Weathering the Storm: Vitro’s Concurso Plan Is Theoretically Enforceable in the United States
On November 28, 2012, the United States Court of Appeals for the Fifth Circuit published an opinion affirming the bankruptcy court’s ruling that the Mexican Plan of Reorganization (the “Concurso Plan”) of the Mexican glass-manufacturing company, Vitro, S.A.B. de C.V., approved by the Federal District Court in Mexico, should not be enforced under Chapter 15 of United States Bankruptcy Code.1 The United States Bankruptcy Court for the Northern District of Texas (the “Bankruptcy Court”) concluded that the Concurso Plan should not be accorded comity to the extent that it extinguishes the guaranties held by the Debtor’s non‑debtor subsidiaries in favor of third-party noteholders.2 In the Bankruptcy Court’s view, such an order would be manifestly contrary to the public policy of the United States. The Bankruptcy Court’s opinion joined a very short list of cases that address the public policy exception under § 1506 of the Bankruptcy Code. On direct appeal, the Fifth Circuit affirmed, but did not rely on § 1506 in the process. Instead, it looked to §§ 1521 and 1507 to conclude that the Bankruptcy Court did not err in refusing to grant relief. In short, the Fifth Circuit concluded that non-consensual, third-party releases could, in theory, be enforced in the United States, but not under the circumstances presented in Vitro’s Concurso Plan.
Chapter 15 Primer
Chapter 15 provides for recognition and assistance where insolvency proceedings are pending in more than one country and establishes guidelines for the protection of assets internationally, while being sensitive to the political issues and differing legal systems of the countries involved. Any determination of a request for assistance under Chapter 15 must be “consistent with the principles of comity.”3
“Comity,” in the legal sense, is neither a matter of absolute obligation, on the one hand, nor of mere courtesy and good will, upon the other. But it is 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 protection of its laws.4
The determination to grant comity is balanced by the language of § 1506, which provides “[n]othing in this chapter prevents the court from refusing to take an action governed by this chapter if the action would be manifestly contrary to the public policy of the United States.”5
Upon recognition of a foreign proceeding, a bankruptcy court may grant “any appropriate relief,” including seven enumerated examples, such as a stay of execution against a debtor’s assets. 11 U.S.C. § 1521(a). A bankruptcy court also may, “consistent with the principles of comity,” provide “additional assistance” after considering whether such assistance will assure other important goals, such as distribution of a debtor’s property substantially in accordance with the order prescribed by the Bankruptcy Code. 11 U.S.C. § 1507(a), (b).
The Vitro Concurso Plan, as originally proposed and ultimately approved in Mexico, eliminated any recourse certain noteholders held against Vitro’s non-debtor subsidiaries. The noteholders were not pleased. Vitro then filed a petition in the United States seeking recognition of the Mexican reorganization case as a foreign main proceeding under Chapter 15 of the Bankruptcy Code. Recognition was granted on July 21, 2011.
In August 2011, a group of noteholders filed suit in New York state court against the subsidiaries. The New York court ruled in favor of the noteholders, finding the indentures prevented nonconsensual modification of the subsidiaries’ guaranties because the subsidiaries expressly waived any rights under Mexican law.
The Mexican court approved the Concurso plan on February 3, 2012, and Vitro proceeded to consummate the plan, issuing new notes and debentures, effectively discharging the obligations of Vitro’s non-debtor subsidiaries, and funding trusts for the payment of claims. Approval of the Concurso plan discharged Vitro’s obligations to the noteholders under the original notes and released claims against the subsidiaries under the guaranties. Vitro then filed its motion to enforce the Concurso Plan in the United States and sought a permanent injunction of collection efforts against its subsidiaries pursuant to §§ 105, 1507, and 1521 of the Bankruptcy Code. Certain noteholders filed objections to the enforcement motion (the “Objecting Parties”).
The Bankruptcy Court’s Conclusions
The Bankruptcy Code does not define “manifestly contrary to public policy,” but the public policy exception of § 1506 is meant to be narrowly construed and used only to defend the most fundamental policies of the United States. The courts primarily focus on two factors:
(1) whether the foreign proceeding was procedurally unfair; and (2) whether the application of foreign law or the recognition of a foreign main proceeding under Chapter 15 would “severely impinge the value and import” of a U.S. statutory or constitutional right, such that granting comity would “severely hinder United States bankruptcy courts’ abilities to carry out . . . the most fundamental policies and purposes of these rights.”6
The Bankruptcy Court rejected the arguments of the noteholders regarding corruption of the Mexican judiciary, impact on the credit markets from approval of the Concurso Plan, and general unfairness of the Mexican proceedings and noted these objections would more appropriately be handled by the Mexican courts, noting an appeal of the Concurso had already been filed in Mexico.
The Bankruptcy Court recognized that the United States has a general policy against the discharge of entities other than a debtor in an insolvency proceeding and denied the enforcement motion for three reasons. First, the Concurso Plan does not substantially comply with the distribution scheme prescribed by the Bankruptcy Code. Under the Bankruptcy Code, the Objecting Parties would receive distributions from Vitro and also be able to recover any deficiencies from the non-debtor subsidiary guarantors. The Concurso Plan, however, provides for drastically smaller recoveries and extinguishes guarantor liability. Second, the Concurso Plan does not sufficiently protect creditors’ interests as required by § 1521(a) in a manner that is balanced with the interests of Vitro. Third, protection of third party claims in a bankruptcy case is a fundamental policy of the United States, and because the Concurso Plan extinguishes these claims, it is manifestly contrary to that public policy and is unenforceable.
The Bankruptcy Court also noted, but did not rule on, two other “meritorious” arguments of the Objecting Parties. Insiders, including intercompany claims, were allowed to vote on the Concurso Plan even though bonds were issued shortly before the Concurso proceeding under questionable circumstances. Also, the Concurso plan arguably violated the absolute priority rule because the holders of equity in Vitro retained significant value when the creditors were not paid in full.
The Bankruptcy Court stated that generally Concurso plans would be enforced in the United States; however, the Vitro plan was unenforceable. The Bankruptcy Court stayed its decision until June 29th to allow Vitro an opportunity to appeal the Bankruptcy Court’s decision and seek a stay on appeal. Vitro filed a request for a direct appeal to the Fifth Circuit pursuant to 11 U.S.C. § 158(d), and the Bankruptcy Court granted Vitro’s request on June 21, 2012. Shortly after, the Fifth Circuit entered an order keeping the temporary restraining order entered by the Bankruptcy court in place during the pendency of the appeal.
The Fifth Circuit’s Conclusions
The Fifth Circuit addressed two issues on appeal. The first was whether Vitro’s co‑foreign representatives qualified as such under the definition in 11 U.S.C. § 101(24). The Fifth Circuit held that the Bankruptcy Court and District Court properly interpreted Chapter 15 as not requiring an official court appointment of a foreign representative, but that an appointment by the foreign equivalent of a debtor-in-possession is acceptable under the Bankruptcy Code. Because Vitro essentially retained the powers of a debtor-in-possession under Mexican law, the Vitro Board’s appointment of the co-foreign representatives was sufficient.
The second issue was whether the Bankruptcy Court erred in refusing to enforce the Concurso Plan. The Fifth Circuit began by determining whether the assistance requested by Vitro’s foreign representatives is specifically enumerated in § 1521(a) and (b)’s laundry-list of specific relief available upon recognition of a foreign proceeding, such as a stay of execution against a debtor’s assets. Those subsections do not provide for discharging the obligations of non-debtor subsidiaries.
Second, in the absence of specific matching relief in § 1521(a)(1)-(7) and (b), the next step is to determine whether Vitro’s requested relief can be considered “appropriate relief” under § 1521(a), which includes any such relief granted under Chapter 15’s predecessor, § 304 of the Bankruptcy Code. The Fifth Circuit concluded that the relief requested was not appropriate because nonconsensual, non-debtor releases are generally not available under U.S. law and are specifically prohibited in the Fifth Circuit.7 Even if such relief were available under § 1521, the Bankruptcy Court properly concluded that the Concurso Plan did not balance the interest of Vitro, its creditors, and the non-debtor subsidiaries, as required by § 1522 (conditioning relief under § 1521 upon a balancing of interests of the debtor and creditors).
Third, because the relief requested by Vitro went beyond the “appropriate” relief available under § 1521(a) (and § 304), the next step was to determine whether the relief should be granted as extraordinary “additional assistance” under the more “rigorous” standard set forth in § 1507. Section 1507 allows relief not otherwise available under U.S. law. The Fifth Circuit acknowledged that sister circuits have allowed nonconsensual, non-debtor releases under limited circumstances. For this reason, relief is at least theoretically available under § 1507. The Bankruptcy Court did not abuse its discretion in refusing to grant additional assistance, however, because § 1507 requires the court to consider whether the relief requested will assure distributions to creditors substantially in accordance with the Bankruptcy Code’s priority scheme. 11 U.S.C. § 1507(b)(4). The Concurso Plan’s creditor distribution scheme was premised upon the discharge of third-party claims against Vitro’s non-debtor subsidiaries, which was a negative factor for Vitro. Moreover, Vitro did not present other evidence in favor of comity and enforcement that outweighed the court’s concerns about the third-party releases. For instance, even when such releases are approved in other circuits, the cases usually involve payment in full to creditors and non-insider creditors voting for the plan. Those circumstances were absent here.
Because the relief requested by Vitro was not available under §§ 1521 and 1507, the Fifth Circuit did not reach the issue of whether the relief requested was manifestly contrary to the public policy of the United States under § 1506. The Fifth Circuit did, however, cast some doubt on the Bankruptcy Court’s manifestly-contrary conclusion based on the limited propriety of third-party releases in other circuits.
The Fifth Circuit was careful to note that it was not determining whether it would have reached the same conclusion as the Bankruptcy Court, which presided over a fact-intensive trial. Instead, the Fifth Circuit concluded that the Bankruptcy Court did not abuse its discretion in refusing to grant relief. The fact-intensive nature of the Vitro case—and the standard of review on appeal—will make its application to future cases unpredictable.
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