Partner Madlyn Primoff Details Importance of Vitro Decision in Turnarounds & Workouts

Turnarounds & Workouts reports that Mexican glassmaker Vitro SAB recently lost its appeal to have its reorganization plan enforced in the United States. The plan was approved in Mexico but rejected in US bankruptcy court since it was in conflict with US policy. In particular, it did not permit noteholders to pursue their claims against Vitro’s non-debtor subsidiaries based on certain guarantees that had been given by those subsidiaries. The noteholders objected to enforcement of the Mexican reorganization plan in the United States precisely because they wanted to preserve their right to sue on the guarantees.

According to Kaye Scholer Bankruptcy & Restructuring Partner Madlyn Primoff, “The best way to look at this is that the Mexican court approved a plan of reorganization that said noteholders couldn’t sue the non-debtor subsidiaries that issued guarantees, and in order to make that effective against US noteholders, Vitro asked the bankruptcy court in Texas for an injunction.” However, US Bankruptcy Judge Hale ruled that Vitro’s reorganization plan was not acceptable under established US policies. Vitro then appealed to the Fifth Circuit, which “ultimately concluded that the bankruptcy court did not abuse its discretion in finding that the Mexican plan of reorganization should not be enforced in the United States,” says Primoff.

“The court determined that the relief wouldn’t have been permitted in Texas or in the Fifth Circuit, but it also looked beyond those jurisdictions and determined that the relief wouldn’t have been permitted under US law at all. Even for those jurisdictions that allow nondebtor releases, the way the releases were structured in Vitro didn’t pass muster. So the court decided not to approve the releases and grant the relief requested by Vitro,” explains Primoff. After the Fifth Circuit issued its decision, Vitro reached a settlement with the noteholders under which the noteholders will be paid 85.25 percent of the face value of their notes plus legal expenses.

Primoff believes that the decision is important because it “puts a stake in the ground as to what will and will not pass muster when a company seeks to use Chapter 15 to obtain ancillary relief for a case pending in another jurisdiction.”