Seventh Circuit Rules UAL's 'Lease' is a Secured Loan.Article by Reed Smith Commercial Restructuring & Bankruptcy Team The U.S. Court of Appeals for the Seventh Circuit has ruled that a United Airlines airport facilities lease was not a true lease but in fact a secured loan. The holding in United Airlines, Inc. v. HSBC Bank USA HSBC Bank USA, N.A., the United States subsidiary of the HSBC Holdings plc, is a bank with its head office in New York City. History The Hongkong and Shanghai Banking Corporation acquired a 51% shareholding in Marine Midland Bank of New York State, headquartered in , N.A., Nos. 04-4209, 04-4315 & 04-4321 (7th Cir., July 26, 2005) allows United to continue using the facilities while paying less than the agreed upon Adj. 1. agreed upon - constituted or contracted by stipulation or agreement; "stipulatory obligations" stipulatory noncontroversial, uncontroversial - not likely to arouse controversy rental payments. The decision delineates the circumstances in which the Seventh Circuit will consider purported leases to be secured finance arrangements, and may affect how United's leases are treated at three other airports. Under s.365 of the U.S. Bankruptcy Code Bankruptcy Code may refer to:
Debt that does not identify specific assets that the debtholder is entitled to in case of default. . The United Airlines case stems from several complex transactions the airline entered into to build and improve its premises at the San Francisco San Francisco (săn frănsĭs`kō), city (1990 pop. 723,959), coextensive with San Francisco co., W Calif., on the tip of a peninsula between the Pacific Ocean and San Francisco Bay, which are connected by the strait known as the Golden , Los Angeles, Denver and John F. Kennedy "John Kennedy" and "JFK" redirect here. For other uses, see John Kennedy (disambiguation) and JFK (disambiguation). John Fitzgerald Kennedy (May 29, 1917–November 22, 1963), was the thirty-fifth President of the United States, serving from 1961 until his assassination in airports. In each case, a public entity issued bonds and agreed to turn over the funds to United. In exchange, United entered into leases giving each public body the right to evict United from certain facilities if it didn't pay its obligations. When United entered into bankruptcy in 2002, it maintained that none of these transactions was a true lease for the purposes of s.365, and proposed to treat each as a secured loan. The Chief Bankruptcy Judge concluded that the Denver transaction was a true lease but that the other agreements were secured loans. All parties appealed, and the District Court held that all four transactions are true leases. On further appeal, the Seventh Circuit examined only the transaction involving the San Francisco Airport. Under that agreement, United, which had leased airport facilities from the California Statewide Communities Development Authority (CSCDA CSCDA California Statewide Communities Development Authority (Walnut Creek) ), subleased a portion of those facilities back to the CSCDA for $1. The CSCDA then leased the property back to United for a rent equal to the interest on the bonds plus an administrative fee, with a balloon payment The final installment of a loan to be paid in an amount that is disproportionately larger than the regular installment. When a loan is made, repayment of the principal, which is the amount of the loan, plus the interest that is owed on it, is divided into installments due at at the end of the term of the agreement. In parsing See parse. parsing - parser whether the arrangement should be considered a true lease or a secured finance arrangement, the Seventh Circuit noted that the Bankruptcy Code seeks to distinguish rental payments that cover current consumption, and therefore should be paid in full by a reorganized entity, from payments to retire past debt. The court concluded the transaction was a secured financing arrangement rather than a true lease because: 1) the "rent" was measured not by the market value of the property but by the amount United borrowed; 2) a "hell or high water" clause obligated ob·li·gate tr.v. ob·li·gat·ed, ob·li·gat·ing, ob·li·gates 1. To bind, compel, or constrain by a social, legal, or moral tie. See Synonyms at force. 2. To cause to be grateful or indebted; oblige. United to make lease payments even if the property became unusable; 3) at the end of the lease, tenancy would revert to United with no additional charge; 4) the balloon payment has no parallel in a true lease but is a common feature of a secured loan; 5) if United prepaid the lease, the lease and sublease sublease n. the lease of all or a portion of premises by a tenant who has leased the premises from the owner. A sublease may be prohibited by the original lease, or require written permission from the owner. would terminate immediately (whereas in a true lease, prepayment entitles the tenant to occupy the property for an additional period). In its decision, the court noted that the Uniform Commercial Code has established a per se rule that if the lessee has an option to acquire ownership at the end of the term for no or nominal payment, the transaction must be treated as secured credit. Note: The ruling is a harsh one for the CSCDA, which faces the prospect of a portion of its expected rental income being treated as unsecured debt. However, in its decision, the Seventh Circuit has further refined the circumstances under which a lease will be characterized as a secured loan for bankruptcy purposes. This article is presented for informational purposes only and is not intended to constitute legal advice. Reed Smith 435 Sixth Avenue Pittsburgh 15219 UNITED STATES Tel: 14122883366 Fax: 14122883063 E-mail: mscherpereel@reedsmith.com URL URL in full Uniform Resource Locator Address of a resource on the Internet. The resource can be any type of file stored on a server, such as a Web page, a text file, a graphics file, or an application program. : www.reedsmith.com Click Here for related articles (c) Mondaq Ltd, 2005 - Tel. +44 (0)20 8544 8300 - http://www.mondaq.com |
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