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1 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.

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Presentation on theme: "1 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."— Presentation transcript:

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2 1 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

3 2 Chapter 11

4 3Outline I. Introduction II. Differences Between US and Colombian Bankruptcy Law III. Motion to Dismiss IV. Judge Gropper’s Opinion

5 4 I. Introduction

6 5 Airline bankruptcies are some of most complex cases due to variety of factorsAirline bankruptcies are some of most complex cases due to variety of factors Avianca case presents interesting cross-border insolvency questionsAvianca case presents interesting cross-border insolvency questions AV filed in SDNY, but not in home countryAV filed in SDNY, but not in home country March 2003 filingMarch 2003 filing Review factors in court’s December 23, 2003 Memorandum OpinionReview factors in court’s December 23, 2003 Memorandum Opinion 303 B.R. 1 (Bankr.S.D.N.Y.)303 B.R. 1 (Bankr.S.D.N.Y.) Overview

7 6 Avianca SA is Colombian corporation Avianca SA is Colombian corporation Principal shareholders (98%): Principal shareholders (98%): Colombian Federation of Coffee Growers Colombian Federation of Coffee Growers Valores Bavaria S.A. Valores Bavaria S.A. Publicly traded on Bogota Stock Exchange (less than 2%) Publicly traded on Bogota Stock Exchange (less than 2%) Bogota hub Bogota hub Served two US cities – Miami and New York Served two US cities – Miami and New York 14 destinations in Colombia 14 destinations in Colombia 12 other locations (primarily Central and South America) 12 other locations (primarily Central and South America) General Background

8 7 31 aircraft and 16 spare engines 31 aircraft and 16 spare engines All leased from lessors located in US All leased from lessors located in US or doing business in US Avianca Inc. - US subsidiary that acts as general agent Avianca Inc. - US subsidiary that acts as general agent Workforce consisting of Workforce consisting of 4,153 Colombian employees 4,153 Colombian employees 28 in US 28 in US 148 outside of Colombia and US 148 outside of Colombia and US Manpower contracts with third parties for additional 900 employees Manpower contracts with third parties for additional 900 employees Revenue Revenue 50%+ from Colombian domestic market 50%+ from Colombian domestic market 24% from Colombia – US Market 24% from Colombia – US Market General Background (cont’d)

9 8 Chronology Oldest operating airline in Western Hemisphere Oldest operating airline in Western Hemisphere Late 1999 faced financial/operational difficulties Late 1999 faced financial/operational difficulties Implemented cost-cutting measures Implemented cost-cutting measures September 2000 re-negotiated with lessors and lenders September 2000 re-negotiated with lessors and lenders Early 2001 entered formal restructuring talks Early 2001 entered formal restructuring talks Exception – BoNY Exception – BoNY 2002 – Signed “Integration Agreement with ACES, Colombia’s 2 nd largest airline 2002 – Signed “Integration Agreement with ACES, Colombia’s 2 nd largest airline “Alianza Summa” formed “Alianza Summa” formed Avianca, ACES, and SAM Avianca, ACES, and SAM Code share and marketing/management integration Code share and marketing/management integration

10 9 Avianca Inc. Wholly owned subsidiary and Agent Chapter 11 Corporate Structure Avianca S.A. Parent Company Both companies file for Chapter 11 protection in March 2003

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

12 11 Caxdac Pilot Pension FundCaxdac Pilot Pension Fund US$98 million secured by funds in trustUS$98 million secured by funds in trust Bank of New York NoteholdersBank of New York Noteholders Aircraft LessorsAircraft Lessors Colombian Tax AuthoritiesColombian Tax Authorities Airline Vendors (Colombia and rest of world)Airline Vendors (Colombia and rest of world) Dip LendersDip Lenders Nationalities of Main Creditors

13 12 Creditors Committee CAXDAC (pilot pension fund) CAXDAC (pilot pension fund) Pilots’ Union Pilots’ Union Banco de Bogota Banco de Bogota Pegasus (aircraft lessor) Pegasus (aircraft lessor) Debis (aircraft lessor) Debis (aircraft lessor) United Aerospace Corp. Inc. (aircraft parts) United Aerospace Corp. Inc. (aircraft parts)

14 13 II.Differences Between US and Colombian Bankruptcy Law

15 14 Automatic stayAutomatic stay Treatment of executory contractsTreatment of executory contracts Assume/reject processAssume/reject process In Latin America, debtor typically required to accept contract or pay full damagesIn 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 periodSixty day aircraft lease vacation period under § 1110/ certainty of non- foreclosure during such period Mitigation of damagesMitigation of damages Advantages of Chapter 11 Filing

16 15 Pension liabilitiesPension liabilities Labor liabilitiesLabor liabilities Taxes/Government FeesTaxes/Government Fees Secured CreditorsSecured Creditors Differing Priorities under US/ Colombian Law

17 16 III. Motion to Dismiss

18 17 Motions to Dismiss Various creditors filed Motions to Dismiss in April 2003 Various creditors filed Motions to Dismiss in April 2003 Led by aircraft lessors Pegasus and Ansett Led by aircraft lessors Pegasus and Ansett Various other small parties including United Aerospace also filed similar motions Various other small parties including United Aerospace also filed similar motions Avianca moved to reject aircraft leases Avianca moved to reject aircraft leases Before court issued ruling, Avianca and lessors settled issue and re-negotiated leases Before court issued ruling, Avianca and lessors settled issue and re-negotiated leases United Aerospace remained as movant and court decided issue United Aerospace remained as movant and court decided issue

19 18 Motions to Dismiss (cont’d) Movants argued: Movants argued: Inability of US court to bind Colombian creditorsInability of US court to bind Colombian creditors Forum ShoppingForum Shopping Discrimination against US creditorsDiscrimination against US creditors US creditors bound by automatic stay while foreign creditors notUS creditors bound by automatic stay while foreign creditors not

20 19 Motions to Dismiss (cont’d) Not in “best interest” of debtor and creditors to file for Chapter 11 Not in “best interest” of debtor and creditors to file for Chapter 11 Filing created uncertainty and done in bad faith Filing created uncertainty and done in bad faith Law 550 process was viable Law 550 process was viable Not enough contact with U.S. Not enough contact with U.S.

21 20 IV.Judge Gropper’s Decision

22 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…” § 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 Court found that both Avianca SA and Avianca Inc. met this test

23 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 §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

24 23 § 305(a) (1) Analysis Court emphasized that both “creditor and debtor” must be better served by dismissal Court emphasized that both “creditor and debtor” must be better served by dismissal Court found that Avianca would not be better served by dismissal Court found that Avianca would not be better served by dismissal 1.No showing that Avianca could have obtained jurisdiction over aircraft lessors and other major financial creditors with Law 550 action in Colombia 2.Law 550 is only four years old and relatively untested in large cases 3.Law 550 has no provision to reject burdensome leases 4.Law 550 allow lessor to terminate reorganization, repossess property, and force liquidation if defaults not cured within 90 days from filing.

25 24 § 305(a) (1) Analysis (cont’d) Court also found that creditors would not be better served by dismissalCourt also found that creditors would not be better served by dismissal 1.Debtor able maintain routes and continue business 2.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 participationApproved by Court after substantial Creditor’s Committee participation 3.Most aircraft lessors agreed to restructure lease without litigation/Pegasus and Ansett settled later 4.BoNY never requested Colombian forum to resolve its disputes

26 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.§ 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 PendingCourt rejected § 305(a)(2) Dismissal Because No Foreign Proceeding Pending

27 26 § 305(a) (2) Analysis – Foreign Proceeding Pending (cont’d) Court also cited Ample contacts with US Ample contacts with US Aircraft flying in US (“lease agreements are life support of an airline”) Aircraft flying in US (“lease agreements are life support of an airline”) Substantial US subsidiary Substantial US subsidiary US credit card receivables program US credit card receivables program Lessors subject to US jurisdiction Lessors subject to US jurisdiction Presence of property in US and willingness of major Colombian parties in interest to participate Presence of property in US and willingness of major Colombian parties in interest to participate

28 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 caseMovants 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 USCourt 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 debtorPrinciple is “thorough pragmatism” as to what relief best suits needs of foreign debtor

29 28 Section 304 – Ancillary Proceeding Court rejected notion that Avianca would be “better served” by Law 550 proceeding and § 340 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 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 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 partiesIf Avianca filed a 550 ancillary case, both courts could be aligned in the best interest of all parties

30 29 Conclusion

31 30 Avianca respected process, prepared business plan, and worked closely with Creditors Committee Avianca respected process, prepared business plan, and worked closely with Creditors Committee Few collection actions in Colombia Few collection actions in Colombia Important to have good understanding of local law/local counsel Important to have good understanding of local law/local counsel Flexibility of US legal system was critical ingredient Flexibility of US legal system was critical ingredient

32 31 For more information, please contact Francisca Reyes Villamizar Francisco Reyes & Asociados Abogados Carrera 12, No , Office 304 Bogota, Colombia Telephone: or Larry B. Pascal Haynes and Boone, LLP 901 Main Street, Suite 3100 Dallas, TX Direct Dial: Direct Fax: d


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