Wednesday, July 26, 2006

United Airlines faces $261 million choice

Although United Airlines has emerged from bankruptcy, it may have to figure out how to pay back $261 million it was lent by the City of Denver, or give up its operating facilities there.

In a July 6 decision, the 7th U.S. Circuit Court of Appeals said the airline could not separate its traditional lease agreement from a complicated deal it struck with the City and County of Denver. If it had been successful, it might have been able to make the $261 million disappear, without losing access to some its Denver facilities.

United struck the deal in question in 1992, around the time the Denver International Airport opened a newly constructed airport. United agreed to lease 45 acres of space there - a practice common with most airlines - but it also agreed to lease space that had yet to be built, including terminal and concourse space, a plane maintenance facility, and an air cargo area.

Instead of building the space and then charging United a lease to pay for the construction, the city and county raised $261 million in municipal bonds and handed it over to United for construction of the proposed facilities. United would then pay back the money through a third party, in this case HSBC Bank, which would then repay the bonds.

When United filed for bankruptcy in 2002, it mounted a creative attempt at divesting itself of the responsibility for the $261 million. United wanted the bond money severed from the rest of its lease so it could treat the debt as a loan - which would be dischargeable under bankruptcy law - instead of a lease - which would require United to keep up payments during the bankruptcy proceedings or lose the property being leased.

But a bankruptcy and district judge both rejected that request. United then appealed to the 7th Circuit.

In its analysis, the court declared that under Colorado law and precedent, the agreement between United and the city/count of Denver "is a single, inseverable whole in that there would have been no bargain whatsoever had the ground provisions been absent from the deal. While the parties could have separated this complex arrangement into two contracts, they did not, and their decision to join their entire agreement into one contract at the outset cannot now be undone after the fact under Colorado law."

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