Bankruptcy, Inc.

June 8, 2003

By Adam Lewis, Brian Busey, & Bill McCarron, Attorneys, Morrison & Foerster

Given the high risk of further airline bankruptcies, an airport is best advised to be prepared in advance to the maximum extent possible. As part of a pre-bankruptcy checkup/makeover, every airport should consider seeking some or all of the following to the extent possible ...

• When structuring or renegotiating airline operating/lease agreements and permits for multiple airport facilities, consider structuring them as a single master lease with a separate addendum for each leased facility. Though a bankruptcy court might end up treating each addendum as a separate lease, such a structure should make it more difficult for an airline to seek to reject just one or a few of the facilities.
• For an airport which sets landing fees by ordinance, also include provisions for the fees in any master lease; or if one is not feasible, create a limited agreement or lease for the landing fees. This makes it easier to establish the existence of an executory contract covering them that an airline must assume or reject in bankruptcy.
• Include within the rental payment requirement a broad attorneys’ fee provision for recovery of fees related to any default rather than just any fees associated with having to bring a lawsuit. As bankruptcy law requires a tenant to timely perform all post-bankruptcy obligations arising under a commercial real estate lease, this adds incentive for an airline to honor its bankruptcy obligation to timely perform its post-petition lease obligations.
• Require a letter of credit sufficient to cover several months of rent, landing fees, and other charges under the lease. Ensure that any default under the lease serves as a basis for drawing on it, and make sure that the airport does not have to give any notice to the airline before drawing on the letter of credit. Include language in the lease requiring the airline to maintain the letter of credit continuously for the lease term, and providing that a failure to do so constitutes a default. Such language may obligate an airline during its bankruptcy to maintain (or replace an expired) letter of credit as part of its obligation to timely perform all post-petition lease obligations. Be sure to examine the language of the letter of credit closely to be certain that it in fact authorizes the airport to draw for any default, not merely a monetary default.
• Provide in the lease that in the event of any payment default, the airline will, without any requirement of giving notice of default to the airline, enjoy a grace period until the end of the month in which to make payment. Doing so may avoid the outcome faced by several airports in the United Airlines (UAL) bankruptcy (the court ruled that given UAL’s bankruptcy filing on December 9, 2002, UAL did not have to timely pay December rent under airport leases requiring payment on the first of the month, because UAL was only obligated to timely perform all post-bankruptcy obligations).
• In instances where the airport in turn owes sums to the airline – e.g., under a provision for sharing or cross-crediting concession revenues – the airport should include lease language expressly providing for the right to set off such sums against rent or other fees owed by the airline. A setoff clause should provide that the airport may effectively treat the airline and its affiliates as a single entity.
• It may be advantageous to include language providing that the automatic stay will not apply to the airport’s ability to enforce its rights under the lease, and that if a court should determine that the stay applies anyway, the airline consents to relief.
• Include language in the lease that all passenger facility charges (PFCs) are held by the airline in trust for the benefit of the airport.
• Municipal owners of airports generally are not liable under special facility revenue bonds (SFR) issued by them. Even so, they have an interest in ensuring that existing SFRs will continue to be paid in bankruptcy as a means of preserving their future ability to use this alternative means of financing airport improvements (an interest recently placed in a state of uncertainty by United Airlines’ pending effort to simply treat such bonds as prepetition unsecured claims subject to potential payment of only pennies on the dollar). Airports can maximize the attractiveness of new issues of SFRs by ensuring that their leases and the bond covenants contain cross-default, eviction, and re-let provisions. Requiring the bond issue be backed by a letter of credit offers further protection.

Attorneys Lewis, Busey, and McCarron specialize in aviation bankruptcy law for Morrison & Foerster, LLC, San Francisco and Washington, D.C. They can be reached at: Lewis (415) 268-7232; Busey (202) 887-1504; McCarron (202) 887-8751 or

After the Airline Files ...

When an airport already faces an airline bankruptcy filing, it should be aware of the following rights and obligations:

• The automatic stay generally prevents an airport operator which leases terminal space or gates to an airline from taking any collection action with respect to any pre-bankruptcy defaults by the airline.

• The Bankruptcy Code grants various protections to an airport operator and other lessors of non-residential real estate. For example, in the event of a pre-bankruptcy default by an airline or other tenant, the airport operator generally is not required to furnish any services or supplies incidental to the lease without payment.

• The airline is required to timely perform all of its post-petition lease obligations until it either assumes or rejects the lease. If the airline fails to do so, the airport can file a motion with the bankruptcy court seeking to compel the airline to comply with its post-petition lease obligations.

• Absent any decision made by the airline to assume or reject the lease within 60 days after its bankruptcy filing (or an extended period allowed by the court), the lease is automatically deemed rejected and the airline must immediately surrender possession of the terminal space and/or gates to the airport.

• An airline wishing to assume a lease in default must, as a prerequisite to assumption, provide adequate assurance that it will: 1) promptly cure the default; 2) promptly compensate the airport operator for any damages which it suffered from the default; and 3) perform its future lease obligations. In cases in which the airline wishes to assign the lease, the assignee must provide the airport operator with adequate assurance of future performance regardless of whether there has been a default.

• If the airline operator has a sufficiently large stake in an airline’s bankruptcy, at the beginning of the bankruptcy it should consider seeking to become an ex-officio member of the creditors’ committee appointed in the case to represent the interests of unsecured creditors.