A Framework for Comity: The Fifth Circuit’s Vitro Decision and the Relationship between Sections 1507 and 1521 of the Bankruptcy Code

Contributed by Katherine Doorley
In a recent opinion, the United States Court of Appeals for the Fifth Circuit affirmed the decision of the United States Bankruptcy Court for the Northern District of Texas denying a request by the foreign representatives of Vitro, S.A.B. de C.V. to enforce the plan of reorganization approved in Vitro’s Mexican Concurso bankruptcy proceedings. In the same opinion, the Fifth Circuit also affirmed an earlier decision of the United States District Court for the Northern District of Texas recognizing the Mexican proceeding and the appointment of Vitro’s foreign representatives.
As discussed in our previous post on the Vitro case, Vitro’s plan was the subject of substantial litigation both in the United States and in Mexico. Prior to filing for protection under the Mexican Ley de Concursos Mercantiles – Mexico’s bankruptcy law, Vitro issued numerous unsecured notes, payment of which was guaranteed by substantially all of Vitro’s subsidiaries, including United States-based entities. Vitro’s Concurso plan provided, in part, for the non-consensual release and discharge of non-debtor obligations, including discharge of the guarantees, while at the same time providing payments to insiders and equity. Mexican law does not differentiate between insider and non-insider creditors and instead counts the votes of all unsecured creditors together. While Vitro’s plan was supported by at least 50% in aggregate principal amount of unsecured debt as required by Mexican law, the plan would not have reached that threshold without the votes of insiders.
After the Mexican courts approved Vitro’s plan, certain noteholders appealed the plan approval order in Mexico, where it was pending as of the date of this post. However, the Mexican courts did not stay the effectiveness of the Plan.
The noteholders next attempted to enforce their guaranties in the United States by filing involuntary petitions against several of the U.S.-based guarantors. The noteholders also filed state-court lawsuits seeking judgments that the guarantors’ obligations under the notes could not be modified.
On April 14, 2011, Vitro’s foreign representative commenced a proceeding under chapter 15 of the Bankruptcy Code seeking recognition of the Mexican proceeding. The petition was originally filed in the United States Bankruptcy Court for the Southern District of New York, but was transferred to the Northern District of Texas. Subsequently, Vitro sought an order from the bankruptcy court under sections 1521 and 1507 of the Bankruptcy Code enforcing the Concurso plan. The bankruptcy court held a four-day trial, following which the court denied the enforcement motion. The bankruptcy court’s decision was certified for direct appeal to the Fifth Circuit.
As part of the 2005 amendments to the Bankruptcy Code, Congress removed section 304 from the Bankruptcy Code and replaced it with chapter 15, which “provides courts with broad, flexible rules to fashion relief appropriate for effectuating its objectives in accordance with comity.” Section 1521 specifies the types of relief that a court can grant as well as the conditions under which relief may be granted, for example, entrusting administration of the debtor’s assets in the United States to a foreign representative and staying actions against the debtor’s property to the extent those actions are not already stayed by another provision of chapter 15.  Section 1507 permits a court to provide “additional assistance” to a debtor extending beyond the relief provided elsewhere in chapter 15 and sets out factors for courts to consider before granting any requested relief, including whether such assistance will “reasonably assure . . . distribution of proceeds of the debtor’s property substantially in accordance with the order prescribed by this title.”
The bankruptcy court held that comity should not be granted to the extent that the Concurso plan provided for the extinguishing of non-debtor guarantees. The bankruptcy court first considered whether Vitro’s plan could be enforced in accordance with sections 1521 or 1507. The bankruptcy court held that granting comity was appropriate “as long as U.S. parties are provided the same fundamental protections that litigants in the United States would receive.” The bankruptcy court then noted that sections 1521 and 1507 are limited by the public policy exception in section 1506, which section states that prior to approval of ancillary assistance, a bankruptcy court must conclude that such assistance would not be “manifestly contrary to the public policy of the United States.” While it would not be the focus of the Fifth Circuit’s opinion, the bankruptcy court focused primarily on the public policy exception in refusing to enforce the Mexican plan. The bankruptcy court opinion was certified for direct appeal to the Fifth Circuit.
The Fifth Circuit Framework
Perhaps the most interesting portion of the Fifth Circuit’s opinion was its examination of the interplay between sections 1507 and 1521. The Fifth Circuit acknowledged that the relationship between these provisions has not always been clear.  The Fifth Circuit first noted that while comity is an important consideration, chapter 15 imposes certain requirements and considerations that limit and occasionally preclude granting comity. The Fifth Circuit addressed, as a question of first impression, how a court should determine whether, and in what order, sections 1507 and 1521 should be applied to requests for relief under chapter 15. The court set out a new framework under which courts should: first, determine whether relief would be available under section 1521(a) or (b); second, if the requested relief is not listed in section 1521(a) or 1521(b), a court should decide whether the relief can be considered “appropriate relief” under section 1521(a); and, finally, if the court determines that the relief is not “appropriate relief,” the court must determine whether the requested relief may be granted under section 1507.  The Fifth Circuit reasoned that, although not specifically mandated in the Fifth Circuit, this new framework would prevent courts from subjecting relief under section 1507 to the same limitations as relief under section 1521, unless those limitations were specifically applicable.  Further, the Fifth Circuit reasoned that following this framework would avoid “all-encompassing applications” of section 1507 and “prematurely expanding the reach of Chapter 15 beyond current international insolvency law.”
In applying its framework, the Fifth Circuit first determined that sections 1521(a)(1)-(7) and (b) did not provide for discharging obligations held by non-debtor guarantors. Next the court determined that section 1521(a)’s general grant of relief also did not provide the requested relief because non-consensual, non-debtor releases through a bankruptcy proceeding are “generally not available” under United States law and are “explicitly prohibited” in the Fifth Circuit.
Finally, the Fifth Circuit turned to section 1507. In its analysis of section 1507, the court began by noting that while non-consensual, non-debtor releases are precluded in the Fifth Circuit, such relief is sometimes available in other circuits, and therefore relief was not precluded under section 1507. The Fifth Circuit next discussed the additional considerations from section 1507(b)(4) and held that Vitro failed to put on evidence of the existence of extraordinary circumstances sufficient to establish a case for non-debtor releases under the law of those Circuits that allow such releases. Specifically, the Fifth Circuit noted that Vitro had not shown the presence of any “truly unusual circumstances” necessitating releases. For example, Vitro did not establish that the affected creditors consented to the Concurso plan; that a majority of the impacted groups had voted in favor of the Concurso plan; that creditors received a distribution close to what they were originally owed; or that the non-consenting creditors were given an alternative way to recover in full what they were owed.  The Fifth Circuit concluded that the bankruptcy court had not abused its discretion in denying relief under section 1507.
We will be interested to see whether or how other courts apply the Fifth Circuit’s framework and whether the decision helps clarify when a court should grant comity under chapter 15.