National Academies Press: OpenBook

The Impact of Airline Bankruptcies on Airports (2009)

Chapter: III. TREATMENT OF AIRPORT CLAIMS

« Previous: II. LEGAL ISSUES
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Suggested Citation:"III. TREATMENT OF AIRPORT CLAIMS." National Academies of Sciences, Engineering, and Medicine. 2009. The Impact of Airline Bankruptcies on Airports. Washington, DC: The National Academies Press. doi: 10.17226/23029.
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Suggested Citation:"III. TREATMENT OF AIRPORT CLAIMS." National Academies of Sciences, Engineering, and Medicine. 2009. The Impact of Airline Bankruptcies on Airports. Washington, DC: The National Academies Press. doi: 10.17226/23029.
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Suggested Citation:"III. TREATMENT OF AIRPORT CLAIMS." National Academies of Sciences, Engineering, and Medicine. 2009. The Impact of Airline Bankruptcies on Airports. Washington, DC: The National Academies Press. doi: 10.17226/23029.
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Suggested Citation:"III. TREATMENT OF AIRPORT CLAIMS." National Academies of Sciences, Engineering, and Medicine. 2009. The Impact of Airline Bankruptcies on Airports. Washington, DC: The National Academies Press. doi: 10.17226/23029.
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Suggested Citation:"III. TREATMENT OF AIRPORT CLAIMS." National Academies of Sciences, Engineering, and Medicine. 2009. The Impact of Airline Bankruptcies on Airports. Washington, DC: The National Academies Press. doi: 10.17226/23029.
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Suggested Citation:"III. TREATMENT OF AIRPORT CLAIMS." National Academies of Sciences, Engineering, and Medicine. 2009. The Impact of Airline Bankruptcies on Airports. Washington, DC: The National Academies Press. doi: 10.17226/23029.
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40 adequate protection prerejection and an administrative expense claim postrejection is still apposite. Braniff had sought and received—in addition to the § 362 automatic stay—a preliminary injunction prevent- ing the Authority from interfering with Braniff’s lease- hold interests at the Memphis International Airport. The Airport subsequently asked the bankruptcy court to lift the automatic stay and require Braniff to: (1) either assume or reject the Airport leases within a cer- tain time period; (2) pay for the reasonable use of the premises from the date on which the petition was filed until the date on which the leases are assumed or re- jected; and (3) pay all rent it received from its sublessees to the Airport as adequate protection.425 The Bankruptcy Court granted the first and third por- tions of the requested relief. Effective March 1, 1983, Braniff did reject the leases. The Airport sought its lease rejection damages under § 503, the full contract rental rate. Braniff argued that this motion should be dismissed because the court had already ruled on the administrative rent issue the pre- vious year when it ruled on the Airport’s automatic stay motion. In essence Braniff argued that the Airport’s use of the term “use and occupancy” was a claim for admin- istrative rent under § 503, and that issue was thus al- ready decided; the Airport argued that it had only re- quested adequate protection and that its use of the term “use and occupancy” was merely descriptive in support for its adequate protection claim. The Court of Appeals reviewed the typical remedy available at that time for a lessor suffering economic losses under an unexpired lease: move under § 365(d)(2) to compel the debtor to assume or reject the lease within a time certain.426 The court then distinguished between liability for lease assumption (liability for en- tire rent per the lease terms) and lease rejection (rea- sonable value of use and occupancy of the premises, receiving administrative expense priority). The latter claim, sometimes referred to as administrative rent, is “ordinarily presumed to be the contract rental rate, ad- justed downward or upward to reflect the extent to which the debtor actually used the demised prem- ises.”427 This claim determines amount and priority, and is generally made following lease rejection. Nonetheless, a court may order the debtor to make an advance payment that will be categorized later as either a payment for use and occupation in the event of lease rejection or rent in the event of lease assumption. The Court of Appeals distinguished this possible rem- edy of advance payment from the possible remedy of adequate protection. The court further distinguished the considerations involved in granting adequate pro- tection—which is interim relief—from those involved in 425 Braniff Airways, 783 F.2d 1284. 426 Braniff Airways, 783 F.2d at 1285, citing 2 COLLIER on BANKRUPTCY ¶¶ 365.01-.03 (15th ed. & Supp. 1985); MURPHY, CREDITORS' RIGHTS IN BANKRUPTCY § 9.07 (1985). 427 Braniff Airways, 783 F.2d at 1285. granting a claim for administrative rent, which is the final amount owed to a lessor under a rejected lease. The Court of Appeals then considered whether the claims made by the airport when it sought to lift the automatic stay were the same claims it made in seeking its lease rejection damages. The appellate court agreed with the district court that the use of the term “use and occupancy” without a reference to § 503 did not consti- tute a claim for administrative rent. In other words, the mere use of the term “use and occupancy” cannot trans- form a request for reasonable protection into a request for administrative rent. The Court of Appeals noted the absence of testimony about the reasonableness of the rate under the lease, which must be considered to de- termine administrative rent, as well as the emphasis during the first hearing on the existence of hardship to Braniff in being compelled to assume or reject the lease. Thus the court concluded that Braniff had not met its burden in establishing that the administrative rent issue had already been litigated. The case was re- manded to allow the bankruptcy court to hear evidence on the Airport’s administrative expense claim. III. TREATMENT OF AIRPORT CLAIMS A. Under the Bankruptcy Code Major issues under the Bankruptcy Code that are relevant to airport claims include: whether lease trans- actions are subject to § 365 assume or reject require- ments; time available for exercising the assume or re- ject option; treatment of trust funds; time allowed for payment of lease obligations; and the payment day ver- sus proration approach. However, given that a signifi- cant number of airport claims in airline bankruptcy proceedings are settled, in many cases the actual re- sults are not widely accessible and in any case do not provide precedent, per se, for how claims will be treated. 1. Prepetition and Postpetition Amounts Owed by Airlines for Terminal Rental Fees, Landing Fees, Fees for the Rental of Other Airport Facilities, and Other Amounts Owed to Airports by Airlines As noted above, once an airline files for bankruptcy protection, there are restrictions on payment of prepeti- tion debt due to the automatic stay. Prepetition debts generally will not be paid until the reorganization plan is confirmed. Furthermore, general unsecured claims are the last to be paid,428 and therefore run the greatest risk of not being paid in full.429 For example, in the United case, the unsecured distribution under the reor- 428 SALERNO, supra note 2, § 4.08[B][3], General Unsecured Creditors. 429 LYNN, supra note 2, ¶ 25.04[5][B], Lease and Contract Assumption, Assignment and Rejection: Advantages for the Debtor.

41 ganization plan was estimated to pay 4 percent to 8 percent of the claims.430 Postpetition rent must be paid until the lease is re- jected. Even in its dispute with the San Francisco Air- port (Section II.D.4 Stub Period Rent, supra), United paid, or acknowledged its obligation to pay, monthly rental beginning with the first month after the date of its bankruptcy filing.431 As indicated in that case, the obligation to pay rent that accrues during the period following the bankruptcy filing date through the end of the first month of the bankruptcy proceeding may be in dispute. It remains to be seen whether other jurisdic- tions will follow the Illinois bankruptcy court in holding that if the payment obligation comes due prepetition, § 365(d)(3) does not require payment during that period and/or in holding that rent for that period may be al- lowed as an administrative expense. In addition, the court may order the airline to pro- vide adequate protection during the time that the air- line is deciding whether to assume or reject the lease. For example, as noted, supra, the Memphis-Shelby County Airport Authority obtained an order from the bankruptcy court that Braniff Airways pay all rent Braniff received from its sublessees to the Authority until Braniff either assumed or rejected the leases in question.432 Once a lease is rejected, the airline is generally liable for the reasonable value of its use and occupancy of the premises. Braniff attempted—unsuccessfully—to avoid paying that expense following rejection of its leases with the Memphis-Shelby County Airport Authority by arguing that the authority had raised the administra- tive rent issue (due as rejection damages under § 503) when it sought adequate protection and was therefore barred from relitigating the issue.433 Payments for goods and services provided to a Chap- ter 11 airline before the bankruptcy filing are subject to the requirements of § 547. Therefore, unpaid fees such as accrued rent and landing fees related to prepetition goods and services may be unrecoverable,434 depending on the application of § 547 and the amount of unsecured claims compared with the resources available to be dis- bursed among unsecured claimants. See discussion of § 547, Section II.B.1, Bankruptcy Code Overview, supra. The limitations on the debtor’s ability to pay prepetition debts creates a financial uncertainty for airports, as an airport’s “stream of payments from a debtor airline would be interrupted to the extent of unpaid fees for prepetition goods and services, including accrued rent and landing fees.”435 430 United Air Lines, 351 B.R. 919. 431 United Air Lines, 291 B.R. 123. 432 Braniff Airways, 783 F.2d at 1284–85. 433 Id. at 1283. 434 The possibility of not receiving these prepetition fees is a financial risk that airports must disclose in financial offerings. See, e.g., Massport 2007 Bond Issuance, supra note 38, at 58. 435 Id. In addition, as discussed supra, at least one airline— TWA—claimed that rental fees were property of the estate and tried to recover payments as preferences.436 The amount at stake was $1,332,834.16. The results of the dispute are not publicly available. Northwest Airlines also tried to avoid a postpetition payment it made under a special facilities lease with the Minneapolis-St. Paul MAC, as part of its argument that the lease was actually a financing transaction. Northwest also took the position that (i) the MAC’s claim with respect to the Facilities Lease constitutes, to the extent allowed, a pre-petition unse- cured claim; and (ii) the MAC is not entitled to exercise any rights or remedies under the Facilities Lease that could not be exercised by a creditor holding only a general unsecured pre-petition claim against a debtor.437 The bond trustee argued that the lease was a true lease and that Northwest was obligated under § 365 to pay the lease obligations. The bond trustee also argued that if the lease were a disguised financing under the Bankruptcy Code, the claims would be “secured based upon the governing documents and upon a theory of equitable liens and/or mortgages.”438 It appears that at least as of December 31, 2007, the litigation had not been resolved.439 The amounts recoverable out of what is owed to an airport by an airline that files for bankruptcy protection will depend in part on the nature of the obligation. For example, when MarkAir filed for bankruptcy protection, it owed Denver International Airport $3.1 million, of which $1.6 million was for taxes. Denver argued that the taxes were held in trust rather than being property of the estate and therefore that Denver should receive priority in recovering that money.440 MarkAir left a 436 TWA Post Confirmation Estate, 305 B.R. 221 (“payments covered such matters as terminal and gates rent, utilities, security service, parking, and landing and takeoff rights”). See AAAE/ACI-NA comments in response to the June 26, 2003, Federal Register Notice, at 3, available at www.regulations.gov/fdmspublic/component/main?main=Docu mentDetail&o=0900006480313b58 (Last visited Dec. 16, 2008). AAAE/ACI-NA suggested that TWA might have been trying to recover PFCs as well, but PFCs are not mentioned in the bank- ruptcy court’s opinion. 437 In re Northwest Airlines Corp., Chapter 11, Case No. 05- 17930 (ALG) Jointly Administered (Bankr. S.D.N.Y.), Disclo- sure Statement With Respect to Debtors’ First Amended Joint and Consolidated Plan of Reorganization Under Chapter 11 of the Bankruptcy Code, Mar. 30, 2007, at 27–28, www.nwa- restructuring.com/nwa_downloads/nwa_CourtFiledDocuments /DisclosureStatementPlan/FinalDAandPlanHardCopy.pdf. 438 Id. at 28. 439 Dec. 31, 2007, 10-K, EX-10.7-Material Contract: Amended and Restated Third Amendment to Airline Operating Agreement and Terminal Building Lease Minneapolis-St. Paul International Airport, at 22–23, available at www.secinfo.com/d11MXs.tez8.b.htm (Last visited Dec. 16, 2008). 440 Markair Bankruptcy May Cost Denver Airport $3.1 Mil- lion, THE SEATTLE TIMES, Nov. 1, 1995, available at

42 string of unpaid debts in its earlier bankruptcy proceed- ings, including $138,500 owed to the city of Juneau in airport landing and lease fees.441 The categorization of rent and other fees owed for the period during which the debtor has under § 365(d)(3) to assume or reject executory contracts and unexpired leases (“stub period rent”) may depend on whether the bankruptcy court takes a payment day approach or proration approach. As discussed in Section II.D.4, Stub Period Rent, supra, the bankruptcy court held that United Airlines’ $30 million in rent owed for the period from December 9, 2002 (the day of the Chap- ter 11 filing), and December 31, 2002, came due prepeti- tion and held that payment was not required under § 365(d)(3). However, the court also found that the air- port could file an administrative claim for rent owed during the stub period. Thus even rent that comes due prepetition but covers a postpetition period may be eli- gible for administrative rent status, and thus receive higher priority than a prepetition claim. Cash security deposits may be declared assets of the bankruptcy estate,442 so other financial securities may be preferable: “The SCAS, which had an existing secu- rity deposit requirement, has moved away from cash- based deposits to requiring other financial instruments to avoid the cash deposits becoming part of the bank- rupt estate.” 443 2. Passenger Facility Charges Despite the requirements of 49 U.S.C. § 40117(m), there is still some danger for airports that bankrupt airlines will fail to segregate and remit PFC funds as required. That failure could lead to the PFC deposits being transformed into cash collateral for lenders or to there being insufficient funds available to properly re- mit to the airports on whose behalf the PFCs were col- lected.444 As discussed in the Vanguard case, supra, the http://community.seattletimes.nwsource.com/archive/?date=19 951101&slug=2150116 (Last visited Dec. 16, 2008). 441 Update—Customs Ups the Ante, THE SEATTLE TIMES, Feb. 1, 1994, available at http://community.seattletimes.nwsource.com/archive/?date=19 940201&slug=1892819 (Last visited Dec. 16, 2008). 442 Sacramento County Airport System, July 21, 2003, com- ments in response to FAA request for comments, FAA-2003- 15481-0014, available at www.regulations.gov/fdmspublic/component/main?main=Docu mentDetail&o=0900006480313b48 (Last visited Dec. 16, 2008). 443 U.S. DOT/FAA—Discussion of Comments Received in Response to Federal Register Notice, FAA-2003-15481-0020, at 4, available at www.regulations.gov/fdmspublic/component/main?main=Docu mentDetail&o=0900006480313b48 (Last visited Dec. 17, 2008). 444 ATA Airlines Bankruptcy News, [00007] Orlando Air- port's Motion to Compel Segregation of Pfc's, Oct. 27, 2004, available at http://bankrupt.com/ata.txt (Last visited Dec. 17, 2008), citing In re Vanguard Airlines, Inc., (Case No. 02-50802- JWV, W.D. Mo., Kansas City Division). The order confirming Vanguard’s First Amended Liquidating Plan of Reorganization is included in Vanguard’s Dec. 19, 2003, Form 8-K, available at airline had failed to segregate PFC funds before filing for bankruptcy. Ultimately Vanguard’s failure to segre- gate the PFC funds led to an insufficiency of funds for virtually all of its airports: 15 airports agreed to settle- ment amounts that were exceeded by their unsecured claims for the remaining amounts.445 While the PFC issue should be less of a problem now since § 40117(m) was amended to require segregation by covered carriers and to specify that failure to do so does not defeat the trust fund status of the funds, the Vanguard case shows the economic hit that airports can take if airlines in fact fail to segregate and remit PFC revenues as required. As discussed in Section II.D.3, Passenger Facility Charges, supra, airlines routinely move in bankruptcy proceedings to put PFCs in a separate account,446 or are compelled to do so following motions to compel filed by airports.447 Where such accounts are established, it is important to ensure that the PFCs are placed in an ac- count that cannot be accessed by other creditors. Substantial attorney’s fees may be required to pro- tect the airport’s claim to PFC revenues during the bankruptcy proceedings unless the bankrupt airline moves on its own to segregate PFC funds.448 As noted, supra, this issue may be addressed in the court order authorizing segregation of PFC revenues. At least one bankruptcy court found that a Chapter 7 trustee did not have the same obligation as a DIP to pay PFCs. That court also found that where the Chapter 7 trustee inherited a very limited amount of funds well below the amount of PFCs that should have been remit- ted, and then came up with more funding, based on sales of assets, the airports seeking to recover their PFCs could not show a sufficient nexus between their claims and the trustees’ funds to be able to recover. Fi- nally, the court rejected the argument that it should impose a constructive trust, holding that to do so in those circumstances would conflict with the bankruptcy policy of ratable distribution.449 Ultimately, the MarkAir http://sec.edgar-online.com/2004/01/06/0001000578-04- 000001/Section5.asp (Last visited Dec. 17, 2008). 445 In Re: Vanguard Airlines, Inc., I.D. No. 48-1149290, Debtor, In Proceedings Under Chapter 11, Case No.: 02-50802, (Bankr. W.D. Mo.), Order Granting Motion to Approve Settle- ment with PFC and Security Fee Claimants, June 18, 2004. 446 In re Delta Airlines, Inc., Case No. 05-17923-ASH (Bankr. S.D.N.Y. Sept. 14, 2005) [Docket No. 29]. 447 See, e.g., In re US Airways Group, Inc., et al., Case No. 04-13819-SSM (Bankr. E.D. Va., Oct. 15, 2004); In re Aloha Airgroup, Inc., et al., Case No. 04-03063 (Bankr. D. Haw. Feb. 10, 2005); In re ATA Holdings Corp., et al., Case Nos. 04-19866 and 04-19868–74 (Bankr. S.D. Ind. Nov. 1, 2004). 448 FAA, Discussion of comments received in response to Federal Register Notice in Federal Register Vol. 68, No. 123, 38108, at 5, available at www.regulations.gov/fdmspublic/ component/main?main=DocumentDetail&o=0900006480313 b4f (Last visited Dec. 17, 2008). 449 In re Markair, Inc., 5 ABR [Alaska Bankruptcy Reports] 277 (Bankr. D. Alaska 1998), available at

43 trustee agreed to apply a portion of MarkAir’s multimil- lion-dollar settlement from an antitrust action against Alaska Airlines450 to the PFC claims, resulting in partial payment of prepetition PFCs and close to full payment of postpetition PFCs. The MarkAir case illustrates the danger of failing to aggressively follow up on collection of PFC funds pre-bankruptcy and earlyon in the bank- ruptcy process: the longer the process goes on, the greater the likelihood that sufficient funds will not re- main to cover the PFC obligation and/or that a Chapter 7 court will find that the obligation to remit no longer exists. Another Chapter 7 airline, Transmeridian Airlines, recently settled its PFC claims with 14 airports, result- ing in the airports receiving 10 percent of their out- standing PFCs in cash and retaining an allowed, gen- eral unsecured claim for the remaining 90 percent.451 DOT and FAA take the position that PFCs are not property of the estate and therefore cannot be recover- able as preferences.452 3. Acceptance or Rejection (by the Debtor) of Leases for Real Property and Improvements at Airports Airports could have found themselves in limbo as they waited for airlines to assume or reject their leases. In particular, many airports considered extensions to the period in which the debtor might continue to occupy the premises while deciding whether to assume or reject the lease burdensome.453 The extension issue is less troublesome now than when the AAAE/ACI-NA made their comments in 2003, given the 2005 amendment to the Bankruptcy Code that put an end to routine exten- sions to the 60-day consideration period. See discussion of § 365 in Section II.B.1, supra. Nonetheless, Chapter 11 airlines continue to receive § 365(d)(4) extensions, although presumably with the airports’ consent. For example, Delta Air Lines received the following exten- sions: order dated November 10, 2005, extending time www.akb.uscourts.gov/5abr277.htm#5abr277 (Last visited Dec. 17, 2008). 450 MarkAir Calls $19 Million Alaska Airline Settlement Mixed Victory, BUSINESS WIRE, July 23, 1998, available at http://findarticles.com/p/articles/mi_m0EIN/is_1998_July_23/ai _50191764 (Last visited Dec. 17, 2008). 451 Order Granting Motion (as Amended) to Settle with Air- port Defendants ABE, ATL, BQN, CLT, CVG, IAD, JFK, MDT, OKC, RFD, SFB, SJU, SYR, and TOL In Adversary Proceeding No. 07-06617, in re Transmeridian Airlines, Inc., Case No. 05- 83284-jb, ch. 7 (Bankr., N.D. Ga. May 2, 2008). 452 Author’s June 27, 2008, telephone conversation with Bernard F. Diederich, Senior Attorney, Office of General Coun- sel, U.S. Dep’t of Transp. 453 See AAAE and ACI-NA comments in response to the June 26, 2003, Federal Register Notice titled, “Request for Pub- lic Comment on the Impact of Airlines Emerging From Bank- ruptcy on Hub Airports, Airport Systems and U.S. Capital Bond Markets,” 68 Fed. Reg. 38108 (June 26, 2003), at 2, available at www.regulations.gov/fdmspublic/component/main?main=Docu mentDetail&o=0900006480313b58 (Last visited Dec. 17, 2008). through May 15, 2006; order dated May 1, 2006, extending time through October 16, 2006; order dated October 10, 2006, extending time through April 16, 2007; with further extensions possible.454 In addition to refusing to provide consent to extensions, the airport may seek to compel the airline to assume or reject the leases within a time certain.455 In order to assume a lease, the airline in bankruptcy must have the bankruptcy court’s approval, must cure any defaults, and may have to provide adequate assur- ance of future performance. For example, in order to obtain court approval of assumption of a sublease, Be- lize Airlines, a sublessee to Pan Am—under the facts standing in much the same position as an airport—was required to pay all past due and current rent within 15 days after entry of the court’s order, and was required to put up a security deposit of approximately 3 months’ rent.456 Before emerging from Chapter 11, US Airways re- jected all of its leases and contractual agreements with the Allegheny County Airport Authority, effective January 5, 2004, subject to renegotiation of a new long- term lease agreement.457 At that time such a move was unprecedented.458 Fitch Ratings considered the potential lease rejection to be a “material negative event,” which resulted in downgrading of the airport’s credit rating from A- to BBB. The PNC Bank also withdrew the air- port’s line of credit.459 While rejecting all leases at an airport was viewed as unprecedented, that was not the first lease that US Airways had rejected.460 Moreover, examples abound of bankrupt airlines that have rejected leases, or used the threat of rejection to renegotiate leases under more fa- vorable terms. For example, after filing for bankruptcy protection, United Airlines rejected its lease for a main- tenance center at the Indianapolis International Air- port. While the airport was able to subsequently lease out portions of the facility, it was forced to incur some expenses for operation and maintenance, a portion of which were reimbursed under a settlement between the airport and the bankruptcy trustee. Interestingly, it appears that United Airlines did not attempt to rechar- 454 Delta Air Lines Form 8-K, Airports/Facilities Restructur- ing, at 63 (SEC Form 8-K available at http://www.sec.gov/answers/form8k.htm (Jan. 2, 2009). 455 Braniff Airways, 783 F.2d at 1283. 456 Pan American World Airways, Inc. v. Belize Airways, Ltd. (In re Belize Airways, Ltd.), 5 B.R. 152 (Bankr. S.D. Fla. 1980). 457 U.S. DEP’T OF TRANSP., IMPACT OF AIR CARRIERS EMERGING FROM BANKRUPTCY ON HUB AIRPORTS, AIRPORT SYSTEMS AND U.S. CAPITAL MARKETS (2003), http://ostpxweb.dot.gov/aviation/domav/dotspecterstudy.pdf. 458 Brown Company, supra note 13, at 1. 459 Brown Company, supra note 13, at 3–4. 460 TAMPA INT’L AIRPORT, ANNUAL REPORT 2006, at 45, www.tampaairport.com/about/facts/financials/hcaa_ann_rpt_20 06.pdf.

44 acterize its lease for this facility, choosing instead to merely reject the lease and abandon the facility.461 In 2005, Delta Air Lines rejected its special facility bond lease for certain facilities at the Cincin- nati/Northern Kentucky Airport.462 The lease rejection led to a settlement that provided the Bond Trustee a $260,000,000 prepetition, nonpriority, unsecured claim against the airline. In addition, Delta and the Kenton County Airport Board (KCAB) entered into a new lease for the facilities in question under a smaller bond in- denture. Delta also amended and restated leases with Massachusetts Port Authority for Logan Airport;463 re- jected a lease for a maintenance hangar at Tampa In- ternational Airport;464 and rejected its lease at the Greater Orlando Airport Authority, negotiating a new lease with fewer gates.465 In Tampa’s situation, both ground rent payments and bondholder payments were lost; the bond indenture required that the lease and debt service agreement remain in place until the bond- holders were paid in full; the lease agreement requires that the airport not recognize any ground rent pay- ments until the bondholders are paid.466 Note that when the defaulting airline reaches a settlement agreement with the bond trustee that allows the parties to enter a new lease agreement, dissenting bondholders may chal- lenge the settlement agreement, although in KCAB’s case, the challenge was unsuccessful. The bankruptcy court upheld the trustee’s right to negotiate the settle- ment and the district court held the bondholders’ ap- peal was equitably moot.467 As noted in Section II.D.1, Lease Recharacterization, supra, an airline may attempt to reject its leases but still retain use of the property. Even when the airline rejects leases and agrees to abandon the property, the amount of damages owed, and when they must be paid, 461 Indianapolis Airport Authority, supra note 49, at 11, 57– 58. 462 Delta Air Lines 370 B.R. 537. See also CINCINNATI- NORTHERN KENTUCKY INT’L AIRPORT, ANNUAL MARKETING REPORT, 2006 Financial Statements, at 38, www.cvgairport.com/files/files/CVG_2006.pdf; Delta Air Lines Form 8-K, Feb. 7, 2007, Airports/Facilities Restructuring, at 54–59 (Discussion of special facilities restructuring at Bos- ton/Logan, Cincinnati, Atlanta, Dallas, Tampa, Portland, Los Angeles, Chicago, and New York/LaGuardia Airports), avail- able at http://pcquote.brand.edgar-online.com/EFX_dll/ EDGARpro.dll?FetchFilingHTML1?SessionID=gMXgCgom AhfWRT_&ID=4936650 (Last visited Dec. 17, 2008). 463 Massport 2007 bond issuance, supra note 38, at 68. 464 TAMPA INT’L AIRPORT, supra note 460, at 45; Tampa In- ternational Airport, Agenda for Aviation Authority Regular Board Meeting, Dec. 14, 2006, at 37. 465 Delta Air Lines Form 8-K, Airports/Facilities Restructur- ing, at 59; Beth Kassab, Delta Signs New Lease Deal with OIA as Song Fades Away, ORLANDO SENTINEL, May 2, 2006. (SEC Form 8-K available at http://www.sec.gov/answers/form8k.htm (Jan. 2, 2009)). 466 TAMPA INT’L AIRPORT, supra note 460, at 45; Tampa Agenda, supra note 464, at 37. 467 Delta Air Lines 370 B.R. at 537. can be a subject of dispute. See Sections II.D.4, Stub Period Rent, and II.D.5, Other (Lease rejection), supra. Regardless of the exact circumstances, lease rejec- tion or lease renegotiation is likely to result in some loss of airport revenue that the airport must attempt to recoup. Redeploying the gates or facility in question, whether by release or assignment, should mitigate the loss, although new leases may be at lower rates. Also, assumption of a Chapter 11 airline’s gate leases and other airport assets must be approved by the bank- ruptcy court.468 Beyond redeploying, the airport’s ability to recoup lost revenue depends to some extent on the structure of the use agreement in effect. Under residual agreements the airport can generally increase fees charged to its remaining airlines; under compensatory agreements the airport must absorb the loss.469 In addi- tion, any new leases must comport with the FAA’s non- discrimination requirement. Because of the leverage afforded by potential lease rejections, airlines may request lease modifications be- fore deciding which leases and contracts to accept or reject under bankruptcy. For example, the SFO Airport Commission approved a modification to its lease with US Airways resulting in an annual $1.6 million reduc- tion in rent to the airport, rather than risk having the airline reject its lease outright during the Chapter 11 proceedings.470 Once a lease is rejected, the airline is free to negotiate a new lease with the airport, subject to the approval of the bankruptcy court. In many cases, negotiations following the com- mencement of lease rejection proceedings—which pro- ceedings must be approved by the court to be effective— substitute for litigation. The Delta special facility lease with KCAB, noted above, provides a good illustration. Following its Chapter 11 filing, Delta Air Lines issued notice to KCAB and the Bond Trustee that Delta in- tended to reject a special facility bond lease supporting improvements at the Cincinnati/Northern Kentucky 468 E.g. ATA AIRLINE BANKRUPTCY NEWS (Bankruptcy Creditors' Service, Inc.), Oct. 27, 2004, available at http://bankrupt.com/ata.txt (Last visited Dec. 17, 2008). See Commitment Letter from AirTrans, http://bankrupt.com/misc/AirTranCommitmentLetter.pdf. At least in some instances the airport itself will be able to exert some control over lease assignments. 469 AAAE and ACI-NA comments in response to Request for Public Comment on the Impact of Airlines Emerging From Bankruptcy on Hub Airports, Airport Systems and U.S. Capi- tal Bond Markets, 68 Fed. Reg. 38108 (June 26, 2003), at 2 available at www.regulations.gov/fdmspublic/component/main?main=Docu mentDetail&o=0900006480313b58 (Last visited Dec. 17, 2008). 470 Minutes of the Airport Commission [SFO] Special Meet- ing of March 25, 2003, Modification No. 9 to Lease and Use Agreement No. 82-0120–US Airways, Inc., at 12–13, www.sfoairport.com/web/export/sites/default/download/about/co mmission/agenda/pdf/minutes/M032503.pdf; San Francisco International Airport Competition Plan Update, Dec. 10, 2003, at 4, www.flysfo.com/web/export/sites/default/download/about/compe tition/pdf/Competition_Plan_Update_Final_-_121003.pdf.

45 Airport. Negotiations followed Delta’s motion for ap- proval of rejection of the lease. The issues that were covered during the negotiations and resolved by the settlement agreement rather than by litigation in- cluded: • Delta's ability to reject the Facilities Agreement. • Whether the obligations under the Guaranty were capped under § 502(b)(6) of the Bankruptcy Code. • Whether the Facilities Agreement itself was a dis- guised financing transaction. • Whether the Indenture Trustee had a claim to "re- let proceeds" to the extent that the Facilities Agreement was rejected. • Whether Kentucky law was an obstacle to Delta's plans to reject the Facilities Agreement or otherwise occupy the Facilities at a reduced rental rate even if the Rejection Motion was approved. • The viability of the Indenture Trustee's claims against KCAB.471 The negotiations ultimately resulted in a settlement agreement under which the original lease was termi- nated and replaced with a new lease at a fixed interest rate. The settlement agreement also provided the Bond Trustee a $260 million allowed prepetition, nonpriority, unsecured claim against Delta.472 The airport associations have suggested that airlines may use bankruptcy to discharge their obligations for cleaning up environmental contamination at an airport, shifting those costs to the airport itself and/or other carriers,473 although debtors may not abandon hazard- ous waste and appear to be subject to strict penalties for violating other environmental laws.474 In any event, there do not appear to be any reported cases that have involved Chapter 11 airlines filing for bankruptcy to avoid environmental obligations. Current FAA regulations do not address assignment of airport leases in bankruptcy proceedings. B. Under 49 U.S.C. § 40117/FAA Regulations 49 U.S.C. § 40117/14 C.F.R. Part 158 require that all airlines operating regularly: collect PFCs;475 record PFC activities and compensation retained;476 establish and maintain a financial management system that accounts for PFC revenues separately and discloses them as trust funds in airline financial statements;477 file quar- terly reports with airports for which PFCs are col- lected;478 conduct a CPA procedural audit if more than 471 Delta Airlines, 370 B.R. 543. 472 Delta Airlines, 374 B.R. 520. 473 AAAE/ACI-NA, supra note 469, at 3. 474 LYNN, supra note 2, ¶ 21.03[9], Exceptions to the Auto- matic Stay; ¶ 21.06[2], Environmental Claims. 475 49 U.S.C. § 40117(i)(2)(A); 14 C.F.R. § 158.45(a)(3). 476 14 C.F.R. § 158.69(a). 477 14 C.F.R. § 158.49. 478 14 C.F.R. § 158.65(a). 50,000 PFCs are collected annually;479 and remit PFCs to airports monthly.480 Both statute and regulation spec- ify that PFC revenues are trust funds held for the bene- ficial interest of the airports for which they are col- lected.481 The Vision 100—Century of Aviation Reauthoriza- tion Act (Vision 100)482 amended 49 U.S.C. § 40117 by adding a provision on financial management of fees for “covered” airlines (essentially those entering bank- ruptcy proceedings after December 12, 2003). Although the new statutory requirements for covered airlines went into effect as of December 12, 2003, the imple- menting regulations were not finally promulgated until June 22, 2007.483 In the interim FAA notified airlines entering bankruptcy—and their bankruptcy courts—of the statutory requirements and recommended proce- dures for the airlines to follow in order to be in compli- ance with likely regulatory requirements.484 The additional requirements for covered airlines in- clude:485 establishing a separate segregated account for PFCs that includes and maintains a PFC reserve as specified by law and FAA regulation; putting any exist- ing commingled PFC revenues into the PFC account; using that PFC account for all PFC transactions during the airline’s bankruptcy, thus no longer commingling PFC revenues with other corporate revenues (funds deposited in operating accounts must be transferred to the PFC account); compensating an airport for costs incurred to recover PFCs in the event the airline fails to comply with 14 C.F.R. 158.49(c) or causes that airport to incur costs to recover or retain PFC revenue; and not pledging PFC revenues as collateral. The covered air- lines are not required to create a separate account for each airport for which they collect PFCs. In addition, covered airlines that do not segregate PFC revenues as required are prohibited from collecting interest on their PFC revenues.486 Finally, covered airlines must provide the FAA with copies of the quarterly reports provided to airports and must also file monthly PFC account state- ments with the FAA.487 The FAA made clear that sub- accounts within existing accounts do not meet the PFC account requirement and that 49 U.S.C. § 40117(m)(3) 479 14 C.F.R. § 158.69(b). 480 49 U.S.C. § 40117(i)(2)(B) requires Secretary to establish remittance procedures; 14 C.F.R. § 158.51 requires monthly remittance. 481 49 U.S.C. § 40117(g)(4); 14 CFR § 158.49(b). 482 Sect. 124, 108 Pub. L. No. 176, 117 Stat. 2502 (Dec. 12, 2003). 483 Passenger Facility Charge Program, Debt Service, Air Carrier Bankruptcy, and Miscellaneous Changes: Final Rule, 72 Fed. Reg. 28837 (May 23, 2007). 484 E.g., a Dec. 15, 2005, letter from Catherine M. Lang, Act- ing Associate Administrator for Airports, was sent to Neal S. Cohen, Executive Vice President and Chief Financial Officer, Northwest Airlines. 485 49 U.S.C. § 40117(m); 14 C.F.R. § 158.49. 486 49 U.S.C. § 40117(m)(5); 14 C.F.R. § 158.53(b). 487 14 C.F.R. § 158.65(b).

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The Impact of Airline Bankruptcies on Airports Get This Book
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TRB’s Airport Cooperative Research Program (ACRP) Legal Research Digest 6: The Impact of Airline Bankruptcies on Airports examines legal issues presented by the filing of airline bankruptcies that are relevant to airports, and explores how airport lawyers and courts have responded to those issues. The report highlights the basics of bankruptcy theory and law relevant to airport operating agreements with airlines, and identifies issues such as lease recharacterization and payment of stub period rent that particularly affect airports dealing with airlines in bankruptcy.

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