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The Bankruptcy Hotline
Seventh Circuit Examines Lease vs. Secured Loan Issue
The Seventh Circuit has ruled that a site sublease and a facilities lease between United Airlines and the California Statewide Communities Development Authority was not a “true lease” under ' 365, but rather a secured loan, meaning that United can retain the property and pay only the economic value of the security interest and treat any residue as unsecured debt. United Airlines Inc. v. HSBC Bank USA, No. 04-4209 (July 26).
Under ' 365, only a “true lease” counts as a “lease” that would require a debtor who chooses to assume the lease to fully perform all of its obligations. Here, the debtor argued that the agreement was not a lease under ' 365, but rather a secured loan. The district court disagreed and the Seventh Circuit reversed.
Looking to the substance of the documents rather than the form, the court concluded that United used an asset (its leasehold interest) to secure an extension of credit, agreeing to pay “rent” equal to the price of that credit rather than any element of value in the “leased” premises.
Editor's note: A full analysis of this case and the issue will appear in an upcoming issue.
Seventh Circuit Examines Lease vs. Secured Loan Issue
The Seventh Circuit has ruled that a site sublease and a facilities lease between
Under ' 365, only a “true lease” counts as a “lease” that would require a debtor who chooses to assume the lease to fully perform all of its obligations. Here, the debtor argued that the agreement was not a lease under ' 365, but rather a secured loan. The district court disagreed and the Seventh Circuit reversed.
Looking to the substance of the documents rather than the form, the court concluded that United used an asset (its leasehold interest) to secure an extension of credit, agreeing to pay “rent” equal to the price of that credit rather than any element of value in the “leased” premises.
Editor's note: A full analysis of this case and the issue will appear in an upcoming issue.
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