Vitro's Mexican Plan Of Reorganization Denied Comity In The U.S

In a Chapter 15 case presenting interesting considerations for cross border lenders and borrowers, the Bankruptcy Court for the Northern District of Texas ("Bankruptcy Court") declined to implement in the United States the Vitro plan of reorganization that had been approved by a Mexican court, because the plan (i) did not provide for distributions to noteholders consistent with Chapter 11, (ii) did not sufficiently protect the interests of U.S. creditors, and (iii) did not protect the noteholders' third-party claims against non-debtor subsidiaries, instead releasing those claims. The Bankruptcy Court held that the distributions provided under the Mexican plan were not entitled to comity and the third-party releases were contrary to public policy of the United States.1 The Vitro decision has interesting implications which we discuss in this Client Update.

Factual Background

Vitro, S.A.B. de C.V. ("Vitro") is the largest manufacturer of glass containers and flat glass in Mexico and one of Mexico's leading multinational companies, with subsidiaries throughout the Americas and Europe. In February 2009, Vitro defaulted on $1.5 billion in debt and began restructuring negotiations with its noteholders. During the negotiations, Vitro engaged in various intercompany transactions with its subsidiaries which, as a result, became creditors of the estate and were given the ability to cast votes on a restructuring plan on the account of intercompany claims worth $1.9 billion.

Mexican Proceedings

In November 2010, Vitro began soliciting votes for a prepackaged plan of reorganization in Mexico, and in December 2010, Vitro filed for voluntary reorganization in a Mexico district court seeking approval of a prepackaged "concurso mercantil" reorganization plan which contemplated the financial restructuring of its debt. The Mexican Business Reorganization Act (Ley de Concursos Mercantiles) requires that, for a prepackaged restructuring agreement to be filed by the debtor at the commencement of a concurso mercantil case, it must have the preliminary approval of creditors representing at least 40 percent of the claims. The Mexican court initially denied Vitro's concurso mercantil petition because the proposed plan included intercompany claims in the calculation of the creditor claim percentage, however a Mexican appellate court found the plan to meet the statutory requirement and ordered the commencement of the case, appointing a conciliator with the role of reviewing the claims and assisting Vitro in reaching an agreement with the creditors. At the completion of the conciliator's review, the Mexican court issued a decision recognizing the ranking and amount of each claim. Such decision reflected the treatment provided in Vitro's initial concurso plan pursuant to which the subsidiaries' intercompany claims were allowed and the noteholders would recover only an estimated 60% of the value of their bonds. In response, the noteholders put forth an alternative plan; however, the conciliator submitted in response a revised plan that was even less favorable to creditors and particularly to dissenting creditors. The conciliator's plan (the "Mexican Plan") paid the noteholders below par, granted recovery for equity holders,

decreased recovery for any dissenting creditors, and included releases for non-debtor subsidiaries.2 In February 2012, the Mexican court approved of the Mexican Plan.

United States Proceedings

Before the Mexican concurso was filed in Mexico, Vitro creditors had filed involuntary Chapter 11 petitions...