February 3, 1993
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
No. 92-1225
WATERVILLE INDUSTRIES, INC.,
Plaintiff, Appellee,
v.
FINANCE AUTHORITY OF MAINE,
Defendant, Appellant.
No. 92-1338
WATERVILLE INDUSTRIES, INC.,
Plaintiff, Appellant,
v.
FINANCE AUTHORITY OF MAINE and
FIRST HARTFORD CORPORATION,
Defendants, Appellees.
APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MAINE
[Hon. D. Brock Hornby, District Judge]
Before
Breyer, Chief Judge,
Bownes, Senior Circuit Judge,
and Boudin, Circuit Judge.
Martha C. Gaythwaite with whom Harold J. Friedman, Friedman &
Babcock, Stephen A. Canders and Elizabeth Bordowitz were on brief for
Finance Authority of Maine.
Jotham D. Pierce, Jr. with whom Adam H. Steinman, Eileen J.
Griffin, and Pierce, Atwood, Scribner, Allen, Smith & Lancaster were
on brief for Waterville Industries, Inc.
February 3, 1993
BOUDIN, Circuit Judge. Waterville Industries, Inc.,
brought suit against the Finance Authority of Maine ("FAME")
seeking contribution to "response costs" assessed against
Waterville Industries by the Environmental Protection Agency
under the Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA"), 42 U.S.C. 9601 et seq.
FAME, claiming the protection of statutory exceptions to
CERCLA liability, appeals from the district court's decision
that it is responsible for 60 percent of those costs.
Waterville Industries cross-appeals from the district court's
refusal to order FAME to contribute to its attorneys' fees.
We conclude that FAME is exempt from contribution under
CERCLA and therefore do not reach the cross-appeal relating
to the amount of contribution.
I.
This action arises out of efforts to clean up two waste
water lagoons located at a defunct textile mill in
Waterville, Maine. Although the genesis of the mill is
neither clear from the record nor critical to the case, it
appears that the First Hartford Corporation developed the
mill in the early 1970's with state assistance.1 In or
1First Hartford's role was carried out by two related
corporations, First Hartford Corporation and First Hartford
Realty Corporation; the latter held the lease on the real
property in question but subleased it to First Hartford
Corporation. We refer throughout the opinion to the dual
enterprise as "First Hartford."
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about 1972, First Hartford acquired the property, sold it to
Waterville Textile Development Corporation -- a quasi-public
corporation unconnected with the appellee in this case -- and
then leased it back. Loans in connection with the project
were made to First Hartford by Society for Savings, an out-
of-state lender, and secured by mortgages on the property,
which Society for Savings held. The loans were guaranteed by
appellant FAME, an instrumentality of the state of Maine.2
In 1980, First Hartford defaulted on the loans. As a
result, FAME pursuant to its guarantee made substantial
payments to Society for Savings to cure the defaults, assumed
First Hartford's future obligations to Society for Savings,
and received from the latter an assignment of the mortgages.
On the same day that it received the mortgages, March 14,
1980, FAME accepted a deed in lieu of foreclosure from
Waterville Textile Development Corporation and became the
holder of title to the property.
On the same day, FAME leased the property back to First
Hartford to allow First Hartford to continue to operate the
mill. The new lease required First Hartford to make monthly
payments directly to Society for Savings to cover obligations
coming due on the original debt which FAME had assumed. The
2In 1972, FAME's functions were carried out by the Maine
Industrial Building Authority. That entity was later
succeeded by the Maine Guarantee Authority which was in turn
succeeded by FAME. In this opinion, we will for simplicity
refer to the successive entities as "FAME."
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lease also required First Hartford to pay an additional
$22,340 per month directly to FAME. During the period in
which First Hartford operated the mill as a lessee of FAME,
First Hartford released certain hazardous wastes into two
lagoons associated with the mill.
First Hartford continued to experience financial trouble
after the March 14, 1980, transactions, and filed for Chapter
11 bankruptcy protection on February 20, 1981. First
Hartford ceased operations at the mill on October 6, 1981.
Apparently a dispute then occurred between First Hartford and
FAME as to whether First Hartford had a continuing interest
in the property. This dispute was resolved in a "settlement
stipulation" approved by the bankruptcy court on July 29,
1982, which provided that "title to the Real Property is
vested solely in [FAME]," but which gave First Hartford until
October 15, 1982, to find a buyer for the property.
First Hartford did not find a buyer by October 15, 1982,
and on or about March 29, 1983, FAME contracted with an
auctioneer to sell the property. An auction was held on
August 19, 1983, and MKY Realty was the high bidder. On
September 23, 1983, FAME and MKY Realty entered into a
contract for the sale of the property, and on November 15,
1983, FAME conveyed the property to Gano Industries, the
nominee of MKY Realty. Gano Industries later changed its
name to Waterville Industries, the appellee in this case.
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II.
In September 1988, the EPA filed an administrative
complaint against Waterville Industries seeking penalties and
response costs under CERCLA in connection with the clean-up
of the lagoons. As the current owner of the property,
Waterville Industries was liable for such costs under the
statute. 42 U.S.C. 9607(a)(1). Waterville Industries
entered into a consent agreement with EPA to clean up the
property. It has now incurred substantial engineering costs
in connection with the clean-up, and further expenses are
expected. Waterville Industries then brought this action
pursuant to CERCLA contending that FAME, as a former owner
of the property, is liable for contribution. 42 U.S.C.
9613(f) (authorizing contribution action against "any other
person who is liable or potentially liable" for clean-up
costs).
CERCLA holds several categories of persons liable for
the clean-up of hazardous substances at a facility, including
"any person who at the time of disposal of any hazardous
substance owned or operated any facility at which such
hazardous substances were disposed of[.]" 42 U.S.C.
9607(a)(2). Waterville Industries argues that FAME is liable
for contribution because it "owned" the property between
March 14, 1980, and October 6, 1981, during which time
hazardous substances were released into the lagoons by First
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Hartford. The statute, however, contains exceptions to the
definition of an "owner," one of which excludes from that
status "a person, who, without participating in the
management of a vessel or facility, holds indicia of
ownership primarily to protect his security interest in the
vessel or facility." 42 U.S.C. 9601(20)(A).
FAME has contended throughout the litigation that it
falls within this security interest exception from CERCLA
liability. Waterville Industries' main response is that when
FAME accepted a deed in lieu of foreclosure on March 14,
1980, it "became the owner in fee simple of the land, and the
mortgages merged into the deed and disappeared." At that
point, Waterville Industries argues, FAME no longer had a
"security interest" to protect because it was the outright
owner of the property, and therefore the secured creditor
exception by its terms became inapplicable. The district
court accepted this reasoning, holding:
From March 14, 1980, to October 6, 1981 [the date
First Hartford ceased operations,] [FAME] was an
owner with a leasehold relationship to the operator
and was during that time no longer protecting a
security interest as it might have been had it been
a mortgagee or as it might have done prior to its
taking the March 14, 1980, deed.
Our own analysis begins with the construction of
CERCLA's security interest exception, plainly an issue of
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law.3 The purpose of the exception, apparent from its
language and the statutory context, is to shield from
liability those "owners" who are in essence lenders holding
title to the property as security for the debt. Congress may
have been concerned with maintaining sources of credit or may
have thought that CERCLA's far-reaching liability should be
limited to those owners who had the real equity interest in
the property. In all events, legislative history and case
law confirm that Congress had in mind not only the classic
case of the bank mortgage but also equivalent devices serving
the same function, such as lease financing arrangements.4
Our review of the record persuades us that what FAME
received from Waterville Textile Development Corporation
through the March 14, 1980, transactions was the nominal
title typical of the lender in a lease financing transaction.
Waterville Textile Development Corporation was a quasi-public
development corporation used in connection with the 1972
loans in order to hold title to the property; it purchased
3In this case, we have accepted the trial court's
findings of fact, as supplemented by other facts drawn from
the record. In re Crown Sportswear, Inc., 575 F.2d 991, 993
(1st Cir. 1978).
4See H.R. Rep. No. 172, pt. 1, 96th Cong., 1st Sess. 36
(1979) (an "owner" does not include a person who "hold[s]
title . . . in connection with a lease financing arrangement
under the appropriate banking laws, rules or regulations");
In re Bergsoe Metal Corp., 910 F.2d 668 (9th Cir. 1991)
(lease financing is a security interest under CERCLA).
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the property from First Hartford for $1 and then leased it
back to First Hartford. That lease in turn gave First
Hartford an option to buy the property for $1 at the end of
the lease (or, based on formula payments, even before the
lease expired if it chose). This is an ordinary lease
financing arrangement, commonly called a sale and lease back.
See, e.g., In re PCH Assocs., 949 F.2d 585, 599-600 (2d Cir.
1991).
When FAME acquired title from Waterville Textile
Development Corporation on March 14, 1980, it simultaneously
re-leased the property to First Hartford, altering the
payment terms as already described. But the new lease, which
is part of the record, also provides that "[e]xcept as
modified or referred to by the terms of this Agreement, in
all other respects, the Underlying Leases and Sublease
between [Waterville Textile] Development, [First Hartford]
Realty and First Hartford shall remain in full force and
effect." Thus, First Hartford's payment obligations were
altered but its option to buy the property for $1 remained in
force and the lease financing character of the transaction
remained unchanged.
The payments required under the new March 14, 1980,
lease reinforce our conclusion. First Hartford was committed
to continue payments to Society for Savings just as before
and also to make monthly payments of just over $22,000
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directly to FAME. Although Waterville Industries points to
the latter payment as "profits" inconsistent with the
supposed passive- lender role of FAME, the lease shows that
the total payments were to be limited to $868,982. We think
the fair inference from this limitation supports FAME's
explanation that the payments to it were intended to repay
FAME for its own payments to Society for Savings made under
the guarantee in order to cure First Hartford's own default.
There are yet other signs that FAME's interest was that of a
security holder.5
We think that the able district judge may have been
misled on the security interest issue by the failure of the
parties to develop the precise rights of First Hartford
under the March 14, 1980, lease, including (by incorporation
of the original 1972 lease) the option to purchase for $1.
Although the security interest exception was argued
vigorously on both sides in this court, the facts as to the
option are not mentioned in the briefs. If FAME had re-
leased the property to Waterville Industries on March 14,
1980, without continuing the purchase option, our line of
analysis would be different and FAME's current position could
be weaker.
5For example, First Hartford continued to be responsible
for real estate taxes and the payment schedule provided that
the monthly sums payable to FAME were to be applied first to
"interest," which suggests repayment of a debt.
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Our view of the matter accords with that of the Ninth
Circuit in In re Bergsoe Metal Corp., 910 F.2d 668 (9th Cir.
1991). There the court upheld the exemption claim under the
security interest exception of a titular owner who held title
to property merely as security in a sale-and-lease-back
transaction. While there are factual distinctions, the
holding and thrust of the case supports FAME's exempt status
in the year following March 14, 1980. We note also that EPA
has recently adopted regulations declaring that the security
interest exception applies to "title held pursuant to lease
financing transactions." 40 C.F.R. 300.1100(b)(1). These
regulations do not govern for they were not in effect at the
time of the events in this case.6 Since our reading of the
statute on this issue does not rest upon the regulations, we
need not resolve arguments between the parties concerning the
weight to be accorded to the EPA's views.
The more difficult problem for FAME is its status under
the exemption after October 6, 1981, when First Hartford
ceased operation. Thereafter--precisely when is less
certain--First Hartford presumably lost its rights under the
lease and, as sometimes happens to security holders, FAME's
titular ownership became real and no longer merely a security
6The regulations are currently under review in the D. C.
Circuit in cases not yet briefed or argued. Michigan v. EPA,
C.A. No. 92-1312 (Pet. filed July 28, 1992); Chemical Mfrs.
Ass'n v. EPA, C.A. No. 92-1314 (Pet. filed July 28, 1992).
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interest. However, we think such a maturation of ownership
does not divest the owner of protection under CERCLA's
security interest exception so long as the owner proceeds
within a reasonable time to divest itself of ownership. Why
this is so, and how FAME then fares under this reading of the
statute, are separate questions which we address in that
order.
Admittedly, CERCLA itself does not explicitly provide
any period for divestiture after the collapse of a financing
arrangement, but such a "safety zone" seems to us implicit in
the statute. Were it otherwise, every sale and lease-back
arrangement would subject the lender-lessor to the risk of
sudden CERCLA liability whenever the lessee, by default or
otherwise, lost its contractual rights to regain full
ownership. So long as the lender-lessor makes a reasonably
prompt effort to divest itself of its unwelcome ownership, we
think continued coverage under the exception serves its basic
policy: to protect bona fide lenders and to avoid imposing
liability on "owners" who are not in fact seeking to profit
from the investment opportunity normally presented by
prolonged ownership. The sparse case law on this point is
divided with two decisions supporting our approach and one
opposed.7
7Supporting our view are United States v. Mirabile, 15
Envtl. L. Rep. 20994, 20996 (E.D. Pa. 1985), and In re T.P.
Long Chem., Inc., 45 Bankr. 278, 288-89 (Bankr. N.D. Ohio
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EPA has followed the same path in its new regulations.
It provides a safe harbor of 12 months within which the
security interest holder may take title and offer the
property for sale, noting that one who delays longer "may
still be able to show that it has acted consistently with the
exemption . . . ." 57 Fed. Reg. 18,344, 18,364 (Apr. 29,
1992). Again, we have reached our own conclusion
independently of the regulations, which technically do not
apply to pre-adoption events. Certainly EPA's choice of 12
months for its safe harbor cannot govern this case, for such
bright-line rules make sense only when known to affected
parties in advance. Instead, we think the question is
whether, under all the circumstances, FAME acted reasonably
promptly to divest itself of ownership once the lease
arrangement ended.
The earliest time that one would expect a security
holder to start to divest itself of unwelcome ownership would
ordinarily be when the security holder obtained full title
free of serious encumbrances. So long as First Hartford held
a lease with an option to buy for $1, FAME was still only a
1985). At odds with our approach is Guidice v. BFG
Electroplating & Mfg. Co., 732 F. Supp. 556 (W.D. Pa. 1989),
unless a voluntary purchase at a mortgage foreclosure sale is
distinguished from the automatic termination of a lease.
Finally, United States v. Maryland Bank & Trust Co., 632 F.
Supp. 573 (D. Md. 1986), relied upon by Waterville, does not
reach our issue, the foreclosing mortgagee in that case
having failed promptly to resell the property after
foreclosure.
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security holder protected by the exception. First Hartford
filed for Chapter 11 reorganization on February 20, 1981, and
ceased operation of the mill on October 6, 1981. FAME then
filed an application in the bankruptcy proceeding seeking an
order declaring it the owner of the property and directing
First Hartford to surrender possession; First Hartford
opposed the application. Not until July 15, 1982, did First
Hartford and FAME enter into a stipulation that "affirmed
that title to the real property was vested solely in [FAME's
predecessor] and terminated the rights of First Hartford and
First Hartford Realty in the various leases."8 Even then
First Hartford was given until October 15, 1982, to seek a
buyer for the property.
Thus, it was only after October 15, 1982, that FAME was
finally in a position to give an unclouded and unencumbered
title to a purchaser. Within six months of that date, FAME
had contracted (in late March 1983) with an auctioneer to
sell the property. After an auction, FAME agreed (in
September 1983) to sell the property to MKY Realty, the
successful auction bidder, and it conveyed title not long
afterwards (in November 1983). Based on this sequence of
8The stipulation provided that "First Hartford and
Realty waive any and all rights or claims to be declared the
legal or equitable owner of the real property." First
Hartford was also granted a right to the proceeds of any sale
so far as they exceeded a specified sum, apparently computed
to approximate FAME's own past and pending debts on the
guarantees.
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events, we think it is apparent that FAME made diligent
efforts to dispose of the property in a timely fashion: until
October 1981, FAME had only a security interest; a quarrel
over First Hartford's interest delayed matters until October
1982; and within six months thereafter, FAME had placed the
property on the market leading to its sale within the year.
III.
In conclusion, we are satisfied based on the record that
FAME is fully protected by the security interest exception.
Waterville Industries complains bitterly in its brief that
FAME sold it the property through MKY Realty without making
full disclosure of the hazardous wastes or of notices of
violation sent to FAME, and there is separate litigation
between the parties on this subject. But the right of
contribution under CERCLA is a statutory one that here turns
solely on FAME's status as an "owner," a status defeated by
the security interest exception. Waterville Industries'
other claims against FAME, whatever their nature or merits,
are a matter for another forum.
Having resolved the case based on the security interest
exception, we do not reach FAME's separate claim that it is
also protected by the provision exempting a state unit that
acquires ownership "involuntarily . . . by virtue of its
function as sovereign." 42 U.S.C. 9601(20)(D). This
exemption, which the district court rejected on the ground
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that the acquisition was voluntary, presents difficult
problems of interpretation that we need not address.
Similarly, our reversal of the award of contribution makes it
unnecessary to consider the cross-appeal of Waterville
Industries seeking attorneys' fees as part of that
contribution.
Reversed.
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