Avianca Holdings: Second Circuit’s “Billing Date” Approach to Fixed-Schedule Lease Payments in Bankruptcy Stands after U.S. Supreme Court Declines Challenge

Background and Procedural History

Avianca, a major Latin American airline, filed the Chapter 11 Cases on May 10, 2020, in the U.S. Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) due to financial difficulties resulting from the COVID-19 pandemic. Avianca continued to operate its airline business as a debtor-in-possession throughout the pendency of the Chapter 11 Cases. In the course of operating its business, Avianca had, prior to the bankruptcy, contracted with certain parties (the “Brokers”) who provided brokerage services aimed at securing aircraft leases. The Brokers ultimately procured 20 aircraft leases (the “Brokered Leases”) for Avianca, all of which provided for Brokers’ fees, contractually named “additional rent payments,” to be paid by Avianca at fixed intervals over the life of each Brokered Lease. At the commencement of the Chapter 11 Cases, the Brokers had completed all services, but the Brokered Leases were unexpired and some of the “additional rent payments” had not yet come due under the applicable schedules.

Under section 365(a) of the Bankruptcy Code, Avianca as a debtor-in-possession had the ability to decide whether to assume or reject the unexpired Brokered Leases as part of its chapter 11 process. Rejection of a lease in chapter 11 operates as a breach of the agreement immediately before the petition date, relieving the debtor of future performance obligations and leaving the lease counterparty with a prepetition rejection damages claim. However, up until the time that a debtor either assumes or rejects a lease, section 365(d)(5) of the Bankruptcy Code provides that a debtor must perform all obligations “first arising from or after 60 days after the [chapter 11 petition] under an unexpired lease of personal property . . . until such lease is assumed or rejected . . . unless the court, after notice and a hearing and based on the equities of the case, orders otherwise.”

Avianca did not assume or reject any of the Brokered Leases during the 60-day grace period provided for by section 365(d)(5), instead rejecting them gradually over the course of the next two years. In the period between the end of the 60-day grace period and the rejection of each of the Brokered Leases (the “Interim Period”), Avianca did not make any of the additional rent payments as scheduled, nor did it ask the Bankruptcy Court to excuse it from the payments based on the equities of the case. The Brokers filed several proofs of claim in the Chapter 11 Cases related to the additional rent payments that were scheduled to be paid during the Interim Period. They then filed a motion with the Bankruptcy Court to compel payment of those claims, alleging that they were entitled to administrative expense status because they were obligations of the debtors which arose after filing of the Chapter 11 Cases and thus had to be paid in full. Avianca responded that the additional rent payments “arose” when they became unconditional obligations of the debtors — i.e., at the time the Brokered Leases were executed, that is, prior to the bankruptcy filing — and that the Brokers therefore only held prepetition unsecured claims, which would have been paid at well under par. Ultimately, the Bankruptcy Court agreed with the Brokers that the additional rent payments were postpetition obligations and ordered Avianca to pay $4,338,484.66 in satisfaction of all of the additional rent payments that arose during the Interim Period.

Avianca appealed the Bankruptcy Court’s decision to the U.S. District Court for the Southern District of New York (the “District Court”), which agreed that the additional rent payments were postpetition obligations and affirmed the Bankruptcy Court’s order. Avianca then appealed the District Court’s decision to the Second Circuit.

The Second Circuit Opinion

The Second Circuit affirmed the District Court’s ruling, holding that Avianca’s obligation to pay the additional rental amounts “first arose” under section 365(d)(5) when each installment came due under the Brokered Leases’ payment schedules, not when the Brokered Leases were executed prepetition or when the Brokers performed their services.

The Second Circuit’s analysis largely relied on statutory interpretation. The court found that, by design, section 365(d)(5) tilts toward creditor protection for personal property lessors after a 60‑day grace period and shifts to the debtor the burden to seek equitable relief “based on the equities of the case.” Avianca neither assumed or rejected the Brokered Leases within the grace period nor sought equitable modification of its payment obligations, and thus could not avoid the statute’s directive to timely perform payment obligations that arose postpetition.

In rendering its opinion, the Second Circuit recognized a long‑standing split between courts that adopt an “accrual” approach and those that adopt a “billing date” approach and expressly embraced the billing‑date rule as the interpretation most consistent with the text, structure, and policy of Section 365(d)(5). The court underscored that any perceived windfall resulting from treating scheduled amounts for prepetition services as postpetition obligations is addressed by the statute’s built‑in safety valves: the 60‑day grace period and the debtor’s ability to seek equitable relief after notice and a hearing.

The Second Circuit’s opinion accordingly affirmed the order requiring Avianca to pay the $4,338,484.66 in satisfaction of the additional rent payments that arose during the Interim Period. Following the Supreme Court’s refusal to hear an appeal, that order and the Second Circuit’s ruling are final.

Key Takeaways

For debtors, the decision reinforces that, in the Second Circuit, obligations under unexpired personal property leases that “come due” after the 60‑day post-filing grace period must be paid on a current basis until assumption or rejection without regard to whether the estate receives a contemporaneous benefit. Debtors who wish to avoid priority treatment for scheduled amounts that reflect prepetition services must either act within the grace period or seek the equitable relief expressly authorized by section 365(d)(5). For lessors and counterparties to equipment and aircraft leases, the ruling strengthens the enforceability of fixed‑schedule payment provisions during the post‑petition, pre‑assumption or rejection period. The decision also provides negotiating leverage and clarity in structuring lease economics where broker or transaction fees are amortized as part of rent over the lease term.

The practical impact of this decision is that, in future airline bankruptcy cases, debtors may move more quickly to decide which aircraft leases to assume or reject to avoid having to pay ongoing lease obligations for a long period of time, or budgets for the chapter 11 process will need to take into account such payment obligations, thereby impacting the cost/benefit analysis that debtors will undertake when deciding when to assume or reject aircraft leases.

As for the aircraft leasing market more generally, brokers (and similarly situated parties) can take some comfort that in the Second Circuit, payments structured as additional lease payments will be entitled to priority of payment under section 365(d)(5) of the Bankruptcy Code.

¹Avianca Holdings S.A. v. Burnham Sterling & Co. LLC and Babcock & Brown Secs. LLC (In re Avianca Holdings S.A.), No. 24-255 (2nd Cir. Feb. 3, 2025) (the “Opinion” of the “Second Circuit”).