TEXAS BANKRUPTCY COURT REFUSES TO RECOGNIZE CONFIRMED MEXICAN CORPORATE REORGANIZATION PLAN BY RONALD G. NEIWIRTH *

On June 15, 2012 a U.S. Bankruptcy Judge in the Northern District of Texas (the “Bankruptcy Court”), declined to issue an injunction requested by Vitro, S.A.B. de C.V., a debtor in a Mexican reorganization case (“Vitro”).  Vitro had filed a Chapter 15 bankruptcy case in Dallas, seeking the assistance of the U.S. courts to enforce a reorganization plan (“Concurso”), which had been approved in its “foreign main proceeding.”

On February 3, 2012, a Mexican Court had issued a Concurso Approval Order (the “Order” )under the authority of the Mexican Ley de Concursos Mercantiles (“LCM”), in the Vitro’s case, which is largely analogous to Chapter 11 reorganizations in the U.S.  Following the entry of the Order, Vitro moved to the Bankruptcy Court for injunctions to enforce the terms of the Concurso.

Affected creditors objected to the proposed injunction, explaining that they held valid guarantees of Vitro’s debt, and that the Concurso, which allowed various insiders to obtain almost U.S. $500 million in benefits, while prohibiting the holders of guarantees from pursuing non-debtor subsidiaries, was so completely at odds with U.S. law and public policy, that the Bankruptcy Court should not grant the requested injunction.

For the Bankruptcy Court, there were two primary issues at stake:  First, the Order prohibited Vitro creditors who held guarantees of their obligations from third parties, from pursuing collection.  Should the Bankruptcy Court enforce that prohibition as a matter of “comity”?  Second, should the extension of comity by the Bankruptcy Court be limited under 11 U.S.C. §1506, where enforcing the foreign order would be “manifestly contrary” to the public policy of the U.S.?  Ultimately, the Bankruptcy Court agreed with the objectors.

Chapter 15 of the Bankruptcy Code was enacted in 2005 to (i) codify the process by which cross-border bankruptcies and liquidations might obtain judicial recognition in the U.S., and (ii) to provide for the enforcement of rulings emanating from the “foreign main proceeding,” subject to a public policy provided by 11 U.S.C. § 1506, which limits the extension of comity to foreign court judgments where it would be “manifestly contrary” to the public policy of this country.

In addition to the basic effect of recognition by a U.S. court of a “foreign main proceeding” under 11 U.S.C. § 1520, additional relief may be granted to protect the assets of the Debtor or the interest of creditors under 11 U.S.C. § 1521.  Moreover, the statute providing that “additional assistance may be provided to the Foreign Representative of the Debtor consistent with principles of comity.”

11 U.S.C. §1522(b) permits the court to impose conditions upon any discretionary relief that it may grant.  While Section 1507(b) provides a list of issues for the Bankruptcy Court to consider in enforcing a foreign judgment, comity should be the primary consideration.  Comity is defined as the “…recognition which one nation allows within its territory to the legislative, executive, or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protections of its laws.”  Hilton v. Guyot, 159 U.S. 113, 163-164, 16 S.Ct. 139 (1895).

Generally, granting comity to judgments and foreign bankruptcy proceedings is appropriate so long as U.S. parties are able to obtain the same fundamental protections that litigants in the United States would enjoy.  Here, the Court explained that:  “the principle of comity has never meant categorical deference to foreign proceedings.  It is implicit in the concept that deference should be withheld where appropriate to avoid violation of the laws, public policies, or rights of the citizens of the United States.” Vitro, S.A.B. de C.V. v. ACP Master, Ltd. (In re Vitro, S.A.B. de C.V.), Ch. 15 Case No. 11-33335-HDH-15, 2012 WL 2138112 (Bankr. N.D. Tex. Jun. 13, 2012).

Ultimately, the Bankruptcy Court concluded that the Mexican Concurso, which extinguished the guarantee claims of the objecting creditors in the United States against entities who were not debtors in the Mexican case, should not be accorded comity.  It therefore would not be enforced.  Even so, the court took pains to acknowledge that generally speaking, reorganization pursuant to the Mexican LCM is a fair process and worthy of respect.  The Bankruptcy Court simply would not countenance the Mexican court’s release of third parties who were not debtors in the reorganization case, from their guarantee obligations to creditors.

While there is a general reluctance in this country to utilize foreign law in resolving American cases, a Chapter 15 cross-border bankruptcy is primarily a foreign case, with certain U.S. components.  Obviously, a line must be drawn somewhere short of total uncritical acceptance of all foreign rulings and foreign main proceedings, but determining where to draw the line is difficult.  An expedited appeal has been taken to the Fifth Circuit.

 

*Practice Group Leader, Insolvency & Reorganization Department, Boyd & Jenerette

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2 responses to “TEXAS BANKRUPTCY COURT REFUSES TO RECOGNIZE CONFIRMED MEXICAN CORPORATE REORGANIZATION PLAN BY RONALD G. NEIWIRTH *

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