Mexican glassmaker Vitro SAB is heading to a U.S. appeals court to save its restructuring at home from an assault by U.S. creditors in a case that could transport the U.S. bankruptcy code beyond that nation's borders.
The case pits one of Monterrey, Mexico's powerful and politically connected "Group of 10" businesses against U.S. hedge funds, which Latin American critics have reviled as "vultures" for their battle against Argentina's sovereign debt restructuring.
Hanging in the balance is the use of Chapter 15. Foreign companies have used this 7-year-old piece of the U.S. bankruptcy code about 600 times to get an overseas insolvency proceeding enforced in the United States.
Many creditors have come to view Chapter 15 as little more than a rubber-stamp process that allows U.S. assets to be folded into a foreign proceeding. However, some legal experts say the 5th Circuit Court of Appeals could improperly recast it as a tool to impose U.S. bankruptcy law abroad.
Vitro's appeal stems from a ruling this month by U.S. Bankruptcy Judge Harlin Hale of Dallas, who refused to enforce the company's Mexican restructuring against U.S. hedge funds led by Aurelius Capital Management and Elliott Management Corp.
The hedge fund bondholders had said the restructuring plan violated a bedrock rule of U.S. bankruptcy by rewarding shareholders before repaying creditors in full.
They also attacked Vitro for effectively engineering support for its restructuring by issuing debt, which included voting power, within its corporate family and then using these "insider" votes to outnumber objecting outside creditors.
Hale's ruling has won praise from financial experts and investors for giving a measure of certainty to cross-border finance.
"While it's bad for Vitro, it's actually good for Mexican companies because they can borrow on more stable conditions in the U.S.," said Claudio Loser, a fellow with the Inter-American Dialogue think tank and a former International Monetary Fund director.
Rob Rauch, who manages a distressed emerging market portfolio for investment firm Gramercy, said the case could provide a positive precedent for bolstering Chapter 15.
"We have found a strong reluctance of U.S. judges to tackle the issues, especially if there are not significant assets in U.S.," he said.
Some legal experts, however, believe Hale may have ruled the right way, but for the wrong reasons.
The ruling potentially allows anyone opposed to a foreign proceeding to attack it by pointing to a precedent in the U.S. bankruptcy code, which was not the intention of the law, said Ken Coleman, a bankruptcy lawyer with Allen & Overy.
"Now we will flyspeck every (Chapter 15) case that comes in as if it were a U.S. domestic case," he said.
Vitro is confident of its appeal, according to its lawyer, Andrew LeBlanc of Milbank, Tweed, Hadley & McCloy.
Elliott declined to comment, and Aurelius did not immediately respond to a request for comment.
Chapter 15 allows Hale to recognize and assist in Vitro's Mexican $3.4 billion insolvency proceeding, which a Mexican court approved in February.
Other companies that have used Chapter 15 include Japan Airlines Corp, Icelandic lender Glitnir Banki HF, German alternative energy company Solar Millennium AG and Humpuss Sea Transport Pte Ltd, a unit of Indonesia's PT Humpuss Intermoda Transportasi Tbk.
Hale refused to enforce Vitro's plan because of what he called "the most problematic part" of the restructuring -- the elimination of the hedge funds' claims.
Under the plan, the funds' debt, which was guaranteed by Vitro's subsidiaries, was replaced with bonds of much lower value, while shareholders ended up with $500 million.
The subsidiaries never declared bankruptcy and so were never protected from their creditors.
The hedge funds have won judgments against Vitro's subsidiaries in various U.S. courts for defaulting on the debt. Vitro wanted Hale to issue an injunction to prevent the funds from enforcing those judgments, granting the subsidiaries "nondebtor releases" that would protect them from being sued.
Hale is supposed to support the Mexican restructuring without concern about how it would turn out in his court, said Rafael Zahralddin, a Wilmington bankruptcy lawyer with Elliott Greenleaf. The exception, he said, is that a judge must stop short of taking action that the bankruptcy code describes as "manifestly contrary to the public policy of the United States."
That bar is meant to be quite high, and Coleman of Allen & Overy said he could point to dozens of U.S. bankruptcy cases with nondebtor releases.
"How can it be manifestly contrary to U.S. public policy when it exists in our system?" Coleman said.
By contrast, he pointed to a restructuring of Muscletech Research and Development Inc, a Canadian maker of health supplements made with ephedra, which was linked to heart attacks and strokes, and which U.S. authorities have banned.
U.S. District Judge Jed Rakoff in Manhattan did not find the plan "manifestly contrary" even though it did not provide a jury trial to U.S. product liability claimants -- a constitutional right in the United States.
If the 5th Circuit Court of Appeals affirms Hale's ruling, it would apply in the states of Louisiana, Mississippi and Texas. While it would not be binding in New York or Delaware, two busy courts for Chapter 15 cases, it would set a precedent.
"This opens the door for better use of capital markets," said Loser, the former IMF official. "Of course, others will say it is U.S. imperialism, trying to impose its own legislation on other countries."
(Reporting By Tom Hals in Wilmington, Delaware; Editing by Lisa Von Ahn)