People who handle cases in all kinds of civil courts, whether state, federal, or both, get an odd feeling when they wander into a special kind of civil court -- the U.S. bankruptcy court. The oddness comes partly from the strange ways bankruptcy law handles disputes. Often, the merits of a claim seem to take a back seat to how many stake-holders you can get to back your plan for how to treat -- "adjust" -- your claim and claims like it in a reorganization or liquidation of the debtor. And perhaps as a result the free-wheeling hearings that bankruptcy lawyers and judges call trials feel more like semi-impromptu gabfests, where rules of evidence and other bulwarks of trial practice bend, sway, and splinter.
Two rulings out of courts of appeals brought the weirdness of bankruptcy to mind this week. One dealt with whether a U.S. bankruptcy court did wrong by deeming the outcome of a foreign bankruptcy too outlandish for U.S. bankruptcy law to stand. The other concerned limits on the powers of bankruptcy courts to make binding rulings on certain kinds of claims.
In the first case, a Mexican company had gone into a "concurso mercantil" proceeding after the 2008 downturn swamped its business (glass-making). But -- before filing the concurso -- the firm, Vitro, had somehow turned its subsidiaries from debtors (to the tune of $1.2 billion) into creditors (in the amount of about $1.5 billion). These same subs had signed guaranties for around $1.216 billion in Vitro notes. The subs then voted their more than 50 percent (in face amount) of Vitro's general debt obligations in favor of a concurso plan that denied any payment to a note holder that did not consent to the plan unless they later agreed to the plan. The plan also released the subs' guaranties of the Vitro notes.
The Fifth Circuit said ix-nay on the exican-May an-play under chapter 15 of U.S. bankruptcy law. Vitro had brought the chapter 15 case in an effort to stop U.S. holders of Vitro notes from taking steps to enforce the subs' guaranties in U.S. courts. (Note holders had won a ruling from a state court in the Empire State that, as a matter of New York law, the guaranties prohibited their release in insolvency proceedings such as the concurso.) The bankruptcy court ruled against Vitro on the ground that the concurso plan strayed too far from U.S. bankruptcy norms -- the ones that bar "insiders" of a debtor (e.g., Vitro's subs) from casting key votes on a plan and that prohibit reorganization plans that wipe out obligations of non-debtors (such as the Vitro subs). The Fifth Circuit panel agreed. Ad Hoc Group of Vitro Noteholders v. Vitro SAB de CV (In re Vitro SAB de CV), No. 11-10542 (5th Cir. Nov. 28, 2012).
The other case, in the Ninth Circuit, held that a Supreme Court ruling from last term, in Stern v. Marshall, 131 S. Ct. 2594 (2011) (posts here and here), prevents bankruptcy courts from issuing final judgments on any sort of claim in respect of which a party may demand a jury trial and that requires an Article III judge -- including claims to recover fraudulent transfers under section 548 of U.S. bankruptcy law. The ruling thus clarified that Stern v. Marhsall applies not only to state law claims but also to claims that exist solely because of bankruptcy law. Executive Benefits Ins. Agency v. Arkison (In re Bellingham Ins. Agency, Inc.), No. 11-35612 (9th Cir. Dec. 4, 2012).