Ad Hoc Group of Vitro Noteholders v. Vitro S.A.B. de C.V., 701 F.3d 1031 (5th Cir. 2012)

CASE SNAPSHOT

This case demonstrates the applicability of chapter 15 proceedings, the interaction between the emphasis on comity and the core established protections of the Bankruptcy Code. The Court of Appeals for the Fifth Circuit held that the debtor’s restructuring plan (approved in Mexico in accordance with Mexican bankruptcy law) was not entitled to enforcement in the United States because the plan failed to satisfy essential tenets of U.S. bankruptcy law. The plan failed in several respects: affected creditors did not approve the plan and were outweighed by insider votes; equity retained substantial value; non-debtor subsidiaries were granted third-party releases; and non-consenting creditors were cut out from any recovery.

FACTUAL BACKGROUND

Vitro S.A.B. de C.V. is Mexico’s largest glass manufacturer. From 2003 to 2007, Vitro borrowed $1.2 billion predominantly from U.S. investors; these notes, which were unsecured, were guaranteed by non-debtor Vitro subsidiaries. The guarantees provided that they would not be released in any bankruptcy proceeding, and that New York law would apply. In 2009, Vitro restructured subsidiary debt owed to Vitro, which resulted in Vitro subsidiaries becoming creditors of Vitro in the amount of $1.5 billion. A year later (after the expiration of Mexico’s “suspicion period” in which the debt restructuring could be voided), Vitro commenced bankruptcy proceedings in Mexico, under Mexican bankruptcy law.

Generally, Vitro’s restructuring plan called for the $1.2 billion notes to be extinguished, as well as the obligations of the non-debtor guarantors, and existing equity holders would retain their ownership position. Under Mexican law, creditors vote together as a single group. Nearly 75 percent of creditors approved the plan, but more than 50 percent of all voting claims were held by Vitro subsidiaries. In other words, the plan would have failed but for the approval of Vitro insiders.

The Mexican court approved Vitro’s plan. Vitro’s foreign representatives, appointed by Vitro’s Board of Directors, commenced a proceeding under chapter 15 of the Bankruptcy Code, seeking recognition and enforcement of the Mexican proceeding in the United States. The bankruptcy court granted recognition of the Mexican proceeding and plan, but denied the enforcement motion because the plan granted injunctive relief in favor of non-debtor parties without paying creditors substantially what they were owed. The decision was certified for direct appeal to the Fifth Circuit.

COURT ANALYSIS

Chapter 15 was enacted to implement the Model Law on Cross-Border Insolvency, and provides courts with broad, flexible rules to effectuate comity in cross-border bankruptcy matters. The court pointed out that “whether any relief under Chapter 15 will be granted is a separate question from whether a foreign proceeding will be recognized by a United States bankruptcy court.”

The first issue addressed was whether Vitro’s foreign representatives were properly recognized. The objecting creditors argued that the representatives could only validly be appointed by a court, and since the representatives were appointed by the Vitro Board of Directors, they should not be recognized in the chapter 15 proceeding. The Court of Appeals upheld the bankruptcy determination that “it was unnecessary for a foreign representative to be appointed by a court,” based on 11 U.S.C. § 101(24)’s definition of a “foreign representative,” and the commentary to the enactment of the Model Rules that expressly rejected such a narrow rule.  

The court then engaged in a thorough consideration of Vitro’s enforcement motion, in which Vitro sought broad relief under sections 1507 and 1521. Vitro sought an order giving full force and effect in the United States to the Mexican court’s order approving the plan, and further sought a permanent injunction prohibiting certain action in the United States against itself and its non-debtor subsidiaries, including any enforcement or collection process under the guaranties. The court addressed the question of whether the bankruptcy court erred in refusing to enforce the Mexican court’s approval order “solely because the plan novated guarantee obligations of non-debtor parties and replaced them with new obligations of substantially the same parties.”

The court first stated that “a central tenet of Chapter 15 is the importance of comity in cross-border insolvency proceedings. Given Chapter 15’s heavy emphasis on comity, it is not necessary, nor to be expected, that the relief requested by a foreign representative be identical to, or available under, United States law. Nevertheless, Chapter 15 does impose certain requirements and considerations that act as a brake or limitation on comity, and preclude granting the relief requested.” The court also stated that, “while comity should be an important factor, … we are compelled … to determine whether a foreign representative may independently seek relief under either section 1521 or section 1507, and whether a court may itself determine under which of Chapter 15’s provisions such relief would fall. Both appear to be questions of first impression.”

The court concluded that it should first consider the specific relief set forth in section 1521(a) and (b), and if the relief is not explicitly provided for there, a court should then consider whether the relief falls more generally under section 1521’s grant of any “appropriate relief,” which the court construed as the relief available under chapter 15’s predecessor, section 304 of chapter 11. “Only” if the requested relief was not available under section 304 should a court turn to section 1507 to decide if the relief is available as “additional assistance.”

The court acknowledged that the relationship between sections 1507 and 1521 is not clear. Section 1521(a) empowers a court to “grant any appropriate relief” when necessary to “effectuate the purpose of [Chapter 15], and to protect the debtor’s assets or the creditors’ interests.” This subsection also lists a series of forms of relief, including staying actions and executions against assets of the debtor’s, and suspending the right to transfer, encumber or otherwise dispose of any debtor assets. Section 1521(b) provides that the court may “entrust the distribution” of debtor assets located in the United States, “provided that the court is satisfied that the interests of creditors in the United States are sufficiently protected.”

Unlike section 1521, section 1507 gives courts the power to provide "additional assistance." Section 1507 was added "because Congress recognized that Chapter 15 may not anticipate all of the types of relief that a foreign representative may require." Section 1507 requires a court to consider if whether such additional assistance "will reasonably assure" just treatment of holders of claims or interests in the debtor’s property, protection of claim holders in the United States against prejudice, and prevention of preferential or fraudulent disposition of debtor property.

"We are thus faced with two statutory provisions that each provide expansive relief, but under different standards." The court thus adopted a framework for analyzing requests for relief. Because section 1521 lists specific forms of relief, the court held that a court should initially consider whether the relief requested falls under one of the explicit provisions of this section. If the relief requested cannot be found in sections 1521(a)(1)-(7) or 1521(b), a court should decide whether the relief requested can be considered "appropriate relief" under section 1521(a), which would require consideration of whether such relief was previously provided under section 304. Then, "only if the requested relief appears to go beyond the relief previously available under section 304 or currently provided for under United States law, should a court consider section 1507." While section 1507’s broad grant of assistance might be viewed as a catch-all, "it cannot be used to circumvent restrictions present in other parts of Chapter 15, nor to provide relief otherwise available under other provisions." Thus, section 1507 relief would be "in nature more extraordinary than that provided under section 1521, [and] the test for granting that relief is more rigorous."

The court then applied this new analytic framework to the relief requested by the debtor, and concluded that the bankruptcy court did not err in denying the debtor’s enforcement motion. "Sections 1521(a)(1)-(7) and (b) do not provide for discharging obligations held by non-debtor guarantors. Section 1521(a)’s general grant of ‘any appropriate relief’ also does not provide the necessary relief because our precedent has interpreted the Bankruptcy Code to foreclose such a release…. Even if the relief sought were theoretically available under section 1521, the facts of this case run afoul of the limitation in section 1522. Finally, although we believe the relief requested may theoretically be available under section 1507 generally, Vitro has not demonstrated circumstances comparable to those that would make possible such a release in the United States…." Those circumstances include demonstrating that extraordinary circumstances exist to justify such release.

The court then measured its determination against its obligation to extend comity to the Mexican court’s order, and held that "many of the factors that might sway us in favor of granting comity … are absent here." Vitro had not shown the "truly unusual circumstances necessitating" the non-consensual release of the non-debtor guarantors. Moreover, the creditors did not obtain a distribution "close to what they were originally owed," while equity retained "substantial value" and dissenting creditors "were grouped together into a class with insider voters who only existed by virtue of Vitro reshuffling its financial obligations between it and its subsidiaries," just outside the "suspicion period" under Mexican law.

Accordingly, the court held that the bankruptcy court’s decision to deny the debtor’s enforcement motion was reasonable.

PRACTICAL CONSIDERATIONS

The Fifth Circuit laid out a clear roadmap to consider relief requested in chapter 15 proceedings. Given the increasing number of companies operating across borders in today’s global economy, this decision may serve as a template for courts required to balance the considerations and expectations of debtors and creditors under the Bankruptcy Code, against chapter 15’s statutory requirement of comity. It also provides further assurance that bankruptcy proceedings are proceedings in equity, and that the strong preference to provide comity to foreign proceedings will not outweigh fundamental protections embedded into the U.S. Bankruptcy Code.