We regularly encounter the issue of whether a bankruptcy court will treat a document entitled “Lease” (of either personalty or real estate) as a true lease or a disguised financing. The Seventh Circuit ruled on July 26, 2005 in the United Airlines case that a transaction where an airline obtained money to build/improve an airport was a secured transaction and not a lease. The case relies on California law for this legal conclusion. Here is a quote from that case:
The transaction between United and the CSCDA is not a “true lease” under California law. (i) The “rent” is measured not by the market value of 20 acres within the maintenance base but by the amount United borrowed. The hell or high water clause demonstrates the lack of connection between the maintenance base’s rental value and United’s financial obligation. (ii) At the end of the lease, the CSCDA has no remaining interest. The CSCDA stresses that United will not “own” anything as of 2033; it still would be the Airport’s tenant. But its full tenancy interest reverts to it for no additional charge. Reversion without additional payment is the UCC’s per se rule for identifying secured credit. (iii) The balloon payment has no parallel in a true lease, though it is a common feature of secured credit. (iv) If United pre-pays, the lease and sublease terminate immediately; in a true lease, by contrast, prepayment would secure the tenant’s right to occupy the property for an additional period. The parties have not cited any case from any state deeming an arrangement of this kind to be a “true lease.”
Here is the link to this interesting case:

http://www.ca7.uscourts.gov/tmp/KS0WDAQ5.pdf

Mike