Even with its security interest in assets of a landfill gas management company, a lender has no claim to a city’s gas system structures and installations where the city regained title to them after ending an operating agreement with the company, so says a federal appeals court.
In 1995, the city of Peoria, Ill., signed a lease agreement with Resource Technology Corporation (RTC) that permitted RTC to install and manage a gas-to-energy project at the city's landfill. The system included a network of underground wells and pipes that collect and transport the gas to a plant where it is converted into electricity, which RTC sold to the local electric utility. The transmission of electricity between the plant and the utility used three miles of RTC-furnished poles, cables and associated infrastructure known as the "interconnect.”
For an initial term of ten years with options to extend, the lease granted RTC the exclusive right to construct, operate and maintain the project at its sole expense. Under certain circumstances, the lease could be terminated early. In exchange, RTC agreed to pay the city a royalty of six percent on its energy sales. What’s more, the city could, at no cost, retain certain system appurtenances after the lease ended.
Part way into the initial term, RTC filed a bankruptcy petition, allowing it to submit a reorganization plan, keeping its business alive and paying its creditors over time. In 2000, the bankruptcy judge entered an order authorizing Banco Panamericano to provide post-petition financing to RTC. Underpinning this financing were liens and security interests affecting essentially all of RTC's assets. For good measure, the order granted the lender a "superpriority" claim, which bestowed preferential payment ahead of RTC’s unsecured obligations, administrative expenses and even some priority claims.
Banco declared in 2004 that RTC had defaulted on the loan. Under federal bankruptcy law, an automatic injunction halts actions by creditors to collect obligations from the debtor. With sufficient justification, a secured creditor, however, may ask the bankruptcy court for relief. Here, the court lifted the automatic stay, allowing Banco to foreclose on the collateral. Meanwhile, RTC continued to operate the gas collection project, and in 2006, the bankruptcy court permitted an extension of its lease with the city.
The amount of methane gas collected at the landfill dwindled in 2008, and by February 2009, the gas conversion operation had ceased entirely. Later that month, the city sent RTC a formal termination letter, citing RTC’s failure to cure certain breaches of the 1995 lease. The letter also said that the city elected to retain all of the “structures” and “below-grade installations and/or improvements" as specified in the lease. The city asked RTC to remove any other equipment that it wished to retain as soon as possible. Because RTC was no longer collecting and processing gas, the city did what was necessary to comply with environmental regulations, including installing a blower to withdraw gas from the landfill and flaring it off.
Banco filed a lawsuit in federal district court against the city and Peoria County alleging that the city unjustly benefitted from the structures and installations—the gas collection system and the interconnect—that it kept after it terminated the RTC lease. (Unjust enrichment is a legal principle that no one should be allowed to profit at another's expense without making restitution for the reasonable value of any property, services or other benefits that have been unfairly received and retained. For simplicity, this discussion refers only to the city.)
The complaint alleged that Banco had a better claim to the property because its loan was secured by a lien on all of RTC's assets and the bankruptcy court had given its loan elevated priority for payment. After each side filed a motion for judgment in its favor, the district court ruled for the city on the ground that the language of the lease barred the lender's unjust enrichment claim. Banco "could not have obtained any rights greater than those held by RTC even with a super-priority interest," says U.S. District Judge James E. Shadid.
A three-judge panel of the U.S. Court of Appeals for the Seventh Circuit upheld the decision. The panel agreed with the reasoning of the district court, but found an even simpler explanation. “The lease gave RTC no post-termination interest in the disputed property at all, only obligations,” the opinion said. “This makes eminent sense from a practical standpoint, since the property in question—pipes, pumps, electrical lines, etc.—was being installed on public property, the city landfill, and removal would pose obvious practical problems, at least without the city's consent.”
The key wording of the lease reads as follows:
Within Thirty (30) days after termination of this Lease for any reason, Peoria shall notify RTC of any equipment, structures, and below grade installations and/or improvements that Peoria wishes to retain. Any structures and below-grade installations and/or improvements that Peoria elects to retain shall become Peoria's property at no cost to Peoria. Peoria will purchase any equipment that it elects to retain, and RTC elects to sell to Peoria, at a price mutually agreed upon by Peoria and RTC. Any equipment, structures, and below-grade installations and improvements not retained by Peoria shall be removed by RTC at its sole expense. * * * Title to and ownership of any of RTC's property which is not removed within ninety (90) days after termination passes to Peoria.
The language addresses three types of property: equipment, structures and below-grade installations/improvements. The disputed property falls into the latter two categories: the gas collection system is a below-grade installation, and the interconnect, consisting of utility poles and cables, is a structure. After the lease was terminated, RTC retained a property interest in the equipment at the gas collection project, which is why Peoria could keep that property only if RTC "elects to sell" it and the parties could find a "price mutually agreed upon." Indeed, at oral argument, Banco’s lawyer told the appeals court that his client was seeking compensation only for the structures and installations, not the equipment.
“The lease gave Peoria the right to retain the structures and installations at no cost no matter how the lease terminated,” the opinion continued. “As the district court noted, the lease first provided that Peoria could retain the structures and installations if it notified RTC within 30 days of termination. Even if Peoria neglected to notify RTC within 30 days of termination, however, that property automatically passed to Peoria 90 days after termination of the lease. One way or the other, Peoria had the right to retain the property after termination, which happened years before this suit was filed. * * * The lease allowed for no situation in which RTC could have kept the structures and installations without Peoria's consent.”
Barry Shanoff is a Bethesda, Md., attorney and general counsel of the Solid Waste Association of North America.