* Ruling a victory for hedge fund creditors
* Vitro may have to renegotiate bankruptcy plan
* May shape enforcement of foreign bankruptcies in U.S.
By Tom Hals
Nov 28 Vitro SAB de CV lost its bid
to enforce its Mexican restructuring plan on U.S. hedge funds on
Wednesday in a ruling that legal experts said could shape the
how foreign insolvencies are handled by American courts.
The case was closely watched by foreign investors in Mexico,
who feared Vitro's reorganization could have undermined U.S.
lenders' willingness to extend credit to Mexican companies.
The Fifth Circuit Court of Appeals in New Orleans affirmed a
ruling by a Dallas bankruptcy court judge who refused to
recognize the $3.4 billion Mexican reorganization plan because
it was contrary to U.S. policy.
The company had filed a U.S. Chapter 15 bankruptcy, which
allows U.S. courts to recognize and enforce foreign insolvency
Vitro's reorganization plan was attacked by creditors for
short-changing them while preserving $500 million for
shareholders. Two U.S. hedge funds, Aurelius Capital Management
and Elliot Capital Management, led the fight against the plan,
which in a court filing they called "a testament to audacity,
brazen manipulation and greed."
Mexican law allowed creditors within Vitro's corporate
family to vote on the plan, and those insider votes were crucial
in getting it approved over the opposition of the hedge funds.
Vitro said in a statement it would consider its next legal
steps in order to have the plan enforced in the United States.
The hedge funds did not immediately return requests for
The hedge funds hold debt that was issued by Vitro's
subsidiaries, which never filed for bankruptcy and therefore
were not protected from creditors.
The funds had won several judgments against the subsidiaries
for defaulting on their obligations and Wednesday's ruling
clears the way for the funds to act on those judgments. The
appeals court acknowledged that the ruling could lead to
"financial chaos" for Vitro, but said that was not a reason to
enforce the plan.
"Vitro's two-wrongs-make-a-right reasoning is unpersuasive,"
wrote Justice Carolyn King in the 60-page opinion.
Legal experts said the ruling was important for the use of
Chapter 15 bankruptcy by defining the parameters of when a
foreign proceeding must comply with the U.S. code.
"It will embolden creditors who want to take a hard look at
the procedural maneuverings in a foreign bankruptcy," said John
Pottow, a law professor at the University of Michigan, who said
he had done some consulting for the hedge funds.
The bankruptcy battle pitted one of Monterrey, Mexico's
politically powerful "Group of 10" businesses against two hedge
funds that have been vilified in Latin America as vultures.
The two funds scored a major legal victory last week when a
New York federal judge ordered Argentina to pay the funds $1.3
billion owed on the country's defaulted debt.
Pottow said he expected Vitro might go back to Mexico and
negotiate a new bankruptcy plan as a result of the ruling.
Chapter 15 was enacted in 2005 and has been used about 600
times by companies such as Japan Airlines Corp,
Icelandic lender Glitnir Banki HF and German alternative energy
company Solar Millennium AG.
Japanese chipmaker Elpida Memory Inc is currently locked in
a Chapter 15 fight with U.S. hedge funds over its plan to sell
the company to Micron Technology Inc for $2.5 billion. The sale
has been approved by a Tokyo court and Elpida will soon ask
Delaware's Bankruptcy Court to enforce the sale in the United
States over the opposition of the hedge funds.
Alan Feld, a bankruptcy attorney with Sheppard Mullin
Richter & Hampton, said the ruling will help define what aspects
of a foreign proceeding will be acceptable to U.S. judges.
He said if plans are contrary to U.S. policy and there are
accusations of unfairness, there is a good chance those plans
will not be enforced.
"I think this is a result we are likely to see again and
again," said Feld.
Pottow said Wednesday's ruling will not necessarily put all
foreign proceedings under the microscope. He said the appeals
court went out of its way to be respectful of the Mexican court,
which the hedge funds had accused of corruption.
"I don't see this as a jingoistic or xenophobic opinion," he