In Re: Avianca Holdings S.A.

Background

Avianca Holdings S.A. and related debtors filed Chapter 11 bankruptcy cases in 2020. Before bankruptcy, Avianca Holdings issued $484,419,000 in 9% senior secured notes. The notes were secured by interests in a pool of assets called the Shared Collateral. The appellants held 2023 Notes with a total face amount of $8,250,000.

During the bankruptcy cases, Avianca obtained debtor-in-possession financing. The financing liens had priority over the liens securing the 2023 Notes, and the bankruptcy court’s financing order required the financing claims to be paid first from the Shared Collateral. Most 2023 Noteholders participated in a transaction that converted their notes into Tranche A financing loans, but the appellants did not.

Avianca later conducted a marketing process to seek additional financing. More than 125 potential parties were contacted, more than 35 accessed a virtual data room, and none offered enough money to repay the financing claims. The bankruptcy court found that the Shared Collateral was worth less than the higher-priority financing claims, leaving the 2023 Noteholders with no secured value.

The Chapter 11 plan substantively consolidated 37 of the 40 debtors. Substantive consolidation treats separate bankruptcy estates as one for purposes such as combining assets and liabilities and voting on a reorganization plan. Three debtors were left unconsolidated. The plan placed the 2023 Noteholders in Class 11 with other general unsecured creditors, who were to receive a pro rata share of a $30 million cash pool or an equity pool, depending on their claims.

The bankruptcy court approved the plan on November 2, 2021, and rejected the appellants’ objections. The appellants appealed, and Avianca moved to dismiss the appeal under equitable mootness, a doctrine that can prevent a court from granting effective relief after a bankruptcy plan has been substantially implemented.

Issues and analysis

The appellants challenged the treatment of the Shared Collateral, substantive consolidation, and the plan’s vote calculation.

Value of the Shared Collateral. The appellants argued that the bankruptcy court improperly placed the burden of proving value on them. The district court found no reversible error because the bankruptcy court had stated that its result would be the same even if the debtors had the burden of proof. The bankruptcy court found that the appellants offered no evidence showing that the Shared Collateral had value after payment of the higher-priority financing claims, while Avianca had proved by a preponderance of the evidence that the 2023 Notes’ interest in the collateral had no value.

The district court also held that the bankruptcy court’s valuation finding was not clearly erroneous. The marketing process provided evidence that no party was willing to invest enough money in Avianca or its assets to repay the financing claims. The appellants suggested other valuation methods but did not provide an alternative valuation, a valuation expert, or evidence that the collateral was worth more than the financing claims.

Substantive consolidation. The district court upheld the consolidation of 37 debtors. Under Second Circuit law, consolidation may be appropriate when creditors dealt with the debtors as one economic unit or when the debtors’ affairs are so entangled that separating them would be impossible or excessively costly. The record supported findings that the consolidated debtors shared back-office functions, employees, officers, debtors, shareholders, creditors, a headquarters, and centralized cash management. An adviser testified that separating their books and records could take millions of dollars and 20 years.

The court also upheld leaving three debtors outside the consolidation. Those debtors maintained separate books and records with their own accounting staff, while the consolidated debtors’ finances were tracked through an integrated general ledger. The appellants cited no legal authority allowing consolidation merely because including the three debtors might improve some creditors’ recovery.

Plan voting. The appellants argued that the bankruptcy court incorrectly rejected their argument under the Bankruptcy Code’s absolute priority rule. That rule applies when a class votes to reject a Chapter 11 plan. Class 11 accepted the plan with 98.96% of the dollar amount of voting claims. Even assuming the 2023 Noteholders should have been placed in a separate class, holders of 77.49% of the dollar amount of voting 2023 Note claims accepted the plan. The district court therefore held that the absolute priority rule did not apply.

Disposition

Judge Vernon S. Broderick affirmed the bankruptcy court’s rejection of the appellants’ objections. The court found no reversible error in the valuation of the Shared Collateral, the substantive consolidation of 37 debtors, or the calculation of the plan vote. The court also denied as moot Avianca’s motion to dismiss the appeal based on equitable mootness. The clerk was directed to terminate the pending motion and close the case.