Lawyer: Ethanol contract can't protect everything

For years, proponents of the waste-to-ethanol plant slated for Schneider have touted its ability to turn the county's trash into energy, all without a dime from taxpayers.

"We have absolutely no downside," said Jeffrey Langbehn, executive director of the Lake County Solid Waste Management District. "There's no great next scandal on this thing."

Langbehn and district legal counsel Clifford Duggan say they are confident the county is fully protected in its contract with Powers Energy One to host the plant.

But a legal expert's look at the contract shows some costs to the county could be unavoidable.

Who's liable for contamination?

The Times provided a copy of the Powers Energy contract to Jeremy Telman, a Valparaiso University Law School professor specializing in contract law.

Telman called the agreement "well drafted" to protect the county's interests, but he said he doesn't think it's possible to contract against all potential future problems.

"It seems like they've done everything to protect themselves through contractual means," Telman said. "My concern is that it is not really possible to insulate a public entity from liabilities that might arise under statutes."

For example, Telman said, the contract may not protect the county should the plant somehow violate federal environmental rules.

"My guess is that the main danger of risk to taxpayers would come from environmental degradation caused by the proposed ethanol plant," Telman said. "Although the company pledges to indemnify the county for any such liabilities, it may well be beyond the power of the company to do so."

Telman said federal rules sometimes can exempt public entities from facing such massive penalties from environmental problems that they go bankrupt.

But "somebody has to be liable for cleanup," he said. "The general rule is that the owner of the site is always liable."

Under the contract, ownership of the Schneider land and the facility will be transferred to the county "at no cost to the District."

"We have basically given the building and the land to the Lake County Solid Waste Management District," said Earl H. Powers, president of Powers Energy.

Telman warned even if public groups are exempt from liability under statutes, "They still might end up bearing the costs of environmental cleanup because the alternative is to permit the land to go unused because it has become unusable."

According to the contract, the company will "indemnify and hold harmless the District, County and all Municipalities ... from any and all losses based upon any alleged harm," including alleged environmental violations.

Telman said the clause means, "the county should never be out a penny because the company is to assume all costs up front. The only danger to the county would arise if the company were to be unable to meet its obligations to pay liabilities."

Telman said he was not an expert in environmental law, but said, "I believe that plaintiffs could go after the owner of the site if the company is unable to pay.

"Contract or no contract, if there's contamination on the site, the county's on the hook," he said.

County property as collateral

Powers' agreement with the county lets him use the sheer promise of the facility and its land to cull the $280 million in private funding to build it.

Under his contract with the county, Powers' company "may use the Site and Facility to secure any financing necessary to construct or operate the Facility."

Powers called the agreement standard practice, saying, "Any time you borrow money, you use land for collateral. Any asset you have, you can use."

Though the contract stipulates the district will own the plant, Powers has described it as more of a public-private partnership.

"Me and the district's going to own it," he said. "I'm putting the money in, and signing it over to the district."

According to Powers and district officials, should Powers Energy One not be able to pay investors their money owed to finance the project, investors would take a back seat to the district's wishes.

As a deed holder, they say, the county would have the initial right over what would happen to the company's property.

"The bondholders have a right to come back against Powers Energy of America, yes, and any security they have," Powers said. "(But the county) would have to be satisfied first, and the bondholders come in second. There isn't any question about that."

Langbehn said he has no concern the county could lose the facility or land as collateral, saying, "We have superior title."

But Telman, citing the collateral clause, which he called "problematic," said he did not believe it could guarantee the county against unforeseen costs in retaining its assets, including the plant.

Telman said he believed the provision "expresses an understanding that the county will not be at risk beyond the value of the property.

"If the district is permitting its property to be used as collateral, I do not see how it can escape becoming a partial guarantor of the company's obligations."

For example, Telman said, if Powers' company were to go bankrupt, any plaintiffs associated with the costs of building the ethanol plant seeking repayment could come back to claim the plant.

"I assume private investors will come in and say, 'This is ours,' because it is," he said.

x