By: Ramona Ortega
In a rare event, the Bankruptcy Court for the Northern District of Texas (“Bankruptcy Court”) refused to extend comity to a Mexican court and declined to enforce an order for a plan of reorganization for Vitro, S.A. B. de C.V. (“Vitro”). The Bankruptcy Court found the plan manifestly contrary to the public policy of the United States under Section 1506 of the Bankruptcy Code.
Under the Mexican plan, bondholders will receive approximately 40 cents on the dollar, while debtors retain $500 million in equity, and non-debtor subsidiaries will be released from their guarantees–contrary to U.S. bankruptcy practice. The decision is being appealed and is headed to the Fifth Circuit Court of Appeals for expedited review.
Vitro, a Mexican based multinational manufacturer of glass containers, conducts substantially all of its operations through various global subsidiaries. Almost all of Vitro’s wholly-owned subsidiaries have guaranteed its approximately US $1.2 billion unsecured notes pursuant to indentures governed by U.S. law.
The Bankruptcy Court’s decision not to extend comity was heavily influenced by the plan’s proposal to discharge the obligations of Vitro’s non-debtor subsidiary guarantors, but the opinion raises other issues, including the possible violation of the absolute priority rule that ensures bondholders are paid before equity holders are allowed to retain equity.
The court relied on the guidance in §1507 in finding that the plan was contrary to public policy, particularly paragraphs (b)(1)-(5), which (among other things) provide for just treatment of all holders of claims against or interests in the debtor’s property, and the distribution of proceeds of the debtor’s property substantially in accordance with the order prescribed in the Bankruptcy Code. Under the Mexican plan, the creditors would receive drastically different treatment than under a chapter 11 plan, where creditors would receive a distribution from the debtor and “would be free to pursue their other obligors, in this case the non-debtor guarantors.” The court concluded that approving the plan would open the door to restructuring plans that would allow non-consensual releases to the detriment of creditors without “any seeming bounds.”
The plan was issued under Mexico’s bankruptcy statute, Ley de Concursos Mercantile, and was submitted to the district court for recognition pursuant to § 1521 and § 1507 of chapter 15. These sections of Bankruptcy Code allow U.S. courts to “grant any appropriate relief” or “additional assistance” to foreign debtors in order to protect assets.
Relief in chapter 15 is generally granted under longstanding principles of comity but a long line of international insolvency cases, including In re Treco, Overseas Inn S.A., P.A. and Hilton v. Guyot, have ensured that comity should be granted only where the rights of U.S. citizens are protected. Specifically, §1506, the public policy exception, prevents the court from “taking any action that would be manifestly contrary to the public policy of the United States.”
This Case has important implications for the growing caseload of international insolvencies. Determining whether a policy is manifestly contrary to U.S. public policy entails balancing equity, law, and legal precedent. The Vitro decision marks one of few rulings where the Court limits the scope of “discretionary relief a bankruptcy court may grant in aid of a foreign proceeding as a matter of US public policy.” Despite the Bankruptcy Court’s refusal to extend comity, its decision seems to be influenced more by the specific terms of the reorganization plan rather than a revival of territorialism, a theory of cross-border insolvency in which international cooperation is limited.
Exacerbating the Vitro bankruptcy saga is a feverish fight between hedge fund giant Paul Singer of Elliott Management Corp. and the Vitro Board, headed by Adrian Sada, the great-grandson of the company’s founder, who wants to ensure family control of the company. Singer, primarily a Vitro creditor, bought up Vitro bonds in 2010 for pennies on the dollar and is now at the forefront of the fight to ensure that the fund realizes its full potential for profit. The hedge funds are looking to ascertain $1.1 billion in new bonds, a 10 percent cash payment and 61 percent of Vitro shares. Vitro, for its part, has manipulated Mexico’s underdeveloped insolvency law by utilizing loopholes to allow its intercompany claims to become voting classes of creditors in order to stack the votes in favor of its plan.
Vitro underscores the reach and implications of transnational insolvency proceedings on financing and bond transactions in Latin America, highlighting lingering unresolved Chapter 15 questions related to priority and comity. Depending on the outcome of Vitro, investors might need to rethink their distressed debt strategy in Latin America.