Second Circuit Affirms Priority Payment of Broker Fees Included in Aircraft Leases Utilizing the “Billing-Date Approach” Under Bankruptcy Code § 365(d)(5)

On February 3, 2025, the Second Circuit affirmed that under 11 U.S.C. § 365(d)(5), a debtor-in-possession must timely perform lease obligations that arise after 60 days from the bankruptcy filing based on their contractual due date, rather than when the lease was executed. Avianca Holdings S.A. v. Burnham Sterling & Co. LLC & Babcock (In re Avianca Holdings S.A.), 202 U.S. App. LEXIS 2363, 2025 WL 36632 (2d Cir. Feb. 3, 2025). The ruling upheld bankruptcy court and district court decisions requiring chapter 11 debtor Avianca Holdings S.A. (Avianca) to pay additional rental obligations (commissions) due under aircraft leases, reinforcing that debtors must either reject leases within the 60-day grace period or remain responsible for scheduled payments.

In this alert, we examine the holding and the implications of the Second Circuit’s decision for lessors and brokers, including the importance of timely lease rejection within the 60-day grace period and protections that section 365(d)(5) affords lessors and service providers for scheduled payments under unexpired leases while a debtor evaluates whether to assume or reject the lease. If the debtor assumes the lease, which it can generally do until confirmation of a reorganization plan, section 365(d)(5) becomes moot as the debtor becomes obligated to cure all lease defaults and perform all lease obligations on a go forward basis.

Background
Avianca, a leading airline in Latin America, filed for chapter 11 on May 10, 2020. Pre-petition, Avianca entered into 20 aircraft leases, brokered by Burnham Sterling & Company LLC and Babcock & Brown Securities LLC (the “Initiators”). These leases included scheduled “additional rental payments” owed to the Initiators for their brokerage services, which were structured as fixed payments over time rather than single lump-sum commissions. Although these agreements were executed pre-petition, some of the additional rental payments became due more than 60 days after Avianca’s bankruptcy filing but before the airline formally decided whether to assume or reject the leases.

After filing for bankruptcy, Avianca entered into substantially identical “usage stipulations” with nearly all of its aircraft lessors. See, e.g., In re Avianca Holdings S.A., Case No. 20-11133 (MG), Docket No. 401 (Bankr. S.D.N.Y. July 7, 2020). The “usage stipulations” modified certain of Avianca’s obligations under each lease, including providing that Avianca would have to pay only “power-by-the-hour” rent during the bankruptcy case, rather than the rent specified in the lease, pending a final decision by Avianca as to whether the underlying lease would be assumed or rejected. The usage stipulations each stated that all rights regarding future assumption or rejection of the relevant lease were reserved. Other than suspending the obligation to pay rent in favor of power-by-the-hour rentals, the usage stipulation did not explicitly address payment of the “additional rental” amounts due to the Initiators, nor were the Initiators parties to any of the aircraft usage stipulations (which were executed between the applicable lessor and Avianca).

Although Avianca continued paying the modified rent to the aircraft lessors, it stopped making the additional rental payments to the Initiators. In response, the Initiators filed a motion to compel payment under section 365(d)(5), which requires debtors to timely perform obligations arising from unexpired leases of personal property beginning 60 days post-petition until the lease is assumed or rejected, giving debtors a 60-day grace period on payments. Avianca opposed the motion, arguing that its obligation to pay the additional rental payments arose pre-petition when the leases were signed, making the Initiators’ claims general unsecured pre-petition claims rather than priority obligations. No one argued that the enhanced protections given to aircraft lessors and financing parties under section 1110 applied because Avianca is not a U.S.-certificated air carrier. Additionally, the issue of the applicability of Alternative A of the Cape Town Convention to the Avianca chapter 11 cases was not addressed. See Recent Ruling Addresses Applicability of Alternative A and Cape Town Convention in U.S. Bankruptcy Cases. The bankruptcy court ruled in favor of the Initiators, finding that Avianca’s obligations arose when the payments became due under the lease terms, not at the time of lease execution. The district court affirmed, emphasizing that Avianca had the opportunity to reject the leases within the 60-day grace period but chose not to, thereby triggering its obligation to make all of the scheduled payments. On appeal, the case presented a key legal question: whether obligations under section 365(d)(5) arise when they are contractually due or when the underlying agreement is executed.

Second Circuit Affirms: Obligations Arise Under § 365(d)(5) When Payment Becomes Due
On appeal to the Second Circuit, Avianca asserted that the commission payments should be viewed as payment obligations incurred (accrued) pre-petition when the leases were executed, which provided no post-petition benefit to the debtor’s estate and thus should be treated as unsecured claims (the “accrual approach”). In contrast, the brokers asserted that the commission payments should be viewed as post-petition obligations, because that is when they were billed and became due (the “billing-date approach”) and they were entitled to administrative expense treatment by virtue of the statute.

In weighing these conflicting positions, the language of section 365(d)(5) was critical to the Second Circuit. It held that section 365(d)(5) requires a debtor-in-possession to “timely perform all of the obligations of the debtor” under an unexpired lease of personal property starting 60 days after the order for relief until the lease is assumed or rejected. 11 U.S.C. § 365(d)(5) (emphasis added). Relying on the statute, the Second Circuit adopted the billing-date approach, holding that the inflection point for requiring performance by a debtor post-petition, pre-rejection or assumption, is when the payment obligation becomes due, not when it accrued.

Following this approach, the court ruled that the obligation to pay the commission payments came due post-petition under section 365(d)(5), not when the lease was executed. The court emphasized that the statute requires the debtor to perform all obligations under the lease following the 60-day grace period. The court rejected Avianca’s positions that the obligation to pay the commissions arose pre-petition and the Initiators failed to demonstrate that they benefited the estate to qualify for administrative status. The court concluded that the billing-date interpretation aligns with the statutory text of section 36(d)(5), which explicitly grants priority to lease payments arising post-petition, “notwithstanding section 503(b)(1),” thereby eliminating the need for creditors to prove a post-petition benefit to the estate, as required for administrative expenses. The court further noted that if a debtor wishes to avoid lease payment obligations, it must either reject the lease within the 60-day grace period or seek relief from the court based on the equities of the case. Avianca failed to avail itself of either alternative, thereby leaving itself subject to the requirements of section 365(d)(5).

By adopting the billing-date approach, the ruling reinforces that debtors cannot avoid post-petition, pre-rejection lease payments simply because the lease and related obligations were executed pre-petition. This decision provides greater certainty for creditors, particularly lessors and service providers, ensuring they receive timely payments for obligations that come due under leases after the statutory grace period but before rejection. At the same time, it underscores the importance for debtors to assess and manage their lease obligations early in the bankruptcy process, as delaying or avoiding rejection may result in continued current payment liabilities.

Implications for Debtors and Creditors
This decision highlights considerations for structuring and drafting aircraft lease agreements. To ensure payments like broker commissions will be paid as they come due post-petition, lease agreements must specify fixed due dates and include any additional payments as lease obligations, as any flexibility or ambiguity could undermine a creditor’s ability to claim priority payment under section 365(d)(5). Absent clear contractual language, third-party payment obligations could be at risk of being categorized as general unsecured claims rather than priority administrative expenses.

Additionally, the timing of lease rejection plays a critical role in determining how long third-party fees, like those owed to the Initiators, must continue to be paid as administrative expenses. Debtors should carefully manage the rejection timeline of leases that include third-party payment obligations, as accelerating the effective rejection date could significantly reduce the amount of fees payable under the lease as an administrative priority. Debtors also should specify whether any additional rental obligations are included or excluded from any agreed rental payments pending assumption or rejection of the lease in any usage stipulations executed at the outset of the bankruptcy case if payment of additional rent is an issue.

Conclusion
The Avianca decision highlights the importance of clear lease terms in bankruptcy proceedings for all amounts to be included as part of the lease. Both creditors and debtors should carefully structure lease agreements and assess their obligations early in the bankruptcy process to mitigate risks.

(This is another in our series of client alerts related to international and cross-border insolvency issues.)