United Airlines, Inc. v. HSBC Bank USA, N.A.

In the 1990s, United Airlines (debtor) worked with state government bodies to finance projects at airports in San Francisco, Los Angeles, Denver, and New York City. In San Francisco, the California Statewide Communities Development Authority (CSCDA) issued $155 million in bonds and gave United the proceeds for use at San Francisco International Airport. United subleased 20 acres of its maintenance base at the airport to the CSCDA for 36 years, for total rent of $1. The CSCDA then leased the 20 acres back to United for rent equal to the interest on the bonds plus an administrative fee. The lease had a $155 million balloon payment due in 2033 to retire the principal. At the end of the lease term, the CSCDA would have no remaining interest, and United’s full interest in the maintenance base would revert to United for no additional charge. The other airport transactions were structured similarly. After United entered bankruptcy in 2002, United asserted that none of the airport transactions were actually leases for purposes of 11 U.S.C. § 365 (i.e., the Bankruptcy Code provision allowing the bankruptcy trustee to assume or reject the debtor’s unexpired leases). Instead, United asserted that the transactions were secured loans. The bankruptcy court reasoned that for purposes of § 365, leases include true leases but not transactions that take the form of a lease but are security interests in substance. The bankruptcy court found that only the Denver transaction was a true lease. Accordingly, the court ordered United to resume full payments on the Denver transaction but allowed United to reduce its payments on the other three transactions and treat the difference between the amounts due and the amounts paid as unsecured debt. The district court found that all four transactions were true leases. The parties appealed the San Francisco dispute.