Fifth Circuit Expected To Issue Landmark Ruling Concerning Recognition of Foreign Bankruptcy Proceedings Contrary to US Public Policy

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[author: Alan Feld]

In a widely followed dispute, the Fifth Circuit Court of Appeals will soon render a decision on the appeal of a Texas Bankruptcy Court’s refusal to recognize non-debtor third party releases in the Mexican reorganization proceeding (concurso mercantil) of Mexican glass manufacturer Vitro SAB de CV. Wall Street and the capital markets will be watching this appeal closely as a reversal of the Bankruptcy Court would likely make lenders and bondholders extremely nervous about extending future credit to Mexican corporations.

In June 2012, a Texas Bankruptcy Judge was faced with recognition (under Chapter 15 of the US Bankruptcy Code) of the plan confirmed in the Mexican concurso mercantil proceeding of Vitro. The plan was extremely controversial as inter-company and insider claims were used to outvote the third party claims of foreign (mainly US-based) bondholders to substantially reduce the payout to creditors while preserving the equity position of the controlling shareholders. The recognition proceeding in the US Bankruptcy Court was vigorously opposed by the US bondholder group on the grounds that, among other things, the enforcement of 3rd party non-debtor releases are contrary to US public policy and completely cut off the rights of American creditors who hold, in the aggregate, approximately $1.2 billion in bonds guaranteed by Vitro’s non-debtor US based affiliates.

Relying on a rarely used public policy exception, the Bankruptcy Court ruled that Vitro’s concurso mercantil improperly extinguished the bondholder claims against the non-debtor subsidiary guarantors in violation of fundamental US policy against the discharge of claims against a non-debtor party. The Bankruptcy Court specifically ruled that Vitro’s concurso mercantil would violate section 1506 of the Bankruptcy Code in that it was “manifestly contrary to the United States’ public policy of preserving a creditor’s rights and claims against a nondebtor.”

In light of the importance of this issue, the Bankruptcy Court’s ruling has been “certified” for direct appeal to the Fifth Circuit Court of Appeals (bypassing the District Court). Oral argument was recently conducted and a decision is expected shortly. The capital markets will be watching this one closely as this ruling will impact a lender’s ability to rely on the commitments of guarantors and other third parties in extending credit and underwriting risk. The availability of credit to Mexican businesses may be dramatically affected by the ruling on this important issue.

 

Published In: Bankruptcy Updates, Civil Procedure Updates, General Business Updates, International Trade Updates

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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