Partner Madlyn Primoff Weighs in on Fifth Circuit Restructuring Decision for Bloomberg BNA

Bloomberg BNA’s Bankruptcy Law Reporter has covered the recent decision by the Court of Appeals for the Fifth Circuit to reject the bankruptcy plan of Mexican glassmaker Vitro SAB. The plan was previously approved in Mexico but rejected in US bankruptcy court due to its disregard for the claims of bondholders against Vitro affiliates that guaranteed the debt despite said affiliates not being in bankruptcy. The bondholders argued that this is not permitted by US law and that the system of voting by which the plan was approved in Mexico was corrupt. As a result, the Fifth Circuit affirmed the previous decision and refused to approve the Mexican reorganization plan in the United States.

According to Bankruptcy & Restructuring Partner Madlyn Gleich Primoff, the Vitro decision “establishes that the relief available to foreign representatives in Chapter 15 cases is not unlimited.” The decision sets forth a framework for determining whether US courts should provide ‘‘additional assistance under Chapter 15 and principles of comity by providing for enforcement of reorganization plans adopted outside the United States. The Court of Appeals specifically held that the bankruptcy court did not abuse its discretion in refusing to enforce a Mexican reorganization plan that incorporated non-debtor releases that would not have been entitled to approval under United States law.’’

Primoff also notes that the ‘‘Court of Appeals’ decision leaves open a number of questions that will eventually need to be addressed. For example, was the Mexican plan not entitled to be enforced in the United States because it was approved based on votes cast by insiders, which would be in contravention of United States law? Was it not entitled to enforcement because it violated the absolute priority rule under United States law? Should the plan not have been enforced because it contained single class voting? Should the relief requested have been denied under Bankruptcy Code Section 1506 because it was ‘manifestly contrary’ to the public policy of the United States? These are all questions that remain for another day in another case.’’

The most interesting part of the case, Primoff points out, is the ‘‘Court of Appeals’ determination that the Mexican reorganization plan and the release of the guaranty obligations would not be enforced in the United States.’’