In re Ual Corp.

• Decision Date: 30 March 2004
• Docket Number: Adversary No. 03 A 00978.,Adversary No. 03 A 00977.,Adversary No. 03 A 00975.,Adversary No. 03 A 00976.,Bankruptcy No. 02 B 48191.
• Citation: 307 B.R. 618
• Parties: In re UAL CORPORATION, et al., Debtors. United Air Lines, Inc., Plaintiff, v. HSC Bank USA, as trustee, the California Statewide Communities Development Authority, the City and County of San Francisco, and the Airports Commission for the City and County of San Francisco, Defendants. United Air Lines, Inc., Plaintiff, v. The Bank of New York, Inc., as trustee, the Port Authority of New York and New Jersey, and the New York City Industrial Development Agency, Defendants. United Air Lines, Inc., Plaintiff, v. U.S. Bank N.A., as trustee, the Regional Airports Improvement Corporation, and the City of Los Angeles, Defendants. United Air Lines, Inc., Plaintiff, v. HSC Bank USA, as paying agent, and the City and County of Denver, Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

Page 618

307 B.R. 618

In re UAL CORPORATION, et al., Debtors.

United Air Lines, Inc., Plaintiff, v. HSC Bank USA, as trustee, the California Statewide Communities Development Authority, the City and County of San Francisco, and the Airports Commission for the City and County of San Francisco, Defendants.

United Air Lines, Inc., Plaintiff, v. The Bank of New York, Inc., as trustee, the Port Authority of New York and New Jersey, and the New York City Industrial Development Agency, Defendants.

United Air Lines, Inc., Plaintiff, v. U.S. Bank N.A., as trustee, the Regional Airports Improvement Corporation, and the City of Los Angeles, Defendants.

United Air Lines, Inc., Plaintiff, v. HSC Bank USA, as paying agent, and the City and County of Denver, Defendants.

Bankruptcy No. 02 B 48191.

Adversary No. 03 A 00975.

Adversary No. 03 A 00976.

Adversary No. 03 A 00977.

Adversary No. 03 A 00978.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

March 30, 2004.

COPYRIGHT MATERIAL OMITTED

James H.M. Sprayregen, Marc Kieselstein, David R. Seligman, Todd Gale, Kirkland & Ellis, Chicago, IL, for Debtors.

Ronald Barliant, Andrew Weissman, Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd., Chicago, IL; and Katherine A. Constantine, Steven J. Heim, Dorsey & Whitney, LLP, Minneapolis, MN; Mark J. Prager, Jill L. Murch, Foley & Lardner, Chicago, IL, for U.S. Bank National Association.

R. Dale Ginter, Sallie B. Armstrong, Jenna L. Clark, Downey Brand LLP, Sacramento, CA, for California Statewide Communities Development Authority.

Paul E. Chronis, Kristin L. Cantu, Hannah J. Mufson, Nathan F. Coco, McDermott, Will & Emery, Chicago, IL, for JFK.

Charles P. Schulman, Arlene Gelman, Sachnoff & Weaver, Ltd, Chicago, IL; John J. Bingham, Jr., Aaron E. DeLeest, David A. Gill, Danning, Gill, Diamond & Kollitz, LLP, Los Angeles, CA; Steven J. Heim, Patrick J. McLaughlin, Katharine A. Constantine, Dorsey & Whitney, LLP, Minneapolis, MN, for LAX and City of Los Angeles.

David A. Golin, Gesas, Pilati, Gesas & Golin, Ltd., Chicago, IL; Rockard J. Delgadillo, Eduardo Angeles, John M. Werlich, Office of the Los Angeles City Attorney, Los Angeles, CA, for The Regional Airports Improvement Corp.

William W. Kannel, Timothy J. Langella, George Hofman, Mintz, Levin, Cohen, Ferris, Glovsky & Popeo, PC, Boston, MA; Douglas W. Jessop, Kerstin Cass, Jessop & Company, P.C., Andrew M. Schauer, Krys Boyle, P.C., Denver, CO, for Denver Airport.

Gary W. Garner, Harold Kaplan, Mark F. Hebbeln, Stephanie Wickouski, Gardner, Carton & Douglas, Chicago, IL, for Denver City and County of Denver and SFO.

Jason E. Rios, Dale R. Ginter, Downey Brand, LLP, Sacramento, CA, for California Statewide Communities.

Kirk Dillman, Michael Morris, Josh Mester, Hennigan, Bennett & Dorman, LLP, Los Angeles, CA, for HSBC Bank.

MEMORANDUM OF DECISION

EUGENE R. WEDOFF, Chief Judge.

Four related adversary proceedings are before the court in these jointly administered cases. In each of the proceedings, one of the debtors, United Air Lines, Inc. ("United"), seeks a declaratory judgment that certain of its payment obligations related to airport improvements are not obligations arising under "leases" pursuant to § 365 of the Bankruptcy Code (Title 11 U.S.C., the "Code"). The defendants in the proceedings are other parties to the instruments giving rise to the payment obligations. The defendants have all asserted that these instruments are in fact "leases" under § 365. Both United and the defendants seek summary judgment. As discussed below, a "lease" under § 365 must be a "true" lease, as opposed to a financing instrument. Because this is not the situation in three of the four adversary proceedings, United is entitled to summary judgment in those proceedings. In the fourth proceeding, involving the Denver airport, a true lease is involved, and the defendants are entitled to judgment.

Jurisdiction

Federal district courts have exclusive jurisdiction over bankruptcy cases. 28 U.S.C. § 1334(a). Pursuant to 28 U.S.C. § 157(a), district courts may refer bankruptcy cases to the bankruptcy judges for their district, and, by Internal Operating Procedure 15(a), the District Court for the Northern District of Illinois has referred the pending cases. When presiding over a referred case, a bankruptcy judge has jurisdiction under 28 U.S.C. § 157(b)(1) to enter appropriate orders and judgments in core proceedings within the case. The pending adversary proceedings are core proceedings under 28 U.S.C. § 157(b)(2)(A) (matters concerning the administration of the estate), § 157(b)(2)(B) (allowance or disallowance of claims against the estate), § 157(b)(2)(M) (orders approving the use or lease of property), and § 157(b)(2)(O) ("other proceedings affecting ... the adjustment of the debtor-creditor or equity security holder relationship"). See In re PCH Assocs., 60 B.R. 870, 872-73 (S.D.N.Y.), aff'd, 804 F.2d 193 (2d Cir.1986) (declaratory judgment action to determine the "lease" status of an agreement is a core proceeding). This court therefore has jurisdiction to enter final orders with respect to the pending proceedings.

Undisputed Facts

The four adversary proceedings that produced the present motions all involve a similar situation: tax-exempt bonds were issued to finance the construction of airport improvements for the benefit of United, and the debt service on the bonds was to be paid with funds received from United. The parties dispute the effect in bankruptcy of the documents giving rise to United's payment obligations, but there is no dispute about the identity or content of these documents.

1. San Francisco International Airport (SFO) — Adversary Proceeding No. 03 A 00975. At the San Francisco International Airport, United entered into a Ground Lease with the City and County of San Francisco, administered by their Airports Commission, on June 18, 1973 (the "SFO Ground Lease"). United was to use the leased land for "construction and operation of aircraft maintenance hangar, test and storage facilities" and for administrative and supervisory operations, rather than for loading and unloading commercial passengers and cargo. (SFO Ground Lease at 4-5.) The lease had an initial term of 20 years and was subject to two ten-year extensions at the option of United. (Id. at 7.) Thus, the lease would expire no later than 2113.

Some 24 years after the Ground Lease was executed, United, the California Statewide Communities Development Authority (a governmental agency authorized to issue bonds, the "CSCDA"), and an indenture trustee (now HSC Bank USA, the "SFO trustee") entered into four interrelated agreements, all dated August 1, 1997, in order to finance a number of improvements in United's facilities at the airport. The agreements included (1) a Site Sublease (the "SFO Sublease"), (2) a Facilities Lease (the "SFO Leaseback"), (3) an Indenture of Mortgage and Deed of Trust (the "SFO Indenture"), and (4) a Guaranty Agreement.

• The SFO Sublease. Pursuant to the SFO Sublease, United leased to the CSCDA a portion of the property covered by the SFO Ground Lease. (SFO Sublease at 2 and Exhibit A.) The term of the SFO Sublease is defined as the period from September 1, 1997 to October 5, 2033, unless a shorter or longer period (ending no later than October 5, 2038) is required to retire bonds to be issued by the CSCDA (with the parties expressly recognizing that the SFO Ground Lease might expire before the expiration of the SFO Sublease). (Id. at 2.) The rent that the CSCDA was required to pay United for the entire term of the sublease was $1, and there is no provision for remedies on the part of United for any default by the CSCDA. (Id.)

• The SFO Leaseback. Under the SFO Leaseback, the CSCDA leased back to United the identical property leased to it in the SFO Sublease. (SFO Leaseback at 2.)¹ The term of the SFO Leaseback is also identical to the term of the SFO Sublease. (Id. at 3.) However, the rent United agreed to pay for leasing back the property that it subleased to the CSCDA is defined by the amounts necessary to make payments on the bonds to be issued under the SFO Indenture, together with the costs of administering the financing. (Id. at 3-4.)² The SFO Leaseback provides a full set of default provisions and remedies, including the CSCDA's right to take possession of the leased facilities and relet them if United fails to make the required payments. (Id. at 16-19.)

• The SFO Indenture. The SFO Indenture generally provides (a) for the issuance of tax-exempt bonds by the CSCDA (SFO Indenture at 15, 37), (b) for the SFO trustee to receive the proceeds of the sale of the bonds for purposes of funding construction of defined improvements benefiting United (id. at 20-22), and (c) for the SFO trustee to receive the rental payments from United under the SFO Leaseback for the purpose of paying the debt service on the bonds and ultimately retiring them (id. at 29-33). The SFO Indenture makes clear that the bonds are "limited obligations" of the CSCDA, payable only from revenue received from United and earnings on this revenue. (Id. at 15.)

• Guaranty Agreement. The Guaranty Agreement sets out a guaranty from United to the SFO trustee of all payments due under the bonds.

2. JFK International Airport (JFK) — Adversary Proceeding No. 03 A 00976. At JFK International Airport in New York, United leases land from the Port Authority of New York and New Jersey (the "Port Authority") under an Agreement of Lease (the "JFK Ground Lease") dated August 1, 1995. The Port Authority's rights in the property derive from an "Agreement with respect to Municipal Air Terminals" between the Port Authority and the City of New York, dated April 17, 1947. The JFK Ground Lease involves premises consisting of two adjacent areas. (JFK Ground Lease at 2 and Exhibit A.) United was required to surrender one of the areas (Area II — referred to as Area 2 in the Exhibit and later agreements) no later...