Vol 10 (2013) - Issue 2

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In re Vitro: The Fifth Circuit Refuses to Sign Off on Non-Debtor Affiliate Releases

On 28 November 2012, the United States ('US') Court of Appeals for the Fifth Circuit (the 'Court of Appeals') affirmed the much debated decision of the United States Bankruptcy Court for the Northern District of Texas (the 'Bankruptcy Court') denying recognition of the Mexican plan of reorganisation of Vitro S.A.B. de C.V. ('Vitro') approved by a Mexican court in Vitro’s insolvency proceeding ('concurso') in Mexico. The Court of Appeals also affirmed the district court’s judgment recognising the Mexican reorganisation proceeding and the appointment of the foreign representatives.

Background
Vitro, the largest glass manufacturer in Mexico, operates through a network of subsidiaries, including US subsidiaries. Between February 2003 and February 2007, Vitro borrowed a total of approximately USD 1.216 billion through the issuance of three series of unsecured notes (the 'Notes'). The Notes were bought predominantly by US investors (the ‘Noteholders’). The Notes were guaranteed by substantially all of Vitro’s subsidiaries. The guaranties were to be governed and construed under New York law and were not to be released, discharged, or otherwise affected by any settlement or release as a result of any insolvency, reorganisation, or bankruptcy proceeding affecting Vitro. After being impacted by the financial crisis, Vitro failed to make scheduled interest payments to the Notes. Vitro started restructuring its debt, and through these transactions, among other things, Vitro amassed significant intercompany indebtedness, but failed to disclose these transactions to Noteholders.
Vitro’s negotiations with creditors were unsuccessful. Vitro commenced a voluntary reorganisation proceeding in Mexico, pursuant to which a conciliador (an appointed quasi-judicial officer with certain responsibilities in the concurso proceeding) was appointed. On December 5, 2011, the conciliador submitted a plan of reorganisation (the 'Plan'). The Plan provided, among other things, that the Notes would be extinguished and the subsidiary guarantors would be discharged. Under Mexican law, a plan of reorganisation is confirmed if at least 50% of the aggregate principal amount of unsecured debt, as a single class, votes in favor of the plan. The approval of Vitro’s Plan was secured by Vitro’s subsidiaries, who held over half of all voting claims due to prior reshuffling of intercompany obligations.
Vitro’s foreign representatives, appointed by Vitro’s board of directors, filed a chapter 15 petition seeking recognition as a foreign main proceeding. Over objections, the bankruptcy court recognised the Vitro’s concurso as a foreign main proceeding and approved the petition confirming the foreign representatives. Subsequently, the foreign representatives sought court order enforcing the Plan and precluding US investors from pursuing collection from Vitro’s guarantor subsidiaries (the 'Enforcement Motion'), which was denied by the Bankruptcy Court.