ELR Citation: ELR 20752
No(s). s. 92-1225, -1338 (1st Cir. Feb 3, 1993)

Reversing a district court's contribution award, the court holds that the appellant-defendant—a state finance authority—is exempt from liability under the Comprehensive Environmental Response, Compensation, and Liability Act's (CERCLA's) security interest exception because it acted reasonably and promptly to divest itself of ownership of a contaminated Waterville, Maine, textile mill once a sale-and-lease-back transaction collapsed. The state finance authority had guaranteed loans of the company that developed the mill. That company hadacquired the property, sold it to a quasi-public corporation for $1 and then leased it back with an option to purchase the property for $1 at the end of the lease. When the company defaulted, the finance authority cured the defaults and assumed the company's obligations to the lender. The finance authority then received assignment of the mortgages, accepted a deed in lieu of foreclosure from the quasi-public corporation, and then leased the property back to the company that had defaulted. The court held that the finance authority's interest under a new lease retained the character of a security interest because the company retained the right to purchase the property for $1 at the end of the lease. The company released hazardous substances into two lagoons on the property and ultimately filed for bankruptcy. Pursuant to a stipulation, title vested in the finance authority which, within six months, sold it to the plaintiff. The U.S. Environmental Protection Agency then required the plaintiff to incur cleanup costs and the plaintiff sued the finance authority for contribution.

The court holds that Congress intended the security interest exception to protect owners who are in essence lenders holding title as a security for debt. The legislative history and case law confirm that Congress intended the exception to cover lease financing arrangements, commonly called sale-and-lease-backs. When the developer lost its rights under the lease, the finance authority became the real owner, however, the court holds, such a maturation of ownership does not abrogate the security interest exception if the owner proceeds within a reasonable time to divest itself of the property. Although CERCLA does not explicitly provide a period for divestiture after collapse of a financing arrangement, such a "safety zone" is implicit in the statute. Under the circumstances, the finance authority acted reasonably and promptly to divest itself of ownership once the sale-and-lease-back transaction collapsed. Accordingly, the court reverses a contribution award to the plaintiff.

Counsel for Plaintiff-Appellee
Jotham D. Pierce Jr., Adam Steinman, Eileen J. Griffin
Pierce, Atwood, Scribner, Allen, Smith & Lancaster
One Monument Sq., Portland ME 04101
(207) 773-6411

Counsel for Defendant-Appellant
Elizabeth Bordowitz
Finance Authority of Maine
P.O. Box 949, Augusta ME 04332
(207) 623-3263

Before BREYER, Chief Judge, BOWNES, Senior Circuit Judge, and BOUDIN, Circuit Judge.