## Facts

- United Airlines entered airport-facility financing arrangements using municipal tax-exempt bonds for construction and improvements at San Francisco International Airport.
- The California Statewide Communities Development Authority (CSCDA) issued revenue bonds; a governmental entity retained legal title to the facilities.
- CSCDA entered lease documents and “subleased” the facilities to United; United’s “rent” was set to match bond debt service and flowed to bondholders through HSBC as trustee.
- United filed for Chapter 11 in December 2002 and sought a determination that the arrangement was a secured financing rather than a “true lease,” to avoid treatment as an unexpired lease under 11 U.S.C. § 365.
- The bankruptcy court characterized the transaction as a secured financing; the district court reversed, treating California law as controlling and concluding it was a true lease.
- United appealed.

## Issues

1. Whether the airport “sublease” should be treated as a true lease or a secured financing for purposes of 11 U.S.C. § 365 in Chapter 11.
2. Whether characterization is governed by federal bankruptcy law or by state law (including California law).
3. What economic features indicate a purported lease is actually a financing arrangement secured by the debtor’s payment stream and property interests.

## Decision

- The Seventh Circuit reversed the district court.
- The court held the arrangement was, in substance, a secured financing rather than a true lease.
- Because it was not a true lease, § 365’s assumption/rejection and cure requirements did not apply to the transaction.
- The result was to treat the bondholders’ rights as secured claims to the extent of collateral value, with any deficiency treated as unsecured.

## Legal Principles

- Section 365 applies only to “true leases”; labels and formal drafting do not control when the economic substance is financing.
- Federal bankruptcy law governs the characterization of a transaction for Bankruptcy Code purposes; state law may inform analysis but does not dictate classification when inconsistent with bankruptcy substance-based treatment.
- Economic indicia of secured financing include: payments calibrated to debt service; allocation of risks resembling lender/borrower rather than lessor/lessee; minimal lessor residual interest; and formal title serving a tax-financing function rather than reflecting ordinary landlord ownership risks.
- Recharacterization affects bankruptcy consequences: true leases require assumption with cure and ongoing performance or rejection with surrender, while secured financings are addressed through secured-claim valuation and plan treatment.

## Conclusion

The Seventh Circuit classified United’s San Francisco airport bond “sublease” as a secured financing, not a true lease, removing it from § 365 and subjecting the bondholders’ rights to secured-claim valuation and Chapter 11 plan treatment rather than lease-assumption cure obligations.


United Airlines, Inc. v. HSBC Bank USA, N.A., 416 F.3d 609 (7th Cir. 2005)