Vol 20 (2023) - Issue 6

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No Double Dipping: Avianca Bankruptcy Court Demands that Foreign Creditors Drop Foreign Enforcement Proceedings at Risk of Having Bankruptcy Claims Disallowed

Synopsis
In a January 2023 opinion,1 the Southern District of New York Bankruptcy Court overseeing the bankruptcy case of Latin American airline Avianca and certain of its affiliates sanctioned over 150 of the airline's Brazilian and Columbian creditors who had filed proofs of claim in the bankruptcy case finding that those creditors' failure to drop their similar claims in foreign jurisdictions violated the discharge awarded to Avianca in connection with its approved reorganisation plan.
In requesting such sanctions from the Bankruptcy Court, Avianca requested unique relief – arguing that such creditors should be given 30 days to discontinue their foreign lawsuits on the threat of otherwise seeing their claims in the bankruptcy case disallowed – noting that otherwise Avianca faced the risk of inequitable 'double dipping' by such creditors who could seek to recover both in foreign enforcement actions and in the bankruptcy case. While noting that Avianca had 'cited no case' that allowed such unique sanctions, and that it was 'not aware' of any such case, the Bankruptcy Court nonetheless found Avianca's request to be 'proper' finding that 'the injustice that would result from the Foreign Plaintiffs' double recovery, and the Foreign Plaintiffs' clear contempt for this Court's order' justified the proposed approach. The Bankruptcy Court presented a stark and novel choice to the breaching creditors:
discontinue their foreign claims within 30 days or have their claims in the bankruptcy case disallowed.
The decision is a stark reminder of the conflicts that can sometimes arise based on the Bankruptcy Code's international reach, and the impact that US bankruptcy proceedings can have even outside of the United States. At times, foreign creditors are surprised to learn of the Bankruptcy Code's purported scope and, presumably believing they are beyond the court's reach, refuse to act (or to cease acting) regardless of what a Bankruptcy Court might otherwise order – indeed counsel to a significant number of the creditors at issue in Avianca expressly admitted as such noting that he 'did not believe his clients' had an obligation 'to choose between prosecuting their claims in the Bankruptcy Court 'or in the Colombian courts.' The Avianca court issued a stark rebuke of that view holding that it represented 'clear and convincing' evidence that the foregoing creditors had 'flouted' the Bankruptcy Code's scheme reminding even purely foreign creditors of the risks posed by refusing to comply with US bankruptcy court orders.