Bankruptcy Court Refuses To Stay International Litigation Against Non-Debtor Subsidiaries Despite Express Statutory Language Giving It the Power, but Not the Obligation, To Do So

by Cadwalader, Wickersham & Taft LLP
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In re Vitro, S.A.B de C.V v. ACP Master, Ltd., et al., Case No. 11-33335-HDH-15 (N.D. Tex. 2011), is a decision by a bankruptcy court but contains discussion of the issue often arising in contentious international litigation:  attempts to enjoin proceedings in other countries in favor of proceedings in the U.S., or attempts to enjoin proceedings in the U.S. in favor or litigation or proceedings in other countries.  For a general discussion of the role of U.S. courts and law in the sequencing of international disputes, see our discussion in our e-book, International Practice:  Topics and Trends.

In Vitro, the 2008 global financial crisis left Vitro with insufficient funds to pay roughly $300 million in senior notes and led to derivatives-related litigation in New York.  Vitro tried to restructure its debt, which led to failed negotiations with its creditors, an attempt by Vitro to structure a pre-packaged bankruptcy in Mexico, the filing of involuntary bankruptcy proceedings in the U.S., and a formal bankruptcy proceeding (upheld after an appeal) in Mexico.

Chapter 15 of the U.S. Bankruptcy Code was enacted to mediate claims and proceedings between international bankruptcy proceedings.  The debtor tried to declare the Mexico proceeding a “foreign main proceeding”, an issue the Court had not yet decided.  At this in this decision was the two-fold question: 

(1) does the Court have the authority under Chapter 15 of the Bankruptcy Code to issue a preliminary injunction to protect Vitro SAB and its non-debtor guarantor subsidiaries; and (2) has Vitro SAB and its non-debtor subsidiaries met the requirements for a preliminary injunction to issue.

On the first question, the Court observed that Chapter 15 was enacted “so as to provide effective mechanisms for dealing with cases of cross-border insolvency”.  The Court determined that it had authority to grant an injunction during the “gap” period:  i.e., “the period between the filing of a chapter 15 petition and a court’s determination of whether to grant recognition to the relevant foreign proceeding”. 

The discussion of the second question, however, is the more interesting.  The first question was whether even the clear statutory protections of a stay “can be extended to Vitro SAB’s non-debtor subsidiaries”.   Here the Court said yes.  But then, in determining whether the four-part test for obtaining a preliminary injunction was satisfied ((1) that he is likely to succeed on the merits, (2) that he is likely to suffer irreparable harm in the absence of preliminary relief, (3) that the balance of equities tips in his favor, and (4) that an injunction is in the public interest), the Court held that the likelihood of success was not to be applied to whether the restructuring was going to be successful in Mexico (if it is successful the debtor argued that that would extinguish the claims in the U.S. that the debtor wanted to stay) but rather should be applied to the merits of the underlying litigation — i.e., “to the non-bankruptcy action itself”.    On the record before it the Court could not make that determination.  The Court also found that the other requisites for an injunction were not met to subsidiaries and assets other than of the debtor itself.

The decision is on appeal, and argument was heard in the Fifth Circuit in May 2012.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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