Author Archives: Casey Servais

Vitro Update: “Savings Clause” Fails to Save Vitro Subsidiaries From Involuntary Bankruptcy

Shortly after the U.S. Court of Appeals for the Fifth Circuit refused to enforce Vitro SAB’s Mexican plan of reorganization in the United States, Judge Harlin D. Hale of the U.S. Bankruptcy Court for the Northern District of Texas dealt another major blow to the embattled Mexican glassmaker by placing ten of its U.S.-based guarantor subsidiaries into involuntary bankruptcy at Vitro’s noteholders’ request. At a hearing on the involuntary petitions, the Vitro subsidiaries argued that a “savings clause” in the indenture governing the notes created a bona fide dispute as to the amount of the noteholders’ claims, and that creditors with disputed claims are not permitted to file involuntary petitions under Bankruptcy Code section 303. However, Judge Hale held that the savings clause at issue was designed to protect noteholders from attempts to void the subsidiaries’ guarantees as fraudulent transfers and could not be used to manufacture a disputed claim and invalidate an involuntary bankruptcy petition. This decision helps ensure that savings clauses, which appear in many indentures and credit agreements, serve their intended purpose—to protect lenders, rather than serve as a defense to involuntary bankruptcy or other creditor remedies. In re Vitro Asset Corp., et al., No. 11-32600-hdh-11 (Bankr. N.D. Tex. Dec. 4, 2012). Continue reading

Fifth Circuit Crafts New Test For Foreign Debtor Relief

On Nov. 28, 2012, the U.S. Court of Appeals for the Fifth Circuit in In re Vitro S.A.B. de C.V. issued a groundbreaking decision under Chapter 15 of the Bankruptcy Code, which provides the mechanics for U.S. bankruptcy courts to deal with cross-border insolvency proceedings. Although deference to judgments of foreign courts is the norm under Chapter 15, in this instance the Fifth Circuit refused to enforce a court-approved Mexican plan of reorganization on the ground that it contained non-consensual non-debtor releases of noteholders’ claims against the debtor’s non-debtor subsidiaries. Unlike the bankruptcy court below, the Fifth
Circuit did not hold that non-consensual nondebtor releases are “manifestly contrary” to U.S. public policy. Instead, the court held that such releases could theoretically be approved in Chapter 15 cases, but only upon a showing of the same type of “exceptional circumstances” that are deemed to justify such releases in U.S. based cases under Chapter 11.

The Fifth Circuit also developed an impressive new analytical framework for interpreting and reconciling the various provisions of Chapter 15. If adopted by courts in other jurisdictions, the Fifth Circuit’s systematic approach to the application of Chapter 15 could prove even more influential than the specific holdings of the case.

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Eighth Circuit Rules That a “Perpetual” Trademark Licensing Agreement Is an “Executory” Contract Subject to Rejection Under Bankruptcy Code Section 365

The United States Court of Appeals for the Eighth Circuit recently ruled that a perpetual, royalty-free, and exclusive trademark licensing agreement qualified as an executory contract subject to assumption or rejection under section 365 of the Bankruptcy Code. The decision creates new uncertainty for licensees under similar agreements, who may suddenly find that intellectual property rights they had taken for granted are at risk of termination in the event of a bankruptcy filing by the licensor. Lewis Bros. Bakeries Inc. v. Interstate Brands Corp. (In re Interstate Bakeries Corp.), 690 F.3d 1069 (8th Cir. 2012). Continue reading

Eighth Circuit Rules That a “Perpetual” Trademark Licensing Agreement Is an “Executory” Contract Subject to Rejection Under Bankruptcy Code Section 365

The United States Court of Appeals for the Eighth Circuit recently ruled that a perpetual, royalty-free, and exclusive trademark licensing agreement qualified as an executory contract subject to assumption or rejection under section 365 of the Bankruptcy Code. The Eighth Circuit’s ruling is seemingly at odds with a 2010 decision by the Third Circuit which found an extremely similar licensing agreement to be non-executory. These decisions may signal a circuit split on the issue, and in any event, create uncertainty for licensees who have acquired perpetual licenses in connection with an asset sale, and have otherwise been operating under the licensing agreement post-closing without incident. Continue reading

Vitro Update: Texas District Court Clears the Way for Noteholders to File Involuntary Bankruptcy Petitions Against Vitro’s Subsidiary Guarantors

On August 28, 2012, the United States District Court for the Northern District of Texas vacated a series of bankruptcy court rulings that had blocked Vitro SAB’s noteholders from filing involuntary bankruptcy petitions against Vitro’s non-debtor subsidiary guarantors. In a decision authored by Chief Judge Sidney A. Fitzwater, the District Court struck down two of the subsidiary guarantors’ most important affirmative defenses to the involuntary bankruptcy, holding that petitioning creditors’ guaranty claims were not contingent and the subsidiary guarantors were not generally paying their debts as they came due. Knighthead Master Fund, L.P. v. Vitro Packaging LLC (In re Vitro Asset Corp.), No. 3:11-CV-263-D (N.D. Tex. Aug. 28, 2012). This marks another major victory for Vitro noteholders, who – as reported by Restructuring Review here – just weeks ago persuaded the Bankruptcy Court for the Northern District of Texas not to enforce a Mexican plan of reorganization that purported to release Vitro’s non-debtor subsidiaries of the same guaranties at issue in the District Court’s decision. Continue reading

SDNY Bankruptcy Court Rules That Borders Gift Card Holders Are Not “Known Creditors” Entitled To Actual Notice Of A Bankruptcy Bar Date

Judge Martin Glenn of the Bankruptcy Court for the Southern District of New York recently ruled that Borders gift card holders did not qualify as “known creditors.” The Court concluded that the gift card holders were entitled only to publication notice rather than actual notice of the bar date for filing bankruptcy claims in Borders’ chapter 11 case. Because potential gift card claims often constitute a significant portion of the unsecured claims in retail bankruptcy cases, the treatment of gift cards and the type of notice to which their holders are entitled can significantly impact the recoveries of other unsecured creditors including bondholders. In re BGI, Inc., f/k/a Borders Group, Inc., No. 11-10614, 2012 Bankr. LEXIS 3724 (Bankr. S.D.N.Y. Aug.14, 2012). Continue reading

SDNY Bankruptcy Court Holds that “Soft Dollar” Claims Are Not Customer Claims Under SIPA

On July 10, 2012, Judge James M. Peck of the Bankruptcy Court for the Southern District of New York ruled that so-called “soft dollar” claims do not qualify for treatment as customer claims under the Securities Investor Protection Act. The decision represents the first time that any court has been asked to determine the status of “soft dollar” claims under SIPA. In re Lehman Brothers Inc., No. 08-01420, 2012 Bankr. LEXIS 3103 (Bankr. S.D.N.Y. July 10, 2012). Continue reading

Second Circuit Affirms Arbitration Panel’s Finding That A Securities Clearing Firm May Be Liable As The “Initial Transferee” Of A Fraudulent Transfer

On July 3, 2012, the United States Court of Appeals for the Second Circuit refused to vacate an arbitration award against Goldman Sachs Execution & Clearing, P.C. The Court left intact the arbitration panel’s finding that the clearing firm was liable as the “initial transferee” of a fraudulent transfer by a customer engaged in a Ponzi scheme. The Second Circuit’s decision weakens the “mere conduit” defense that has traditionally shielded clearing firms from fraudulent transfer claims, and may increase the risk associated with accepting deposits from dishonest or insolvent customers. Goldman Sachs Execution & Clearing L.P. v. Official Unsecured Creditors’ Comm. of Bayou Group, LLC, No. 10-5049-cv, 2012 U.S. App. LEXIS 13531 (2d Cir. July 3, 2012). Continue reading

Vitro: Chapter 15 and the Limits of Comity: Texas Bankruptcy Court Refuses to Enforce Third Party Release Provisions in Mexican Plan of Reorganization

On June 13, 2012, Judge Harlin D. Hale of the United States Bankruptcy Court for the Northern District of Texas refused to enforce provisions of a Mexican plan of reorganization that purported to extinguish guarantees by the debtor’s non-debtor subsidiaries. In refusing to enforce the non-debtor release, Judge Hale held both that the release of non-debtor guarantors was contrary to United States public policy and that the release did not merit enforcement under the specific criteria of chapter 15 for granting relief to a foreign debtor. The decision demonstrates that, while comity is the primary consideration governing chapter 15 cases, it is not without limit. The decision should also indicate to creditors that third party releases of non-debtor guarantors created in cases pending outside the U.S. are not likely to be enforced in the United States. Vitro, S.A.B. de C.V. v. ACP Master, Ltd. (In re Vitro), No. 11-33335-HDH-15, 2012 Bankr. LEXIS 2682 (Bankr. N.D. Tex. June 13, 2012). Continue reading

Eleventh Circuit Upholds a Bankruptcy Court’s Exclusive Jurisdiction to Enforce its Own Chapter 11 Discharge Injunctions

On May 30, 2012, the United States Court of Appeals for the Eleventh Circuit held that a bankruptcy court in one federal district lacks jurisdiction to determine whether a debt was discharged under a chapter 11 plan confirmation order issued by a bankruptcy court in another federal district. Alderwoods Group, Inc. v. Garcia, 1:10-cv-20509-KMM, 2012 U.S. App. LEXIS 10891 (11th Cir. May 30, 2012). The decision makes it clear that a debtor must seek enforcement of its discharge order in the same federal court that granted the discharge in the first place. Continue reading