In re Vitro, S.A.B. de C.V., No. 11-33335-HDH-15 (Bankr. N.D. Tex. June 13, 2012)

Vitra S.A.B. de C.V. (“Vitro SAB”) had entered bankruptcy proceedings in Mexico.  Certain of its non-debtor subsidiaries were guarantors to various noteholders -- U.S. financial institutions -- pursuant to an indenture agreement.  The District Court of Nuevo León, Mexico, issued a Concurso Approval Order in Vitro SAB’s Mexican bankruptcy proceeding which modified the debts owed by Vitro SAB to the noteholders and novated and extinguished the guarantees provided by the non-debtor subsidiaries.  Despite the Concurso order, the noteholders continued to take actions against the subsidiary guarantors in various U.S. courts.  Consequently, Vitro SAB filed a petition in the U.S. bankruptcy court pursuant to Chapter 15 of the Bankruptcy Code, seeking enforcement of the Concurso order and a permanent injunction against the noteholders from bringing proceedings in the U.S. against Vitro SAB and its non-debtor subsidiaries. 

More specifically, the U.S. bankruptcy court was asked to consider (1) whether to give effect to the Concurso Approval Order in the United States through §§ 1521 or 1507 of the Bankruptcy Code based on the principle of comity; and (2) whether the public policy exception of § 1506 of the Bankruptcy Code would prevent enforcement of the Concurso Approval Order as “manifestly contrary” to the public policy of the United States. 

In addition to the mandatory effects that recognition of a foreign bankruptcy proceeding by a U.S. bankruptcy court would have, the Bankruptcy Code provides the bankruptcy court with additional powers to assist a foreign representative of the debtor.  For example, Section 1521 allows a bankruptcy court to “grant any appropriate relief” to “effectuate the purpose of this chapter and to protect the assets of the debtors or the interests of the creditors.”  Such relief could include “the distribution of all or part of the debtor’s assets located in the United States to the foreign representative…provided that the court is satisfied that the interests of creditors in the United States are sufficiently protected.”  Similarly, Section 1507 of the Bankruptcy Code provides that “the court, if recognition is granted, may provide additional assistance to a foreign representative.”  Such a decision is to be based upon certain considerations enumerated in § 1507(b), but is primarily guided by principles of comity. 

These powers, however, are also to be governed by the public policy exception set forth in Section 1506 of the Bankruptcy Code.  The public policy exception provides that “[n]othing in this chapter prevents the court from refusing to take an action governed by this chapter if the action would be manifestly contrary to the public policy of the United States.”  The public policy exception is narrowly construed, and the Fifth Circuit has held that it should be invoked only in exceptional cases concerning issues of fundamental importance to the United States. 

The court declined to grant Vitro SAB’s motion seeking enforcement of the Mexican Concurso order.  First, the court denied enforcement because the Concurso plan violates subsection 1507(b)(4) by failing to distribute the proceeds of the estate in substantial accordance with the Bankruptcy Code.  The system set forth in the Concurso plan for distributing proceeds is drastically different from the manner in which proceeds would be distributed under a Chapter 11 plan.  Under the Concurso plan, noteholders would receive only a fraction of the amounts owed under indentures from Vitro SAB and the noteholders would have no rights as against other obligors.  Second, the court denied enforcement because the Concurso plan does not sufficiently protect the interests of creditors in the United States and does not appropriately balance the interests of creditors and Vitro SAB and its non-debtor subsidiaries, in contravention of Section 1521. 

Finally, the court denied enforcement because the Concurso plan’s extinguishment of third-party claims against non-debtors is manifestly contrary to the fundamental policy of protecting third-party claims in bankruptcy cases.  The United States has a general public policy against discharging claims for entities other than the debtor in an insolvency proceeding, unless there are extraordinary circumstances.  Accordingly, the court was troubled by the part of the Mexican proceeding that extinguished claims held by the objecting noteholders against non-debtor subsidiaries. The court therefore held the Concurso plan of the Mexican court could not be accorded comity by United States courts.