October 15, 2004

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
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Chapter 11
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Outline

• Introduction
• Differences Between US and Colombian
  Bankruptcy Law
• Motion to Dismiss
• Judge Groppers Opinion

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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 courts December 23, 2003
  Memorandum Opinion
• 303 B.R. 1 (Bankr.S.D.N.Y.)

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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)

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General Background (contd)

• 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

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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, Colombias 2nd largest airline
• Alianza Summa formed
• Avianca, ACES, and SAM
• Code share and marketing/management integration

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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

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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

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Nationalities of Main Creditors

• Caxdac Pilot Pension Fund
• US98 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

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Creditors Committee

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

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Differences Between US and Colombian Bankruptcy
Law
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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

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Differing Priorities under US/ Colombian Law

• Pension liabilities
• Labor liabilities
• Taxes/Government Fees
• Secured Creditors

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Motion to Dismiss
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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

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Motions to Dismiss (contd)

• 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

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Motions to Dismiss (contd)

• 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.

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IV. Judge Groppers Decision
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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

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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

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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.

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305(a) (1) Analysis (contd)

• 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 Creditors
  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

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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

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305(a) (2) Analysis Foreign Proceeding
Pending (contd)

• 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

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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

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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

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Conclusion
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• 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

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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_at_roble.net.co or Lar
ry B. Pascal Haynes and Boone, LLP 901 Main
Street, Suite 3100 Dallas, TX 75202 Direct Dial
214-651-5652 Direct Fax [phone] E-mail
larry.pascal_at_haynesboone.com
d-1236496.3