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 &amp;
                                                                  
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  &amp; 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."   

                             -3-

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."

                             -4-

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.

                             -5-

                             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

                             -6-

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

                             -7-

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).

                             -8-

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

                             -9-

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.

                             -10-

     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).
            

                             -11-

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
                

                             -12-

     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  &amp; 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 &amp; 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.

                             -13-

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.  

                             -14-

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

                             -15-

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.
             

                             -16-
