I wonder if the Mexican government caught the almost unbelievable story of the distressed debt fund Elliott Capital seizing a three-masted Argentine naval frigate, the Libertad, earlier this month in Ghana. Elliot and its vulture-fund brethren have been driven to piracy by Argentina's breathtaking refusal to make good on U.S. court judgments obtained by the funds, which refused to exchange their defaulted Argentine bonds in the sovereign's two restructurings. The vultures are awaiting a key ruling from the 2nd Circuit Court of Appeals that will determine whether Argentina can pay bondholders who participated in the restructuring before it pays them, but, in the meantime, a court in Ghana said Elliott was acting within its rights when it took control of the Libertad. The hedge fund is demanding that Argentina put up a $20 million bond in exchange for the release of the ship.

Apparently undeterred by the swashbuckling derring-do of distressed debt funds, Mexico has just entered a dispute between the politically connected Mexican glassmaker Vitro and a group of vulture funds, including Elliott and Aurelius, that assert they're owed more than $1 billion on Vitro notes. On Wednesday, the Mexican government filed an amicus brief at the 5th Circuit, where Vitro is appealing a ruling by U.S. Bankruptcy Judge Harlin Hale of Dallas.

Hale refused to approve a Vitro reorganization plan that had been voted upon by creditors and okayed by a court in Mexico. But that plan, as Hale explained in his order in Vitro's Chapter 15 bankruptcy, would have extinguished the hedge funds' claims as Vitro noteholders under New York state law. (The funds have obtained a New York declaratory judgment upholding their rights as noteholders; they say they're owed more than $1 billion by Vitro subsidiaries.) Vitro's lawyers at Thompson & Knight and Milbank, Tweed, Hadley & McCloy argued that under the principle of international comity, the U.S. bankruptcy judge should recognize the Mexican-approved plan. The hedge funds, represented by (among others) Dechert, claimed that the Mexican judicial process was corrupt and unfair. Hale wouldn't go along with those allegations, but nevertheless concluded that the Mexican plan contravened U.S. policy. Vitro hadn't put the subsidiaries that actually guaranteed its bonds into bankruptcy, yet its Mexican plan eliminated their debt to the hedge funds, Hale wrote. So, under the bankruptcy code, he could not accord the plan comity. (My Reuters colleague Tom Hals had a prescient story about the ruling back in June.)

A three-judge panel of the 5th Circuit heard Vitro's emergency appeal on Oct. 3, but the arguments seem to have raised questions about the Mexican proceeding and the noteholders' rights under New York law. The panel -- Judges Carol King and Jerry Smith and Senior Judge Rhesa Barksdale -- asked both sides to submit letters describing the noteholders' pending appeals of the Mexican reorganization plan. Then, on Oct. 15, the government of Mexico surfaced for the first time. Mexico asked for leave to enter the fray, asserting that international bankruptcy cooperation is at stake, and the government has an interest in international recognition of judgments rendered by its courts.

The amicus brief Mexico's lawyers at Goldstein & Russell submitted Wednesday expands on that point. If bondholders have a problem with the Mexican plan, the brief argued, those objections can and will be considered by Mexican courts. "There is no reason to suspect that these concerns will not receive a full and fair hearing in Mexico -- just as there is no reason to suspect that they did not already receive one such hearing in the initial Mexican bankruptcy proceeding," the brief said. In every bankruptcy, Mexico asserted, some creditors fare better than others, so U.S. courts "should seldom, if ever, refuse to enforce a foreign plan on the basis of a disagreement with the way that a particular creditor or class of creditors was treated."

"In ordinary commercial cases," Mexico's brief continued, "courts should apply a rule of law that exercises extreme caution before denying recognition to a foreign insolvency judgment. A contrary result would signal to dissatisfied parties (creditors and debtors alike) that they may seize upon any deviation from U.S. bankruptcy law as a basis to challenge the enforcement of a foreign plan, and comity shall be reduced from a strong norm of international cooperation to mere rhetoric."

Obviously, vulture funds aren't now going to be prowling the high seas for Mexican naval vessels; Mexico's involvement as an amicus in the Vitro case isn't the same as Argentina's flouting of U.S. judgments. But the Libertad's seizure is a vivid example of how hard these funds are willing to fight for their rights as bondholders. I have a strong suspicion that Mexico hasn't heard the last of Vitro's vultures.

(This post has been corrected. An earlier version misidentified Judge Hale.)

(Reporting by Alison Frankel)

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