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Financial assurances by operators

Posted on: June 14th, 2016
by David Ganje

Business projects involving some type of government oversight are usually regulated because of a project’s significant environmental or property rights impact.  The purpose of regulation is to safeguard the public in the event of a problem arising from such a project. End-of life decommissioning, reclamation, contamination are all typical contingency events.  Proper planning, evolving around the full life of a proposed project, is key.  But government is not always well endowed with the skills of planning and foresight.
 
No owner, officer or director of a business likes to consider the mortality of a business project.  Even more challenging are government regulators who oversee a project.  Regulators do not always require good exit planning or end-of-business planning for regulated projects. This shortcoming is shown when one considers a government agency’s duty to require a financially viable exit plan. It might be a mining project, a wind farm or a pipeline.  One need only look at existing requirements for decommissioning a project, or for reclaiming the property at the end of the life of a project. By way of example, in four different General Accountability Office public reports over the years, the GAO was critical of several federal agencies ability to set or determine such things as the costs of reclamation for a project.

Bonds, deposit accounts and self-funding are some of the ways that an operator provides its legal obligation for end-of-life financial assurances. These financial submissions are, in my view, often inadequate.

A couple of recent experiences in South Dakota spotlight this problem. A few years back a state-licensed grain warehouse (in the old days we called them grain elevators) by the name of Anderson Seed Company went belly up. Authority for setting bonds was then and is now given to the SD PUC. The bond for Anderson had been set at $100,000. However, $2.6 million in claims were lost. The insolvency of the company resulted in a little over 4 cents on the dollar paid back to those South Dakota parties who lost money in the insolvency. The setting of the bond was inadequate. The payout to the innocent grain sellers/producers was inadequate. The end-of-life planning was not well done. This experience resulted in a change in the law, but that change is itself an incomplete effort at planning project end-of-life contingencies. The second example is the very recent oil well breakdown near the town of Wasta. A drill bit broke part way down an oil well. This break necessitates the plugging of the well to protect aquifers. But the operator has run out of money. The operator was required by the state to put up a nominal bond of $120,000 for each well for which it had obtained a permit. According to a recent news article, the state DENR reported that the bond money was not enough to address this problem. The official stated that the cost could be $2 million because of the broken bit and the 150 feet of drill pipe that remain in the hole about a mile into the earth.

Board members and agency staff are often appointed to their positions because of their expertise and training in geology, law, hydrology, engineering and the like. Agency staff and appointed board members often have expertise dealing with normal board matters including mining permit applications, water rights disputes and similar issues.  It is unusual however for even a large agency to have expertise on financial qualification matters that must be designated by the agency and directed to the operator who is then obligated to provide the agency with end-of-project planning or safety assurances. Further, a regulatory system that sets a ‘statutory amount’ for this type of bonding may be too simple a solution.

A state official has stated that we don’t have a “broken system” in South Dakota. That is not the issue. The issue is not whether lots of bonds are liquidated on a regular basis. The whole system is not broken. The issue at hand is, did the called-in bond do what it was supposed to do when an insolvency, bankruptcy or contamination occured?

I have previously put before the public a suggestion that will address some of these problems.  This recommendation should be considered by the state legislature. My recommendation:  an agency with authority over an operator’s financial assurance requirements shall evaluate in writing all financial assurance proposals using an agency-designated non-party (an outside consultant) with recognized experience on the matter of providing financial assurance.  A completed report and recommendation by an outside consultant shall be a condition before granting or maintaining a permit or license. The costs incurred by the agency in contracting with the independent outside consultant shall be paid by the operator.

Op-ed available at the Argus Leader

David Ganje practices law in the area of natural resources, environmental and commercial law in South Dakota and North Dakota. His website is Lexenergy.net

Equipment Lease Legal Rights VS Security Interest Claims

Posted on: June 16th, 2014
by David Ganje

State of New York

Supreme Court, Appellate Division

Third Judicial Department

95778

________________________________

CIT TECHNOLOGY FINANCING

SERVICES, INC., Formerly

Known as NEWCOURT LEASING

CORPORATION,

Respondent,

v

TRICYCLE ENTERPRISES, INC.,          MEMORANDUM AND ORDER

et al.,

Defendants,

and

CAYUGA MILLWORK, INC., et al.,

Appellants.

 

Calendar Date:  October 21, 2004

Before:  Mercure, J.P., Crew III, Mugglin, Rose and

Lahtinen, JJ.

__________

Richard P. Ruswick, Ithaca, for appellants.

Ganje Law Office, Albany (David L. Ganje of counsel), for

respondent.

 __________

Rose, J.

 

(1) Appeal from an order of the Supreme Court (Relihan Jr.,

J.), entered September 30, 2003 in Tompkins County, which, inter

alia, granted plaintiff’s motion for an order of seizure and

replevin, and (2) motion to dismiss appeal.

 

This action involves competing claims to certain machinery that was the subject of a lease agreement between plaintiff’s predecessor in interest as lessor and defendant Tricycle Enterprises, Inc. as lessee.  Following Tricycle’s default, its vice president, defendant Jack Roscoe, took possession of the subject machinery in satisfaction of a secured debt and used the

machinery in his newly incorporated business, defendant Cayuga Millwork, Inc., without making any payments to plaintiff. Plaintiff then commenced this action seeking to recover the

unpaid rent and possession of the machinery.  In response, Roscoe asserted that his claim to the machinery as a creditor with a perfected security interest is superior to plaintiff’s claim because the lease agreement here is really a disguised security agreement giving plaintiff nothing more than an unperfected security interest.  Finding the agreement to be a true lease rather than a secured transfer of ownership, Supreme Court granted plaintiff’s motion for summary judgment, awarded a money judgment in the amount of the unpaid rent and issued an order of seizure for the machinery.  Roscoe and Cayuga Millwork (hereinafter collectively referred to as defendants) now appeal.

This appeal has not, as plaintiff argues, been rendered moot by the fact that the machinery has been seized and sold to a third party.  An appeal will not be considered moot if “the rights of the parties will be directly affected by the determination of the appeal and the interest of the parties is an immediate consequence of the judgment” (Matter of Hearst Corp. v

Clyne, 50 NY2d 707, 714 [1980]).  Here, if Supreme Court’s order were reversed, defendants could be entitled to damages or restitution (see CPLR 5015 [d]; 5523; Charles A. Gaetano Constr. v Citizens Devs. of Oneonta, 223 AD2d 866, 867 [1996]; Albany Sav. Bank v All Advantages Limousine Serv., 154 AD2d 759, 761 [1989]).

Turning to the merits, defendants contend that the agreement provides that Tricycle would have the option to purchase the machinery for nominal consideration at the conclusion of its five-year term, creating a security interest under UCC 1-201 (37) (a) (iv).  Defendants argue that the “10% of Total Cash Price” provided as the amount of the consideration in the agreement’s purchase option is nominal compared to the anticipated remaining market value of the machinery at the end of the lease term.  They calculate the remaining market value to be $50,508.  While the agreement sets the purchase option price at 10% of total cash price, however, it does not define total cash price.  We find that this term should be read to mean the total of all payments to be made over the five-year term of the lease.  Accordingly, the purchase option price would be 10% of $152,736 or $15,274, which is approximately 30% of the machinery’s remaining market value.

Because the agreement here provides that it is to be governed by the laws of Massachusetts, we are guided by that state’s case law interpreting Mass Gen Law Ann, ch 106, § 1-201 (37), which mirrors UCC 1-201 (37).  The Massachusetts courts have recognized a “rule of thumb” that a purchase option price in excess of 25% of the market value of the goods at the end of the lease term is not nominal consideration under UCC 1-201 (37) (see Marine Midland Bank, NA v Moran, 1994 Mass App Div 167, 171 [1994], citing Matter of Access Equip., 62 BR 642, 646 [D Mass 1986]). Accordingly, we conclude that plaintiff retained an economically significant reversionary interest in the machinery, the option price of 30% of that remaining value here is more than nominal and, thus, the agreement was a true lease rather than a security agreement (see Carlson v Giachetti, 35 Mass App Ct 57, 62-64 [1993]; Marine Midland Bank, NA v Moran, supra at 169; see also Matter of APB Online, 259 BR 812, 818 [2001]; cf. Rocky Riv. Condo Corp. v Federal Deposit Ins. Corp., 855 F Supp 489, 492 [D Mass 1994] [option to purchase for $1]; Breeden v Hit Publs., 2001 Mass App Div 11, 11-13 [2000] [option to purchase for $1]).

 

ORDERED that the motion is denied, without costs.

 

ORDERED that the order is affirmed, with costs.

 

 

ENTER:

Michael J. Novack

Clerk of the Court