october 15, 2004 houston, texas larry b. pascal francisco reyes villamizar

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October 15, 2004October 15, 2004Houston, TexasHouston, Texas

Larry B. PascalLarry B. PascalFrancisco Reyes VillamizarFrancisco Reyes Villamizar

ABAABASection of International Law and Section of International Law and

PracticePractice

Chapter 11Chapter 11

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Cross – Border InsolvencyCross – Border Insolvency

Importance of cross-border Importance of cross-border proceedingsproceedings Increase of transnational Increase of transnational

lendinglending Increasing number of Increasing number of

multinational corporationsmultinational corporations Corporations hold Corporations hold

numerous assets in foreign numerous assets in foreign countriescountries

Uniform international Uniform international statutes necessarystatutes necessary

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TerritorialismTerritorialism

Main characteristicsMain characteristics National sovereignty imposes local law National sovereignty imposes local law

over all issues within the territoryover all issues within the territory Each country seizes local assets and Each country seizes local assets and

applies them for the benefit of local applies them for the benefit of local creditorscreditors

Foreign creditors are often unfairly Foreign creditors are often unfairly treated and seldom receive proper treated and seldom receive proper noticenotice

No equal distribution of debtor’s assetsNo equal distribution of debtor’s assets

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TerritorialismTerritorialism

ConsequencesConsequences Creditors may not Creditors may not

learn of debtor’s learn of debtor’s insolvency in timeinsolvency in time

Uncertainty for Uncertainty for international investorsinternational investors

Initiation of multiple, Initiation of multiple, often inefficient, often inefficient, bankruptcy bankruptcy proceedingsproceedings

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UniversalismUniversalism

Main characteristicsMain characteristics Main forum and secondary Main forum and secondary

jurisdictionsjurisdictions Coordination and cooperation Coordination and cooperation

between all courtsbetween all courts Foreign creditors are fairly treated Foreign creditors are fairly treated

and promptly notifiedand promptly notified Equal distribution of debtor’s assets Equal distribution of debtor’s assets

is often achievedis often achieved

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The Avianca Chapter 11 The Avianca Chapter 11 CaseCase


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BackgroundBackground Shareholders of Avianca:Shareholders of Avianca:

1. 1. Coffee growersCoffee growers

2. 2. Valores Bavaria S.A.Valores Bavaria S.A. Avianca’s financial problemsAvianca’s financial problems Combination of assets of Avianca-Combination of assets of Avianca-

Aces: Aces:

Alianza SummaAlianza Summa


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Avianca’s hubs located in Avianca’s hubs located in ColombiaColombia

Main debtorsMain debtors Bank of New York NoteholdersBank of New York Noteholders Airplane lessorsAirplane lessors Caxdac Pension FundCaxdac Pension Fund Dip LendersDip Lenders OthersOthers


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Corporate StructureCorporate Structure

Avianca Inc. Avianca Inc. Wholly owned subsidiary and AgentWholly owned subsidiary and Agent



Avianca S.A.Avianca S.A.Parent CompanyParent Company

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Main factors affecting AviancaMain factors affecting Avianca Slowdown of Colombian EconomySlowdown of Colombian Economy Exchange rates affecting pesoExchange rates affecting peso BoNY TransactionBoNY Transaction Fuel pricesFuel prices 9-119-11 High aircraft lease ratesHigh aircraft lease rates Unwillingness to negotiate high Unwillingness to negotiate high

rate leasesrate leases


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Pros of filing in the USPros of filing in the US Treatment of executory contractsTreatment of executory contracts Sixty day vacation period/ Sixty day vacation period/

certainty of non-foreclosurecertainty of non-foreclosure Automatic stayAutomatic stay Mitigation of damagesMitigation of damages Assume/reject processAssume/reject process BoNY (trapping of cash)BoNY (trapping of cash)


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Priorities under US/ Priorities under US/ Colombian Law Colombian Law Pension liabilitiesPension liabilities Labor liabilitiesLabor liabilities TaxesTaxes Different treatment of Different treatment of

secured creditorssecured creditors Treatment of Treatment of

Colombian creditorsColombian creditors


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Other legal issuesOther legal issues First day motionsFirst day motions

Vendors (catering, IATA, wages, etc)Vendors (catering, IATA, wages, etc)National taxesNational taxes

Civil Aviation DepartmentCivil Aviation Department Small vendorsSmall vendors

Unenforceability of Automatic Stay in Unenforceability of Automatic Stay in ColombiaColombia


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Liquidation of AcesLiquidation of Aces Not economically viableNot economically viable Mandatory liquidation Mandatory liquidation

proceeding was orderedproceeding was ordered Liabilities higher than Liabilities higher than

assetsassets Pensioners have Pensioners have

threatened shareholders threatened shareholders with piercing actions with piercing actions


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Motions to dismiss Motions to dismiss based upon:based upon:

Inability of the US Inability of the US court to bind court to bind Colombian creditorsColombian creditorsForum ShoppingForum ShoppingDiscrimination of local Discrimination of local creditorscreditors

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Motions to dismiss based upon:Motions to dismiss based upon:Not in “best interest” of debtor Not in “best interest” of debtor or creditors to file for Chapter 11or creditors to file for Chapter 11Filing creates uncertainty and Filing creates uncertainty and proves bad faithproves bad faithLaw 550 process was viableLaw 550 process was viableNot enough contact with U.S.Not enough contact with U.S.

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The Court’s The Court’s Argument:Argument:

Property Property requirements under requirements under 109 (a)109 (a)

No foreign process No foreign process pendingpending

FulfilledFulfilledExistence of substantialExistence of substantial

property in the U.S.property in the U.S.

FulfilledFulfilled 1.1. No Law 550 No Law 550 proceeding initiatedproceeding initiated2.2. Cited precedents Cited precedents not applicablenot applicable

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““Best Interests” Best Interests” TestTest


PassedPassed

1.1. Law 550 is inefficentLaw 550 is inefficent

2.2. Majority of creditors Majority of creditors served well by Ch. 11served well by Ch. 11

3.3. Colombian creditors did Colombian creditors did not oppose Ch. 11not oppose Ch. 11

4.4. Avianca has been able Avianca has been able to maintain businessto maintain business

Established under 305(a)(1)Established under 305(a)(1)for dismissal or suspension for dismissal or suspension

of proceedingsof proceedings

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Other reasons for approval of Ch.11:Other reasons for approval of Ch.11:

High level of contact between Avianca High level of contact between Avianca and the U.S.and the U.S.

Existence of substantial credit card Existence of substantial credit card receivablesreceivables

Ongoing dispute with BONY Ongoing dispute with BONY NoteholdersNoteholders

American Lessors – Lease agreements American Lessors – Lease agreements are the life support of an airlineare the life support of an airline

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(cont’d)(cont’d)

The process is not detrimental to The process is not detrimental to US creditorsUS creditors

Law 550 can still be invokedLaw 550 can still be invoked

1.1. ParallelParallel

2.2. AncillaryAncillary

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Judge Gropper on Law Judge Gropper on Law 550:550:

Only 4 years old and Only 4 years old and relatively untestedrelatively untested

No provision allowing for No provision allowing for rejection of burdensome rejection of burdensome lease lease

Lessor may force debtor Lessor may force debtor into liquidation after only into liquidation after only 90 days of unresolved 90 days of unresolved default default

Nevertheless, a 550 Nevertheless, a 550 proceeding may be proceeding may be recognized in the U.S.recognized in the U.S.

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Judge Gropper on Cross-Border Judge Gropper on Cross-Border Insolvency:Insolvency:

An ancillary case in the U.S. is not the An ancillary case in the U.S. is not the preferred alternative for a foreign enterprisepreferred alternative for a foreign enterprise

If Avianca filed a 550 ancillary case, both If Avianca filed a 550 ancillary case, both courts would be aligned in the best interest of courts would be aligned in the best interest of all partiesall parties

U.S. courts may choose to proceed jointly U.S. courts may choose to proceed jointly with foreign courts in order to exercise full with foreign courts in order to exercise full jurisdictionjurisdiction

If a main proceeding was pursued in If a main proceeding was pursued in Colombia, U.S. courts would be limited by Colombia, U.S. courts would be limited by such country’s substantive rights in such country’s substantive rights in bankruptcybankruptcy

d-1236496.2d-1236496.2

october 15, 2004 houston, texas larry b. pascal francisco reyes villamizar

Documents

casethe avianca chapter

achievedthe avianca

local law

local assets

numerous assets

debtors insolvency

caseavianca s

courtsforeign creditors