In re Vitro Fifth Circuit Declines to Enforce Mexican Plan of Reorganization and Crafts New Framework for Foreign Debtor Relief

By: Maurizio Anglani

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In a matter of first impression, the Court of Appeals for the Fifth Circuit refused to enforce a foreign debtor’s plan of reorganization because it discharged debts of the debtor’s non-debtor subsidiaries.[1] In 2003, Vitro S.A.B. de CV (“Vitro”), a Mexican corporation, issued various notes totaling more than $1 billion. Most of Vitro’s direct and indirect subsidiaries, including its U.S. subsidiaries, guaranteed the notes.[2] Before the notes became due, Vitro initiated an insolvency proceeding in Mexico.[3] However, many of Vitro’s U.S. subsidiaries did not participate in the insolvency proceedings.[4] In February 2012, the Mexican court approved Vitro’s reorganization plan.[5] The Mexican plan purported to extinguish the guarantees of Vitro’s debt by Vitro’s U.S. subsidiaries.[6] Vitro’s representatives then sought to recognize and enforce releases granted in the foreign case, but the Bankruptcy Court for the Northern District of Texas denied relief, holding that non-consensual, non-debtor releases are “manifestly contrary” to U.S. public policy.[7]  

The Fifth Circuit affirmed the lower court’s decision, but did not adopt its reasoning. Instead, the Fifth Circuit developed a new framework for analyzing comity issues under Chapter 15 of the Code. Although the Code generally obligates U.S. courts to give deference to foreign judgments on the basis of comity,[8] the Fifth Circuit suggested that the Code also includes at least three “requirements and considerations that act as a brake … on comity.”[9]

First, section 1521 of the Code enumerates specific forms of relief available to a foreign debtor,[10] and the enforcement of non-debtor releases is not one of the specifically enumerated forms of relief.[11] However, section 1521(a) also includes a catch-all provision that enables the court to go beyond the specific forms of relief provided by the statute. Under section 1521(a), courts may grant “any appropriate relief” to a foreign debtor. Nevertheless, the Fifth Circuit concluded that only relief generally available under U.S. law could fit this category.[12] Since a non-debtor release is not generally available under U.S. law, the court refused to grant such relief pursuant to section 1521(a).[13]

Second, under section 1507 the court has authority to grant a foreign debtor “additional assistance,”[14] but only when the relief requested is “more extraordinary” than what is permitted under the provisions of section 1521. The court held that the enforcement of non-debtor releases constitutes “extraordinary relief” and may be available under section 1507 if all of section 1507’s requirements are met.[15] The court found that Vitro’s plan did not satisfy the requirements of section 1507(b)(4) because the plan would not provide for a distribution substantially in accordance with the order of priority prescribed by the Bankruptcy Code.[16] The court further supported its decision under section 1507 when it concluded that even if Vitro had complied with 1507(b)(4), Vitro failed to show the type of “extraordinary circumstances” that are necessary to grant “extraordinary relief.”[17]

Finally, section 1506[18] forbids enforcement of foreign judgments that are manifestly contrary to the public policy of the U.S.[19] Although the Bankruptcy Court had held that non-consensual, non-debtor releases violate the public policy of the U.S., the Fifth Circuit noted that such releases are allowed in exceptional circumstances.[20] Consequently, the court expressed skepticism that non-debtor releases violated public policy. However, it did not decide the section 1506 issue, because the court had already denied relief under sections 1507 and 1521.

In re Vitro is a significant case for practitioners involved in cross-border restructuring. The opinion of the Fifth Circuit provides a new framework for analyzing comity issues. In addition, as evidenced by the decisions of both courts regarding the section 1506 issue, companies seeking to enforce foreign judgments should be particularly cautious about including provisions that extinguish the rights of creditors vis-à-vis non-debtors, even where those non-debtors are subsidiaries wholly owned by the debtor.

[20] Id at 1069.