The Impact of Airline Bankruptcies on Airports (2009)

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46 prohibits a carrier from granting an interest in PFCs to a third party.488 Enforcement of § 40117(m) has been raised in at least one proceeding where the Chapter 11 airline took the position that the airports could not bring a motion to compel during the bankruptcy proceeding, arguing that action remained the sole purview of the FAA and USDOT.489 Although this issue was not fully litigated, the motions to compel were in effect granted via a con- sent order issued by the bankruptcy court.490 Nonethe- less, the statute and implementing regulations do not describe any enforcement responsibilities, and the FAA has taken the position that it cannot address this issue in its regulations without additional legislative author- ity.491 Thus far it appears that the issue of how the com- pensation requirements of 49 U.S.C. § 40117(m)(4)/14 C.F.R. § 158.49(c)(4) will work has not been litigated. However, several consent orders resolving motions to compel debtors to segregate and remit PFCs have ad- dressed the issue, albeit obliquely. The issue had been addressed by providing that in the event of failure to cure a default of the obligation to pay PFCs, the airport operator will be entitled to request an expedited hear- ing to compel payment of PFCs and all costs incurred.492 As to the priority of such airport compensation, the FAA noted that “Bankruptcy law makes participation in a bankruptcy proceeding unavoidable for public agen- cies seeking to assure a carrier implements the PFC financial management requirements of Vision 100. Par- ticipation may be necessary even when the air carrier is willing to implement the provision.”493 This statement may lend support for the argument that such expenses should be considered a postpetition claim treated as an administrative expense entitled to priority under § 503(b),494 but the issue has apparently not been litigated. Prior to enactment of 49 U.S.C. § 40117(m), airline associations raised the issue of airlines using PFCs as 488 FAA Final Rule, 72 Fed. Reg. at 28841. 489 In re Northwest Airlines Corp., Chapter 11, Case No. 05- 17930 ALG (Bankr. S.D.N.Y.), 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 Remit Passenger Facility Charges, Sept. 16, 2005, at 4, par. 5, citing Debtor’s Motion, ¶ 23. 490 Consent Order Resolving Multiple Motions to Compel Debtors to Segregate and Remit Passenger Facility Charges and Consolidated Opposition of Debtors, In re Northwest Air- lines Corp., Chapter 11, Case No. 05-17930 (ALG), Jointly Ad- ministered (Oct. 28, 2005). 491 Preamble to final rule, 42 Fed. Reg. 28837, 28841. 492 E.g., Consent Order Resolving Multiple Motions to Com- pel Debtors to Segregate and Remit Passenger Facility Charges and Consolidated Opposition of Debtors, In re North- west Airlines Corp., Chapter 11, Case No. 05-17930 (ALG), Jointly Administered (Oct. 28, 2005), at 5, par. 7. 493 FAA Final Rule, 72 Fed. Reg. at 28842. 494 Denver raised this issue in its request that the FAA pro- vide a cost recovery procedure. FAA Final Rule, 72 Fed. Reg. at 28841. subjects of liquidity covenants with creditors.495 Doing so following that enactment would violate the statutory provision and its implementing regulations. At least one airport operator expressed concern that airports not be considered third parties for purposes of § 158.49(c)(3).496 Although the FAA did not address this concern directly, it did state that air carriers and public agencies are the only authorized holders of PFC reve- nue,497 from which point it follows that airports are not third parties. IV. CONCLUSIONS Once an airline files for bankruptcy protection, its ability to pay debts is constrained by the bankruptcy court’s determination of the best interests of the estate and the rights of other creditors (secured, priority, and general unsecured). Even certain payments made prepetition may be subject to recovery by the DIP/trustee. In addition, and key for airports dealing with airlines in bankruptcy, executory contracts and unexpired leases may be assumed or rejected, some- times over an extended period of time. This section: 1) reviews the major legal issues at play under the Bankruptcy Code and under federal law and regulation that should be of greatest concern to airport counsel; 2) offers some points for airports to consider in order to mitigate losses due to airline bankruptcy, both before and after airlines file for bankruptcy protection; and 3) sounds a cautionary note about steps that ap- pear helpful, but in fact may not be. A. Summary of Legal Issues 1. Lease Recharacterization Recharacterizing a lease as a “disguised financing” allows a Chapter 11 airline to continue using the facil- ity in question without assuming the lease under § 365, thus avoiding paying at least some of the amounts owed until the end of the bankruptcy proceeding—and possi- bly avoiding some payment altogether. Since generally bond repayment is not owed to the airport, the financial effect on the airport is indirect: failure to pay on bonds reduces the market for such bonds, thereby reducing financing available for airport improvements. A key distinction between a true lease and a loan is that under a true lease the amount of payment is tied to the rental value of the premises and under a loan the amount of payment is tied to the funds borrowed. An- other way of looking at it is that the lease is based on current consumption and the loan is based on extension 495 AAAE/ACI-NA, supra note 469, at 5. 496 City of St. Louis, FAA-2006-23730-0014, Comments to NPRM on Passenger Facility Charge Program, Debt Service, Air Carrier Bankruptcy, and Miscellaneous Changes, available at www.regulations.gov/fdmspublic/component/main?main=Docke tDetail&d=FAA-2006-23730 (Last visited Dec. 16, 2008). 497 72 Fed. Reg. at 28841.

47 of credit. There are a number of specific factors leading to a finding of no true lease in bankruptcy. The one court that has recharacterized an airport lease as a dis- guised financing has identified the following factors: (1) the fact that debtor airline’s “rental” payments were tied to the amount borrowed from the bondholders; (2) the presence of a balloon payment; (3) the presence of a “hell or high water” clause, meaning the debtor had to pay the full “rental” amount if even the property became unusable; (4) the fact that prepayment of the debtor’s obligations would end the arrangement; and (5) the fact that creditor did not have a remaining inter- est in the property at the end of the transaction. Being a lease under federal tax standards is not neces- sarily sufficient to be considered a true lease under § 365, as both the DEN and LAX leases were leases for purposes of receiving federal tax exemptions.498 2. Relationship Between Multiple Agreements The contexts in which a court may need to analyze whether multiple agreements must be construed to- gether or separately include: whether multiple leases are severable, so that the trustee may assume some and reject others; whether agreements linked by a cross- default clause are substantially connected; whether an agreement found to be “disguised financing” is sever- able from a “true lease” agreement (recharacterization cases). Where the nondebtor party seeks to construe multiple agreements together, a significant concern for the bankruptcy court is ensuring that the nondebtor does not require the Chapter 11 estate to bear the costs of substantially unrelated agreements. To conduct the cross-default analysis, bankruptcy courts will generally look to whether the nondebtor party is being deprived of an essential part of its bargain.499 If two agreements (or two parts of a single agreement) are such that the party would not have entered into one without the other, the agreements should stand together. Severability is determined under state law. Often the test is intent, not form. The parties may have in- tended separate agreements to be a single contract or may have intended agreements bundled together to be treated separately. A key factor is an assessment of the underlying economic interests: economic dependence is a factor for reading agreements together; the existence of unrelated consideration in parallel agreements is a factor for construing the agreements separately.500 It appears that a mere statement of intent, not supported by actual economic effect, is not sufficient to establish that one agreement was essential to entering into an- other.501 Apportionability of payment, in and of itself, is not necessarily sufficient grounds for severing a lease. 498 See, e.g., Jessop, supra note 134. 499 United Air Lines, 346 B.R. at 468–69. 500 Id. at 469–70. 501 Id. at 471. 3. Stub Period Rent Many leases require that rent be paid in advance.502 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 order for re- lief.”503 The existence of an obligation to pay this rent, and the standard for measuring the amount owed, is likely to turn on the application of § 365(d)(3). A key question in construing § 365(d)(3) is when the payment obligation arose, and, as noted below, courts are split over the correct standard to apply. At least one com- mentator flatly states that “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.”504 However, while the provision itself may seem straight- forward, if the debtor does not actually “timely perform all the obligations of the debtor…arising from and after the order for relief under any unexpired lease of non- residential real property, until such lease is assumed or rejected, notwithstanding section 503(b)(1) of this title,” results may differ on how the subsequent claim will be treated. It seems courts are split over whether a lessor is automatically entitled to administrative expense pri- ority if § 365(d)(3) does apply, or whether the lessor must establish its administrative claim status under § 503(b)(1)(A) [“actual, necessary costs and expenses of preserving the estate”]. It is also possible, but not certain, that if on the facts of the case § 365(d)(3) does not apply, the lessor may nonetheless have an administrative claim under § 503. Issues concerning the amount of administrative rent owed—in the negotiation arena if not in actual litiga- tion—include whether there is a presumption in favor of using the lease rate to set the rent; if so, what is the burden of proof—and which party has it—on what the presumption should be; and whether the administrative rent should be tied to the fair market value of the prop- erty or to the lessee’s actual use of the property; and whether the lessor can receive more than the lease rate. Disputes over stub period rent illustrate the importance of whether facilities rentals owed are categorized as prepetition (which helps the airline) or postpetition (which helps the airport). 4. State Law Issues A number of substantive issues in bankruptcy pro- ceedings are decided under state law. These include: • Whether the failure to perform the remaining obli- gations of an executory contract would constitute a ma- terial breach excusing performance of the other party 502 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. (Bankr. N.D. Ill., filed July 28, 2003). 503 United Air Lines, 291 B.R. at 123. 504 SALERNO, supra note 2, § 4.11[A][7], Administrative Rent.

48 (important if there is a question of whether a contract exists and so can be assumed or rejected under § 365). • Whether executory contract was terminated prepe- tition (and therefore cannot be assumed). • e.g., state contract law construction of forfeiture clauses.505 • Whether an agreement is a lease or a loan; Sev- enth Circuit Court of Appeals has held that as a matter of federal law, economic substance governs in this de- termination, while state law determines which aspects are important in determining whether a transaction is a lease. • Contract severability: the question is often the in- tent of the parties, and then how state law requires determining that intent (contract interpretation princi- ples). • Determination of what constitutes repossession or surrender for purposes of § 502(b)(6). • Whether the debtor holds a property interest un- der § 541. • The extent of the right of set-off under § 553. 5. PFC Enforcement/Treatment of PFCs While it is arguable that the bankruptcy court’s ap- proval is not needed in order for the airline to set up the separate PFC account required under § 40117(m), it may be in the interest of both airports and compliant airlines to cover such accounts in first day orders or similar motions. Even if not required, the bankruptcy court’s imprimatur should deflect challenges to the PFC account by other creditors. At least one air carrier—Northwest Airlines—has argued in court that only USDOT and FAA have the authority to compel compliance with § 40117(m). The case settled, so the standing issue has not been liti- gated. Nonetheless, the settlement agreement required the airline to set up a separate account for PFCs and stipulated the trust fund nature of the PFC funds. The USDOT and FAA’s pursuit of PFC compliance may mitigate the importance of the enforcement issue. How- ever, if airlines do not comply with their PFC remit- tance requirements, the possibility still exists that bankruptcy will result in insufficient funds being avail- able to remit to the airports on whose behalf the PFCs were collected. USDOT, FAA, and airports all have a strong interest in maintaining that PFCs cannot be- come property of the bankrupt estate under § 541. If not property of the estate, PFCs cannot constitute cash col- lateral under § 363(a) and cannot be subject to prefer- ence actions under §§ 547 and 550. 6. Removing Unwanted Tenants Lessees may attempt to use bankruptcy proceedings to maintain leases that the airport wished to terminate. Section 541 of the Bankruptcy Code should preclude such efforts, provided that the lease in question is ter- 505 Belize Airways, 5 B.R. 152 (Florida law disfavors forfei- ture clauses in leases, tender of payment should be allowed to cure default). minated before Chapter 11 is filed. Determination of termination is made under state law and so may vary, but providing prompt notice of defaults is generally a key factor. Once the lessee has filed for bankruptcy, the airport can no longer stop the lessee from assuming or assigning the lease. Although § 365(c) provides that the debtor may not assume or assign any executory contract or unexpired lease if applicable law excuses the airport from accepting performance from or rendering perform- ance to an entity other than the debtor or DIP and the airport does not consent, there does not appear to be any applicable law that would excuse performance. It has been suggested, but not determined, that USDOT could provide such excuse by regulation. 7. Treatment of Gates Two issues are of particular importance: the time al- lowed for assuming/rejecting the leases and assignment of leases. Recent changes under BAPCPA to the time allowed for assuming/rejecting leases may ease the hardship to the airport in terms of having gates un- available due to the bankruptcy process. As to assign- ments, § 365 generally favors them. While § 365(c) theoretically offers a possible means to object to as- signments, thus far it does not appear that any court has agreed with an argument that DOT’s competition policy is “applicable law” for purposes of that provision. Moreover, a general lease provision allowing assign- ment of agreements may support the Chapter 11 carrier being able to assign its gate leases regardless of the airport’s preferences.506 8. Federal Splits in Authority There are a number of issues that have come up in airline bankruptcy cases (or in other bankruptcy cases that seem relevant to airline bankruptcy) on which fed- eral courts are split as to the appropriate legal stan- dard. These include: the performance date (billing) ap- proach and the proration (accrual) approach to determine the amount and timing of payments under § 365(d)(3); whether § 365(d)(3) can apply to obligations that come due prepetition; whether § 365(d)(3) estab- lishes an administrative priority claim without the need to establish such a claim under § 503(b); whether stub period rent, if coming due prepetition, can nonetheless be accorded administrative claim status; whether the nondebtor party must show more than a hypothetical possibility that the contract will be assigned before the exception under § 365(e)(2)(A) will apply; whether the “15 percent” in § 502(b)(6)(A) refers to 15 percent of the time left on the lease, measured from the date of sur- render, or to 15 percent of the rent that would have become due after the date of surrender; and whether a debtor is precluded from pursuing a preference avoid- ance action under 11 U.S.C. § 547 once a claim has been allowed under § 502(d). 506 Midway Airlines, 6 F.3d 492.

49 B. Mitigating Losses It is advisable to conduct a prebankruptcy assess- ment; that is, to evaluate all airport agreements to de- termine the effect that airline bankruptcies would have on those agreements. Airport counsel, in consultation with bankruptcy counsel (or airline operating agree- ment consultants), can then consider changes in leases/operating permits that may reduce exposure in future bankruptcies.507 In addition, it may be useful to compile a checklist of issues to track in the event of ac- tual airline bankruptcies. This section provides a num- ber of examples of issues that airport counsel, directly or through bankruptcy counsel, may be advised to monitor. 1. Prebankruptcy In drafting new airport operating agreements and leases, and in reviewing existing agreements for rene- gotiation, a number of issues may limit the airport’s exposure in the event of bankruptcy. These include, but are not limited to: Multiple leases.—As noted above, airlines in Chapter 11 have the option of assuming or rejecting executory contracts and unexpired leases. To the extent that the airline can pick and choose among multiple leases, it is more likely that the airline will be able to shed less de- sirable leases. Depending on state law concerning sev- erability of contracts, it may be feasible to structure leases for multiple facilities as one lease, which may make it more difficult to reject only a few facilities.508 A key factor is whether the multiple agreements are eco- nomically interdependent, as opposed to independent agreements merely bundled together. See Sections II.D.2, Severability, and II.D.3, Cross-Default Clauses, supra. Evaluate the possibility of keeping the flexibility to terminate one or all of the leases upon the lessee’s default under one lease, without being obligated to ter- minate all of the leases. The results may vary depending on state contract law, but generally transactions that are integrated bar- gains are more likely to hold together than multiple transactions dropped into one document. A mere state- ment of reliance that the parties would not have en- tered into one of the leases without the other(s) may not be enough to find that agreements are integrated. The assertion should be supported by underlying economic reality. Structuring payments.—To the extent that agree- ments cover obligations that could be billed monthly or annually, it may be advisable to evaluate how the bill- ing structure could affect collection in the event of bankruptcy.509 Consider whether steps can be taken to 507 See generally Adam Lewis, Brian Busey & Bill McCarron, Bankruptcy, Inc., AIRPORT BUSINESS MAGAZINE, June 2003, available at www.airportbusiness.com/print/Airport-Business- Magazine/Bankruptcy--Inc/1$1126 (Last visited Dec. 17, 2008). 508 See id. 509 See In Re Handy Andy Home Improvement Ctrs., Inc., 196 B.R. 87, 93 (Bankr. N.D. Ill. 1996) (by not requiring reduce the likelihood of payments being recovered as avoidable preferences. Take into account whether the airport is in a payment date or proration jurisdiction, as well as how the jurisdiction treats other questions of receiving payment under § 365(d)(3)/§ 503(b). Try to get landing fees covered in an agreement, even if the air- port sets fees under an ordinance.510 Keep on top of debts.—Remember, the airport cannot let payments go unpaid and then suddenly rush to col- lect when it looks like the airline is in trouble. Aside from practical problems, i.e., refusal to pay, payments made within 90 days of a bankruptcy filing may be re- coverable by the DIP as avoidable preferences. There- fore, waiting to collect debts from airlines or to enforce contractual terms may result in a loss or impairment of the ability to collect such debts once a bankruptcy peti- tion is filed.511 While probably not an option in the case of major airlines, consider whether to file for involun- tary bankruptcy of smaller tenants that look like they are wasting their estates. Perfecting security interests.512—The benefit of per- fecting is to protect claims that would otherwise not receive priority. It is advisable to have bankruptcy counsel consider whether in an airport’s particular cir- cumstances there are any downsides to perfecting its security interest in the property leased to an airline, and if so to take another tack, for example by obtaining a letter of credit.513 (See 11 U.S.C. § 502, supra.) Danger of cash collateral.—Evaluate whether cash deposits are at risk in the airport’s particular jurisdic- tion, which determination may be affected by wording of the deposit agreement. Consider whether to use a letter of credit, which—if properly drawn—as an agreement between the airport and the bank should not be property of the bankruptcy estate514 and therefore should not be subject to the automatic stay or constitute an avoidable preference. However, also keep in mind that under § 503(b)(7), it appears that surety bonds and letters of credit may decrease the payment owed the airport, while cash security deposits may increase it.515 In addition, it is possible that prepetition draws on a letter of credit serving as a security deposit will be held monthly payments of real estate taxes, landlord extended credit to lessee, which debt arose prepetition). 510 Lewis, supra note 507. 511 Even if the airport is diligent in pursuing overdue amounts, it may be prudent to put in allowances for uncollect- ible debts in landing fees and terminal rental rates. See Mass- port 2007 Bond Issuance, supra note 38, at 58–59, A-7. 512 See Carragher, supra note 336. 513 See, e.g., SAN DIEGO COUNTY REGIONAL AIRPORT AUTHORITY, SAN DIEGO, CALIFORNIA, COMPREHENSIVE ANNUAL FINANCIAL REPORT, FISCAL YEAR ENDED JUNE 30, 2006, at 47, www.san.org/documents/airport_authority/financials/CAFR_v3 .5_finalPrint.pdf. 514 In Re ITXS, Inc., 318 B.R. 85, 87 (Bankr. W.D. Pa. 2004). 515 See Jessop, supra note 134.

50 under § 502(b)(6) to reduce the landlord's allowable claim in bankruptcy.516 Lease options: Airport counsel, in conjunction with bankruptcy counsel, may want to consider under which circumstances the airport would benefit if the Chapter 11 airline were held to its leases and under which cir- cumstances the airport would benefit if the Chapter 11 airline were prevented from assuming its leases, and then explore whether leases can be constructed accord- ingly. For example, including provisions that allow the airport to terminate the lease for late payment or simi- lar breaches, rather than relying on ipso facto clauses (discussed below), may provide the ability to terminate unwanted leases. To the extent that the airport is party to a transac- tion with financing aspects, consider the ramifications if that part of the transaction were held to be a secured loan and plan accordingly. To decrease the odds of hav- ing a transaction with financing aspects be held to be a disguised financing rather than a true lease, emphasize the current consumption rather than credit compo- nents; to the extent possible make the financing part of the ground lease (taking state law into consideration); if possible have the facility revert to the airport or other public authority; and be aware of the ramifications of “hell or high water” clauses, particularly if they conflict with provisions in an accompanying ground lease. Com- bining leases may be easier to do if the facilities to be financed are built on the ground being leased (DEN) as opposed to being separate (SFO). State law on contract construction should be carefully reviewed. The use of short-term gate leases rather than long- term exclusive leases will optimize opportunities to re- capture the gates of a Chapter 11 airline.517 In fact, such leases can be advantageous regardless of the presence of bankruptcies, provided they are negotiated to allow the airport more control over gate utilization.518 Lease valuation.—It may be advisable to consider how a lease should be valued if it is rejected. Depending on the factual situation, in the event of bankruptcy the airport may need to establish the value of the premises in order to establish a priority administrative claim. There may be advantages to doing so before bankruptcy actually ensues. 516 Connectix Corp., 372 B.R. at 494–95. 517 Bernard F. Diederich, Federal Government Updates: PFCs (DOT White Paper—Airline Bankruptcy Issues), pre- sented at ACI-NA 2008 Spring Legal Affairs Committee Con- ference, Session II: Current Airport Legal Issues, Apr. 18, 2008. 518 For example, the Philadelphia International Airport re- placed expiring 32-year leases with 5-year leases that allow the airport to require airlines to share partially used gates or re- turn unused gates to the airport. Tom Belden, New Gate-Lease Deals Mark the End of an Airport Era: The Old 32-Year Regu- lation-Era Leases Are Out; Five-Year Deals Are In. Two Air- lines Will Likely Wind Up with More Gates, THE PHILADELPHIA INQUIRER, July 1, 2006, available at http://findarticles.com/p/articles/mi_kmtpi/is_200607/ai_n1656 6977 (Last visited Jan. 2, 2009). PFCs.—Monitor PFC reports to ensure that airlines are keeping current. Follow up with the airlines and, if necessary, USDOT and FAA if airlines fall behind. USDOT and FAA do try to get airlines to pay late re- mittances.519 2. Postbankruptcy Bankruptcy can be a squeaky wheel operation. The nondebtor party rarely benefits by sitting on its rights. While it is particularly important to remember substan- tial consummation (once a reorganization plan is sub- stantially consummated, the court will be reluctant to disrupt it), there are many steps along the way to plan confirmation at which the nondebtor who hesitates may lose—Big. With that in mind, the following are exam- ples, not a completely exhaustive list, of points to con- sider. Read the Chapter 11 disclosure statement: How are the airport’s claims classified? How will they be treated? Is it necessary to file any proofs of claim? Be mindful of the airport’s voting rights if the airport will get less than the full value of its claims or if the leases will be rejected or otherwise modified under the air- port’s reorganization plan. Consider what the airport would like to see in the reorganization plan and be pre- pared to offer input in time to influence the Chapter 11 airline. Consider whether to seek to reduce the period of exclusivity, object to the reorganization plan, or propose an alternative plan. Stay on top of: • Procedural issues, especially first day motions. In particular it is important to monitor proposed case management procedures. These procedural rules may have substantive implications, as they will establish notice periods and other matters that can influence out- comes. Specific procedural orders may also establish legal standards for resolving disputes in the bankruptcy case. In addition, when a court fails to rule on a mo- tion—such as a motion for adequate protection—in a timely fashion, the unfolding of events during the pend- ency of the motion may affect the outcome of the mo- tion.520 Therefore, if a motion is pending, do not assume that if the court does not rule the problem will go away. If the airline does not on its own address setting up a separate PFC account, consider remedies, infra. • Bankruptcy dates. Pay close attention to the Bar Date, which is so named for a reason. Keep track of the period available to the Chapter 11 airline for assuming or rejecting leases. It is also advisable to stay on top of dates to ensure accurate accounting of rent owed for computing damages. The effective date of rejection may substantially affect the character and amount of the resulting claims: be alert for motions requesting that rejection be made retroactive to the petition date. • Cash collateral, postpetition financing, and other motions. Requests by the airline for authorization to 519 Diederich, supra note 28. 520 Continental Airlines, 91 F.3d 553.

51 use cash collateral, receive an extension of time to as- sume a lease, etc., may be challenged on the ground that the debtor has failed in some obligation, such as paying postpetition rent. Also, look out for motions that could include PFCs. • Potential remedies. A number of remedies may be appropriate, including: motion for relief from automatic stay; objection to airline’s request for authorization to use cash collateral; motion to compel airline to assume or reject an unexpired lease; motion to compel airline to segregate and remit PFCs;521 and request for adequate protection. In the event of an adequate protection mo- tion, take care not to raise an administrative rent claim prematurely. In particular consider requesting ade- quate protection in the event of lease assignment. Re- member that adequate protection is likely to be un- available once the reorganization plan is confirmed. • FAA reporting requirements. An airline that has entered bankruptcy must file monthly PFC account statements with the FAA and quarterly PFC reports with each airport for which it collects PFCs. Being alert to failure to file required reports or discrepancies in 521 The facts of a particular situation, e.g., whether the air- line has failed to remit some or all PFCs to date, will dictate specific points that must be covered. However, there are cer- tain general points advisable to include in any proposed order to compel: • Reference to statutory and regulatory requirement to collect and remit PFCs. • Reference to statutory and regulatory requirements for air- lines in bankruptcy regarding PFCs. • Statement that the airline holds the PFCs in trust for the airports and has no legal nor equitable interest in the PFCs. Statement that the PFCs are not property of the estate under 11 U.S.C. § 541. • Establishment of segregated account for establishing mini- mum reserve and depositing and remitting PFCs to airport operator(s); terms of account will comply with 49 U.S.C. § 40117 and 14 C.F.R. pt. 158. • Specific statement of how amount in reserve account is to be calculated. • Specific statement of deposit obligations to ensure PFC ac- count is kept current, including daily deposit and monthly reconciliation obligations. • Statement that as required by § 40117(m)(3), the airline has not and will not grant security interest in the PFCs to any third party. • Statement of default notice and cure, including airport’s right to expedited hearing to compel payment and for all costs in- curred. • Statement that nothing in the order changes the PFC trust fund status. Depending on the circumstances it may also be advisable to include a statement that the order does not cover any other claims that the airport may have against the airline and re- serve the right of setoff and/or recoupment. Motions/orders that can be used as models can be located through Pacer, see note 402, supra. reporting may afford an opportunity to press the delin- quent airline to adhere to its responsibilities, rather than waiting and discovering that the funds have been spent elsewhere. See discussion of Vanguard, MarkAir supra. • Notices, particularly of the Chapter 11 airline’s statements of amounts owed. If the airline alleges an inaccurate amount owed and the airport does not dis- pute in a timely fashion, the bankruptcy court may adopt the amount asserted by the airline. • Claims and objections. Be timely. This is particu- larly important for Chapter 7 unsecured claims; see Section II.C, Bankruptcy Process, supra. Once the reor- ganization plan is substantially consummated, the court will be loath to do anything to upset it. 522 Try to recover claims as soon as possible, while there is still recovery to be had. Work with other creditors: Depending on the air- port’s particular circumstances, it may be advantageous to enter a workout settlement with the bondholders. Settlement elements may include: “entering into han- gar operational maintenance and marketing agree- ments, purchasing and/or selling unsecured bankruptcy claims, prosecuting collection of unsecured bankruptcy claims and potentially acquiring some or all of the bondholders’ rights in the bonds.”523 C. Sounds Good, But… There are a number of measures that may appear helpful but are in fact unlikely to hold up. While there may be strategic reasons for including such provisions in airline agreements and leases, the airport relies solely on them to protect its interests at its peril. These include: 1. Anti-assignment clauses: Given the sensitivity of having gates or other facilities assigned in contraven- tion of the airport’s competition plan or other impera- tives, it is tempting to want to control the assignment process. Unfortunately, the Bankruptcy Code puts the debtor’s need to dispose of assets ahead of such con- cerns. 2. Clauses waiving rights under § 365 to reject execu- tory contracts: When an airport invests significant re- sources in a single-tenant facility, it is also tempting to want to hold the airline to the lease. However, much as is the case for anti-assignment clauses, the Bankruptcy Code puts the debtor’s need to dispose of obligations ahead of such concerns. 3. Ipso facto clauses: Depending on the facts, the air- port may wish to prevent an airline from assuming a lease or contract. The strongest ground for doing so is to be able to establish that the lease was not unex- pired/the contract was not executory. Thus it may seem prudent to include contractual clauses purporting to affect the airline’s interest upon filing for bankruptcy 522 Continental Airlines, 91 F.3d at 560. 523 Tampa Agenda, supra note 464, at 38.

52 protection. However, provisions purporting to terminate or modify an airline’s interest in property because of bankruptcy filing are likely to be held to violate § 363(l). Provisions that waive the automatic stay may be less vulnerable depending on the specific circum- stances, but are by no means certain to hold up. 4. Grouping unrelated leases: State law should gov- ern. However, even if state law takes a completely for- mulistic approach, a bankruptcy court may look at the underlying economic reality to allow the airline in bankruptcy to accept beneficial leases and reject those that do not benefit the bankruptcy estate. 5. Statements in an agreement that the airport relied upon payment in a bond agreement in order to enter into an Airport Use Agreement: Not likely to work without support from underlying economic circumstances. At least it didn’t work for Chicago. Similar results are likely for unsupported statements of reliance in an at- tempt to tie together unrelated agreements.