The Impact of Airline Bankruptcies on Airports (2009) / Chapter Skim
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Pages 10-37
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From page 10... ...
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 bankruptcy may tie up gates and other assets; recent bankruptcy actions had lessened the security of airline/airport finance contracts; PFC stand-alone financing had mostly not been affected by airline bankruptcies; and special facility bond financing had come under great scrutiny due to recent airline bankruptcies.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 investments in exchange for coverage of airport costs, left airports vulnerable when those airlines entered bankruptcy and rejected their leases.
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From page 11... ...
13 fact a bankruptcy process that allows bad management to stay in control is a questionable solution.125 In addition, 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)
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14 11 U.S.C. § 105, Power of court This section is the source of a bankruptcy court's equitable power, although the extent of those powers is not clearly settled.136 11 U.S.C.
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15 ruptcy are exempt from the automatic stay under the express police and regulatory exception of § 362(b)
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16 tantly perhaps, whether the asset is increasing or decreasing in value.172 The decision must also be the product of an independent business judgment.173 Subsection (c) prohibits a debtor from using cash collateral unless each entity with interest in the collateral consents or the court authorizes such use after notice and a hearing.
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From page 15... ...
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 determination 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 defined 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.
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From page 16... ...
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.
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From page 17... ...
19 Rejection constitutes a breach deemed to have occurred immediately before the filing date of the petition.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 expenses, which claim must be addressed under the reorganization plan.223 If the assets of the estate are insufficient 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 administrative expense priority for the reasonable value of the debtor's use and occupancy of the property postpetition.225 If the debtor neither assumes nor rejects an unexpired lease of real property "by the earlier of 120 days after entry of the order for relief or of an order confirming a plan of reorganization, the lease is deemed to be rejected and the trustee (or chapter 11 debtor)
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20 Courts have split over whether the "15 percent" refers 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.
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21 tion services may also be entitled to administrative expense priority under § 503(b)
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22 the debtor holds a property interest.259 Thus, the interest 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)
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From page 21... ...
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)
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24 basis for the requirement that the debtor provide the secured lender the economic value of the security interest.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)
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25 the event of airline bankruptcy, a point disputed by airline representatives.310 In 2003 Section 40117 was amended to set forth requirements for financial management of PFCs for a "covered air carrier" (an air carrier that files for bankruptcy or has an involuntary bankruptcy proceeding begun against it) .311 Subsection (m)
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26 C Bankruptcy Process 316 The bankruptcy process begins when the debtor files a petition for bankruptcy protection.
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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 modified under the confirmation plan vote on the plan.
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28 estate because of savings assumed by avoiding prolonged 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.
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29 either assume the lease and fully perform or reject the lease and surrender the property. Under §§ 506(a)
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30 disagreed on what constituted comparable properties. HSBC argued that a similar hangar facility at the San Francisco airport was the most comparable property.
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31 tween rental value and United actual financial obligations"354 but was at complete odds with the provisions in the underlying lease in the event that the leased premises 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 borrowed.
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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)
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33 addition, the master leases expressly provided that individual leases were not to be merged into one another. Finally, the court found that the parties' prepetition negotiation to substitute one individual lease for another under one of the master leases supported the conclusion that the master lease was not in fact severable.
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From page 32... ...
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 provisions in bankruptcy.
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35 intervention in holding that the timely performance requirement of § 365(d)
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36 the applicability of the Contract Rate to the Stub Period."389 Although United acknowledged the existence of a rebuttable presumption in favor of the lease rate, United disputed the existence of a heightened standard. Instead, United cited several circuit court opinions that the presumption can be rebutted by evidence of a different value.390 United also argued that ordinarily presumptions do not change the burden of proof, and that there was no reason to do so in this case.
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From page 35... ...
37 As of September 1, 2005, United had paid approximately $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)
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From page 36... ...
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 protection on December 30, 2004, Aloha requested authorization to pay certain prepetition obligations and for postpetition financing. Shortly thereafter Aloha also moved for authorization for use of cash collateral.
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From page 37... ...
39 Airways case, the consent order specified steps the airline 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.
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