Vitro to Ask U.S. Court to Enforce Mexican Reorganization
By David McLaughlin and Bill Rochelle - Oct 3, 2012 12:00 AM ET
Vitro SAB, the Mexican glassmaker, will try to convince a U.S. appeals court today that its restructuring should be enforced in the U.S. in a case deciding how closely a foreign bankruptcy must conform to U.S. law.
Elliott Management Corp. and other holders of Vitro’s $1.2 billion in defaulted bonds won a victory in June when U.S. Bankruptcy Judge Harlin Hale in Dallas ruled that the Mexican plan was “manifestly contrary” to U.S. policy.
Vitro appealed directly to the U.S. Court of Appeals in New Orleans, where a three-judge panel is set to hear arguments today. The case 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.
Vitro SAB appealed directly to the U.S. Court of Appeals in New Orleans, where a three-judge panel is set to hear arguments today. Photographer: Susana Gonzalez/Bloomberg
“This goes much farther than U.S. law,” Primoff, who isn’t involved in the case, said in a phone interview. “The question is whether it goes so far that it’s manifestly contrary to U.S. public policy.”
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 inMexico, Vitro asked Hale to enforce the plan in the U.S. under Chapter 15 of U.S. bankruptcy law and block litigation by bondholders 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.
Whether Vitro wins is a “close call on public-policy grounds,” Dan Glosband, a lawyer at Goodwin Procter LLP inBoston who helped draft the Chapter 15 law, said in a phone interview.
The Vitro case is “already affecting the way investors are pricing repayment risk” on Mexican company bonds, said Arturo Porzecanski, a professor of international economic policy at American University in Washington.
Vitro used “a lack of clarity” in Mexican law to win approval of a restructuring that imposed “huge losses on bondholders while shielding the company’s shareholders,”Porzecanski said in an e-mail.
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.
“We remain confident in the strength of our arguments and the legal bases of our appeal,” Roberto Riva Palacio, a spokesman for Vitro, said in a written statement.
Donald Cutler, a spokesman for the bondholder group that has been sparring with Vitro over the plan, declined to comment.
Failing to enforce the Mexican reorganization would have a“far-reaching negative effect” on relations between the U.S. and Mexico, Vitro told the appeals panel in court filings. The U.S. bankruptcy court rejected the idea that the Mexican court’s approval of the plan was fraught with “fraud, corruption, and unfairness,” Vitro said.
The bondholder group, which also includes Aurelius Capital Management, contends in court papers that the court process in Mexico “was completely inimical to the most basic elements of fairness.” They successfully argued to Hale that U.S. law doesn’t permit non-bankrupt companies to reduce their debt through an affiliate’s bankruptcy.
Vitro, based in San Pedro Garza Garcia, Mexico, responded by telling the appeals court that foreign law can be enforced in the U.S. even if it differs from U.S. law.
The bondholders “are really asking this court to protect them from the decision of the Mexican court simply because they lost there,” Vitro said in court papers.
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.
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