618 B.R. 684
Bankr. S.D.N.Y.2020Background
- Avianca Holdings and affiliates filed Chapter 11 on May 10, 2020 and moved on June 23, 2020 to reject eight contracts (the "USAV Agreements") that implemented a 2017 "future-flow" sale of certain credit-card receivables and related contract rights to USAV for $150 million.
- The centerpiece agreements are the RSPA (Contract Rights & Receivables Sale, governed by Colombian law) and the Undertaking Agreement (servicer obligations); USAV financed the purchase through a loan from the USAV Lender Group (USAV Loan Agreement, New York law).
- Debtors conceded six of the eight agreements have no independent executory obligations but argued those agreements are inseparable from the RSPA/Undertaking for rejection purposes under Colombian law.
- USAV and the Lenders argued the RSPA and Undertaking are not executory (USAV allegedly has no material unperformed duties) and that rejection cannot “undo” the 2017 sale (invoking Mission Product/Tempnology).
- The Court ruled the RSPA and the Undertaking Agreement are executory and may be rejected (effective nunc pro tunc to June 23, 2020); the other six agreements are not executory and cannot be rejected as a single integrated contract under Colombian law. The Court held rejection is a breach (not rescission) and reserved damages/security disputes for claims process.
Issues
| Issue | Debtors' Argument | USAV/Lenders' Argument | Held |
|---|---|---|---|
| Whether the RSPA and Undertaking Agreement are executory | Both parties have ongoing, material unperformed obligations (Debtors: servicer/trigger-event obligations; USAV: contingent Additional Purchase Price payments) | USAV/Lenders: USAV has no material continuing duties; Trigger Events relieve USAV | Held: Yes — both agreements are executory (both sides have material unperformed obligations) |
| Whether the six ancillary USAV Agreements may be treated as a single integrated contract under Colombian law for rejection | These agreements are economically integrated with the RSPA and should be rejected together | Lenders/USAV: Colombian law (contratos coligados) does not treat separate writings as one contract; they remain distinct | Held: No — under Colombian law the separate agreements are not treated as a single contract for rejection |
| Whether rejection would rescind/unwind the 2017 sale or strip USAV of rights to post‑rejection receivables | Debtors: they seek only to breach future obligations (e.g., obligation to transfer rights under future replacement card agreements), not to undo the 2017 sale | USAV/Lenders: rejection would improperly allow Avianca to reclaim rights sold in 2017 and divert future receivables to Debtors | Held: Rejection is a breach, not rescission (Mission Product). USAV retains rights it received under the RSPA (e.g., AMEX/Credomatic merchant‑specific proceeds); Debtors are relieved from future performance obligations under the agreements |
| Whether rejection is appropriate and effective retroactively; and effect on claims/security | Debtors: rejection is necessary to restore cash flow and preserve estate; request nunc pro tunc to June 23, 2020 | USAV/Lenders: dispute equities, contend liquidated damages and security interests may entitle them to priority/secured recovery | Held: Court approves rejection as sound business judgment and effective nunc pro tunc to June 23, 2020; rejection damages/security priorities reserved for claims resolution |
Key Cases Cited
- Mission Product Holdings, Inc. v. Tempnology, LLC, 139 S. Ct. 1652 (2019) (rejection of an executory contract effects a breach, not rescission; rights previously conferred survive)
- In re Columbia Gas Sys., 50 F.3d 233 (3d Cir. 1995) (Countryman test for executory contracts: substantial unperformed obligations on both sides)
- In re Gen. DataComm Indus., Inc., 407 F.3d 616 (3d Cir. 2005) (contractual provision that makes failure terminable renders that duty material for executory‑contract analysis)
- Sunbeam Prods. Co. v. Chicago Am. Mfg., LLC, 686 F.3d 372 (7th Cir. 2012) (contrasting views on effect of rejection on counterparty rights)
- NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1984) (business‑judgment standard governs assumption/rejection decisions under § 365)
- In re Teligent, Inc., 268 B.R. 723 (Bankr. S.D.N.Y. 2001) (contingent obligations can render a contract executory)