Vitro SAB, the Mexican glassmaker seeking to salvage its restructuring, urged an appeals court to enforce its bankruptcy plan in the U.S. over opposition from hedge fund Elliott Management Corp. and other creditors.
Vitro is facing “legal chaos” with a bankruptcy plan that’s valid in Mexico and unenforceable in the U.S., Vitro attorney Andrew Leblanc told the U.S. Court of Appeals in New Orleans today.
“Vitro would be crippled in the United States” if a bankruptcy judge’s decision that denied enforcement of the plan in the U.S. is upheld, Leblanc said.
The case came directly to the appeals court following a victory in bankruptcy court by Elliott and other holders of some of Vitro’s $1.2 billion in defaulted bonds. U.S. Bankruptcy Judge Harlin Hale in Dallas ruled in June that the Mexican plan was “manifestly contrary” to U.S. policy because it reduced the liability of non-bankrupt Vitro units on the bonds.
A panel of three appeals court judges heard the case. The outcome will help determine the boundaries on what is permissible in a foreign reorganization that seeks recognition in the U.S., said Madlyn Gleich Primoff, a bankruptcy attorney at Kaye Scholer LLP in New York.
“This goes much further than U.S. law,” Primoff, who isn’t involved in the case, said about Vitro’s plan. “The question is whether it goes so far that it’s manifestly contrary to U.S. public policy.”
In a U.S. bankruptcy, so-called third-party releases are permissible only under “very narrow circumstances,” Circuit Judge Carolyn King said during today’s hearing. We “don’t have that here,” she said. She also said that the U.S. bondholders understood the risk when they bought bonds in a company that could go bankrupt in Mexico.
Vitro, which makes glass containers and car windshields, defaulted on $1.5 billion of debt in 2009, including $1.2 billion of bonds, after construction and auto-glass sales plunged during the U.S.’s worst recession since the 1930s. The company also incurred $340 million of derivative losses from bad bets on natural gas prices and currencies.
After winning approval for its reorganization plan in Mexico, Vitro asked Hale to enforce the plan in the U.S. under Chapter 15 of U.S. bankruptcy law and block litigation by bondholders, including Aurelius Capital Management, that have fought to collect on the defaulted debt.
Hale faulted the plan for extinguishing the claims of bondholders against Vitro units that guaranteed the debt, even though the units aren’t in bankruptcy. Enforcing the plan in the U.S. “would create precedent without any seeming bounds,” Hale said in his ruling.
G. Eric Brunstad Jr., a lawyer for the bondholders, said the Vitro units need only file for bankruptcy to halt collection efforts on the bonds.
“There would be chaos, but the subsidiaries would do what they should have done - file for bankruptcy,” Brunstad said.
Leblanc, of law firm Milbank, Tweed, Hadley & McCloy LLP, said there was no violation of U.S. policy because a majority of unsecured creditors voted for the plan reducing the units’ debt. The bankruptcy judge determined that the procedure in Mexico was fair and without corruption, he added.
Even if Vitro wins the appeal being argued today, the company still must deal with a separate defeat in August when a U.S. district judge in Dallas ruled that 10 Vitro units should have been thrown into bankruptcy involuntarily.
The appeal is Vitro SAB v. Ad Hoc Group of Vitro Noteholders (In re Vitro SAB), 12-10689, U.S. Court of Appeals for the Fifth Circuit (New Orleans). The suit in bankruptcy court where the judge decided not to enforce the Mexican reorganization in the U.S. is Vitro SAB v. ACP Master Ltd. (In re Vitro SAB), 12-03027, U.S. Bankruptcy Court, Northern District of Texas (Dallas). The Chapter 15 case for the parent is Vitro SAB, 11-33335, in the same court.