Fifth Circuit Affirms Important Decision in International Bankruptcy Law Disallowing Non-Debtor Discharge


Several months ago, we covered a U.S bankruptcy court’s denial of comity to Vitro S.A.B. de C.V. (“Vitro”)’s Mexican reorganization plan.  The Fifth Circuit recently affirmed the decision. While press interest has been moderate, professionals have recognized that the case has important ramifications for Chapter 15 beyond the argued facts.

What follows is a brief review of the background facts and essential holding of the bankruptcy court’s decision and then our analysis of the Fifth Circuit’s decision. For a more thorough analysis of the bankruptcy court’s decision please see our prior article.


Vitro, incorporated in Mexico, is among the largest glass manufacturers in the world.  As its revenues have declined since 2007, Vitro announced in early 2009 that it would be restructuring its debt. Consequently, it ceased interest payments on its outstanding debt (the “Old Notes”).  Almost two years later, in December 2010, Vitro filed for bankruptcy in Mexico (the “concurso proceeding”) and filed a Chapter 15 petition in the United States Bankruptcy Court for the Northern District of Texas, which eventually recognized the Mexican case as the foreign main proceeding.

Vitro’s Old Notes were guaranteed by most of its subsidiaries and financed primarily by U.S. investors.  During 2009 and 2010, through a series of undisclosed transactions, Vitro came to owe its subsidiaries approximately $1.5 billion in intercompany debt, which was more than 50% of outstanding debt in aggregate.  As a result, Vitro’s Mexican plan of reorganization (the “Concurso Plan”) was approved in the Mexican court (which by law requires approval by creditors holding in aggregate 50% of the outstanding debt).  At the heart of the dispute, the Concurso Plan, among other provisions, extinguishes Vitro’s subsidiaries’ guarantees of Vitro’s Old Notes and replaces the Old Notes with new debt.  After the approval of its Concurso Plan by the Mexican court, Vitro petitioned the bankruptcy court for relief in the form of recognition and enforcement of the Concurso Plan in the United States.

While the Fifth Circuit affirmed the bankruptcy court’s essential decision to deny relief because the Concurso Plan attempts to discharge non-debtor obligations, it did so on slightly different grounds because of the general confusion that surrounds the operative provisions regarding Chapter 15 comity.  More importantly, the Fifth Circuit provided a new framework for determining when foreign proceedings should be granted relief on the principles of comity.


As stated by the Supreme Court in Hilton v. Guyot, comity is the “recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation.”  Hilton v. Guyot, 159 U.S. 113 (1985).  Because comity is the underlying principle in Chapter 15 cases, the Fifth Circuit and decisions around the United States made clear that “In considering whether to grant relief, it is not necessary that the result achieved in the foreign bankruptcy proceeding be identical to that which would be had in the United States. It is sufficient if the result is ‘comparable.’” Schimmelpenninck v. Byrne (In re Schimmelpenninck), 183 F.3d 347 (5th Cir. 1999).  As a result, most foreign plans of reorganization are recognized by U.S. Courts.

The Fifth Circuit’s framework for evaluating whether to grant specific relief in Chapter 15 cases

Nonetheless, the Fifth Circuit agreed with the bankruptcy court that there must be limitations to comity, inherent within the bankruptcy code’s provisions.  The court recognized that there has been confusion and disagreement over which sections of the code may provide relief in chapter 15 cases (specifically between sections 1507 and 1521). See, e.g., In re Toft, 453 B.R. 186, 190 (Bankr. S.D.N.Y. 2011); In re Atlas Shipping A/S, 404 B.R. 726, 741 (Bankr. S.D.N.Y. 2009).  As a result, the court crafted a new framework to analyze whether and where a court should provide particular relief in chapter 15 cases.

Under the framework, a court must first review section 1521 for whether the requested relief is specifically enumerated within its provisions (section 1521(a)(1)-(7)).  If the requested relief is not specifically provided, the court must then consider whether the requested relief may be allowed for by the general language of section 1521 (“any appropriate relief”).

By reviewing the legislative history of section 1521, the Fifth Circuit determined that the generalized language of the section referred to relief that could have been provided under section 304. Section 304, which governed relief in foreign bankruptcy cases, was repealed and replaced by section 1521.

Finally, if relief cannot be granted under either of the first two steps of the framework, the court can finally grant relief, in extraordinary circumstances, under the very broad “additional assistance” language of section 1507.  The Fifth Circuit’s framework thus attempts to resolve the debate over which section (1521 vs. 1507) should be considered first when granting relief. Some cases and commentators dispute whether section 1507 could be used as an end-around to 1521.  See, e.g., In re Int’l Banking Corp. B.S.C., 439 B.R. 614, 626 n.10 (Bankr. S.D.N.Y. 2010).  Ultimately, the Fifth Circuit took the position that more specific provisions should take precedence over more generalized ones.

The Fifth Circuit’s decision

Applying its framework to Vitro’s requested relief to enforce its plan of reorganization, which would erase Vitro’s subsidiaries’ guarantees of Vitro’s Old Notes (essentially a non-debtor discharge), the Fifth Circuit found that the relief could not be granted under section 1521 or 1507.  The Fifth Circuit could not find a specific provision in section 1521 that would allow Vitro’s request to essentially discharge the obligations of its non-debtor subsidiaries.  Nor did the court find that the more general language of section 1521 could allow for relief, as such relief could not have been provided for in the repealed section 304.

However, the Fifth Circuit, unlike the Bankruptcy Court below, did believe that the relief requested might be possible under section 1507 – the court found occasional instances in U.S. decisions that allowed for non-debtor discharge.  Nonetheless, because such discharges are very rare and only granted in exceptional circumstances, the court ultimately concluded that the release provisions of the plan would be contrary to the Code’s priority scheme, and that Vitro had not demonstrated the extraordinary circumstances that would allow the court to grant such extraordinary relief.


It seems that the Fifth Circuit was able to balance the competing interests of comity and preserving U.S. bankruptcy policy.  Notably, the Fifth Circuit did not base its ruling on whether providing the requested relief would be contrary to U.S. policy under section 1506 – the court found several instances where non-debtors were in fact discharged from their obligations. Nonetheless, the court made clear that such discharges are rare and unlikely to be acceptable in the United States.

Ultimately, the new framework may provide more certainty to debtors and creditors alike with respect to when courts will grant relief.  While the decision could be criticized as a U.S. court imposing U.S. policy onto other nations, comity appears to still be the rule of the day, as the Fifth Circuit appears to have interpreted the Code sections generously and broadly.  The decision is a signal to foreign debtors that Chapter 15 relief is not simply carte blanche.

Vitro has suggested that it may appeal the decision to the Supreme Court.  Since the Fifth Circuit’s test seems rigorous and carefully considered with more than enough deference to the principles of comity, it seems hard to believe that the Supreme Court would overrule the decision, if it granted certiorari at all.


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