R Recently, the Fifuh Circuit Court of Appeals, in In re Hear Bruce - PDF document

N AT I O N A L A S S O C I AT I O N O F C R E D I T M A N A G E M E N T MARCH 2013 THE PUBLICATION FOR CREDIT & FINANCE PROFESSIONALS $7.00 S e l e c t e d t o p i c Bruce NathaN, esq. aNd richard corBi, esq. The Fifth Circuit’s Vitro Decision on Cross Border Insolvencies: A Game Changer? R Recently, the Fifuh Circuit Court of Appeals, in In re Hear Bruce as he Vitro S.A.B. DE CV, affjrmed the decision by the Bank- presents, or co-presents: ruptcy Court for the Northern District of Texas to 22048. Bankruptcy Rumblings: refuse to enforce a controversial plan of reorganization Identifying and Mitigating Risk proposed by Vitro S.A.B. de CV (Vitro) and approved in of a Financially Troubled Vitro’s foreign insolvency proceeding in Mexico. Tie Customer Headed toward Bankruptcy court took issue with Vitro’s court-approved plan in Vitro’s Mexico proceeding because the plan had dis- 22062 & 22072. Bankruptcy Reform Town charged certain bondholders’ guarantee claims against Hall from the Perspective of the Credit Vitro’s subsidiaries who were not debtors in the pro- Executive and Other Constituencies ceeding. Tie Fifuh Circuit held that the plan’s release of Learn more about this and other legal third party claims against non-debtors (Vitro’s subsid- educational sessions on pp. 38-53. iaries) could only be approved in a Chapter 15 case based on proof of “exceptional circumstances,” even where the plan was not necessarily “manifestly con- trary” to U.S. public policy. Vitro failed to satisfy this that U.S. courts will not necessarily rubberstamp a for- high burden because its plan (i) did not appropriately eign court’s decision that runs afoul of U.S. bankruptcy balance the interests of Vitro’s creditors and the bond- law. Tiis could have signifjcant implications upon and holders holding Vitro’s subsidiaries’ guarantees that might undermine cross-border restructurings. were subject to the plan’s release provision; (ii) violated the absolute priority rule, which is a cornerstone of U.S. chapter 15 overview bankruptcy law, by allowing Vitro’s equity to retain sub- Chapter 15 contains the rules and procedures that a stantial value, while not providing full payment of cred- foreign debtor can utilize to facilitate a foreign insol- itors’ claims; and (iii) improperly denied the bondhold- vency proceeding in the United States. Chapter 15 cases ers a distribution close to the full amount of their claims are fjled to protect a foreign debtor’s assets and business and prevented non-consenting bondholders any alter- in the U.S. from creditor enforcement actions and allow native means to fully recover their claims. a foreign debtor to obtain relief from U.S. courts on most matters. Bankruptcy Code Section 101(23) Tie Fifuh Circuit’s refusal to uphold the Mexico court defjnes a foreign proceeding as a “collective judicial or order approving Vitro’s plan confmicts with the doctrine administrative proceeding in a foreign country, includ- of comity that gives strong deference to a foreign court’s ing an interim proceeding, under a law relating to order or judgment. Tie Fifuh Circuit’s decision shows insolvency or adjustment of debt in which proceeding 1 B U S I N E S S C R E D I T M A R C H 2 0 1 3

the assets and afgairs of the debtor are subject to control and tially all of its multinational operations through its subsidiar- supervision by a foreign court, for the purpose of reorganiza- ies. Vitro and its subsidiaries have manufacturing facilities in tion or liquidation.” Vitro’s reorganization proceeding pend- 11 countries and distribution centers throughout the Ameri- ing in Mexico qualifjes as a foreign proceeding. cas and Europe. A foreign representative in a foreign insolvency proceeding Vitro issued unsecured notes in the aggregate principal commences a Chapter 15 case by fjling a petition for Chapter amount of approximately $1.2 billion to numerous U.S bond- 15 relief with a U.S. bankruptcy court. Bankruptcy Code Sec- holders. Substantially all of Vitro’s indirect and direct subsid- tion 101(24) defjnes a foreign representative as the agent iaries, who were not debtors in the Mexico proceeding, guar- appointed in a foreign proceeding to oversee the reorganiza- anteed the full payment of the notes. tion or liquidation of the foreign debtor and represent the debtor in any foreign court, such as a U.S. bankruptcy court. On December 13, 2010, Vitro fjled a voluntary judicial reor- ganization proceeding (the Mexico proceeding) under the Ley A foreign representative must obtain recognition of a foreign de Concursos Mercantiles (Mexico’s Bankruptcy Reorganiza- proceeding in order to obtain the rights and benefjts afgorded tion Act) in Mexico’s Federal District Court for Civil and by Chapter 15. Tiat includes the specifjc categories of relief Labor Matters for the State of Nuevo León. When Vitro com- contained in Section 1521(a) of the Bankruptcy Code, as well menced the Mexico proceeding, the total outstanding indebt- as authorizing more general relief by allowing a bankruptcy edness owed to Vitro’s creditors, excluding intercompany court to “grant any appropriate relief” in order to “efgectuate indebtedness, totaled approximately $1.7 billion, of which the purpose of this chapter and to protect the assets of the approximately $1.2 billion was owed on the Vitro notes. On debtors or the interests of the creditors.” According to Section January 7, 2011, the district court in Mexico denied Vitro’s 1521(b), that also includes entrusting “the distribution of all or request for a concurso mercantile to adjudicate Vitro as a debt- part of the debtor’s assets located in the United States to the or in the Mexico proceeding. Tie district court’s decision was foreign representative or another person, including an exam- appealed and on April 8, 2011, an appellate court in Mexico iner, authorized by the court, provided that the court is satisfjed reversed the district court’s ruling and issued a declaration of that the interests of creditors in the United States are suffjciently concurso mercantile adjudicating Vitro as a debtor in the Mex- protected” (emphasis added). ico proceeding. In addition, Section 1507(a) of the Bankruptcy Code states Tiereafuer, Vitro’s foreign representatives (appointed by that “the court, if recognition is granted, may provide addi- Vitro’s board of directors) fjled a Chapter 15 petition in the tional assistance to a foreign representative.” However, accord- United States and the case ended up in the United States ing to Section 1507(b), there must be reasonable assurance of Bankruptcy Court for the Northern District of Texas. Vitro the: “(1) just treatment of all holders of claims against or inter- ultimately obtained bankruptcy court approval recognizing ests in the debtor’s property; (2) protection of claim holders in the Mexico proceeding. the United States against prejudice and inconvenience in the processing of claims in such foreign proceeding; (3) preven- In August 2011, the U.S. bondholders holding Vitro notes tion of preferential or fraudulent dispositions of property of guaranteed by Vitro’s subsidiaries commenced suit in the New the debtor; [and] (4) distribution of proceeds of the debtor’s York state court seeking a money judgment on their guaran- property substantially in accordance with the order pre- tees and a declaratory judgment that Vitro’s reorganization in scribed by this title...” the Mexico proceeding would not impact their ability to col- lect their guarantee claims against the subsidiaries. Tie New Section 1506 of the Bankruptcy Code further states that not- York state court ruled in favor of the bondholders, holding withstanding the comity doctrine that defers to a foreign that the subsidiaries’ guarantees could not be modifjed in the court’s order on judgment, “[n]othing in [Chapter 15] prevents Mexico proceeding. the court from refusing to take an action governed by [Chapter 15] if the action would be manifestly contrary to the public Vitro sought approval of a prepackaged concurso restructuring policy of the United States.” While the Bankruptcy Code does plan of reorganization. On February 3, 2012, the district court not defjne “manifestly contrary to the public policy of the approved the concurso reorganization plan in the Mexico pro- United States,” the courts have focused on whether: (i) the for- ceeding (the concurso plan approval order). Tiat included eign proceeding is procedurally unfair; and (ii) the application approval of the plan’s provision releasing the bondholders’ of the foreign law would “severely impinge the value and guarantee claims against Vitro’s subsidiaries who were not import” of a U.S. statutory or constitutional right so that grant- debtors in the Mexico proceeding. Despite the issuance of the ing comity would “severely hinder” a U.S. bankruptcy court’s concurso approval order, the U.S. bondholders continued their ability to protect those rights. U.S. lawsuit to collect their guarantee claims against the sub- sidiaries. On March 2, 2012, Vitro’s foreign representatives Facts fjled a motion in the bankruptcy court to enforce the plan in Vitro S.A.B. de C.V. and its subsidiaries are the largest manu- the U.S. and stay the bondholders’ pending litigation in New facturers of glass containers and fmat glass in Mexico. Vitro is a York to collect their guarantees against Vitro’s subsidiaries. holding company organized in Mexico that conducts substan- Tie bondholders objected to the enforcement motion. Afuer 2 B U S I N E S S C R E D I T M A R C H 2 0 1 3