Vitro Update: Texas District Court Clears the Way for Noteholders to File Involuntary Bankruptcy Petitions Against Vitro’s Subsidiary Guarantors

by Cadwalader, Wickersham & Taft LLP

[author: Casey Servais]

On August 28, 2012, the United States District Court for the Northern District of Texas vacated a series of bankruptcy court rulings that had blocked Vitro SAB’s noteholders from filing involuntary bankruptcy petitions against Vitro’s non-debtor subsidiary guarantors. In a decision authored by Chief Judge Sidney A. Fitzwater, the District Court struck down two of the subsidiary guarantors’ most important affirmative defenses to the involuntary bankruptcy, holding that petitioning creditors’ guaranty claims were not contingent and the subsidiary guarantors were not generally paying their debts as they came due. Knighthead Master Fund, L.P. v. Vitro Packaging LLC (In re Vitro Asset Corp.), No. 3:11-CV-263-D (N.D. Tex. Aug. 28, 2012). This marks another major victory for Vitro noteholders, who – as reported by Restructuring Review here – just weeks ago persuaded the Bankruptcy Court for the Northern District of Texas not to enforce a Mexican plan of reorganization that purported to release Vitro’s non-debtor subsidiaries of the same guaranties at issue in the District Court’s decision.


Like almost every important decision in the Vitro cases, the District Court’s ruling on the noteholders’ involuntary bankruptcy petitions was the product of a complex procedural history involving many twists and turns.

The main debtor in the case, Vitro SAB, is a holding company organized under the laws of Mexico that conducts substantially all of its multinational operations through various subsidiaries. Together with its subsidiaries, Vitro serves as the largest manufacturer of glass containers and flat glass in Mexico. 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. All of Vitro’s wholly-owned direct and indirect subsidiaries had guarantied the notes. On November 17, 2010, a number of United States-based investment funds that held Vitro notes filed involuntary chapter 11 petitions against fifteen of Vitro’s United States subsidiaries in the Bankruptcy Court for the Northern District of Texas. Several of these subsidiaries ultimately consented to chapter 11 relief, but the remaining subsidiaries continued to resist the involuntary petitions.

The remaining subsidiary guarantors answered the involuntary petitions and asserted a number of affirmative defenses rooted in section 303 of the Bankruptcy Code, which establishes the requirements for commencing an involuntary chapter 11 case. Under section 303, a creditor bringing an involuntary petition must generally hold a non-contingent claim that is not the subject of a bona fide dispute (section 303(b)(1)) and must usually satisfy at least one of two enumerated grounds for relief, the first being that the alleged debtor is generally not paying its debts as they come due (section 303(h)(1)). The subsidiary guarantors argued that the noteholders failed to satisfy sections 303(b)(1) and (h)(1). Specifically, the subsidiary guarantors contended that the noteholders’ claims were contingent because, under the terms of the governing indentures, the subsidiaries’ guaranty obligations did not arise until the noteholders made a demand for payment. Additionally, the subsidiary guarantors argued that, notwithstanding their failure to honor the guaranty obligations, they were generally paying their debts as they came due because they were continuing to pay their trade creditors in the ordinary course of business.

In March and April 2011, Judge Russell F. Nelms of the Bankruptcy Court for the Northern District of Texas held a trial on the involuntary petitions. At the beginning of the trial, Judge Nelms ruled against the subsidiary guarantors on the contingent liability issue, finding that the indentures expressly waived any requirement that the noteholders make a demand for payment. The subsidiary guarantors objected to this ruling on due process grounds, asserting that in addition to filing their own pretrial brief, they should have been given an opportunity to respond to the noteholders’ pretrial brief. In response to these objections, Judge Nelms declared his findings on the contingent liability issue to be “preliminary” and allowed the subsidiary guarantors to address the issue at length during the trial. Apparently believing that Judge Nelms would not depart from his preliminary ruling, the noteholders did not present extensive arguments on the contingent liability issue at trial. To the noteholders’ surprise, however, Judge Nelms reversed his initial ruling in response to the subsidiary guarantors’ subsequent arguments, and also ruled for the subsidiary guarantors with respect to their section 303(h)(1) affirmative defense. Accordingly, the Bankruptcy Court denied the noteholders’ involuntary bankruptcy petitions.

Shortly after the trial, Judge Nelms became ill, and the case was transferred to Judge Harlin D. Hale, the same judge who would later refuse to enforce Vitro’s Mexican plan of reorganization. The noteholders subsequently brought motions to alter Judge Nelm’s rulings. Judge Hale issued an order implying that he would have reached a different result than Judge Nelms. However, to overturn Judge Nelms’ rulings at this procedural stage, Judge Hale would have needed to find that the rulings constituted a “manifest error of law.”  Judge Hale could not make this finding based on the record before him, and accordingly, denied the motions to alter. The noteholders then appealed to the District Court.


The District Court confronted two issues on appeal – whether Judge Nelms had committed clear error in finding that (i) the subsidiaries’ guaranty obligations were contingent as to liability and (ii) the subsidiaries were generally paying their debts as they came due. The District Court ultimately concluded that Judge Nelms had, in fact, clearly erred on both issues.

With respect to the contingency of liability issue, the court found that the guaranty obligations established by the governing indentures were unconditional and absolute. The Court began by acknowledging that one provision in the indentures, which stated that “[u]pon failure by [Vitro] to pay . . . , each Guarantor shall forthwith on demand pay the amount not so paid at the place and in the manner specified in the Indenture,” could be interpreted as creating a demand requirement. However, the Court ultimately concluded  that this language did not give rise to a demand requirement, finding instead that the language merely required the subsidiary guarantors to pay upon demand but did not make demand a precondition to payment.

The Court also analyzed the effect of a waiver provision in the indentures. Applying a standard rule of contract interpretation known as the “last antecedent rule,” the Court determined that the waiver provision overrode any demand requirement the indentures might otherwise contain. The last antecedent rule provides that a limiting clause or phrase should ordinarily be read as modifying only the noun or phrase that it immediately follows. An exception to this rule occurs when a modifier is set off from a whole series of antecedents by a comma, in which case the modifier should be read to apply to each of those antecedents. Where a comma is not used to set off the modifier, however, the lack of a comma constitutes confirmation that the modifier applies only to the last antecedent. The waiver provision in the indentures was punctuated as follows:

Each Guarantor irrevocably waives acceptance hereof, presentment, demand, protest and any notice not provided for herein, as well as any requirement that at any time any action be taken by any Person against [Vitro SAB] or any other Person.

The limiting phrase at issue was “not provided for herein,” and the question before the Court was whether this phrase applied to all of the preceding nouns, including “demand,” in which case the subsidiary guarantors would have waived only a demand requirement not provided for in the indentures themselves, or whether the phrase instead applied only to its immediate antecedent, “notice,” in which case the guarantors would have waived all demand requirements, including those contained elsewhere in the indentures. Because the limiting phrase “not provided for herein” was not set off from its antecedents by a comma, the last antecedent rule dictated that this phrase applied only to its immediate antecedent, “notice,” and not to the earlier antecedent “demand.” Accordingly, the Court concluded that the subsidiary guarantors had waived all demand requirements, including any demand requirement supposedly contained in the indentures. Because the indentures waived demand, the District Court ruled that the Bankruptcy Court had erred in finding that the subsidiaries’ guaranty obligations were contingent.

With respect to the issue of whether the subsidiary guarantors were generally paying their debts as they came due, the District Court applied a four-factor test from In re Moss, 249 B.R. 411, 422 (Bankr. N.D. Tex. 2000). Pursuant to Moss, courts must consider (i) the number of unpaid claims, (ii) the amount of such claims, (iii) the materiality of the non-payments, and (iv) the alleged debtor’s overall conduct of its financial affairs. Applying this test to the subsidiary guarantors, the Court found it significant that the guaranty obligations under the Vitro notes constituted approximately 99.9% of the total debt for each subsidiary guarantor. The Court cited to recent persuasive authority for the proposition that an alleged debtor may not be generally paying its debts as they come due if it is “not paying one hundred percent of [its] debts to only one creditor, or paying most of [its] debts in number to small recurring creditors, but is not paying a few creditors that make up the bulk of [its] debts,” and concluded that the subsidiary guarantors “easily fell within the second category.” Accordingly, the District Court held that the subsidiaries were not generally paying their debts as they came due, vacated Judge Nelms’ rulings, and remanded to the Bankruptcy Court for further proceedings consistent with its opinion.


Although the District Court did not go so far as to grant the Vitro noteholders’ involuntary petitions, the Court struck down two of the subsidiary guarantors’ most powerful affirmative defenses to the petitions. Therefore, it seems increasingly likely that the Bankruptcy Court will eventually enter involuntary orders for relief. If this happens, the Vitro noteholders will gain a great deal of leverage over the subsidiary guarantors, who will be required to manage their estates in the noteholders’ and other creditors’ best interests and will no longer be able to transfer significant assets or engage in transactions outside the ordinary course of business without bankruptcy court approval.

In view of this latest defeat, Vitro’s best hope of keeping its subsidiaries’ assets out of the reach of its noteholders may be to convince the Fifth Circuit Court of Appeals to enforce the non-debtor releases contained in its Mexican plan of reorganization. The District Court’s decision with respect to the involuntary petitions thus further raises the stakes in Vitro’s pending appeal of the Bankruptcy Court’s prior decision refusing to enforce the Mexican plan of reorganization. Oral arguments before the Fifth Circuit Court of Appeals are scheduled to begin on October 3, 2012.

[View source.]

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.

© Cadwalader, Wickersham & Taft LLP | Attorney Advertising

Written by:

Cadwalader, Wickersham & Taft LLP

Cadwalader, Wickersham & Taft LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.