Over the last several years, the number of Chapter 15 filings has continued to grow. One of the most prominent of these bankruptcy filings is the Vitro S.A.B. de C.V. case. When last we reported on the Vitro case, the Texas bankruptcy court administering the Chapter 15 case had denied recognition to the Mexican restructuring plan of Vitro because the plan provided third party releases to non-debtors. See Vitro, S.A.B.: Bankruptcy Court Refuses to Recognize Mexican Concurso That Releases Claims Against Non-Debtors” (November 2012). At the end of 2012, and following an expedited appeal, the United States Court of Appeals for the Fifth Circuit weighed in on the release issues. In its much-awaited opinion, see 701 F.3d 1031, the Fifth Circuit affirmed the decision of the bankruptcy court. This article briefly reviews the Fifth Circuit’s analysis and explains why this decision may influence future Chapter 15 cases.
Vitro, the largest manufacturer of glass containers and flat glass in Mexico, borrowed approximately $1.216 billion from third party investors evidenced by certain notes. These notes were unsecured but guaranteed by substantially all of Vitro subsidiaries, including those located in the United States. In 2009, Vitro defaulted on the notes.
In an effort to restructure its financial obligations, Vitro filed a concurso proceeding in Mexico. (A concurso proceeding is akin to a Chapter 11 case in the United States.) After months of litigation, the Mexican courts declared Vitro to be in bankruptcy under Mexican law.
Pursuant to Mexican law, a conciliador, a quasi-judicial officer responsible for the filing of an initial list of recognized claims, was appointed to mediate the concurso proceeding and, if necessary, to protect the debtors’ estate and manage the debtors’ businesses. Vitro’s conciliador submitted a concurso (i.e., a reorganization plan) that provided for, among other things, a reduction of principal and interest payments and an extension of the maturity dates of the notes. Moreover, the concurso provided that Vitro’s obligations under the notes would be extinguished and the guarantors’ obligations would be discharged. On February 3, 2012, the Mexican court approved the concurso over the objection of certain noteholders. Thus, the Mexican court’s order restructured Vitro’s obligations to the noteholders and extinguished nondebtor subsidiary guarantees.
Prior to being declared in bankruptcy in Mexico, Vitro filed a petition for recognition of the concurso proceeding under Chapter 15 in Dallas, Texas. Over the objection of certain creditors, the bankruptcy court granted recognition to the concurso proceeding as a foreign main proceeding. Upon recognition of the concurso proceeding as a foreign main proceeding, creditors were automatically stayed from pursuing litigation against Vitro or its assets in the United States. Recognition by itself, however, did not discharge the claims against the guarantors. The bankruptcy court’s recognition decision was affirmed by the district court and thereafter appealed to the Fifth Circuit.
Meanwhile, while the appeal of the recognition of the Mexican concurso proceedings was pending, Vitro’s foreign representatives filed a motion seeking enforcement of the concurso under Chapter 15. Enforcement of the concurso in the United States would result in a discharge of the subsidiary guarantors’ obligations. As discussed in our prior article on this case, the bankruptcy court denied the enforcement motion, finding non-debtor discharges to be manifestly contrary to United States public policy. The bankruptcy court’s decision was certified for direct appeal to the Fifth Circuit and consolidated with the appeal of the bankruptcy court’s order granting recognition.
The Fifth Circuit’s Decision
According to the Fifth Circuit, comity is an important factor in determining whether relief should be granted under Chapter 15. Two sections of the Bankruptcy Code, Section 1521 and Section 1507, provide for the type of relief that can be granted. Specifically, Section 1521 provides that “[u]pon recognition . . . the court may . . . grant any appropriate relief, including . . . granting any additional relief that may be available to a trustee . . . .” However, obtaining relief under 1521 is not without limits. Section 1522, for example, provides that the relief can only be provided if the interests of creditors are sufficiently protected. Similarly, the second relevant provision, Section 1507, permits the court to grant “additional assistance” upon recognition. Relief under Section 1507, however, is also limited. It must be “consistent with principles of comity” and, in a case involving a business entity debtor, such relief must “reasonably assure” four factors, including the just treatment of creditors and distributions substantially in accordance with the order prescribed for U.S. bankruptcy cases. Here, Vitro requested enforcement of its concurso pursuant to both Sections 1521 and 1507.
The Fifth Circuit acknowledged that the difference between the relief available under Sections 1521 and 1507 is somewhat unclear. Ultimately, the Fifth Circuit concluded that relief under Section 1521 is generally limited to the specific forms of relief specifically identified in that provision as well as the relief that was previously available under Section 304, the statutory predecessor to Chapter 15. Section 1507, in contrast, serves as a broader “catch-all” that may permit relief beyond what is available under Section 1521 in certain circumstances. However, the Fifth Circuit warned that Section 1507 “cannot be used to circumvent restrictions present in other parts of Chapter 15, nor to provide relief otherwise available under other provisions.” The Circuit then examined the provisions in detail.
Sections 1521 lists specific forms of relief available upon recognition, including “any additional relief that may be available to a trustee.” According to the Fifth Circuit, none of those sections support a non-debtor release of the discharge of claims against a non-debtor guarantor. Moreover, such relief is not available under Section 1521, because “a non-consensual, non-debtor release through a bankruptcy proceeding, is generally not available under United States law.” The Fifth Circuit thus found Section 1521(a) did not permit such releases. It then turned to an examination of Section 1507.
The Fifth Circuit noted that, based on its prior decisions, non-debtor releases are generally not available in bankruptcy cases pending within the Circuit. Nevertheless, the Fifth Circuit concluded that a non-debtor release was theoretically possible under Section 1507, noting that “the devil is in the details.” Here, however, Vitro failed to convince the bankruptcy court that the proposed distribution of proceeds of the debtor’s property was either (let alone both) “substantially in accordance with the order prescribed by this title” or supported by the affected creditors. As the Fifth Circuit was required to review the bankruptcy court’s decision under a “deferential standard,” it could not find that the bankruptcy court erred in concluding that Section 1507 had not been satisfied. Indeed, according to the Fifth Circuit, it only needed to determine that the bankruptcy court’s decision was reasonable. As such, the bankruptcy court’s ruling was affirmed.
While the Fifth Circuit concluded that a non-debtor release was theoretically available under Chapter 15, its analysis suggests that such a release would not be recognized in the Fifth Circuit where the priority scheme of the foreign country (or at least the affect of the foreign country’s priority scheme on the case at issue) is inconsistent with the priority scheme recognized in the United States. This analysis will likely make non-debtor releases very difficult to obtain in connection with Chapter 15 cases that are filed in the Fifth Circuit and, with respect to non-Fifth Circuit cases, encourage disputes whenever third party releases are sought to be recognized