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The Impact of Airline Bankruptcies on Airports (2009)

Chapter: II. LEGAL ISSUES

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Suggested Citation:"II. LEGAL ISSUES." National Academies of Sciences, Engineering, and Medicine. 2009. The Impact of Airline Bankruptcies on Airports. Washington, DC: The National Academies Press. doi: 10.17226/23029.
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Suggested Citation:"II. LEGAL ISSUES." National Academies of Sciences, Engineering, and Medicine. 2009. The Impact of Airline Bankruptcies on Airports. Washington, DC: The National Academies Press. doi: 10.17226/23029.
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Suggested Citation:"II. LEGAL ISSUES." National Academies of Sciences, Engineering, and Medicine. 2009. The Impact of Airline Bankruptcies on Airports. Washington, DC: The National Academies Press. doi: 10.17226/23029.
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Suggested Citation:"II. LEGAL ISSUES." National Academies of Sciences, Engineering, and Medicine. 2009. The Impact of Airline Bankruptcies on Airports. Washington, DC: The National Academies Press. doi: 10.17226/23029.
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Suggested Citation:"II. LEGAL ISSUES." National Academies of Sciences, Engineering, and Medicine. 2009. The Impact of Airline Bankruptcies on Airports. Washington, DC: The National Academies Press. doi: 10.17226/23029.
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Suggested Citation:"II. LEGAL ISSUES." National Academies of Sciences, Engineering, and Medicine. 2009. The Impact of Airline Bankruptcies on Airports. Washington, DC: The National Academies Press. doi: 10.17226/23029.
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Suggested Citation:"II. LEGAL ISSUES." National Academies of Sciences, Engineering, and Medicine. 2009. The Impact of Airline Bankruptcies on Airports. Washington, DC: The National Academies Press. doi: 10.17226/23029.
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Suggested Citation:"II. LEGAL ISSUES." National Academies of Sciences, Engineering, and Medicine. 2009. The Impact of Airline Bankruptcies on Airports. Washington, DC: The National Academies Press. doi: 10.17226/23029.
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Suggested Citation:"II. LEGAL ISSUES." National Academies of Sciences, Engineering, and Medicine. 2009. The Impact of Airline Bankruptcies on Airports. Washington, DC: The National Academies Press. doi: 10.17226/23029.
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Suggested Citation:"II. LEGAL ISSUES." National Academies of Sciences, Engineering, and Medicine. 2009. The Impact of Airline Bankruptcies on Airports. Washington, DC: The National Academies Press. doi: 10.17226/23029.
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Suggested Citation:"II. LEGAL ISSUES." National Academies of Sciences, Engineering, and Medicine. 2009. The Impact of Airline Bankruptcies on Airports. Washington, DC: The National Academies Press. doi: 10.17226/23029.
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Suggested Citation:"II. LEGAL ISSUES." National Academies of Sciences, Engineering, and Medicine. 2009. The Impact of Airline Bankruptcies on Airports. Washington, DC: The National Academies Press. doi: 10.17226/23029.
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Suggested Citation:"II. LEGAL ISSUES." National Academies of Sciences, Engineering, and Medicine. 2009. The Impact of Airline Bankruptcies on Airports. Washington, DC: The National Academies Press. doi: 10.17226/23029.
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Suggested Citation:"II. LEGAL ISSUES." National Academies of Sciences, Engineering, and Medicine. 2009. The Impact of Airline Bankruptcies on Airports. Washington, DC: The National Academies Press. doi: 10.17226/23029.
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Suggested Citation:"II. LEGAL ISSUES." National Academies of Sciences, Engineering, and Medicine. 2009. The Impact of Airline Bankruptcies on Airports. Washington, DC: The National Academies Press. doi: 10.17226/23029.
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Suggested Citation:"II. LEGAL ISSUES." National Academies of Sciences, Engineering, and Medicine. 2009. The Impact of Airline Bankruptcies on Airports. Washington, DC: The National Academies Press. doi: 10.17226/23029.
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Suggested Citation:"II. LEGAL ISSUES." National Academies of Sciences, Engineering, and Medicine. 2009. The Impact of Airline Bankruptcies on Airports. Washington, DC: The National Academies Press. doi: 10.17226/23029.
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Suggested Citation:"II. LEGAL ISSUES." National Academies of Sciences, Engineering, and Medicine. 2009. The Impact of Airline Bankruptcies on Airports. Washington, DC: The National Academies Press. doi: 10.17226/23029.
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Suggested Citation:"II. LEGAL ISSUES." National Academies of Sciences, Engineering, and Medicine. 2009. The Impact of Airline Bankruptcies on Airports. Washington, DC: The National Academies Press. doi: 10.17226/23029.
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Suggested Citation:"II. LEGAL ISSUES." National Academies of Sciences, Engineering, and Medicine. 2009. The Impact of Airline Bankruptcies on Airports. Washington, DC: The National Academies Press. doi: 10.17226/23029.
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Suggested Citation:"II. LEGAL ISSUES." National Academies of Sciences, Engineering, and Medicine. 2009. The Impact of Airline Bankruptcies on Airports. Washington, DC: The National Academies Press. doi: 10.17226/23029.
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Suggested Citation:"II. LEGAL ISSUES." National Academies of Sciences, Engineering, and Medicine. 2009. The Impact of Airline Bankruptcies on Airports. Washington, DC: The National Academies Press. doi: 10.17226/23029.
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Suggested Citation:"II. LEGAL ISSUES." National Academies of Sciences, Engineering, and Medicine. 2009. The Impact of Airline Bankruptcies on Airports. Washington, DC: The National Academies Press. doi: 10.17226/23029.
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Suggested Citation:"II. LEGAL ISSUES." National Academies of Sciences, Engineering, and Medicine. 2009. The Impact of Airline Bankruptcies on Airports. Washington, DC: The National Academies Press. doi: 10.17226/23029.
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Suggested Citation:"II. LEGAL ISSUES." National Academies of Sciences, Engineering, and Medicine. 2009. The Impact of Airline Bankruptcies on Airports. Washington, DC: The National Academies Press. doi: 10.17226/23029.
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Suggested Citation:"II. LEGAL ISSUES." National Academies of Sciences, Engineering, and Medicine. 2009. The Impact of Airline Bankruptcies on Airports. Washington, DC: The National Academies Press. doi: 10.17226/23029.
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Suggested Citation:"II. LEGAL ISSUES." National Academies of Sciences, Engineering, and Medicine. 2009. The Impact of Airline Bankruptcies on Airports. Washington, DC: The National Academies Press. doi: 10.17226/23029.
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Suggested Citation:"II. LEGAL ISSUES." National Academies of Sciences, Engineering, and Medicine. 2009. The Impact of Airline Bankruptcies on Airports. Washington, DC: The National Academies Press. doi: 10.17226/23029.
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12 • require timely payment of bankrupt airline for the entire month in which it declares bankruptcy. In December 2003 the FAA issued its report.108 The report noted that airline reorganization under bank- ruptcy may tie up gates and other assets; recent bank- ruptcy actions had lessened the security of air- line/airport finance contracts; PFC stand-alone financing had mostly not been affected by airline bank- ruptcies; and special facility bond financing had come under great scrutiny due to recent airline bankrupt- cies.109 The report discussed the risk of relying on a dominant airline, i.e., that the traditional approach of entering long-term relationships with major airlines, and giving those airlines veto power over airport in- vestments in exchange for coverage of airport costs, left airports vulnerable when those airlines entered bank- ruptcy and rejected their leases. The report explained that bankrupt airlines have considerable leverage be- cause airports are faced with accepting minor damages or renegotiating leases on terms more favorable to the airlines. Similarly, allowing airlines to finance im- provements through special facility bond financing also put the bankrupt airlines in a position of having lever- age over the airports, even though the bonds are not technically obligations of the issuing airports.110 Finally, the report referenced the fact that airline bankruptcy— and even the specter of airline bankruptcy—had re- sulted in lowered credit ratings for airports.111 II. LEGAL ISSUES112 A. Bankruptcy Theory The United States Constitution authorizes federal bankruptcy law,113 now embodied in the Bankruptcy Code.114 Federal courts have exclusive jurisdiction over bankruptcy cases.115 1. Purpose of Bankruptcy Code Bankruptcy is intended to “give worthy debtors a fresh start.”116 At the same time that the Code is in- tended to protect debtors, it is also intended to satisfy creditors and provide for the orderly distribution of as- 108 U.S. Dep’t of Transp., Impact of Airline Bankruptcy on Hub Airports, Airport Systems and U.S. Capital Bond Markets, Dec. 2003, available at www.regulations.gov/fdmspublic/component/main?main=Docke tDetail&d=FAA-2003-15481 (Last visited Dec. 17, 2008). 109 Id. at 5. 110 Id. at 13–14. 111 Id. at 15. 112 See generally AM. JUR. 2D Bankruptcy § 2311, chs. 7, 11, 13. 113 U.S. CONST. art. I, § 8. 114 11 U.S.C. §§ 101 et seq. 115 28 U.S.C. § 1334. Venue is determined under 28 U.S.C. § 1408–09. 116 In re Carp, 340 F.3d 15, 25 (1st Cir. 2003). sets.117 The purpose of Chapter 7 is to dispose of the assets of a debtor that can no longer continue as a vi- able enterprise. The purpose of Chapter 11 of the Code is to allow the debtor to reorganize and continue in business. The specific aims of Chapter 11 include: …to relieve the debtor from immediate payment of prepe- tition debt; to reorganize the debtor's finances; to return the debtor to the marketplace as a viable enterprise; to reform or rescind burdensome contracts; to provide con- tinued employment to the debtor's workforce; to treat creditors in an even-handed manner; to further the public interest; to attempt to ensure the stockholders a fair re- turn on their investment; and to consolidate in as great a manner as possible all of the debtor's widespread inter- ests. (Citations omitted).118 The advantages of filing for Chapter 11 protection include the “automatic stay, the reduction in debt load, the ability to cancel or restructure unfavorable con- tracts.”119 Some have argued that Chapter 11 is no longer being used for its original purpose, but is used to force the sale of assets.120 In fact, while the aim of Chapter 11 is reorganization, most courts recognize that liquidation is also possible under Chapter 11.121 2. Application in Airport Context Before airline deregulation in 1978, no major airline had gone out of business, although the regulatory agency had administratively disposed of failing airlines by merging them into other successful airlines.122 Since deregulation, many airlines, including a number of leg- acy carriers, have filed for bankruptcy protection.123 Some view bankruptcy as an appropriate market sub- stitute for regulation.124 Others have suggested that in 117 DEMPSEY, supra note 3, §17.14, Bankruptcy and Deregu- lation. 118 Heuer, supra note 3, at 257–58. 119 Dattner, supra note 7, at 298. 120 DOUGLAS G. BAIRD & ROBERT K. RASMUSSEN 3, n.1, THE END OF BANKRUPTCY (John M. Olin Law & Economics Working Paper No. 173 (2D Series), www.law.uchicago.edu/Lawecon/WkngPprs_151- 175/173.dgb.bankruptcy.end.pdf, citing Susan Carey, American Airlines,’ TWA Financing Plan Is Approved, Although Rivals Cry Foul, WALL ST. J., Jan. 29, 2001, at A3; Douglas G. Baird & Robert K. Rasmussen, Chapter 11 at Twilight, 56 STAN. L. REV. 673 (Dec. 2003). 121 Loop Corp. v. U.S. Trustee, 379 F.3d 511, 517 (8th Cir. 2004), citing In re Jartran, Inc., 886 F.2d 859, 868 (7th Cir. 1989) (liquidating plans permissible under Chapter 11); Matter of Sandy Ridge Dev. Corp., 881 F.2d 1346, 1352 (5th Cir. 1989) (“[A]lthough Chapter 11 is titled ‘Reorganization,’ a plan may result in the liquidation of the debtor.”). 122 DEMPSEY, supra note 3, § 17.02, The Bankruptcy Reform Act of 1978. 123 McQuaid, supra note 8, at 665. The Air Transport Asso- ciation posts an unofficial list of airline bankruptcies since 1979, available at http://www.airlines.org/economics/specialtopics/USAirlineBank ruptcies.htm (Last visited Dec. 17, 2008). 124 Heuer, supra note 3, at 257, 259.

13 fact a bankruptcy process that allows bad management to stay in control is a questionable solution.125 In addi- tion, despite the ostensible purpose of the Bankruptcy Code, some airline executives have viewed—or have been viewed as using—bankruptcy proceedings as a competitive tool.126 In fact, a filing made solely to avoid an executory contract may be subject to a challenge on the grounds of bad faith in violation of Section 1129(a)(3).127 However, the fact that “a financially trou- bled company, which is losing money and is insolvent (or nearly so), is unable to pay its debts as they mature, has no credit and no free assets, and is about to run out of cash” has rejection of an executory contract as part of its reorganization plan does not mean the plan is in bad faith.128 B. Statutes/Regulations Airline bankruptcy proceedings are subject to re- quirements of the federal Bankruptcy Code129 and rules of procedure,130 including the requirement that any re- quested relief is within the jurisdiction of the Bank- ruptcy Court.131 Such proceedings are also affected by 125 DEMPSEY, supra note 3, § 17.25. 126 Judge Approves Markair's Plan for Reorganization, THE SEATTLE TIMES, June 10, 1993, available at http://community.seattletimes.nwsource.com/archive/?date=19 930610&slug=1705814 (Last visited Dec. 17, 2008); McQuaid, supra note 8, at 669, n.45 (2007), citing Robert M. Lawless, Stephen P. Ferris, Narayanan Jayaraman & Anil K. Makhija, Industry-Wide Effects of Corporate Bankruptcy Announce- ments, 12 BANKR. DEV. J., 293, 298, n.17 (1996). 127 Heuer, supra note 3, at 260–61 (1991), citing In re Conti- nental Airlines Corp. 38 B.R. 67, 71 (Bankr. S.D. Tex. 1984). 128 See In re Continental Airlines Corp. 38 B.R. 67 (Bankr. S.D. Tex. 1984). 129 Some have argued that practices that have no direct au- thorization in the Bankruptcy Code constitute a federal com- mon law of bankruptcy. Adam J. Levitin, Toward a Federal Common Law of Bankruptcy: Judicial Lawmaking in a Statu- tory Regime, Paper 939, bepress Legal Series, 2006, available at http://law.bepress.com/expresso/eps/939 (Last visited Jan. 2, 2009). 130 U.S.C., tit. 11A. 131 Under 28 U.S.C. § 157, each district court may refer any or all proceedings arising under title 11 to its bankruptcy judges. Those judges have authority to decide all core proceed- ings arising under title 11, including: (A) matters concerning the administration of the estate; (B) allowance or disallowance of claims against the estate or exemptions from property of the estate, and estimation of claims or interests for the purposes of confirming a plan under chapter 11, 12, or 13 of title 11 but not the liquidation or estimation of contingent or unliquidated personal injury tort or wrongful death claims against the estate for purposes of distribution in a case under title 11; (C) counterclaims by the estate against persons filing claims against the estate; (D) orders in respect to obtaining credit; (E) orders to turn over property of the estate; (F) proceedings to determine, avoid, or recover preferences; state law concerning issues such as contract construc- tion and by federal aviation law and regulations. This section discusses the Bankruptcy Code and relevant federal aviation provisions. 1. Bankruptcy Code Overview The first significant modern amendment of U.S. bankruptcy law was made by the Bankruptcy Reform Act of 1978, which repealed existing federal bankruptcy law and replaced it with the Bankruptcy Code.132 Addi- tional amendments were enacted in 1984, 1994, and 1997.133 A more comprehensive revision of the Bank- ruptcy Code was enacted in 2005.134 The following provisions of the Bankruptcy Code are subjects of analysis in airline bankruptcy cases or have otherwise been identified as particularly relevant for airports in airline bankruptcy cases, but are not specific to airline bankruptcy. A list of these provisions with links to online versions of the Code is included in Ap- pendix A. The emphasis here is on substantive issues presented, although procedural issues may preclude consideration of such issues.135 (G) motions to terminate, annul, or modify the automatic stay; (H) proceedings to determine, avoid, or recover fraudulent conveyances; (I) determinations as to the dischargeability of particular debts; (J) objections to discharges; (K) determinations of the validity, extent, or priority of liens; (L) confirmations of plans; (M) orders approving the use or lease of property, including the use of cash collateral; (N) orders approving the sale of property other than property resulting from claims brought by the estate against persons who have not filed claims against the estate; and (O) other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship, except personal injury tort or wrongful death claims. 28 U.S.C. § 157(b)(2). See SALERNO, supra note 2, § 3.07, Judi- cial Gloss on Core and Non-Core Proceedings. 132 SALERNO, supra note 2, § 1.04[A]. 133 NOLLKAMPER, supra note 2, § 100. 134 Bankruptcy, Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), 109 Pub. L. No. 8, 19, Stat. 23, Apr. 20, 2005. See Douglas W. Jessop, New Changes in the Bankruptcy Code Affecting Airports and Special Facility Bonds in Bank- ruptcy. Available from Jessop & Company, PC, jmail@jessopco.com or jwjessop@jessopco.com. 135 E.g., Interface Group-Nevada, Inc. v. Trans World Air- lines, Inc. (In re TWA, Inc.), 145 F.3d 124 (3d Cir. 1998) (fail- ure to adequately state issue of award of interest on adminis- trative claim as required under Bankruptcy Rules 8006 and 8010 precluded court from ruling on issue on appeal).

14 11 U.S.C. § 105, Power of court This section is the source of a bankruptcy court’s eq- uitable power, although the extent of those powers is not clearly settled.136 11 U.S.C. § 361, Adequate protection Sets forth the methods by which adequate protection required under §§ 362, 363, or 364 may be provided. The determination occurs before the contract/lease is assumed or rejected. Periodic rental payments compen- sating the creditor for use and occupancy of the prem- ises may serve as adequate protection.137 Issues posed under this section include appropriate valuation method (time of determination of value); factors in de- termining adequacy of protection; who is entitled to adequate protection; and burden of proof. Adequate protection is only available when the debtor retains collateral under § 362. Once the automatic stay is no longer applicable, automatic protection is moot.138 11 U.S.C. § 362, Automatic stay The stay is one of the basic protections of the Bank- ruptcy Code. 139 The stay stops the “race to the court- house,”140 giving the debtor breathing room without ul- timately affecting creditors’ rights. The stay is self- executing, taking effect when the bankruptcy petition is filed.141 In addition, a debtor may obtain preliminary injunctions preventing its lessors from interfering with its leasehold interests.142 The stay may be lifted on the motion of creditors un- der specific circumstances, e.g., lack of adequate protec- tion (which must be ruled on within a specified time period) and the existence of a cause of action unrelated to the bankruptcy. The stay does not cover perfecting purchase money security interests that were granted prepetition. The Bankruptcy Code does not expressly prohibit prepetition waivers of the automatic stay,143 and courts have differed on whether contractual waivers of the 136 See Levitin, supra note 129. 137 Memphis-Shelby County Airport Auth. v. Braniff Air- ways, Inc. (In re Braniff Airways, Inc.), 783 F.2d 1283 (5th Cir. 1986). 138 HSBC Bank USA, Nat’l Ass’n v. United Air Lines, Inc., 360 B.R. 780, 782, 784–785 (Bankr. N.D. Ill. 2007) (request for adequate protection of bank’s interest in collateral). 139 SALERNO, supra note 2, § 4.07, Automatic Stay. 140 John K. Rezac & Richard E. Lear, Application of Bank- ruptcy’s Automatic Stay to Actions Against Non-Debtors, 5 BANKRUPTCY AND CREDITORS’ RIGHTS (Holland & Knight) 4 (2d Quarter 2004). 141 In re Gruntz, 202 F.3d 1074 (9th Cir. 2000). 142 Braniff Airways, 783 F.2d 1283. 143 Judith Greenstone Miller & John C. Murray, Waivers of Automatic Stay: Are They Enforceable (and Does the New Bankruptcy Act Make a Difference)?, 41 REAL PROP. PROB. & TR. J. 1, 5 (2006), http://www.firstam.com/ekcms/uploaded Files/firstam_com/References/Reference_Articles/John_C_ Murray_Reference/Real_Estate_Bankruptcies/autostaywaivers. pdf. automatic stay are enforceable.144 The arguments for refusing to enforce such waivers include: the debtor cannot act prebankruptcy on behalf of the debtor-in- possession; specific provisions of the Bankruptcy Code (§§ 363, 365, 541) render such waivers unenforceable; and the Bankruptcy Code “extinguishes the private right of freedom to contract around its essential provi- sions.”145 It seems that recent cases have held that a prepetition waiver of the automatic stay is a factor for the court to consider in evaluating whether to grant requested relief from the stay.146 Where courts have enforced such waivers, they appear to have generally considered the facts of the case to determine whether the waiver should be enforced, taking into account pub- lic policy issues and the rights of third-party creditors.147 Factors to consider include “(1) the sophistication of the party making the waiver; (2) the consideration for the waiver, including the creditor's risk and the length of time the waiver covers; (3) whether other parties are affected including unsecured creditors and junior lien- holders, and; (4) the feasibility of the debtor's plan.”148 In addition, courts appear to differentiate between waivers that are part of prepetition agreements and those that are included in prior bankruptcy proceed- ings, with the former being unlikely to be enforced and the latter more likely to be enforced.149 Courts also seem more likely to enforce waivers in single-asset cases.150 For property to be subject to the automatic stay, the debtor must have an interest in the property before the beginning of the bankruptcy case.151 Where, for exam- ple, an airline lost its airport slots due to failure to use them before the airline declared bankruptcy, any sub- sequent action concerning the slots could not be stayed under § 362(a)(1) because such action was postpeti- tion.152 A government attempt to collect prepetition debt under exercise of its regulatory power is subject to the stay.153 However, at least under some circumstances, administrative proceedings by the U.S. Department of Transportation (USDOT) to reallocate authority to op- erate scheduled service away from an airline in bank- 144 In re Trans World Airlines, 261 B.R. 103 (Bankr. D. Del. 2001); In re Desai, 282 B.R. 527, 530 (Bankr. M.D. Ga. 2002); Jeffrey W. Warren, On the Edge: The Enforceability of a Pre- Petition Waiver of the Automatic Stay, AM. BANKR. INST. J. , Apr. 2008, available at http://findarticles.com/p/articles/mi_qa5370/is_/ai_n25419346 (Last visited Jan. 2, 2009). 145 In re Pease, 195 B.R. 431, 433 (Bankr. D. Neb. 1996). 146 Miller, supra note 143, at 6. 147 Pease, 195 B.R. at 432–33. 148 Desau 282 B.R. at 532 (on balance factors did not support granting relief from stay). 149 In re Bryan Road, 382 B.R. 844, 849 (Bankr. S.D. Fla. 2008). 150 Pease, 195 B.R. at 432–33. 151 In re Bigalk, 75 B.R. 561 (Bankr. D. Minn. 1987). 152 FAA v. Gull Air, Inc. (In re Gull Air, Inc.), 890 F.2d 1255 (1st Cir. 1989). 153 SALERNO, supra note 2, § 4.07[B], n.182.

15 ruptcy are exempt from the automatic stay under the express police and regulatory exception of § 362(b)(4).154 Where a lease expires by its own terms either prepeti- tion or during the bankruptcy case, actions by the land- lord to regain possession are not subject to the stay.155 The party seeking relief from the stay under § 362(d)(1) [for cause, including the lack of adequate protection of an interest in property of such party in interest] has the burden of making an initial showing of cause.156 The party seeking relief from the automatic stay under § 362(d)(2) [related to property in which the debtor does not have equity and which property is not necessary to an effective reorganization] has the burden of proof on the issue of the debtor’s equity in the prop- erty in question (showing that the debtor had no equity and the property is not necessary for effective reorgani- zation);157 the party opposing relief from the automatic stay has the burden of proof on all other issues, includ- ing adequacy of protection.158 Conversion to Chapter 7 does not revive the stay if relief from the stay had been granted in the preceding Chapter 11 proceedings.159 So long as the automatic stay applies, the court must approve any payments other than § 363 ordinary course of business payments. Once the reorganization plan is confirmed, the automatic stay is lifted as to any prop- erty that revests to the debtor under the plan.160 11 U.S.C. § 363, Use, sale, or lease of property This section governs the sale of corporate assets be- fore the reorganization plan is approved.161 It divides actions into two categories: use, sale, or lease in the ordinary course of business and use, sale, or lease out- side the ordinary course of business. The bankruptcy court must approve the latter.162 Subsection (b) requires that assets proposed to be disposed of outside the ordi- 154 In re USAfrica Airways Holdings, Inc., 192 B.R. 641 (D. Del. 1996) (DOT has significant regulatory power over interna- tional travel; flights to South Africa limited by South African government, lack of flights by Chapter 11 airline harming con- sumers). 155 SALERNO, supra note 2, § 4.07[B][8], Additional Excep- tions to the Stay. 156 In re Bogdanovich, 292 F.3d 104, 110 (2d Cir. 2002) (dis- cussion of grounds for lifting stay to allow litigation to continue in another court). 157 In re Anthem Communities/RBG, LLC, 267 B.R. 867 (Bankr. D. Colo. 2001). 158 SALERNO, supra note 2, § 4.07[F], nn. 273–75. 159 Mark A. Bailey, Bankruptcy Practice (ch. 19 in Washing- ton Lawyers Practice Manual, 2006), 19.4.33, Duration of Stay, citing In re State Airlines, Inc., 873 F.2d 264 (11th Cir. 1989). 160 United Air Lines, 360 B.R. at 785. 161 Matthew T. Gunlock, An Appeal to Equity: Why Bank- ruptcy Courts Should Resort to Equitable Powers for Latitude in Their Interpretation of “Interests” Under Section 363(f) of the Bankruptcy Code, 47 WM. & MARY L. REV. 347 (2005). 162 United Retired Pilots Benefit Protection Ass’n v. United Air Lines, Inc. (In re UAL Corp.), 443 F.3d 565, 568 (7th Cir. 2006). nary course of business be property of the estate.163 The most common type of sale outside the ordinary course of business is sale of all or part of the debtor’s estate. 164 However, a proposed transaction releasing claims by all parties against the Chapter 11 debtor, secured credi- tors, officers, and directors is not a “use, sale, or lease” authorized by § 363 under which a trustee may, after notice and hearing, use, sell, or lease, other than in or- dinary course of business, property of the estate.165 Whether an agreement amended after the Chapter 11 petition is filed is an asset that can be sold only with court permission under § 363(b) or is a prepetition executory contract that may be assumed under § 365 depends on the materiality of differences between the original agreement and the amended agreement, and other factors such as public statements concerning the status of the original agreement.166 The debtor in possession (DIP) has a duty to “protect and conserve property in his possession for the benefit of creditors.”167 In order for the DIP or trustee to meet its fiduciary duty, there must be “some articulated business justification for using, selling, or leasing the property outside the ordinary course of business.”168 In addition, the court must consider whether the proposed transaction is in the best interests of the estate.169 In other words, the debtor cannot use its authority under § 363(b) to circumvent the requirements of Chapter 11.170 The debtor bears the burden of proving that “a sale of property out of the ordinary course of business under § 363(b) of the Code will aid [the debtor’s] reor- ganization and is supported by a good business justifi- cation.”171 The Second Circuit has suggested the follow- ing factors in evaluating whether a proposed sale meets the business judgment test: the proportionate value of the asset to the estate as a whole, the amount of elapsed time since the filing, the likelihood that a plan of reorganization will be proposed and confirmed in the near future, the effect of the pro- posed disposition on future plans of reorganization, the proceeds to be obtained from the disposition vis-a-vis any appraisals of the property, which of the alternatives of use, sale or lease the proposal envisions and, most impor- 163 Institutional Creditors of Continental Air Lines v. Conti- nental Air Lines (In re Continental Air Lines, Inc.), 780 F.2d 1223, 1226 (5th Cir. 1986). 164 Heuer, supra note 3, at 267, n.121. 165 Pension Benefit Guaranty Corp. v. Braniff Airways, Inc. (In re Braniff Airways, Inc.), 700 F.2d 935 (5th Cir. 1983). 166 In re Ionosphere Clubs, Inc., 100 B.R. 670, 673–674 (Bankr. S.D.N.Y. 1989). 167 In re Devers, 759 F.2d 751, 754 (9th Cir. 1985), citing In re Halux, Inc., 665 F.2d 213, 216 (8th Cir. 1981). See § 1107, infra. 168 Continental Airlines, 780 F.2d at 1226. 169 In re America West Airlines, Inc., 166 B.R. 908, 912 (Bankr. D. Ariz. 1994). 170 Continental Airlines, 780 F.2d at 1227. 171 Ionosphere Clubs, 100 B.R. at 675, citing In re Lionel Corp., 722 F.2d 1063, 1071 (2d. Cir. 1983).

16 tantly perhaps, whether the asset is increasing or de- creasing in value.172 The decision must also be the product of an inde- pendent business judgment.173 Subsection (c) prohibits a debtor from using cash col- lateral unless each entity with interest in the collateral consents or the court authorizes such use after notice and a hearing. See Section II.D.5, Passenger Facility Charges, infra. Essentially the court must find that the entities with interest in the collateral are adequately protected.174 Subsection (e) provides that a creditor may request that the court prohibit or condition use, sale, or lease of property as needed to provide adequate protection of its interest in the property. The debtor has the burden of proof on this issue.175 The term “adequate protection” is not defined under the Code; its meaning is determined under the facts of the case.176 Requests under this sub- section become moot once the reorganization plan is confirmed.177 Subsection (f) governs the situations under which the trustee may sell property free and clear of any in- terest in such property of entities other than the estate. Construction of the term “interest” determines whether a plaintiff with an “interest” may pursue a claim against the purchaser of the property or must compete for compensation from the pool of remaining assets of the estate.178 While the Third Circuit has held that Equal Employment Opportunity Commission (EEOC) and travel voucher claims were within “interests” that could be extinguished under § 363(f),179 that reading of § 363(f) is not unanimous.180 Where the debtor’s rights in a portion of an airport terminal building purchased from an airline could be partitioned and sold separately from the remainder of the airline’s interests in the building without prejudice to the airline, the debtor could sell its portion.181 172 Id. 173 Id. at 678–79. 174 LYNN, supra note 2, ¶ 24.19[1], Cash Collateral. 175 In re Air Vermont, Inc., 39 B.R. 684 (Bankr. D. Vt. 1984). 176 In re O.P. Held, Inc., 74 B.R. 777 (Bankr. N.D.N.Y., 1987). 177 United Air Lines, 360 B.R. at 785. 178 Gunlock, supra note 161 at 355. 179 In re Trans World Airlines, Inc., 322 F.3d 283 (3d Cir. 2003) (airline workers' employment discrimination claims, as well as flight attendants' rights under travel voucher program that debtor-airline had established in settlement of sex dis- crimination action, both qualified as “interests in property,” under bankruptcy statute that provided for sale of assets of estate free and clear of interests in property) [MBNA v. TWA, 275 B.R. 712 (Bankr. D. Del. 2002)]. 180 Gunlock, supra note 161, at 363–64, citing In re Eveleth Mines LLC, 312 B.R. 634, 364 (Bankr. D. Minn. 2004). Gunlock argues that the Third Circuit outcome is only defensible if § 363(f) is read with the equitable powers of § 105(a). 181 In re Air Florida System, Inc., 48 B.R. 437, 440 (Bankr. S.D. Fla. 1985). Subsection (l) prohibits contractual clauses that pur- port to affect a debtor’s interest in property upon filing for bankruptcy. This provision has also been held to invalidate contractual provisions that purport to termi- nate or modify the debtor’s interest in property because of bankruptcy filing, including waiving the automatic stay.182 See discussion of automatic stay, supra. 11 U.S.C. § 365, Executory contracts and unexpired leases Section 365 modifies rights of nondebtors under executory contracts; allows the trustee/DIP to assume or reject executory contracts within specified time- frames; and allows the assignment of an assumed con- tract “if adequate assurance of future performance by the assignee…is provided.”183 This is perhaps the single most significant provision for airports dealing with air- lines in bankruptcy. Its main purpose is to allow a debtor to reject executory contracts in order to relieve the estate of burdensome obligations while at the same time providing “a means whereby a debtor can force others to continue to do business with it when the bankruptcy filing might otherwise make them reluctant to do so,”184 thus maximizing the value of the estate for creditors.185 The authority to object is vital to the basic purpose of reorganization under Chapter 11.186 The term “executory contract” is not specifically de- fined in the Bankruptcy Code. 187 However, a widely used definition of “executory contract” is as follows: A contract is executory where the obligation “of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete per- formance would constitute a material breach excusing the performance of the other.”188 The actual determina- 182 Matthew P. Goren, Chip Away at the Stone: The Validity of Pre-Bankruptcy Clauses Contracting Around Section 363 of the Bankruptcy Code, 51 N.Y.L. SCH. L. REV. 1077, 1086 n.42, 1087 n.44. (2006–2007), citing In re Pease, 195 B.R. 431 (Bankr. D. Neb. 1996) (holding that prepetition waivers of the automatic stay were per se invalid and unenforceable) and In re Nat'l Gypsum Co., 118 F.3d 1056, 1067 n.18 (5th Cir. 1997) (prepetition arbitration clause was effectively an ipso facto clause and thus unenforceable). 183 In re Fleming Cos., 499 F.3d 300, 305 (3d Cir. 2007) (where material and significant term of agreement cannot be performed by prospective assignee, contract may not be as- signed). 184 In re Chateaugay Corp., 10 F.3d 944, 954–55 (2d Cir. 1993), citing Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303, 1310 (5th Cir. 1985) (per curiam). 185 In re Midway Airlines Inc., 6 F.3d 492 (7th Cir. 1993). 186 N.L.R.B. v. Bildisco and Bildisco, 465 U.S. 513, 528, 104 S. Ct. 1188, 1197, 79 L. Ed. 2d 482, 497 (1984). 187 In re Terrell, 892 F.2d 469 (6th Cir. 1989). 188 Pacific Express v. Teknekron Infoswitch Corp (In re Pa- cific Express Inc.), 780 F.2d 1482, 1487 (9th Cir. 1986), citing Countryman, Executory Contracts in Bankruptcy: Part I, 57 MINN. L. REV. 439, 460 (1973); Terrell, 892 F.2d at 471 n.2, citing Countryman; In re Lawson, 14 F.3d 595 (4th Cir. 1993);

17 tion of whether the failure to perform the remaining obligations of an executory contract would constitute material breach excusing performance by the other party is made under state law.189 Thus the determina- tion of whether an executory contract was terminated prepetition—and therefore cannot be assumed by the DIP—is made under state law.190 At least in the Second Circuit, the creditor cannot take actions postpetition under a contract that was executory at the time of bankruptcy so as to preclude the debtor from rejecting the contract.191 The term “lease” for purposes of § 365 is also not de- fined under the Bankruptcy Code.192 As noted above, the requirement of performing postpetition obligations only applies to true leases. As discussed in Section II.D.1, Lease Recharacterization, infra, this can be a big issue for airports that have participated in special facility revenue bond-funded improvements. Whether an agreement is a lease or rental agreement for purposes of assumption or rejection of unexpired leases generally depends on state law,193 unless state law is contrary to provisions of the Bankruptcy Code.194 Depending on the facts of the case, the court may look to the principle of equitable estoppel and determine that the debtor is es- topped from claiming that its lease agreement is in fact a financing instrument not subject to § 365.195 The time frame for assumption or rejection of nore- sidential real property leases for bankruptcy cases be- gun on or after October 17, 2005, is 120 days after the order for relief or plan confirmation order, whichever is earlier, instead of the 60 days allowed for pre- Bankruptcy Abuse Prevention and Consumer Protec- tion Act (BAPCPA) bankruptcy cases.196 However, BAPCPA also eliminated the routine multiple 60-day extensions previously allowed, instead allowing one In re Columbia Gas System, Inc., 50 F.3d 233 (3d Cir. 1995); In re Ravenswood Apartments, Ltd., 338 B.R. 307 (6th Cir. 2006). 189 892 F.2d at 472 (quoting Hall v. Perry (In re Cochise Col- lege Park, Inc.), 703 F.2d 1339, 1348 n.4 (9th Cir. 1983)); see also Butner v. United States, 440 U.S. 48, 54–55, 99 S. Ct. 914, 918, 59 L. Ed. 2d 136, 141 (1979) (state law determines prop- erty rights unless a federal purpose mandates otherwise). 190 SALERNO, supra note 2, § 4.11[A][1], Requirements for Assumption: Existence. 191 COR Route 5 Co. LLC v. Penn Traffic Co. (In re Penn Traffic Co.), 524 F.3d 373 (2d Cir. 2008). 192 In re Harris Pine Mills, 862 F.2d 217 (9th Cir. 1988); United Air Lines v. HSBC Bank (In re UAL Corp.), 416 F.3d 609, 611 (7th Cir. 2005); Davis, supra note 41. 193 Harris Pine Mills, 862 F.2d 217. 194 In re Re-Trac Corp., 59 B.R. 251 (Bankr. D. Minn. 1986). 195 In re Martin Bros. Toolmakers, Inc., 796 F.2d 1435 (11th Cir. 1986). 196 Wendy Tien, Treatment of Unexpired Leases: Post- Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, UNITED STATES ATTORNEYS' BULLETIN 35 (July 2006), www.justice.gov/usao/eousa/foia_reading_room/usab5404.pdf. The author asserts that this new language means that an un- expired commercial lease may not be assumed or rejected after plan confirmation. extension of 90 days past the initial 120-day period— only for cause—and requiring the landlord’s consent for any additional extensions. It has been suggested that this new time requirement under BAPCPA may provide incentives for debtors to seek to recharacterize leases as secured financings.197 Section 365(d)(2) requires that all other unexpired leases and all executory contracts be assumed or rejected by plan confirmation. Generally the trustee may assume or reject without the lessor’s consent. Moreover, contractual provisions purporting to waive rights under § 365 to reject execu- tory contracts are generally held to be unenforceable, as they are contrary to the purposes of § 365.198 However, the lessor may seek to compel the debtor under § 365(d)(2) to either assume or reject the lease in ques- tion.199 Generally ipso facto clauses, i.e., clauses stating that the fact of bankruptcy terminates the agreement, are not enforceable. However, actual default by a debtor airline is not affected by the presence of an ipso facto clause, and the fact that bankruptcy precludes making payments does not preclude nonpayment from consti- tuting default.200 In addition, subsection (e)(2)(A) pro- vides that if applicable law excuses a nondebtor party from accepting or rendering performance and that party does not consent, the prohibition against ipso facto clauses does not apply. However, the Federal Circuit Courts are split over whether the nondebtor party must show more than a hypothetical possibility that the con- tract will be assigned before the exception will apply.201 Anti-assignment clauses in the lease202 do not pre- vent assignment, provided the debtor assumes the lease under § 365 and the assignee provides adequate protec- tion. There are some additional restrictions on assign- ment: Subsection (c) provides that if applicable law ex- cuses a nondebtor party from accepting or rendering performance and that party does not consent, the debtor may not assume or assign the lease in ques- 197 Guy B. Moss & Stephanie W. Mai, Business Bankruptcy Implications of the Bankruptcy Abuse Prevention and Con- sumer Protection Act of 2005, BANKRUPTCY LAW SECTION NEWSLETTER (Boston Bar Association Bankruptcy Law Sec- tion, Boston, Mass.), May 2005, at 5. 198 Trans World Airlines, 261 B.R. at 103 (debtor may not agree prebankruptcy to assume or reject executory contract; DIP may not make unilateral decision to assume or reject). The court distinguished such waivers from prepetition waivers of the automatic stay, which may be allowed, particularly in sin- gle-asset cases. Id. at 114. 199 Braniff Airways, 783 F.2d at 1285 (5th Cir. 1986); CIT Commc’ns Finance Corp. v. Midway Airlines Corp. (In re Mid- way Airlines Corp.), 406 F.3d 229 (4th Cir. 2005) (lease of tele- phone equipment). 200 U.S. Bank Nat’l Ass’n v. United Air Lines, Inc. (In re United Air Lines), 438 F.3d 720, 732, n.5 (7th Cir. 2006). 201 In re Mirant Corp., 440 F.3d 238 (5th Cir. 2006). 202 See Fleming, 499 F.3d 307 (§ 365(f)(1) prohibits explicit anti-assignment clauses and provisions so restrictive that they constitute de facto anti-assignment clauses).

18 tion.203 The Seventh Circuit has held that if the lease explicitly addresses (and contemplates) assignment of the lease in the event of bankruptcy, the airport will not be able to object to assignment on the ground that it is in contravention of federal or state law. The court ex- pressly found that a specific contractual provision al- lowing assignment in case of bankruptcy must govern over a general policy in favor of competition.204 Subsec- tion (c) also prohibits assumption of a contract to extend debt financing or of a nonresidential real property lease that was terminated under applicable nonbankruptcy law before the order for relief was entered. Section 365(d)(3) requires the debtor to timely per- form all obligations of the debtor arising from and after the order for relief under an unexpired lease for noresi- dential real property until the lease is assumed or re- jected,205 notwithstanding the provisions of § 503(b)(1), which means the debtor must pay postpetition rent and other charges as they come due.206 The provision does not specify consequences of noncompliance.207 The pur- pose of § 365(d)(3) is to ensure that the landlord contin- ues to receive payment for lease obligations;208 the re- quirement only applies to true leases. However, when the payment obligation becomes due, to what period in time the obligation relates (before or after the relief order date, in whole or in part), and when the payment is made will determine whether a particular payment obligation comes under § 365(d)(3) at all and whether the particular obligation is considered a prepetition or postpetition obligation.209 In addition, the courts have split between the performance date (billing) approach and the proration (accrual) approach to determine the amount and timing of payments under § 365(d)(3).210 The issue of the scope of the requirements of § 365(d)(3) as it has affected airports is discussed in Section II.D.4, Stub Period Rent, infra. If assuming, the trustee/DIP must assume the entire agreement, “rather than assuming only the beneficial 203 Metro. Airports Comm’n v. Northwest Airlines, 6 F.3d 492 (7th Cir. 1993). 204 Id. at 497. 205 Adelphia Bus. Solutions, Inc. v. Abnos, 482 F.3d 602, 605–06 (2d Cir. 2007); United Air Lines, 291 B.R. at 124. 206 In re Iron Age Corp., 378 B.R. 419 (Bankr. D. Mass. 2007). 207 LYNN, supra note 2, ¶14.07, Power to Assume or Reject Executory Contracts; SALERNO, supra note 2, § 4.11[A][7], cit- ing 3 COLLIER ON BANKRUPTCY, ¶ 365.04[3][g] (Alan N. Res- nick & Henry J. Sommer eds., 15th ed. rev.) for discussion of developing case law. 208 Cukierman v. Uecker (In re Cukierman), 265 F.3d 846, 851 (9th Cir. 2001). 209 Prepetition rent is generally not payable unless the con- tract or lease is assumed. See Lynn, supra note 2, ¶ 24.08[1], Executory Contracts. 210 See Victoria Kothari, 11 U.S.C. § 365(D)(3): A Conceptual Status Argument for Proration, 13 AM. BANKR. INST. L. REV. 297 (2005). aspects and rejecting the burdensome ones.”211 However, in assuming a particular executory contract or unex- pired lease, the trustee/DIP need not perform under other substantially unrelated agreements, even where separate agreements are included in the same docu- ment.212 This is true even if separate agreements are linked by a cross-default clause. As the court noted in a recent Illinois bankruptcy case, “assumption under § 365 is subject to a ‘well-established’ cross-default rule: ‘[C]ross-default provisions do not integrate executory contracts or unexpired leases that otherwise are sepa- rate or severable.’”213 In order to assume a contract the debtor must cure, or provide assurance of prompt cure of, any defaults. The purpose of the cure and adequate assurance condi- tions was to ensure that contracting parties receive the full benefit of their bargain.214 Although the scope of cure had been a subject of dispute,215 amendments to § 365 under BAPCPA made clear that the cure re- quirement now includes nonmonetary as well as mone- tary faults.216 However, defaults from failure to perform nonmonetary obligations that cannot be cured need only be cured prospectively following assumption, with com- pensation provided by any financial losses resulting from the nonmonetary default.217 Defaults triggered by the bankruptcy itself are an exception to this rule.218 If the debtor assumes the lease, assumption renders future obligations under the lease administrative ex- penses.219 The Third Circuit has held that assumption of contracts under § 365 precludes a trustee from avoiding contract payments as preferences under § 547.220 211 United Air Lines, 346 B.R. at 467, citing 465 U.S. 532; In re Shangra-La, Inc., 167 F.3d 843, 849 (4th Cir. 1999). See also Fleming, 499 F.3d at 308 (debtor could not assume and assign store lease because essential term of lease required service from warehouse whose lease had already been rejected). 212 United Air Lines, 346 B.R. at 467–68. 213 Id. at 468 (citation omitted). See § II.D.3, Cross-Default Clauses, infra. 214 In re Ionosphere Clubs, Inc., 85 F.3d 992 (2d Cir. 1996). 215 In re Bankvest Capital Corp., 360 F.3d 291, 293 (1st Cir. 2004) (First Circuit disagreed with Ninth Circuit over non- monetary cure requirements). 216 Paul H. Deutch, The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005: Important Implications for the Equipment Leasing Industry, 24 LJN’s EQUIPMENT LEASING NEWSLETTER 1 (June/July 2005), www.troutmansanders.com/mc/art-deutch.pdf.; Valerie P. Mor- rison & Rebecca L. Saitta, Impact of the Bankruptcy Abuse Prevention and Consumer Protection Act on Franchise Reor- ganizations Under Chapter 11, 27 FRANCHISE L. J. 125 (2007). Posted at www.wileyrein.com/docs/publications/13304.pdf; Salerno & Kroop, § 1.04[B][2], at 1–15. 217 Moss, supra note 197, at 5–6. 218 United Air Lines, 346 B.R. at 468, n.10. 219 Cukierman, 265 F.3d at 850; See also Jacob, supra note 2, at 15-8–15-9. 220 Kimmelman v. Port Auth. N.Y & N.J. (In re Kiwi Int’l Air Lines, Inc.), 344 F.3d 311, 318–19 (3d Cir. 2003).

19 Rejection constitutes a breach deemed to have oc- curred immediately before the filing date of the peti- tion.221 Thus, if the debtor rejects the lease, the lessor will generally have a nonpriority unsecured claim for damages222 under § 365(g) for prepetition rent and ex- penses, which claim must be addressed under the reor- ganization plan.223 If the assets of the estate are insuffi- cient to pay all unsecured creditors in full, the lessor may receive only a small portion of its unsecured claim.224 However, the lessor is entitled to an adminis- trative expense priority for the reasonable value of the debtor’s use and occupancy of the property postpeti- tion.225 If the debtor neither assumes nor rejects an unex- pired lease of real property “by the earlier of 120 days after entry of the order for relief or of an order confirm- ing a plan of reorganization, the lease is deemed to be rejected and the trustee (or chapter 11 debtor) must immediately surrender the property to the lessor.”226 See §§ 502 and 503, infra, for discussion of limitations on lease rejection damages. 11 U.S.C. § 366, Utility service This section allows a utility to discontinue service if the trustee does not provide adequate assurance of payment within 20 days after the date of the order for relief. Airports that provide utility service will benefit from BAPCPA amendments to this section that specify what constitutes adequate assurance to prevent the utility from denying service to a chapter 11 debtor, pre- cluding the argument that historic timely payments constitute adequate assurance. In addition, administra- tive expense priority does not constitute adequate as- surance.227 11 U.S.C. § 502, Allowance of claims or interests This section determines whether a claim228 is allow- able. For example, § 502 would be one of the bases for 221 Penn Traffic, 524 F.3d at 378; In re Dehon, Inc., 352 B.R. 546, 558–59 (Bankr. Mass. 2006). 222 United Air Lines, 346 B.R. at 467. See § 502(g), infra. 223 LYNN, supra note 2, ¶ 24.08[1], Executory Contracts. 224 See Penn Traffic, 524 F.3d at 378. 225 Braniff Airways, 783 F.2d at 1286. See § 503 infra. 226 Titus & McConomy v. Trizechahn Gateway (In re Titus & McConomy, LLP), 375 B.R. 165, 173 (Bankr. W.D. Pa. 2007), citing 11 U.S.C. § 365(d)(4)(A). See SALERNO, supra note 2, § 1.04[B], at 1-15. A different rule applies for executory con- tracts. See Diamond Z Trailer, Inc. v. JZ L.L.C. (In re JZ L.L.C.), 371 B.R. 412, 422 (9th Cir. BAP 2007), emphasizing permissive nature of assumption or rejection under § 365, al- lowing for “ride through.” 227 SALERNO, supra note 2, § 1.04[B], at 1-16. 228 Broadly defined under 11 U.S.C. 101(5): (A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or (B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, relief in a claim for payment of stub period rent,229 see Section II.D.4, infra. If a claim is allowable, its priority is determined under § 506.230 Subsection (a) provides that a claim is deemed allowed unless a party in inter- est objects. Therefore, once a proof of claim is filed, other parties in interest may challenge the claim, even though the underlying claim is outside the bankruptcy estate, for example because it relates to an executory contract that the trustee has already rejected.231 Subsection 502(b)(6) places a cap on a claim for dam- ages resulting from the termination of a lease of real property,232 particularly relevant in airline bankruptcy disputes.233 The purpose of the cap is to prevent land- lords from realizing a windfall from a breach of a real property lease and to ensure that the landlord receives compensation for damages without crowding out the other unsecured creditors.234 The statutory cap only ap- plies to true leases.235 The Second Circuit held that the cap does not apply to administrative expenses, and so “cannot cap future rent due under an assumed lease.”236 That In re Klein Sleep Products holding was modified by BAPCPA’s addition of § 503(b)(7), infra. The provision caps the landlord’s claim at: (A) the rent reserved by such lease, without acceleration, for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of such lease, following the earlier of— (i) the date of the filing of the petition; and (ii) the date on which such lessor repossessed, or the les- see surrendered, the leased property; plus (B) any unpaid rent due under such lease, without accel- eration, on the earlier of such dates. contingent, matured, unmatured, disputed, undisputed, secured, or unsecured. See LYNN, supra note 2, ¶ 20.05[17], Claim, ¶ 20.05[18], Proof of Claim. 229 In re UAL Corp., Chapter 11, Case No. 02-B-48191, Debtors’ Motion for an Order Approving and Authorizing Pay- ment Under the Agreed-Upon Stub Rent Procedures, July 28, 2003, par. 3. 230 UPS Cap. Bus. Credit v. Gencarelli (In re Gencarelli), 501 F.3d 1, 5 (1st Cir. 2007) (to extent that prepayment penalties against a solvent debtor that were part of otherwise allowed claim were unreasonable, they constituted unsecured claim under § 506(b), rather than being unallowed). 231 Durkin v. Benedor (In re G.I. Indus.), 204 F.3d 1276, 1280 (9th Cir., 2000). 232 Solow v. PPI Enters. (In re PPI Enters. (U.S.) Inc.), 324 F.3d 197, 207 (3d Cir. 2003). 233 In re Delta Air Lines, Inc., 370 B.R. 537, 543 (Bankr. S.D.N.Y. 2007). 234 Titus & McConomy, 375 B.R. at 171. 235 See Malden Mills Indus. v. Maroun (In re Malden Mills Indus., Inc.), 303 B.R. 688, 703 (BAP 1st Cir. 2004). 236 Nostas Assocs. v. Costich (In re Klein Sleep Products, Inc.), 78 F.3d 18, 28 (Cal. 1996).

20 Courts have split over whether the “15 percent” re- fers to the total rent due under the rest of the lease or the time remaining under the lease.237 In order to apply the cap, the court must determine the proper date for calculating the amount allowed: the date the bankruptcy petition is filed (11 U.S.C. § 502(b)(6)(A)(i)) or the date the lessor repossessed or the lessor surrendered the leased property (11 U.S.C. § 502(b)(6)(A)(ii)).238 The determination of what consti- tutes repossession or surrender for purposes of § 502(b)(6) is made under state law.239 Some courts will apply the security deposit against the amount allowed under the statutory cap.240 Subsection 502(d) requires the bankruptcy court to disallow claims from a creditor from whom property is recoverable or who is the recipient of avoidable trans- fers under § 545 unless the creditor has turned over the property or paid the transferred amount.241 This is true even if the underlying avoidance action would be time- barred.242 Courts are split over whether a debtor is pre- cluded from pursuing a preference avoidance action under § 547 once a claim has been allowed under § 502. The rationale for precluding the avoidance action is that it is only fair to resolve all issues related to a credi- tor’s claim at one time; that it is unfair to engage in a claim objection while concealing a preference action. The rationale for allowing the avoidance action is that § 502(d) offers an affirmative defense to debtors, but does not preclude bringing an avoidance action after the 237 In re Connectix Corp., 372 B.R. 488, 491 (Bankr. N.D. Cal. 2007) (adopting total time approach), citing “total rent” approach: In re New Valley Corp., No. 98-CV-982, 2000 WL 1251858, at 11–12 (D. N.J. 2000); In re Andover Togs, Inc., 231 B.R. 521, 545–46 (Bankr. S.D.N.Y. 1999); In re Today's Woman of Florida, Inc., 195 B.R. 506, 507–08 (Bankr. M.D. Fla. 1996); In re Gantos, Inc., 176 B.R. 793, 795–96 (Bankr. W.D. Mich. 1995); In re Financial News Network, Inc., 149 B.R. 348, 351 (Bankr. S.D.N.Y. 1993); In re Communicall Central, Inc., 106 B.R. 540, 544 (Bankr. N.D. Ill. 1989); 2 NORTON BANKRUPTCY LAW AND PRACTICE 2d, § 41.24 (2006) and “total time” ap- proach: In re Blatstein, No. 97-CV-3739 WL 560119, at 15-16 (E.D. Pa. 1997); In re Allegheny Int’l, Inc., 136 B.R. 396, 402– 03 (Bankr. W.D. Pa. 1991); In re Ace Electrical Acquisition, LLC, 342 B.R. 831, 833 (Bankr. M.D. Fla. 2005); In re Iron-Oak Supply Corp., 169 B.R. 414, 419-20 (Bankr. E.D. Cal. 1994); In re Bob's Sea Ray Boats, Inc., 143 B.R. 229, 231 (Bankr. D.N.D. 1992); 4 COLLIER ON BANKRUPTCY (15th ed. rev.) at ¶ 502.03[7][c]. 238 PPI Enters., 324 F.3d at 197, 208 n.18. 239 Titus & McConomy, LLP, 375 B.R. at 165, 171. 240 PPI Enters., 324 F.3d at 208. 241 El Paso City of Texas v. America West Airlines, Inc., 217 F.3d 1161, 1163 (9th Cir. 2000) (claim based on statutory lien not perfected or enforceable against bona fide purchaser at time bankruptcy case is begun shall be disallowed unless claimant pays amount or turns over property for which it is liable). 242 Id. at 1167. claims allowance process.243 See Section II.D.4, Other (Preferential transfers), infra. Subsection 502(g) provides that rejection of an unex- pired lease under § 365 gives rise to a general unse- cured claim for contract damages.244 The Second Circuit has held that by implication, claims arising from as- sumed leases should be treated as administrative ex- penses.245 Subsection 502(h) governs the treatment of claims for recovery of property under §§ 522 [Exemptions, not relevant to airline bankruptcy], 550 [Liability of trans- feree of avoided transfer], and 553 [Setoff], providing that such claims will be treated as if they had arisen prepetition. The effect of subsection 502(h) is that if a transfer is avoided under § 547 and recovered by the bankruptcy estate under § 550, the transferee will have a claim that will be determined under § 502 and al- lowed as if the claim had arisen prepetition.246 11 U.S.C. § 503, Allowance of administrative ex- penses Under § 503(b)(1), administrative expenses are the “actual, necessary costs and expenses of preserving the estate.” Obtaining this administrative expense status is significant because such expenses receive a high prior- ity. See § 507, infra. Unpaid postpetition rent that ac- crues during the period the debtor considers whether to assume or reject an unexpired lease should be entitled to administrative priority247 and postpetition, postrejec- 243 Allison R. Axenrod, Section 502(d) Does Not Preclude Ac- tions to Avoid Allowed Claims, 11 BANKRUPTCY BULLETIN (Weil, Gotshal & Manges) 5, 6 (2004), citing TWA Inc. Post Confirmation Estate v. City & County of San Francisco Air- ports Comm’n (In re TWA Inc. Post Confirmation Estate), 305 B.R. 221 (Bankr. D. Del. 2004) (preference avoidance action not precluded); Caliolo v. Azdel, Inc. (In re Cambridge Indus. Hold- ings Inc.), No. 00-1919, 02-03293, 2003 Bankr. LEXIS 794 (Bankr. D. Del. July 18, 2003) (preference avoidance action precluded); LaRoche Indus., Inc. v. Gen. Am. Transp. Corp. (In re LaRoche Indus., Inc.), 284 B.R. 406 (Bankr. D. Del. 2002) (preference avoidance action not precluded). See also Rhythms NetConnections, Inc. v. Cisco Systems (In re Rhythms Net- Connections), 300 B.R. 404 (Bankr. S.D.N.Y. 2003) (preference avoidance action not precluded); Robert S. Brady, Edmon L. Morton & Joseph M. Barry, TWA Evens the Score on the Avail- ability of the 502(d) Claim Preclusion Defense in Delaware, 23- 3 ABI JOURNAL 44 (2004), available at http://findarticles.com/p/articles/mi_qa5370/is_/ai_n21347712. 244 Eagle Ins. Co. v. BanVest Capital Corp. (In re BankVest Corp.), 360 F.3d 296. See Davis, supra note 41, at 143. 245 Klein Sleep Prods, 78 F.3d at 26–28. 246 Solow v. Greater Orlando Aviation Auth. (In re Midway Airlines, Inc.), 175 B.R. 239, 247 (Bankr. N.D. Ill. 1994). 247 LYNN, supra note 2, ¶ 14.07, Power to Assume or Reject Executory Contracts; SALERNO, supra note 2, § 4.11[A][7]. Executory Contracts: Administrative Rent (“With respect to a lease, a landlord is entitled to the rent provided for in the lease from the petition date through the date the lease is rejected; all such rent is accorded administrative expense priority status.”). But see In re Amber's Stores, Inc., 193 B.R. 819 (Bankr. N.D. Tex. 1996) and In re Palace Quality Services Industries, Inc., 283 B.R. 868 (Bankr. E.D. Mich. 2002), both reviewing cases

21 tion services may also be entitled to administrative ex- pense priority under § 503(b)(1) based on the debtor’s use of the premises during that postpetition period.248 See Sections II.D.4, Stub Period Rent, and II.D.5., Other (Lease Rejection), infra. The effective date of the rejec- tion “determines when a debtor's obligation to pay rent ceases”249 and thus will affect the rent owed, so making a rejection date retroactively effective can reduce or eliminate administrative rent claims.250 Although the rejection of an unexpired nonresidential lease does not take effect until approved by the bankruptcy court, the court may, based on its equitable powers, make such approval retroactive. 251 Turning over the keys and va- cating the premises prepetition are factors that weigh heavily in favor of allowing retroactive approval;252 most cases that have provided retroactive approval have in- volved debtors that had vacated the premises.253 How- ever, the Ninth Circuit approved a retroactive rejection date in a case where neither the landlord nor lessee debtor occupied the premises, in part because the land- lord’s conduct and motives appeared to be more geared toward running up its administrative rent claim than to obtaining its rights to re-let the premises.254 Where the debtor assumes an ongoing executory con- tract or unexpired lease before the bankruptcy plan is confirmed—or enters into a new executory contract dur- ing reorganization—and then breaches the agreement, the breach is deemed to have occurred postpetition and gives rise to an administrative expense claim under § 503(b).255 However, claims for nonresidential real prop- erty leases that are assumed and then rejected are sub- ject to the specific provisions of § 503(b)(7). Under sub- section (b)(7), a landlord whose nonresidential real property lease was assumed and then rejected is enti- tled to an administrative claim for money owed—except for failure to operate or penalty—for 2 years from the rejection date or actual turnover date (whichever is that require the lessor, despite applicability of § 365(d)(3), to establish administrative expense status under § 503(b)(1)(A). 248 Malden Mills, 303 B.R. at 706; SALERNO, supra note 2, § 4.11[A], Administrative Rent. 249 Pacific Shores Dev. LLP v. At Home Corp. (In re At Home Corp.), 392 F.3d 1064, 1069 (9th Cir. 2004). 250 SALERNO, supra note 2, § 4.11[C], Executory Contracts: Rejection. See Amber Stores, 193 B.R. 819 (lessor entitled to any administrative expense claim for unpaid post-petition lease obligations that occurred before lease rejection without establishing claim for administrative status under § 503(b)(1)(A), but date of effective rejection is date of court order; based on equities of case, lease should be deemed re- jected on petition date; lessee moved out and turned over keys prepetition, so no administrative claim for postpetition rent). 251 Thinking Machines Corp. v. Mellon Financial Servs. Corp. # 1 (In re Thinking Machines Corp.), 67 F.3d 1021, 1029 (1st Cir. 1995). 252 Amber Stores, 193 B.R. at 827. 253 Pacific Shores, 392 F.3d 1074. 254 Id. 255 LYNN, supra note 2, ¶ 14.07, Power to Assume or Reject Executory Contracts. later), without reduction or setoff except for sums re- ceived from entities other than the debtor. The claim for any remaining sums due for the balance of the lease comes under the statutory cap of § 502(b)(6). 11 U.S.C. § 506, Determination of secured status Section 506(a) provides that—unlike a lessee, who under § 365 must assume the lease and fully perform or surrender the property—a secured borrower may retain the property without paying the full price as agreed. The secured borrower must provide the lender the eco- nomic value of the secured property; to the extent the loan is greater than that economic value, the balance becomes an unsecured debt.256 See Section II.D.1, Lease Recharacterization, infra. Section 506(b) provides that if creditors are overse- cured, they may collect reasonable fees. The intent of this provision is to prevent oversecured creditors from prioritizing unreasonable fees, but not to prevent them from collecting them altogether.257 The limitation under § 506(b) on claims a landlord can make for unpaid rent against the bankrupt estate only applies to true leases, not transactions intended as secured financings.258 11 U.S.C. § 507, Priorities Priority claims must be paid before general unse- cured claims. This section sets forth the order of prior- ity of expenses and claims. Those most relevant to air- port cases are certain trustee claims (first priority), administrative expenses under § 503(b) (second prior- ity), unsecured claims under § 502(f) [relates to certain ordinary course of business claims in involuntary cases] (third priority), and government tax claims (eighth pri- ority, see § 1129(a)(9)). Fourth and fifth priority claims are personnel-related, and are relevant to the extent that employee claims may deplete the estate before general unsecured airport claims can be satisfied. 11 U.S.C. § 511, Rate of interest on tax claims This provision was added by BAPCPA. It provided that the rate for interest required to be paid on tax claims is to be determined under applicable nonbank- ruptcy law. 11 U.S.C. § 541, Property of the estate With certain exceptions, “all legal or equitable inter- ests of the debtor in property as of the commencement of the [bankruptcy] case” are property of the estate [§ 541(a)(1)], as is “any interest in property that the estate acquires after the commencement of the case.” [§ 541(a)(7)] Generally state law determines whether 256 United Air Lines, Inc. v. HSBC Bank USA (In re United Air Lines Corp.), 453 F.3d 463, 465 (7th Cir. 2006); HSBC Bank USA v. UAL Corp. (In re UAL Corp.), 351 B.R. 916, 917– 18 (Bankr. N.D. Ill. 2006). See Barbra R. Parlin, Not So Fast: Seventh Circuit Says United Airline’s San Francisco Airport Bonds Are a Secured Financing After All, 6 BANKRUPTCY and CREDITORS’ RIGHTS (Holland & Knight) 9, 10 (3d Quarter 2005) (analyzing United Air Lines, Inc. v. HSBC Bank USA, N.A. (In re UAL Corp.), 416 F.3d 609 (7th Cir. 2005)). 257 Gencarelli, 501 F.3d at 6–7. 258 Liona Corp., Inc. v. PCH Assocs. (In re PCH Assocs.), 949 F.2d 585 (2d Cir. 1991).

22 the debtor holds a property interest.259 Thus, the inter- est of a debtor under a lease of nonresidential property that has been terminated before the Chapter 11 filing is no longer property of the estate, and thus no longer assumable. The § 541 analysis, which looks to state law to determine the validity of the lease, precedes any analysis of assumability under § 365(b).260 One area of particular interest to some airports is whether airline slots are property of the estate. In 1983 the Fifth Circuit held that they are not property,261 al- though this holding has been criticized262 and at least one commentator has argued that subsequent FAA treatment of slots places this holding in question.263 There are some cases that held that slots could be prop- erty under § 541.264 However, FAA takes a different po- sition.265 It does not appear that this issue has been re- cently litigated. This issue may also be of less interest since at present only five airports have government restrictions on the number of takeoff and landing au- thorizations, whereas control of gates—which are air- port property—is of more general interest. In addition, at least one court has held that an airline operating certificate is property under § 541,266 although USDOT also disputes this position.267 Another area of particular interest to airports is whether PFCs can be considered property of the estate under this section. Both airports and USDOT take the position that they cannot.268 Accordingly, USDOT also takes the position that PFC remittances cannot be re- covered as avoidable preferences.269 11 U.S.C. § 544, Trustee as lien creditor and a suc- cessor to certain creditors and purchasers 259 SALERNO, supra note 2, § 4.06, Creation of the Estate, cit- ing Butner v. United States, 440 U.S. 48; In re Contractors Equip. Supply Co. v. Citybank, 861 F.2d 241 (9th Cir. 1988). 260 Jet 1 Center, Inc. v. City of Naples Airport Auth. (In re Jet 1 Center), 335 BR 771, 781 (Bankr. M.D. Fla. 2005). 261 Braniff Airways, 700 F.2d at 935. Accord, Air Illinois, Inc. v. FAA (In re Air Illinois), 53 B.R. 1, 2–3 (Bankr. S.D. Ill. 1985). 262 THOMAS H. JACKSON, THE LOGIC AND LIMITS OF BANKRUPTCY LAW, 97–98, at n.22 (1986). 263 Heuer, supra note 3, at 61-62. 264 Gull Air, 890 F.2d 1255; American Cent. Airlines, Inc. v. O'Hare Regional Carrier Scheduling Comm. (In re of American Cent. Airlines, Inc.), 52 B.R. 567, 570–71 (Bankr. N.D. Iowa 1985); In re McClain Airlines, Inc., 80 B.R. 175 (Bankr. Ariz. 1987). 265 The FAA has had several regulations and orders related to congestion management that are relevant to airline bank- ruptcy, insofar as they relate to the issue of ownership of take- off and landing slots. See App. C—FAA Congestion Provisions. 266 In re Horizon Air, Inc., 156 B.R. 369 (N.D.N.Y. 1993). 267 Diederich, supra note 28. 268 In re Vanguard Airlines, Inc., Case No. 02-50802-JWV (Bankr. W.D. Mo. 2003) (Proposed Settlement Agreement). 269 Author’s June 27, 2008, telephone conversation with Bernard F. Diederich, Senior Attorney, Office of General Coun- sel, U.S. Dep’t of Transp. The trustee may be able to avoid unperfected liens.270 Once a lien is determined to be avoidable, payments made on the lien may be an avoidable preference.271 11 U.S.C. § 547, Preferences Subsection 457(b) allows the trustee to avoid certain payments made to creditors, in order to “facilitate ‘the prime bankruptcy policy of equality of distribution among creditors of the debtor. Any creditor that re- ceived a greater payment than others of its class [prepe- tition] is required to disgorge so that all may share equally.’”272 If a payment is recovered as an avoidable preference, that amount goes back into the Chapter 11 estate, and the creditor from whom it was recovered will have an unsecured claim for that amount.273 As noted, supra, the Third Circuit has held that assump- tion of contracts under § 365 precludes a trustee from avoiding contract payments as preferences under § 547.274 One of the requirements for an avoidable preference is that the creditor received more than it would have if instead the creditor had received payment of its debt under Chapter 7. The debtor has the burden of proving that to be the case in order to avoid a payment as a preference.275 Another issue is whether the debtor was in fact insolvent when an alleged preferential payment was made,276 which may be a matter of dispute. Subsection 547(c) provides nine circumstances under which payments cannot be avoided as preferences, es- sentially those in which the payments are for new value rather than in repayment of existing debt. Subsection 547(g) provides that the debtor has the burden of prov- ing the applicability of these exceptions.277 The § 547 exceptions include the contemporaneous exchange and ordinary course of business defenses. For example, a preference action to recover a payment made to an un- secured creditor within 90 days of Chapter 11 filing— otherwise avoidable—can be defeated by the ordinary course of business defense: a payment on a debt in- curred in the ordinary course of business is either made in the ordinary course of business or made according to ordinary business terms.278 The debtor has the burden of 270 Heuer, supra note 3, at 271–72, citing In re Air Florida, 48 Bankr. 440. 271 Id. at 272. 272 Kimmelman, 344 F.3d at 316, citing 2 COLLIER ON BANKRUPTCY ¶ 547.01 (15th ed. rev. 2003). 273 Fiber Lite Corp. v. Molded Acoustical Prods., Inc. (In re Molded Acoustical Prods., Inc.), 18 F.3d 217 (3d Cir. 1994). 274 Kimmelman, 344 F.3d at 318–19. 275 Id. at 316–17. 276 Travellers Int’l, AG v. TWA (In re TWA), 134 F.3d 188 (3d Cir. 1998). 277 TWA Post Confirmation Estate, 305 B.R. at 227–28. 278 Before BAPCPA, in order to defeat a preference action under § 547, the “ordinary course of business” defense required that the payment be made in the ordinary course of business and made according to ordinary business terms. In re Midway Airlines, 69 F.3d 792, 794 n.1 (7th Cir. 1995) (payment to cabi-

23 proving that the conditions for the ordinary course of business exception have been met.279 Establishing that payments were made within the contract terms does not necessarily establish that payments are ordinary.280 If a debtor obtains a judgment from an airline when the airline is insolvent, payment of the judgment is an avoidable preference.281 11 U.S.C. § 553, Setoff Subsection (a) expressly preserves a creditor’s right to setoff to the extent that right is protected under state law.282 11 U.S.C. § 1101(2), Substantial consummation The term is defined as: (A) transfer of all or substantially all of the property pro- posed by the plan to be transferred; (B) assumption by the debtor or by the successor to the debtor under the plan of the business or of the manage- ment of all or substantially all of the property dealt with by the plan; and (C) commencement of distribution under the plan. Substantial consummation is the primary considera- tion in determining whether to dismiss a case based on “equitable mootness.” Once a reorganization plan is substantially consummated, the court will want to avoid disrupting it. This is sometimes referred to as the doctrine of equitable mootness, allowing the court to dismiss a case “when, even though effective relief could conceivably be fashioned, implementation of that relief would be inequitable.”283 11 U.S.C. § 1107, Rights, powers, and DIP For the most part these are the same as those of the trustee, including the right to assume or reject under net maker was preference because creditor had failed to show payment made according to ordinary business terms.). 279 TWA, Inc. Post Confirmation Estate v. World Aviation Supply, Inc. (In re TWA, Inc. Post Confirmation Estate), 327 B.R. 706 (Bankr. D. Del. 2005). 280 Hechinger Inv. Co. v. Universal Forest Prod. (In re Hech- inger Inv. Co. of Delaware, Inc., 489 F.3d 568, n.6 (3rd Cir. 2007), citing In re TWA, Inc. Post Confirmation Estate, 327 B.R. at 709 (finding that transfer made during the preference period was not ordinary because, although it was made within the contract terms, the history of dealings between the parties was that of payments being made well outside such terms). 281 Trans World Airlines, 134 F.3d 188 (determination of in- solvency will be made with reference to 11 U.S.C. 101(32)(A); discussion of appropriate valuation methods). Although not relied on in the appellate decision, the bankruptcy court also held that the creditor’s forbearance from levying on a judgment is not new value for purposes of defeating a § 547 action. In re Trans World Airlines, Inc. (In re TWA), 180 B.R. 389, 403 (Bankr. Del. 1994). 282 United Air Lines, 438 F.3d at 732. 283 In re Delta Air Lines, Inc., 05 B17923 (ASH), (Jointly Administered) (Bankr. S.D.N.Y. Apr. 30, 2008), www.nysb.uscourts.gov/opinions/ash/161907_28_opinion.pdf at 25, citing Deutsche Bank AG, London Branch v. Metromedia Fiber Network, Inc. (In re Metromedia Fiber Network, Inc.), 416 F.3d 136, 143 (2d Cir. 2005). § 365.284 The DIP must act as a fiduciary of the credi- tors, protecting and conserving property for the benefit of the creditors and refraining from acting so as to damage the estate or hinder successful reorganiza- tion.285 11 U.S.C. § 1108, Authorization to operate business The trustee has authority to operate the business unless a party in interest requests that the court order otherwise and, after notice and hearing, the court does so. Taken with § 1107 this section authorizes the DIP to operate the business. 11 U.S.C. § 1109, Right to be heard This section provides that “a party in interest” may raise and appear and be heard on any issue in a case under Chapter 11. The section provides a “non- exhaustive list” of what may constitute a party in inter- est.286 11 U.S.C. § 1121, Who may file a plan Section 1121(b) establishes an initial period of 120 days after the Bankruptcy Court enters an order for relief under Chapter 11, during which only the debtor may file a plan. Other parties in interest may file plans once the exclusivity period has ended. However, if the debtor files a plan within such 120-day period, § 1121(c)(3) extends the exclusivity period by an addi- tional 60 days to permit the debtor to seek acceptances of such plan. Section 1121(d) also permits the Bank- ruptcy Court to extend or reduce these exclusivity peri- ods “for cause.” 11 U.S.C. § 1123, Contents of plan Subsection (a)(5)(D) governs the sales of corporate assets pursuant to the reorganization plan.287 11 U.S.C. § 1129, Confirmation of plan This section sets forth the requirements for a bank- ruptcy court to confirm a proposed reorganization plan, including the requirement that the plan be proposed in good faith. BAPCPA amended subsection (a)(9) to de- crease the time period over which tax claims must be paid and to require that tax claims be treated at least as well as the best available treatment of unsecured claims under the plan. The plan must be consensual unless the requirements of subsection (b), including the “fair and equitable requirement,” are met.288 Subsection (b)(2)(A), which sets forth the requirements for fair and equitable treatment of secured claim holders, is one 284 DEMPSEY, supra note 3, § 17.17, Powers of Bankruptcy Judge and Trustees; Bankruptcy Courts, Bankruptcy Basics: The Chapter 11 Debtor in Possession, available at www.uscourts.gov/bankruptcycourts/bankruptcybasics/chapter 11.html#debtor (last visited Dec. 16, 2008). 285 In re Ionosphere Clubs, Inc., 113 B.R. 164 (Bankr. S.D.N.Y. 1990). 286 Doral Ctr. v. Ionosphere Clubs (In re Ionosphere Clubs, Inc.), 208 B.R. 812, 814 (S.D.N.Y. 1997). 287 Gunlock, supra note 161. 288 In re Armstrong World Ind., Inc., 432 F.3d 507 (3d Cir. 2005) (denying confirmation of reorganization plan because it violated absolute priority rule; creditors must be paid before stockholders retain equity interest).

24 basis for the requirement that the debtor provide the secured lender the economic value of the security inter- est.289 Once the reorganization plan is confirmed, the terms of the plan dictate treatment of claims.290 11 U.S.C. § 1141, Effect of confirmation Under subsection (b) all property of the estate— scheduled or not—vests in the debtor upon confirma- tion, but under appropriate circumstances the debtor may be subject to equitable constraints. 291 Subsection (c) governs the sales of corporate assets pursuant to the reorganization plan.292 2. Bankruptcy Code Airline Provision The only remaining provision that relates solely to airline bankruptcies is 11 U.S.C. § 1110, Aircraft equipment and vessels.293 This section appears to be of extremely limited relevance to airport counsel, so is only discussed here in brief.294 Section 1110 offers greater protection than that afforded under § 365;295 it is intended to offer either repossession or payment.296 The intent of § 1110 was “to enhance the borrowing ability of airlines…by offering equipment financiers greater certainty with regard to their ability to protect collat- eral in a bankruptcy proceeding.”297 The true lease ques- tion, while still technically an issue, is of far less import under § 1110 than under § 365.298 Section 1110 only applies to reorganizations under Chapter 11, not to liquidations under Chapter 7. Where it does apply, it prevents the court from preventing re- possession of the covered aircraft equipment, eliminates the requirement that the creditor/lessor move to lift the automatic stay, and places the right of repossession over the debtor’s right to use, sell, or lease covered air- craft equipment.299 Section 1110(a) prevents a bank- ruptcy court “from using any source of law, including antitrust, as the basis of an injunction against repos- 289 United Airlines, 416 F.3d at 610. 290 United Air Lines, 360 B.R. at 782. 291 JZ L.L.P., 371 B.R. at 419–21. 292 Gunlock, supra note 161. 293 Section 328 of BAPCPA, 109 Pub. L. No. 8, 119 Stat. 100, struck the special airport lease provisions of § 365(c)(4) and (d)(5)-(9). 294 A more comprehensive discussion is found in Jacob, su- pra note 2. 295 See Heuer, supra note 3, at 264–65, citing In re Airlift Int’l, 761 F.2d 1503 (11th Cir. 1985). 296 Heuer, supra note 3, at 266, citing Seidle v. Gatx Leasing Corp., 778 F.2d 659 (11th Cir. 1985). 297 Airlift Int’l, 761 F.2d at 1507, citing H.R. REP. NO. 595, 1st Sess. 238–39 (1977), U.S. CODE CONG. & ADMIN. NEWS 1978, at 5787. See also United Air Lines, Inc. v. U.S. Bank N.A., 406 F.3d 918 (7th Cir. 2005), (U.S. 2005) (Right to repos- sess aircraft equipment in an airline chapter 11 case is abso- lute). The court notes that improper exercise of § 1110 reme- dies may subject creditors to liability to Chapter 11 estate. Id. at 924. 298 See Jacob, supra note 2, at 15-10–15-11. 299 Id. at 15-2. session.”300 In addition, if the creditor/lessor has a con- tractual right to repossession, § 1110 preserves that right despite the provisions of §§ 362, 363, 1129, and other provisions of the Bankruptcy Code, including in- junctive powers under § 105(a), unless specified condi- tions are met,301 basically agreeing to pay the full amount owed or coming to agreement with the credi- tor/lessor on a lower price.302 Payments made to pro- tected creditors within 90 days before the petition is filed are not recoverable as preferences.303 Covered equipment includes aircraft, aircraft en- gines, propellers, appliances, and spare parts; protected creditors are secured lenders, lessors, and conditional vendors. Ground support equipment may not be cov- ered.304 Section 1110 is to be construed narrowly: the provision only applies if the debtor holds an air carrier certificate issued under 49 U.S.C. § 447,305 and does not apply to transactions where the debtor is not yet a certi- fied air carrier or is the parent corporation of a certified carrier.306 3. Federal Aviation Provisions The Anti-Head Tax307 prohibits a public agency from charging taxes or fees on a per-person basis in air transportation. However, in 1990 this restriction was modified to allow the imposition of PFCs (discussed in Section I.B.1, Bond Financing, supra), subject to FAA approval of the amount (as of April 2008 the amount was set at a maximum of $4.50 per enplaned passen- ger) and duration of the charge.308 Airports are allowed to use PFC revenue “to fund FAA-approved projects that enhance safety, security, or capacity; reduce noise; or increase air carrier competition.”309 PFC funds are collected by airlines on behalf of the airports that impose the charges. Historically the FAA has permitted airlines to commingle PFC revenues and other funds. Airport operators objected that this com- mingling made it difficult to recover PFC revenues in 300 United Air Lines, 406 F.3d, at 924. 301 Jacob, supra note 2, at 15-4–15-5. 302 United Air Lines, 406 F.3d 918. 303 Kimmelman, 344 F.3d 311. 304 Jacob, supra note 2, at 15-9, citing A&S Sales & Leasing, Inc. v. Belize Airways, Ltd. (In re Belize Airways, Ltd.), 7 B.R. 601, 602 (Bankr. S.D. Fla. 1980); Cal. Chieftan v. Air Vt., Inc. (In re Air Vt., Inc.), 761 F.2d 130, 133 (2d Cir. 1985). 305 Jacob, supra note 2, at 15-3, citing Swiss Air Transp. Co. v. Tex. Int’l Airlines, Inc. (In re Continental Airlines Corp.), 57 B.R. 854, 857–58 (Bankr. S.D. Tex. 1985). 306 Jacob, supra note 2, at 15-9, citing In re Pan Am Corp., 124 B.R. 960, 974 (Bankr. S.D.N.Y.). 307 49 U.S.C. 40116. 308 49 U.S.C. 40117. 309 Passenger Facility Charge (PFC), available at www.faa.gov/airports_airtraffic/airports/pfc/ (Last visited Dec. 16, 2008).

25 the event of airline bankruptcy, a point disputed by airline representatives.310 In 2003 Section 40117 was amended to set forth re- quirements for financial management of PFCs for a “covered air carrier” (an air carrier that files for bank- ruptcy or has an involuntary bankruptcy proceeding begun against it).311 Subsection (m): • Requires that a covered air carrier segregate its PFC revenue in a separate account, maintaining an amount equal to the average monthly liability for those fees; • Stipulates that if a covered air carrier fails to seg- regate PFC funds as required, the trust fund status of those funds will not be defeated by an inability to iden- tify and trace the precise funds that should have been segregated; • Prohibits covered carriers from granting any secu- rity or other interest in PFC funds to third parties; • Provides for compensation to eligible entities for expenses incurred to recover or retain PFC revenue due to failure by a covered air carrier to comply with the financial management requirements of subsection (m); • Allows covered air carriers to retain the interest on the required accounts if those accounts are established and maintained in compliance with subsection (m); and • Provides that regulations allowing commingling do not apply to covered air carriers. Section 40117(m) is implemented through 14 C.F.R. Part 158. On May 23, 2007, the FAA issued the final rule on the PFC program that amended 14 C.F.R. Part 158 to include the measures to protect PFC revenues in bankruptcy proceedings.312 Under the regulation, the definition of “covered air carrier” provides a 90-day grace period to allow an air carrier to dismiss involun- tary bankruptcy proceedings (protection against frivo- lous involuntary bankruptcy filings), although the grace-period is limited to air carriers that are current on their PFC remittances. The regulation also provides that an air carrier ceases to be a covered air carrier when it emerges from bankruptcy proceedings. The regulation did not expand the definition of covered air carrier to include an airline in financial distress, as the 310 FAA, Discussion of comments received in response to Re- quest for Public Comment on the Impact of Airlines Emerging From Bankruptcy on Hub Airports, Airport Systems and U.S. Capital Bond Markets, 68 Fed. Reg. 38108 (June 26, 2003), at 3, available at www.regulations.gov/fdmspublic/component/main?main=Docu mentDetail&o=0900006480313b4f (Last visited Dec. 16, 2008). 311 Section 124,108 Pub. L. No. 176, 117 Stat. 2502–2503, Vision 100—Century of Aviation Reauthorization Act, Pub. L. No. 108-176, adding subsection (m), Financial Management of Fees, to 49 U.S.C. 40117. 312 FAA Final Rule, Passenger Facility Charge Program, Debt Service, Air Carrier Bankruptcy, and Miscellaneous Changes, 72 Fed. Reg. 28837-28851 (May 23, 2007); Technical correction: 72 Fed. Reg. 31713-31714 (June 8, 2007). FAA took the position that doing so would exceed its authority under Vision 100.313 As amended, 14 C.F.R. Part 158.49(b) requires the collecting carriers to account for PFC revenue sepa- rately. While carriers that are not covered carriers may commingle the PFC funds with other revenue sources, the regulation specifies that: PFC revenues held by an air carrier or an agent of the air carrier after collection are held in trust for the beneficial interest of the public agency imposing the PFC. Such air carrier or agent holds neither legal nor equitable interest in the PFC revenues except for any handling fee or inter- est collected on unremitted proceeds as authorized in § 158.53.314 The revised 14 C.F.R. Part 158.49(c) requires that covered carriers go beyond accounting for PFC revenue separately to actually put PFC revenues in a separate account, and deposit into that account an amount equal to its average monthly PFC obligation (PFC reserve). Covered carriers are not, however, required to create separate accounts for each airport for which they collect PFCs. While a covered carrier may deposit collected PFC revenues into its general accounts along with ticket sales revenues, it must remove—at least once daily—all PFC revenue from its general accounts and deposit it in the PFC account (or substitute a prescribed estimate). Commingling is prohibited. Subsection (c) further specifies that if a covered car- rier fails to segregate its PFC funds, the fact that the precise PFC funds can’t be traced in the carrier’s ac- counts will not defeat the trust fund status of those PFC funds. The regulation prohibits the covered carrier from granting an interest—secured or otherwise—in PFC funds. Finally, subsection (c) requires that a cov- ered carrier that causes a public agency to spend funds to recover or retain PFC revenues must compensate that public agency for costs incurred to recover PFCs owed. 14 C.F.R. Part 158.49(d) still requires each collecting carrier “to disclose the existence and amount of PFC funds regarded as trust funds in financial statements.” This requirement may prevent airlines from making not yet remitted PFC revenues the subject of liquidity cove- nants for the benefit of nonairport creditors, an issue raised by the airport associations.315 313 FAA Final Rule, Passenger Facility Charge Program, Debt Service, Air Carrier Bankruptcy, and Miscellaneous Changes, 72 Fed. Reg. 28841 (May 23, 2007). 314 14 C.F.R. 158.49(b). 315 AAAE/ACI-NA comments in response to Request for Pub- lic Comment on the Impact of Airlines Emerging from Bank- ruptcy on Hub Airports, Airport Systems and U.S. Capital Bond Markets, 68 Fed. Reg. 38108 (June 26, 2003), at 4, avail- able at www.regulations.gov/fdmspublic/component/main?main=Docu mentDetail&o=0900006480313b58 [click on docket] (Last visited Dec. 16, 2008).

26 C. Bankruptcy Process 316 The bankruptcy process begins when the debtor files a petition for bankruptcy protection. The debtor is not bankrupt until it has been discharged in bankruptcy at the end of the process. A debtor filing for reorganization under Chapter 11 need not be insolvent.317 Conversely, creditors that fear that the debtor is wasting its estate can file for an involuntary bankruptcy petition to have the debtor declared insolvent and have a trustee ap- pointed.318 Each federal judicial district has a bankruptcy court, presided over by a federal bankruptcy judge. The fed- eral district court provides the first level of appellate review, followed by the Bankruptcy Appellate Review (intermediate appellate review), circuit court of appeals, and finally the Supreme Court.319 The U.S. Bankruptcy Courts provide a good overview of the bankruptcy proc- ess.320 In brief, the Federal Rules of Bankruptcy Proce- dure, along with each bankruptcy court’s local rules, govern bankruptcy procedure. In addition to the bank- ruptcy petition, the debtor must file: “(1) schedules of assets and liabilities; (2) a schedule of current income and expenditures; (3) a statement of financial affairs; and (4) a schedule of executory contracts and unexpired leases.” The debtor bears the risk of nondisclosure.321 In Chapter 7 cases the trustee appointed to oversee the bankruptcy case carries out much of the adminis- trative process. Liquidation under Chapter 7 entails the court-appointed trustee reducing the debtor’s assets to cash and distributing the proceeds, if any, to creditors. An unsecured creditor receives a distribution only if the creditor has filed a timely proof of claim and if there are assets in addition to the debtor’s exempt property and property not subject to the rights of secured creditors.322 Chapter 7 cases may be filed where the debtor is or- ganized, has its principal place of business, or has its principal assets. The trustee will meet with creditors between 20 and 40 days after the Chapter 7 petition is filed. Governmental units have 180 days following the 316 For more detailed guidance, see generally NOLLKAMPER, supra note 2 (Procedural information on Chapter 7, Chapter 11, creditors’ proceedings, adversary proceedings, appeals, and U.S. Bankruptcy Courts); SALERNO, supra note 2 (Overview of U.S. bankruptcy law, bankruptcy court system, Chapter 7, and Chapter 11). 317 DEMPSEY, supra note 3, § 17.19, Filing of Voluntary Peti- tion. 318 DEMPSEY, supra note 3, § 17.20, Involuntary Bankruptcy. 319 SALERNO, supra note 2, § 3.15, Appeals of Bankruptcy Court Orders. 320 See Bankruptcy Basics, available at www.uscourts.gov/bankruptcycourts/bankruptcybasics.html (Last visited Dec. 16, 2008). Unless indicated otherwise, infor- mation in this section is based on the Bankruptcy Courts’ Bankruptcy Basics. 321 JZ, L.L.C., 371 B.R. at 417. 322 Bankruptcy Basics: The Process, available at www.uscourts.gov/bankruptcycourts/bankruptcybasics/process. html (Last visited Dec. 16, 2008). case filing to file a claim. If operating the business will benefit the creditors and distribution of assets, the court may authorize the trustee to operate the business for a limited time. Chapter 11 is used to reorganize businesses. Once the bankruptcy petition is filed, the debtor becomes a DIP, remaining so until the reorganization plan is con- firmed, the case is dismissed or converted to Chapter 7, or a trustee is appointed. As one treatise noted, Chapter 11 allows “the management that [flies] the airline into stormy weather to stay at the controls, at least until a trustee is appointed.”323 Virtually all litigation involving a Chapter 11 debtor will come before the bankruptcy court.324 The filing date marks the demarcation between debts that are generally nonpayable during the case (prepetition) and debts that must be paid before the acceptance of the reorganization plan (postpetition).325 In addition, the date of the order for relief, which may be but need not be the same as the filing date, will de- termine numerous rights during the proceedings, such as whether a nonresidential real property lease has been terminated so as to preclude assumption.326 A disclosure statement containing information about the debtor’s liabilities, assets, and business affairs suf- ficient to provide a basis for assessing the reorganiza- tion plan must be filed. The reorganization plan must classify the claims and explain how they will be treated. The creditors’ committee can be a major actor, partici- pating in plan formulation. However, during the first 120 days after the bankruptcy petition is filed—a period that can be extended up to 18 months—only the debtor can file a reorganization plan. The debtor then has an additional 180 days—a period that can be extended up to 20 months or reduced—to obtain acceptance of its plan. Once the exclusive period expires, and assuming acceptance has not been achieved, other parties in in- terest may file a plan. Any party in interest may object to confirmation of a reorganization plan. A Chapter 11 creditor need not file a proof of claim if its claim is listed on the debtor’s schedules and is not disputed, unliquidated, or contingent, but if the creditor relies on the debtor’s schedule listing, it cannot after the bar date dispute the amount or priority of the claim as listed by the debtor. Secured creditors and postpeti- tion creditors generally do not have to file proofs of claim. However, prepetition unsecured creditors whose claims are not listed by the debtor; whose claims are 323 DEMPSEY, supra note 3, § 17.25, Critique of Bankruptcy Code. 324 LYNN, supra note 2, ¶ 21.02[2], Centralization of Litiga- tion in Bankruptcy Court. For example, in 2006, United Air Lines sought the bankruptcy court’s approval to enter into a settlement of tax claims with 23 California counties. TROUBLED COMPANY REPORTER, Tues., Jan. 31, 2006, vol. 10, no. 26, available at http://bankrupt.com/TCR_Public/060131.mbx (Last visited Dec. 16, 2008). 325 LYNN, supra note 2, ¶ 20.05[9], Prepetition and Postpeti- tion; ¶ 21.03[2], Postpetition Bills Must Be Paid; ¶ 24.24[4], Payment of Prepetition Debts Owed to Critical Vendors. 326 11 U.S.C. § 365(c)(3).

27 listed as disputed, unliquidated, or contingent; or who dispute the amount or priority of listed claims must file timely (before the bar date) proof of claims.327 Creditors who will be paid less than the value of their claims or whose contractual rights will be modi- fied under the confirmation plan vote on the plan. The court must approve the disclosure plan. Then once the votes are counted, the court conducts a hearing on the confirmation plan. The bankruptcy court approves case management procedures for each bankruptcy case.328 These proce- dures are critical, as they will determine such issues as the parties to receive notice and the manner in which notice must be provided, the amounts the debtor asserts are owed, time periods allowed for disputing debtors’ characterization of claims, requirements for resolving disputes before bringing the issue to the bankruptcy court, and time periods for making payments. For ex- ample, the bankruptcy court will enter a Bar Date Or- der, which will establish procedures and set deadlines for filing Proofs of Claim and will approve the form and manner of the bar date notice. Creditors must comply with this and other orders specific to the case in order to be able to file and prosecute their claims.329 The court may also adopt procedures for specific issues that will supersede even the case management procedures. For example, in the United stub rent dispute, discussed in Section II.D.4, Stub Period Rent, infra, the Order Ap- proving and Authorizing Payment Under the Agreed- Upon Stub Rent Procedures provided that those proce- dures would supersede the Case Management Proce- dures—to the extent inconsistent with the Stub Rent Procedures—for all motions filed for allowance and payment of claim for rent for the rejected leases in question.330 D. Cases This section covers several issues that have come to the fore in airline bankruptcy cases and that are of par- ticular interest to airport lawyers. These include 327 LYNN, supra note 2, ¶ 20.05[18], Proof of Claim. 328 See, e.g., In re UAL Corp., Reorganized Debtors, Chapter 11, Case No. 02-B-48191, Fourth Amended Case Management Procedures , available at www.pd- ual.com/UALRestruct_CMP.html (Last visited Dec. 16, 2008). 329 See, e.g., In re UAL Corp., Chapter 11, Case No. 02-B- 48191, Order Pursuant to Sections 105(a), 501, 502 and 1111(a) of the Bankruptcy Code and Bankruptcy Rules 2002(a)(7), 3003(c)(3) and 5005(a) Establishing a Bar Date for Filing Proofs of Claim and Proofs of Interest and Approving Form and Manner of Notice Thereof, Feb. 27, 2003; Delta Air Lines Form 8-K, Feb. 7, 2007, Airports/Facilities Restructur- ing, at 63, available at http://pcquote.brand.edgaronline.com/ EFX_dll/EDGARpro.dll?FetchFilingHTML1?SessionID=gMXg CgomAhfWRT_&ID=4936650 (Last visited Dec. 16, 2008). 330 In re UAL Corp., Chapter 11, Case No. 02-B-48191, Or- der Approving and Authorizing Payment Under the Agreed- Upon Stub Rent Procedures (Bankr. N.D. Ill. Aug. 29, 2003), at 2. whether a lease331 associated with tax-exempt bond fi- nancing can be recharacterized as “disguised financing” rather than a “true lease” that must be accepted or re- jected under § 365;332 as a matter related to recharac- terization, whether a lease that covers both ground rents and bond repayments can be severed; whether a group of leases under a master lease can be assumed or rejected individually; whether a cross-default clause can be enforced; whether § 365(d)(3) requires the payment of stub period rent; whether airlines can claim PFC revenues as property of the bankruptcy estate; and whether airlines can compel segregation of PFC reve- nues. In addition, because of the importance of lease rejection and preferential transfers in the context of airline bankruptcy, this section includes a pair of illus- trative lease rejection and preferential transfer cases. In some instances important issues were not formally adjudicated, but were negotiated by the parties and approved by the bankruptcy court. While the positions adopted are not precedential, they—as well as the ar- guments raised—are instructive in determining the issues that airports should consider in handling like matters. In fact, matters containing issues of interest to air- ports often do not result in reported cases. Instead, im- portant issues are often handled through motions and settlements. Airport counsel may find it helpful, to say the least, to see how other airports have dealt with these issues, even if the cases themselves are not prece- dential. In addition, even unreported opinions discuss reported cases that are relevant. Also, although not precedential in the strict sense, given the relatively small universe of airline bankruptcy practitioners, lan- guage used in one settlement agreement can be picked up and used in other similar agreements. For example, the consent order in a US Airways case heard in a Vir- ginia bankruptcy court and that in an Aloha Airgroup case heard in the Hawaii bankruptcy court contained many similar provisions.333 Also, settlements are often approved as being in the best interest of a bankruptcy 331 All references to “leases” in this section should be read as “nonresidential real property leases” unless otherwise indi- cated. 332 All statutory citations in this section are to Title 11 of the U.S.C., unless indicated otherwise. 333 Consent Order Resolving (A) Multiple Objections to Debtors’ Motion for Bridge, Interim and Final Orders (1) Au- thorizing the Debtors to Use Cash Collateral; (2) Providing Adequate Protection; (3) Scheduling A Final Hearing; (4) Ap- proving Form and Manner of Notice; and (5) Granting Related Relief; (B) Multiple Motions to Compel Debtors to Segregate and Remit Passenger Facility Charges, In re US Airways, Inc., Case No. 04-13819-SSM Jointly Administered Chapter 11 Cases (Bankr. E.D. Va.), Oct. 15, 2004; Consent Order and Stipulation Resolving Port of Oakland’s (A) Limited Objection to Interim Order Authorizing Use of Cash Collateral and Other Pre-Petition Collateral; … (C) Motion to Compel Debtors to Segregate and Remit Passenger Facility Charges, etc., In re Aloha Airgroup, Inc., Bk. No. 04-03063, Chapter 11 Jointly Administered (Bankr. D. Haw.), Feb. 10, 2005.

28 estate because of savings assumed by avoiding pro- longed and costly litigation.334 Therefore this section discusses several unreported, though very relevant, cases.335 Several cases involving United Air Lines deal with the recharacterization issue.336 In three instances, United was able to recharacterize its special facility lease as a disguised financing, resulting in the airline being able to continue to use the facility in question without assuming the lease. In the fourth instance, United was unsuccessful in recharacterizing its special facility lease. These cases illustrate the significance of the distinction between the special facility lease being deemed a true lease as opposed to a secured loan and the factors that contribute to lease recharacterization. In addition, one of the cases discusses the factors, in- cluding state law and contract analysis, taken into con- sideration in determining whether a lease can be sev- ered. For example, as discussed in more detail below, a critical distinction between the court’s holdings regard- ing the Los Angeles/San Francisco transactions and the Denver transaction was that in Denver the ground lease and the bond-related lease were rolled together in one contract, which under Colorado law could not be severed. Moreover, United had admitted that the ground lease provisions constituted a true lease.337 Lease severability can be important even in cases where the “true lease” nature of the transaction is not at issue. For example, where a master lease covers a set of individual leases, controversy may arise as to whether the debtor can assume or reject individual leases separately, or must take or leave them as a group.338 Individual leases with cross-default clauses raise similar issues. 334 See Delta Air Lines, 370 B.R. 545. 335 Material cited should be available through PACER, the U.S. Courts’ fee-based electronic system, available with sign-in at http://pacer.psc.uscourts.gov/ (Last visited Dec. 16, 2008). 336 Other airlines have brought recharacterization actions, see, e.g., Daniel J. Carragher, True Lease or Disguised Financ- ing? The “State” of the Law, 25 ABI J. (2006) (referencing ac- tions begun by Northwest vis-à-vis the MSP and Northwest vis-à-vis LAX); Yvette Shields, Delta Files Chapter 11 Exit Plan, THE BOND BUYER, Dec. 20, 2006 (action to recharacterize leases tied to bond repayment at LAX put on hold), available at www.bondbuyer.com/article/html?id=200612199D9QOCPX&fro m=todaysheadlines (Last visited Dec. 16, 2008). However, it appears that the United actions are the only reported cases to date. 337 PATRICIA A. REDMOND & JESSICA D. GABEL, The Tip of the Iceberg: What Lies Beneath for Homebuilder Bankruptcies in the Wake of United Air Lines, 26 ABI J. (2007), http://www.cov.com/files/Publication/65d45c0a-cec3-4436-9bbd- 2f6451f401d5/Presentation/PublicationAttachment/0c8b1f8b- 3a4a-4c00-bef4-370f4e00518d/The Tip of the Iceberg - What Lies Beneath for Homebuilder Bankruptcie.pdf. 338 See MorrisJames Delaware, The Bankruptcy Court for the District of Delaware Holds That Debtors Must Assume or Reject Master Leases as a Whole, June 3, 2008: In re Buffets Holdings, Inc., No. 08-10141 (Bankr. D. Del. May 16, 2008) (Judge Mary F. Walrath), available at Many airport leases require that rent be paid in ad- vance.339 The “stub period” is “the time remaining after the entry of an order for bankruptcy relief, in a period for which rent was payable prior to the entry of the or- der for relief.”340 Issues that arise include whether pay- ment is required under § 365(d)(3), whether the stub period rent should be considered a prepetition claim, and how payment is to be determined. Disputes sur- rounding United’s obligation to pay stub period rent arising from United’s December 2002 bankruptcy filing are discussed below. Finally, accounting for, and remittance of, PFCs by bankrupt airlines are matters of significant concern to airports. Disputes over requirements to account for PFC funds were of greater import before Vision 100 required bankrupt airlines to segregate such funds. Nonetheless, ensuring compliance is still important, as is the ques- tion of whether an airport can compel segregation of PFC funds when an airline in bankruptcy has declined to do so. Moreover, while the statute provides that if failure to segregate funds leads to an inability to trace precise PFC funds, such inability will not defeat the funds’ trust fund status, in practical terms the failure to trace funds may result in an inability to recover those funds. Thus if an airline in liquidation does not identify revenue in its general accounts as PFC revenue, i.e., refuses to “trace” the funds to PFCs, the airline effec- tively appropriates the airports’ PFC revenue. 1. Lease Recharacterization At the time that United entered bankruptcy in 2002,341 it took the position that its transactions entered into to build or improve facilities at the SFO, LAX, Denver (DEN), and JFK airports were not leases that must be assumed or rejected under § 365, but rather secured loans. The Seventh Circuit Court of Appeals, home to United’s place of business, heard all of the ap- peals. San Francisco.—The transaction relating to the San Francisco airport was the first to be reviewed, with the opinion delivered by Judge Easterbrook.342 As the court noted, for purposes of the transaction at issue, the dif- ference between a lease and a loan under the Bank- ruptcy Code is as follows: Under § 365 the lessee must http://bankruptcy.morrisjames.com/2008/06/articles/the- bankruptcy-court-for-the-district-of-delaware-holds-that- debtors-must-assume-or-reject-master-leases-as-a-whole/. (Last visited Dec. 16, 2008). Opinion, http://bankruptcy.morrisjames.com/Buffets%20Case.pdf. The factors raised in this case are covered in § IV.A.2, Relationship Between Multiple Agreements, infra. 339 In re UAL Corp., Case No. 02-B-48191, Debtors’ Motion for an Order Approving and Authorizing Payment Under the Agreed-Upon Stub Rent Procedures, at 2. 340 United Air Lines, 291 B.R. at 123. 341 Information about United restructuring, including case management procedures and first day motions/orders, is avail- able at www.pd-ual.com/ (Last visited Dec. 16, 2008). 342 United Air Lines, 416 F.3d 609.

29 either assume the lease and fully perform or reject the lease and surrender the property. Under §§ 506(a) and 1129(b)(2)(A), a secured borrower may retain the prop- erty without fully paying, instead paying the lender the economic value of the property, with any additional loan balance becoming an unsecured debt. At issue in the San Francisco case was United’s obli- gation to continue making payments on a “lease” of fa- cilities that secured the repayment of $155 million in bonds issued by the California Statewide Communities Development Authority (CSCDA) for United’s benefit for airport improvements unconnected with the lease. United used its 40-year lease of 128 acres for a mainte- nance facility from the airport to structure its facility improvement transaction. There were in fact four documents at issue: 1) sublease: United subleased 20 acres of the 128 acres leased from the airport to CSCDA for a term equal to the debt repayment schedule (not equal to its lease term with the airport) for $1; 2) lease- back: CSCDA leased the 20 acres back to United for rent equal to the bond interest plus an administrative fee, with a balloon repayment of principal at the termi- nation of the leaseback. If United postponed its final payment for 5 years the sublease and leaseback would extend; if United prepaid, the sublease and leaseback would terminate upon the prepayment. If United did not pay, CSCDA could evict it from the 20 acres. The leaseback contained a “hell or high water” clause re- quiring United to pay the rent regardless of whether the airport lease ended early or some event kept United from using the maintenance facility; 3) trust indenture: CSCDA issued the bonds, without recourse to itself, giving the $155 million to United based on the promises to pay in the sublease343 and having the bond indenture Trustee receive payments and distribute them to the bond holders; 4) guaranty: United committed to repay bonds out of its corporate treasury. The court then discussed whether the undeniable lease form of the sublease and leaseback were sufficient for purposes of § 365. The court first determined that “substance controls and that only a ‘true lease’ counts as a ‘lease’ under § 365.”344 In beginning its analysis of form versus substance under § 365, the court discussed the difference between financial and economic distress, noting that the Bankruptcy Code allows an entity in financial distress to write off its debts to allow it to be- gin anew, while requiring it to pay expenses incurred after it files for bankruptcy protection. In examining the differences under the Bankruptcy Code between leases and secured loans, the court emphasized the con- sumption aspect of leases as opposed to the debt com- 343 “Sublease,” not “leaseback,” was the term used by the court. Id. at United Air Lines 612. 344 Id., citing In re PCH Assocs., 804 F.2d 193, 198-200 (2d Cir. 1986); Duke Energy Royal LLC v. Pillowtex Corp. (In re Pillowtex, Inc.), 349 F.3d 711, 716 (3d Cir. 2003); In re Moreg- gia & Sons, Inc., 852 F.2d 1179, 1182-84 (9th Cir. 1988); Pacific Express 780 F.2d at 1486–87; In re Continental Airlines, Inc., 932 F.2d 282 (same under 11 U.S.C. § 1110, another part of the Code dealing with leases). ponents more properly attributable to loans. The court cited the legislative history of § 365 to support the in- terpretation that § 365 deals with the economic sub- stance rather than the form of the transaction. The court found that the determination of what con- stitutes a lease is made under state law, unless state law identifies a lease formally rather than functionally. Accordingly, the court looked to California law, finding that as a Uniform Commercial Code (UCC) state Cali- fornia must use a functional approach for determining whether personal property is leased or secured credit, with a similar approach for real property. In applying the facts of the United Air Lines transaction to Califor- nia precedent, the court found that the transaction was not a “true lease” under California law. First, there was a lack of connection between the payment and the value of the rental property, as shown by the rent amount and the hell or high water clause. Second, the lessor retained no interest in the property once the lease ex- pired, and the lessee’s full interest, although not owner- ship, reverted to it, “the UCC’s per se rule for identify- ing secured credit.”345 Third, the balloon payment is a feature of secured credit, not a true lease. Fourth, ter- mination of lessee’s interest upon prepayment is con- trary to the result of prepayment (right to additional occupation) under a true lease. While financing devices can be true leases, the court found that in this instance United used its asset—the leasehold interest—to secure an extension of credit. Therefore the court held that the transaction between United and CSCDA was a secured loan, not a lease, for purposes of § 365. In summary, the court held that 1) as a matter of federal law, the economic substance of the transaction, rather than titles and forms, will determine whether a transaction is a lease for purposes of § 365, and 2) gen- erally state law will determine which aspects of a transaction are important in determining whether or not the transaction is a lease, except that if state law takes a formulistic approach state law will not control. While its appeal to the Seventh Circuit was pending, HSBC Bank USA brought an adversary proceeding be- fore the bankruptcy court to “determine the nature, extent, and value of CSCDA's interest in the subleased property, assigned to HSBC as trustee.”346 Once the Seventh Circuit ruled that the sublease was not a true lease under § 365, United and HSBC stipulated that HSBC held a perfected security interest in the sub- leased property. The bankruptcy court looked to the appropriate valuation standard under § 506(a): “what the debtor would have to pay to replace it…‘the price a willing buyer in the debtor's trade, business, or situa- tion would pay to obtain like property from a willing seller.’”347 The question then was what constitutes “like property.” United and HSBC agreed that comparable properties should be used to value the collateral, but 345 United Air Lines, 416 F.3d 617. 346 United Air Lines, 351 B.R. 919. 347 Id., citing Assocs. Commercial Corp. v. Rash, 520 U.S. 953, 960 (1997).

30 disagreed on what constituted comparable properties. HSBC argued that a similar hangar facility at the San Francisco airport was the most comparable property. United argued that location was irrelevant to the tasks for which it needed the hangar space and argued for using hangar space in the Portland, Oregon, and Dal- las/Fort Worth airports—the least expensive substitutes that would meet its needs—as the most comparable. The court rejected United’s argument that location was irrelevant in valuing real estate, instead stressing that a real estate comparable should provide the loca- tion value of the property being valued. The court de- clared that “if the location of HSBC's collateral provides value that United does not need, that value must never- theless be considered in assessing what the collateral is worth.”348 The court held that when the debtor chooses to retain the collateral, the appropriate valuation stan- dard is the replacement value of the collateral, not a foreclosure value standard. Having determined the appropriate comparable, the court determined the actual value of the collateral. This required examining the four types of leased property included in the collateral and valuing them according to the agreement of the parties, the lease on the compara- ble property, and the existing lease between United and the airport, as appropriate. Once it determined the an- nual rent, the court determined the present value of future rents, which required looking at the number of future lease years included in the collateral, inflation adjustments, and a discount rate. On that first point the court rejected the argument that the security inter- est should run beyond the period in operation at the time United filed for bankruptcy protection. The court stated that “[b]ecause United acquired the option after its bankruptcy filing, any additional collateral value the option provided is subject to § 552(a) of the Bankruptcy Code, which generally prevents prepetition liens from attaching to property interests that a debtor acquires postpetition.”349 As to inflation adjustments, the court adopted the average contract adjustment rate used by the airport. The date for valuing the collateral is the date of the hearing on United’s plan confirmation; the appropriate discount rate is one that would make either a lump sum or a stream of payments the collateral is likely to provide equally attractive to HSBC. The dis- count rate is the risk that a likely tenant—another ma- jor airline—would default: thus the court concluded that the cost of capital for major airlines would be the appropriate discount rate. The court also subsequently rejected United’s argument that its rental payments to the airport under the underlying lease should have been deleted from the value of the collateral, explaining that United had not conveyed its interest in the lease as 348 Id. at 920. 349 Id. at 923. security, but its right to possess part of the leasehold, while retaining all of its payment obligations.350 LAX.—The same appellate panel next reviewed the LAX transaction, although Judge Manion delivered the court’s opinion.351 United had leased space at the airport from the City of Los Angeles (LA) for over 25 years. In 1982 United entered into a transaction with the Re- gional Airports Improvement Corporation (RAIC), an entity formed by, but legally separate from, the LA, to develop facilities for United at the airport. RAIC has authority to issue tax-exempt bonds. The transaction was achieved pursuant to two agreements. Under the partial assignment, United assigned part of its lease- hold with LA to RAIC and RAIC issued $75,750,000 in tax-exempt bonds to develop the United facilities. Un- der the facilities sublease, RAIC leased the facilities (not yet constructed when the sublease was executed) back to United for a rent amount equal to the bond pay- ments (periodic payments equal to bond interest and balloon payments equal to principal), plus administra- tive costs. The term of the sublease followed the pay- ments. Once United finished paying the bonds, the sub- lease expired. The court reviewed its previous holdings on the is- sues required for deciding whether a transaction is a lease for purposes of § 365. The court then reviewed its findings in the San Francisco case, stating the five fac- tors underlying its conclusion that the transaction was a loan as follows: 1) the fact that United's “rental” payments were tied to the amount borrowed from the bondholders; 2) the pres- ence of a balloon payment; 3) the presence of a “hell or high water” clause, meaning United had to pay the full “rental” amount if even the property became unusable; 4) the fact that prepayment of United's obligations would end the United-CSCDA arrangement; and 5) the fact that CSCDA did not have a remaining interest in the property at the end of the transaction.352 The court proceeded to examine the facts in the LAX transaction against the factors from the San Francisco case. First, the LAX “rent” was linked to the amount of the bond repayment. Second, the LAX transaction in- volved a balloon payment: “The balloon payments here are tremendously revealing in this regard. They make plain that, at the outset, United borrowed $75,750,000 and promised to return that same $75,750,000 in the future. United's balloon obligations are thus powerful evidence that the design of this transaction is that of a loan.”353 Third, the transaction contained a “hell or high wa- ter clause,” which was not only a “telling disjoint be- 350 HSBC Bank USA v. United Air Lines, Inc., In re: UAL Corp., Bankruptcy No. 02 B 48191 (Bankr. N.D. Ill. Jan. 22, 2007), www.ilnb.uscourts.gov/opinions/JudgeWedoff/UAL_ HSBC2.pdf. 351 United Air Lines v. U.S. Bank (In re United Air Lines, Inc.), 447 F.3d 504 (7th Cir. 2006). 352 Id. at 507. 353 Id. at 508.

31 tween rental value and United actual financial obliga- tions”354 but was at complete odds with the provisions in the underlying lease in the event that the leased prem- ises were damaged. The court concluded that the clause was further evidence that the “rent” was tied not to the value of the use of the facilities but to the money bor- rowed. Fourth, prepayment terminated the LAX sub- lease, a provision the court noted that “has a useful purpose in the financing context” but “would be super- fluous in the context of a lease.”355 Finally, the LAX sublessor, like a secured lender, retained no reversion- ary interest once the sublease terminates. The court discounted the argument that LA retained an interest, as the RAIC was a separate legal entity. RAIC argued that the LAX transaction was distinguishable from the San Francisco transaction because at LAX the bond- financed facilities were actually built on the subleased property. The court rejected that argument, character- izing the “property disconnect” as one factor that made it obvious that the transaction was not a lease, and con- cluding that the lack of such a disconnect was not suffi- cient to overcome the findings based on the five factors reviewed by the court. The court concluded: United's Los Angeles transaction with RAIC has all the hallmarks of a secured loan that were critical to our deci- sion in the San Francisco appeal. In a fashion similar to the San Francisco arrangement, United used a leasehold interest to acquire financing from bondholders, and United's payments to the bondholders do not resemble true rental payments. We see no grounds to treat the San Francisco and Los Angeles transactions differently in this context.356 Accordingly the court held that the transaction was not a lease for purposes of § 365. Denver.—Judge Manion also delivered the third re- ported opinion,357 which ruled on the validity of the Denver agreement, the “Special Facilities and Ground Lease.” The bulk of the opinion was devoted to the sev- erability issue, and is discussed below. Having deter- mined that the agreement could not be severed under Colorado law, the court held that since the ground lease provisions clearly constituted a lease for purposes of § 365, the entire agreement must be treated as a lease for purposes of § 365. Therefore, the court did not reach the question of had the bond-related provisions stood alone, would they be considered disguised financing rather than a true lease. 2. Severability/Master Leases United Air Lines (Denver).—The Denver special fa- cilities agreement covered ground space and facilities to be built on the ground space. The facilities were funded by tax-exempt municipal bonds issued by Denver and 354 Id. 355 Id. at 509. 356 Id. at 510. 357 The dispute regarding the JFK facilities lease was re- solved by an unpublished order. United Air Lines, 453 F.3d at 467 n.2. serviced by United through facilities rentals under the lease. When it declared bankruptcy in 2002, United tried to have the bond-related part of the agreement severed from the ground-related portion and declared to be a loan for purposes of § 365. The agreement referred to the ground and the to-be- built facilities as the “leased property.” Under the agreement United paid monthly ground rentals directly to Denver, based on a square footage rate and the cost of common-use services. United conceded that this por- tion of the agreement looked like a lease for § 365 pur- poses. Denver allowed United to build the facilities in question, but ownership and title rested with Denver, and possession of the facilities was to revert to Denver upon the termination of the lease. United paid to ser- vice the bonds through “facilities rentals” that were paid to a third agent that made distributions to the bondholders. The court stated that in order to have the bond- related facilities portions of the agreement not be treated as a lease for purposes of § 365, those portions of the agreement must be severed from the rest of the agreement and the substance of the bond-related por- tion of the agreement must in fact not be in the nature of a lease. The court noted that the Denver case differed from those of SFO and LAX in that each of those trans- actions clearly involved separate documents, while in Denver the transaction was memorialized in one docu- ment. Thus, before addressing the issue of the nature of the bond-related agreement, the court needed to deter- mine whether the Denver agreement could be severed. As the court pointed out, state law governs contract severability. The court then applied the Colorado con- tract severability rule: “A contract cannot be severed unless the language of the contract manifests each party's intent to treat the contract as divisible.”358 The rule requires that to determine severability a court look to the essence of the bargain that the parties struck to assess whether there would have been a bargain if any of the promises were struck out. If there would not have been a bargain, the contract cannot be severed. Put another way: For a contract to be severable, the language of the con- tract must evince the parties' intention to have assented separately to successive divisions of the contract, upon performance of which the other party would be bound. Thus, it is not the number of items in the contract which is determinative of whether it is severable, but the nature of the object or objects in the contract.359 The court reviewed two Colorado cases, one involv- ing a contract for a printing press and a paper folder (press could not be used without the paper folder, there- fore contract could not be severed into two deals, which would have required the plaintiff to pay for the press even though the folder was not delivered), and the other a contract for a truck with a dump body (contract could not be severed into contract for truck and contract for 358 Id. at 468 (citations omitted). 359 Id. at 468–69 (citations omitted).

32 dump body, even though most of the purchase price was for the truck, because plaintiffs would not have entered into contract for truck without contract for dump body). The court then applied these principles to the Denver– United agreement and found that the contract was “an inherently integrated bargain: an agreement for a leasehold coupled with a bond arrangement to improve that leasehold,”360 and that the bond facilities agree- ment would never have been entered into without the ground agreement. The court held that there would not have been a bargain if the ground lease provisions were struck out, so that the agreement cannot be severed. The court rejected United’s argument that the differ- ent payment and default schemes for the ground and facilities portions of the agreement were a basis for sev- ering the agreement. The court noted, “the existence of apportionable sums alone is not dispositive.”361 More- over, the fact that an agreement could have been en- tered into as two separate agreements to begin with does not meet the test for severability. The court also rejected arguments concerning a local ordinance requir- ing two agreements and the existence in the agreement of a standard severability clause. In re Buffets Holdings, Inc.362—Although apparently unreported and not relating to airline bankruptcy, the Buffets opinion’s analysis of the severability of a master lease is nonetheless instructive. The disputed transac- tion involved the sale/leaseback of 29 properties where the debtor owned the building but not the land on which the building stood. The debtor assigned its ground leases and sold the buildings to a limited liabil- ity company (LLC). The debtor then subleased both the grounds and buildings from the LLC under four Master Leases. Upon filing bankruptcy, the debtor moved to reject or assign leases at certain of the locations; the LLC objected. The bankruptcy court reviewed the case law related to the requirement that if a debtor accepts a contract, he does so “com onere” (with all of its terms),363 and the § 365(f)(1) right to assume and assign a lease despite lease provisions purporting to inhibit that right.364 The court then moved on to the central issue of severability, remarking first: The fact that there is one document reflecting the parties' agreements does not mean that it is one contract. “The ‘all or nothing’ requirement [of assumption or rejection 360 Id. at 470. 361 Id. at 470 (citations omitted). 362 In Re Buffets Holdings, Inc., Case No. 08-10141 (MFW) Jointly Administered (Bankr. D. Del. May 16, 2008), at http://bankruptcy.morrisjames.com/Buffets%20Case.pdf. 363 Id. at 5, citing In re Italian Cook Oil Corp., 190 F.2d 994, 997 (3d Cir. 1951). 364 Id. at 5–6, citing 499 F.3d 307; L.R.S.C. v. Rickel Home Ctrs., Inc. (In re Rickel Home Ctrs., Inc.), 209 F.3d 291, 299 (3d Cir. 2000); The Shaw Group, Inc. v. Bechtel Jacobs Co., LLC (In re The IT Group, Inc.), 350 B.R. 166, 179 (Bankr. D. Del. 2006); In re Convenience USA, Inc., No. 01-81478, 2002 WL 230772, at 7 (Bankr. M.D.N.C. Feb. 12, 2002). under section 365] does not mean…that every document denominated a ‘contract’ or a ‘lease’ must be treated as a single, indivisible whole….If a single contract contains separate, severable agreements, however, the debtor may reject one agreement and not another.”365 The court noted that severability is a question of state law,366 and then proceeded to review the test for severability under Illinois law. That test is intent: the parties may have intended a single contract, even though expressed in separate agreements, or they may have intended separate agreements, even if bundled together. The next question is how, under state law, to determine intent: in Illinois it is the four corners ap- proach. Having set forth the legal standards, the bankruptcy court applied those standards to the facts at hand. First, the court reviewed the express terms of the con- tract. Two Master Leases were at issue, each covering multiple, independently operated properties in “scat- tered locations,” with the rent allocated among the properties. The court rejected the debtor’s argument that apportionability of rent mandated finding sever- able contracts, finding instead that the ability to appor- tion rent is one factor to consider, not a conclusive fac- tor, citing Illinois state cases that found nonseverable contracts despite the existence of payment apportioned among different items.367 The court emphasized the fact- intensive nature of the determination of the parties’ intent. The debtors argued that the following facts showed the severability of the contract: the LLC could divide and consolidate individual leases and create new mas- ter leases; the LLC has the right to sell property under any particular lease, which would result in severance; debtors can substitute property if a particular property is condemned; and debtors may assign or substitute any of the individual leases, with the LLC’s consent. How- ever, the court agreed with the LLC that because all of these actions required the LLC’s consent, they in fact demonstrated that the master lease was intended to be integrated except for certain specified circumstances. In 365 Buffets, at 6-7, citing 2 WILLIAM L. NORTON, JR. & WILLIAM L. NORTON, III, NORTON BANKR. L. & PRAC. § 39:11 (2d ed. 1999). 366 Id. at 7, citing In re T & H Diner, Inc., 108 B.R. 448, 453 (D. N.J. 1989); In re Adelphia Bus. Solutions, Inc., 322 B.R. 51, 55 (Bankr. S.D.N.Y. 2005); In re Wolflin Oil, LLC, 318 B.R. 392, 397 (Bankr. N.D. Tex. 2004); In re Plum Run Serv. Corp., 159 B.R. 496, 499 (Bankr. S.D. Ohio 1993) (quotations omit- ted). 367 Buffets, at 9–11, citing City of Chicago v. Sexton, 2 N.E. 263, 264 (Ill. 1885) (contract to furnish ironworks for multi- story building not divisible even though consideration was “made up by stating the estimated cost of each story sepa- rately, and the roof, and then adding the whole together.”); Meredith v. Knapp, 211 N.E.2d 151, 153 (Ill. App. Ct. 1965) (double indemnity coverage in insurance policy not separate contract even though separate premium was charged for it). The court also cited 453 F.3d 468, 470 and In re Plum Run Serv. Corp., 159 B.R. 496, 499 (Bankr. S.D. Ohio 1993).

33 addition, the master leases expressly provided that in- dividual leases were not to be merged into one another. Finally, the court found that the parties’ prepetition negotiation to substitute one individual lease for an- other under one of the master leases supported the con- clusion that the master lease was not in fact severable. The LLC argued that the following provisions dem- onstrated the nonseverable nature of the master leases: rent obligation was joint and several; the master leases could only be extended if all the ground leases were also extended; all rent remained due even if the debtor could not use some of the properties because of “condemna- tion, destruction, or termination of the ground lease”; and the LLC had the right, on default of an individual lease, of declaring the entire master lease in default or of only treating the individual lease as in default.368 The court rejected the argument that the fact that the de- fault provision allowed the LLC to exercise its rights against only one property supported severability, em- phasizing the fact that the provision allowed the LLC to exercise its remedy against all of the properties, based on a default of one of them. The court also rejected the argument that the default provision was an unenforce- able cross-default clause for separate agreements, not- ing the economic interdependence of the agreements. In addition the court rejected the argument that refusing to sever the master leases would inhibit the debtor’s ability to reorganize, noting: There is ‘no federal policy which requires severance of a lease condition solely because it makes a debtor's reor- ganization more feasible.’…. Rather, the determination of whether a specific contract or lease is an indivisible agreement or is several agreements in one, which should properly be severable, depends on the application of state law.”369 Finally, the court discussed the fact that the use of master leases was the subject of negotiation between the parties and in fact was a critical element in the par- ties’ agreement. 3. Cross-Default Clauses Separate agreements can be connected through cross-default clauses. Yet another case involving United Air Lines illustrates the relationship between cross- default clauses and assumption of unexpired leases un- der § 365.370 United had an Airport Use Agreement (AUA) with Chicago granting United exclusive use of certain airport terminal space at O’Hare, including a number of boarding gates. United also was obligated to make payments on a series of bonds issued by Chicago but without recourse to the city. Under the bond pay- ment agreements, United was obligated to make pay- ments to the bond trustees, and the bond trustees, not the city, had the right to enforce the payment agree- ments. United stopped making payments after it en- tered bankruptcy and ultimately entered into a settle- 368 Buffets, at 15. 369 Buffets, at 18, citations omitted. 370 United Air Lines, 346 B.R. 456. ment agreement with the trustees. United’s use of fa- cilities at O’Hare were governed by the AUA, which included a Section 27.08 relating to payments on Spe- cial Facility Revenue Bonds. Section 27.08 stated that if a Special Facility Agreement terminated while bonds were outstanding, the AUA would also terminate and that United’s right to use and occupy its exclusive use premises were conditioned upon United’s performance under the Special Facility Agreement. Section 27.08 further provided: (b) In the event that Airline and City are parties to a Spe- cial Facility Agreement dated prior to the date of execu- tion of this Agreement, it is the understanding and agreement of City and Airline that City would not have demised and let any Exclusive Use Premises to Airline hereunder if Airline had not heretofore undertaken the duties and obligations required to be performed and ob- served by the Airline under the terms of such Special Fa- cility Agreement.371 Unlike its treatment of the bond obligations, United kept current on its obligations under the AUA. The court reviewed gate use arrangements in gen- eral, actual use of boarding gates at O’Hare, and airport revenue at O’Hare in terms of how revenue is affected by flight volume. The court then noted that if the cross- default clause were enforced, United’s right to use gates at O’Hare would be uncertain and its competitive posi- tion would be damaged to the extent it loses exclusive use of gates, while airport financing would not be hurt by the inability to enforce Section 27.08. To reach that conclusion about airport financing, the court rejected the testimony of O’Hare’s expert that failure to enforce the cross-default clause would make it difficult for the airport to issue Special Facility Bonds and GARBs. In addition, the court found that United’s flight volume at O’Hare was unrelated to compliance with the bond re- payment agreements. Following its review of factual conclusions, the court reviewed the cross-default rule. The court noted that there are two principles at play. First, in order to as- sume an agreement the trustee must generally cure all defaults: “in order to assume or reject an unexpired lease or executory contract, the trustee must deal with the agreement as a whole—cum onere—rather than assuming only the beneficial aspects and rejecting the burdensome ones.”372 However, under § 365(b)(2) and (e)(1), if the default is due to the bankruptcy case itself or the debtor’s financial condition, it need not be cured. Second, the performance requirement only applies to the contract or lease the debtor wishes to assume, not to “other, substantially unrelated agreements,”373 a princi- ple that applies to separate agreements included in one document and to separate agreements linked by a cross- default clause. The court then explained that “assump- tion under § 365 is subject to a ‘well-established’ cross- default rule: ‘[C]ross-default provisions do not integrate 371 Id. at 462. 372 Id. at 467. 373 Id.

34 executory contracts or unexpired leases that otherwise are separate or severable.’”374 The court then examined cases that apply the rule, explaining that the issue is “whether agreements linked by a cross-default clause are substantially connected to one another, so that a failure to enforce the clause would deprive the nondebtor party of an essential part of its bargain.”375 The court reviewed two cases in which the agreements subject to a cross-default clause were economically interdependent, so that the parties would not have entered into one of them without the other. In contrast, where two agreements are merely parallel to each other, courts do not enforce cross-default provi- sions in bankruptcy. As to the case at issue, the court found that Section 27.08 was clearly a cross-default clause and that the bond payment obligations were not economically linked to the AUA. The court rejected the argument that the statement of intent in Section 27.08 that Chicago would not have provided exclusive use to United absent the agreement to make bond payments—absent an underly- ing economic reality—was sufficient to support en- forcement of the cross-default clause. Rather the court found that the AUA was a separate agreement, which United was allowed under § 365(a) to assume without taking on the obligations of the bond agreement. Finally the court determined that the cross-default rule was a more appropriate framework for deciding the dispute than was the rule under § 365(b)(2) and (e)(1) against ipso facto clauses. The court also rejected United’s argument that enforcement of Section 27.08 of the AUA would violate § 525(a), which prohibits a gov- ernmental unit from revoking, suspending, or refusing to renew a license, permit, charter, franchise, or other similar grant on account of bankruptcy. 4. Stub Period Rent In 2003, United moved to extend its 60-day period for assuming or rejecting its leases. Airport operators opposed that motion on the ground that United had not paid the stub period rent as required under § 365(d)(3).376 In addition, several of the lessors filed motions to compel payment of rent. The bankruptcy court noted that United had failed to pay many of its advance monthly lease payments due on December 1, 2002; filed for Chapter 11 relief on December 9, 2002; and had not paid any December rent since the filing. The order for relief was entered the day the Chapter 11 request was filed. United either paid or acknowledged its obligation to pay rent beginning January 1, 2003. As the court also noted, all of the motions turned on whether United was required under § 365(d)(3) to pay the stub period rent, that is rent for the period from December 9 through December 31. The court explained that § 365(d)(3) creates: 374 Id. at 468, citing In re Convenience USA, Inc., No. 01- 81478, 2002 WL 230772, at 2 (Bankr. M.D.N.C. Feb. 12, 2002). 375 Id. at 468–69. 376 United Air Lines, 291 B.R. 121. a special period in the course of a bankruptcy case—the period from the date that an order for relief is entered to the date that an unexpired lease of nonresidential real property is assumed or rejected. This period can be re- ferred to as the “option phase” of the bankruptcy case— the period during which the debtor in possession or trus- tee, under the protection of the Bankruptcy Code, is al- lowed to decide whether or not a lease should be as- sumed.377 The court explained that two substantive issues raised in interpreting § 365(d)(3) are 1) what obliga- tions must be performed (those that arise during the option phase), and 2) when the performance must take place (timely—at the time required by the lease). A con- flict arises when the time that a lease payment is due and the time to which the lease obligation relates are not both during the option phase, that is the period in which the debtor must decide whether to assume or reject the lease. In such cases, the determination of how much of the obligation must be paid depends on whether the court applies the “payment date” rule or the “proration rule.”378 The payment date cases hold that the lease obligation must be paid in full, but only if the obligation becomes payable during the option phase, regardless of whether the lease period that gives rise to the obligation takes place during the option phase. The proration cases hold that “a payment obligation due during the option phase must be paid under § 365(d)(3) according to how much of the time period related to the payment is within the option phase.”379 Judge Wedoff noted that when the payment obliga- tion clearly becomes due during the option phase, there is no question that § 365(d)(3) requires the debtor to make payment; the only question is the amount. How- ever, in the case before him, Judge Wedoff held that because in United’s case the obligation was related in part to a period within the option phase but became due before the option phase began, the § 365(d)(3) analysis turned on the second interpretative issue: when the obligation must be performed. The court rejected the position that proration could be applied in such a case.380 Instead the court found that the “plain language of § 365(d)(3), its legislative history, and its context” all indicate that the timely performance requirement of § 365(d)(3) cannot apply to payment obligations that come due prepetition.381 The court also relied upon the fact that the section is meant to operate without judicial 377 Id. at 124 (footnote omitted). 378 Id. 379 Id. at 125, citing In re Handy Andy Home Improvement Ctrs., Inc., 144 F.3d 1125 (7th Cir. 1998). 380 Cf., In re Travel 2000, Inc., 264 B.R. 444 (Bankr. W.D. Mich. 2001), In re Victory Markets, Inc., 196 B.R. 6 (Bankr. N.D.N.Y. 1996) (proration) and In re HQ Global Holdings, Inc., 282 B.R. 169 (Bankr. D. Del. 2002); In re CCI Wireless, LLC, 279 B.R. 590 (Bankr. D. Colo. 2002); The 1/2 Off Card Shop, Inc., 2001 WL 1822419 (Bankr. E.D. Mich. 2001); In re Apple- tree Markets, Inc., 139 B.R. 417 (Bankr. S.D. Tex. 1992) (pay- ment day). 381 United Air Lines, 291 B.R. at 126.

35 intervention in holding that the timely performance requirement of § 365(d)(3) does not apply when the payment obligation becomes due before the debtor files for Chapter 11. The court therefore held that in this case § 365(d)(3) did not require payment of the stub period rent. However, the court rejected the conclusion that the stub period rent must be treated as a prepeti- tion claim. The court referenced the practice before § 365(d)(3) was enacted and noted: By directing a trustee to make timely payment of rental claims that are due during the option phase, § 365(d)(3) serves to satisfy claims that might otherwise have been asserted under § 503, but where § 365(d)(3) does not re- quire trustee payment, administrative claim status under § 503 would still be available to the extent that the use of rental property benefited the estate.382 Therefore the court held that the lessors were free to file an administrative claim under § 503. The court subsequently ruled that United should generally proceed with paying the stub period rent on leases it rejected. Because of the volume of leases in question, the court directed the parties to consider al- ternative dispute resolution for resolving the claims. The parties negotiated procedures, incorporating court rulings on the procedures and legal standards to be used in the dispute resolution. The procedures, which were to supersede the case management procedures to the extent of any inconsistency, covered such issues as notice, time frame for disputing proposed claims amount, mediation/arbitration requirements, legal pre- sumptions to apply, time frames for payment, and allo- cation of fees. The court ultimately approved and au- thorized payment under the agreed-upon stub rent procedures.383 On route to agreeing to procedures, United and the consortium of airports trying to recover stub period rent (“Consortium”) sparred over the appropriate legal stan- dards for ruling on the airports’ claims.384 There were three legal issues to be resolved: 1. In determining the amount of stub rent owed, was there any presumption in favor of the lease rate and, if so, what was the standard that the debtors must meet to overcome that presumption? Who bore the ultimate 382 Id. at 127, citing HQ Global Holdings, 282 B.R. at 173– 74 (agreeing with the parties that a landlord is entitled to an administrative claim for the stub period rent). 383 Id. as In re UAL Corp., Chapter 11, Case No. 02-B-48191, (Bankr. N.D. Ill.), Debtors’ Motion for an Order Approving and Authorizing Payment Under the Agreed-Upon Stub Rent Proce- dures, July 28, 2003; In re UAL Corp., Chapter 11, Case No. 02-B-48191 (Bankr. N.D. Ill.), Order Approving and Authoriz- ing Payment Under the Agreed-Upon Stub Rent Procedures, Aug. 29, 2003. 384 See Amber Stores, 193 B.R. 819 (adopting position that when § 365(d)(3) applies, lessor is entitled to receive adminis- trative expense priority for the rent due under the lease with- out needing to establish claim for administrative status under § (b)(1)(A); cases on both side of question reviewed). burden of proof as to the amount of the administrative claim? 2. Was a lessor’s claim for administrative allowance limited to the debtor’s actual use of the property? 3. Could a lessor receive an amount of Stub Rent greater than the contract rate and, if so, might the les- sor amend its stub rent motion and/or stub rent claim to seek an amount greater than the contract rate in the event that the parties are unable to resolve their dis- pute regarding the Stub Rent Motion and/or Stub Rent claim before the Mediation Period ends?385 Issue 1.—The Consortium386 argued that there should be a strong presumption in favor of determining the administrative claims using the contract rate in the rejected leases, unless United is able to rebut that pre- sumption by clear and convincing, contradictory evi- dence. The Consortium cited several bankruptcy court cases in support of the proposition that there is a pre- sumption that the administrative rent should be set at the contract rate.387 The Consortium then argued that United had the burden of proof to rebut the presump- tion “by clear and convincing evidence that the fair market value of the leasehold is less than the Contract Rate.”388 The Consortium also referenced cases that awarded, as Judge Wedoff did not, stub period rent un- der § 365(d)(3), in support of the proposition that United should have a “heightened burden…to disprove 385 In re UAL Corp., Case No. 02-B-48191, Jointly Adminis- tered Chapter 11 Cases (Bankr. N.D. Ill.), Memorandum Re- garding Legal Standards to Be Applied in Arbitration of Stub Rent Claims, July 3, 2003, at 2. “The Mediation Period” was a term of art within the Proposed Stub Rent Procedures, to which these legal standards would apply. 386 As of July 3, 2003, these included Port of Portland, John Wayne Airport, Detroit Metropolitan Wayne County Airport, Port of Oakland, Metropolitan Washington Airports Authority, Burlington International Airport and the City of Austin, Clark County, Nevada (Las Vegas), City of Cleveland, Columbus Regional Airport Authority, Lee County Airport Authority, Tucson Airport Authority, and Miami-Dade County, Florida. At the time the Airport Consortium memorandum was filed, United had only sought to reject the Port of Oakland’s leases. In re UAL Corp., Case No. 02-B-48191, Jointly Administered Chapter 11 Cases (Bankr. N.D. Ill.), Memorandum Regarding Legal Standards to Be Applied in Arbitration of Stub Rent Claims, July 3, 2003, at 1–2, n.1. 387 These cases included: In re Xonics, Inc., 65 B.R. 69, 74 (Bankr. N.D. Ill. 1986) (“there is a presumption that the rea- sonable rental value of the property is equivalent to the amount of rent fixed in the lease”); Palace Quality Serv., 283 B.R. 889 (“it stands to reason that the actual rental payments associated with that leasehold interest would be a necessary cost associated with the preservation of that particular prop- erty interest”): HQ Global Holdings, 282 B.R. 174 (“There is generally a presumption that ‘the rental value fixed in the lease will control…’”). 388 In re UAL Corp., Case No. 02-B-48191, Jointly Adminis- tered Chapter 11 Cases (Bankr. N.D. Ill.), Memorandum Re- garding Legal Standards to Be Applied in Arbitration of Stub Rent Claims, July 3, 2003, at 4.

36 the applicability of the Contract Rate to the Stub Pe- riod.”389 Although United acknowledged the existence of a re- buttable presumption in favor of the lease rate, United disputed the existence of a heightened standard. In- stead, United cited several circuit court opinions that the presumption can be rebutted by evidence of a differ- ent value.390 United also argued that ordinarily pre- sumptions do not change the burden of proof, and that there was no reason to do so in this case. Thus, follow- ing United’s argument, while the presumption shifted the burden of production to United, once United met that burden, the lessors retain the burden of proof on the point of whether the contract rate is appropriate for setting the amount of the administrative claim. The agreed-upon procedures provided that in order to rebut the presumption, United would have to submit “evidence showing by a preponderance of the evidence that the reasonable rental value of the lease differs from the Lease Rate,” and reiterated that the ultimate burden of proof as to amount lies with the lessor.391 Issue Two.—The Consortium argued that the admin- istrative claims should be valued at the fair market value of the leasehold interest (which it had argued should be set by the rate in the lease), rather than by United’s actual use of the property.392 United, on the 389 Id. at 4, citing inter alia, Towers v. Chickering & Gregory (In re Pacific-Atlantic Trading Co.), 27 F.3d 401, 405 (9th Cir. 1994) (“We observe, however, that section 365(d)(3) expresses the intent of Congress to secure for lessors the full amount of rent due during the 60-day period while the trustee determines to accept or reject the lease, regardless of any benefit to the estate.”); Travel 2000, 264 B.R. 451 (debtor “should be required to pay the full rent under the leases for every day that it con- tinued to occupy the property after the bankruptcy filing”). 390 Cases cited included: In re Dant & Russell, Inc., 853 F.2d 700, 707 (9th Cir. 1988) (“presumption may be rebutted upon evidence showing that the reasonable worth of the lease differs from the contract rate”); Trans World Airlines, 145 F.3d at 136 (“However, the amount treated as an administrative expense would not necessarily be the rent provided for in the lease, since administrative expenses are allowable only for ‘the ac- tual, necessary costs and expenses of preserving the estate.’”); Thompson v. IFG Leasing Comp. (In re Thompson), 788 F.2d 560, 563 (9th Cir. 1986) (“The rent reserved in the lease is presumptive evidence of fair and reasonable value, but the presumption may be rebutted by demonstrating that the rea- sonable worth of the lease differs from the contract rate.”). In re UAL Corp., Chapter 11 Case No. 02-B-48191 (Jointly Ad- ministered), (Bankr. N.D. Ill.), Debtors’ Memorandum on Legal Issues Related to Stub Rent, July 3, 2003, at 2–3. 391 In re UAL Corp., Chapter 11 Case No. 02-B-48191 (Jointly Administered), (Bankr. N.D. Ill. Aug. 29, 2003), Stub Rent Procedures, par. 12.A. 392 Id. at 5–6, citing inter alia Xonics, 65 B.R. at 73 (“view long followed by the Seventh Circuit [is] that administrative rent claims must be based upon the reasonable rental value of the property regardless of the use made of the property.”); 5 COLLIERS ON BANKRUPTCY ¶ 503.06[6][c][ii], at 503–09 (15th ed. rev’d) (reasonable rental value objective standard of benefit to estate; using standard such as extent to which use of prop- erty benefits estate too subjective). other hand, argued that “the lessors are entitled to stub rent only to the extent that United actually used the property,”393 drawing this conclusion from cases that held that § 503 administrative claims depend on the extent to which the estate benefited from use of the rental property.394 United also argued that rent for un- used portions of property is “unnecessary” and therefore should not qualify as an administrative expense. The agreed-upon procedures provided that the amount of the claim would be determined based on the reasonable rental value of the leased premises rather than United’s actual use of the premises.395 Issue Three.—The Consortium argued that if the air- ports are required to provide evidence concerning the fair market value (FMV) of the leases and that FMV is demonstrably greater than the contract rate of the lease, the airports should be allowed to amend their motions to seek amounts in excess of that rate.396 United argued that the airports cannot recover more than the lease rate. The argument was based on the “plain lan- guage of Section 503(b)(1),” and the purpose of Chapter 11 to allow the debtor to reduce its expenses, rather than on any cases holding that the administrative claim cannot be greater than the lease amount.397 The agreed- upon procedures provided that the lessor could not re- ceive more than the lease rate.398 393 In re UAL Corp., Chapter 11 Case No. 02-B-48191 (Jointly Administered), (Bankr. N.D. Ill.), Debtors’ Memoran- dum on Legal Issues Related to Stub Rent, July 3, 2003, at 5. Cases cited include: Dallas-Fort Worth Reg’l Airport Bd. v. Braniff Airways, Inc., 26 B.R. 628, 631 (N.D. Tex. 1982) (“This rate is applied, however, on a pro rata basis according to the time and area actually used.”); In re Homeowner’s Outlet Mall Exch., Inc., 89 B.R. 965, 970 (Bankr. S.D. Fla. 1988) (“[S]ince the Trustee did not occupy the entire premises, rent for the last 33 days will be allowable pro-rata only for the 85,000 square feet actually occupied by the Trustee.”) 394 In re UAL Corp., Chapter 11 Case No. 02-B-48191 (Jointly Administered), (Bankr. N.D. Ill.), Debtors’ Memoran- dum on Legal Issues Related to Stub Rent, July 3, 2003, at 6. United cited In re Bauer, 291 B.R. 127. United also cited In re Jartran, Inc., 732 F.2d 584, 587 (7th Cir. 1984) (debt must be beneficial to DIP in operating the business to qualify as admin- istrative expense). It is not clear that these cases reached the issue of whether using only a portion of a leased premises means that the benefit to the estate must be considered so reduced. 395 In re UAL Corp., Chapter 11 Case No. 02-B-48191 (Jointly Administered), (Bankr. N.D. Ill. Aug. 29, 2003), Stub Rent Procedures, par. 12.A.B. 396 In re UAL Corp., Case No. 02-B-48191, Jointly Adminis- tered Chapter 11 Cases, (Bankr. N.D. Ill.), Memorandum Re- garding Legal Standards to Be Applied in Arbitration of Stub Rent Claims, July 3, 2003, at 6, citing 65 B.R. 75 (additional rent awarded based on FMV of lease). 397 In re UAL Corp., Chapter 11 Case No. 02-B-48191 (Jointly Administered), (Bankr. N.D. Ill.), Debtors’ Memoran- dum on Legal Issues Related to Stub Rent, July 3, 2003, at 8–9. 398 In re UAL Corp., Chapter 11 Case No. 02-B-48191 (Jointly Administered), (Bankr. N.D. Ill. Aug. 29, 2003), Stub Rent Procedures, par. 12.C.

37 As of September 1, 2005, United had paid approxi- mately $270,000 for stub rent and estimated it would pay about $1.2 million for stub rent related to rejected leases.399 5. Passenger Facility Charges Although there do not appear to be any reported cases concerning segregation of PFCs under § 40117(m),400 there have been numerous instances of Chapter 11 airlines filing motions to fund, maintain, and manage a separate PFC account or being compelled to do so. Most of the examples located have involved settlement agreements rather than airlines requesting on their own that the bankruptcy court authorize them to segregate PFCs. The consent orders generally recite the statutory requirements for financial management of PFCs, including the provision that the trust fund status of the PFCs not be defeated by the inability to specifi- cally trace funds due to the debtor’s failure to segre- gate.401 Vanguard.—Vanguard did not remit PFCs as re- quired before it sought bankruptcy protection. Once it did file for Chapter 11 protection, Vanguard filed an Emergency Motion for an Order Authorizing Use of Cash Collateral, to which a number of airports objected to the extent that the collateral included PFCs. Van- guard then agreed to keep $960,000 in its accounts pending resolution of the PFC and other trust fund claims. Vanguard subsequently filed, but did not serve, a declaratory judgment complaint.402 In that complaint the airline essentially argued that because it had failed to identify and segregate PFCs as trust funds, the PFCs were not subject to a trust in favor of the airports and had become property of the Vanguard’s bankruptcy es- tate under § 541, making any attempt by the airports to collect those PFC funds a violation of the automatic stay. The parties eventually settled the disputes. In the settlement agreement Vanguard stipulated that it held the PFCs in trust for the beneficial interest of the air- ports; it had no legal or equitable interest in the PFCs; and the PFCs were not property of the bankruptcy es- tate under § 541(d). Vanguard requested that the bank- 399 UAL’s Sept. 7, 2005, 8K filling, Exhibit 99.3, Stub Rent Litigation, at 81, available at www.secinfo.com/dsvRm.zAQa.b.htm (Last visited Dec. 16, 2008). 400 There are several reported cases concerning challenges to the FAA’s approval of PFCs at various airports, e.g., Southeast Queens Concerned Neighbors, Inc. v. F.A.A., 229 F.3d 387 (2d Cir. 2000); Village of Bensenville v. F.A.A., 376 F.3d 1114 (D.C. Cir. 2004). Such cases are beyond the scope of this report. 401 49 U.S.C. § 40117(m)(2). 402 A copy of the complaint was filed on July 29, 2003, by ACI-NA and AAAE as Attachment 1 to Comments of ACI-NA and AAAE in response to Request for Public Comment on the Impact of Airlines Emerging From Bankruptcy on Hub Air- ports, Airport Systems and U.S. Capital Bond Markets. The attachment, FAA-2003-15481-0010, may be downloaded from www.regulations.gov/fdmspublic/component/main?main=Docke tDetail&d=FAA-2003-15481. ruptcy court approve the settlement agreement, which avoided litigation with 17 airports,403 and awarded the airports just under half of their PFC claims.404 US Airways.—On September 12, 2004, the airline filed for Chapter 11 protection, for authorization to use cash collateral, and for authorization to assume a Spe- cial Purpose Trust that served as a reserve to ensure payment of a variety of fees, charges, and taxes, includ- ing PFCs. On September 13, 2004, the Denver and San Francisco airports (later joined by four others) filed ob- jections to the cash collateral motion—to the extent that US Airways sought to include PFCs as part of the cash collateral—and motions to compel the airline to segre- gate and remit PFCs. The court conditionally approved the trust motion; Denver and San Francisco objected. Denver’s objection was based on the argument that a trust that “serves as a reserve to ensure the payment of amounts owing to various administrators, institutions, authorities, agencies and entities in connection with [PFCs] and charges described in 49 U.S.C. § 40117 and 14 C.F.R. Part 158” does not meet the requirements of § 40117(m). In addition, Denver argued that US Airways’ failure to specify the amounts being held in the PFC reserve, the methodology used to calculate average monthly liability, and the amounts actually deposited also violated § 40117(m).405 The following month the parties settled. As part of the consent order, the court adjudged and decreed that the PFCs were trust funds, not property of the estate, and that US Airways would either create a separate PFC trust account or designate such an account within its existing Special Purpose Trust. The consent order also specified steps US Air- ways would be required to take to segregate and ac- 403 Motion to Approve Settlement with PFC and Security Fee Claimants, In re Vanguard Airlines, Inc., I.D. No. 48- 1149290, In Proceedings Under Chapter 11, Case No.: 02- 50802-JWV (Bankr. W.D. Mo., May 18, 2004), granted: Order Granting Motion to Approve Settlement with PFC and Security Fee Claimants (June 18, 2004); See also First Amended Disclo- sure Statement of Vanguard Airlines, Inc., in Support of Debtor's First Amended Liquidating Plan of Reorganization, Included as part of Vanguard’s Dec. 4, 2003, 8-K SEC Filing, available at http://sec.edgar- online.com/2003/12/04/0001000578-03-000012/Section4.asp (Last visited Dec. 16, 2008). 404 City and County of Denver, Mar. 31, 2006, Comments on Proposed Rulemaking for Passenger Facility Charge Program Docket No. FAA-2006-23730, at 2, n.1, available at www.regulations.gov/fdmspublic/component/main?main=Docke tDetail&d=FAA-2006-23730. The district court approved Van- guard’s Liquidating Plan of Reorganization Under Chapter 11 on Dec. 19, 2003. See http://msnmoney.brand.edgar- online.com/EFX_dll/EDGARpro.ddl?FetchFilingHTML1?ID =2676610&SessionID=af6iWbLOX20sv_9 (Last visited Dec. 16, 2008). Subsequently the Chapter 11 proceeding was converted to a Chapter 7 case. 405 Denver International Airport’s Limited Objection to En- try of Order Authorizing the Assumption of Certain Executory Trust Fund Agreements Pursuant to 11 U.S.C. § 365(a), In re US Airways, Inc., Case No. 04-13819-SSM Jointly Adminis- tered Chapter 11 Cases (Bankr. E.D. Va.), Sept. 24, 2004.

38 count for PFCs; prohibited US Airways from granting security or other interest in the PFCs to any third party; and included a remedy in case of uncured default by US Airways on its obligation to pay PFCs.406 Aloha Airlines.—Upon filing for Chapter 11 protec- tion on December 30, 2004, Aloha requested authoriza- tion to pay certain prepetition obligations and for post- petition financing. Shortly thereafter Aloha also moved for authorization for use of cash collateral. The Port of Oakland filed limited objections to the cash collateral and postpetition financing motions and moved to com- pel Aloha to segregate and remit PFCs. Oakland’s mo- tion asked the court to specifically: (i) provide that PFC trust funds do not fall within the definition under 11 U.S.C. § 541 of property of the estate, and thus do not constitute cash collateral under 11 U.S.C. § 363(a); (ii) carve out the PFC’s [sic] so that there can be no confusion amongst the secured lender community, post-petition lenders, or others that the PFC’s [sic] are segregated trust funds; (iii) require the Debtors to open a separate account for the Port’s PFC trust funds for collec- tions post-petition and immediately remit the past due collections, if any, to the Port as required in the ordinary course of business consistent with 49 U.S.C. § 40117(m) and 14 C.F.R. § 158; (iv) require the Debtors to remit the Port’s PFC trust funds monthly to the Port required by 14 C.F.R. § 158; and (v) require the Debtors to comply with all other accounting and remittance requirements pro- vided in 14 C.F.R. § 158.407 The parties came to a settlement agreement very similar to that arrived at in the US Airways case, in- cluding a remedy in the event of uncured default by the airline. Delta Air Lines.408—As part of its Chapter 11 pro- ceeding, Delta petitioned the court for authority to fund, maintain, and manage a separate PFC account so that Delta would be able to satisfy its obligations under 49 U.S.C. § 40117(m). Delta’s motion set forth the statu- tory requirements and described actions Delta had taken to meet those requirements, stating, “it is under- stood that collected PFCs are held in trust and are not 406 Consent Order Resolving (A) Multiple Objections to Debtors’ Motion for Bridge, Interim and Final Orders (1) Au- thorizing the Debtors to Use Cash Collateral; (2) Providing Adequate Protection; (3) Scheduling a Final Hearing; (4) Ap- proving Form and Manner of Notice; and (5) Granting Related Relief; (B) Multiple Motions to Compel Debtors to Segregate and Remit Passenger Facility Charges, In re US Airways, Inc., Case No. 04-13819-SSM Jointly Administered Chapter 11 Cases (Bankr. E.D. Va.), Oct. 15, 2004. 407 Consent Order and Stipulation Resolving Port of Oak- land’s (A) Limited Objection to Interim Order Authorizing Use of Cash Collateral and Other Pre-Petition Collateral; …(C) Motion to Compel Debtors to Segregate and Remit Passenger Facility Charges, etc., In re Aloha Airgroup, Inc., Bk. No. 04- 03063, Chapter 11 Jointly Administered (Bankr. D. Haw.), Feb. 10, 2005, at 3–4. 408 Delta restructuring information, including case manage- ment procedures, claims objections procedure order, and bar date order, available at www.deltadocket.com/ (Last visited Dec. 16, 2008). considered property of the Debtors’ estates.”409 Delta cited the US Airways and Aloha Airlines cases in ask- ing the court to approve its motion so as to avoid “addi- tional and unnecessary litigation.”410 Northwest Airlines.—On September 14, 2005, Northwest filed for Chapter 11 protection and for au- thority to assume certain executory trust fund agree- ments. The Greater Orlando Airport Authority (GOAA) filed a Motion to Compel Debtors to Segregate and Re- mit Passenger Facility Charges, followed shortly there- after by Denver International Airport, which asked for substantially the same relief as GOAA. All told, some 30 airports sought to compel Northwest to segregate and remit PFC revenues.411 Northwest objected to the airport motions on the grounds that Northwest was already complying with § 40117(m) and the airports did not have standing to seek compliance, as that was the sole purview of the FAA and DOT.412 Northwest took the position that its payment of PFCs into a trust estab- lished to ensure timely payment of various taxes and fees as appropriate was in compliance with § 40117(m). Denver argued that Northwest’s own description of its trust fund demonstrated that it was commingling PFC revenue in violation of § 40117(m).413 The parties set- tled, with Northwest agreeing to establish an irrevoca- ble trust for the benefit of the airports as a “segregated account that is maintained for the specific purpose of ensuring timely deposit and payment of collected PFCs to the appropriate airport operators.”414 As in the US 409 Debtors’ Motion Pursuant to Sections 105(a) and 363(c)(1) of the Bankruptcy Code for Authorization to Continue to Fund, Maintain and Manage a Separate Account for Pas- senger Facility Charges, In re Delta Air Lines, Inc., Chapter 11 Case No. 05-17923 (pcb) Jointly Administered (Bankr. S.D.N.Y.), Sept. 14, 2005, at 3–4, citing 49 U.S.C. § 40117(g)(4), (m)(2). 410 Id. at 6. 411 A list of various motions and legal memoranda is in- cluded in one of many notices filed by Northwest’s bankruptcy counsel, www.nwa-restructuring.com/nwa_downloads/nwa_ CaseInformation/agenda_10_26.pdf. While a number of mo- tions and other information on the Northwest Chapter 11 pro- ceedings—including case management procedures—are avail- able on the Northwest restructuring Web site, available at www.nwa-restructuring.com/nwa_legalInformation.html (Last visited Dec. 16, 2008), accessing the PFC motions and memoranda online requires a fee-based PACER account, avail- able at https://ecf.nysb.uscourts.gov/cgi-bin/login.pl (Last vis- ited Dec. 16, 2008). 412 Denver International Airport’s Reply and Joinder with the Consortium of Airports’ Reply to Debtors’ Consolidated Opposition to Motion to Compel Debtors to Segregate and Re- mit Passenger Facility Charges, In re Northwest Airlines Corp., Chapter 11 Case No. 05-17930 ALG (Bankr. S.D.N.Y.), Sept. 16, 2005, at 2–4. 413 Id. at 4–5. Presumably other airports made substantially similar arguments. 414 Consent Order Resolving Multiple Motions to Compel Debtors to Segregate and Remit Passenger Facility Charges and Consolidated Opposition of Debtors, In re Northwest Air-

39 Airways case, the consent order specified steps the air- line would be required to take to segregate and account for PFCs; prohibited the airline from granting security or other interest in the PFCs to any third party; and included a remedy in case of uncured default by the airline on its obligation to pay PFCs. 6. Other Preferential transfers.—The case of TWA Inc. Post Confirmation Estate v. City & County of San Francisco Airports Comm’n (In re TWA Inc. Post Confirmation Estate)415—heard by Judge Walsh—involved a motion by San Francisco to dismiss efforts of the TWA Inc. Post Confirmation Estate (TWA PCE) to avoid and recover allegedly preferential prepetition transfers. During the 90 days before filing for Chapter 11 pro- tection, TWA made payments to San Francisco of $1,332,834.16 to cover terminal and gates rent, utilities, security service, parking, and landing and takeoff rights, etc. TWA’s liquidation plan, approved in June of 2002, specifically reserved the right to settle claims and to pursue all available claims, including avoidance ac- tions under §§ 547 and 550. In November 2002, TWA and San Francisco entered a stipulation agreement con- cerning two claims filed by San Francisco, under which agreement San Francisco’s administrative claim for $8,735,516.85 was deemed an allowed administrative expense claim in the amount of $92,166.00 and an al- lowed prepetition unsecured claim of $8,642,752.62 and its administrative claim for $89,296,821.00 was deemed an allowed administrative expense claim in the amount of $1,209,000.00 and an allowed prepetition unsecured claim of $13,094,167.80. TWA’s plan administrator then paid the two administrative expense claims. However, TWA also made a demand that San Francisco return the $1,332,834.16 paid prior to the January 10, 2001, Chapter 11 filing date. When San Francisco did not respond to the demand letter, TWA began an adversary proceeding under §§ 547 and 550, which San Francisco moved to dismiss. San Francisco argued that because it had its prepetition claims allowed under § 502(d) and no avoidance action was brought as part of the Estate's objections to claims, TWA’s avoidance action should be dismissed.416 San Francisco relied on LaRoche Industries, Inc. v. General American Transportation Corp. (In re LaRoche Indus., Inc.),417 in which the court held that § 502(d) stands for the proposition that if a claim is al- lowed there is no longer a voidable transfer due from that claimant. In essence, a voidable transfer, such as a pref- erence, must be determined, as part of the claims process lines Corp., Chapter 11 Case No. 05-17930 ALG Jointly Admin- istered (Bankr. S.D.N.Y.), Oct. 28, 2005, at 3. 415 TWA Confirmation Post Estate, 305 B.R. 221. 416 Id. at 224. 417 LaRouche Indus., 284 B.R. at 406. and not at a later time, especially after distribution under the plan has been made.418 However, after reviewing LaRoche and another Delaware bankruptcy case that held that § 502(d) would be meaningless if debtors could bring new or con- tinuing preference actions after claims are allowed, Judge Walsh noted the split in authority concerning the application of § 502(d). He then reviewed Missouri and New York bankruptcy cases that both rejected La Roche.419 The Bridge court found that § 502(d) is an af- firmative defense to a creditor’s claim against the DIP and is only relevant when the DIP objects to a claim under § 502(d). The Rhythms court, reaching the same result, noted that the debtors agreed to a settlement before they were able to begin a preference analysis or the claims objection process. Judge Walsh found those two cases “a better application of § 502(d).”420 He further observed that applying § 502(d) as argued by San Fran- cisco would not make sense in the context of large Chapter 11 cases. Finally, Judge Walsh rejected San Francisco’s argument that it had conveyed new value under § 547(c)(4),421 which would have precluded the trustee from avoiding the $1,332,834.16 payment. He found that San Francisco had not carried its burden of proof on that point. It should be noted that airlines in bankruptcy could seek to recover PFC remittances as avoidable prefer- ences. However, it is the position of the USDOT that PFCs are not property of the estate and their remit- tance cannot be recovered under § 547.422 Lease rejection.—A 1986 case involving the Mem- phis-Shelby County Airport Authority (“the Airport”) illustrates a number of issues that can come up in the course of an airline bankruptcy proceeding, including distinguishing between a request for adequate protec- tion before the Chapter 11 airline decides whether to assume or reject its leases and a request for administra- tive rent damages once the airline rejects the leases in question.423 Although the case predates the enactment of § 365(d)(3), given that some courts, despite the applica- bility of § 365(d)(3), still require the lessor to establish its administrative claim under § 503(b)(1)(A),424 the Memphis-Shelby analysis is still useful. Moreover, it appears that the question of distinguishing between 418 TWA Post Confirmation Estate, 305 B.R. at 224–25, cit- ing LaRouche Indus., 284 B.R. at 408–09. 419 Peltz v. Gulfcoast Workstation Group (In re Bridge Info. Sys., Inc.), 293 B.R. 479 (Bankr. E.D. Mo. 2003), and Rhythms NetConnections, 300 B.R. at 404. 420 TWA Post Confirmation Estate, 305 B.R. at 226. 421 It appears that San Francisco did not raise the ordinary course of business defense. In any event, the opinion did not discuss that defense. 422 Author’s June 27, 2008, telephone conversation with Bernard F. Diederich, Senior Attorney, Office of General Coun- sel, U.S. Dep’t of Transp. 423 Braniff Airways, 783 F.2d 1283. 424 See, e.g., Palace Quality Servs., 283 B.R. 868, which dis- cusses both sides of the issue.

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TRB’s Airport Cooperative Research Program (ACRP) Legal Research Digest 6: The Impact of Airline Bankruptcies on Airports examines legal issues presented by the filing of airline bankruptcies that are relevant to airports, and explores how airport lawyers and courts have responded to those issues. The report highlights the basics of bankruptcy theory and law relevant to airport operating agreements with airlines, and identifies issues such as lease recharacterization and payment of stub period rent that particularly affect airports dealing with airlines in bankruptcy.

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