Chapter	  11	  and	  Ley	  de	  Concursos	  Mercantiles:	  which	  is	  better	  at	  fostering	  the	  rehabilitation	  ...
Chapter 11 and Ley de Concursos Mercantiles: which is better at fostering the                                             ...
The discussion will address the applicable reorganization provisions to companiesrather than to individuals, and it is foc...
system, and comparatively little debt in Mexico.”4Commencing reorganization proceedingsBoth in Mexico and in the US, a reo...
More interesting than statistics is determining why US companies are more willing tovoluntarily file than Mexican companie...
paying punitive damages in case of dismissal,16 but only the payment of costs andvisitor fees.17Moreover, the US standard ...
Chapter 11 does not foresee a financial standard that must be satisfied before filing abankruptcy petition. Not even balan...
The visitor is a specialized auxiliary whose functions are analyzing and reporting tothe court whether the company “has br...
of its financial obligations in a general manner.33 It is deemed that a commercialentity has breached the performance of i...
In addition, LCM establishes a rebuttable presumption for considering that a companyhas “breached the performance of its f...
that will no be able to fulfill its commitments when they come due. Involuntarypetitions still subjected to a general cess...
debtor without obtaining prior court approval, or relief from the automatic stay. Thecourt shall grant relief from the sta...
In Mexico, when the court issues the judgment declaring a debtor under the“insolvency” situation that the law describes (s...
A going concern needs employees and they do not work for free. Thus, it isreasonable for a statute to provide that debtors...
The scope of the stay foreseen on the US statute is more convenient for a debtor thanthe established on the Mexican law. B...
operating the business through its current management, unless the court orders theappointment of a trustee.51In Mexico, th...
The courts have also appointed a trustee “in those instances in which the debtor inpossession lacked credibility or failed...
In Mexico, some of the responsibilities that in the US correspond to the trustee ordebtor in possession are commended to t...
of a trustee is exceptional, while in Mexico the appointment of a conciliator ismandatory.In the US, before the Bankruptcy...
mandatory appointment of a trustee deters debtors from filing reorganization at anearly stage. Hence, the mandatory truste...
Notwithstanding, in some cases, even creditors will often prefer to deal with currentmanagers with whom they are familiar ...
is explained in more detail below, the reorganization proceeding is shareholderfriendly because LCM does not establish the...
percent of the amount of any transfer made to such insider for any purpose during thecalendar year before.86In a similar p...
Operating the businessAs mentioned above, both Chapter 11 and LCM provide that the debtor can continuerunning the business...
In addition to cash, cash-collateral might be important for continue operating thecompany. Chapter 11 provides that the us...
Under the assumed construction of LCM provisions, the Mexican statute would bemore convenient than the US from a debtor’s ...
Chapter 11 establishes that debtor in possession may sell property of the estate freeand clear of any interest in such pro...
As stated above, Chapter 11 provides the requirements for using cash-collateral andselling estate’s assets free and clear ...
(ii)                                                   After notice and a hearing, the court may authorize a debtor in pos...
post-petition financing, Chapter 11 is better than LCM at fostering the rehabilitationof a company.Reorganization planThe ...
Once the debtor’s exclusivity period ends, “[a]ny party in interest, including thedebtor, the trustee, a creditor’s commit...
la Federación);116 otherwise, the debtor would be declared in liquidation (quiebra)and the court would start the liquidati...
In the US, voting on a plan is by class.120 Thus, any plan must classify similar claimstogether and treat claims within a ...
In Mexico, for a plan to be approved, it requires the acceptance of the debtor and thecreditors holding a specific amount ...
It is considered that all unsecured creditors have accepted a plan, when such a planprovides the payment of the entire amo...
held by debtor affiliates and insiders are also counted for purposes of calculating therequired amount of debt to approve ...
debtor company could retain their equity interests even though the company’sunsecured creditors are not receiving full pay...
unsecured creditors as a class, but of the holders of certain amount of debt, in whichdebtor’s affiliated debt and secured...
“Ley de Concursos Mercantiles”
“Ley de Concursos Mercantiles”
“Ley de Concursos Mercantiles”
“Ley de Concursos Mercantiles”
“Ley de Concursos Mercantiles”
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“Ley de Concursos Mercantiles”

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Jorge Valdés King, Associate of Barrera Siqueiros y Torres Landa, who excelled in the areas of Civil, Commercial and Family Litigation; developed a comparison between Chapter 11 of the United States Code and Mexico’s Ley de Concursos Mercantiles (LCM), when graduated from the Harvard Law School.

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“Ley de Concursos Mercantiles”

  1. 1.  Chapter  11  and  Ley  de  Concursos  Mercantiles:  which  is  better  at  fostering  the  rehabilitation  of  a  company?  Jorge  Valdés  King  Harvard  Law  School                                                                                                                                                                                                                                                                          LL.M.  Program                                                                                                                                                                                                                                                                      Supervisor:  Prof.  Martin  Bienenstock                                                                                                                                                                                              Corporate  Reorganization   May,  2012  
  2. 2. Chapter 11 and Ley de Concursos Mercantiles: which is better at fostering the rehabilitation of a company? Jorge Valdés KingIntroductionThis paper is based on a comparative study of the reorganization provisions of Title11 of the United States Code (“Chapter 11”)1 with the reorganization provisions ofMexico’s Ley de Concursos Mercantiles (“LCM”)2. Although based on a comparativestudy, this work does not intend to be a complete description of the analyzed statutes.Chapter 11 and LCM vary in a wide number of aspects, being the reason of suchdifferences not only the divergent legal traditions but also the structure of thejudiciary and the size of each country’s economy. Where relevant, references aremade to such differences.The purpose of this work is to determine which statute is better at fostering therehabilitation of a company and how each statute can or cannot save the lifelinesnecessary to maintain the company as a going concern. This paper highlights theadvantages and disadvantages of each approach and provides conclusions in whichpreferences are expressed. In addition, this paper intends to identify what publicpolicies each statute serves and how well do they serve them.                                                                                                                1 Title 11 of the United States Code (2006) [hereinafter U.S.C.] is the primary source of bankruptcy law in the U.S.C. It is2 Ley de Concursos Mercantiles (Bankruptcy Law), as amended, Diario Oficial de la Federación, 12 de Mayo de 2000[hereinafter LCM]. LCM provides for one sole bankruptcy proceeding (concurso mercantil), encompassing three successivestages: (i) verification (verificación), (ii) reorganization (conciliación), and (iii) liquidation (quiebra). This paper is mainlyfocused on the reorganization stage, but some references are made to the verification and liquidation stages. Under certaincircumstances, if voluntarily requested by a debtor, the verification stage might be followed by the liquidation stage. In someother cases, known as prepackaged reorganizations (concurso mercantil con plan de reestructura previo), the bankruptcyproceeding might be initiated in the reorganization stage.   1
  3. 3. The discussion will address the applicable reorganization provisions to companiesrather than to individuals, and it is focused in large companies instead of in smallones.3The purpose of a reorganization proceeding is allowing a company to be rehabilitatedas a going concern. But to determine whether Chapter 11 and LCM save or do notesave the needed lifelines to achieve that goal, it is necessary to understand thefunctioning and procedural structure of each reorganization system. In the followingpages, while analyzing whether each statute saves or not the needed lifelines torehabilitate a company, I try to explain the basic functioning and procedural structureof each system.An important caveat: “[A]nytime you compare the bankruptcy systems of the UnitedStates and Mexico, you are comparing apples to oranges because the two economiesare so very different. There is such an incredible amount of debt in the United States                                                                                                                3 In the United States (“US”), the 1938 Chandler Act created two separate business reorganization chapters in the BankruptcyCode. Chapter X for publicly traded companies and Chapter XI for small business, but the Bankruptcy Reform Act of 1978changed the structure of business reorganization. Under this new code, the formal distinction between small businesses and bigcompanies was largely abolished. However, in 2005, the US Congress passed a large package of amendments that, among otherthings, reintroduced the small-case/big-case distinction that had been eliminated in 1978. The 2005 amendments added a newsmall business case definition for businesses with debts less than $2 million at the time of filing (for cases filed on or after April1, 2010, the amount should be no more than $2,343,300). See Elizabeth Warren, Chapter 11: Reorganizing AmericanBusinesses, 6-8 (2008).The Mexican statute also distinguishes between small and big debtors. LCM applies to any physical person or legal entity that isconsidered a merchant or commercial agent (comerciante) under the Mexican Commercial Code. See LCM, arts. 3-4. Accordingto the Mexican Commercial Code, individuals who engage in commercial activities as their day-to-day occupation, all Mexicanprivate corporations and the Mexican branches and agencies of non-Mexican corporations are deemed to be merchants orcommercial agents. See Código de Comercio (Commercial Code), as amended, arts. 3, 14 and 15, Diario Oficial de laFederación, 7 al 13 de Octubre de 1889. Notwithstanding, LCM only applies to small commercial agents to the extent that theyexpressly submit to it. See LCM, art. 5. This means that small commercial agents cannot be involuntary subjected to thebankruptcy proceeding established on LCM. Indeed, it is unclear which bankruptcy proceeding applies to small commercialagents that do not voluntarily submit themselves to LCM. I think they are subjected to Ley de Quiebras y Suspensión de Pagos(Bankruptcy and Suspension of Payments Law), as amended, Diario Oficial de la Federación, 20 de abril de 1943. See infra note10. LCM defines “small commercial agents” as those whose debts are less than 400,000 UDIS (inflation-linked units) at the timeof filing. See LCM, art. 5. Considering the current UDIS value and the peso-dollar exchange rate, such amount is approximately$145,000. The cap for small cases under Chapter 11 is approximately 13 times bigger than the cap for small cases under LCM.Such a gap reflects the difference in size of the economies of these countries.   2
  4. 4. system, and comparatively little debt in Mexico.”4Commencing reorganization proceedingsBoth in Mexico and in the US, a reorganization proceeding could be initiatedvoluntary or involuntary. In the first scenario it is the debtor directly who files themotion, and in the second one are generally the creditors of the debtor who do it.5Besides creditors, in the US fewer than all of the general partners of a partnership,6 ora foreign representative of the debtor’s estate, if such estate is in a foreignproceeding,7 may file an involuntary motion; while in Mexico, the Attorney General(Ministerio Público) is also authorized to file an involuntary petition.8Although Chapter 11 allows creditors to initiate a reorganization proceeding,“involuntary bankruptcy petitions [filed by the creditors] are so rare that theAdministrative Office of the United States Courts quit publishing the data on thenumber of involuntary cases nearly twenty years ago”.9 The opposite happens inMexico. Up to November 2010, ten years and a half after LCM’s enactment,10creditors had filed 36.36% of the insolvency petitions.11                                                                                                                4 Nathalie Martin, Que es la Diferencia?: A Comparison of the First Days of a Business Reorganization Case in Mexico and theUnited States, 10 U.S.-Mex. L.J., 73 (2002).5 In Mexico, tax authorities have standing as creditors to file an involuntary petition. See LCM, art. 21.6 11 U.S.C. § 303(b)3.7 11 U.S.C. § 303(b)4.8 LCM, art. 21.9 Warren, supra note 3, at 23.10 LCM is relatively new; it was enacted on May 12, 2000. It substituted Ley de Quiebras y Suspensión de Pagos (Bankruptcyand Suspension of Payments Law) of 1943. The old law remains in force and effect to any bankruptcy proceeding filed prior toMay 13, 2000, and arguably (see supra note 8), it remains in force and effect for small commercial agents that do not voluntarilysubmit themselves to the bankruptcy proceeding foreseen on LCM. The old law had many deficiencies that lead to constantabuses. Its loopholes allowed debtors to stay in endless suspension of payments.11 Instituto Federal de Espcialistas de Concursos Mercantiles [IFECOM] (Federal Institute of Bankruptcy Specialists), Informecorrespondiente al Semestre del 1º de junio de 2010 al 15 de noviembre de 2010 (Semestral Report June 2010 – November2010), 6 (2010). Available at http://www.ifecom.cjf.gob.mx/PDF/informes/21.pdf (last visited May 3, 2012).   3
  5. 5. More interesting than statistics is determining why US companies are more willing tovoluntarily file than Mexican companies. As explained in more detail below, a reasoncould be that debtors do not have an incentive to voluntary file in Mexico becausetheir motion will not produce an automatic relief,12 and the statute provides themandatory appointment of an expert (conciliador) that, during the reorganizationproceeding, intervenes in the management of the company in a greater or lesser extentand may displace current managers.Addressing the same question from the opposite perspective, we should ask why UScreditors are less willing to initiate bankruptcy proceedings than the Mexicancreditors. One answer could be that in the US, involuntary petitions by creditors mustbe filed by three or more entities, each of which is either a holder of a claim or anindenture trustee representing such a holder.13 In Mexico, a single creditor may file aninvoluntary petition.14Another reason could be that, in the US, if petitioning creditors file an involuntarycase that is later dismissed because the debtor is generally paying its debts as theycome due, such creditors shall pay costs, attorneys fees, actual damages and in somecases punitive damages.15 In Mexico, a petitioning creditor does not face the risk of                                                                                                                12 According to LCM provisions, between the filing of an insolvency petition and the issuance of an order for relief, there mightbe up to 83 business days.13 11 U.S.C. § 303(b)1. If a debtor has fewer than 12 creditors, a single creditor holding a claim of at least $10,000 may file aninvoluntary petition. See 11 U.S.C. § 303(b)2.14 LCM, art 24. Notwithstanding that LCM, art. 11 establishes a rebuttable presumption for considering a company under theinsolvency situation that the law describes, when an entity does not pay debts to two or more creditors, a single creditor may filean involuntary petition. See CONCURSO MERCANTIL. SU DECLARACIÓN PUEDE SER SOLICITADA POR UN SOLOACREEDOR DE CONFORMIDAD CON LOS ARTÍCULOS 9o. FRACCIÓN II Y 21, PRIMER PÁRRAFO, DE LA LEY DELA MATERIA, Tribunales Colegiados de Circuito [T.C.C.] (Collegiate Circuit Courts), Semanario Judicial de la Federación ysu Gaceta [S.J.F y su Gaceta], Novena Época, Tomo XXVI, Julio de 2007, Tesis VI.1o.C.104 C, Página 2475.15 11 U.S.C. § 303(i)(1)-(2).   4
  6. 6. paying punitive damages in case of dismissal,16 but only the payment of costs andvisitor fees.17Moreover, the US standard for determining whether a debtor is not generally payingits debts as they come due is higher than the Mexican one, since a disputed debt is notenough to achieve it. “[T]he court believes that where a debtor fails to pay a debtwhich is subject to a bona fide dispute that debt should not be considered a debtwhich has not been paid as it became due. There is no apparent reason why a debtorshould have to pay disputed debts to avoid the entry of an order for relief.”18Order for reliefAn order for relief might be defined as the event that marks the beginning of areorganization proceeding. This date is important because it affects other matters,such as the beginning of the stay.In the US, filing a voluntary petition constitutes an order for relief.19 When aninvoluntary petition is filed, the debtor may contest whether an order for relief shouldbe entered. If the petition is contested, a hearing is held. The court will enter the orderfor relief if it finds either that a custodian for the debtor has been appointed or that thedebtor is generally not paying its debts as they become due.20                                                                                                                16 For US cases awarding punitive damages for involuntary petition dismissals see: Sjostedt v. Salmon (In re Salmon), 128 B.R.313, 318-19 (Bankr. M.D. Fla. 1991) (awarding $250,000 in punitive damages under § 303(i)(2)); In re Fox Island SquarePartner- ship, 106 B.R. 962, 969 (Bankr. N.D. Ill. 1989) (finding the involuntary petition was filed in bad faith and awarding$500 in punitive damagcs); Jaffe v. Wavelength, Inc. (In re Wavelength, Inc.), 61 B.R. 614, 620-21 (B.A.P 9th Cir. 1986)(awarding $10,000 in punitive damages against two individuals who filed an involuntary petition in bad faith).17 LCM, art. 48. Although LCM does not authorize a court to award actual damages in case of dismissal of an involuntarypetition, there is no provision that prevents a debtor to file an independent claim for such damages.18 In re All Media Properties, Inc., 5 Bankr. 126, 144 (Bankr. S.D. Tex. 1980).19 11 U.S.C. § 301.20 11 U.S.C. § 303(h). See In re All Media, supra note 18 at 142-44 in connection with the treatment of "disputed" debts fordetermining whether a debtor is generally not paying its debts as they become due.   5
  7. 7. Chapter 11 does not foresee a financial standard that must be satisfied before filing abankruptcy petition. Not even balance sheet insolvency is required. “Disputes overinsolvency and litigation over eligibility to file for bankruptcy are largely absent fromthe U.S. system. That is a deliberate policy choice, made on the assumption that veryfew businesses would choose to file bankruptcy unless they needed it. Wasting timeand resources to litigate eligibility for bankruptcy is likely to doom the last fragilehope for reorganization”.21Notwithstanding, US courts have created a good faith test to ensure that the system isnot abused. For instance, the Second Circuit’s standard includes a dual test: “abankruptcy petition will be dismissed if both the objective futility of thereorganization process and the subjective bad faith filing the petition are found.”22Things are different in Mexico. When a debtor files an insolvency petition and thejudge considers that such petition fulfills certain formal requirements,23 the courtformally declares the beginning of the insolvency proceeding in the verificationstage,24 but such pronouncement does not constitute an order for relief. After issuingthe beginning declaration, the court orders IFECOM 25 to appoint a visitor(visitador).26                                                                                                                21 Warren, supra note 3, at 24.22 In re Kingston Square Assocs, 214 B.R. 713, 725 (Bankr. S.D.N.Y. 1997).23 According to a non-binding precedent, presumptive evidence that debtor is under the insolvency situation that the lawdescribes is enough to declare the beginning of the verification stage. See CONCURSO MERCANTIL, SOLICITUD DE.BASTA DEMOSTRAR EN FORMA PRESUNTIVA LOS EXTREMOS DEL ARTÍCULO 10 DE LA LEY DE CONCURSOSMERCANTILES PARA QUE SEA ADMITIDA A TRÁMITE, T.C.C., S.J.F. y su Gaceta, Novena Época, Tomo XVIII,Diciembre de 2003, Tesis I.7o.C.42 C, Página 1362.24 See supra note 2.25 IFECOM stands for Instituto Federal de Especialistas de Concursos Mercantiles (Federal Institute of Bankruptcy Specialists).26 LCM, arts. 24 and 29.   6
  8. 8. The visitor is a specialized auxiliary whose functions are analyzing and reporting tothe court whether the company “has breached the performance of its financialobligations in a general manner” and, if necessary, suggesting the adoption of interimreliefs to protect the estate.27 The auxiliary is named visitor because she actually visitsthe debtor’s office to gather the needed information.28After the visit, the court analyzes both, the documentary evidence that the debtorsubmitted with its petition29 and the visitor’s report. Then the court enters an order forrelief if the debtor “has breached the performance of its financial obligations in ageneral manner”.30Something similar happens with involuntary petitions. When a creditor files, the courtdeclares the beginning of the insolvency proceedings and orders the appointment of avisitor. The debtor is given the opportunity to contest. If the petition is contested ahearing is held and after analyzing the visitor’s report and the evidence that the partiessubmitted,31 the court enters an order for relief if the debtor “has breached theperformance of its financial obligations in a general manner”. There is a rebuttablepresumption in case the debtor does not contend the creditor’s petition.32A commercial entity shall be declared insolvent and subject to a proceeding underLCM (declarada en concurso mercantil) to the extent it has breached the performance                                                                                                                27 LCM, arts. 30, 36 and 40.28 LCM, art. 32.29 A debtor must attach to its voluntary petition, among other documents, the balance sheets of the last 3 years. See LCM, art. 20.30 LCM, art. 42.31 LCM does not expressly establish that the parties may file evidence for challenging the visitor’s report but such right has beenrecognized in a non-binding precedent. See CONCURSOS MERCANTILES. LAS PARTES PUEDEN OFRECER PRUEBASPARA DESVIRTUAR EL DICTAMEN DEL VISITADOR AL MOMENTO DE DESAHOGAR LA VISTA QUE ORDENAEL ARTÍCULO 41 DE LA LEY RELATIVA, Primera Sala de la Suprema Corte de Justicia de la Nación [1a. Sala SCJN](Supreme Court - 1st Chamber), S.J.F. y su Gaceta, Novena Época, Tomo XX, Julio de 2004, Tesis 1a. XCIV/2004, Página 191.32 LCM, art. 26.   7
  9. 9. of its financial obligations in a general manner.33 It is deemed that a commercialentity has breached the performance of its financial obligations in a general mannerwhen: (i) it has failed to pay matured debt obligations owed to two or more creditors; (ii) among such outstanding debts, there are some that have been unpaid for at least 30 days from their maturity date and represent 35% or more of the total outstanding liability of the entity at the filing date; and (iii) the commercial entity does not have assets to pay at least 80% of its total matured debts at the filing date.34For the purpose of (iii) above, only the following assets are considered: cash; termdeposits, investments and account receivables, with a maturity date no later than 90days after the filing date; and securities whose value is known and could be sold in 30business-days after the filing date.35A voluntary petition would be admitted if the debtor satisfies condition (i) and either(ii) or (iii). An involuntary petition would be admitted only if the three conditions aremet. From an economical perspective, “insolvency” situation that LCM requires tocarry out a reorganization proceeding is similar to illiquidity since fixed assets are notconsidered for any purpose.                                                                                                                33 LCM, art. 9.34 LCM, art. 10, fracc. I-II.35 LCM, art. 10, pfos. (a)-(d).   8
  10. 10. In addition, LCM establishes a rebuttable presumption for considering that a companyhas “breached the performance of its financial obligations in a general manner”, whenno assets are found to perform a judicial order of attachment or foreclose a judgmentlien, when the entity does not pay debts to two or more creditors, when themanagement of the company is not found or the offices have been closed, when thecommercial entity engages in fraudulent activities to avoid payment of its obligationsor when breaches the pecuniary obligations established on a previous reorganizationplan.36It is clear that Chapter 11 and LCM have different criterions to initiate reorganizationproceedings. In the US, “[i]f you are a potential Chapter 11 debtor, the reason foryour decision to file a Chapter 11 case is irrelevant, and totally up to you. You can doit for strategic reasons; you can do it to increase your market share; you can do itbecause you are Macy’s Department Store and you feel like having a big sale.Insolvency is not required. A person or company can file at any time. In Mexico,without insolvency in the ‘not-paying-debts-as-they-come-due-sense’, you cannotmaintain a case under Ley de Concursos Mercantiles.”37Chances of a successful rehabilitation are bigger when a debtor addresses its financialdistress at an early stage. In line with the odds, the international trend is not to delayvoluntary filing until a debtor is illiquid. Some countries allow the debtor to filewhenever it wishes (e.g. the US), while others allow the debtor to file when it foresees                                                                                                                36 LCM art. 11. It has been recognized in a non-binding precedent that an insolvency judgment might be based on legalpresumptions. See CONCURSO MERCANTIL, DECLARACIÓN DE. PROCEDE CON BASE EN PRESUNCIONESLEGALES, T.C.C., S.J.F. y su Gaceta, Novena Época, Tomo XVII, Marzo de 2003, Tesis I.8o.C.239 C, Página 1703.37 Martin, supra note 4, at 78.   9
  11. 11. that will no be able to fulfill its commitments when they come due. Involuntarypetitions still subjected to a general cessation of payments.38LCM does not completely follow the international trend on voluntary petitions.Neither allows debtor to file whenever it wishes, nor when it envisages a futureilliquid scenario. Therefore, the fixed, numerical and actual illiquid criterionestablished on the Mexican statute as a requirement to voluntary file, puts at stake thereorganization’s success.39Regarding voluntary petitions, I consider that the US approach is better at fosteringthe rehabilitation of a going concern, since it allows debtors to address their financialdifficulties at an early stage. In contrast, regarding involuntary petitions, the Mexicansystem is better than the American since the latter provides punitive consequences incase of dismissal, which discourages creditors from filing.StayIn the US, when an insolvency petition (voluntary or involuntary) is filed, anautomatic stay is imposed on all litigation against the debtor and its property. Thefiling automatically operates as a stay and no specific facts must be pleaded or provento cause it to become effective. The stay is self-executing, even without specificnotice.40 While the automatic stay is in place, no action can be taken against the                                                                                                                38 International Monetary Fund, Legal Department, Orderly & Effective Insolvency Procedures: key issues, 1-2 (1999).39 After reviewing the statement of motives included in the bill to enact LCM and the diary of the discussions among thecongressmen in connection with such statute, I have the impression that the policy choice behind establishing a rigid numericalconcept of insolvency as a requisite for initiating bankruptcy proceedings was to prevent debtors from filing with fraudulentpurposes, but at the same time, to avoid that debtors were submitted to bankruptcy proceedings by their creditors without havinga real financial distress.40 11 U.S.C. § 362.   10
  12. 12. debtor without obtaining prior court approval, or relief from the automatic stay. Thecourt shall grant relief from the stay if an interest in property is not adequateprotected, if the debtor does not have equity in the property and if the property is notnecessary to an effective reorganization.41There are some statutory exceptions to the automatic stay. For instance, the automaticstay does not apply to regulatory actions by governmental units,42 neither to any actby a lessor to a debtor to obtain possession of nonresidential real property under alease agreement that has terminated by the expiration of the stated term of the leasebefore the commencement of or during a reorganization proceeding.43 The policychoice behind this provision is protecting landlords’ interests.The analysis of each exception to the stay is beyond the scope of this paper but thepossibility that a landlord may remove a bankrupt tenant if the real estate leaseterminated before or during reorganization does not foster the rehabilitation of acompany. One of the most important things a company should have for continuing itsoperations is an adequate place to do that.An eviction does not diminish the assets of a company; therefore, allowing a landlordto remove a tenant when the lease has terminated does not directly constitutedepletion of debtor’s assets. Notwithstanding, forcing a debtor to move when facingan insolvency situation might be the death of a company, not only because it shouldcarry out and pay a move, but because the business could be non-rentable in adifferent location.                                                                                                                41 11 U.S.C. § 362(d).42 11 U.S.C. § 362(b)(4).43 11 U.S.C. § 362(b)(10).   11
  13. 13. In Mexico, when the court issues the judgment declaring a debtor under the“insolvency” situation that the law describes (sentencia de concurso mercantil), anyjudicial order of attachment, execution or foreclosure against the debtor or itsproperties should be stopped. 44 The stay is self-executing even without specificnotice. Unlike in the US, pecuniary actions or lawsuits begun by or against the debtorthat are pending at the time of issuing the insolvency judgment shall not be stayed.45Another difference is that LCM does not provide relief from the stay.There are two statutory exceptions to the stay. The stay does not have effect over ajudicial order of attachment, execution or foreclosure against the debtor or itsproperties, if such order derives from a labor judicial proceeding or trial in whichworkers are seeking to collect due wages of the last two years before the filing.46Likewise, the stay does not have effect over an order of attachment to secure taxduties.47The abovementioned exceptions, particularly the one that allows foreclosing debtor’sassets for paying due wages, do not foster the rehabilitation of a company. Whenfacing financial distress, a business needs to save money and preserve assets;therefore, allowing workers to deplete company’s active does not benefit thereorganization purpose.                                                                                                                44 LCM, art. 65.45 LCM, art. 84.46 LCM, art. 65.47 LCM, art. 69.   12
  14. 14. A going concern needs employees and they do not work for free. Thus, it isreasonable for a statute to provide that debtors should pay their employees whilebeing reorganized, but allowing foreclosure on company’s assets to pay past duewages can cause the doom of a company.This provision reflects that the Mexican Congress chose protecting certain labor rightseven over the rehabilitation of a company. Indeed, this provision derives from theMexican Constitution,48 which recognizes the payment priority of past due wages of ayear before filing, even over secured claims.49According to Robert Rauch, “[o]ld-style Latin American procedures historicallytended to give massive protections to labor claims and to the fiscal claims of thegovernment. This precluded effective reorganizations (and often had the perverseimpact of ensuring these claimants never saw much of a recovery) as such claimstypically overwhelmed the financial capacity of the corporation. Management andshareholders would often continue to run their business as usual, to their own benefit,with little effort to resolve their financial situation. Private creditors could expect littlerecovery.”50 It seems that the Mexican reorganization system, although recent, stillhave some of the historical vices of the “old-style” Latin American procedures.                                                                                                                48 See Constitución Política de los Estados Unidos Mexicanos (Political Constitution of the United Mexican States), as amended,art. 123, pfo. A, frac. XXIII, Diario Oficial de la Federación, 5 de Febrero de 1917.49 The Mexican Congress extended the constitutional payment priority of past due wages from one year before filing to two yearsbefore filing. See LCM arts. 224-225. However, in a not binding precedent, such an extension has been declared unconstitutionalfor violating the right to equality. See CONCURSOS MERCANTILES. LOS ARTÍCULOS 224, FRACCIÓN I Y 225,FRACCIÓN I, DE LA LEY RELATIVA, AL ESTABLECER LA PRELACIÓN DE CRÉDITOS A FAVOR DE LOSTRABAJADORES POR EL TÉRMINO DE DOS AÑOS, VIOLAN LA GARANTÍA DE IGUALDAD ANTE LA LEY, 1a.Sala SCJN, S.J.F. y su Gaceta, Décima Época, Libro VI, tomo 1, Marzo de 2012, Tesis 1a. VIII/2012 (9a.), Página 271. Hence,since the exception to the stay foreseen on Art 65 LCM derives from the constitutional payment priority of past due wages, it canbe argued that such exception to the stay is unconstitutional when applied to attachments, executions or foreclosures to collectpast wages due prior a year before filing reorganization.50 Robert L. Rauch, Mexico’s Concurso Mercantil from an International Bondholder’s Perspective, 4 (2011). Available athttp://gramercy.com/Portals/0/PDFs/2011%20December%20-%20Concurso%20Mercantil%20from%20an%20International%20Investors%20Perspective.pdf (last visited May 3, 2012).   13
  15. 15. The scope of the stay foreseen on the US statute is more convenient for a debtor thanthe established on the Mexican law. By stopping any litigation and collection effortagainst the debtor, the US stay allows a debtor not to be distracted by defending itselfat different courts and be focus in its rehabilitation proceeding.In contrast, the scope of the stay foreseen on the Mexican law, at first glance, seemsto be more convenient for creditors because they can continue litigating their claimsagainst the debtor. This creditors’ “advantage” under the LCM provisions, however,might be immaterial because at some point both systems allow creditors to litigatetheir pecuniary claims against the debtor within the reorganization proceeding and thestay prevents foreclosure on estate’s assets.Chapter 11 allows to relief the stay under certain circumstances, while LCM does notprovide a relief. This is an important difference because the mere possibility of liftingthe stay gives creditors bargaining leverage to get a prepetition settlement.Managing the companyIn both countries, during a reorganization proceeding, the company does not need tobe shut down at any moment. This is a deliberate public policy to preserve the goingconcern value by avoiding damages and losing revenue.In the US, upon the commencement of a reorganization proceeding, the debtorbecomes a “debtor in possession” by virtue of law. During the pendency of the case,the debtor remains in possession of all its assets and is authorized to continue   14
  16. 16. operating the business through its current management, unless the court orders theappointment of a trustee.51In Mexico, the debtor remains in possession of the assets that it legally owns,52 andcontinues operating the business.53 However, the statute provides for the mandatoryappointment of a conciliator (conciliador).54In the US, before confirming a reorganization plan, a trustee might replace a debtor inpossession from running the business, for fraud, dishonesty, incompetence, or grossmismanagement of debtor’s affairs by current management, either before or after thecommencement of the case; or simply if appointing a trustee is in the interest ofcreditors, security holders or the estate.55 “[T]he courts have appointed trustees based on adequate showing of: irreconcilableconflict of interest; commingling of assets; inadequate accounting records or controls;failure to pay taxes; especially employee withholding taxes; dishonesty; and fraud.The courts have also ordered the appointment of a trustee where the debtor inpossession has consistently violated the applicable local rules, and where the debtor inpossession has either failed to make payments to a secured party or has madeunauthorized payments including, for example, payments on account of prepetitionindebtedness.”56                                                                                                                51 11 U.S.C. § 1101(1), 1104(a)(1) and 1108.52 LCM, art. 70. Interested parties might request to repossess those assets whose property has not been transmitted to the debtor.53 LCM, arts. 74-75.54 LCM. art. 43, frac. IV. The court, within the insolvency declaration (sentencia de concurso mercantil), shall order IFECOM toappoint a conciliator.55 11 U.S.C. § 1104(a)(1)-(2).56 Robert J. Berdan and Arnold G. Bruce, Displacing the Debtor in Possession: The Requisites for and Advantages of theAppointment of a Trustee in Chapter 11 Proceedings, 67 Marq. L. Rev., 478-81 (1983-1984).   15
  17. 17. The courts have also appointed a trustee “in those instances in which the debtor inpossession lacked credibility or failed to instill confidence, or where, by analogy, thedebtor in possession displayed an inability to effectuate a plan of reorganization.”57Despite of the above, the appointment of an outsider trustee should be the exceptionrather than the rule.58 As a matter of fact, “the courts have declined to appoint atrustee where current management has a need expertise in a complex industry, orwhere it was unclear whether a trustee was any more likely to successfully rehabilitatethe debtor than the debtor in possession.”59 If the court is reluctant to appoint atrustee, it may appoint an examiner to investigate debtor’s conduct and businessaffairs.60Under Chapter 11, the debtor in possession or appointed trustee has, among others,the following duties: • Taking care of the estate’s property.61 • Examining and, if necessary, opposing to the claims that creditors submit.62 • Providing information about the operation of the estate to all parties in interest.63 • Filing tax reports in case the business continues operating.64 • Making a final accounting of the estate.65                                                                                                                57 Id. at 48158 According to Gerard McCormack, this was stressed on In Re Marvel Entertainment Group (1998) 140 F 3d 463 at 471. SeeGerard McCormack, Corporate Rescue Law – An Anglo American Perspective, 81 (2008).59 Berdan and Bruce, supra note 56, at 484.60 11 U.S.C. § 1104(c).61 11 U.S.C. § 1106(a)(1) and 704(a)(2).62 11 U.S.C. § 1106(a)(1) and 704(a)(5).63 11 U.S.C. § 1106(a)(1) and 704(a)(7).64 11 U.S.C. § 1106(a)(1) and 704(a)(8).65 11 U.S.C. § 1106(a)(1) and 704(a)(9).   16
  18. 18. In Mexico, some of the responsibilities that in the US correspond to the trustee ordebtor in possession are commended to the conciliator. Pursuant to LCM provisions,the conciliator has, among others, the following duties: • Examining and suggesting to the court which creditors’ claims shall be allowed.66 • Monitoring debtor’s business operations.67 • Deciding on the termination of executory contracts, approval of post-filing financing, substitution of liens or establishment of new ones over debtor’s property, and sales of assets outside ordinary business operations.68 • Analyzing the desirability of the continuance of the business and, if necessary, requesting the court to shut down the business.69 • Requesting the court to remove the debtor in possession70 and, if removed, assuming the administration of the company.71 • Trying that the debtor and creditors negotiate a reorganization plan.72 • Requesting the extension of the reorganization stage73 or the beginning of the liquidation stage.74It is clear that both statutes foresee the appointment of an outsider that, in a greater orlesser extent, intervenes the management of the company. In the US, the appointment                                                                                                                66 LCM, arts. 121, 123, 128 and 130.67 LCM, art. 75.68 LCM, art. 75.69 LCM, art. 79.70 LCM, art. 81.71 LCM, art. 82.72 LCM, art. 148.73 LCM, art. 145.74 LCM, art. 150.   17
  19. 19. of a trustee is exceptional, while in Mexico the appointment of a conciliator ismandatory.In the US, before the Bankruptcy Reform Act of 1978, the Chandler Act of 1938 hadcreated two separate business reorganization chapters, Chapter X for publicly tradedcompanies and Chapter XI for small business. For protecting the interests of publicinvestors, Chapter X required the appointment of a trustee in most cases. In contrast,since Chapter XI addressed situations with less complicated corporate structures,where public investors were not likely to be affected, the appointment of a trustee wasunavailable and the debtor generally remained in possession, managing the businessand pursuing the reorganization effort.75“Under the mandatory trustee provision, the trustee became the key figure in thereorganization process. The trustee was generally authorized to operate the debtor’sbusiness, to investigate the debtor’s affairs, to pursue causes of action on behalf of theestate and to provide information to creditors and stockholders. The trustee was alsoresponsible for developing, in consultation with creditors and stockholders, areorganization plan. In this respect, the trustee provided structure to the case byserving as the focal point about which formulation of the plan revolved.”76Although Chapter X authorized to retain debtor’s management even after theappointment of a trustee, in most cases the trustee displaced the management. Thisinduced debtors to attempt to reorganize under Chapter XI, where they could remainin possession and control of the business. This practice supported the view that                                                                                                                75 Barry L. Zaretsky, Trustees and Examiners in Chapter 11, SCL Rev., 917-20 (1992).76 Id at 917-19.   18
  20. 20. mandatory appointment of a trustee deters debtors from filing reorganization at anearly stage. Hence, the mandatory trustee provision was considered one of the mostproblematic aspects of the former reorganization system.77At the time of discussing the Bankruptcy Reform Act of 1978, the mechanisms ofdebtor in possession and mandatory trustee were both considered. At the end, asexplained above, the US Congress opted for the debtor in possession as default rule,with the possibility of replacing it with a trustee under certain circumstances.In contrast, while enacting LCM at the beginning of this century, the MexicanCongress opted for the mandatory appointment of a conciliator, whose role is quitesimilar to the one that trustees used to have under Chapter X.Unfortunately, there is not a clear response to the question of which method is better.“To leave the old management in control as DIP –debtor in possession- is to run anumber of risks. Old management, after all, often comprises the same folks whobrought the business to the brink of collapse, which may not be a strong endorsementfor their management skills and business acumen. More important, old managementmay have incentives that are at odds with those articulated in the bankruptcysystem.”78 For instance, old managers may prefer to continue running the businessalthough it is clear that the company is not going to be rehabilitated, rather thanliquidating it for the benefit of the creditors.                                                                                                                77 Id at 919-21.78 Warren, supra note 3, at 60.   19
  21. 21. Notwithstanding, in some cases, even creditors will often prefer to deal with currentmanagers with whom they are familiar than to suffer the time and expense ofeducating an outsider about the business and its problems. Replacing the oldmanagement is not necessarily the best alternative, particularly when the company isfacing an insolvency situation and the business continues its operations. Key businessdecisions should be done rapidly and outsiders might not be prepared to take them.Knowledge of the business is an important asset when the company’s life is at stake.Chapter 11 and LCM try to conciliate these contradictory positions. Both statutesallow the old management to continue running the business but in a monitored andcontrolled manner. The difference is in the mechanisms and extent of such controland surveillance. The US system provides that a trustee might, exceptionally,substitute the debtor in possession, as well as the appointment of examiners,79 andcreditors committees.80 In contrast, LCM provides the mandatory appointment of aconciliator, who closely supervises debtor’s management and, to a certain extent,controls its activities, as well as the appointment of examiners (interventores).81 TheMexican statute does not provide the appointment of creditors committees.The mandatory conciliator provision might have deterred Mexican debtors fromvoluntary filing for reorganization since current managers does not want to besupervised, controlled or supplanted by a conciliator. However, the number ofdeterred debtors should be small because managers of Mexican companies, even inbig pocket businesses, are regularly the controlling shareholders themselves, and as it                                                                                                                79 11 U.S.C. § 1104(c).80 11 U.S.C. § 1102(a)(1).81 LCM, arts. 62-64. The so-called “interventores” have similar functions to the ones examiners have under Chapter 11.   20
  22. 22. is explained in more detail below, the reorganization proceeding is shareholderfriendly because LCM does not establish the absolute priority rule.After analyzing both alternatives, I consider that the best mechanism is allowing thedebtor in possession’s current management to continue running the business under thesupervision of a mandatory outsider (trustee or conciliator) who, under certainexceptional circumstances, prior court approval, might totally replace the currentmanagement at request of any stakeholders or the outsider himself. This proposaldefers from the US system in the sense that the outsider appointment is mandatory,and from the Mexican one, in the sense that any stakeholder might request themanagers’ removal and not only the conciliator.Retaining key employeesRunning a business during reorganization is not easy. It requires management skillsand technical knowledge that are difficult to find. Chapter 11 makes difficult to retainkey managers because it does not allow to transfer or pay any amount to an insider forthe purpose of inducing such person to remain with the debtor’s business,82 unless thetransfer is essential to retain such person because she has a similar job offer,83 or sheis essential to the survival of the business,84 and the transfer is not greater than 10times the amount of a similar transfer given to non-management employees,85 or if nosimilar transfers were made to non-management employees, not greater than 25                                                                                                                82 11 U.S.C. § 503(c)(1).83 11 U.S.C. § 503(c)(1)(A).84 11 U.S.C. § 503(c)(1)(B).85 11 U.S.C. § 503(c)(1)(C)(i).   21
  23. 23. percent of the amount of any transfer made to such insider for any purpose during thecalendar year before.86In a similar path, LCM establishes under a rebuttable presumption of fraud, amongothers, any and all operations carried out against the estate (i.e. any transfer orpayment by the debtor) in benefit of any member of the board of directors, if donewithin 270 days before the issuance of the insolvency judgment.87 Since any operationmade under a presumption of fraud is voidable, unless made in good faith, LCM alsomakes complicated to retain management employees.There is a difference between these approaches. In the US such payments are bannedunless made on necessity and within an established cap, while in Mexico are voidableunless made in good faith. The Mexican system seems to be more effective forretaining key employees because it does not cap the amount of the payment. Althoughgood faith is required under LCM provisions, such a burden is similar to the necessityrequirement established in Chapter 11.In contrast, by capping the amount of the payments allowed for the benefit ofmanagement employees, the US statute protects in a clearer manner the creditor’sinterest.Both statutes reflect a similar policy choice, preventing managers to be benefited fromthe insolvency of the company.                                                                                                                86 11 U.S.C. § 503(c)(1)(C)(ii).87 LCM, arts. 112 and 117.   22
  24. 24. Operating the businessAs mentioned above, both Chapter 11 and LCM provide that the debtor can continuerunning the business. However, every aspect of a business requires the use, purchase,sale or lease of property. For example, a retail debtor must use cash to buy inventoryand then sell that inventory to its costumers.Thus, a statute that allows a debtor to pay its employees, purchase supplies, andproduce the services and goods that keep income coming in, is more efficient atfostering the rehabilitation of a company than a statute that does not allow it.Notwithstanding, since running a business implies risk, the interest of creditors needsto be protected.Chapter 11 authorizes the debtor in possession or trustee to enter into transactionswithout the need to seek judicial approval, including the use, sale or lease of propertyof the estate, provided that such transactions are within the ordinary course ofbusiness.88 In a similar path, LCM authorizes the debtor in possession to carry out allof its ordinary business operations under supervision of the conciliator.89Hence, under both statutes, the debtor in possession has immediate access to cashgenerated on the regular course of business, but such cash can only be used forordinary operations.                                                                                                                88 11 U.S.C. § 363(c)(1).89 LCM, art. 75.   23
  25. 25. In addition to cash, cash-collateral might be important for continue operating thecompany. Chapter 11 provides that the use, sell or lease of cash-collateral is notallowed unless the entities having an interest in it give their consent,90 or under courtauthorization after notice and a hearing.91 Authorization may be granted only if thecreditor remains adequately protected.92LCM does not have an explicit provision regarding the use of cash-collateral.However, it provides that the substitution of a guarantee outside of the debtor’sordinary course of business requires conciliator approval and the consent of theinterested creditor. 93 Hence, it might be argued that by authorizing collateralsubstitution, LCM implicitly authorizes the use of cash-collateral because on securedtransactions the use of cash-collateral automatically implies the substitution of aguarantee.94Assuming arguendo that LCM allows the use of cash-collateral, there would be,anyway, a difference on its treatment. In the US, the use of cash-collateral alwaysrequires the consent of the interested creditor or approval of the court; while inMexico, it would require no approval if the cash-collateral is used within the ordinarycourse of business, and would require the approval of the conciliator and consent ofthe interested creditor when used outside the ordinary course of business.                                                                                                                90 11 U.S.C. § 363(c)(2)(a).91 11 U.S.C. § 363(c)(2)(b).92 11 U.S.C. § 363.93 LCM, art. 75.94 For example, a working capital loan extended for the acquisition of raw materials is initially secured with the acquiredsupplies. When the raw materials are transformed, the loan is secured with the resulting inventory. Later on, the loan is securedwith the account receivable derived from the inventory sales. Once the receivable is collected, the cash itself becomes collateral,but if the borrower uses the cash again, the loan is now secured with whatever has been acquired.   24
  26. 26. Under the assumed construction of LCM provisions, the Mexican statute would bemore convenient than the US from a debtor’s perspective, but much more lessprotective from the point of view of the creditors with an interest in cash-collateral.Chapter 11 provides that a debtor in possession may use, sell or lease property of theestate outside of the ordinary course of business, after notice and a hearing.95 Incontrast, LCM establishes that the sale of estate’s assets outside the ordinary course ofbusiness requires the approval of the conciliator, who has to consider the non-bindingopinion of appointed examiners.96 If the subject of the sale is a perishable asset or anasset whose conservancy cost is higher than its expected recovery value, theconciliator might not request the examiners’ opinion.97The Mexican approach (conciliator approval) seems to be more efficient than the USone (court authorization, after notice and hearing) regarding the sale of estate’sproperty outside the ordinary course of business. However, since the conciliator mayhave to consider the opinion of the appointed examiners, the advantage of efficiencycould be insignificant.Another thing to consider is the right to sell property free and clear of liens and otherinterests. Such a right is important because the estate could be able to obtain superiorrecoveries from assets that might otherwise be worth considerably less if foreclosureis carried out.                                                                                                                95 11 U.S.C. § 363(b)(1).96 LCM, art. 75.97 LCM, art. 77.   25
  27. 27. Chapter 11 establishes that debtor in possession may sell property of the estate freeand clear of any interest in such property provided the satisfaction of one thefollowing conditions: (i) non-bankruptcy law permits the sale; (ii) the entity having aninterest in the property consents to the sale; (iii) the interest in the property is a lienand the price exceeds the value of all liens on the property; (iv) the interest in theproperty is in bona fide dispute; or (v) the entity could be compelled, in a legal orequitable proceeding, to accept a money satisfaction of its interest.98LCM does not explicitly address the sale of estate’s assets free and clear of any secureinterest during the reorganization proceeding. However, besides authorizing the saleof estate’s assets and collateral substitution, LCM provides that alienation of assets, atleast within the liquidation stage, should be done in a manner that maximizesrecovery.99 Thus, I consider, and this is just a personal assumption, that a sale ofestate’s assets free and clear of any secure interest would be allowed within areorganization proceeding under LCM provisions, as long as the sale maximizes therecovery.Still under the previous assumption, if such a sale were not among the debtor’sregular operations, approval of the conciliator and consent of the creditors having aninterest in the property would be required. If such a sale were within the ordinarycourse of business, the debtor would not need any authorization to do it. However, inorder to respect the priority rule, it is my impression that in any case, creditors havingan interest in the property should remain adequately protected.                                                                                                                98 11 U.S.C. § 363(f).99 LCM, art. 197. This provision corresponds to the liquidation stage. See supra note 2.   26
  28. 28. As stated above, Chapter 11 provides the requirements for using cash-collateral andselling estate’s assets free and clear of any interest and liens, while LCM does notexplicitly do that.100 Based on the principle of legal certainty, I personally considerthat the US statute has an advantage over the Mexican with regard to those issues.FinancingEvery business needs financing to fund its operations. However, a company that isfacing insolvency is regularly under credit and loan default. Such a bad reputationmakes difficult for a debtor to obtain post-petition financing and, therefore, a statutethat somehow facilitates a debtor to obtain financing while under reorganizationcontributes to save the lifelines of a going concern.Chapter 11 allows a debtor in possession to obtain three different kinds of post-petition financing: (i) A debtor in possession may obtain unsecured credit in the ordinary course of business. Such credit does not require court approval and is granted administrative expense status.101 It must be paid in full if a reorganization plan is confirmed and has priority over all other types of prepetition debts in case of conversion to Chapter 7 liquidation.                                                                                                                100 Under certain construction of LCM provisions, it could be argued that the statute implicitly authorizes the use of cashcollateral and the sale of encumbered estate’s property; such a construction, however, has not been addressed on judicialprecedents. Thus, it cannot be assured that the use of cash collateral and the sale of encumbered estate’s property would bepermitted on every reorganization case.101 11 U.S.C. § 364(a).   27
  29. 29. (ii) After notice and a hearing, the court may authorize a debtor in possession to obtain unsecured credit outside the ordinary course of business as an administrative expense.102 (iii) If the debtor in possession cannot obtain unsecured credit, the court may authorize post-petition credit (a) with priority over all other administrative expenses, (b) secured by unencumbered property, or (c) secured by a junior lien.103 (iv) If credit is not otherwise available and the existing lenders are adequately protected, the court may authorize a debtor in possession to obtain credit secured by a senior or equal lien.104Under LCM provisions, post-petition financing always requires conciliator’sapproval. The conciliator, considering the opinion of the examiners, may authorize adebtor in possession to obtain secured or unsecured credit, in or outside the ordinarycourse of business.105 Post-petition unsecured credit is granted administrative expensestatus.106 LCM does not allow granting a primary lien; therefore, a post-petition creditmay only be secured by unencumbered property or by a junior lien.As mentioned before, for a company subjected to reorganization, obtaining financingis not easy because lenders are afraid of not being able to recover their money. Suchfear diminishes when lenders became secured creditors and even more when they geta primary lien. A statute that allows a debtor in possession to obtain financing securedby a primary lien saves an important lifeline of a going concern. Hence, regarding                                                                                                                102 11 U.S.C. § 364(b).103 11 U.S.C. § 364(c).104 11 U.S.C. § 364(d).105 LCM, art. 75.106 LCM, art. 224.   28
  30. 30. post-petition financing, Chapter 11 is better than LCM at fostering the rehabilitationof a company.Reorganization planThe purpose of a reorganization proceeding is to maintain the debtor’s business aliveas a feasible and profitable company. Since the economic value of an insolventdebtor’s assets is regularly not enough to fulfill all its prepetition commitments, areorganization plan seeks to fairly redistribute such value among the interested parties(creditors, shareholders, etc.).Filing a planIn the US, during the first 120 days after the issuance of the order for relief, only thedebtor may file a plan.107 If the debtor files a plan within that period, such plan has tobe accepted within the first 180 days after the order for relief.108 Both periods may beextended or shortened.109If a debtor does not file a plan within the 120-days period, or if filed does not gainacceptance within the 180-days period, other parties may file a plan. A debtor maylose its exclusive right if a party in interest has obtained an order decreasing orterminating the exclusivity period;110 or a trustee has been appointed.111                                                                                                                107 11 U.S.C. § 1121(b).108 11 U.S.C. § 1121(c)(3).109 11 U.S.C. § 1121(d). The 120-days period within which only the debtor may file a plan may not be extended beyond 18months after the order for relief, while the 180-days period within which to gain acceptance of the plan may not be extendedbeyond 20 months after the order for relief.110 The exclusivity period can be reduced “for cause”. See 11 U.S.C. § 1121(d).111 11 U.S.C. § 1121(c)(1).   29
  31. 31. Once the debtor’s exclusivity period ends, “[a]ny party in interest, including thedebtor, the trustee, a creditor’s committee, an equity security holder’s committee, acreditor, an equity security holder, or any indenture trustee, may file a plan.”112The Mexican statute has a complete different approach. LCM does not provide anexclusivity period in which only the debtor may file a plan. Indeed, any party ininterest may propose a plan at any time during the reorganization stage. Actually, theplan is negotiated outside the court, regularly at conciliator’s initiative.113Once the conciliator considers that the debtor and the creditors required to accept aplan have a favorable opinion about a proposed plan, he files into the court a proposalof the plan to be considered by all the parties in interest. After all the parties had beengiven the chance to review the proposal, the conciliator may file the reorganizationplan that the debtor and the required creditors have signed.114 Later on, each creditorhas the opportunity to reject the plan, and the court will determine if the plancomplies with the legal requirements.115A reorganization plan must be filed within 185 days as of the day in which theinsolvency judgment was published in the Federal Official Gazette (Diario Oficial de                                                                                                                112 11 U.S.C. § 1121(c).113 One of the responsibilities of the conciliator is trying that the debtor and the creditors negotiate a reorganization plan. SeeLCM, art. 148. An important amount of the conciliator’s fees depend on the confirmation of a plan. See Reglas de CarácterGeneral de la Ley de Concursos Mercantiles (General Rules of the Bankruptcy Law), Regla 36, Diario Oficial de la Federación,18 de Diciembre de 2009.114 LCM, art. 161.115 LCM, arts. 163-164.   30
  32. 32. la Federación);116 otherwise, the debtor would be declared in liquidation (quiebra)and the court would start the liquidation stage.117The 185-days period may be extended for 90 days more, at request of the conciliatoror of the creditors that hold at least two-thirds in amount of the total allowed claims.A second extension may be granted for an additional period of 90 days, at request ofthe conciliator and the creditors that hold at least 90% in amount of the total allowedclaims. In any case, the period for filing a plan cannot exceed 365 days.118As mentioned above, Chapter 11 provides for an exclusivity period in which only thedebtor may file a plan, while LCM does not foresee such exclusivity. In my opinion,such difference is irrelevant because LCM does not respect the absolute priority ruleand provides that any reorganization plan requires debtor’s approval to be effective.119In the US, the exclusivity period is important to keep control over the reorganizationprocedure since a plan can be approved even without debtor or shareholders’acceptance. Shareholders and managers might be deprived from their controllinginterest if a creditor’s plan is approved. Thus, in the US, the existence of anexclusivity period for the debtor to propose a plan is a device that diminishes thethreat of losing control and promotes the use of reorganization proceedings.Approving a plan                                                                                                                116 LCM, art. 145.117 LCM, art. 167.118 LCM, art. 145. The 365-days maximum length of the reorganization stage has not been respected in several cases (e.g.Compañía Mexicana de Aviación, S.A. de C.V. and Grupo Fertinal, S.A. de C.V.).119 These ideas are discussed in more detail below.   31
  33. 33. In the US, voting on a plan is by class.120 Thus, any plan must classify similar claimstogether and treat claims within a class similarly.121 Claims, not creditors, must beclassified. It is important to determine whether a class of claims or interests isimpaired or not because unimpaired classes cannot vote on a plan, since they arepresumed to have accepted it.122Pursuant to Chapter 11 provisions, a plan might be consensual or nonconsensual. Aplan is consensual if all impaired classes vote to accept it. A particular class accepts aplan if creditors that hold at least two-thirds in amount and more than one-half of theallowed claims of such class vote to accept the plan.123 For a class of interests toaccept a plan, at least two-thirds in amount of the allowed interests who voted musthave voted to accept the plan.124If a plan is not accepted by each class, it may be confirmed if at least one class ofimpaired creditors accepts the plan;125 the plan does not discriminate unfairly, and isfair and equitable as to the dissenting classes. 126 The capacity to confirm anonconsensual plan is known as “cramdown”.In any case, unless a class unanimously accepts the plan, members of a class mustreceive under the plan at least as much as they would get in a Chapter 7 liquidation.                                                                                                                120 11 U.S.C. § 1126.121 11 U.S.C. § 1123(a)(4).122 11 U.S.C. § 1126(f).123 11 U.S.C. § 1126(c).124 11 U.S.C. § 1126(d).125 11 U.S.C. § 1129(a)(10).126 11 U.S.C. § 1129(b)(1).   32
  34. 34. In Mexico, for a plan to be approved, it requires the acceptance of the debtor and thecreditors holding a specific amount of debt. Regarding the debtor’s acceptance, animportant question is who has the legal authority to accept a plan on behalf of thedebtor when the conciliator has completely replaced the debtor’s managers. In myopinion, LCM does not provide a clear answer to this question, and there is no publicprecedent that addresses this issue. There are three possible answers: (i) theconciliator, who has the duty of administering the debtor’s business; (ii) the replacedmanagers, who had the legal authority to act on behalf of the debtor; or (iii) anyrepresentative appointed by the old managers or the shareholders meeting.On the other hand, a plan requires the acceptance of creditors holding a specificamount of debt. The specific amount of debt should be bigger than the sum of 50% ofthe total allowed unsecured claims plus 50% of the allowed claims of the securedcreditors that accept the plan, if any.127 Under this logic, if none secured creditoraccepts the plan, the plan needs the acceptance of the creditors that hold a simplemajority of the total allowed unsecured debt, but if any secured creditor accepts theplan, the simple majority of the allowed unsecured debt is not anymore enough foraccepting the plan. In this sense, as long as a secured creditor accepts the plan, thedestiny of the unsecured creditors is not anymore in the hands of the creditors thathold a simple majority of the allowed unsecured debt.Notwithstanding the above, an accepted plan cannot be confirmed if a simple majorityof unsecured creditors, or any number of creditors holding 50% in amount of the totalallowed unsecured claims, expressly rejects the plan.128                                                                                                                127 LCM, art. 157.128 LCM, art. 163.   33
  35. 35. It is considered that all unsecured creditors have accepted a plan, when such a planprovides the payment of the entire amount of their claims.129For a plan to be confirmed, it cannot provide for the creditors that did not accept it, adiscount or forgiveness of principal and interest, a maturity extension, or acombination of both, bigger than the granted by the creditors that accepted the planand hold at least 30% in amount of the total allowed unsecured claims.130A creditor that holds a secured claim and did not accept the plan may foreclose on thecorresponding collateral, unless the plan provides for the payment of the claim or thepayment of the collateral value. If the collateral value is lesser than the amount of theclaim, the deficiency is treated as an unsecured claim. 131 Notwithstanding, anysecured claim whose payment is provided for in the plan is still secured by thecollateral with the corresponding lien priority.132 In this sense, a secured creditor canstill foreclose on the corresponding collateral if the claim provided for in the plan isnot paid.Unlike in the US, where claims are sophisticatedly classified and two-thirds inamount and a majority in number of each class is required to vote in favor of a plan(unless confirmation is sought by cramdown), the Mexican statute only distinguishesbetween secured and unsecured claims, and the consent of creditors holding a specificamount of debt is enough to confirm a plan. Moreover, under LCM provisions, claims                                                                                                                129 LCM, art. 158.130 LCM, art. 159.131 LCM, art. 160.132 LCM. art. 165.   34
  36. 36. held by debtor affiliates and insiders are also counted for purposes of calculating therequired amount of debt to approve a plan, while such claims are not considered forvoting purposes under Chapter 11.The Mexican approach has advantages and disadvantages for the debtor. A debtormay only need to negotiate with a group of creditors who hold the specific amount ofdebt needed to approve a plan, even though such creditors do not hold a majority ofthe claims or represent a majority of the creditors in number. Moreover, the debtorcan consider the claims of its affiliates and insiders to achieve the required amount ofdebt.133On the other hand, a debtor cannot benefit from the flexibility that Chapter 11provides. Claims classification, particularly of unsecured claims, facilitates theapproval of a plan, since the necessities of each class of creditors might be different.In addition, pursuant LCM provisions, secured creditors cannot be crammed downsince a plan shall provide for the payment of their claim, or the payment of thecollateral value. This circumstance is relevant in those cases where secured creditorshold the majority of the allowed claims.As mentioned above, LCM does not respect the absolute priority rule, whichessentially provides that creditors or holders of equity interests may not receive anyrecovery of their claims or interests unless the creditors with a higher priority havereceived full payment of their claims. As a matter of fact, pursuant LCM provisions,as long as holders of the specific amount of debt accept the plan, shareholders of a                                                                                                                133 Examples of the use of affiliated debt for obtaining the required amount of debt to approve a plan are seen in thereorganization proceedings of Corporación Durango, S.A. de C.V., (although in this case such strategy was not used at the end),Vitro, S.A.B. de C.V., and Fertilizantes Nitro, S.A. de C.V.   35
  37. 37. debtor company could retain their equity interests even though the company’sunsecured creditors are not receiving full payment.134 This circumstance supportsshareholders’ reluctance to offer creditors equity during the negotiation of areorganization plan.“As with so many revolutionary regulatory changes, the [LCM’s enactment] processwas highly political as the various interest groups lobbied for advantage. The finalprocedures, effective in May 2000, reflect the politics. In the context of understandingthe bias of the procedures, they would be characterized as ‘controlling shareholderfriendly,’ with the exception that the local banks were able to lobby for absoluteprotections for secured creditors by incorporating no provision for cram down.”135Although Chapter 11 has important devices to achieve the confirmation of areorganization plan, such as the cramdown provision and the sophisticatedclassification of claims, it is my impression, and this is just a personal assumption,that the mechanisms of specific amount of debt and inclusion of debtor’s affiliatedand insiders debt for purposes of calculating the amount of debt required to approve aplan under LCM provisions, could be more effective at getting the approval of areorganization plan.From an unsecured creditor perspective, the US system is fairer than the Mexican one.Under Chapter 11, a plan requires the acceptance of each class of unsecured creditors,unless confirmation is sought by cramdown, in which case fairness and equity isneeded anyway. In contrast, under LCM, a plan does not require the approval of the                                                                                                                134 This circumstance can be understood within the Mexican economic situation, where a few prominent people control many ofthe largest companies and expect to retain their controlling interests at the end of a reorganization proceeding.135 Rauch, supra note 50, at 5.   36
  38. 38. unsecured creditors as a class, but of the holders of certain amount of debt, in whichdebtor’s affiliated debt and secured debt could be considered. Unlike in the US, itmight be the case that unsecured creditors receive less under a LCM reorganizationplan, than what they would get in case of liquidation.Effects of confirming a planIn the US, upon confirmation of a plan, prepetition and post-petition debts aredischarged and treated as set forth in it. A confirmed plan binds the debtor and allcreditors and equity security holders, regardless whether they voted to accept the plan,or whether the plan impairs a claim or interest.136Unless otherwise provided in the plan, confirmation vests all of the property of theestate in the debtor.137 Except as otherwise provided in the plan, the property dealtwith by the plan is free and clear of all claims and interests of creditors and owners.138Preexisting secured claims, if any, are eliminated and replaced by any secured claimsprovided for in the plan.In a similar path, LCM provides that a confirmed plan binds the debtor, all theunsecured creditors, the secured creditors that accepted the plan, and the securedcreditors for which the plan provides a complete payment. Creditors holding securedclaims do not waive their collateral or their lien priority by subscribing the plan;                                                                                                                136 11 U.S.C. § 1141.137 11 U.S.C. § 1141(b).138 11 U.S.C. § 1141(c).   37

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