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October 15, 2004 Houston, Texas

2004 ABA Fall Meeting International Law Section. The Avianca Chapter 11 Case Larry B. Pascal Haynes and Boone, LLP Dallas Francisco Reyes Villamizar Francisco Reyes & Asociados Abogados Bogota. October 15, 2004 Houston, Texas. Chapter 11. Outline. Introduction

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October 15, 2004 Houston, Texas

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  1. 2004 ABA Fall Meeting International Law Section The Avianca Chapter 11 Case Larry B. Pascal Haynes and Boone, LLP Dallas Francisco Reyes Villamizar Francisco Reyes & Asociados Abogados Bogota October 15, 2004 Houston, Texas

  2. Chapter 11

  3. Outline • Introduction • Differences Between US and Colombian Bankruptcy Law • Motion to Dismiss • Judge Gropper’s Opinion

  4. I. Introduction

  5. Overview • Airline bankruptcies are some of most complex cases due to variety of factors • Avianca case presents interesting cross-border insolvency questions • AV filed in SDNY, but not in home country • March 2003 filing • Review factors in court’s December 23, 2003 Memorandum Opinion • 303 B.R. 1 (Bankr.S.D.N.Y.)

  6. General Background • Avianca SA is Colombian corporation • Principal shareholders (98%): • Colombian Federation of Coffee Growers • Valores Bavaria S.A. • Publicly traded on Bogota Stock Exchange (less than 2%) • Bogota hub • Served two US cities – Miami and New York • 14 destinations in Colombia • 12 other locations (primarily Central and South America)

  7. General Background (cont’d) • 31 aircraft and 16 spare engines • All leased from lessors located in US • or doing business in US • Avianca Inc. - US subsidiary that acts as general agent • Workforce consisting of • 4,153 Colombian employees • 28 in US • 148 outside of Colombia and US • Manpower contracts with third parties for additional 900 employees • Revenue • 50%+ from Colombian domestic market • 24% from Colombia – US Market

  8. Chronology • Oldest operating airline in Western Hemisphere • Late 1999 faced financial/operational difficulties • Implemented cost-cutting measures • September 2000 re-negotiated with lessors and lenders • Early 2001 entered formal restructuring talks • Exception – BoNY • 2002 – Signed “Integration Agreement with ACES, Colombia’s 2nd largest airline • “Alianza Summa” formed • Avianca, ACES, and SAM • Code share and marketing/management integration

  9. Corporate Structure Avianca S.A. Parent Company Chapter 11 Avianca Inc. Wholly owned subsidiary and Agent • Both companies file for Chapter 11 • protection in March 2003

  10. Main Factors Affecting Avianca • Slowdown of Colombian Economy • Exchange rates affecting peso • BoNY Dispute • High fuel prices • 9-11 • High aircraft lease rates post 9-11 • Lessors unwilling to re-negotiate lease rates

  11. Nationalities of Main Creditors • Caxdac Pilot Pension Fund • US$98 million secured by funds in trust • Bank of New York Noteholders • Aircraft Lessors • Colombian Tax Authorities • Airline Vendors (Colombia and rest of world) • Dip Lenders

  12. Creditors Committee • CAXDAC (pilot pension fund) • Pilots’ Union • Banco de Bogota • Pegasus (aircraft lessor) • Debis (aircraft lessor) • United Aerospace Corp. Inc. (aircraft parts)

  13. Differences Between US and Colombian Bankruptcy Law

  14. Advantages of Chapter 11 Filing • Automatic stay • Treatment of executory contracts • Assume/reject process • In Latin America, debtor typically required to accept contract or pay full damages • Sixty day aircraft lease vacation period under § 1110/ certainty of non-foreclosure during such period • Mitigation of damages

  15. Differing Priorities under US/ Colombian Law • Pension liabilities • Labor liabilities • Taxes/Government Fees • Secured Creditors

  16. Motion to Dismiss

  17. Motions to Dismiss • Various creditors filed Motions to Dismiss in April 2003 • Led by aircraft lessors Pegasus and Ansett • Various other small parties including United Aerospace also filed similar motions • Avianca moved to reject aircraft leases • Before court issued ruling, Avianca and lessors settled issue and re-negotiated leases • United Aerospace remained as movant and court decided issue

  18. Motions to Dismiss (cont’d) • Movants argued: • Inability of US court to bind Colombian creditors • Forum Shopping • Discrimination against US creditors • US creditors bound by automatic stay while foreign creditors not

  19. Motions to Dismiss (cont’d) • Not in “best interest” of debtor and creditors to file for Chapter 11 • Filing created uncertainty and done in bad faith • Law 550 process was viable • Not enough contact with U.S.

  20. IV. Judge Gropper’s Decision

  21. § 109 Analysis – Who May Be Debtor • § 109(a) of US Bankruptcy Code permits filing by person “that resides or has a domicile, place of business, or property in the United States…” • Court found that both Avianca SA and Avianca Inc. met this test

  22. § 305(a) Analysis - Abstention • Notwithstanding broad eligibility standards found in §109, court has ample authority to dismiss case not properly brought • §305(a) test is • (1) interests of creditors and debtors would be better served by such dismissal, or • (2)(A) there is a pending foreign proceeding; and • (2)(B) Section 304(c) factors warrant such dismissal

  23. § 305(a) (1) Analysis • Court emphasized that both “creditor and debtor” must be better served by dismissal • Court found that Avianca would not be better served by dismissal • No showing that Avianca could have obtained jurisdiction over aircraft lessors and other major financial creditors with Law 550 action in Colombia • Law 550 is only four years old and relatively untested in large cases • Law 550 has no provision to reject burdensome leases • Law 550 allow lessor to terminate reorganization, repossess property, and force liquidation if defaults not cured within 90 days from filing.

  24. § 305(a) (1) Analysis (cont’d) • Court also found that creditors would not be better served by dismissal • Debtor able maintain routes and continue business • Signed agreements post-petition with major suppliers, tax authorities, employee groups, and other Colombian and US entities • Approved by Court after substantial Creditor’s Committee participation • Most aircraft lessors agreed to restructure lease without litigation/Pegasus and Ansett settled later • BoNY never requested Colombian • forum to resolve its disputes

  25. § 305(a) (2) Analysis – Foreign Proceeding Pending • § 305(a)(2) also permits court to dismiss case if foreign proceeding is pending and § 304 (c) factors warrant such action. • Court rejected § 305(a)(2) Dismissal Because No Foreign Proceeding Pending

  26. § 305(a) (2) Analysis – Foreign Proceeding Pending (cont’d) • Court also cited • Ample contacts with US • Aircraft flying in US (“lease agreements are life support of an airline”) • Substantial US subsidiary • US credit card receivables program • Lessors subject to US jurisdiction • Presence of property in US and willingness of major Colombian parties in interest to participate

  27. Section 304 – Ancillary Proceeding • Movants also argued that availability of § 304 ancillary proceeding relief implied duty of foreign debtor to file in home country and avoid US plenary case • Court rejected this argument citing § 303(b)(4) permitting plenary proceeding in US • Principle is “thorough pragmatism” as to what relief best suits needs of foreign debtor

  28. Section 304 – Ancillary Proceeding • Court rejected notion that Avianca would be “better served” by Law 550 proceeding and § 340 ancillary proceeding • Encounter problem that US courts should not confer substantive rights that go beyond these available in home country • Lack of effective mechanism for rejecting leases • If Avianca filed a 550 ancillary case, both courts could be aligned in the best interest of all parties

  29. Conclusion

  30. Avianca respected process, prepared business plan, and worked closely with Creditors Committee • Few collection actions in Colombia • Important to have good understanding of local law/local counsel • Flexibility of US legal system was critical ingredient

  31. For more information, please contact Francisca Reyes Villamizar Francisco Reyes & Asociados Abogados Carrera 12, No. 96-67, Office 304 Bogota, Colombia Telephone: 011-571-691-4647 E-mail: frlaw@roble.net.co or Larry B. Pascal Haynes and Boone, LLP 901 Main Street, Suite 3100 Dallas, TX 75202 Direct Dial: 214-651-5652 Direct Fax: 214-200-0702 E-mail: larry.pascal@haynesboone.com • d-1236496.3

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