                            In the
 United States Court of Appeals
              For the Seventh Circuit
                         ____________

Nos. 04-4209, 04-4315 & 04-4321
UNITED AIRLINES, INC.,
                                             Plaintiff-Appellant,
                                v.


HSBC BANK USA, N.A., as Trustee, and
CALIFORNIA STATEWIDE COMMUNITIES
DEVELOPMENT AUTHORITY,
                                          Defendants-Appellees.
                         ____________
       Appeals from the United States District Court for the
          Northern District of Illinois, Eastern Division.
        Nos. 04 C 2836 & 2837—John W. Darrah, Judge.
                         ____________
       ARGUED MAY 5, 2005—DECIDED JULY 26, 2005
                     ____________




 Before BAUER, EASTERBROOK, and MANION, Circuit
Judges.
  EASTERBROOK, Circuit Judge. What is a “lease” in federal
bankruptcy law? Businesses that do not pay up front for
assets may acquire them via unsecured debt, secured debt,
or lease; in each event the business pays over time. Similar
economic function implies the ability to draft leases that
work like security agreements, and secured loans that work
2                          Nos. 04-4209, 04-4315 & 04-4321

like leases. Yet the Bankruptcy Code of 1978 distinguishes
among these devices. A lessee must either assume the lease
and fully perform all of its obligations, or surrender the
property. 11 U.S.C. §365. A borrower that has given secu-
rity, by contrast, may retain the property without paying
the full agreed price. The borrower must pay enough to give
the lender the economic value of the security interest; if this
is less than the balance due on the loan, the difference is an
unsecured debt. See 11 U.S.C. §506(a) and §1129(b)(2)(A).
There are other ways in which the Code treats leases
differently from security interests, but they don’t matter to
today’s dispute.
  During the 1990s United Air Lines entered into complex
transactions to obtain money to build or improve premises
at four airports—San Francisco, Los Angeles, Denver, and
John F. Kennedy in New York. For each airport, a public
body issued bonds that, because of the issuer’s status as a
unit of state government, paid interest that is free of federal
taxation. The public bodies turned this money over to
United against its promise to retire the bonds and reim-
burse administrative costs. At each airport, United entered
into a lease giving the body that had issued the bonds the
right to evict United from operational facilities if it did not
pay.
  When United entered bankruptcy in 2002, however, it
took the position that none of these transactions is a “lease”
for purposes of §365. United proposed to treat each trans-
action as a secured loan, so that it could continue using
the airport facilities while paying only a fraction of the
promised “rent.” Chief Bankruptcy Judge Wedoff concluded
that the word “lease” in §365—a term not defined anywhere
in the Bankruptcy Code—includes “true leases” but not
transactions where the form of a lease is used but the
substance is that of a security interest. Applying this
approach as a matter of federal law, Judge Wedoff con-
cluded that the Denver transaction is a true lease but that
Nos. 04-4209, 04-4315 & 04-4321                            3

the other three are not. In re UAL Corp., 307 B.R. 618
(Bankr. N.D. Ill. 2004). This meant that United had to cure
the default and resume full payments on its Denver deal
but could reduce its payments on the other transactions and
treat the difference as unsecured debt.
   Everyone appealed. The district judge issued four opin-
ions, one for each airport, and held that all four transac-
tions are “true leases.” Two are published: United Air Lines,
Inc. v. HSBC Bank USA, 322 B.R. 347 (N.D. Ill. 2005)
(Denver), and HSBC Bank USA v. United Air Lines, Inc.,
317 B.R. 335 (N.D. Ill. 2004) (San Francisco). Relying
principally on Butner v. United States, 440 U.S. 48 (1979),
and In re Powers, 983 F.2d 88 (7th Cir. 1993), Judge Darrah
first concluded that state rather than federal law controls
the distinction between security interests and leases. Then,
applying California, Colorado, and New York law, he held
that each transaction must be treated as a “lease.” United
has appealed in all of these adversary actions. The
San Francisco dispute has been fully briefed; the other ap-
peals are being held for the disposition of this one. Parties
to the Los Angeles, Denver, and New York transactions
have presented their views as amici curiae. We confine our
attention in this opinion to the San Francisco transaction.
   Since 1973 United has been the lessee of 128 acres, used
for a maintenance base, at San Francisco International
Airport. The lease will end in 2013 unless the parties nego-
tiate an extension; rent depends on an independent party’s
estimate of the property’s market value. In 1997 the
California Statewide Communities Development Authority
(CSCDA) issued $155 million in bonds for United’s benefit.
United received the proceeds for use in improving its facil-
ities at the Airport—though not at the maintenance base.
The transaction was accomplished through four documents.
    ! The sublease. United subleases 20 acres of the
        128-acre maintenance base to the CSCDA for 36
4                        Nos. 04-4209, 04-4315 & 04-4321

       years. This term matches the debt-repayment
       schedule rather than United’s lease with the
       Airport. The total rent CSCDA pays is $1.
    ! The leaseback. The    CSCDA   leases the 20 acres
       back to United for a rent (paid to HBSC Bank
       as the Indenture Trustee) equal to interest on
       the bonds plus an administrative fee. The lease
       has a $155 million balloon payment in 2033 to
       retire the principal. United may postpone final
       payment until 2038; if it does, the sublease also
       is extended. United also is entitled to prepay; if
       it does, the sublease and leaseback terminate.
       If United does not pay as agreed, the CSCDA
       may evict it from the 20 acres. The leaseback
       includes a “hell or high water” clause: United
       must pay the promised rent even if its lease
       from the Airport ends before 2033, the property
       is submerged in an earthquake (the Airport
       abuts San Francisco Bay), or some other physi-
       cal or legal event deprives United of the use or
       economic benefit of the maintenance base.
    ! The trust indenture. The       CSCDAissues the
       bonds, turns the $155 million over to United
       against the promises made in the sublease, and
       arranges for the Trustee to receive United’s
       payments for distribution to the bondholders.
       The bonds are without recourse against the
       CSCDA.

    ! The guaranty. United commits its corporate
       treasury to repayment of the bonds.
That the sublease and leaseback have the form of “leases”
is unquestioned. But does §365 use form, or substance, to
distinguish “leases” from secured credit?
 Although the statute does not answer that question in so
many words, every appellate court that has considered the
Nos. 04-4209, 04-4315 & 04-4321                              5

issue holds, and the parties agree, that substance controls
and that only a “true lease” counts as a “lease” under §365.
See In re PCH Associates, 804 F.2d 193, 198-200 (2d Cir.
1986); In re Pillowtex, Inc., 349 F.3d 711, 716 (3d Cir. 2003);
In re Moreggia & Sons, Inc., 852 F.2d 1179, 1182-84 (9th
Cir. 1988); In re Pacific Express, Inc., 780 F.2d 1482, 1486-
87 (9th Cir. 1986). See also, e.g., In re Continental Airlines,
Inc., 932 F.2d 282 (3d Cir. 1991) (same under 11 U.S.C.
§1110, another part of the Code dealing with leases). We’ll
return to what a “true lease” might be; that term is no more
self-defining than the bare word “lease.” Before fleshing out
the definition, we explain why we agree with these deci-
sions, because the reasons for preferring substance over
form affect which substantive features of the transactions
matter.
  Whether the word “lease” in a federal statute has a formal
or a substantive connotation is a question of federal law; it
could not be otherwise. See Reves v. Ernst & Young, 494
U.S. 56, 71 (1990); Bryant v. Yellin, 447 U.S. 352, 370-71 &
n.22 (1980). (Whether federal law incorporates state law to
answer the questions that result from this choice is a
different issue, to which we turn later. Cf. United States v.
Kimbell Foods, Inc., 440 U.S. 715 (1979).) The Bankruptcy
Code specifies different consequences for leases and secured
loans. If these were formally distinct—in the way that
mergers and asset sales in corporate law are distinct—then
the statutory reference might best be understood as adopt-
ing the established forms. But “lease” is a label rather than
a form. A transaction by which A sells a widget to B in
exchange for periodic payments, with B to own the asset
after the last payment, could be structured as an install-
ment sale, a loan secured by the asset, or a lease, with only
a few changes in verbiage and none in substance. It is
unlikely that the Code makes big economic effects turn on
the parties’ choice of language rather than the substance of
their transaction; why bother to distinguish transactions if
these distinctions can be obliterated at the drafters’ will?
6                          Nos. 04-4209, 04-4315 & 04-4321

   Many provisions in the Code, particularly those that
deal with the treatment of secured credit, are designed to
distinguish financial from economic distress. A firm that
cannot meet its debts as they come due, but has a positive
cash flow from current operations, is in financial but not
economic distress. It is carrying too much debt, which can
be written down in a reorganization. A firm with a negative
cash flow, by contrast, is in economic distress, and liquida-
tion may be the best option. In order to distinguish financial
from economic distress, the Code effectively treats the date
on which the bankruptcy begins as the creation of a new
firm, unburdened by the debts of its predecessor. See
generally Boston & Maine Corp. v. Chicago Pacific Corp.,
785 F.2d 562 (7th Cir. 1986). The new firm must cover all
new expenses, while debt attributable to former operations
is adjusted. Section 365, which deals with leases, classifies
payments for retaining airplanes and occupying business
premises as new expenses, just like payments for labor and
jet fuel. The rules for credit, by contrast, treat debt service
as an “old” expense to be adjusted to deal with financial
distress.
  This works nicely when rent under a lease really does pay
for new inputs: each monthly payment on an airplane lease
covers another month’s use of a productive asset, just as
payments for jet fuel do. But “rent” that represents the cost
of funds for capital assets or past operations rather than
ongoing inputs into production has the quality of debt, and
to require such obligations to be assumed under §365 to
retain an asset would permit financial distress from past
operations to shut down a firm that has a positive cash flow
from current operations. Imagine a lease of an airplane
with a 20-year economic life that provided for no rental
payments during the first 10 years, followed by rent at 2.5
times the market rate for the last ten (it exceeds twice the
spot-market price because the payments must cover accrued
interest on the deferrals). To separate financial from
Nos. 04-4209, 04-4315 & 04-4321                               7

economic distress it would be essential to separate the loan
components of that “lease” from the current-consumption
components. The cost of capital hired before the bankruptcy
could be written down while the expenses of current
operations continued to be met.
  When Congress enacted the Bankruptcy Code in 1978, the
legal system afforded rules that facilitated the disentan-
gling of credit and consumption components of leases. Since
1939 this had been routine in tax law. See Helvering v. F&R
Lazarus & Co., 308 U.S. 252 (1939). See also, e.g., Frank
Lyon Co. v. United States, 435 U.S. 561 (1978). During the
1940s and 1950s much state law on the subject was
summed up and codified in the Uniform Commercial Code.
Section 1-201(37) of the 1958 Official Text separates credit
components, in which the asset serves as security, from
consumption components this way:
    Unless a lease . . . is intended as security, reserva-
    tion of title thereunder is not a “security inter-
    est” . . . . Whether a lease is intended as security is
    to be determined by the facts of each case; however,
    (a) the inclusion of an option to purchase does not
    of itself make the lease one intended for security,
    and (b) an agreement that upon compliance with
    the terms of the lease the lessee shall become or
    has the option to become the owner of the property
    for no additional consideration or for a nominal
    consideration does make the lease one intended for
    security.
A lease in which the consumption component dominates
often is called a “true lease,” while one in which the asset
serves as security for an extension of credit is treated as a
security agreement governed by the UCC’s Article 9.
  No legally sophisticated person writing in 1978 could
have thought that the word “lease” in a text that distin-
guishes between current consumption (which must be paid
for in full) and secured debt (which may be written down to
8                          Nos. 04-4209, 04-4315 & 04-4321

ease financial distress) means any transaction in the form
of a lease. The need to look through form to substance
would be apparent not only from the structure of the
statute but also from the fact that many of the leased assets
would be covered directly by the UCC. Section 365 in
particular deals with leases of both personal and real
property; it would not be sensible to read the same word as
referring to substance when dealing with personal property
and form when dealing with real property. The statute thus
must refer to substance throughout §365. Nothing else
respects both the structure of the Bankruptcy Code and the
way the legal community understood the distinction
between leases and security agreements in the 1970s.
  Because the parties have made so much of the legislative
history, we add that the understanding that §365 deals with
substance rather than form is reflected in many of the
documents that precede the Code’s enactment. The passage
to which the litigants pay the most attention reads:
    The phrase ‘lease of real property’ applies only to a
    ‘true’ or ‘bona fide’ lease and does not apply to fi-
    nancing leases of real property or interests therein,
    or to leases of such property which are intended as
    security.
    [I]n a true lease of real property, the lessor retains
    all risk and benefits as to the value of the real
    estate at the termination of the lease . . .
    Whether a ‘lease’ is [a] true or bona fide lease or, in
    the alternative, a financing ‘lease’ or a lease in-
    tended as security, depends upon the circumstances
    of each case. The distinction between a true lease
    and a financing transaction is based upon the
    economic substance of the transaction and not, for
    example, upon the locus of title, the form of the
    transaction or the fact that the transaction is
Nos. 04-4209, 04-4315 & 04-4321                             9

    denominated as a ‘lease’. The fact that the lessee,
    upon compliance with the terms of the lease, be-
    comes or has the option to become the owner of the
    leased property for no additional consideration [or]
    for nominal consideration indicates that the trans-
    action is a financing lease or lease intended as se-
    curity. In such cases, the lessor has no substantial
    interest in the leased property at the expiration of
    the lease term. In addition, the fact that the lessee
    assumes and discharges substantially all the risks
    and obligations ordinarily attributed to the outright
    ownership of the property is more indicative of a
    financing transaction than of a true lease. The
    rental payments in such cases are in substance
    payments of principal and interest either on a loan
    secured by the leased real property or on the pur-
    chase of the leased real property.
S. Rep. No. 989, 95th Cong., 2d Sess. 64 (1978). This
passage is interesting because it illustrates how the legal
community thought in 1978 about the roles of form versus
substance in dealing with a word such as “lease.” It would
be a mistake to find rules of decision in this un-enacted
passage, see American Hospital Association v. NLRB, 499
U.S. 606, 615-16 (1991), but it does show that Congress
shared the legal community’s understanding that some
transactions with the form of a lease are best treated as
security agreements.
  To say that substance prevails over form as a matter of
federal law is not to resolve all issues of detail—or for that
matter to imply that federal law supplies the details. Which
aspects of substance matter? The Senate Report does not
supply the answer. “[R]estrictive language contained in
Committee Reports is not legally binding.” Cherokee Nation
v. Leavitt, 125 S. Ct. 1172, 1182 (2005). Reports are not
enacted and do not create rules independent of the text in
10                         Nos. 04-4209, 04-4315 & 04-4321

the United States Code. Anyway, this report sounds like a
reminder to be sensible rather than a formulary.
  Because nothing in the Bankruptcy Code says which
economic features of a transaction have what consequences,
we turn to state law. All of the states have devoted sub-
stantial efforts to differentiating leases from secured credit
in commercial and banking law. Leases are state-law
instruments, after all, and the norm in bankruptcy law is
that contracts (of which leases are a species) and property
rights in general have the same force they would have in
state court, unless the Code overrides the state entitlement.
See Butner v. United States, 440 U.S. 48 (1979); see also,
e.g., Raleigh v. Illinois Department of Revenue, 530 U.S. 15,
20 (2000); BFP v. Resolution Trust Corp., 511 U.S. 531, 544-
45 (1994); Nobelman v. American Savings Bank, 508 U.S.
324, 329-30 (1993); Barnhill v. Johnson, 503 U.S. 393, 398
(1992). A state law that identified a “lease” in a formal
rather than a functional manner would conflict with the
Code, because it would disrupt the federal system of
separating financial from economic distress; a state ap-
proach that gives a little more or a little less weight to one
of several “factors” does not conflict with any federal rule,
because there is none with which it could conflict. Cf. In re
James Wilson Associates, 985 F.2d 160 (7th Cir. 1992).
  United contends that the second and ninth circuits have
held that federal law supplies the definition of a “lease” in
addition to establishing a functional approach to the in-
quiry. Perhaps some language in PCH Associates and
Moreggia could be read that way, though we think it more
likely that both courts were concerned with the first ques-
tion (whether the word “lease” in §365 has a formal or
functional scope), which is a matter of federal law, than
with the second—what body of law identifies a “true lease”
under the functional approach? Neither opinion cites Butner
or any of the Supreme Court’s other decisions specifying
that state law must be used whenever possible to define the
Nos. 04-4209, 04-4315 & 04-4321                           11

interests on which the Code operates. If either the second
or the ninth circuits believes that federal law answers all
questions concerning the operation of §365, then we
disagree; for the reasons we have given, the third circuit
(which in Continental Airlines and Pillowtex used state
definitions) got this right. Indeed, we held exactly this in
Powers, a decision under §365 that the bankruptcy judge
did not mention. Powers involves the choice between lease
and installment sales contract for personal property; we
cannot imagine any reason why state law would define a
“true lease” for personal property while federal law would
supply the definition for real property.
  So what does California law provide? The district judge
thought that California allows form to control, and because
United and the CSCDA chose the form of a lease United is
stuck with that characterization under §365. If indeed
California identifies leases in such a mechanical fashion,
then its law must yield, but we do not understand it to
distinguish leases from secured credit in this way. Neither
do we follow the district court’s conclusion that form pre-
vails unless “clear and convincing evidence” supports a
different characterization. Burdens of proof and persuasion
are supplied by the forum, not by the source of substantive
law. Bankruptcy law uses the preponderance standard. See
Grogan v. Garner, 498 U.S. 279 (1991). Anyway, burdens of
persuasion are irrelevant to characterization of documen-
tary transactions. See, e.g., In re Schoonover, 331 F.3d 575,
577 (7th Cir. 2003); In re Weinhoeft, 275 F.3d 604 (7th Cir.
2001).
  Like the district judge, the parties in this court seek to
find California’s law in the decisions of federal bankruptcy
judges sitting in California, and they debate the signifi-
cance of what these judges have said about the subject. Yet
federal judges are not the source of state law or even its
oracles. To find state law we must examine California’s
statute books and the decisions of its judiciary. California
12                         Nos. 04-4209, 04-4315 & 04-4321

has enacted the UCC; there can be no doubt that it uses a
functional approach to separating leases from secured credit
with respect to personal property. California takes a similar
approach for real property as a matter of common law. Burr
v. Capital Reserve Corp., 71 Cal. 2d 983, 458 P.2d 185
(1969), and Beeler v. American Trust Co., 24 Cal. 2d 1, 147
P.2d 583 (1944), are especially revealing.
  Beeler arose from a sale and leaseback of real property.
When the tenant stopped paying, the court had to decide
whether he could be evicted under landlord-tenant law,
with the landlord retaining the fee title to the property, or
whether instead the tenant retained an equity of redemp-
tion under the law of mortgage loans, so that any payments
in excess of the market rental value would redound to the
tenant’s benefit. The Supreme Court of California charac-
terized the transaction as an equitable mortgage despite the
fact that the papers cast it as an absolute deed plus a lease.
It relied not only on the fact that the landlord was a
financial institution but also on the fact that the rent was
equal to the sum needed to pay off a loan and the fact that
the lessee would become an owner after some years. (This
is the UCC’s per se rule: If the lessee has an option to
acquire ownership at the end of the term for no or a nomi-
nal payment, then the transaction must be treated as
secured credit.) The yearly rent was $3,000, substantially
less than the going rate for similar property but exactly
equal to the amount needed to amortize a $60,000 extension
of credit—and the $60,000 for which the property had been
“sold” initially was less than the market price of equivalent
real estate. The state court thought that this deal had all
the hallmarks of a mortgage loan except the form— and the
form had to yield. This was not a “true lease” as the court
saw it.
  Burr posed the question whether a lease of personal
property should be treated as a loan; the answer mattered
because at the time California’s usury law set a 10% max-
Nos. 04-4209, 04-4315 & 04-4321                             13

imum interest rate on loans, but there was no price control
on leases. Burr needed money to expand his business. He
obtained cash by selling some of the existing business’s
property to a bank and immediately leasing it back at a
rental designed to amortize the extension of credit. The
Supreme Court of California held that this form must be
pierced to get at the substance: Burr had borrowed money
on security of the property subject to the lease, and as the
interest rate in one of the parties’ three transactions
exceeded 10% the bank could not collect the full agreed
payment.
  California has applied this approach in many other cases,
which we need not recount. See, e.g., Lovelady v. Bryson
Escrow, Inc., 27 Cal. App. 4th 25, 32 Cal. Rptr. 2d 371
(1994). It has been more willing to follow form when that
will enhance tax revenues, denying parties a right to pierce
their own form at the state’s expense, when the state
treasury was not privy to the original choice. See, e.g., Rider
v. San Diego, 18 Cal. 4th 1035, 959 P.2d 347 (1998); Dean
v. Kuchel, 35 Cal. 2d 444, 218 P.2d 521 (1950). The only
state decision to which the district judge referred is of this
kind and held that it just did not matter whether a given
transaction was a “lease” or something else. Desert Hot
Springs v. Riverside County, 91 Cal. App. 3d 441, 154 Cal.
Rptr. 297 (1979). Instead the question was whether a
person who had leased some land from a city for 50 years,
built a city hall there, and leased the improved parcel back
to the city for a 15-year term (substantially less than the
structure’s useful life), had retained a “possessory interest”
subject to taxation under Cal. Rev. & Tax Code §107. The
court’s affirmative answer is unhelpful on a question of the
kind we confront. Whether the CSCDA has an interest that
some other arm of California’s government could tax is
neither here nor there.
  The transaction between United and the CSCDA is not a
“true lease” under California law. (i) The “rent” is measured
14                         Nos. 04-4209, 04-4315 & 04-4321

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.”
  We do not doubt that many financing devices are true
leases; the lessor owns the property and thus finances its
acquisition, relieving the lessee of the need to raise funds
itself, and net leases may measure rent by the lessor’s
financial commitments. United acquired many of its air-
planes that way. But in such a transaction the lessee ac-
quires an asset; from the lessee’s perspective, it is engaged
in securing assets with current value, and it can escape the
rental obligation by surrendering the asset. United did not
obtain the maintenance base from CSCDA; it already had the
base under its lease from the Airport, and could not end the
obligation to the CSCDA by vacating the maintenance base.
What United did was use an asset (its leasehold interest in
the maintenance base) to secure an extension of credit, just
as the business did in Burr, and as in Beeler it agreed to
pay “rent” equal to the price of that credit rather than any
element of value in the “leased” premises.
  The CSCDA has filed a cross-appeal to argue that United’s
failure to contest the lease within 60 days of its execution
Nos. 04-4209, 04-4315 & 04-4321                             15

disables it from arguing that the arrangement is not a “true
lease.” California has what the parties call a “validation
statute,” which provides this deadline. Cal. Code Civ. P.
§860, §869. The cross-appeal is pointless. The CSCDA wants
us to affirm rather than alter the judgment, and appellees
may advance in support of their judgments any argument
preserved in the district court. Massachusetts Mutual Life
Insurance Co. v. Ludwig, 426 U.S. 479 (1976). The
cross-appeal is dismissed as surplusage.
  The district judge rejected the CSCDA’s contention, stating
that it had not been presented to the bankruptcy judge.
Although the CSCDA says otherwise, we need not resolve
that dispute. State procedures do not matter in bankruptcy.
State law defines property rights, but federal law prescribes
the hoops through which the litigants must jump. California
could not enact a law saying: “§365 always must be applied
to documents with the form of leases unless the debtor
takes specified steps before entering bankruptcy.” Matters
that could not have been determined before bankruptcy
can’t be foreclosed because they were not so determined. See
Brown v. Felsen, 442 U.S. 127 (1979). Nor may states insist
that questions affecting the outcome of a bankruptcy be
adjudicated in state court; the federal bankruptcy jurisdic-
tion is exclusive. Issues that have been resolved in state
court (say, in pre-bankruptcy litigation) may well have
preclusive effect in the federal litigation. See, e.g., Grogan,
498 U.S. at 284-85 n.11; Brown, 442 U.S. at 139; Kelly v.
Robinson, 479 U.S. 36, 47-49 (1986). But states may not
compel potential debtors in bankruptcy to use state tribu-
nals before repairing to federal court.
   What is more, the state validation statute does not apply
on its own terms. United is not challenging the validity of
the sublease and leaseback. It concedes that the transaction
is valid as a matter of state law and that it owes the money.
The question under §365 is whether it must pay in full to
enjoy continued occupancy or whether, instead, it may
16                       Nos. 04-4209, 04-4315 & 04-4321

reduce payments to the value of the interest secured by the
leasehold and treat the residue as unsecured debt. Califor-
nia’s validation statute does not address that question and
so is irrelevant in this litigation.
  The transaction between United and the CSCDA at
San Francisco Airport is a secured loan and not a lease for
the purpose of §365. The judgment of the district court is
reversed, and the case is remanded for further proceedings
consistent with this opinion.

A true Copy:
      Teste:

                       ________________________________
                       Clerk of the United States Court of
                         Appeals for the Seventh Circuit




                  USCA-02-C-0072—7-26-05
