The Fifth Circuit recently upheld a Texas Bankruptcy Court’s refusal to enforce non-debtor third party releases in the Mexican reorganization proceeding (known as a concurso mercantil) of Mexican glass manufacturer Vitro SAB de CV. As a result of this decision, Wall Street and the capital markets will breathe a sigh of relief and will likely continue to extend credit to Mexican corporations with some confidence that guaranties will be enforced.
In June 2012, a Texas Bankruptcy Judge refused to enforce, under Chapter 15 of the US Bankruptcy Code, a reorganization plan approved by a Mexican court in Vitro’s concurso mercantil proceeding. Vitro’s non-debtor subsidiaries had guaranteed over $1 billion in US bonds, and under Vitro’s reorganization plan, among other things, those guarantees would have been released. Vitro’s reorganization plan was approved using the votes of the non-debtor guarantor subsidiaries, as well as other insider claims. The US bondholders vigorously opposed enforcement of the plan in the Texas Bankruptcy Court. The Bankruptcy Court’s decision relied upon the rarely used Section 1506 of the US Bankruptcy Code, which provides that Vitro’s plan could not be enforced if it was “manifestly contrary to the public policy of the United States”. Vitro’s appeal was certified for direct appeal to the Fifth Circuit.
While the Fifth Circuit upheld the Texas Bankruptcy Judge’s decision, it declined to do so based on public policy reasons and Section 1506. Instead, the Fifth Circuit parsed Chapter 15 of the US Bankruptcy Code (in particular, Sections 1521, 1522 and 1507), and determined that those Bankruptcy Code sections did not authorize the release of claims against non-debtor guarantors in this particular circumstance. While the Fifth Circuit left open the possibility that a US court could enforce a release of non-debtor entities pursuant to a foreign reorganization plan, the decision makes it clear that such releases will be scrutinized carefully and granted under extraordinary and compelling circumstances.
Following the Fifth Circuit’s decision, lenders may still reasonably rely on the commitments of guarantors and other third parties in extending credit and underwriting Mexican and other foreign transactions. However, because the decision does leave some possibility, however small, that such guarantees and other commitment will not be enforced, there may be some minor disruption in the capital markets. Any such disruption will be very small compared to the dramatic effect that would have ensued had the Fifth Circuit reversed the Texas Bankruptcy Court.