Case of the Day: In re Vitro

The case of the day is In re Vitro S.A.B. de C.V. (Bankr. N.D. Tex. 2012). Vitro, a Mexican glass manufacturer, was in reorganization proceedings in Nuevo León, Mexico under the Ley de Concursos Mercantiles. In 2011, Vitro began a Chapter 15 bankruptcy proceeding in the Northern District of Texas and sought to enjoin lawsuits by its creditors against the guarantors of its debt, who were not themselves in insolvency proceedings. The bankruptcy judge denied Vitro’s motion for an injunction, and the creditors sued the guarantors (which were Vitro subsidiaries) in the New York Supreme Court. The New York court entered a declaratory judgment in favor of the creditors declaring that Vitro’s reorganization proceeding would not affect the creditors’ rights against the guarantors. The New York court also enjoined the guarantors from assenting to the Mexican reorganization plan for which Vitro was seeking approval. But Vitro asked the Texas bankruptcy judge to enjoin the creditors from seeking injunctive relief in the New York state courts, and the Texas judge agreed. Thus the guarantors ultimately were able to vote on the Mexican reorganization plan. Unsurprisingly, they voted in favor: the plan “not only modifies the debts owed by Vitro SAB to the noteholders under various indentures, it also novates and extinguishes the guarantees, effectively discharging the obligations of Vitro SAB’s non-debtor subsidiary guarantors to the noteholders.”

The Mexican court approved the reorganization plan, but the creditors continued to take various collection actions against the Vitro subsidiaries/guarantors. Vitro asked the Texas bankruptcy judge to recognize and enforce the Mexican judgment approving the plan and thus to enjoin the creditors’ collection activities on the grounds that the guarantors’ obligations had been extinguished in the Mexican proceedings, even though the guarantors were not themselves in insolvency proceedings.

The bankruptcy judge refused to recognize and enforce the Mexican court’s decision extinguishing the claims against the guarantors, relying primarily on public policy considerations; Section 1506 of the Bankruptcy Code provides:

Nothing in this chapter prevents the court from refusing to take an action governed by this chapter if the action would be manifestly contrary to the public policy of the United States.

The judge noted: “Generally speaking, the policy of the United States is against discharge of claims for entities other than a debtor in an insolvency proceeding, absent extraordinary circumstances not present in this case.” The judge reached this conclusion even though he was not persuaded by the doomsday arguments the creditors advanced, which claimed that a decision in favor of Vitro would damage the United States financial markets.

While the judge ultimately ruled in favor of the creditors, I’d like to note that he rejected the corruption argument the creditors made about Mexico’s judiciary. The creditors’ expert witness testified persuasively about corruption in Mexico generally, but the court found no evidence that the Vitro proceedings themselves had been corrupted.

The Vitro case is being closely watched by the bankruptcy bar, so I expect we will have more news to report as the case winds its way through the appeal process.

About Ted Folkman

Ted Folkman is a shareholder with Murphy & King, a Boston law firm, where he has a complex business litigation practice. He is the author of International Judicial Assistance (MCLE 2d ed. 2016), a nuts-and-bolts guide to international judicial assistance issues, and of the chapter on service of process in the ABA's forthcoming treatise on International Aspects of US Litigation, and he is the publisher of Letters Blogatory, the Web's first blog devoted to international judicial assistance, which the ABA recognized as one of the best 100 legal blogs in 2012, 2014, and 2015.

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