Last week, the Bankruptcy Court for the Northern District of Texas granted involuntary bankruptcy petitions against ten US subsidiaries of Mexican glassmaker Vitro S.A.B. de C.V. (the “New Debtor Subsidiaries” and “Vitro”, respectively). The ruling is a win in the multi-paned litigation involving certain petitioning noteholders (the “Noteholders”) in their fight against Vitro’s efforts to effect a non-consensual restructuring of their debt through a Mexican insolvency proceeding.
By way of background, in 2009, Vitro stopped making interest payments on $1.2 billion of notes (the “Notes”) guaranteed by its subsidiaries (including the New Debtor Subsidiaries). After failing to obtain creditor support for three restructuring proposals, Vitro announced in November 2010 that it would initiate a voluntary reorganization proceeding, or concurso, in Mexico. Soon after, the Noteholders filed involuntary chapter 11 petitions against the New Debtor Subsidiaries and five of Vitro’s other US subsidiaries. Those five US subsidiaries ultimately consented to chapter 11 relief, but the New Debtor Subsidiaries continued to resist the involuntary petitions.
Generally speaking, the Bankruptcy Code provides that an involuntary petition must be filed by three or more creditors holding claims that are not “contingent as to liability or the subject of a bona fide dispute as to liability or amount”. Specifically, a court must grant a contested involuntary petition if the debtor is “generally not paying [its] debts as they become due unless such debts are the subject of a bona fide dispute as to liability or amount.” See 11 U.S.C. § 303(b)(1), (h)(1). The Bankruptcy Court initially denied the involuntary petitions, holding that the New Debtor Subsidiaries’ obligations were contingent as to liability and that the New Debtor Subsidiaries were generally paying their debts as they became due. Unbroken, the Noteholders successfully appealed that decision to the District Court for the Northern District of Texas. The District Court held that because the relevant indentures waived demand of payment, the obligations were not contingent. The District Court further found that the Bankruptcy Court erred in its determination that the New Debtor Subsidiaries were paying their debts as they became due, noting that payment of multiple invoices constituting less than 1% of the debt outstanding was not sufficient.
On remand, the only remaining issue for the Bankruptcy Court to decide was whether the Noteholders’ claims were the subject of a bona fide dispute as to amount. The parties’ arguments hinged on whether certain indenture provisions operated as a savings clause or a limitation on guarantor liability. The Bankruptcy Court held that various New York state court judgments involving the parties (recall the multi-paned ongoing litigation) established that the disputed provisions operated as a savings clause and, accordingly, there was no bona fide dispute as to the amount of the Noteholders’ claims. If the opinion ended there, the New Debtor Subsidiaries might have escaped with just some hairline cracks. But there’s more.
In a shattering blow, the court further (and arguably unnecessarily) invoked the Fifth Circuit’s “special circumstances” exception to the technical requirements of section 303(b) of the Bankruptcy Code. Under this exception, a creditor can push a debtor into the bankruptcy window even if the statutory requirements are not satisfied “where there is fraud, trick, artifice or scam by an alleged debtor.” The Court held that the New Debtor Subsidiaries’ post-petition conduct triggered the special circumstances exception. Specifically, after the initial dismissal of the involuntary petitions, five of the New Debtor Subsidiaries reformed as Bahamian entities. Also, while the appeal was pending, one of the New Debtor Subsidiaries sold all of its stock to another entity. Despite numerous opportunities, the New Debtor Subsidiaries did not disclose the reincorporations and transfer of stock to the Bankruptcy Court, the District Court or the New York state courts. The Bankruptcy Court concluded that, to the extent it is still alive and well in the Fifth Circuit, the special circumstances exception applied because the New Debtor Subsidiaries were actively trying to conceal their actions and evade the Noteholders’ attempts to collect a debt.
Now that we can all hear the Rolling Stone bellowing “Shattered” in the background, what does this mean for the Noteholders and the New Debtor Subsidiaries? To start, there is now another active US forum for the Noteholders to seek recovery on their guarantee claims. This is relevant, given the Fifth Circuit’s decision a few weeks ago affirming the Bankruptcy Court’s refusal to enforce Vitro’s concurso plan in the US to the extent it sought to release and extinguish obligations of non-debtor subsidiaries. Additionally, the Court that will oversee the New Debtor Subsidiaries’ cases has already found evidence that they concealed material facts. So settle back, raise your glass and wait for another “pane”-ful round of litigation.