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The Third Circuit ruled that bankruptcy court correctly applied the reorganization test in the aggregate. The court noted that Congress did not provide any guidance as to how to apply the reorganization test under these circumstances, and that the plan-by-plan approach appeared to be unworkable. The court stated that '[a]bsent a clear congressional mandate to the contrary,' it would not impose upon bankruptcy courts 'an approach to the reorganization test that would conflict with their tradition of preventing unfairness in bankruptcy proceedings. Congress must speak more clearly than it has in ERISA if it wishes bankruptcy courts to take a plan-by-plan approach to the reorganization test.'

The court further found that applying the reorganization test to multiple plans in the aggregate to be the more 'straightforward' approach. 'A basic tenet of statutory construction is that courts should interpret a law to avoid absurd or bizarre results.' By adopting the PBGC's interpretation of ' 1341, the court stated that it would be concluding that Congress required courts to apply the reorganization test on a plan-by-plan basis, but without any guidance on the mechanics of this approach, 'making it essentially unworkable. We will not adopt a statutory construction that leads to such an anomalous result, especially where the aggregate ap-proach represents an alternative that is 'neither irrational nor arbitrary.”

United Loses 365 Argument in Denver

The Seventh Circuit has affirmed the decisions of both the bankruptcy and district courts that an agreement between United Air Lines and the city and county of Denver for the financing and construction of facilities at the Denver International Airport must be treated as a true lease for purposes of '365. United Air Lines Inc. v. HSBC Bank USA (In re United Air Lines Inc.), No. 05-1459, (July 6).

Although the Seventh Circuit has addressed similar issues with respect to United's leases at the San Francisco and Los Angeles International Airports, a critical distinction here is that the parties consolidated their deal into a single document, whereas 'in the San Francisco and Los Angeles cases (in which we held two supposed lease arrangements to be secured loans), the underlying ground leases were addressed in separate documents.' Because Denver and United 'tied their ground and facilities arrangements into a single contract,' which cannot be severed under Colorado law, the agreement, taken as a whole, must be treated as a lease.

The court noted that while United was seeking to treat certain bond-related obligations in the agreement as lease obligations under ' 365, it would first need to clear two hurdles. 'First, the bond-related portions of the agreement must be severable from the rest of the agreement, which, with its traditional ground rentals, is indisputably a lease. Second, the substance of the agreement's facilities provisions must genuinely be that of a loan and not a lease.' To be severable under Colorado law, however, there needs to be contractual language manifesting each party's intent to treat the contract as divisible. Moreover, the court found the contract to be 'an inherently integrated bargain: an agreement for a leasehold coupled with a bond arrangement to improve that leasehold.' Because the parties did not separate the transaction into two contracts, and because their 'decision to unite their interdependent ground and facilities objectives into a single contract at the outset cannot now be undone after the fact under Colorado law.'

Pension Plan Terminations Must Be Considered in the Aggregate

Addressing an issue of first impression for the federal appeals courts, the Third Circuit has ruled that when an employer in Chapter 11 seeks to simultaneously terminate multiple pension plans under ERISA's reorganization test, the proper approach is to apply the test in the aggregate as opposed to considering the termination of each plan independently. In re Kaiser Aluminum Corp., No. 05-2695 (July 26).

Pursuant to their reorganization in Chapter 11, Kaiser Aluminum Corporation and 25 of its affiliates requested that the bankruptcy court approve the termination of six pension plans under the reorganization test set forth in ERISA ' 4041(c)(2)(B)(ii)(IV), 29 U.S.C. '1341(c)(2)(B)(ii)(IV)(2000). Applying the test to all six plans in the aggregate, the bankruptcy court found that their termination was required for the debtor to emerge from Chapter 11. The Pension Benefit Guaranty Corporation appealed, arguing the bankruptcy court should have applied the test on a plan-by-plan basis to each of the pension plans. Under this approach, the PBGC argued that some of pension plans would not fulfill the reorganization test, and therefore could not be terminated. The district court affirmed, however, and the PBGC again appealed.

The Third Circuit ruled that bankruptcy court correctly applied the reorganization test in the aggregate. The court noted that Congress did not provide any guidance as to how to apply the reorganization test under these circumstances, and that the plan-by-plan approach appeared to be unworkable. The court stated that '[a]bsent a clear congressional mandate to the contrary,' it would not impose upon bankruptcy courts 'an approach to the reorganization test that would conflict with their tradition of preventing unfairness in bankruptcy proceedings. Congress must speak more clearly than it has in ERISA if it wishes bankruptcy courts to take a plan-by-plan approach to the reorganization test.'

The court further found that applying the reorganization test to multiple plans in the aggregate to be the more 'straightforward' approach. 'A basic tenet of statutory construction is that courts should interpret a law to avoid absurd or bizarre results.' By adopting the PBGC's interpretation of ' 1341, the court stated that it would be concluding that Congress required courts to apply the reorganization test on a plan-by-plan basis, but without any guidance on the mechanics of this approach, 'making it essentially unworkable. We will not adopt a statutory construction that leads to such an anomalous result, especially where the aggregate ap-proach represents an alternative that is 'neither irrational nor arbitrary.”

United Loses 365 Argument in Denver

The Seventh Circuit has affirmed the decisions of both the bankruptcy and district courts that an agreement between United Air Lines and the city and county of Denver for the financing and construction of facilities at the Denver International Airport must be treated as a true lease for purposes of '365. United Air Lines Inc. v. HSBC Bank USA (In re United Air Lines Inc.), No. 05-1459, (July 6).

Although the Seventh Circuit has addressed similar issues with respect to United's leases at the San Francisco and Los Angeles International Airports, a critical distinction here is that the parties consolidated their deal into a single document, whereas 'in the San Francisco and Los Angeles cases (in which we held two supposed lease arrangements to be secured loans), the underlying ground leases were addressed in separate documents.' Because Denver and United 'tied their ground and facilities arrangements into a single contract,' which cannot be severed under Colorado law, the agreement, taken as a whole, must be treated as a lease.

The court noted that while United was seeking to treat certain bond-related obligations in the agreement as lease obligations under ' 365, it would first need to clear two hurdles. 'First, the bond-related portions of the agreement must be severable from the rest of the agreement, which, with its traditional ground rentals, is indisputably a lease. Second, the substance of the agreement's facilities provisions must genuinely be that of a loan and not a lease.' To be severable under Colorado law, however, there needs to be contractual language manifesting each party's intent to treat the contract as divisible. Moreover, the court found the contract to be 'an inherently integrated bargain: an agreement for a leasehold coupled with a bond arrangement to improve that leasehold.' Because the parties did not separate the transaction into two contracts, and because their 'decision to unite their interdependent ground and facilities objectives into a single contract at the outset cannot now be undone after the fact under Colorado law.'