Vol 9 (2012) - Issue 6

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In re Vitro: Comity Should Not Be Taken For Granted – The Public Policy Exception is Alive and Well

In an important decision interpreting comity and the public policy exception under chapter 15 of the Bankruptcy Code,1 the United States Bankruptcy Court for the Northern District of Texas (the 'Bankruptcy Court') denied recognition of the Mexican plan of reorganization ('concurso') of Vitro S.A.B. de C.V. ('Vitro') approved by a Mexican court in its insolvency proceeding in Mexico. The Bankruptcy Court ruled that by extinguishing claims against non-debtors, the concurso was manifestly contrary to a fundamental policy of the U.S. embodied in section 524(e) of the Bankruptcy Code, which protects third party claims by providing that the discharge of a debt does not affect the liability of any other entity for such debt. The much-anticipated decision of the U.S. Court of Appeals on whether to uphold or reverse the Bankruptcy Court's ruling will determine another chapter in the Vitro saga, which has been heavily litigated in the U.S.

Background
Vitro, the largest manufacturer of glass containers and flat glass in Mexico, operates its business through a network of subsidiaries, including U.S. subsidiaries. In 2003 and 2007, Vitro issued unsecured senior notes (the 'Senior Notes') in the aggregate amount of USD 1.225 billion, guaranteed by substantially all of Vitro's wholly-owned direct and indirect subsidiaries. In addition, Vitro had approximately USD 2 billion of outstanding indebtedness to its direct and indirect subsidiaries.
Due to the impact of the financial crisis, Vitro failed to make scheduled interest payments to the Senior Notes and other indebtedness, which sparked, among other things, derivatives-related litigation in the U.S. Negotiations with creditors were unsuccessful, and on 17 November 2010, certain U.S. creditors filed involuntary petitions against 15 of the U.S. subsidiaries of Vitro in the United States Bankruptcy Court for the Northern District of Texas. Four of the debtors consented to the relief requested, and additional two debtors filed voluntary petitions. On 2 and 9 December 2010, two U.S. entities controlling or managing funds that held Vitro's Senior Notes initiated substantially similar law suits in the Supreme Court of the State of New York against Vitro and 49 of its subsidiaries as guarantors for breach of contract and payment of accelerated principal and accrued interest. Then, on 13 December 2010, after having solicited a pre-packaged plan of reorganization in Mexico, Vitro initiated a voluntary judicial reorganization proceeding in the Federal District Court for Civil and Labor Matters for the State of Leon, Mexico (the 'Mexican Court'). While the Mexican Court denied the request for a Mexican business bankruptcy, finding that the conditions for a prepackaged proceeding were not met because the intercompany claims should not be considered, the decision was reversed on appeal and a declaration of Vitro's business bankruptcy was issued on 8 April 2011.
Upon the Mexican appellate court's decision, Vitro re-filed a chapter 15 petition (originally filed on 14 December 2010)3 seeking recognition as a foreign main proceeding. On 26 April 2011, Vitro's foreign representative filed a motion in the Bankruptcy Court seeking a temporary restraining order and preliminary injunction that would prevent the note holders from commencing or continuing any and all litigation or actions to collect against Vitro and its subsidiaries, other than the subsidiaries whose proceedings were already pending the U.S. and were protected by the automatic stay under section 362 of the Bankruptcy Code.