
USCA1 Opinion

	




          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."                                            -3-                                         -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-                                         -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-                                         -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-                                         -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-                                         -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-                                         -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-                                         -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-                                         -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-                                         -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-                                         -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  & 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.                                         -13-                                         -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-                                         -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-                                         -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-                                         -16-
