In 2008, Vitro became unable to service the interest payments on several series of notes it had issued and, on November 1, 2010, commenced a voluntary judicial reorganization proceeding in a Mexican federal court pursuant to Mexico’s business reorganization act, the Ley de Concursos Mercantiles. Notwithstanding the pending Mexican insolvency proceeding, certain holders of Vitro’s notes instituted actions against Vitro and its non-debtor subsidiaries in New York state court, seeking to accelerate the notes and enforce the guarantees. In response to these noteholder actions, Vitro filed a complaint in the United States Bankruptcy Court for the Southern District of New York and requested a temporary injunction enjoining the noteholders from attempting to enforce the non-debtor subsidiary guarantees. The case was later transferred to the United States Bankruptcy Court for the Northern District of Texas, which denied Vitro’s motion for a temporary injunction. Subsequently, the Texas bankruptcy court recognized Vitro’s Mexican insolvency proceeding as a foreign main proceeding pursuant to chapter 15 of the Bankruptcy Code.
On February 3, 2012, the Mexican bankruptcy court entered an order approving the plan. The plan and the approval order contained certain provisions that purported to extinguish the non-debtor subsidiary guarantees. In spite of these provisions, the noteholders continued their efforts to enforce the non-debtor subsidiary guarantees in United States courts. Consequently, Vitro’s foreign representatives in the chapter 15 case filed a motion in the Texas bankruptcy court requesting that the court give full force and effect to the Mexican reorganization plan by enjoining any future attempts to enforce the non-debtor subsidiary guarantees in the United States.
Last week, Vitro, seeking to salvage its restructuring plan, urged an appeals court to enforce its bankruptcy plan in the U.S. over opposition from hedge fund Elliott Management Corp. and other creditors, Bloomberg reported. Vitro is facing“legal chaos” with a bankruptcy plan that’s valid in Mexico and unenforceable in the U.S., Vitro attorney Andrew Leblanc told the U.S. Court of Appeals in New Orleans today. “Vitro would be crippled in the United States” if a bankruptcy judge’s decision that denied enforcement of the plan in the U.S. is upheld, Leblanc said. The case came directly to the appeals court following a victory in bankruptcy court by Elliott and other holders of some of Vitro’s $1.2 billion in defaulted bonds. U.S. Bankruptcy Judge Harlin Hale in Dallas ruled in June that the Mexican plan was “manifestly contrary” to U.S. policy because it reduced the liability of non-bankrupt Vitro units on the bonds. A panel of three appeals court judges heard the case. The outcome will help determine the boundaries on what is permissible in a foreign reorganization that seeks recognition in the U.S., said Madlyn Gleich Primoff, a bankruptcy attorney at Kaye Scholer LLP in New York.
Chapter 15 is a new chapter added to the Bankruptcy Code by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. It is the U.S. domestic adoption of the Model Law on Cross-Border Insolvency promulgated by the United Nations Commission on International Trade Law ("UNCITRAL") in 1997, and it replaces section 304 of the Bankruptcy Code. The Model Law was adopted by Mexico in 2000, five years earlier, and implemented through the enactment of Mexico’s business reorganization act - the Ley de Concursos Mercantiles.
The purpose of Chapter 15 (and its correlative in the Ley de Concursos Mercantiles and the Model Law on which they are based) is to provide effective mechanisms for dealing with insolvency cases involving debtors, assets, claimants, and other parties of interest involving more than one country. This general purpose is realized through five objectives specified in the statute: (1) to promote cooperation between the United States courts and parties of interest and the courts and other competent authorities of foreign countries involved in cross-border insolvency cases; (2) to establish greater legal certainty for trade and investment; (3) to provide for the fair and efficient administration of cross-border insolvencies that protects the interests of all creditors and other interested entities, including the debtor; (4) to afford protection and maximization of the value of the debtor's assets; and (5) to facilitate the rescue of financially troubled businesses, thereby protecting investment and preserving employment.
Mauricio Leon de la Barra is an international law attorney licensed to practice law in Mexico and California, and has more than 15 years of experience representing clients in cross-border business and real estate transactions and litigation involving international, U.S. and Mexican laws.