Bank transfer
Beginning in 2001, the power industry experienced significant
backlash from the days of high power prices and easy access to
financing for new power plants. As a result of reduced power prices
and increased natural gas prices, power plants in a number of
regional markets have not performed as expected at the time they
were financed.
Compliance with, and the restructuring of, existing debt facilities is also complicated by falling credit ratings of many industry participants and the related loss of investor confidence. Industry experts estimate there is up to 100,000MW of distressed generation in the US and $40-$90 billion in debt associated with the construction of new power plants which will become due by 2006.2
Banks are now faced with borrowers unwilling or unable to continue operating a project or making unreasonable demands regarding the restructuring of existing debt. In addition, the market is flooded with energy companies trying to improve their financial situation by selling power plants. With power prices low and an oversupply of generation in certain sections of the country, prices or bids for such assets are typically now significantly below book value.3
Although no bank relishes the idea of going into the power business, taking ownership and operating or mothballing a power plant until the market for asset sales improves, may be the best, if not the only, alternative available in some cases. Some borrowers are even willing to simply transfer ownership to lenders while, in other cases, foreclosure may be necessary.
This article attempts to address some of the key issues to be considered in evaluating the ownership of one or more power plants by a bank or group of banks.
I. Energy Regulatory Issues4
Banks face different regulatory concerns depending on whether they transact with traditional, fully-regulated public utilities, or with those operating exclusively in competitive power markets subject to ?light-handed? regulation.5 These differences arise under the Federal Power Act (FPA) where Federal Energy Regulatory Commission (Ferc) waives compliance with its accounting rules and other regulations for utilities that qualify for light-handed regulation. Differences also exist under the Public Utility Holding Company Act (PUHCA) where entities subject to light-handed regulation (and those that own or control them) may be exempt from PUHCA's requirements.
The discussion below summarizes the requirements of the FPA and PUHCA and the ways banks can structure transactions so as not to become fully regulated under these statutes.
A. Federal Power Act
1. Overview
Part II of the FPA is the Depression-era law that governs the ownership or operation of electric transmission lines and the wholesale sale of electric power in interstate commerce. Any person that owns or operates such facilities is a ?public utility? subject to regulation by the Ferc. The FPA gives the Ferc the authority to regulate not only the rates, charges and services of public utilities, but also their accounting practices, securities issuances and even who can sit on their boards of directors.6
Ferc regulatory policy has evolved significantly over the past 15 years to introduce the economic discipline of competitive markets into the utility business model. The Ferc has done so by permitting light-handed regulation of utilities thought to lack the ability to dictate pricing through market power. Light-handed regulation means that the Ferc has, for example, (1) waived compliance with its accounting rules, the requirement to file cost data to support rates, and the requirement to file certain reports (though not those detailing power sales), (2) allows simplified reporting of interlocking director positions, and (3) pre-authorizes the utility to issue securities such as stock, membership interests or notes and to guarantee obligations. Importantly, the Ferc does not waive or minimize the regulatory requirement for these entities to obtain prior approval to buy, sell or lease utility assets, enter into merger transactions, or acquire the securities of any other public utility.
To qualify for this light-handed regulation, the utility must demonstrate that it, and its affiliates, lack market power in generation and transmission services, lack control over other inputs to power generation that could be used to erect barriers to competitive entry, and that it has a code of conduct in place to prevent cross-subsidies with any utility affiliates that operate State-franchised service areas. Utilities typically form stand-alone subsidiary companies or partnerships to qualify for light-handed regulation to market power that they do not produce themselves, or to own generating assets to produce power for sale at negotiated prices.
2. Asset Ownership
Project finance lenders may have the option to take direct ownership of these assets in a foreclosure situation.7 There are two critical regulatory requirements that come into play ? first, the need to obtain prior Ferc approval for the transfer of ownership, and second, the possibility that the lender will become regulated as a public utility upon foreclosing on the utility assets.
Section 203. Section 203 of the FPA requires prior Ferc approval when a public utility proposes to: (1) dispose of jurisdictional facilities with an original cost in excess of $50,000 by sale, lease or otherwise, (2) merge or consolidate its facilities with those of any other person, or (3) acquire the stock of any other public utility. The Ferc has held that the mere granting of a security interest in public utility property is not a present disposition that requires prior approval under Section 203.8 When, however, a lender proposes to foreclose on its security interest in jurisdictional property, Section 203 applies.9
The Ferc is required to approve transactions under Section 203 when they are consistent with the public interest.10 In applying the public interest standard, the Ferc examines the impact a transaction will have on competition, rates and regulation, with the competitive impacts analysis sometimes being the most troubling.
The Ferc worries any time market participants own or control sufficient generation to be in a position to influence market prices (usually 20% or more ownership in the relevant market), and is also concerned with significant changes in the concentration of generation ownership. The more concentrated generation ownership is in a particular market, the more closely the Ferc scrutinizes any transaction that would tend to further increase the level of concentration. The more concerned the Ferc is with market concentration, the longer it may take to get Ferc approval of a transaction.
Lenders who do not have affiliates that control significant amounts of generating capacity in the relevant market ordinarily will not be subject to close market power scrutiny when they foreclose on generating assets, and the Ferc can approve such transactions in a relatively short amount of time.11
Public Utility Regulation. If a lender forecloses on utility assets directly it will become subject to Ferc regulation as a public utility. The Ferc, however, directly regulates only the entity that owns or operates jurisdictional facilities, not its upstream parents or affiliates.12 Thus, banks can avoid becoming subject to general FPA regulation by owning utility assets through single purpose subsidiary companies. This can be accomplished either by holding the security interest in utility assets through a special purpose subsidiary of the lender established at the time of the loan, or by holding a security interest in the securities of the borrower if it is a single purpose entity formed to own and operate the project.
3. Stock Ownership
Lenders can foreclose on a project in default by exercising ownership rights to the pledged securities of the project company. This structure can also be used to accommodate foreclosure on multiple project companies controlled by the same ultimate borrower. A recent example is Athens Generating Company, L.P., where the Ferc authorized PG&E National Energy Group, Inc. to transfer its ownership of four generating projects to a special purpose company owned by lenders to the projects.13 The special purpose company acquired the stock of the project companies in a holding company arrangement. Each project company retained its Ferc power sales tariff and, thus, remained the jurisdictional public utility. In approving the transaction, the Ferc considered ownership or control over other generating projects that individual lenders or their affiliates had to determine whether the transaction would give any of the lenders market power in the sale of electric products. The Ferc found the lenders' investments in such projects was de minimis and approved the transaction.
B. The Public Utility Holding Company Act
1. Overview
Companies, partnerships or individuals and their affiliates who own or control with power to vote more than 10% of the outstanding voting securities of gas or electric utility companies, and who do not qualify for one of PUHCA's exemptions, are subject to pervasive regulation by the Securities and Exchange Commission (SEC) of their securities issuances, acquisitions, finances, accounting, management and other matters as registered public holding companies. Gas utilities are entities that own or operate facilities used for the distribution at retail of natural or manufactured gas, and electric utilities are those that own or operate facilities for the generation, transmission or distribution of electric energy for sale. Thus, banks or other lenders that foreclose on utility assets or securities potentially may become electric utility companies under PUHCA, and their parents may be required to become registered holding companies. Fortunately, there are ways for banks to exercise their security interests without becoming subject to PUHCA regulation.
2. Exempt Wholesale Generators
The most straightforward way to avoid general PUHCA regulation is to own a generating project through an exempt wholesale generator, or EWG. An EWG is any person determined by the Ferc to be engaged directly, or indirectly, and exclusively in the business of owning and/or operating one or more eligible facilities and selling electric energy exclusively at wholesale.14 To be an ?eligible facility? the project must be used to generate electric energy at wholesale. If the facility was in retail rate base in any State on October 24, 1992, the relevant State public service commission must specifically find that permitting it to become an eligible facility will benefit consumers in the State, be consistent with the public interest, and not violate the laws of the State.15 Each of the generating projects in the Athens Generating case mentioned above were qualified as EWGs, which means the banks will not become subject to SEC regulation as holding companies solely as a result of their ownership of the securities of the project companies.
An EWG structure is well-suited to single purpose wholesale generating projects where lenders take a pledge of the securities of the project company as security for the loan. This structure may not be available, however, to transactions involving loans to multi-purpose utilities, or those that make retail sales to consumers.
3. Section 3(a)(4)
Section 3(a)(4) of PUHCA provides an exemption from general PUHCA regulation for lenders that foreclose on utility assets with the goal of divesting them. Thus, although Section 3(a)(4) is available to a broader class of utility assets than the EWG exemption, Section 3(a)(4) does not permit lenders to retain ownership of the assets for an indefinite period of time.
SEC Rule 3 implements the Section 3(a)(4) exemption by allowing lenders to hold utility assets or securities (1) as collateral for a bona fide debt, (2) in the ordinary course of the lender's business as a fiduciary, or (3) acquire the utility assets or securities solely for purposes of liquidation in connection with a bona fide debt previously contracted when the lender has owned the securities beneficially for a period of not more than two years.16 The SEC has noted that ?the language of [section 3(a)(4)] clearly denotes a desire to give an applicant thereunder a reasonable time in which it might dispose of its public utility or holding company securities without being subject to the Act,?17 and has granted a ?temporary? exemption for as many as seven years.18 If the bank qualifies for this exemption it must file an annual statement with the SEC within 30 days after the last day of February.19 The SEC has the authority to terminate a Section 3(a)(4) exemption under Rule 6 if it finds the exemption is detrimental to the public interest or the interest of investors or consumers.20
II. Bank Regulatory Issues
This section focuses on the authority of a non-US bank that has an office or commercial lending subsidiary in the US and thus would be treated as a bank holding company.21 However, the activities addressed below are generally permissible for US banks as well.22
Non-US banks that control a US branch or agency office, a US commercial lending subsidiary or a US depository institution are subject to different laws and regulations than apply to foreign banks that have no US offices or subsidiaries. Under the International Banking Act (IBA), foreign banks that operate state-chartered branches, agencies or commercial lending subsidiaries in the US are treated as bank holding companies,23 and their branches are subject to the laws and regulations of the state that licensed the branch.24 (A foreign bank's US agency or commercial lending subsidiary would similarly be subject to the law of the state in which the agency or subsidiary is located.)
As a result, a non-US bank having a US branch must look to the Bank Holding Company Act (BHCA) and to OCC regulations or state law for authority to invest directly or through a subsidiary in a power plant. In contrast, a non-US bank that does not own or operate a branch, agency or commercial lending subsidiary in the US is subject only to such federal and state laws as would normally apply to an out-of-state or non-US bank or other entity that has no physical presence in any state.
A. Authority Under the BHCA
The BHCA, as implemented by the Federal Reserve Board's Regulation Y, permits a bank holding company to hold voting securities or other assets that are acquired by foreclosure or otherwise, in the ordinary course of collecting a debt previously contracted (DPC) in good faith.25 The acquisition of such securities or other assets does not require notice to or prior approval from the Federal Reserve Board (Board).
Under this authority, the DPC property must be divested within two years of acquisition. However, the Board may, upon request, extend the two-year period for up to three additional years, and may permit additional extensions for up to five years (for a total of 10 years), for shares, real estate or other assets where the holding company demonstrates that:
1. An extension would not be detrimental to the public interest; and
2. Either the bank holding company has made good faith attempts to dispose of the shares, real estate or other assets, or disposition would have been detrimental to the company.
The authority to grant extensions has been delegated by the Board to the Federal Reserve Banks.26 In support of a request for an extension, a bank holding company must outline the efforts it has made to divest its interest in the shares or other assets, and must provide the reasons that an extension is consistent with the public interest.27
Extensions are not to be granted except under compelling circumstances, and periodic progress reports on divestiture plans are generally required.28 When the permissible extension periods expire, the Board no longer has discretion to grant further extensions, and the prohibited shares or other assets must have been divested. Divestiture may be ordered before the end of the permissible holding period if supervisory concerns warrant such action.
The BHCA also expressly authorizes a bank holding company to establish a subsidiary to hold real estate acquired by itself or by any of its banking subsidiaries for debts previously contracted for the purpose of disposing of the real estate in an orderly manner.29 Permissible activities of this liquidating subsidiary include completion of a real estate development project and other activities necessary to make the real estate salable. The date of acquisition is the date the bank holding company or its subsidiary acquired the DPC asset.
Significantly, this authority generally may not be used to extend the time under which a bank holding company may hold DPC property. In most cases, where a bank holding company or its subsidiary has held property for the statutory holding period, the property may not be shifted to another subsidiary or to the bank holding company to extend the permissible holding period. Due to the complexity and potential impact on a bank holding company of a forced divestiture at the end of the holding period, alternative arrangements are possible if merited for supervisory reasons.30
The Board has not expressly addressed the ownership by a bank holding company of an electric power plant. However, it has tacitly recognized a bank holding company's authority under the BHCA and Regulation Y to hold and operate DPC property as diverse as an oil refinery and a movie studio.31
Also noteworthy is a bank holding company's separate authority to acquire debt that is in default at the time of acquisition if the company divests of any shares or assets securing the debt that are not permissible investments for bank holding companies.32 The divestiture must be accomplished within two years after acquisition of the debt, although this deadline may be extended via Federal Reserve Board approval of up to three one-year extensions. Although prior Board approval is not required in order to invest in debt in default, notice must be provided to the Board within ten business days after making the investment.
B. Authority Under the National Bank Regulations
A national bank's authority to hold DPC property is substantially similar to that of bank holding companies. Federally-licensed branches or agencies of non-US banks have identical authority. This authority permits national banks to hold securities33 and real property34 acquired through foreclosure on collateral or otherwise in satisfaction of a debt previously contracted.
Such securities or property may be held for a period not to exceed five years from the date that ownership was originally transferred to the bank. The Office of the Comptroller of the Currency may extend the holding period for up to an additional five years if a bank provides a clearly convincing demonstration as to why an additional holding period is needed. A national bank may not hold securities or real property for speculative purposes.35
C. Authority Under New York Law
Because a state-chartered branch of a non-US bank derives its authority to invest in a nonbank subsidiary from state law, such an investment must be permitted under state law in order for a non-US bank to invest in a nonbank subsidiary through its US branch. Under the New York Banking Law (NYBL), a State branch generally possesses the same powers as banks chartered under the NYBL.36 This authority is subject, however, to limitations in the IBA which prohibit a State branch from engaging in any activity not permitted for a national bank unless the Federal Reserve Board has authorized the State branch to engage in the activity.37
The NYBL authorizes a New York bank to purchase, hold, lease and convey real property that is conveyed to it in satisfaction of debts previously contracted in the course of its business or that it purchases at sales under judgments, decrees or mortgages held by it.38 In addition, a New York bank may ?acquire stock in settlement or reduction of a loan, or advance of credit or in exchange for an investment previously made in good faith and in the ordinary course of business, where such acquisition of stock is necessary in order to minimize or avoid loss.?39 This seems clearly to authorize a New York bank or branch to directly hold and operate DPC property.
A separate question arises as to whether a New York bank or branch may hold and operate DPC property indirectly through a separate entity, which may be either wholly- or majority-owned and controlled by the bank, or co-owned with other members of a lending syndicate and not majority-owned or controlled by the bank. Based on the broad statutory language in the NYBL authorizing investment in DPC property and on the absence of any statutory or regulatory provisions expressly restricting bank's power to deal with DPC property, it appears that New York banks have sufficiently broad latitude to hold DPC property indirectly through a separate entity, whether or not it was majority-owned or controlled by the bank. However, in response to inquiries, the New York Banking Department (NYBD) has not been able to identify any interpretation that addresses the scope of the statutory authorization or that directly or indirectly supports (or undercuts) such an application of the statute.
If indirect ownership through a separate entity is not authorized under the NYBL DPC provision, then the authority for such indirect ownership would have to come from the NYBL provisions governing equity investments by New York banks and, by extension, New York branches or agencies of non-US banks.40 Among the investments authorized is stock or other equity in subsidiary corporations engaged in (1) the ownership or operation of real or personal property acquired through foreclosure or in settlement or reduction of debts owed to the bank,41 or (2) any other business in which the bank or trust company may engage directly.42
The NYBL provides that such investments must conform to regulations adopted by the NYBD governing the ownership of subsidiaries.43 Accordingly, both New York banks and New York branches and agencies of non-US banks must follow the procedures applicable to the establishment of operating subsidiaries set forth in Part 14 (specifically, Section 14.3) of the General Regulations of the Banking Board, which governs the establishment of operating subsidiaries.44
Significantly, Section 14.2 states that the Section 14.3 procedures apply only to subsidiaries as to which the bank or branch owns a majority of the voting stock and is the sole controlling person. Accordingly, if the authority to invest in a special entity established to hold DPC property must rely on the subsidiary investment authority in Part 14 rather than the separate authority to hold DPC property, this authority would not appear to extend to a DPC entity that is co-owned by multiple members of a lending syndicate unless (1) the other co-owners were not New York-chartered or -licensed banks or branches and (2) the ownership could be structured so that the New York bank or branch was the controlling person and majority owner of voting stock. If the section 14.3 procedures could not be relied upon, the sole alternative would appear to require obtaining a three-fifths vote of the New York Banking Board specifically approving ownership of such a subsidiary.45
III. Liability as an Owner46
A. Transfer of Ownership
The most likely form of transfer of ownership of a project-financed power plant to a bank or group of banks is assignment by the sponsor of (or foreclosure on) its ownership interest in the project company rather than the assets themselves. This avoids any issues regarding the transfer or reissuance of permits and the assignment and assumption of key contracts and, therefore, the transfer can be completed much more quickly. This approach assumes that the intent is to continue operating the project as a whole rather than sell the assets.
Banks considering such action will, as a matter of proper diligence, examine the existing liabilities of the project company and on-going disputes or litigation in which the project company may be involved. This will allow the banks to determine if pre-existing liabilities counsel in favor of either an involuntary bankruptcy proceeding or removing the assets from the project company and moving them to another special purpose entity.
In addition to the automatic stay, an involuntary bankruptcy proceeding would allow the opportunity to reject unfavorable contracts, to seek to recoup recent transfers as fraudulent or preferential and negotiate with unsecured creditors with respect to existing liabilities. Of course, banks must be aware that the borrower can also invoke bankruptcy law. In a default situation, there is always a risk that a project company will file a voluntary bankruptcy petition to attempt to prevent foreclosure and force the lenders to work through the creditors' committee to develop a reorganization plan.
B. Liability for Contract and Tort Claims
As a general matter, a parent company is not directly liable for the acts of its subsidiary but, rather, is treated as a separate corporate entity.47 Thus, banks which directly or indirectly own an equity interest in a project company which, in turn, owns and operates a power plant should not be liable for the debts and other liabilities of the project company as a result of such operations.
There are exceptions to the general rule but only in unusual circumstances will a court disregard the separate corporate existence of a subsidiary, even a wholly-owned subsidiary, in order to impose vicarious liability on the parent.48 Courts are much more likely to disregard the independence of the parent company where upholding the parent's separate existence would sanction a fraud or promote injustice. In such a situation, courts will invoke the power to pierce the corporate veil in order to enforce equitable rights.49
There is substantial case law on this issue with respect to corporations but the same principles would likely be applied to limited liability companies, which have become a common ownership vehicle for power plants.50
A court will normally apply this doctrine only if it determines, based on the totality of the circumstances, that the corporation or limited liability company is a ?mere instrumentality? of the parent and that holding the parent liable is necessary to defeat fraud or avoid injustice. In tort cases, courts may pierce the corporate veil even in the absence of fraudulent conduct based on the theory that the injured party did not voluntarily enter into a relationship with the corporation or limited liability company. In contract cases, however, the separate identity of a corporation usually is respected absent fraud.
A prerequisite to piercing the corporate veil is a showing that the corporation or limited liability company is simply the alter ego of a dominant member or parent. The degree of control exercised by the member or parent corporation must be more than that level of control which is normally exercised by an active parent.51 It must entail ?complete domination, not only of finances but of policy and business practice in respect to the transaction attacked.?52 In such a situation, the subsidiary is deemed an ?alter ego,? ?mere instrumentality,? or ?agent? of its parent.53
Courts consider several factors, including: whether the subsidiary was properly capitalized at the time of the corporate undertaking; whether the subsidiary was solvent; whether dividends were paid; whether separate records were kept; whether separate bank accounts were maintained; whether officers and directors functioned independently or overlapped; whether other corporate formalities were observed; whether a dominant member or parent siphoned off funds; whether there is significant parental financing and control over the subsidiary; whether a parent has control over the subsidiary's day-to-day operations; and whether the subsidiary simply functioned as a facade for a dominant member or parent.54 No single factor justifies a decision to disregard the corporate entity.55
Banks can obtain additional protection by establishing a new special-purpose entity in which the bank or banks will own a direct interest and which in turn will own the project company. This will likely also be necessary to reflect operating and decision making procedures where a bank group is involved and their pro rata exposure on the existing debt can be translated into pro rata ownership of the special-purpose entity. Such action would be subject to the consideration of the issues and limitations discussed in Section II above applicable to a New York-chartered or New York-licensed bank or branch.
Also, banks should ensure that the project company has appropriate insurance in place with respect to both third party property damage and personal injury. If insurance sufficiently covers a third party's claim, then it is less likely that they will seek to recover from a parent company or other related entities viewed as ?deep pockets.?
The following suggestions in structuring and developing operating procedures for the holding company and the project company may help banks further minimize the theoretical risk of the corporate veil being pierced:
C. Liability for Environmental Claims
The consideration of federal law is necessary with respect to potential liability for environmental claims associated with the operation of a power plant. Section 101(E) of Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) grants lenders some protection from the general rule that entities which own or operate a power plant will be liable for the clean-up of hazardous substances released at the site prior to the transfer of ownership. Section 101(E)(i) provides that a lender which holds indicia of ownership to establish or maintain a security interest does not constitute and owner or operator for purposes of CERCLA.
In addition, Section 101(E)(ii) provides that a lender that forecloses on a power plant or other facility does not automatically become an owner/operator with respect to pre-existing contamination under CERCLA but it is necessary to evaluate their post-foreclosure activities. To the extent that activities after foreclosure are focused on the sale or lease of the facility, maintaining the business in anticipation of a sale or the winding-up of operations, the lender is not subject to CERCLA liability. Section 101(E)(ii) states, however, that the exclusion of liability only applies:
if the person seeks to sell, re-lease (in the case of a lease finance transaction), or otherwise divest the person of the vessel or facility at the earliest practicable, commercially reasonable time, on commercially reasonable terms, taking into account market conditions and legal and regulatory requirements.56
The issue then becomes how long in light of market conditions is it commercially reasonable for a former lender to own and operate a power plant. There is not definitive case law as each case would have to be reviewed in light of the surrounding facts and circumstances.57 It is clear, however, that to take advantage of the exclusion of liability set forth in Section 101(E)(iii), lenders will need to take steps to establish a record demonstrating their efforts to sell the facility.58 This is similar to the evidence of a good faith attempt to sell the assets or the project company required to obtain an extension of the initial two-year period applicable to banks and bank holding companies as discussed in detail in Section II.A above.
The above analysis applies to the circumstance where a lender forecloses on or takes ownership of the assets to protect its security interest while attempting to sell the property. In the event that a bank takes ownership of the project company with the intent of retaining ownership for an extended period until the market for such assets improves,59 then there are two theories under which it could be liable under CERCLA for the clean-up of hazardous substances released at the site. First, the bank could be held liable for the actions of its subsidiary under CERCLA if a court finds it would be appropriate to pierce the corporate veil under the traditional corporate analysis described in Section III.C above with respect to the actions resulting in the contamination.60 Second, a bank which steps in and directly operates the facility can be held liable under CERCLA for its own actions regardless of its corporate existence independent from the project company that actually owns the power plant the operation of which resulted in the contamination.61 The US Supreme Court has indicated that direct operations means the parent entity ?must manage, direct or conduct operations specifically related to pollution, that is, operations having to do with the leakage or disposal of hazardous waste or decisions about compliance with environmental regulations.?62
In both cases, a finding of some form of control by the parent is necessary to impose liability on such entity under CERCLA. However, once within the class of potentially responsible parties under CERCLA, a bank would be jointly and severally liable for contamination pre-dating it ownership of the project company. The bank would then have the right to seek contribution from the previous owner or operator directly responsible for the contamination.
The project company could also face liability for air pollution violations under state law or other state permit violations. Banks acting as a parent company are only held liable for these fines and penalties if there is a finding under state law that the corporate veil should be pierced or the parent company is otherwise found to be the operator of the facility.
IV. Operations
The most significant impediment to bank ownership may not be legal constraints but the more practical problem of day-to-day management. This problem is often mitigated by the existence of project agreements in favor of the project company which can be assumed or maintained in connection with transfer of the assets or the project company to a new owner. Even if that is not the case, however, given the number of energy experts available for hire due to cutbacks at various energy companies, banks should not have trouble finding qualified personnel. Indeed, one trend in the industry is the establishment of companies to provide operation and maintenance services specifically to banks and lender groups. Examples include subsidiaries of Constellation Energy Group, Northeast Utilities, Public Service Enterprises Group Inc., KeySpan Corp. and Pepco Holdings Inc.
V. Conclusion
Although long-term ownership of a power plant or plants by banks is not currently contemplated by applicable bank regulatory, Ferc or environmental laws, a bank is not compelled by legal restraints and considerations to rule out the option of owning and operating power plants for an extended period of time until the market for such assets improves.
Although it is necessary to consider a number of factors, bank ownership and operation of power plants can be a viable alternative to restructuring debt on less than favorable terms or selling the facility for an amount well below book value. In such a situation, a bank would need to make decisions regarding required action under laws and regulations applicable to banks, steps to avoid subjecting the bank to Ferc regulation, the method for transfer of ownership, the ownership structure, management procedures and contracting for necessary services (to the extent the project company does not have such contracts in place).
Footnotes:
1 Robert E. Bostrom is the Managing Partner of the New York office of Winston & Strawn, a member of the firm's Executive Committee, and heads the firm's Financial Services Practice. Kenneth F. Hall is Of Counsel in the firm's New York office and a member of the firm's Financial Services Practice. Vanessa Richelle Wilson is a senior associate in the Washington, D.C. office of Winston & Strawn practicing in the area of energy project finance. Raymond B. Wuslich is a partner in the firm's Washington, D.C. office practicing in the area of energy regulatory matters.
2 Source ? Reuters
3 Source ? Global Power Report
4 Margaret H. Claybour contributed significantly to this section.
5 The focus of the discussion below is on traditional project financing transactions where the lender takes a security interest in the project's assets and any associated purchased power agreement, or the securities evidencing ownership of the project.
6 For example, Section 305(b) of the FPA prohibits any person from serving simultaneously as an officer or director of a public utility and an officer or director of any financial institution authorized by law to underwrite or issue public utility securities without Ferc's prior approval.
7 For purposes of this discussion ?PPA? includes both energy sales and capacity sales through tolling agreements.
8 E.g., Baltimore Refuse Energy Systems Company, 40 Ferc ¶ 61,366, at 62,118, n.11 (1987).
9 Jurisdictional property includes not only transmission facilities (which can include equipment such as generator step-up transformers), but also includes the contracts, books, records and accounts of the public utility.
10 Ferc has pre-authorized financial institutions to acquire small amounts of public utility stock (no more than 5%) in the course of their lending businesses when the transaction does not otherwise give the institution control over the public utility. See UBS AG, et al., 101 Ferc ¶ 61,312 (2002), order on reh'g pending. It is doubtful that such pre-authorization would apply, for example, if a group of financial institutions each owning less than 5% were to foreclose on a public utility because the act of foreclosure would be a disposition of public utility property requiring prior Ferc approval.
11 Ferc often approves transactions raising insignificant competitive concerns in little more than a month. Ferc staff is authorized to approve such transactions through delegated orders. More difficult applications can take many months to process and risk outright rejection, particularly when intervenors protest and raise important issues. In such circumstances the final order must be voted on and approved by the Ferc commissioners, which is a more time-consuming process.
12 E.g., Long Lake Energy Corporation, 50 Ferc ¶ 61,262 (1990).
13 103 Ferc ¶ 61,290 (2003).
14 15 U.S.C. § 79z-5a(a)(1).
15 Such findings have typically been made for legacy generating assets located in so-called ?retail access? States like California, Maryland, New York, Pennsylvania, and most of the Northeastern States. If the facility was owned by a company in a registered holding company system, then each State commission with jurisdiction over the operating companies in that system must also make each of the listed findings.
16 17 C.F.R § 250.3(a) (2003).
17 Manufacturers Trust Co., 9 S.E.C. 283, 288 (1941).
18 Coastal States ? Lo-Vaca Settlement Trust Mercantile National Bank at Dallas, Holding Co. Act Release No. 21104 (Apr. 23, 1979).
19 17 C.F.R. § 250.3(c). See also 17 C.F.R. § 259.403, Form U-3A3-1.
20 17 C.F.R. § 250.6.
21 12 U.S.C. § 3106a(1). A federally-licensed branch would be subject to the regulations of the Office of the Comptroller of the Currency, which are also applicable to national banks.
22 Generally, as long as a non-US bank does not conduct within a state the types of activities that would require it to be licensed or otherwise qualified under federal or state law to do business in the state, the bank would generally look to its home-country law to determine its authority to conduct a particular activity, and would look to state law only for limitations on the exercise of that authority within the state or with citizens of the state.
23 12 U.S.C. § 3106(a).
24 12 U.S.C. § 3106a(1). A federally-licensed branch would be subject to the regulations of the Office of the Comptroller of the Currency.
25 12 U.S.C. § 1843(c)(2); 12 C.F.R. § 225.22(d)(1).
26 12 C.F.R. §265.11(a)(5).
27 Note that transfers of DPC property within a bank holding company system do not extend any period for divestiture of the property. 12 C.F.R. § 225.22(d)(1)(iii).
28 See 12 C.F.R. § 225.138.
29 12 U.S.C. § 1843(c)(1)(D).
30 See Federal Reserve Board Bank Holding Company Supervision Manual § 3030.0 (December 2002).
31 See Letter from Scott G. Alvarez, Assoc. General Counsel, to Paul N. Watterson, Jr., Esq., January 30, 1997 (oil refinery ownership by Dai-Ichi Kangyo Bank, Ltd., Tokyo, Japan); Letter from Kathleen M. O'Day, Assoc, General Counsel, to Robert S. Royer, Esq., June 16, 1996 (ownership of Metro-Goldwyn Mayer, Inc. by Credit Lyonnais).
32 12 C.F.R. §§ 225.22(a), 225.28(b)(2)(vii).
33 12 C.F.R. § 1.7.
34 12 U.S.C. § 29.
35 12 C.F.R. § 1.7(d); see 12 U.S.C. § 29 (which lists the purposes for which a national bank may hold real property).
36 See NYBL § 2(1) defining bank as ?any corporation, other than a trust company, organized under or subject to the provisions of article three of this chapter? (emphasis added) (several sections of the NYBL subject non-US banks to various provisions of NYBL Article 3). The Legal Division of the New York Banking Department has repeatedly expressed the view that State branches may exercise the same powers as New York-chartered banks.
37 12 U.S.C. § 3105(h).
38 NYBL § 98(1)(b), (1)(c).
39 NYBL § 97(4-a)(d), (f). A New York bank may also acquire, hold and convey any other real property that is specifically approved by the New York Banking Board by a three-fifths vote of all Board members, but this process would require submission of an application and receipt of approval prior to acquiring the property. See NYBL § 98(1)(d).
40 The NYBD has stated that, like New York banks, New York-licensed branches and agencies of non-US banks may ?acquire, establish, or make an additional investment in a branch or agency subsidiary (whether such subsidiary is a corporation, or other type of legal entity such as a limited liability company).? NYBD Industry Letter, ?Foreign Branches and Agencies Establishing Operating Subsidiaries ? Guidance Letter? (6/4/01).
41 NYBL § 97(4-a)(d).
42 NYBL § 97(4-a)(f). The NYBL also authorizes investment in the stock of any other corporation if specifically authorized by another provision of New York law or specifically approved by a three-fifths vote of the New York Banking Board, an authority infrequently used. NYBL § 97(5).
43 NYBL § 97(4-a).
44 3 N.Y.C.R.R. Part 14 (?Investments in Corporations by Banks and Trust Companies?).
45 See 3 N.Y.C.R.R. § 14.4. See also footnote 39 above.
46 This article does not address a bank's exposure to lender liability claims prior to assuming ownership of the assets or the project company.
47 Precision, Inc. v. Kenco/Williams, Inc., 2003 U.S. App. LEXIS 5740 (6th Cir. 2003) (citing U.S. v. Bestfoods, 524 U.S. 51, 61, 141 L. Ed. 2d 43, 118 S.Ct. 1876 (1998); Phoenix Canada Oil Co. v. Texaco, Inc., 842 F.2d 1466, 1476 (3rd Cir. 1988); Lowell Staats Min. Co., Inc. v. Pioneer Uravan, Inc., 878 F.2d 1259 (10th Cir. 1989); United States v. Jon-T Chemicals, Inc., 768 F.2d 686, 690 (5th cir. 1985), cert. denied, 475 U.S. 1014 (1986); Sears, Roebuck & Co. v. Jardel Co., 421 F.2d 1048, 1053 (3rd Cir. 1970); McMullin v. Pelham Bay Riding, Inc., 593 N.Y.S.2d 27 (N.Y. App. Div. 1993).
48 Precision, Inc. v. Kenco/Williams, Inc., 2003 U.S. App. LEXIS 5740 (6th Cir. 2003) at 9-10; Bradson Mercantile v. Vanderbilt Indus. Contracting Corp., 883 F. Supp. 37, 50 (W.D.N.C. 1995); National Carloading Corp. v. Astro Van Lines, Inc., 593 F.2d 559 (4th Cir. 1979).
49 Brown v. Syntex Labs, Inc., 755 F.2d 668, 674 (8th Cir. 1985); Sears, Roebuck & Co. v. Jardel Co., 421 F.2d 1048, 1053 (3rd Cir. 1970); Geyer v. Ingersoll Publications Company, 621 A.2d 784, 793-94 (Del. Ch. 1992); Fletcher v. Atex, Inc., 68 F.3d 1451, 1457 (2d Cir. 1995) (stating that Delaware courts will pierce the corporate veil when there is fraud); U.S. v. Cordova Chemical Co. of Michigan, 113 F.3d 572, 580 (6th Cir. 1997); Transportes Aereos de Angola v. Ronair, Inc., 693 F.Supp. 102, 111 (D.Del. 1988)(stating that ?[w]hen the corporate form is misused, courts will pierce the corporate veil in order to ?prevent fraud, illegality, or injustice, or when recognition of the corporate entity would defeat public policy.?).
50 Ditty v. Checkrite Ltd., Inc., 973 F. Supp. 1320, 1335-1336 (D. Utah 1997); Abu-Nassar v. Elders Futures Inc., 1991 WL 45062, *10 (S.D.N.Y. 1991). See also, Eric Fox, Piercing the Veil of Limited Liability Companies, 62 Geo. Wash. L. Rev. 1143, 1168 (1994).
51 Application of Crespo, 475 N.Y.S.2d 319 (N.Y. Sup. Ct. 1984); Gardemal v. Westin Hotel Co., 186 F.3d 588, 597 (5th Cir.1999) (citing Jon-T Chemicals, 768 F.2d at 692-3).
52 William M. Fletcher, Fletcher Cyclopedia of the Law of Private Corporations, § 43 (perm. ed. rev. vol. 1999).
53 Jon-T Chemicals, 768 F.2d at 691; see also U.S. v. Funds Held ex rel. Wetterrer, 210 F.3d 96, 109 (2d Cir. 2000);
54 Bd. of Trs. v. Foodtown, Inc. 296 F.3d 164, 171 (3rd Cir. 2002); Harper v. Delaware Valley Broadcasters, Inc., 743 F. Supp. 1076, 1086 (D. Del. 1990); Phoenix Canada Oil Company v. Texaco, Inc., 842 F.2d 1466, 1476 (3rd Cir. 1988).
55 Id; Sears, Roebuck & Co. v. Jardel Co., 421 F.2d 1048, 1053 (3rd Cir. 1970); Alberto v. Diversified Group, 55 F.3d 201, 205 (5th Cir. 1995) (citing U.S. v. Golden Acres, Inc., 702 F.Supp. 1097, 1104 (D.Del. 1988), aff'd, 879 F.2d 860 (3rd Cir. 1989)). We were unable to locate a case to date in which a bank acting as an upstream owner of a power plant was held liable for the obligations and liabilities of its subsidiary based on the theory of piercing the corporate veil.
56 42 U.S.C. 9601 (Section 101(E)(ii) of CERCLA).
57 See U.S. v. Odabashian et al., 1999 U.S. Dist. LEXIS 23200, *15-17 (W.D. Tenn 1999) (holding that three years and ten months was a commercially reasonable period where the new owner put the property on the market within two months of foreclosure); see also, Northeast Doran, Inc. v. Key Bank of Maine, 15 F.3d 1, 2-3 1st Cir. 1004); Waterville Industries v. Finance Authority of Maine, 984 F.2d 549, 552-53 (1st Cir. 1993); In re Cuyahoga Equipment Corporation, 980 F.2d 110, 118-119 (2d. Cir. 1992); In re Bergose Metal Corp., 910 F.2d 668, 672 (9th Cir. 1990).
58 Id. at 16.
59 Please note that there is no specific time limit on lenders in connection with Section 101(E) as long as an attempt is made to resell. Market conditions could justify maintaining ownership for an extended period if the assets are put up for sale and no reasonable offer is received.
60 United States v. Best Foods, 524 U.S. 51, 61-64 (1998). In connection with CERCLA, some courts have suggested that an independent federal common law test for piercing the corporate veil but is appropriate rather than the application of the most relevant state law but as federal common law ?draws upon state law for guidance, ... the choice between state and federal [veil-piercing law] may in many cases present questions of academic interest, but little practical significance.?). Id. at 63, footnote 9 (quoting In re Acushnet River & New Bedford Harbor Proceedings, 675 F. Supp. 22, 33(D. Mass. 1987)).
61 Best Foods, 524 U.S. at 65.
62 Id. at 66-67.
Compliance with, and the restructuring of, existing debt facilities is also complicated by falling credit ratings of many industry participants and the related loss of investor confidence. Industry experts estimate there is up to 100,000MW of distressed generation in the US and $40-$90 billion in debt associated with the construction of new power plants which will become due by 2006.2
Banks are now faced with borrowers unwilling or unable to continue operating a project or making unreasonable demands regarding the restructuring of existing debt. In addition, the market is flooded with energy companies trying to improve their financial situation by selling power plants. With power prices low and an oversupply of generation in certain sections of the country, prices or bids for such assets are typically now significantly below book value.3
Although no bank relishes the idea of going into the power business, taking ownership and operating or mothballing a power plant until the market for asset sales improves, may be the best, if not the only, alternative available in some cases. Some borrowers are even willing to simply transfer ownership to lenders while, in other cases, foreclosure may be necessary.
This article attempts to address some of the key issues to be considered in evaluating the ownership of one or more power plants by a bank or group of banks.
I. Energy Regulatory Issues4
Banks face different regulatory concerns depending on whether they transact with traditional, fully-regulated public utilities, or with those operating exclusively in competitive power markets subject to ?light-handed? regulation.5 These differences arise under the Federal Power Act (FPA) where Federal Energy Regulatory Commission (Ferc) waives compliance with its accounting rules and other regulations for utilities that qualify for light-handed regulation. Differences also exist under the Public Utility Holding Company Act (PUHCA) where entities subject to light-handed regulation (and those that own or control them) may be exempt from PUHCA's requirements.
The discussion below summarizes the requirements of the FPA and PUHCA and the ways banks can structure transactions so as not to become fully regulated under these statutes.
A. Federal Power Act
1. Overview
Part II of the FPA is the Depression-era law that governs the ownership or operation of electric transmission lines and the wholesale sale of electric power in interstate commerce. Any person that owns or operates such facilities is a ?public utility? subject to regulation by the Ferc. The FPA gives the Ferc the authority to regulate not only the rates, charges and services of public utilities, but also their accounting practices, securities issuances and even who can sit on their boards of directors.6
Ferc regulatory policy has evolved significantly over the past 15 years to introduce the economic discipline of competitive markets into the utility business model. The Ferc has done so by permitting light-handed regulation of utilities thought to lack the ability to dictate pricing through market power. Light-handed regulation means that the Ferc has, for example, (1) waived compliance with its accounting rules, the requirement to file cost data to support rates, and the requirement to file certain reports (though not those detailing power sales), (2) allows simplified reporting of interlocking director positions, and (3) pre-authorizes the utility to issue securities such as stock, membership interests or notes and to guarantee obligations. Importantly, the Ferc does not waive or minimize the regulatory requirement for these entities to obtain prior approval to buy, sell or lease utility assets, enter into merger transactions, or acquire the securities of any other public utility.
To qualify for this light-handed regulation, the utility must demonstrate that it, and its affiliates, lack market power in generation and transmission services, lack control over other inputs to power generation that could be used to erect barriers to competitive entry, and that it has a code of conduct in place to prevent cross-subsidies with any utility affiliates that operate State-franchised service areas. Utilities typically form stand-alone subsidiary companies or partnerships to qualify for light-handed regulation to market power that they do not produce themselves, or to own generating assets to produce power for sale at negotiated prices.
2. Asset Ownership
Project finance lenders may have the option to take direct ownership of these assets in a foreclosure situation.7 There are two critical regulatory requirements that come into play ? first, the need to obtain prior Ferc approval for the transfer of ownership, and second, the possibility that the lender will become regulated as a public utility upon foreclosing on the utility assets.
Section 203. Section 203 of the FPA requires prior Ferc approval when a public utility proposes to: (1) dispose of jurisdictional facilities with an original cost in excess of $50,000 by sale, lease or otherwise, (2) merge or consolidate its facilities with those of any other person, or (3) acquire the stock of any other public utility. The Ferc has held that the mere granting of a security interest in public utility property is not a present disposition that requires prior approval under Section 203.8 When, however, a lender proposes to foreclose on its security interest in jurisdictional property, Section 203 applies.9
The Ferc is required to approve transactions under Section 203 when they are consistent with the public interest.10 In applying the public interest standard, the Ferc examines the impact a transaction will have on competition, rates and regulation, with the competitive impacts analysis sometimes being the most troubling.
The Ferc worries any time market participants own or control sufficient generation to be in a position to influence market prices (usually 20% or more ownership in the relevant market), and is also concerned with significant changes in the concentration of generation ownership. The more concentrated generation ownership is in a particular market, the more closely the Ferc scrutinizes any transaction that would tend to further increase the level of concentration. The more concerned the Ferc is with market concentration, the longer it may take to get Ferc approval of a transaction.
Lenders who do not have affiliates that control significant amounts of generating capacity in the relevant market ordinarily will not be subject to close market power scrutiny when they foreclose on generating assets, and the Ferc can approve such transactions in a relatively short amount of time.11
Public Utility Regulation. If a lender forecloses on utility assets directly it will become subject to Ferc regulation as a public utility. The Ferc, however, directly regulates only the entity that owns or operates jurisdictional facilities, not its upstream parents or affiliates.12 Thus, banks can avoid becoming subject to general FPA regulation by owning utility assets through single purpose subsidiary companies. This can be accomplished either by holding the security interest in utility assets through a special purpose subsidiary of the lender established at the time of the loan, or by holding a security interest in the securities of the borrower if it is a single purpose entity formed to own and operate the project.
3. Stock Ownership
Lenders can foreclose on a project in default by exercising ownership rights to the pledged securities of the project company. This structure can also be used to accommodate foreclosure on multiple project companies controlled by the same ultimate borrower. A recent example is Athens Generating Company, L.P., where the Ferc authorized PG&E National Energy Group, Inc. to transfer its ownership of four generating projects to a special purpose company owned by lenders to the projects.13 The special purpose company acquired the stock of the project companies in a holding company arrangement. Each project company retained its Ferc power sales tariff and, thus, remained the jurisdictional public utility. In approving the transaction, the Ferc considered ownership or control over other generating projects that individual lenders or their affiliates had to determine whether the transaction would give any of the lenders market power in the sale of electric products. The Ferc found the lenders' investments in such projects was de minimis and approved the transaction.
B. The Public Utility Holding Company Act
1. Overview
Companies, partnerships or individuals and their affiliates who own or control with power to vote more than 10% of the outstanding voting securities of gas or electric utility companies, and who do not qualify for one of PUHCA's exemptions, are subject to pervasive regulation by the Securities and Exchange Commission (SEC) of their securities issuances, acquisitions, finances, accounting, management and other matters as registered public holding companies. Gas utilities are entities that own or operate facilities used for the distribution at retail of natural or manufactured gas, and electric utilities are those that own or operate facilities for the generation, transmission or distribution of electric energy for sale. Thus, banks or other lenders that foreclose on utility assets or securities potentially may become electric utility companies under PUHCA, and their parents may be required to become registered holding companies. Fortunately, there are ways for banks to exercise their security interests without becoming subject to PUHCA regulation.
2. Exempt Wholesale Generators
The most straightforward way to avoid general PUHCA regulation is to own a generating project through an exempt wholesale generator, or EWG. An EWG is any person determined by the Ferc to be engaged directly, or indirectly, and exclusively in the business of owning and/or operating one or more eligible facilities and selling electric energy exclusively at wholesale.14 To be an ?eligible facility? the project must be used to generate electric energy at wholesale. If the facility was in retail rate base in any State on October 24, 1992, the relevant State public service commission must specifically find that permitting it to become an eligible facility will benefit consumers in the State, be consistent with the public interest, and not violate the laws of the State.15 Each of the generating projects in the Athens Generating case mentioned above were qualified as EWGs, which means the banks will not become subject to SEC regulation as holding companies solely as a result of their ownership of the securities of the project companies.
An EWG structure is well-suited to single purpose wholesale generating projects where lenders take a pledge of the securities of the project company as security for the loan. This structure may not be available, however, to transactions involving loans to multi-purpose utilities, or those that make retail sales to consumers.
3. Section 3(a)(4)
Section 3(a)(4) of PUHCA provides an exemption from general PUHCA regulation for lenders that foreclose on utility assets with the goal of divesting them. Thus, although Section 3(a)(4) is available to a broader class of utility assets than the EWG exemption, Section 3(a)(4) does not permit lenders to retain ownership of the assets for an indefinite period of time.
SEC Rule 3 implements the Section 3(a)(4) exemption by allowing lenders to hold utility assets or securities (1) as collateral for a bona fide debt, (2) in the ordinary course of the lender's business as a fiduciary, or (3) acquire the utility assets or securities solely for purposes of liquidation in connection with a bona fide debt previously contracted when the lender has owned the securities beneficially for a period of not more than two years.16 The SEC has noted that ?the language of [section 3(a)(4)] clearly denotes a desire to give an applicant thereunder a reasonable time in which it might dispose of its public utility or holding company securities without being subject to the Act,?17 and has granted a ?temporary? exemption for as many as seven years.18 If the bank qualifies for this exemption it must file an annual statement with the SEC within 30 days after the last day of February.19 The SEC has the authority to terminate a Section 3(a)(4) exemption under Rule 6 if it finds the exemption is detrimental to the public interest or the interest of investors or consumers.20
II. Bank Regulatory Issues
This section focuses on the authority of a non-US bank that has an office or commercial lending subsidiary in the US and thus would be treated as a bank holding company.21 However, the activities addressed below are generally permissible for US banks as well.22
Non-US banks that control a US branch or agency office, a US commercial lending subsidiary or a US depository institution are subject to different laws and regulations than apply to foreign banks that have no US offices or subsidiaries. Under the International Banking Act (IBA), foreign banks that operate state-chartered branches, agencies or commercial lending subsidiaries in the US are treated as bank holding companies,23 and their branches are subject to the laws and regulations of the state that licensed the branch.24 (A foreign bank's US agency or commercial lending subsidiary would similarly be subject to the law of the state in which the agency or subsidiary is located.)
As a result, a non-US bank having a US branch must look to the Bank Holding Company Act (BHCA) and to OCC regulations or state law for authority to invest directly or through a subsidiary in a power plant. In contrast, a non-US bank that does not own or operate a branch, agency or commercial lending subsidiary in the US is subject only to such federal and state laws as would normally apply to an out-of-state or non-US bank or other entity that has no physical presence in any state.
A. Authority Under the BHCA
The BHCA, as implemented by the Federal Reserve Board's Regulation Y, permits a bank holding company to hold voting securities or other assets that are acquired by foreclosure or otherwise, in the ordinary course of collecting a debt previously contracted (DPC) in good faith.25 The acquisition of such securities or other assets does not require notice to or prior approval from the Federal Reserve Board (Board).
Under this authority, the DPC property must be divested within two years of acquisition. However, the Board may, upon request, extend the two-year period for up to three additional years, and may permit additional extensions for up to five years (for a total of 10 years), for shares, real estate or other assets where the holding company demonstrates that:
1. An extension would not be detrimental to the public interest; and
2. Either the bank holding company has made good faith attempts to dispose of the shares, real estate or other assets, or disposition would have been detrimental to the company.
The authority to grant extensions has been delegated by the Board to the Federal Reserve Banks.26 In support of a request for an extension, a bank holding company must outline the efforts it has made to divest its interest in the shares or other assets, and must provide the reasons that an extension is consistent with the public interest.27
Extensions are not to be granted except under compelling circumstances, and periodic progress reports on divestiture plans are generally required.28 When the permissible extension periods expire, the Board no longer has discretion to grant further extensions, and the prohibited shares or other assets must have been divested. Divestiture may be ordered before the end of the permissible holding period if supervisory concerns warrant such action.
The BHCA also expressly authorizes a bank holding company to establish a subsidiary to hold real estate acquired by itself or by any of its banking subsidiaries for debts previously contracted for the purpose of disposing of the real estate in an orderly manner.29 Permissible activities of this liquidating subsidiary include completion of a real estate development project and other activities necessary to make the real estate salable. The date of acquisition is the date the bank holding company or its subsidiary acquired the DPC asset.
Significantly, this authority generally may not be used to extend the time under which a bank holding company may hold DPC property. In most cases, where a bank holding company or its subsidiary has held property for the statutory holding period, the property may not be shifted to another subsidiary or to the bank holding company to extend the permissible holding period. Due to the complexity and potential impact on a bank holding company of a forced divestiture at the end of the holding period, alternative arrangements are possible if merited for supervisory reasons.30
The Board has not expressly addressed the ownership by a bank holding company of an electric power plant. However, it has tacitly recognized a bank holding company's authority under the BHCA and Regulation Y to hold and operate DPC property as diverse as an oil refinery and a movie studio.31
Also noteworthy is a bank holding company's separate authority to acquire debt that is in default at the time of acquisition if the company divests of any shares or assets securing the debt that are not permissible investments for bank holding companies.32 The divestiture must be accomplished within two years after acquisition of the debt, although this deadline may be extended via Federal Reserve Board approval of up to three one-year extensions. Although prior Board approval is not required in order to invest in debt in default, notice must be provided to the Board within ten business days after making the investment.
B. Authority Under the National Bank Regulations
A national bank's authority to hold DPC property is substantially similar to that of bank holding companies. Federally-licensed branches or agencies of non-US banks have identical authority. This authority permits national banks to hold securities33 and real property34 acquired through foreclosure on collateral or otherwise in satisfaction of a debt previously contracted.
Such securities or property may be held for a period not to exceed five years from the date that ownership was originally transferred to the bank. The Office of the Comptroller of the Currency may extend the holding period for up to an additional five years if a bank provides a clearly convincing demonstration as to why an additional holding period is needed. A national bank may not hold securities or real property for speculative purposes.35
C. Authority Under New York Law
Because a state-chartered branch of a non-US bank derives its authority to invest in a nonbank subsidiary from state law, such an investment must be permitted under state law in order for a non-US bank to invest in a nonbank subsidiary through its US branch. Under the New York Banking Law (NYBL), a State branch generally possesses the same powers as banks chartered under the NYBL.36 This authority is subject, however, to limitations in the IBA which prohibit a State branch from engaging in any activity not permitted for a national bank unless the Federal Reserve Board has authorized the State branch to engage in the activity.37
The NYBL authorizes a New York bank to purchase, hold, lease and convey real property that is conveyed to it in satisfaction of debts previously contracted in the course of its business or that it purchases at sales under judgments, decrees or mortgages held by it.38 In addition, a New York bank may ?acquire stock in settlement or reduction of a loan, or advance of credit or in exchange for an investment previously made in good faith and in the ordinary course of business, where such acquisition of stock is necessary in order to minimize or avoid loss.?39 This seems clearly to authorize a New York bank or branch to directly hold and operate DPC property.
A separate question arises as to whether a New York bank or branch may hold and operate DPC property indirectly through a separate entity, which may be either wholly- or majority-owned and controlled by the bank, or co-owned with other members of a lending syndicate and not majority-owned or controlled by the bank. Based on the broad statutory language in the NYBL authorizing investment in DPC property and on the absence of any statutory or regulatory provisions expressly restricting bank's power to deal with DPC property, it appears that New York banks have sufficiently broad latitude to hold DPC property indirectly through a separate entity, whether or not it was majority-owned or controlled by the bank. However, in response to inquiries, the New York Banking Department (NYBD) has not been able to identify any interpretation that addresses the scope of the statutory authorization or that directly or indirectly supports (or undercuts) such an application of the statute.
If indirect ownership through a separate entity is not authorized under the NYBL DPC provision, then the authority for such indirect ownership would have to come from the NYBL provisions governing equity investments by New York banks and, by extension, New York branches or agencies of non-US banks.40 Among the investments authorized is stock or other equity in subsidiary corporations engaged in (1) the ownership or operation of real or personal property acquired through foreclosure or in settlement or reduction of debts owed to the bank,41 or (2) any other business in which the bank or trust company may engage directly.42
The NYBL provides that such investments must conform to regulations adopted by the NYBD governing the ownership of subsidiaries.43 Accordingly, both New York banks and New York branches and agencies of non-US banks must follow the procedures applicable to the establishment of operating subsidiaries set forth in Part 14 (specifically, Section 14.3) of the General Regulations of the Banking Board, which governs the establishment of operating subsidiaries.44
Significantly, Section 14.2 states that the Section 14.3 procedures apply only to subsidiaries as to which the bank or branch owns a majority of the voting stock and is the sole controlling person. Accordingly, if the authority to invest in a special entity established to hold DPC property must rely on the subsidiary investment authority in Part 14 rather than the separate authority to hold DPC property, this authority would not appear to extend to a DPC entity that is co-owned by multiple members of a lending syndicate unless (1) the other co-owners were not New York-chartered or -licensed banks or branches and (2) the ownership could be structured so that the New York bank or branch was the controlling person and majority owner of voting stock. If the section 14.3 procedures could not be relied upon, the sole alternative would appear to require obtaining a three-fifths vote of the New York Banking Board specifically approving ownership of such a subsidiary.45
III. Liability as an Owner46
A. Transfer of Ownership
The most likely form of transfer of ownership of a project-financed power plant to a bank or group of banks is assignment by the sponsor of (or foreclosure on) its ownership interest in the project company rather than the assets themselves. This avoids any issues regarding the transfer or reissuance of permits and the assignment and assumption of key contracts and, therefore, the transfer can be completed much more quickly. This approach assumes that the intent is to continue operating the project as a whole rather than sell the assets.
Banks considering such action will, as a matter of proper diligence, examine the existing liabilities of the project company and on-going disputes or litigation in which the project company may be involved. This will allow the banks to determine if pre-existing liabilities counsel in favor of either an involuntary bankruptcy proceeding or removing the assets from the project company and moving them to another special purpose entity.
In addition to the automatic stay, an involuntary bankruptcy proceeding would allow the opportunity to reject unfavorable contracts, to seek to recoup recent transfers as fraudulent or preferential and negotiate with unsecured creditors with respect to existing liabilities. Of course, banks must be aware that the borrower can also invoke bankruptcy law. In a default situation, there is always a risk that a project company will file a voluntary bankruptcy petition to attempt to prevent foreclosure and force the lenders to work through the creditors' committee to develop a reorganization plan.
B. Liability for Contract and Tort Claims
As a general matter, a parent company is not directly liable for the acts of its subsidiary but, rather, is treated as a separate corporate entity.47 Thus, banks which directly or indirectly own an equity interest in a project company which, in turn, owns and operates a power plant should not be liable for the debts and other liabilities of the project company as a result of such operations.
There are exceptions to the general rule but only in unusual circumstances will a court disregard the separate corporate existence of a subsidiary, even a wholly-owned subsidiary, in order to impose vicarious liability on the parent.48 Courts are much more likely to disregard the independence of the parent company where upholding the parent's separate existence would sanction a fraud or promote injustice. In such a situation, courts will invoke the power to pierce the corporate veil in order to enforce equitable rights.49
There is substantial case law on this issue with respect to corporations but the same principles would likely be applied to limited liability companies, which have become a common ownership vehicle for power plants.50
A court will normally apply this doctrine only if it determines, based on the totality of the circumstances, that the corporation or limited liability company is a ?mere instrumentality? of the parent and that holding the parent liable is necessary to defeat fraud or avoid injustice. In tort cases, courts may pierce the corporate veil even in the absence of fraudulent conduct based on the theory that the injured party did not voluntarily enter into a relationship with the corporation or limited liability company. In contract cases, however, the separate identity of a corporation usually is respected absent fraud.
A prerequisite to piercing the corporate veil is a showing that the corporation or limited liability company is simply the alter ego of a dominant member or parent. The degree of control exercised by the member or parent corporation must be more than that level of control which is normally exercised by an active parent.51 It must entail ?complete domination, not only of finances but of policy and business practice in respect to the transaction attacked.?52 In such a situation, the subsidiary is deemed an ?alter ego,? ?mere instrumentality,? or ?agent? of its parent.53
Courts consider several factors, including: whether the subsidiary was properly capitalized at the time of the corporate undertaking; whether the subsidiary was solvent; whether dividends were paid; whether separate records were kept; whether separate bank accounts were maintained; whether officers and directors functioned independently or overlapped; whether other corporate formalities were observed; whether a dominant member or parent siphoned off funds; whether there is significant parental financing and control over the subsidiary; whether a parent has control over the subsidiary's day-to-day operations; and whether the subsidiary simply functioned as a facade for a dominant member or parent.54 No single factor justifies a decision to disregard the corporate entity.55
Banks can obtain additional protection by establishing a new special-purpose entity in which the bank or banks will own a direct interest and which in turn will own the project company. This will likely also be necessary to reflect operating and decision making procedures where a bank group is involved and their pro rata exposure on the existing debt can be translated into pro rata ownership of the special-purpose entity. Such action would be subject to the consideration of the issues and limitations discussed in Section II above applicable to a New York-chartered or New York-licensed bank or branch.
Also, banks should ensure that the project company has appropriate insurance in place with respect to both third party property damage and personal injury. If insurance sufficiently covers a third party's claim, then it is less likely that they will seek to recover from a parent company or other related entities viewed as ?deep pockets.?
The following suggestions in structuring and developing operating procedures for the holding company and the project company may help banks further minimize the theoretical risk of the corporate veil being pierced:
- Avoid complete overlap of the boards of directors and
management of the banks, the holding company and the project
company (some overlap of the boards and management is
acceptable).
- Ensure that the project company is adequately
capitalized.
- Ensure that the holding company and the project each
observe formalities, maintain separate books and records,
adhere to procedural requirements, properly appoint managers
and adhere to management policies.
- Ensure that in all contractual and other business
relationships with third parties, such third parties clearly
understand that they are dealing with the project company and
not with the holding company or the banks. Also, ensure that
the project company is neither authorized to, nor attempts to,
enter into any explicit or implicit agreements, covenants,
commitments or representations on behalf of the holding company
or the banks.
- Ensure that the actions of the project company are not
dominated or controlled by the holding company or the banks.
For example, day-to-day decisions of the project company should
be made by responsible managers of the project company, without
the need for the approval of the holding company or the banks.
The banks and the holding company should regulate and control
the project company through promulgation of appropriate
corporate policy guidelines for adoption by the holding
company.
- Establish procedures to ensure that whenever persons who
are directors or officers common to two or more of a bank, the
holding company and the project company take any action or sign
any contract, they do so in the appropriate corporate
capacity.
C. Liability for Environmental Claims
The consideration of federal law is necessary with respect to potential liability for environmental claims associated with the operation of a power plant. Section 101(E) of Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) grants lenders some protection from the general rule that entities which own or operate a power plant will be liable for the clean-up of hazardous substances released at the site prior to the transfer of ownership. Section 101(E)(i) provides that a lender which holds indicia of ownership to establish or maintain a security interest does not constitute and owner or operator for purposes of CERCLA.
In addition, Section 101(E)(ii) provides that a lender that forecloses on a power plant or other facility does not automatically become an owner/operator with respect to pre-existing contamination under CERCLA but it is necessary to evaluate their post-foreclosure activities. To the extent that activities after foreclosure are focused on the sale or lease of the facility, maintaining the business in anticipation of a sale or the winding-up of operations, the lender is not subject to CERCLA liability. Section 101(E)(ii) states, however, that the exclusion of liability only applies:
if the person seeks to sell, re-lease (in the case of a lease finance transaction), or otherwise divest the person of the vessel or facility at the earliest practicable, commercially reasonable time, on commercially reasonable terms, taking into account market conditions and legal and regulatory requirements.56
The issue then becomes how long in light of market conditions is it commercially reasonable for a former lender to own and operate a power plant. There is not definitive case law as each case would have to be reviewed in light of the surrounding facts and circumstances.57 It is clear, however, that to take advantage of the exclusion of liability set forth in Section 101(E)(iii), lenders will need to take steps to establish a record demonstrating their efforts to sell the facility.58 This is similar to the evidence of a good faith attempt to sell the assets or the project company required to obtain an extension of the initial two-year period applicable to banks and bank holding companies as discussed in detail in Section II.A above.
The above analysis applies to the circumstance where a lender forecloses on or takes ownership of the assets to protect its security interest while attempting to sell the property. In the event that a bank takes ownership of the project company with the intent of retaining ownership for an extended period until the market for such assets improves,59 then there are two theories under which it could be liable under CERCLA for the clean-up of hazardous substances released at the site. First, the bank could be held liable for the actions of its subsidiary under CERCLA if a court finds it would be appropriate to pierce the corporate veil under the traditional corporate analysis described in Section III.C above with respect to the actions resulting in the contamination.60 Second, a bank which steps in and directly operates the facility can be held liable under CERCLA for its own actions regardless of its corporate existence independent from the project company that actually owns the power plant the operation of which resulted in the contamination.61 The US Supreme Court has indicated that direct operations means the parent entity ?must manage, direct or conduct operations specifically related to pollution, that is, operations having to do with the leakage or disposal of hazardous waste or decisions about compliance with environmental regulations.?62
In both cases, a finding of some form of control by the parent is necessary to impose liability on such entity under CERCLA. However, once within the class of potentially responsible parties under CERCLA, a bank would be jointly and severally liable for contamination pre-dating it ownership of the project company. The bank would then have the right to seek contribution from the previous owner or operator directly responsible for the contamination.
The project company could also face liability for air pollution violations under state law or other state permit violations. Banks acting as a parent company are only held liable for these fines and penalties if there is a finding under state law that the corporate veil should be pierced or the parent company is otherwise found to be the operator of the facility.
IV. Operations
The most significant impediment to bank ownership may not be legal constraints but the more practical problem of day-to-day management. This problem is often mitigated by the existence of project agreements in favor of the project company which can be assumed or maintained in connection with transfer of the assets or the project company to a new owner. Even if that is not the case, however, given the number of energy experts available for hire due to cutbacks at various energy companies, banks should not have trouble finding qualified personnel. Indeed, one trend in the industry is the establishment of companies to provide operation and maintenance services specifically to banks and lender groups. Examples include subsidiaries of Constellation Energy Group, Northeast Utilities, Public Service Enterprises Group Inc., KeySpan Corp. and Pepco Holdings Inc.
V. Conclusion
Although long-term ownership of a power plant or plants by banks is not currently contemplated by applicable bank regulatory, Ferc or environmental laws, a bank is not compelled by legal restraints and considerations to rule out the option of owning and operating power plants for an extended period of time until the market for such assets improves.
Although it is necessary to consider a number of factors, bank ownership and operation of power plants can be a viable alternative to restructuring debt on less than favorable terms or selling the facility for an amount well below book value. In such a situation, a bank would need to make decisions regarding required action under laws and regulations applicable to banks, steps to avoid subjecting the bank to Ferc regulation, the method for transfer of ownership, the ownership structure, management procedures and contracting for necessary services (to the extent the project company does not have such contracts in place).
Footnotes:
1 Robert E. Bostrom is the Managing Partner of the New York office of Winston & Strawn, a member of the firm's Executive Committee, and heads the firm's Financial Services Practice. Kenneth F. Hall is Of Counsel in the firm's New York office and a member of the firm's Financial Services Practice. Vanessa Richelle Wilson is a senior associate in the Washington, D.C. office of Winston & Strawn practicing in the area of energy project finance. Raymond B. Wuslich is a partner in the firm's Washington, D.C. office practicing in the area of energy regulatory matters.
2 Source ? Reuters
3 Source ? Global Power Report
4 Margaret H. Claybour contributed significantly to this section.
5 The focus of the discussion below is on traditional project financing transactions where the lender takes a security interest in the project's assets and any associated purchased power agreement, or the securities evidencing ownership of the project.
6 For example, Section 305(b) of the FPA prohibits any person from serving simultaneously as an officer or director of a public utility and an officer or director of any financial institution authorized by law to underwrite or issue public utility securities without Ferc's prior approval.
7 For purposes of this discussion ?PPA? includes both energy sales and capacity sales through tolling agreements.
8 E.g., Baltimore Refuse Energy Systems Company, 40 Ferc ¶ 61,366, at 62,118, n.11 (1987).
9 Jurisdictional property includes not only transmission facilities (which can include equipment such as generator step-up transformers), but also includes the contracts, books, records and accounts of the public utility.
10 Ferc has pre-authorized financial institutions to acquire small amounts of public utility stock (no more than 5%) in the course of their lending businesses when the transaction does not otherwise give the institution control over the public utility. See UBS AG, et al., 101 Ferc ¶ 61,312 (2002), order on reh'g pending. It is doubtful that such pre-authorization would apply, for example, if a group of financial institutions each owning less than 5% were to foreclose on a public utility because the act of foreclosure would be a disposition of public utility property requiring prior Ferc approval.
11 Ferc often approves transactions raising insignificant competitive concerns in little more than a month. Ferc staff is authorized to approve such transactions through delegated orders. More difficult applications can take many months to process and risk outright rejection, particularly when intervenors protest and raise important issues. In such circumstances the final order must be voted on and approved by the Ferc commissioners, which is a more time-consuming process.
12 E.g., Long Lake Energy Corporation, 50 Ferc ¶ 61,262 (1990).
13 103 Ferc ¶ 61,290 (2003).
14 15 U.S.C. § 79z-5a(a)(1).
15 Such findings have typically been made for legacy generating assets located in so-called ?retail access? States like California, Maryland, New York, Pennsylvania, and most of the Northeastern States. If the facility was owned by a company in a registered holding company system, then each State commission with jurisdiction over the operating companies in that system must also make each of the listed findings.
16 17 C.F.R § 250.3(a) (2003).
17 Manufacturers Trust Co., 9 S.E.C. 283, 288 (1941).
18 Coastal States ? Lo-Vaca Settlement Trust Mercantile National Bank at Dallas, Holding Co. Act Release No. 21104 (Apr. 23, 1979).
19 17 C.F.R. § 250.3(c). See also 17 C.F.R. § 259.403, Form U-3A3-1.
20 17 C.F.R. § 250.6.
21 12 U.S.C. § 3106a(1). A federally-licensed branch would be subject to the regulations of the Office of the Comptroller of the Currency, which are also applicable to national banks.
22 Generally, as long as a non-US bank does not conduct within a state the types of activities that would require it to be licensed or otherwise qualified under federal or state law to do business in the state, the bank would generally look to its home-country law to determine its authority to conduct a particular activity, and would look to state law only for limitations on the exercise of that authority within the state or with citizens of the state.
23 12 U.S.C. § 3106(a).
24 12 U.S.C. § 3106a(1). A federally-licensed branch would be subject to the regulations of the Office of the Comptroller of the Currency.
25 12 U.S.C. § 1843(c)(2); 12 C.F.R. § 225.22(d)(1).
26 12 C.F.R. §265.11(a)(5).
27 Note that transfers of DPC property within a bank holding company system do not extend any period for divestiture of the property. 12 C.F.R. § 225.22(d)(1)(iii).
28 See 12 C.F.R. § 225.138.
29 12 U.S.C. § 1843(c)(1)(D).
30 See Federal Reserve Board Bank Holding Company Supervision Manual § 3030.0 (December 2002).
31 See Letter from Scott G. Alvarez, Assoc. General Counsel, to Paul N. Watterson, Jr., Esq., January 30, 1997 (oil refinery ownership by Dai-Ichi Kangyo Bank, Ltd., Tokyo, Japan); Letter from Kathleen M. O'Day, Assoc, General Counsel, to Robert S. Royer, Esq., June 16, 1996 (ownership of Metro-Goldwyn Mayer, Inc. by Credit Lyonnais).
32 12 C.F.R. §§ 225.22(a), 225.28(b)(2)(vii).
33 12 C.F.R. § 1.7.
34 12 U.S.C. § 29.
35 12 C.F.R. § 1.7(d); see 12 U.S.C. § 29 (which lists the purposes for which a national bank may hold real property).
36 See NYBL § 2(1) defining bank as ?any corporation, other than a trust company, organized under or subject to the provisions of article three of this chapter? (emphasis added) (several sections of the NYBL subject non-US banks to various provisions of NYBL Article 3). The Legal Division of the New York Banking Department has repeatedly expressed the view that State branches may exercise the same powers as New York-chartered banks.
37 12 U.S.C. § 3105(h).
38 NYBL § 98(1)(b), (1)(c).
39 NYBL § 97(4-a)(d), (f). A New York bank may also acquire, hold and convey any other real property that is specifically approved by the New York Banking Board by a three-fifths vote of all Board members, but this process would require submission of an application and receipt of approval prior to acquiring the property. See NYBL § 98(1)(d).
40 The NYBD has stated that, like New York banks, New York-licensed branches and agencies of non-US banks may ?acquire, establish, or make an additional investment in a branch or agency subsidiary (whether such subsidiary is a corporation, or other type of legal entity such as a limited liability company).? NYBD Industry Letter, ?Foreign Branches and Agencies Establishing Operating Subsidiaries ? Guidance Letter? (6/4/01).
41 NYBL § 97(4-a)(d).
42 NYBL § 97(4-a)(f). The NYBL also authorizes investment in the stock of any other corporation if specifically authorized by another provision of New York law or specifically approved by a three-fifths vote of the New York Banking Board, an authority infrequently used. NYBL § 97(5).
43 NYBL § 97(4-a).
44 3 N.Y.C.R.R. Part 14 (?Investments in Corporations by Banks and Trust Companies?).
45 See 3 N.Y.C.R.R. § 14.4. See also footnote 39 above.
46 This article does not address a bank's exposure to lender liability claims prior to assuming ownership of the assets or the project company.
47 Precision, Inc. v. Kenco/Williams, Inc., 2003 U.S. App. LEXIS 5740 (6th Cir. 2003) (citing U.S. v. Bestfoods, 524 U.S. 51, 61, 141 L. Ed. 2d 43, 118 S.Ct. 1876 (1998); Phoenix Canada Oil Co. v. Texaco, Inc., 842 F.2d 1466, 1476 (3rd Cir. 1988); Lowell Staats Min. Co., Inc. v. Pioneer Uravan, Inc., 878 F.2d 1259 (10th Cir. 1989); United States v. Jon-T Chemicals, Inc., 768 F.2d 686, 690 (5th cir. 1985), cert. denied, 475 U.S. 1014 (1986); Sears, Roebuck & Co. v. Jardel Co., 421 F.2d 1048, 1053 (3rd Cir. 1970); McMullin v. Pelham Bay Riding, Inc., 593 N.Y.S.2d 27 (N.Y. App. Div. 1993).
48 Precision, Inc. v. Kenco/Williams, Inc., 2003 U.S. App. LEXIS 5740 (6th Cir. 2003) at 9-10; Bradson Mercantile v. Vanderbilt Indus. Contracting Corp., 883 F. Supp. 37, 50 (W.D.N.C. 1995); National Carloading Corp. v. Astro Van Lines, Inc., 593 F.2d 559 (4th Cir. 1979).
49 Brown v. Syntex Labs, Inc., 755 F.2d 668, 674 (8th Cir. 1985); Sears, Roebuck & Co. v. Jardel Co., 421 F.2d 1048, 1053 (3rd Cir. 1970); Geyer v. Ingersoll Publications Company, 621 A.2d 784, 793-94 (Del. Ch. 1992); Fletcher v. Atex, Inc., 68 F.3d 1451, 1457 (2d Cir. 1995) (stating that Delaware courts will pierce the corporate veil when there is fraud); U.S. v. Cordova Chemical Co. of Michigan, 113 F.3d 572, 580 (6th Cir. 1997); Transportes Aereos de Angola v. Ronair, Inc., 693 F.Supp. 102, 111 (D.Del. 1988)(stating that ?[w]hen the corporate form is misused, courts will pierce the corporate veil in order to ?prevent fraud, illegality, or injustice, or when recognition of the corporate entity would defeat public policy.?).
50 Ditty v. Checkrite Ltd., Inc., 973 F. Supp. 1320, 1335-1336 (D. Utah 1997); Abu-Nassar v. Elders Futures Inc., 1991 WL 45062, *10 (S.D.N.Y. 1991). See also, Eric Fox, Piercing the Veil of Limited Liability Companies, 62 Geo. Wash. L. Rev. 1143, 1168 (1994).
51 Application of Crespo, 475 N.Y.S.2d 319 (N.Y. Sup. Ct. 1984); Gardemal v. Westin Hotel Co., 186 F.3d 588, 597 (5th Cir.1999) (citing Jon-T Chemicals, 768 F.2d at 692-3).
52 William M. Fletcher, Fletcher Cyclopedia of the Law of Private Corporations, § 43 (perm. ed. rev. vol. 1999).
53 Jon-T Chemicals, 768 F.2d at 691; see also U.S. v. Funds Held ex rel. Wetterrer, 210 F.3d 96, 109 (2d Cir. 2000);
54 Bd. of Trs. v. Foodtown, Inc. 296 F.3d 164, 171 (3rd Cir. 2002); Harper v. Delaware Valley Broadcasters, Inc., 743 F. Supp. 1076, 1086 (D. Del. 1990); Phoenix Canada Oil Company v. Texaco, Inc., 842 F.2d 1466, 1476 (3rd Cir. 1988).
55 Id; Sears, Roebuck & Co. v. Jardel Co., 421 F.2d 1048, 1053 (3rd Cir. 1970); Alberto v. Diversified Group, 55 F.3d 201, 205 (5th Cir. 1995) (citing U.S. v. Golden Acres, Inc., 702 F.Supp. 1097, 1104 (D.Del. 1988), aff'd, 879 F.2d 860 (3rd Cir. 1989)). We were unable to locate a case to date in which a bank acting as an upstream owner of a power plant was held liable for the obligations and liabilities of its subsidiary based on the theory of piercing the corporate veil.
56 42 U.S.C. 9601 (Section 101(E)(ii) of CERCLA).
57 See U.S. v. Odabashian et al., 1999 U.S. Dist. LEXIS 23200, *15-17 (W.D. Tenn 1999) (holding that three years and ten months was a commercially reasonable period where the new owner put the property on the market within two months of foreclosure); see also, Northeast Doran, Inc. v. Key Bank of Maine, 15 F.3d 1, 2-3 1st Cir. 1004); Waterville Industries v. Finance Authority of Maine, 984 F.2d 549, 552-53 (1st Cir. 1993); In re Cuyahoga Equipment Corporation, 980 F.2d 110, 118-119 (2d. Cir. 1992); In re Bergose Metal Corp., 910 F.2d 668, 672 (9th Cir. 1990).
58 Id. at 16.
59 Please note that there is no specific time limit on lenders in connection with Section 101(E) as long as an attempt is made to resell. Market conditions could justify maintaining ownership for an extended period if the assets are put up for sale and no reasonable offer is received.
60 United States v. Best Foods, 524 U.S. 51, 61-64 (1998). In connection with CERCLA, some courts have suggested that an independent federal common law test for piercing the corporate veil but is appropriate rather than the application of the most relevant state law but as federal common law ?draws upon state law for guidance, ... the choice between state and federal [veil-piercing law] may in many cases present questions of academic interest, but little practical significance.?). Id. at 63, footnote 9 (quoting In re Acushnet River & New Bedford Harbor Proceedings, 675 F. Supp. 22, 33(D. Mass. 1987)).
61 Best Foods, 524 U.S. at 65.
62 Id. at 66-67.
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