Avianca Holdings S.A. v. Burnham Sterling & Co. LLC (In re Avianca Holdings S.A.)
The ‘billing approach,’ not the ‘accrual approach,’ decides whether there is a priority claim for personal property and real estate leases more than 60 days after filing.
- Rochelle Quick Take
View Rochelle Summary- Case Type:
- Business
- Case Status:
- Affirmed
- Citation:
- 24-255-bk (2nd Circuit, Feb 03,2025) Published
- Tag(s):
- Ruling:
- The U.S. Court of Appeals for the Second Circuit affirmed a bankruptcy court's order granting a motion to compel post-petition priority payment of $4.3M in brokers' fees under prepetition leases pursuant to 11 U.S.C. § 365(d)(5), which requires a debtor-in-possession to “timely perform all of the obligations of the debtor ... first arising from or after 60 days after the order for relief ... under an unexpired lease of personal property ... until such lease is assumed or rejected.” The obligation to pay the fees arose on the scheduled dates in the leases, not when the lease was executed.
- Procedural context:
- The Second Circuit identified the sole issue on appeal as follows: "did Avianca's [i.e, the debtor-in-possession's] obligation to pay the additional rental payments [to the brokers under certain leases] 'first aris[e] from or after 60 days after the order for relief in a case under chapter 11 of this title"? See 11 U.S.C. § 365(d)(5)." The proper interpretation of the statute constituted an issue of law, which the circuit court considered de novo. In doing so, the court provided a primer on "the basic mechanics of assumption and rejection" before addressing when obligations arise under § 365(d)(5). The court also explained why the claims for brokerage fees, couched as "additional rent payments" under the leases, were not entitled to priority as administrative expenses under 11 U.S.C. § 503(b)(1).
- Facts:
- In 2014, Creditor-Appellees Burnham Sterling and Company LLC and Babcock & Brown Securities, LLC (the “Initiators”) provided brokerage services to Debtor-Appellant Avianca Holdings S.A., a large Latin American airline. On Avianca's behalf, the Initiators successfully brokered leases for twenty suitable airplanes. The leases stated that, in addition to paying the actual lessors of the airplanes, Avianca also would pay the Initiators for their services via “additional rental payment[s]” due on a pre-set schedule over each lease's lifetime. Avianca filed a chapter 11 bankruptcy petition in the U.S. Bankruptcy Court for the Southern District of New York in May 2020 after the Initiators had completed their work. Operating its business as a debtor-in-possession, Avianca retained the statutory authority to decide whether to assume or reject the unexpired leases. It paid the rent due to the airplane lessors as scheduled in the leases but did not pay the Initiators the additional rental payments that came due between sixty days after the petition date and before Avianca decided whether to assume or reject the leases. The Initiators filed proofs of claim and moved to compel Avianca to pay the additional rental payments under the leases, contending their claims were entitled to priority treatment under 11 U.S.C. § 365(d)(5). Avianca opposed the relief, arguing the Initiators only were entitled to general unsecured claims as "the 'obligations' to pay the Initiators arose pre-petition, not 60 days after the petition date, because the Initiators rendered all of their brokerage services pre-petition and the payment terms in the leases were set prior to Avianca’s bankruptcy filing." The bankruptcy court granted the Initiators' motion based on "both the plain meaning of [Section 365(d)(5)] and the commercial realities of the parties' arrangement." After the U.S. District Court for the Southern District of New York affirmed, Avianca took a further appeal to the Second Circuit.
- Judge(s):
- WESLEY, LYNCH, and KAHN