[author: Casey Servais]
On June 13, 2012, Judge Harlin D. Hale of the United States Bankruptcy Court for the Northern District of Texas refused to enforce provisions of a Mexican plan of reorganization that purported to extinguish guarantees by the debtor’s non-debtor subsidiaries. In refusing to enforce the non-debtor release, Judge Hale held both that the release of non-debtor guarantors was contrary to United States public policy and that the release did not merit enforcement under the specific criteria of chapter 15 for granting relief to a foreign debtor. The decision demonstrates that, while comity is the primary consideration governing chapter 15 cases, it is not without limit. The decision should also indicate to creditors that third party releases of non-debtor guarantors created in cases pending outside the U.S. are not likely to be enforced in the United States. Vitro, S.A.B. de C.V. v. ACP Master, Ltd. (In re Vitro), No. 11-33335-HDH-15, 2012 Bankr. LEXIS 2682 (Bankr. N.D. Tex. June 13, 2012).
Vitro SAB, a holding company organized under the laws of Mexico, conducted substantially all of its multinational operations through various subsidiaries. Vitro, together with its subsidiaries, served as the largest manufacturer of glass containers and flat glass in Mexico and maintained manufacturing facilities in eleven countries and distribution centers throughout the Americas and Europe. In 2008, in the wake of the global financial crisis, Vitro became unable to service the interest payments on several series of notes it had issued in 2003 and 2007. Significantly, substantially all of Vitro’s wholly-owned direct and indirect subsidiaries had guaranteed the notes.
Unable to service its debt, on November 1, 2010, Vitro commenced a voluntary judicial reorganization proceeding in a Mexican federal court pursuant to Mexico’s business reorganization act, the Ley de Concursos Mercantiles. Notwithstanding the pending Mexican insolvency proceeding, certain holders of Vitro’s notes instituted actions against Vitro and its non-debtor subsidiaries in New York state court, seeking to accelerate the notes and enforce the guarantees. In response to these noteholder actions, Vitro filed a complaint in the United States Bankruptcy Court for the Southern District of New York and requested a temporary injunction enjoining the noteholders from attempting to enforce the non-debtor subsidiary guarantees. The case was later transferred to the United States Bankruptcy Court for the Northern District of Texas, which denied Vitro’s motion for a temporary injunction. Vitro SAB S.A.B. de C.V. v. ACP Master, Ltd. (In re Vitro), 455 B.R. 571 (Bankr. N.D. Tex. 2011). Subsequently, the Texas bankruptcy court recognized Vitro’s Mexican insolvency proceeding as a foreign main proceeding pursuant to chapter 15 of the Bankruptcy Code.
Vitro submitted a plan of reorganization in the Mexican insolvency proceeding, and on February 3, 2012, the Mexican court entered an order approving the plan. The plan and the approval order contained certain provisions that purported to extinguish the non-debtor subsidiary guarantees. In spite of these provisions, the noteholders continued their efforts to enforce the non-debtor subsidiary guarantees in United States courts. Consequently, Vitro’s foreign representatives in the chapter 15 case filed a motion in the Texas bankruptcy court requesting that the court give full force and effect to the Mexican reorganization plan by enjoining any future attempts to enforce the non-debtor subsidiary guarantees in the United States.
The Texas bankruptcy court framed its analysis around two issues. First: Should the court, consistent with the principles of comity, enforce the plan provisions extinguishing the non-debtor subsidiary guarantees? In evaluating this issue, the court turned to sections 1507 and 1521 of the Bankruptcy Code for guidance.
Section 1507(a) permits a bankruptcy court to provide “additional assistance” to a chapter 15 debtor that extends beyond the relief expressly provided for elsewhere in the chapter. Further, section 1507(b) enumerates five factors a court must consider in determining whether to provide such additional assistance. The Texas bankruptcy court focused specifically on the fourth factor, namely whether the Mexican reorganization plan would assure distribution of Vitro’s property substantially in accordance with the order prescribed by the Bankruptcy Code. See 11 U.S.C. § 1507(b)(4). The court concluded that the Mexican plan did not, in fact, provide for a distribution in accordance with the priorities under the United States Bankruptcy Code, because under a chapter 11 plan, the noteholders would have received a distribution from Vitro and would have been free to pursue their guarantee claims against the non-debtor subsidiary guarantors. By cutting off the noteholders’ rights against the non-debtor subsidiary guarantors, the plan provided the noteholders with “drastically” different treatment than they would have received under the Bankruptcy Code. In re Vitro, 2012 Bankr. LEXIS 2682, at *38.
Section 1521 enumerates a number of specific types of relief that a bankruptcy court may grant to a chapter 15 debtor, and also places certain conditions on any grant of relief. Most relevant here, section 1521(b) allows a bankruptcy court to entrust the distribution of the debtor’s United States assets to the debtor’s foreign representative, but only if the court is satisfied that the interests of creditors in the United States are sufficiently protected. Similarly, section 1522 provides that a court may grant relief under section 1521 only if the interests of creditors and other interested entities, including the debtor, are sufficiently protected. The Texas bankruptcy court found that the requirements of sections 1521(b) and 1522 were not satisfied in Vitro’s case, as the third party release provisions in the Mexican reorganization plan did not sufficiently protect the interests of United States creditors and did not provide an appropriate balance between the interests of creditors, Vitro, and Vitro’s non-debtor subsidiaries.
The second major issue the court addressed was whether, even assuming that the extension of comity was appropriate under sections 1507 and 1522, the court should nevertheless refuse to extend comity based on a “public policy” exception found in section 1506 of the Bankruptcy Code. Specifically, section 1506 provides that “[n]othing in [chapter 15] prevents the court from refusing to take an action . . . if the action would be manifestly contrary to the public policy of the United States.”
To determine whether the section 1506 public policy exception applied to the Mexican reorganization plan’s third party release provisions, the Court invoked the two-factor test articulated in In re Qimonda AG Bankr. Litig., 433 B.R. 547, 568-69 (E.D. Va. 2010):
(i) whether the foreign proceeding was procedurally unfair and (ii) 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 United States statutory or constitutional right.
As to the first factor, the court entertained, but ultimately rejected, a number of objections to the fairness of the Mexican insolvency proceeding, finding instead that reorganization pursuant to the Ley de Concursos Mercantiles is generally a fair process worthy of respect. In applying the second factor, however, the Court concluded that the release of the non-debtor subsidiary guarantors was, in fact, contrary to United States public policy. Treating the plan provisions extinguishing the non-debtor subsidiary guarantees as equivalent to a non-debtor bankruptcy discharge, the court noted that “[g]enerally 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.” In re Vitro, 2012 Bankr. LEXIS 2682, at *38.
The court went on to cite two different sources of legal authority to demonstrate the existence of a United States public policy against non-debtor discharges. First, the court pointed to section 524 of the Bankruptcy Code, which provides that “discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt.” 11 U.S.C. § 524(e). Second, the court pointed to Fifth Circuit case law, which “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.” In re Vitro, 2012 Bankr. LEXIS 2682, at *39. On the basis of these two sources of authority, the court concluded that the protection of third party claims in a bankruptcy case was a fundamental policy of the United States, and that the Mexican reorganization plan’s treatment of the non-debtor subsidiary guarantees was manifestly contrary to this fundamental United States policy.
In the course of the proceedings on Vitro’s motion to enforce the Mexican reorganization plan, the objecting noteholders argued that enforcement of the plan’s third party release provisions would have eroded the status of the United States as a financial center by signaling to bond markets that United States law does not protect creditor rights. While the noteholders’ argument may have been somewhat overstated, the Texas bankruptcy court’s ruling in Vitro may, in fact, help to preserve the attractiveness of United States financial markets by demonstrating the judiciary’s commitment to the fundamental creditor protections contained in the Bankruptcy Code, even in cases involving foreign proceedings governed by chapter 15. Vitro’s foreign representatives have, however, already filed a notice of appeal.