by Lindsay Hagans
Ms. Hagans graduated from the University of Southern California in 2006 with a B.A. in English and Public Relations. After graduation, Ms. Hagans worked in Los Angeles, making low-budget zombie movies, for 2 years before moving back to Texas in 2008 where she then worked as a field organizer on a campaign and at the Texas Capitol as a policy aide for two state senators. Ms. Hagans will spend this summer working for Baker Botts in Houston and Quinn Emanuel in San Francisco before receiving her J.D. in May 2013.
Did the Department of Energy break the law with Solyndra?
On September 6, 2011, Solyndra, a solar energy company and recipient of a $535 million government loan, filed for bankruptcy, which immediately unleashed a political firestorm. Solyndra had been the poster child of President Barack Obama’s green energy initiative, which many critics have said pushed loans through too quickly. Republican lawmakers say that, despite serious warning signs, the Obama administration fast-tracked the loan in an effort to tout the President’s federal stimulus efforts. In response, the Obama administration and the Department of Energy (DOE) say the Solyndra loan was properly vetted and an unfortunate failure in an otherwise successful program.
In 2005, President George W. Bush signed the Energy Policy Act of 2005, which created a loan guarantee program for innovative technologies that avoid greenhouse gases, including renewable energy. In 2007, Solyndra was selected as one of sixteen clean-tech companies considered ready to move forward in the due diligence process, and the DOE began to develop a conditional commitment with these companies for funding from the loan guarantee program. In 2009, the DOE offered a $535 million loan to Solyndra, the first loan guarantee issued under the 2005 energy law and the largest award given to a solar manufacturer.
In late 2010, Solyndra was facing a liquidity problem and approached the DOE for an increase in its loan guarantee. The DOE refused, but after private investors pumped an additional $75 million dollars into the company, the DOE agreed to restructure the loan in February 2011. Under the modified loan agreement, the private investors could recoup their $75 million before the taxpayers got any money back if Solyndra went bankrupt. In other words, the investors’ claims to Solyndra’s assets, in the event of bankruptcy, ranked ahead of the government’s claims.
Did the DOE break the law?
The issue is the February restructuring. Critics argue that the DOE violated the Energy Policy Act when the department “subordinated” the taxpayers’ interest to those of private investors. The DOE insists that it did not violate the 2005 energy law in restructuring the loan. Instead, the department says the move was aimed at protecting the federal investment by giving the struggling company the best chance to stay afloat and giving taxpayers the best chance of being repaid.
In response, Republicans argue that a series of emails shows that there were concerns about the restructuring before it was authorized. The emails, between the administration and officials at the Treasury Department and the Office of Management and Budget, allegedly show that the administration pressed officials to make a swift decision on whether to restructure the loan, and that there was disagreement within the government about whether the initial loan guarantee was sound.
What are the legal ramifications?
While critics may be insistent that the government violated the 2005 energy law, any repercussions will likely be political, not legal. Unlike laws such as the Clean Air Act, which allows citizens to sue the Environmental Protection Agency for possible violations, the Energy Policy Act of 2005 does not provide a similar remedy. A taxpayer wishing to sue the DOE under the Act would not have standing to bring a lawsuit.
Representative Cliff Stearns (R-Fla.) is the chairman of the House Energy and Commerce Committee’s Oversight and Investigations Subcommittee. When asked in an interview about what actions the House could take to address any allegations of illegalities, Rep. Stearns could not provide a specific answer.
Another member of the subcommittee, Representative Michael Burgess (R-Tex.), has publicly expressed his frustration at the lack of available recourse and suggested that such a dearth of options may need to be fixed through a new energy law. Rep. Burgess also indicated that even though there’s language in the 2005 energy law to prevent subordination of a loan guarantee, there’s really no penalty to be imposed on the DOE for doing so.
Indeed, in Section 1702 regarding terms and conditions of repayment, the law states, “the [guaranteed] obligation shall be subject to the condition that the obligation is not subordinate to other financing.” However, in her memo, Richardson justified the decision by arguing that the rule is “applicable only as a condition precedent to the issuance of a loan guarantee. It is not a continuing restriction on the authority of the secretary.” In other words, the proscription against subordination only applies at the time of initial loan, not any subsequent modifications.
Perhaps a reason for the lack of repercussions is because the government has typically had wide discretion in making these executive-level decisions, even if the decision is subsequently viewed as ill advised by critics. Also, any waiver of federal sovereign immunity must be explicitly waived, as in the Clean Air Act. Here, it was not.
The House Committee investigation
After the bankruptcy became public, the House Energy and Commerce Committee initiated an investigation into Solyndra and whether the administration failed to follow proper protocol before issuing the loan guarantee. The committee has requested DOE officials to submit to depositions, but on October 18, the DOE informed the House committee that it would not allow the committee to perform depositions of DOE officials, including Susan Richardson. Richardson is the chief counsel of the DOE Loan Programs Office; in that capacity, she authored the memo justifying the DOE’s decision to restructure the $535 million loan to Solyndra.
While the Republican-controlled committee has cried foul, the DOE says it has offered to make Energy Secretary Steven Chu available for a hearing on November 1st or 2nd, voluntarily provided more than 65,000 pages of documents to the committee, and provided the head of the loan program for a committee hearing. However, the DOE says the committee does not have the authority to compel a witness to perform a deposition.
Despite these concessions, news sources indicate that Chu, Richardson and other DOE officials are all likely to be called to testify on why they decided to change the terms of the loan. While before the committee, the DOE officials can also expect questions about why they apparently did not follow a DOE regulation requiring them to first consult with the Justice Department before modifying the terms of Solyndra’s loan guarantee.
The DOE is not the only governmental department to be haled into a hearing before the committee. Two officials from the Treasury Department testified at a recent hearing that the DOE’s decision to restructure the $535 million loan guarantee was unusual, and they had not seen anything else like it before. However, the officials refused to comment on the legality of the restructuring, saying their role was to raise questions but not provide legal guidance.
Additional Solyndra hearings are likely to be scheduled in the coming weeks. Meanwhile, the White House has said that it will not give Congress internal communications relating to Solyndra’s loan guarantee, citing confidentiality interests of the executive branch. In response, news sources indicate that House Republicans are preparing for a possible vote in early November to subpoena White House documents related to Solyndra.
The FBI investigation
Solyndra may be facing bigger problems than just the House committee inquiry. On September 8, the Federal Bureau of Investigation raided the company’s Fremont, California, offices. There are differing stories given as to why the FBI has initiated a criminal investigation. Ben Schwartz, a vice president and lawyer at Solyndra, official testified in U.S. Bankruptcy Court in Delaware that the FBI’s search warrant affidavit specifically sought information about company contracts. But some news sources, citing an anonymous FBI official, suggest that the FBI is examining possible misrepresentations in financial statements that Solyndra submitted to the DOE.
Schwartz was in court because the U.S. Office of the Trustee said he had refused to answer questions about the company’s contracts. His refusal, government lawyers argued, proved that a trustee should be appointed to take over the company. However, after hearing oral testimony, U.S. Bankruptcy Court Judge Mary F. Walrath rejected the government’s argument, saying there was no indication of any fraud or mismanagement at the company.
Update: The latest update, as of October 28, 2011, is that the White House has ordered an independent review of similar loans made by the DOE. The review would not look at the Solyndra case but would evaluate other loans worth tens of billions of dollars and recommend steps to stabilize them if they appear to have problems like the loan to Solyndra.
Text of the 2005 Energy Policy Act: http://www.gpo.gov:80/fdsys/pkg/PLAW-109publ58/pdf/PLAW-109publ58.pdf