Avianca: Second Court Adopts "Billing Date" Approach to Timely Performance of Unexpired Commercial Personal Property Leases in Bankruptcy

In 1984 and 1994, Congress amended the Bankruptcy Code to add protections for commercial real property and equipment lessors. Those provisions—sections 365(d)(3) and section 365(d)(5), respectively—generally require a bankruptcy trustee or chapter 11 debtor in possession ("DIP") to timely pay most postpetition obligations arising under a commercial lease. Court rulings interpreting section 365(d)(3) are plentiful, but there are few decisions addressing section 365(d)(5).  

Section 365(d)(5) provides that, pending the decision to assume or reject an unexpired commercial personal property lease in a chapter 11 case, the trustee or DIP must timely perform all of the debtor's obligations under the lease "first arising" during the period 60 days after the bankruptcy petition date, unless the bankruptcy court orders otherwise. Courts disagree, however, regarding when obligations of the DIP "arise," with two different approaches staked out by bankruptcy and appellate courts, including several federal circuit courts. The "billing date" approach focuses on the date obligations are billed or become due under the terms of the lease, whereas the "accrual" approach examines when obligations accrue under the lease regardless of when they are billed or become due. 

The U.S. Court of Appeals for the Second Circuit weighed in on the debate as a matter of apparent first impression in In re Avianca Holdings S.A., 127 F.4th 414 (2d Cir. 2025). The Second Circuit adopted the majority "billing date" approach to determine the obligations that must be paid under section 365(d)(5). In so ruling, the Second Circuit joined with the Third, Sixth, and Seventh Circuits on this issue. According to the Second Circuit, "the billing date approach is the approach most consistent with the text of Section 365(d)(5), the Bankruptcy Code as a whole, and sound bankruptcy policy."  

Assumption or Rejection of Executory Contracts and Unexpired Leases in Bankruptcy 

Section 365(a) of the Bankruptcy Code gives the trustee (or DIP, pursuant to section 1107(a)) the power to assume (reaffirm) or reject (breach) the debtor's "executory" contracts or unexpired leases (generally defined as contracts or leases where the obligations of both the DIP and the other party are so far unperformed that the failure of either to complete performance would constitute a material breach excusing the other's performance), subject to bankruptcy court approval.  

Section 365(d) lays out various deadlines by which a trustee must assume a contract or lease as well as the trustee's obligation to pay amounts due under such contracts or leases before deciding whether to assume or reject them. 

Under Section 365(d)(2), the trustee or DIP may assume or reject an executory contract or unexpired residential lease or a lease of personal property of the debtor at any time before confirmation of a chapter 11 plan. However, the court, upon the request of a non-debtor counterparty, may order that a contract or lease be assumed or rejected prior to that time. See 11 U.S.C. § 365(d)(2). 

Section 365(d)(3) provides that the trustee or DIP must timely perform all of the debtor's obligations, with certain exceptions, "arising from and after" the order for relief (i.e., the petition date) under any unexpired nonresidential real property lease until such time that the lease is assumed or rejected, "notwithstanding section 503(b)(1)" of the Bankruptcy Code. Section 503(b)(1) confers administrative expense priority on "the actual, necessary costs and expenses of preserving the estate," which have been interpreted to include rent payable under unexpired real property leases. See Burival v. Roehrich (In re Burival), 613 F.3d 810, 812 (8th Cir. 2010) (real property rent claims under section 365(d)(3) are an example of an administrative claim that is not specifically referred to in section 503(b), brought in by use of the construction canon of section 102(3)). 

Pursuant to section 365(d)(4), an unexpired lease of nonresidential real property with respect to which the debtor is the lessee will be deemed rejected if the trustee or DIP does not assume or reject the lease by the earlier of: (i) the date that is 120 days after the date of entry of the order for relief; or (ii) the date of entry of an order confirming a plan. The bankruptcy court may, under section 365(d)(4)(B), extend the time for assumption or rejection for 90 days on motion of the trustee or a lessor. 

Finally, section 365(d)(5) provides that: 

The trustee shall timely perform all the obligations of the debtor, except those specified in section 365(b)(2) [providing that defaults based on a debtor's financial condition need not be cured prior to assumption], first arising from or after 60 days after [the petition date] under an unexpired lease of personal property (other than personal property leased to an individual primarily for personal, family, or household purposes) until such lease is assumed or rejected notwithstanding section 503(b)(1) of this title, unless the court, after notice and a hearing and based on the equities of the case, orders otherwise with respect to the obligations or timely performance thereof. 

11 U.S.C. § 365(d)(5). 

Section 365(d)(5) was added to the Bankruptcy Code in 1994 to protect commercial equipment lessors. See In re Sturgis Iron & Metal Co., Inc., 420 B.R. 716, 742 (Bankr. W.D. Mich. 2009). The amendment came a decade after lawmakers added section 365(d)(3) to the Bankruptcy Code to protect commercial real property lessors. Id. 

An obligation that must be paid pursuant to section 365(d)(5) is entitled to administrative expense priority under section 503(b)(1) whether or not the creditor's service in question preserved or benefitted the bankruptcy estate. See In re Sylva Corp., 519 B.R. 776, 782 (B.A.P. 8th Cir. 2014); In re Bella Logistics LLC, 583 B.R. 674, 677–82 (Bankr. W.D. Tex. 2018). A critical question for many debtors, then, is when an obligation "arises" for purposes of section 365(d)(5). If it arises prepetition and the debtor fails to satisfy the obligation, the lessor's claim is treated as an unsecured prepetition claim, whereas an obligation arising during the 60-day postpetition window described in section 365(d)(5) is entitled to administrative expense status.  

Compared to cases interpreting section 365(d)(3), there are relatively few court decisions construing section 365(d)(5), and until recently, nearly none addressing the meaning of the phrase "first arising from." However, because section 365(d)(3) uses a similar phrase, decisions construing that section are relevant in making that determination. See In re Bella Logistics LLC, 583 B.R. 674, 679 n.7 (Bankr. W.D. Tex. 2018); In re Pettingill Enterprises, Inc., 486 B.R. 524, 531–32 (Bankr. D.N.M. 2013); In re Lakeshore Const. Co. of Wolfeboro, Inc., 390 B.R. 751,756 (Bankr. N.H. 2008); see also Sylva Corp., 519 B.R. at 781 ("[While] the operative language of [Section] 365(d)(3) and (d)(5) are similar enough that cases under [Section] 365(d)(3) … are relevant to provide guidance to a court interpreting a situation under [Section] 365(d)(5), they are not necessarily 'automatic' or dispositive.").

The "accrual" approach (sometimes referred to as the "proration" approach) and the "billing date" approach arrive at different answers for the critical question of when an obligation arises. Under the "accrual" approach, an obligation arises when it accrues, meaning that the trustee or DIP debtor is required to pay only obligations that actually accrue postpetition regardless of when the obligations come due under the operative lease. By contrast, under the "billing date" approach, an obligation arises under an unexpired lease once it comes due under the operative lease, regardless of when the obligation can be said to have accrued. 

Courts are split on which approach is the right one. The majority position, adherents of which (prior to the Second Circuit's ruling in Avianca) include the Third, Sixth, and Seventh Circuits, is that the "billing date" approach is the better reasoned one. See Centerpoint Props. v. Montgomery Ward Holding Corp. (In re Montgomery Ward Holding Corp.), 268 F.3d 205, 209–12 (3d Cir. 2001) (construing section 365(d)(3)); Koenig Sporting Goods, Inc. v. Morse Road Co. (In re Koenig Sporting Goods, Inc.), 203 F.3d 986, 989–90 (6th Cir. 2000) (same); HA-LO Indus., Inc. v. CenterPoint Props. Trust, 342 F.3d 794, 796, 798–800 (7th Cir. 2003) (same); accord Burival v. Creditor Comm. (In re Burival), 406 B.R. 548, 550, 551–54 (B.A.P. 8th Cir. 2009) (same); Bullock's Inc. v. Lakewood Mall Shopping Ctr. (In re R.H. Macy & Co., Inc.), 1994 WL 482948, at *10–13 (S.D.N.Y. Feb. 23, 1994) (Sotomayor, J.) (same); Urban Retail Props. v. Loews Cineplex Ent. Corp., 2002 WL 535479, at **5–8 (S.D.N.Y. Apr. 9, 2002) (same). 

Even so, a significant minority of courts (including those in the Second Circuit prior to the Avianca ruling) have adopted the "accrual" approach. See, e.g., In re Door to Door Storage, Inc., 2018 WL 1899361, *2 (W.D. Wash. Apr. 20, 2018) (construing section 365(d)(3)); El Paso Props. Corp. v. Gonzalez (In re Furr's Supermarkets, Inc.), 283 B.R. 60, 62 (B.A.P. 10th Cir. 2002) (same).  

Avianca Holdings 

Air carrier Avianca leases many of the aircraft that it uses to operate its business. Certain entities (the "Initiators") helped Avianca broker some of these lease agreements. The Initiators' services were all performed prior to Avianca's entry into the aircraft leases, but the lease agreements expressly provided that the Initiators would be paid in installments over the term of the leases. Id. In particular, each lease provided that "[t]he Lessee shall on each Additional Rental Payment Date pay to the Lessor at the Initiator Account, by way of additional rental payment, installments of the Initiator Compensation … [and that the] obligations to pay the Initiator Fees hereunder are unconditional."  

At the onset of the COVID pandemic, Avianca and certain affiliates filed for chapter 11 protection in the Southern District of New York. At that time, installment payments were still due to the Initiators under the lease agreements. However, after the 60-day grace period specified in section 365(d)(3) expired (and the debtor had not yet decided to assume or reject the leases), Avianca failed to make the scheduled installment payments. 

Avianca claimed that, because the amounts due to the Initiators were earned entirely in the prepetition period (meaning that the obligations accrued before the bankruptcy filing), the Initiators' claims should be treated as general unsecured claims. The Initiators responded by seeking an order from the bankruptcy court compelling Avianca pursuant to sections 365(d)(5) and 503(b) to make the installments payment that came due after the petition date until such time that Avianca assumed or rejected the leases. 

The bankruptcy court ruled in favor of the Initiators, but only in part. According to the bankruptcy court, although no court had previously ruled on the definition of "arising from" in section 356(d)(5), the Initiators were correct that no payment was due from the debtors (and therefore, no payment obligation arose) "until and unless its due date was reached" under the leases. The court accordingly held that "both the plain meaning of the statutory terms and the commercial realities of the parties' arrangement here was that there are multiple payment 'obligations' that 'arise' on their respective due dates as specified in the applicable leases." 

The bankruptcy court rejected various policy and legislative history arguments raised by Avianca. It explained that the unambiguous language of section 365(d)(5), which specifically provides that it applies "not withstanding section 503(b)(1)," supports its conclusion. This explicit carve-out, the court emphasized, "omits any benefit to the estate requirement" that would otherwise apply in assessing whether an expense is entitled to administrative priority. 

However, the bankruptcy court ruled that, even though Avianca was obligated to make the scheduled installment payments under section 365(d)(5), the Initiators' claims were not entitled to administrative expense priority because they arose from prepetition transactions. 

Avianca appealed the ruling to the district court, which affirmed, concluding Avianca's "obligation[s] to make the disputed payments 'arose' upon their respective due dates for purposes of Section 365(d)(5), and as such, that those [payments] merit timely and complete payment by [Avianca] pursuant to that provision." In re Avianca Holdings, No. 23 CIV. 1211 (KPF), 2023 WL 9016495, at *4 (S.D.N.Y. Dec. 29, 2023), aff'd, 127 F.4th 414 (2d Cir. 2025). In so ruling, the district court found the reasoning of courts that have embraced the "billing approach" to be more persuasive. Avianca appealed to the Second Circuit. 

The Second Circuit's Ruling 

A three-judge panel of the Second Circuit affirmed the ruling below. 

Writing for the panel, U.S. Circuit Court Judge Gerard E. Lynch examined the language of section 365(d)(5) and determined that the word "arise" in the provision refers to the moment "when payment comes due under the terms of a lease." Avianca Holdings, 127 F.4th at 423. After a textual analysis of section 365(d)(5), the Second Circuit concluded that "Section 365(d)(5) requires the debtor-in-possession to perform the debtor's contractual duties that come into being under an unexpired lease of personal property at least 60 days after the order for relief." Id. at 424. 

The Second Circuit then discussed this finding in the context of the statutory scheme surrounding section 365(d)(5). Judge Lynch drew a distinction between when a "claim" of a creditor arises as opposed to when an "obligation" of a debtor arises. 

A "claim," he explained, is defined in section 101(10)(A) of the Bankruptcy Code in relevant part as a "right to payment, whether or not such right is reduced to judgment, liquidated, disputed, undisputed, legal, equitable, secured or unsecured." Stated differently, a claim is a "(1) right to payment (2) that arose before the filing of the petition." Id. (quoting Elliott v. Gen. Motors LLC (In re Motors Liquidation Co.), 829 F.3d 135, 136 (2d Cir. 2016)). According to Judge Lynch, this definition would suggest that the Initiators' "claim" arose prior to the petition date. However, he emphasized, section 365(d)(5), does not speak of a creditor's "claim," but instead of a debtor's "obligation." 

The Second Circuit rejected Avianca's attempt to conflate the two terms and applied a different test to determine when an obligation arises for purposes of section 365(d)(5)—namely, when the payment has come due "under the terms of the lease." Id. at 425. The Second Circuit also noted that section 365(d)(5)'s explicit carve-out from the requirement in section 503(b)(1) to show that an expense is an actual, necessary cost of preserving the estate negated Avianca's argument that its "estate should not bear an expense for which it receives no benefit." Id. 

Finally, the Second Circuit held that its adoption of the "billing date" approach comports with public bankruptcy policy, including the purpose of section 365, which "is to balance the state law contract right of the creditor to receive the benefit of his bargain with the federal law equitable right of the debtor to have an opportunity to reorganize." Id. at 425­–26. (citation and internal quotation marks omitted). In section 365(d)(5), the Second Circuit wrote, lawmakers elected "to tip the balance slightly in favor of creditor protection as compared to the baseline rules set out elsewhere in the Code." Id. at 426. 

However, Judge Lynch noted, any inequity to the debtor caused by tipping the balance in favor of commercial lessor protections under the provision is subject to "two safety valves" in cases where the automatic resumption pf payments after 60 days interferes with administration of the bankruptcy estate: (i) the debtor has a 60-day grace period during which it can decide whether to assume or reject the lease before resuming payments; and (ii) the debtor can ask the bankruptcy court to amend its payment obligations after expiration of the 60-day grace period on the basis that, among other things, resuming payments would be a windfall for certain creditors who fully performed under their contracts prepetition. Id. According to the Second Circuit, Avianca chose not to rely on either of these safety valves and must abide by the consequences of its decision, "which will require it to pay the Initiators on a priority basis." Id.  

Outlook 

The Second Circuit's ruling in Avianca Holdings is significant for a number of reasons. First, the decision would appear to be a matter of first impression among bankruptcy and appellate courts (including the federal circuits courts of appeals) in determining what obligations must be paid under commercial personal property leases prior to assumption or rejection in accordance with the "arising from" language in section 365(d)(5) of the Bankruptcy Code. Second, the court of appeals adopted the "billing date" approach applied by the majority of courts (including three other circuits) construing the meaning of the similar language of section 365(d)(3), which applies to the payment of pre-assumption or rejection obligations under commercial real property leases. 

Avianca Holdings widens the rift among courts regarding this issue, although there is as yet no circuit split that might invite the U.S. Supreme Court to resolve the dispute. In addition, because many courts in the Second Circuit had embraced the minority approach in construing section 365(d)(3) prior to the Second Circuit's ruling in Avianca Holdings, the decision may represent a sea change concerning this issue. See, e.g., Newman v. McCrory Corp. (In re McCrory Corp.), 210 B.R. 934, 939–40 (S.D.N.Y. 1997); Child World, Inc. v. Campbell/Mass. Trust (In re Child World, Inc.), 161 B.R. 571, 573–77 (S.D.N.Y. 1993) (same); In re Stone Barn Manhattan LLC, 398 B.R. 359, 365–68 (Bankr. S.D.N.Y. 2008) (same). 

Interestingly, despite the 60-day grace period specified in section 365(d)(5), if Avianca's failure to make postpetition installment payments to the Initiators under the lease were deemed to be an event of default, it could have triggered the aircraft lessors' rights under section 1110 of the Bankruptcy Code, thereby jeopardizing Avianca's ability to continue using the leased aircraft. Apparently, this issue did not arise in any material respect during the chapter 11 case.