Introduction

The case of In re: Avianca Holdings S.A., Debtor v. Burnham Sterling & Company LLC and Babcock & Brown Securities LLC represents a pivotal appellate decision by the United States Court of Appeals for the Second Circuit, dated February 3, 2025. This case delves into the nuanced interpretation of bankruptcy statutes, specifically focusing on the prioritization of debtor obligations under 11 U.S.C. § 365(d)(5). The central issue revolves around the timing of Avianca Holdings S.A.'s (hereafter "Avianca") obligation to make additional rental payments to their creditors during bankruptcy proceedings.

Summary of the Judgment

The Court of Appeals affirmed the decisions of both the bankruptcy court and the district court, upholding that Avianca's obligation to pay additional rental payments arose on the due dates specified in the lease agreements, which were more than 60 days post the bankruptcy filing. This interpretation aligns with the "billing date" approach rather than the "accrual" approach advocated by Avianca. Consequently, Avianca was mandated to honor these payment obligations under the priority framework established by 11 U.S.C. § 365(d)(5), despite Avianca's contention that these obligations arose pre-petition.

Analysis

Precedents Cited

The judgment extensively references prior case law to support its interpretation of statutory provisions:

• IN RE PENN TRAFFIC CO.: Discussed the authority of debtors-in-possession to assume or reject executory contracts.
• MISSSION Product Holdings, Inc. v. Tempnology, LLC: Clarified the distinction between assumption and rejection in bankruptcy.
• NLRB v. Bildisco & Bildisco: Addressed the classification of payments under assumed contracts as administrative expenses.
• Anderson v. Credit One Bank, N.A.: Established that questions of law are reviewed de novo on appeal.

These precedents collectively reinforce the court's position on contract obligations during bankruptcy and the interpretation of statutory language pertaining to debtor obligations.

Legal Reasoning

The court's legal reasoning centers on the interpretation of the term "arise" within section 365(d)(5). Avianca argued that obligations arose pre-petition when the leases were executed. However, the court distinguished between a creditor's claim arising pre-petition and the debtor's obligation to pay arising post-petition based on payment schedules. The "billing date" approach was favored, positing that obligations begin when payments are due under lease terms, not merely upon contract execution.

Key points in the reasoning include:

• Statutory Context: The court emphasized interpreting statutes within their broader contexts, determining that "perform" necessitates an existing duty tied to the lease's payment schedule.
• Separation of Claims and Obligations: It was clarified that creditors' claims and debtor obligations are distinct, preventing conflation of when claims arise with when obligations arise.
• Priority Over General Unsecured Claims: The specific language in section 365(d)(5) grants priority to certain obligations, independent of the general administrative expense provisions of section 503(b)(1).
• Legislative Intent and Policy: The court underscored Congress's intent to provide enhanced protections to creditors under unexpired leases, aligning with overarching bankruptcy policies that balance creditor rights and debtor reorganization opportunities.

Impact

This judgment sets a clear precedent for how obligations under pre-existing contracts are treated during bankruptcy, particularly emphasizing that payment obligations are tied to when payments are due rather than when contracts are executed. Key impacts include:

• Clarification of section 365(d)(5): Solidifies the interpretation of obligations arising based on payment schedules post-petition.
• Priority of Payments: Strengthens creditor protections by ensuring that priority claims under specific statutory provisions are honored based on contractual payment timelines.
• Guidance for Future Cases: Provides a framework for courts to interpret similar disputes regarding debtor obligations and creditor claims in bankruptcy contexts.
• Debtor Strategic Decisions: Highlights the importance of timely decisions by debtors regarding assumption or rejection of contracts to avoid unintended priority obligations.

Complex Concepts Simplified

section 365(d)(5)

This statute requires that when a company files for bankruptcy, it must continue to make certain lease payments that become due more than 60 days after the bankruptcy filing. These payments are given priority over general unsecured debts.

Debtor-in-Possession

A company that has filed for bankruptcy but continues to operate its business is referred to as a "debtor-in-possession." This status allows the company to make important decisions about its operations and contracts during the bankruptcy process.

Assumption and Rejection of Contracts

Under bankruptcy law, a debtor can choose to either "assume" (continue) or "reject" (terminate) existing contracts. Assumed contracts must be fulfilled, while rejected contracts result in unsecured claims against the debtor.

Priority Claims vs. General Unsecured Claims

Priority claims are debts that are ranked higher in repayment order than general unsecured claims. They are paid first from the debtor's available assets.

Conclusion

The Avianca Holdings S.A. decision reinforces the prioritization of debtor obligations based on contractual payment schedules post-bankruptcy filing. By adhering to the "billing date" approach, the court ensures that creditors with scheduled payment obligations are accorded priority, thereby balancing creditor protections with the debtor's need for reorganization. This judgment serves as a critical guide for future bankruptcy cases, delineating the boundaries of when obligations arise and the corresponding rights of creditors under the Bankruptcy Code.