Fifth Circuit Rejects Foreign Restructuring Plan
The recent case of In re Vitro S.A.B. de C.V., No 12-10542 (5th Cir. Nov. 28, 2012) involves the recognition and enforcement by a United States Federal Court of a foreign bankruptcy proceeding and foreign plan of reorganization, pursuant to Chapter 15 of the Bankruptcy Code. An earlier discussion of this case appears in a prior submission entitled “Chapter 15 (Pertaining to International Proceedings) is Alive and Well.”
Incorporated in 1909, Vitro S.A.B. de C.V. (“Vitro”) is the largest glass manufacturer in Mexico. The Company operates manufacturing facilities in seven countries and exports its products to more than 50 countries worldwide.
Between February 2003 and February 2007, Vitro borrowed, through the issuance of various series of notes (“Notes”), approximately $1.216 billion, predominantly from U.S. investors. The payment obligations under the Notes were guaranteed by virtually all of Vitro’s subsidiaries. The guarantees provided that the obligations of the guarantors could not be released, discharged, or otherwise affected by any settlement or release as a result of any insolvency, reorganization, or bankruptcy proceeding affecting Vitro.
In the latter half of 2008, Vitro’s business was significantly impacted by the global financial crisis, which resulted in reduced demand for its products. Vitro’s operating income declined by 36.8% from 2007 to 2008, and an additional 22.3% from 2008 to 2009. In February 2009, Vitro announced its intention to restructure its debt and contemporanously stopped making scheduled interest payments on the Notes.
Between August 2009 and July 2010, Vitro engaged in negotiations with its creditors and submitted three proposals for reorganization, each of which was rejected. In the meantime, in December 2009, Vitro entered into a series of transactions with certain creditors and its subsidiaries that generated a large quantity of intercompany debt. Before this time, Vitro’s operating subsidiaries owed Vitro an aggregate of $1.2 billion in intercompany debt. As a result of these 2009 transactions, the subsidiary debt was eliminated and, in a reversal of roles, Vitro’s subsidiaries became creditors to which Vitro owed an aggregate of $1.5 billion in intercompany debt.
On December 13, 2010, after failed negotiations with creditors and strong opposition by 60% of the Noteholders, the Company initiated in a Mexican court a Concurso proceeding (i.e., insolvency proceeding) under the Mexican Business Reorganization Act or Ley de Concurso Mercantiles.
Under the Ley de Concurso, a “conciliador” is appointed in a Concurso proceeding to serve as a quasi-judicial officer with certain responsibilities, including filing an initial list of claims, mediating a reorganization plan between the debtor and creditors and, if necessary to protect the debtor’s estate, managing the debtor’s business.
On December 5, 2011, the conciliador filed with the Mexican court a proposed restructuring plan that was substantially similar to the plan that Vitro had previously proposed to its creditors. Under the plan, the old Notes would be extinguished and the guarantees owed by the subsidiaries would be discharged. The plan further provided that Vitro would issue new notes, in the principal amount of $814,650,00, payable in 2019. The new notes would be issued to third-party creditors, not including Vitro’s subsidiaries (which were owed $1.5 billion), and would bear annual interest at 8%, but would not require payments of principal during the first four years. The new notes would also be guaranteed by Vitro’s subsidiaries.
In addition to the new 2019 notes, the plan also required Vitro to provide the holders of old Notes $95,840,000 of new convertible debt obligations due in 2015 and cash consideration of approximately $50 per $1000 of principal of the old Notes.
Under the Ley de Concurso, creditors holding at least 50% of unsecured debt must vote in favor of the restructuring plan. As distinguishable from U.S. bankruptcy laws, however, the Ley de Concurso does not classify unsecured creditors into interest-aligned classes and instead counts the votes of all unsecured creditors, including insiders, in a single class. As a result, creditors holding 74.67% of unsecured claims voted in favor of the plan, but over 50% of these voting claims were held by Vitro’s subsidiaries in the form of intercompany debt.
While the Ley de Concurso also allows nonconsenting creditors to veto a plan after the initial voting has taken place, a veto requires an agreement by creditors holding 50% of the debt or creditors numbering at least 50% of all unsecured claims. As only 26 of the 886 unsecured creditors (360 of which were Vitro’s employees) sought to veto the plan and as those creditors held less than 50% of the aggregate debt, the veto failed.
Accordingly, the Mexican court approved the Concurso plan, which went into effect on February 23, 2012. Thereafter, Vitro issued the 2019 notes and convertible debt obligations and paid the restructuring cash into 2 trusts created to make distributions to all creditors.
The nonconsenting creditors appealed the Mexican court’s approval of the Concurso plan through the Mexican appellate system. However, there was no stay imposed as to the effectiveness of the Concurso plan.
In addition to objecting to the Concurso plan, nonconsenting creditors attempted to collect on the old Notes and guarantees in the United States. Among other things, they accelerated the old Notes and commenced involuntary bankruptcy proceedings against 15 of Vitro’s subsidiaries domiciled in the United States. Various representatives of Noteholders also filed 2 lawsuits in New York state court against Vitro and its 49 subsidiary guarantors.
In December 2011, the indenture trustee for 2 series of Notes obtained a judgment from the New York state court, providing that “any non-consensual release, discharge or modification of the obligations of the Guarantors . . . is prohibited.” The court also found, however, that whether such prohibition may be modified or eliminated by applicable Mexican laws was not at issue. In the separate New York suit, another indenture trustee obtained the same type of ruling.
Chapter 15 Proceeding
In April 2011, a foreign representative appointed by Vitro’s board of director commenced a chapter 15 proceeding in a U.S. Bankruptcy Court. Enacted in 2005 and replacing former section 304, chapter 15 of the Code was intended “to provide effective mechanisms for dealing with cases of cross-border insolvency [such as Vitro’s] with the objectives of”:
- cooperation between (a) U.S. courts and authorities and (b) courts and authorities of foreign countries;
- greater legal certainty for trade and investments;
- fair and efficient administration of cross-border insolvencies that protect the interests of all interested parties, including creditors and the debtor;
- maximization of the value of the debtor’s assets; and
- facilitation of the rescue of financially troubled companies.
11 U.S.C. § 1501(a). Central to chapter 15 is the concept of “comity,” which is akin to the notion of respect that one nation provides to another nation’s authorities, “having due regard both to international duty and convenience, and to the rights of its own citizens, or other persons who are under the protection of its laws.” Hilton v. Guyot, 159 U.S. 113, 164 (1895). Various sections in chapter 15 highlight this concept. See 11 U.S.C. §§ 1501, 1508, 1507 and 1509(b)(3).
A chapter 15 proceeding is commenced when a foreign representative of a foreign company petitions a U.S. bankruptcy court for recognition of a foreign insolvency proceeding. See 11 U.S.C. §§ 1504, 1515. After recognition, the foreign representative may apply to the U.S. bankruptcy court for appropriate relief outlined in chapter 15. Chapter 15 allows a broad range of relief, including, among other things:
- an automatic stay against property located in the U.S.;
- authority to operate the foreign debtor’s business and exercise the powers of a trustee;
- authority to examine witnesses and take evidence regarding the foreign debtor’s assets;
- authority to commence a regular bankruptcy case in the U.S.;
- authority to sue in U.S. courts; and
- authority to prevent transfers of property in the U.S.
See 11 U.S.C. § 1507, 1509, 1520, 1521. Section 1521(a) also authorizes a bankruptcy court to “grant any appropriate relief” necessary to effectuate the purpose of chapter 15 and to protect the assets of a foreign debtor. Similarly, section 1507 allows a bankruptcy court to provide “additional assistance to a foreign representative under [the Code] or under other laws of the United States.” The Fifth Circuit has previously held that, in considering whether to grant relief under chapter 15, it is not necessary that the foreign proceeding be identical to a regular proceeding under the Bankruptcy Code. See, e.g., In re Schimmelpenninck, 183 F.3d 347, 353 (5th Cir. 1999); In re Oversees Inns S.A. P.A. v. United States, 911 F.2d 1146, 1148 (5th Cir. 1990).
Enforcement of the Concurso Plan
During it’s chapter 15 proceeding, the Bankruptcy Court for the Northern District of Texas recognized the foreign proceeding of Vitro as falling within chapter 15 of the Code. Thereafter, Vitro’s foreign representative filed a motion to enforce the Concurso plan and issue a permanent injunction against claims made by the Noteholders in contravention of such plan. The Bankruptcy Court denied this motion, primarily because of the Concurso’s plan’s proposed release of nondebtor guarantees owed by Vitro’s subsidiaries.
The Noteholders and Vitro ultimately appealed the rulings to the Fifth Circuit Court of Appeals. There were two issues on appeal:
- whether the Bankruptcy Court erred in recognizing the foreign representatives in the chapter 15 proceeding; and
- whether the Bankruptcy Court erred in refusing to enforce the Concurso plan.
Foreign Representative Appointed
The Noteholders argued that the foreign representatives that initiated the chapter 15 proceeding on behalf of Vitro were not properly appointed because they were not appointed by a Mexican court and Vitro, independently, otherwise lacked the powers of a debtor in possession to appoint such representatives. This was an important point because chapter 15 solely authorizes a foreign representative to initiate a chapter 15 proceeding and, after recognition of such proceeding, authorizes solely the foreign representative to seek relief under chapter 15.
The Bankruptcy Code defines a “foreign representative” as ” a person or body, including a person or body appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor’s assets or affairs or to act as a representative of such foreign proceeding.” See 11 U.S.C. § 101(24). A duly recognized foreign representative has the capacity to sue and be sued in the U.S. and to apply directly to a U.S. court for relief, and is entitled to comity and cooperation of all U.S. courts.
On appeal, the Fifth Circuit agreed with the Bankruptcy Court’s conclusion that chapter 15, by its plain language, did not require the foreign representative to be appointed by a court in a foreign country. The various sections of chapter 15 that discuss foreign representatives only provide context in which a foreign representatives are appointed, but do not provide specific requirements. See 11 U.S.C. §§ 101(24), 1509(b)(2), 1515.
Moreover, the Fifth Circuit found that Vitro retained in its foreign proceeding enough authority over its affairs to appoint the foreign representatives in question, irrespective of whether Vitro had all the powers of a debtor in possession, as recognized by U.S. laws.
Rejection of Concurso Plan
With respect to the treatment of the guaranty claims against Vitro’s subsidiaries, the Fifth Circuit held that while relief under chapter 15 may, in exceptional circumstances, include enforcing a foreign court’s order extinguishing the obligations of non-debtor guarantors, Vitro had failed to demonstrate in its case that such exceptional circumstances were present. In doing so, the Fifth Circuit analyzed, as a matter of first impression, whether relief under the enforcement motion could be granted under sections 1521 or 1507 of the Code.
The Fifth Circuit held that in circumstances where a foreign representative seeks broad relief a court must first determine whether the authority requested is specifically listed in section 1521(a) and (b). That section specifically authorizes:
- staying any action against the debtor’s assets, rights, obligations or liabilities;
- staying the execution against the debtor’s assets;
- suspending the right to transfer any assets of the debtor;
- providing for discovery, including the examination of witnesses;
- entrusting the administration of all or part of the foreign debtor’s assets in the U.S.;
- extending emergency relief granted under section 1519(a);
- granting any additional relief available to a trustee under sections 522, 544, 545, 547, 548, 550 and 724(a) of the Code; and
- entrusting the distribution of assets in the U.S. to a foreign representative.
As mentioned, section 1521(a) also gives a foreign representative general authority to grant “any appropriate relief” if the relief requested does not otherwise fall within the relief specifically listed in section 1521(a) and (b). With respect to this general authority, the Fifth Circuit held that “appropriate relief” means any relief previously available under chapter 15’s predecessor, section 304 0f the Code. The Fifth Circuit also noted that section 1522 limits any relief available under section 1521, by providing that any relief can only be granted if the interests of creditors and other interested entities, including the debtor, are sufficiently protected. Moreover, the Fifth Circuit found that only if the “appropriate relief” was not available under former section 304 should a bankruptcy court turn to the relief authorized under section 1507.
The Fifth Circuit ultimately held that the relief requested–discharging obligations held by non-debtor guarantors–in Vitro’s enforcement motion was neither authorized under section 1521(a) and (b) nor authorized as “appropriate relief” under section 1521(a), as such releases are generally impermissible under U.S. laws. The relief requested also ran afoul of section 1522, because the interests of the Noteholders were not being taken into consideration.
The Fifth Circuit then went on to find that the relief requested could fall within section 1507’s broad authority to grant “additional assistance.” See,e.g., In re Metcalfe & Mansfield Alternative Investments, 421 B.R. 685, 694 (Bankr. S.D.N.Y. 2010). According to the Fifth Circuit, section 1507 theoretically provides relief not otherwise available under U.S. laws. Section 1507, however, contains its own limitations on when extraordinary relief can be granted. Among other limitations, section 1507(b)(4) provides that a bankruptcy court should take into consideration whether the “additional assistance” provides for the distribution of proceeds of the debtor’s property substantially in accordance with the order prescribed by chapter 11. The Bankruptcy Court found that this very limitation prohibited the relief requested in the enforcement motion because the Noteholder were being given a substantially reduced recovery (40%), not in conformance with the order of distribution under chapter 11.
While the Fifth Circuit reasoned that section 1507 could theoretically be used to grant non-consensual, non-debtor releases in certain circumstances, it ultimately held that “because Vitro has failed to show the presence of the kind of comparable extraordinary circumstances that would make enforcement of such a plan possible in the United States, the Bankruptcy Court did not abuse its discretion in denying relief.”
The Fifth Circuit considered comity as a central factor in reaching its conclusion. The Court stated “we agree with Vitro that comity is the rule under chapter 15, not the exception.” However, the Court found that many of the factors that would sway the Court in favor of granting comity were not present. In this respect, the Fifth Circuit emphasized several instances where the Concurso plan treated U.S. creditors unfairly. Among other things, the Concurso plan was approved by creditors holding 74.67% of the unsecured claims, but over 50% of those creditors were insiders, i.e., subsidiaries controlled by Vitro itself. In addition, while the Noteholders could only recover 40% of their debt under the Concurso plan, Vitro’s shareholders would retain equity interests worth $500 million. The same results would not occur under chapter 11’s classification and cramdown provisions in nonconsensual plan contexts. See 11 U.S.C. §§ 1122, 1129(10), 1129(b). In light of the unfair treatment of U.S. creditors, the Fifth Circuit felt compelled to agree with the Bankruptcy Court’s decision to deny the enforcement motion.
Where this decision leaves the Concurso plan is speculative. Vitro still has several options, including placing the U.S. subsidiaries in bankruptcy. The other option that is implicit in the Fifth Circuit’s opinion includes providing U.S. creditors with a real vote and a separate place at the negotiating table during the plan confirmation process. Perhaps, such inclusion might likely achieve the equities necessary to enforce comity under chapter 15.
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