Bankruptcy Abroad: US Creditors' Rights Remain Relevant In Chapter 15

With an increasing number of businesses operating without regard to borders in today's global economy, the importance of understanding Chapter 15 — the Bankruptcy Code provisions instructing the cooperation between the United States and courts of foreign lands involved in cross-border insolvency cases — has never been greater. This advisory will touch on the scope of Chapter 15 and its attempt to balance comity and domestic legal policy, as highlighted in the recent Fifth Circuit Court of Appeals decision, Ad Hoc Group of Vitro Noteholders v. Vitro SAB de CV, No. 12-10542 (5th Cir. Nov. 28, 2012).

The relevant facts can be summarized as follows: From 2003 to 2007, Vitro S.A.B. de C.V. ("Vitro"), Mexico's largest glass manufacturer, borrowed approximately $1.2 billion predominately from US investors ("Old Notes"). The Old Notes were guaranteed by Vitro's subsidiaries (the "Guarantors"). The guarantees provided that they would not be released in any bankruptcy proceeding affecting Vitro and that Mexican law would not apply. In December 2009, a series of financial transactions wiped out subsidiary debt (owed to Vitro) and resulted in Vitro's subsidiaries becoming its creditors, to the tune of approximately $1.5 billion. These transactions were revealed approximately 300 days after their completion, thereby bypassing Mexico's 270-day "suspicion period" in which the transactions could be voided.

On December 13, 2010, Vitro began bankruptcy proceedings in Mexico. Under the terms of the proposed restructuring plan ("Plan"), the Old Notes would be extinguished, the Guarantors' obligations would be discharged, and existing equity would retain its ownership position. Under Mexican law, Plan approval required support of at least 50% in aggregate principal amount of unsecured debt and, although 74.67% approved the Plan, over 50% of all voting claims were held by Vitro's subsidiaries; thus, the Plan would not have been approved without the votes of the subsidiaries. Thereafter, Vitro filed a motion in the US Bankruptcy Court in the Northern District of Texas to enforce the Plan (the "Enforcement Motion") over the assets and creditors located in the US. The Bankruptcy Court denied the Enforcement Motion and the case eventually rose to the Fifth Circuit Court of Appeals.

Chapter 15 is intended to provide effective mechanisms for dealing with cases of cross-border insolvency. The central theme of Chapter 15 is comity — the recognition by one nation of the...