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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.

Case of the Day: In re Toft

Today’s case of the day, In re Toft (Bankr. S.D.N.Y. 2011),  involves attempts by the creditors of Dr. Jürgen Toft, a celebrity knee surgeon in Munich, to obtain recognition and enforcement of a “Mail Interception Order” granted by a German insolvency court, which would, in effect, give the administrator of Toft’s bankruptcy estate in Germany access to email accounts stored in the US on the servers of two internet service providers. Dr. Toft did not have a good year in 2010. Dr. Martin Prager, the insolvency administrator in Dr. Toft’s insolvency proceedings in Munich asserted, in his petition to the US court, that Toft had secreted assets, fled Germany and relocated to “an unknown country outside of Europe, possibly the Philippines.” The German court entered the mail interception order, which authorized Prager to intercept Toft’s postal and electronic mail, in 2010. In 2011, Prager obtained an ex parte order from the Chancery Division of the High Court in England recognizing and enforcing the German order.

Prager then sought recognition and enforcement of the German and English orders, ex parte, and the issuance of subpoenas to two US ISPs that would require them to disclose all of Prager’s emails on an ongoing basis—what the judge described as “a wiretap of Toft’s future e-mail correspondence.” Not only did Prager proceed ex parte, he affirmatively requested that Toft receive no notice of the proceedings. You can guess how this ends.

The judge noted that under § 1506 of the Bankruptcy Code, it could deny recognition and enforcement notwithstanding comity if recognition would be manifestly contrary to public policy. This is, of course, a very high hurdle, and the court reviewed the prior cases that had emphasized the narrowness of the statutory exception to recognition. But the judge concluded that “this is one of the rare cases that calls for” refusal of recognition and enforcement. Under the Wiretap Act, as summarized by the judge, “the clandestine interception of e-mails of an individual, occurring contemporaneously with delivery, constitutes an illegal wiretap.” Moreover, under the Stored Communications Act, which we have mentioned at Letters Blogatory on a few occasions, after an e-mail has been delivered, it is illegal for an ISP to disclose the contents of the communication, even in response to a civil subpoena. ISPs can be subject to criminal and civil penalties for violation of the act. In short, the court concluded that Prager was seeking recognition of an order that would, if implemented in the United States, constitute a crime. This was, in the judge’s view, manifestly contrary to US public policy.

Prager argued that if the case had been an ordinary domestic case rather than a foreign proceeding, he would have been entitled to the relief he sought, because US bankruptcy trustees can conduct examinations under Bankruptcy Rule 2004 and can obtain mail redirection orders in certain cases. But the judge concluded that a US bankruptcy trustee could not obtain emails from ISPs in a domestic case through any mechanism available, including a Rule 2004 examination. Moreover, under Rule 2002(q)(1), the court cannot keep proceedings secret from the debtor, as Prager requested.