Reno F.R. Fernandez III and Uzzi O. Raanan
Reno F.R. Fernandez III is a partner with Macdonald Fernandez LLP, a bankruptcy, turnaround and insolvency litigation firm with offices in San Francisco and Modesto, California. Mr. Fernandez is also a member of the Insolvency Law Committee of the Business Law Section of the State Bar of California.
Uzzi O. Raanan is a partner at Danning, Gill, Diamond & Kollitz, LLP, in Los Angeles, California, and specializes in insolvency, bankruptcy, receivership, and commercial law. He is Co-Chair of the Insolvency Committee of the Business Law Section of the State Bar of California.
In 2005, Congress enacted Chapter 15 of the Bankruptcy Code for the purpose of providing "effective mechanisms for dealing with cases of cross-border insolvency" and with the objectives, among other things, of "fair and efficient administration of cross-border insolvencies that protects the interests of all creditors, and other interested entities, including the debtor" and "facilitation of the rescue of financially troubled businesses, thereby protecting investment and preserving employment."1 One of the ways Chapter 15 accomplishes these goals is by allowing bankruptcy courts in the United States to recognize and enforce foreign plans of reorganization. Almost ten years after the enactment of Chapter 15, enforcement of foreign plans of reorganization in the federal court system is not uniform. Results appear to depend upon the federal circuit in which the Chapter 15 case is filed, the underlying facts, and which foreign court gave rise to the plan in question. Two recent cases represent conflicting approaches: In re Vitro, S.A.B. de C.V.,2 applied a more protective approach, while In re Sino-Forest Corp.,3 applied a more traditional, permissive approach. Whether these cases merely reflect their disparate facts, or radically different legal approaches, is an open question.
Chapter 15 Basics Congress enacted Chapter 15 as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)4 to replace former Bankruptcy Code section 304. The prior section authorized bankruptcy courts to grant discretionary relief in cases ancillary to foreign proceedings.5 By contrast, if a foreign proceeding meets certain procedural requirements under Chapter 15,6 a bankruptcy court must enter an order granting recognition of the proceeding as a "foreign main" or "foreign nonmain proceeding" and provide appropriate relief. 7 A foreign main proceeding is a proceeding that is pending in the country where the debtor has "the center of its main interests;" a foreign nonmain proceeding is a proceeding pending where the debtor has an establishment.8 An "establishment" is "any place of operations where the debtor carries out a nontransitory economic activity . . . ."9 The statute does not define the center of main interest (often called "COMI"), but it does provide a presumption that: "In the absence of evidence to the contrary, the debtor's registered office . . . is presumed to be the center of the debtor's main interests."10 In both foreign main and nonmain proceedings, courts "shall grant comity or cooperation to the foreign representative" upon recognition.11
Following recognition as a foreign main or nonmain proceeding, various forms of discretionary relief can be obtained under Bankruptcy Code section 1521. Specifically, section 1521(a) states that, "where necessary to effectuate the purpose of this chapter and to protect the assets of the debtor or the interests of the creditors, the court may . . . grant any appropriate relief."12 Section 1521(a) identifies a non-exclusive list of relief the court may grant, including staying the commencement or continuation of actions concerning the debtor's assets, rights, obligations or liabilities; staying execution against the debtor's assets; suspending the right to transfer, encumber, or dispose of the debtor's assets; providing for the examination of witnesses, the taking of evidence, or the delivery of information concerning the debtor's assets, affairs, rights, obligations, or liabilities; and entrusting the administration or realization of the debtor's assets in the U.S. to the foreign representative, an examiner, or another person.13 Under section 1521(b), a court may grant additional relief.14 Section 1522 limits the relief that can be granted under section 1521.15
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Section 1507(a) gives courts the authority to provide "additional assistance to a foreign representative under this title or under other laws of the United States."16 Section 1507 "was added to the Bankruptcy Code because Congress recognized that Chapter 15 may not anticipate all types of relief that a foreign representative may require and which would otherwise be available to such foreign representative."17 This suggests that a foreign plan may be enforced where traditional principles of comity (which focus upon issues of procedural fairness in the foreign court) would permit the enforcement of a foreign judgment, though the statute provides limitations to the bankruptcy court's authority.
Under section 1507(b), courts must consider whether additional assistance to a foreign representative is "consistent with principles of comity," and will reasonably assure the "distribution of proceeds of the debtor's property substantially in accordance with the order prescribed by" the Bankruptcy Code, among other factors.18 A number of bankruptcy courts in the U.S. have been asked to approve foreign reorganization plans that include releases of non-debtor third party liabilities, based on section 1507 or 1521, or both. As the two cases below demonstrate, U.S. courts do not yet agree on the proper test to apply to such requests.
Vitro S.A.B. de C.V. and its subsidiaries were the largest glass manufacturers in Mexico.19 From 2003 to 2007, Vitro borrowed about $1.2 billion, mostly from U.S. investors, under promissory notes guaranteed by Vitro's subsidiaries.20 Vitro was subsequently hit by the global financial crisis and stopped making interest payments in 2009.21
Following failed negotiations, Vitro initiated reorganization22 proceedings under the Mexican Business Reorganization Act, or Ley de Concursos Mercantiles.23 Many of Vitro's subsidiaries did not file for bankruptcy and, under U.S. law, remained liable on the guaranteed debt. The guaranties specifically provided that they could not be discharged under any Vitro insolvency proceeding, were not subject to Mexican law, were governed by New York law, and had to be enforced in New York courts.24
The Mexican court approved a plan of reorganization providing for a distribution to creditors of approximately 40%25 and a discharge of the non-debtor subsidiary guarantees.26 Equity holders retained interests worth $500 million.27 Approval of a Mexican plan required votes by creditors holding at least 50% of the principal amount of unsecured debt.28 As distinguished from the Bankruptcy Code, unsecured creditors are not divided into classes and insiders may vote on a plan.29 The subsidiary guarantors held the majority of claims that voted for the plan and, therefore, controlled the vote.30
Thereafter, Vitro commenced a Chapter 15 case in the U.S. Following recognition as a foreign main proceeding, Vitro filed a motion to enforce the Mexican plan of reorganization, including the permanent injunction prohibiting actions against the insider guarantors, a discharge of the guarantees, and other relief.31 Certain creditors opposed the motion, and the matter proceeded to trial.32 After a four-day trial, the bankruptcy court denied the motion, and Vitro appealed directly to the Fifth Circuit Court of Appeals.33
The appellate court identified two threshold issues on appeal: (1) whether a foreign representative could independently decide to seek relief under either section 1507 or section 1521; and (2) whether a bankruptcy court has discretion to decide which of these sections to apply when ruling on this type of request.34 Noting that the relationship between the two sections is "not entirely clear,"35 the court adopted a three-step approach, which the court believed would provide "foreign representatives with the clearest path by which to seek Chapter 15 relief."36
First, a court should consider the specific relief enumerated under section 1521(a) and (b), as qualified by section 1522(a).37 Second, if the requested relief is not explicitly authorized, the court should consider whether relief is available under section 1521's grant of "any appropriate relief," which the court interpreted to mean relief previously available under section 304 of the Bankruptcy Code.38 Third, a court should consider whether relief would be appropriate as "additional assistance" under section 1507.39
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The Fifth Circuit Court of Appeals ultimately agreed with the lower court that section 1521's enumerated provisions do not expressly provide for a discharge of non-debtor third party guarantees.40 The court also determined that the requested relief did not fall within the power to grant "any appropriate relief,"41 because non-consensual, non-debtor releases are generally not available under U.S. law and, when it had been accepted in a prior Chapter 15 case, it was done under section 1507, not section 1521. Moreover, it agreed with the lower court's conclusion that section 1522's requirement of a balance of interests precluded a remedy under section 1521.42 This left section 1507 as the only possible solution.
The court acknowledged that section 1507 could provide relief not otherwise available under the Bankruptcy Code, and that the relief sought by Vitro was "theoretically" available under this section. However, it ultimately agreed with the lower court that relief was precluded in the Vitro case by section 1507(b)(4), which requires a foreign plan to provide "distribution of proceeds of the debtor's...
