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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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Contesting Judgments From Abroad

Imagine that your long time international business client calls you one day, in a panic, to tell you that a foreign court has entered a judgment against his company.  Now, some local lawyer is attempting to “domesticate” that judgment and enforce it against your client in the United States.  The judgment is for a large dollar amount and the stakes are high.  But the case is already over, isn’t it?  Your client has already lost, hasn’t it?

Of course not.

This is because foreign legal systems do not always comport with our notions of “due process” and substantial justice.  Look carefully at the foreign judgment and the proceedings and circumstances which gave rise to it.  There may be ample reason/opportunity for you to poke holes in it and, ultimately, defeat the entry of the judgment.

Foreign country judgments in Florida are governed by F.S. § 55.605.  That Statute provides several reasons upon which you can contest the entry of a foreign judgment.  A sampling of those reasons are set forth below.

  1. A.           The Foreign Legal System Where The Judgment Was Entered Was Not Impartial And Did Not Have Procedures Reflecting Due Process.

 

As Dorothy said in the Wizard of Oz, “there is no place like home.”  American lawyers sometimes take for granted the wonderful procedures that we have for notice, an opportunity to be heard and other due process provisions.  The best thing that ever happened to the American legal system was the United States Constitution.  Remember, however, that the United States Constitution applies only in the United States.  Foreign countries do not usually have such a document.  Accordingly, foreign legal systems tend to work differently and do not have built in protections which ensure fairness.

You should research the mechanics of the foreign civil procedure system when your client is contesting the entry of a foreign judgment.  You can do this by consulting Martindale-Hubbell or by contacting counsel abroad and questioning them about how their system operates.  You would be surprised how different foreign legal systems can be from the American system sometimes dispensing with the concept of service of process, notices of hearings and even allowing trials to proceed based only upon publication notices.  Countries which employ these procedures open up their judgments to collateral attack in the United States.

  1. B.   Jurisdiction Over The Defendant

You should evaluate whether the foreign court had jurisdiction over your client by making the same type of due process/minimum contacts analysis you would perform in the United States.  Did your client actually do business in the foreign jurisdiction?  Did your client maintain an office, have a bank account or employees in the foreign jurisdiction?  What gave rise to the basis for the judgment?  All of these things are issues which can be attacked, based upon section 55.605, in the event that recognition is sought for a foreign judgment in the United States.

  1. C.   Notice Of The Foreign Proceedings

It is amazing how many jurisdictions allow notice by publication or through letters sent in the mail.  American-style process service is the exception rather than the rule.  Accordingly, ask your client how he learned about the foreign proceeding.  Did he read about it in the newspaper?  Did a notice appear in the mail?  Did a process server serve the notice?

Just like any litigation, these are important questions to ask when dealing with the domestication of a foreign judgment against your client.  American courts will re-visit the manner in which service of process was made when the issue is whether a foreign judgment should be domesticated.

  1. D.   The Judgment Was Obtained By Fraud

Not every country in the world has a fair legal system.  Many countries operate under concepts of patronage, baksheesh[1] and outright bribery.  Moreover, a plaintiff who sues in a foreign country often misdescribes or omits certain key facts.  This can also give rise to a fraudulent judgment which may not recognized in the United States.  Thus, look carefully into the foreign judgment and how it was obtained in order to determine whether it was obtained by fraud.

  1. E.   The Judgment Violates Public Policy

There are all sorts of reasons why a foreign judgment might violate public policy of the State where domestication and enforcement is sought.  In divorce cases, the rights of women are often overlooked in foreign countries.  Some foreign countries do not have statutes providing for equitable distribution or alimony.  Sometimes, everything goes to the husband.

In business cases, in certain instances, liquidated damages penalties, which might not be enforceable in the United States, have been found enforceable in foreign countries.  Foreign courts also sometimes ignore the terms of the parties’ contract and, instead, enter a judgment based upon the court’s perception of “fairness.”

The courts have denied recognition to foreign judgments where a wrongdoer seeks to enforce a judgment for damages which is related to the wrongdoing.  For example, a bail jumper, who is later captured, cannot sue for injuries relating to his capture.

Foreign libel judgments are particularly susceptible to attack.  The libel laws in foreign countries differ vastly from those in the United States.  England is one such country which has completely different libel laws insofar as a defendant in an English libel proceeding may be held responsible based upon “strict liability” theories without any regard to the First Amendment or other due process concepts (remember that England does not have our Constitution).  Freedom of speech and of the press is a uniquely American concept which many countries ignore.  Foreign judgments which do not take these factors into account can also be subject to collateral attack.

  1. F.    Forum Non Conveniens

Foreign judgments may also be attacked on the grounds that the country in which the lawsuit was brought originally is not a convenient forum in cases where jurisdiction is based only upon personal service.  Courts in these circumstances may engage in a typical forum non conveniens analysis – determining where the witnesses, documents and the transaction took place.  It is unlikely that a Florida court will uphold a foreign judgment where only one of several witnesses is located in the foreign country and the majority of the witnesses and documents are located in the United States.  These types of tactics are usually frowned upon by American courts and, as a result, foreign judgments obtained under these circumstances can be highly suspect.

In sum, be wary of foreign judgments when representing individuals and/or companies who may want to defend against those judgments. There are plenty of reasons that such judgments may be subject to collateral attack.


[1] Baksheesh (from Persian: بخشش‎ bakhshesh[1]) is a term used to describe tippingcharitable giving, and certain forms of political corruption and bribery in the Middle East and South Asia. Leo Deuel[who?] sardonically described baksheesh as “lavish remuneration and bribes, rudely demanded but ever so graciously accepted by the natives in return for little or no services rendered.”[2] http://en.wikipedia.org/wiki/Baksheesh.

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