factors, but had transitioned to a lodestar approach in order to “cabin() the discretion of trial judges.”    The Supreme Court concluded that enhancements could be allowed under section 1988, but only where the hourly rate used in the lodestar calculation did not adequately measure the attorney’s true market value, where the litigation involved an “extraordinary” outlay of expenses and where there was an “exceptional delay” in payment, especially where that delay was due to the defense.    The Court also noted that in civil rights cases, the presumption should be against an enhancement because defendants would be less likely to settle if faced with an open-ended fee request and because civil rights judgments were often paid by the public rather than the defendant. 

  

The Fifth Circuit found that Perdue did not apply in the bankruptcy context.   Relying on the rule of orderliness, as recently articulated in Technical Automation Services Corp. v. Liberty Surplus Insurance Corp., 673 F.3d 399 (5^th Cir. 2012)(which held that Stern v. Marshall did not implicate the authority of Magistrate Judges), the Fifth Circuit found that Perdue was not directly on point and therefore did not compel the Court to abandon its prior precedent.   Among other things, the Court found that bankruptcy fee requests did not entail the same settlement considerations as civil rights cases and that the bankruptcy estate rather than the taxpayer would be paying the fees. 

 

The Court also noted that while the term “reasonable fees” in section 1988 offered little guidance to courts, that section 330(a) of the Bankruptcy Code contained detailed criteria for awarding fees.   

As a result, the Court concluded that until rescinded by a higher authority, fee enhancements were still possible in bankruptcy.   As a result, the Court affirmed the bankruptcy court’s enhanced fee award to CRG Partners.

What It Means

In the particular case, Pilgrim’s Pride means that a particular professional was recognized for doing an extraordinary job.    In the larger context, Pilgrim’s Pride is significant for what its historical analysis said for what it left unsaid.    

From an historical perspective, Pilgrim’s Pride evidences the development of bankruptcy law as its own discipline.    As of 1977, both bankruptcy law and civil rights law followed the twelve Johnson factors.   In the intervening 35 years, bankruptcy has developed its own body of fee jurisprudence.    While both bankruptcy law and civil rights law moved from the Johnson factors to a primarily lodestar based approach, Congress saw fit to define bankruptcy standards in more detail.     The Pilgrim’s Pride decision recognizes that bankruptcy fees fulfill a different role than fees in civil rights cases.    While the Court did not fully articulate it, I believe the difference is this.   Bankruptcy is inherently a collective process in which scarce resources are marshaled for the benefit of the creditor body and (in some cases) equity.    Allowing enhanced fees in rare cases provides incentives for professionals to take on difficult cases and be recognized when they deliver superior results.   Civil rights cases, on the other hand, are focused on compensating a harm and are a zero sum proposition.   Every dollar paid to the plaintiffs and their attorneys is a dollar taken away from the defendants and, by extension, the taxpayers.    While civil rights actions should incentivize government actors to obey the law in future cases, this function is secondary to compensating the wronged individual.    In a bankruptcy case, the professional may not only allocate scarce resources according to an ordered scheme of priorities, but may actually increase the pool of resources.   In a civil rights case, it seems that counsel is focused on obtaining an equitable transfer of resources from one party to another.    

Pilgrim’s Pride also curious because it does not mention the requirement that a professional demonstrate an “identifiable, tangible and material benefit to the bankruptcy estate” as required by In re Pro-Snax Distributors, Inc. in order to be compensated.   There is a tension between Pro-Snax and section 330(a)(4)(A)(i)(I) which mandates denial of fees for services not “reasonably likely to benefit the debtor’s estate.”   There is a significant difference in requiring that services be “reasonably likely” to benefit the estate as opposed to actually yielding an “identifiable, tangible and material benefit.”    In the one instance, compensation is based on whether the services appeared to be reasonable at the time, while the other makes compensation contingent on results.    Pilgrim’s Pride discusses the Johnson factors, the lodestar test and the statutory provisions of section 330(a), but does not discuss Pro-Snax.  Judge Carl Stewart, who authored Pro-Snax, was on the panel that decided Pilgrim’s Pride.

It is certainly possible that the panel did not see the need to discuss Pro-Snax for the reason that Pilgrim’s Pride was a case involving not just an “identifiable, tangible and material benefit,” but an extraordinary one at that.    However, given the Court’s comprehensive discussion of the framework for fees in bankruptcy and its contrast with fees in civil rights cases, the actual results requirement would seem to be a reasonable thing to mention.   

My personal opinion (which is partially motivated by self-interest) is that the Pro-Snax panel never intended to impose an actual results requirement.    The Pilgrim’s Pride opinion discusses how “the lodestar, Johnson factors, and §330 coalesced to form the framework that regulates the compensation of professionals employed by the bankruptcy estate.”    Under Johnson, results were one of twelve factors to be considered.   Under section 330(a), the court is instructed to examine whether the services were “beneficial at the time” and whether they were “reasonably likely to benefit the debtor’s estate.”   The lodestar may be adjusted upwards or downwards based upon the results.    Given that results are a factor to be considered under each of these approaches, it is much more reasonable to conclude that the Pro-Snax panel meant to emphasize the importance of results but not to make them an absolute requirement.   At the very least, it will make for an interesting argument when the Court is asked directly to reconcile Pilgrim’s Pride, Pro-Snax and the language of section 330(a).

Disclosure:   I have a case pending on appeal that raises the application of Pro-Snax.

Early Termination Provision Does Not Apply to Estate Property

In another twist on the evolving interpretation of BAPCPA, a court in Texas has ruled that failure to extend the automatic stay in a subsequent filing does not affect property of the estate that is not claimed by the debtor as exempt.   In re Scott-Hood, No. 11-53580 (Bankr. W.D. Tex. 6/15/12), which can be found here.

In the Scott-Hood case, the Debtor had one prior chapter 13 case dismissed and then filed a new chapter 13 proceeding.   However, the Debtor did not request an extension of the automatic stay pursuant to section 362(c)(3).     JP Morgan Chase Bank filed a Motion for Order Confirming Termination of Automatic Stay which was granted.   The Debtor then filed a motion for reconsideration arguing that section 362(c)(3) was limited to property of the Debtor, not property of the estate.    The Court ultimately agreed.

According to section 362(c)(3)(A), failure to request extension of the stay in a subsequent case means that:

(T)he stay under subsection (a) with respect to any action taken with respect to a debt or property securing such debt or with respect to any lease shall terminate with respect to the debtor on the 30^th day after the filing of the later case.

Because the Debtor did not file a motion to extend the automatic stay, it was necessary for the court to determine what the consequence under section 362(c)(3)(A) was.    The Court noted that there was a split in the cases as to whether the stay terminated as to all property or just the debtor’s property.    The Court noted that this was important in the San Antonio Division of the Western District of Texas because the Standing Order for Chapter 13 cases provides that upon confirmation, property does not revest in the Debtor.   The Court noted:

Thus, in the San Antonio Division of the Western District of Texas, where property of the bankruptcy estate encompasses all property of the debtor as of filing, plus all property acquired post-petition and earnings from services performed post-petition, (citation omitted), an early termination of the stay under section 362(c)(3)(A) could be meaningless.   

 Opinion, p. 3.

After an analysis of the statutory text and legislative history, the Court concluded that the statute meant exactly what it said:  “with respect to the debtor” was limited to the debtor’s property, not the estate’s property.

The result reached by the foregoing textual analysis may be less than optimal.   The fact that the scope of relief is less robust than creditors who lobbied for this legislation might have hoped for, however, is not reason to conclude that the statute is “truly absurd.”    It has meaning.   It just doesn’t have the meaning that the creditor wants it to have.   So it often is with statutes.  They fail to deliver on the expectations of those who zealously worked for their passage.    By the same token, however, the statute does deliver more relief, in this court’s view, than the majority view says it delivers.   That too is but another consequence of the way the statute is written and how it intersects with the rest of the Bankruptcy Code.   The court’s job is not to select the optimal policy outcome but to discover the intent of the drafters of the legislation to the extent that can be done with the interpretive tools available. . . . 

After reviewing both the plain language of the statute itself, as well as its narrow context within section 362 and its broader context within the Bankruptcy Code, the court concludes that section 362(c)(3)(A) terminates the stay only with respect to the debtor individually, with respect to the debtor’s exempt property that stands as collateral for a debt of the debtor, and with respect to certain leases.   It does not terminate with respect to property of the estate.

Opinion, pp. 7-8. 

This result will provide a lot of relief to chapter 7 trustees and some relief to less than diligent debtor’s attorneys.   For chapter 7 trustees, who may not see a case until 30 days after it is filed, it means that they do not lose control over non-exempt assets that are subject to a lien but may have equity.   

For debtor’s lawyers who may not be aware of this new provision (it is not even seven years old so far) or who fail to catch a prior case, the benefit may be less dramatic.   Debtors typically file chapter 13 to protect their exempt property, such as homes and cars.     Under Judge Clark’s ruling, exempt property of the debtor is still subject to early termination of the stay.   However, there is an interesting quirk here.   All property of the debtor, including exempt property, initially enters the estate.   It is only when an exemption becomes final that the property leaves the estate.   Consider this scenario:   a debtor files a subsequent case and claims his truck as exempt.   However, he does not file a motion to extent the stay.   At the conclusion of 30 days, the stay terminates.   However, the truck is still property of the estate.    The property will not leave the estate until 30 days after the first meeting of creditors at the earliest.    If the debtor’s attorney realizes his mistake during the period between 30 days after the petition date and the date that exemptions become final, he can simply amend his exemptions to delete the exemption.   In that instance, the property remains property of the estate and the early termination clause never takes effect.

Bankruptcy Court Denies Recognition to Non-Debtor Releases Contained in Mexican "Concurso"

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.