In Re: Avianca Holdings S.A.

Background

In 2014, Avianca Holdings S.A., later known as HVA Associated Corp., and two former affiliates contracted with Burnham Sterling and Company LLC and Babcock & Brown Securities LLC to arrange financing and leases for aircraft. The brokers originated 20 leases. Instead of receiving their fees immediately, the brokers were to receive installment payments called “Additional Rental Payments,” or ARPs, through the aircraft lease agreements. The agreements also identified the brokers as third-party beneficiaries who could enforce their payment rights.

Avianca filed for Chapter 11 bankruptcy on May 10, 2020. Section 365(d)(5) of the Bankruptcy Code generally requires a Chapter 11 debtor to timely perform all obligations under an unexpired personal-property lease that first arise after the 60-day period following the bankruptcy filing, until the lease is accepted or rejected, unless a court orders otherwise. Avianca did not accept or reject the leases during that period. It later rejected them over roughly two years, but did not pay ARPs that became due after the 60-day period and before the corresponding leases were rejected.

The brokers filed proofs of claim for those unpaid ARPs and asked the Bankruptcy Court to require immediate payment. Avianca objected, arguing that the ARPs were earned when the brokers performed their pre-bankruptcy services and therefore should be treated as general unsecured claims. The Bankruptcy Court ruled that the ARPs were subject to the timely-payment requirement in Section 365(d)(5), partially granted the brokers’ motion to compel, and denied Avianca’s objections on that issue. It ordered Avianca to pay $4,338,484.66. The Bankruptcy Court rejected the brokers’ separate argument that the claims were administrative claims under Section 503(b), and that part of the ruling was not appealed.

Issue and Arguments on Appeal

The appeal presented the narrow question whether the ARPs that became due after the 60-day period and before the relevant leases were rejected were obligations that first arose during the period covered by Section 365(d)(5).

Avianca argued that its obligation arose when the lease agreements were signed because the agreements described the payment obligations as unconditional and the brokers had already performed their services. The brokers argued that the obligations arose on the scheduled dates when the installment payments became due.

Analysis

The District Court reviewed the Bankruptcy Court’s legal conclusion without deference. It agreed with the Bankruptcy Court that the disputed obligations arose on their respective due dates. The court focused on the statutory language requiring the debtor to perform all lease obligations that first arise during the relevant post-bankruptcy, pre-rejection period.

The court reasoned that the lease agreements called the payments “Additional Rental Payments” and treated them as lease obligations. Although the word “unconditional” meant that Avianca could not refuse payment after an obligation arose, it did not determine when the obligation arose. Before the scheduled payment dates, Avianca had no payment to perform. The court therefore concluded that the payment obligations arose when the ARPs came due, not when the agreements were executed.

The court rejected Avianca’s argument that treating the ARPs as priority payments conflicted with the Bankruptcy Code’s policy of treating similar creditors alike. It also concluded that policy and legislative-history arguments could not overcome the statute’s clear text. Avianca could have rejected the leases earlier, which would have prevented the later ARPs from becoming obligations payable under Section 365(d)(5).

Disposition

The court affirmed the Bankruptcy Court’s January 26, 2023 decision and January 31, 2023 order. It held that the ARPs that became due after the 60-day period and before rejection of the applicable leases were subject to timely and complete payment under Section 365(d)(5). The court directed the Clerk to terminate pending motions, adjourn remaining dates, and close the case.