Current Month (August 2025)
Leases and Voluntary Dismissals
By Charlotte Wu, Duke University School of Law
This piece is part of a series of summaries of the leading cases decided in the last year on bankruptcy.
The proper interpretation of 11 U.S.C. § 365(d)(5), which governs executory contracts and unexpired leases, is disputed. In In re Avianca, the Second Circuit discusses the “accrual” approach, mandating that debtors only pay post-petition obligations. However, the Second Circuit ultimately adopted the “billing date” approach, mandating debtors pay obligations according to the operative lease. Furthermore, in In re Powell, the Ninth Circuit discussed voluntary dismissal of Chapter 13 cases. Ultimately, the Ninth Circuit held that a court does not need to determine whether a debtor meets Chapter 13 eligibility requirements to grant voluntary dismissal.
In re Avianca, 127 F.4th 414 (2025)
Issue/Statute: 11 U.S.C. § 365(d)(5)
In 2020, Avianca Holdings S.A. (“Debtor”), an airline, filed for Chapter 11 bankruptcy. The Debtor filed for bankruptcy because of reported financial distress relating to the COVID-19 pandemic. The Debtor operated as a debtor-in-possession and was entitled to assume or reject its unexpired airplane leases. Creditor-Appellees Burnham Sterling and Company LLC and Babcock & Brown Securities, LLC (the “Initiators”) performed brokerage services for the Debtor, helping the Debtor lease airplanes. Pre-petition, the Initiators brokered twenty aircraft leases for the Debtor and performed no post-petition brokering services for the Debtor. Under the brokered aircraft leases, the Initiators were to be compensated with “additional rental payments” for their rendered brokerage services following a pre-set schedule. Ultimately, the Debtor failed to pay the Initiators its fixed payments under unexpired airplane leases between sixty days following the Bankruptcy Court’s order for relief and the Debtor’s rejection of those leases. Over the span of two years, the Debtor rejected all twenty airplane leases. However, the Debtor paid the lessors of the rented aircraft when compensation was due under the leases’ schedule. The Bankruptcy Court granted the creditors’ motion to compel payment. The Debtor appealed to the District Court, and the District Court affirmed the Bankruptcy Court’s decision. The Debtor appealed.
The Second Circuit analyzed whether the Debtor’s duty to pay the additional rental payments “first aris[es] from or after 60 days after the order for relief in a case under chapter 11 of this title.” See 11 U.S.C. § 365(d)(5). The Debtor adopted an “accrual” approach, where debtors only have to pay any debts accrued post-petition. The Debtor argued that an obligation arises when it becomes unconditional. Here, the obligation became unconditional when the leases were executed pre-petition. Initiators adopted the “billing date” approach, where debtors must pay all obligations once they are due under the lease, irrespective of when the obligations were accrued. The Initiators argued that an obligation arises when it is due according to the lease. Ultimately, the Second Circuit adopted the “billing date” approach. The Second Circuit held that the Debtor’s obligation to pay the additional rental payments arose when the payments were due according to the payment schedules in the leases. Furthermore, the Court considered the fact that the Debtor failed to utilize the safety valves built into 11 U.S.C. § 365(d)(5), and it chose not to promptly assume or reject the leases, nor petition for a hearing. Thus, the Second Circuit affirmed the District Court.
In re Powell, 119 F.4th 597 (2024)
Issues/Statutes: 11 U.S.C. § 301(a), 11 U.S.C. § 1307(b)
Creditor TICO Construction Company, Inc. (“TICO”) sued Debtor Jason Powell (“Powell”), who was an employee, in a state court. The state court ruled against Powell for a sum of over $200,000. Over the span of a decade, TICO was unsuccessful in its efforts to collect payment from Powell. In 2021, Powell filed for Chapter 13 bankruptcy, stating that he met all the Chapter 13 eligibility requirements. Powell’s attorney also certified he had properly informed Powell regarding the relevant requirements, available relief, and potential consequences under Title 11. During this proceeding, TICO objected to discharging Powell’s debt. Powell later moved to voluntarily dismiss his Chapter 13 case under 11 U.S.C. § 1307(b), which TICO objected to. TICO moved to convert Powell’s Chapter 13 case and sought sanctions. The Bankruptcy Court dismissed Powell’s petition and declined to grant TICO attorney’s fees and sanctions, holding that Powell had an absolute right to dismiss his case. TICO appealed, and the Bankruptcy Appellate Panel for the Ninth Circuit affirmed the Bankruptcy Court. TICO appealed.
The standard of review for the Ninth Circuit is de novo, because decisions coming from the Bankruptcy Appellate Panel must be reviewed de novo. TICO argued that “debtor” for the purpose of § 1307(b) only refers to those who meet the Chapter 13 eligibility requirements. The Ninth Circuit held that when a debtor files a Chapter 13 bankruptcy petition and certifies they satisfy the eligibility standards, the debtor is presumptively a Chapter 13 debtor. Moreover, this petition filing was sufficient to commence a Chapter 13 case under 11 U.S.C. § 301(a). TICO further argued that § 1307(b) implies that bankruptcy courts must decide the eligibility of a Chapter 13 debtor before they can grant the request for voluntary dismissal under § 1307(b). The Ninth Circuit held that bankruptcy courts do not have to conclusively decide a debtor’s Chapter 13 eligibility to grant a request for voluntary dismissal. Instead, once the Chapter 13 case commences under § 301(a), the debtor is entitled to voluntarily dismiss the case under § 1307(b). Therefore, the bankruptcy court here was required to dismiss the Debtor’s case. The Ninth Circuit affirmed the Bankruptcy Appellate Panel.
Functionalism in Bankruptcy Decisions
By Heebah Khan, St. John’s School of Law
This piece is part of a series of summaries of the leading cases decided in the last year on bankruptcy.
When a bankruptcy court issues a decision, it impacts all debtors, not just the debtor in the present case. As a result, bankruptcy judges may take on a functionalist approach to ensure that their decision promotes a somewhat legislative end-goal. This was certainly the case for the Ninth Circuit Court in In re Saldana, 122 F.4th 333 (9th Cir. 2024). The question facing the Circuit Court was whether voluntary contributions to employer-managed retirement plans constituted disposable income.
Section 1325(b)(2)(A)(i) of the Bankruptcy Code establishes that “the term ‘disposable income’ means current monthly income received by the debtor . . . less amounts reasonably necessary to be expended . . . for the maintenance or support of the debtor.” 11 U.S.C. § 1325 (b)(2)(A)(i).
Chapter 13 debtor Jorden Saldana initially calculated her monthly disposable income to be $115.90 after several exclusions, including subtracting a sum of $601 from her monthly income. The sum of $601 qualified as required contributions to her retirement plan. Under this initial plan, Saldana would not be able to repay her unsecured creditors. The Chapter 13 Trustee denied Saldana’s plan because it did not devote all of Saldana’s disposable income to repaying unsecured creditors, asserting that the sum of $601 was disposable income. The Bankruptcy Court affirmed the Trustee’s objection. The District Court affirmed the Bankruptcy Court.
On appeal, the Ninth Circuit held that Chapter 13 debtors may exclude their voluntary contributions to employer-managed retirement plans from their disposable income calculation. The Ninth Circuit justified its decision by interpreting the language of Section 541(b)(7) of the Bankruptcy Code, which discusses retirement contributions and the Section 1325 disposable income definition, from a debtor-friendly perspective, aligning with Congress’s purpose when passing the Bankruptcy Abuse Prevention and Consumer Protection Act in 2005. The Ninth Circuit claimed that Congress wanted to discourage debtors from filing Chapter 7 liquidation cases and to incentivize Chapter 13 filings instead. Thus, in order to encourage debtors to file Chapter 13 cases, the Ninth Circuit deemed it appropriate to exclude voluntary contributions from a debtor’s disposable income.
The Chapter 13 Trustee filed a petition for certiorari, which was denied. Therefore, as of now, the Ninth Circuit’s ruling stands. The decision by the Ninth Circuit reinforces the premise of bankruptcy being a fresh start for debtors, as the debtor can make payments to their eventual retirement plan without relinquishing it to a proposed repayment plan. While it benefitted the debtor in this case, there are times when the debtor will not be successful. For instance, in In re Serta Simmons Bedding, L.L.C. , 125 F.4th 555 (5th Cir. 2024), Serta Simmons Bedding, LLC, the Chapter 11 debtor, was not as fortunate as Saldana in the Court’s ruling.
Serta Simmons sought to improve its financial situation by signing an uptier transaction agreement. Originally, the company chose to refinance its debt in 2016 through a series of syndicated loans (the “2016 Agreement”). In the 2016 Agreement, the right of pro rata sharing was protected and could only be changed through a unanimous decision between Serta and all of its lenders.
In an uptier transaction, however, a borrower may amend the terms of an agreement in order to issue a new super-priority debt. In the decision, the Fifth Circuit explained, “Because a majority of lenders in the existing facility must typically consent to such an amendment, the borrower purchases consent by allowing these lenders to exchange their existing debt for new super-priority debt, often at an above-market price.” In re Serta Simmons Bedding, L.L.C., 125 F.4th 555, 565 (5th Cir. 2024), as revised (Jan. 21, 2025), as revised (Feb. 14, 2025).
Knowing that the uptier transaction agreement would be controversial, Serta filed adversary proceedings against some of its lenders (who were not included in the transaction), seeking a determination that Serta’s uptier transaction was valid. Serta argued that the transaction classifies as an “open market purchase,” complying with the exceptions within the ratable-sharing provision of the 2016 Agreement. The Bankruptcy Court for the Southern District of Texas upheld the validity of the uptier transaction. Defendants appealed to the Fifth Circuit.
The Fifth Circuit ruled that under New York law, the uptier transaction was not a permissible open market purchase within the meaning of the ratable-sharing provision of the debtors’ syndicated loan agreement, thus invalidating lender-favoring uptier financing. The Fifth Circuit concluded that this will not be the last case involving uptier transactions and ratable treatment within loan agreements. Based on the facts of this case, the Fifth Circuit stated that an exception within a loan agreement for open market purchasing will not include uptier transactions.
In both Saldana and Serta Simmons Bedding, the court wanted to establish precedents that provide clear parameters for issues that may be repeated in the future. Providing a debtor-friendly perspective on disposable income allows all debtors to still file Chapter 13 petitions, even if such a viewpoint could prevent payment to creditors. Similarly, the assumption that uptier transactions will be more frequent in the future means that clear definitions must be set to ensure fairness in the bankruptcy process. The decision from the Fifth Circuit indicating uptier transactions are unlikely to be justified by open market purchase exceptions firmly accomplishes this goal.
