Skip Page Banner  
Skip Navigation

Thoughts on the Validity of DOE Loan Guarantees

Wednesday, February 22, 2012

Contributed by Herbert A. Glaser, Gilbert D. Porter and Micaela Garcia-Ribeyro, Haynes and Boone, LLP

In November of last year, CAlifornians for Renewable Energy (CARE), a self-described “advocate for environmentally- and community-sensitive energy projects,” filed a lawsuit in Washington, D.C. federal court against the U.S. Department of Energy (DOE).1 They allege that up to $13.76 billion in alternative energy loan guarantees issued under Section 1705 (the Section 1705 Guarantees) of the Energy Policy Act of 2005 (EPAct)2were procedurally defective and should be declared invalid.

The potential effects of the CARE complaint are significant. In addition to the billions of dollars of loans funded (in most cases by the Federal Financing Bank3) on the strength of the Section 1705 Guarantees, countless billions of dollars invested by equity investors, co-lenders, contractors, off-takers and other participants, and thousands of permanent jobs, will be thrown into turmoil. More importantly, the CARE suit challenges obligations bearing the “full faith and credit” of the United States, and poses questions about the level of investigation a purchaser of U.S. government obligations must undertake into the governmental procedures under which they were issued. While it is uncertain how the courts will rule on the procedural defects alleged by CARE, we believe they should not invalidate the Section 1705 Guarantees.


The origins of DOE’s alleged procedural defects reach back to the passage of EPAct in 2005, when Section 1703, a counterpart and predecessor provision to Section 1705, was enacted. Under Section 1703 of EPAct DOE was authorized to guarantee loans, backed by the full faith and credit of the United States, to finance clean energy projects that utilized innovative technology. Regrettably, Section 1703 failed to produce any closed transactions for a prolonged period. Many observers believed this was due to at least two issues, (i) prohibitively high “credit subsidy costs” required by statute to be paid by borrowers, in cash and in full, at the outset of each transaction; and (ii) a lack of clarity about the processing of applications for Section 1703 assistance.4 To remedy the latter concern, Congress included in the 2007 Energy Appropriations Act a provision prohibiting DOE from issuing any loan guarantees under Title XVII—then comprised only of the Section 1703 innovative technology program—until regulations governing their award and administration were issued.5 In response, DOE issued rules and regulations on October 23, 2007 (2007 Final Rule), setting forth how applications for loan guarantees under Title XVII of EPAct would be processed and transactions administered.6

Some sixteen months later, in February 2009, Congress passed the American Recovery and Reinvestment Act of 2009 (Recovery Act).7 The Recovery Act expanded Title XVII to include a new Section 1705, authorizing DOE to guarantee renewable energy systems, electric power transmission systems, and leading-edge biofuels projects that commenced construction prior to September 30, 2011.8 Importantly, Section 1705 brought with it a $6 billion appropriation to pay the credit subsidy costs incurred in connection with eligible projects on behalf of borrowers.

Subsequent to the Recovery Act, DOE amended the 2007 Final Rule to improve its operation. As amended, it was published on December 4, 2009 (the 2009 Final Rule).9 Despite the fact that Section 1705 had been enacted into law earlier that year, the 2009 Final Rule referred only to “Eligible Projects under Section 1703” and not to the broader category of “Eligible Projects under Title XVII” referenced in the 2007 Final Rule. Nevertheless, when issuing its public solicitations for projects under Section 1705, DOE effectively instructed applicants that Section 1705 Guarantees would be subject to the 2007 Final Rule, as amended and restated by the 2009 Final Rule.10

At the core of its suit, CARE contends that the 2007 and 2009 Final Rules were promulgated exclusively for projects under Section 1703, and that DOE violated the law in issuing Section 1705 Guarantees without the benefit of rules and regulations specifically addressing the criteria to select projects for Section 1705 Guarantees.

Irrespective of the decision the court might reach regarding DOE’s procedures for issuing Section 1705 Guarantees, legal precedent and sound public policy support upholding the validity of the Section 1705 Guarantees.


The Public Debt Clause of the Fourteenth Amendment of the U.S. Constitution provides that “the validity of the public debt of the United States . . . shall not be questioned.” In Perry v. United States,11 one of the few cases that addressed the Public Debt Clause, the Supreme Court considered its meaning in connection with the redemption of U.S. government “gold bonds” (bonds payable in gold coin of the “present standard of value”), which were issued in 1918 and matured in 1934. In that case, the bondholder sought payment at maturity in gold (or its equivalent) based on the value of gold at the time of issuance. The Treasury Department refused to make payment because Congress had removed the dollar from the gold standard.

Perry offers two important principles relevant to the CARE suit. First, the Supreme Court observed that while Congress has the power to borrow money on the “credit of the United States,” and is authorized to pledge the government’s faith as the highest assurance of payment, Congress cannot later withdraw or ignore its pledge. Second, the Perry court observed that when the United States enters into contracts, it assumes rights and responsibilities similar to those of private parties entering into contracts. While the facts of Perry differ from those at issue here (the Perry bonds involved validly issued obligations; CARE alleges that the Section 1705 Guarantees were never validly issued), the concerns of the Supreme Court regarding the U.S. government repudiating its pledge of payment are relevant, and the reference to the U.S. government assuming rights and responsibilities similar to those of a private party in the context of a debt issuance, are instructive.


Under private commercial law, the ultra vires doctrine (translated as “beyond the powers”) is sometimes used to challenge corporate acts taken beyond the purposes stated in the corporation’s organizational documents. Historically, the doctrine served to excuse a corporation from liability for actions taken by corporate representatives that were beyond the corporation’s stated powers and objectives. This doctrine could be applied by analogy to the case at hand, where CARE alleges that DOE simply lacked the power to issue the Section 1705 Guarantees without first issuing relevant regulations. But in modern practice, the ultra vires doctrine is virtually obsolete. The Model Business Corporation Act (the MBCA) and the analogous provision of the Delaware General Corporation Law (the DGCL) both provide that corporate acts may not be challenged on the ground of lack of power except in very limited circumstances: by a shareholder against a corporation to enjoin the act, by a corporation against an incumbent or former director, officer, employee, or agent, or by a state attorney general in connection with a corporate dissolution.12 Only the first of these exceptions is even remotely analogous to CARE, if one views the role of citizens challenging an agency action to be similar to that of shareholders challenging a corporate action. However, as provided in the MBCA and the DGCL, such lawsuits may proceed in the corporate context only if all affected persons are parties, and the relief granted is “equitable.” Here, not all the affected persons are parties to the CARE litigation, and any relief granted would be inequitable for the thousands of individuals and companies who relied in good faith on the validity of the Section 1705 Guarantees.

Agency law provides additional concepts potentially relevant to the CARE suit. As described by Section 2.03 of the Restatement (Third) of Agency, “apparent authority” of an agent exists if there is a representation by a principal that the agent is authorized to act, a third party has relied on the representation, and the third party has taken action to its detriment acting on such reliance. The doctrine of apparent authority—frequently used by courts to determine the authority of officers and directors to bind their corporations—would support the validity of the Section 1705 Guarantees. First, the Section 1705 Guarantees were reviewed and approved by other U.S. governmental agencies—including Congress, the U.S. Treasury and the Office of Management and Budget—without questioning the authority of DOE. Second, lenders, borrowers, investors, and other interested parties, made important investment and other decisions in reliance on the statements and actions of the government, unaware that such authority might be questioned. Third, each of these parties acted on the government’s representations by entering into loan agreements, supply contracts, off-take agreements and many other binding commercial relationships in support of Section 1705 projects.

While we are not aware of any cases challenging the issuance of financial obligations of the United States, such cases do exist in connection with debt issuances by foreign governments. Section 207 of the Restatement of the Foreign Relations Law of the U.S. (the Restatement) sets out a principle similar to that of apparent authority under agency law: a state (i.e., a national government) is responsible for the acts of its agencies or officials who act under the “color of authority.” Color of authority exists if the affected party reasonably considered an action to be official, the action served a public purpose, and the person acting on behalf of the state presented him- or herself in an official capacity. DOE’s actions in connection with the Section 1705 Guarantees appear to satisfy each of these requirements and, if customary international law as described in the Restatement were to apply to DOE’s actions, the U.S. government would be held liable for losses resulting from invalidation of the Section 1705 Guarantees. Similarly, the Restatement provides that a state is responsible for losses resulting from the repudiation or breach of a contract if the breach or repudiation stems from governmental or sovereign (as opposed to commercial) purposes, and damages have not been paid. The fact that the alleged procedural defects in the CARE case are non-commercial in nature—since they relate to possible non-compliance with applicable law rather than the commercial aspects of the Section 1705 Guarantees—suggests that the U.S. government would be required to compensate for any losses arising from an invalidation of those guarantees.


CARE raises a number of issues of fact and law, and we are confident that DOE and others will vigorously oppose the complaint, on numerous issues of fact and law. Irrespective of the determination of the procedural issues posed by CARE, we believe that legal precedent and sound public policy support the continued effectiveness of the Section 1705 Guarantees. Procedural infirmities should not hamper the intent of Congress in authorizing DOE to issue guarantees backed by the full faith and credit of the United States, nor should the implicit risk of such procedural defects put the investing public at peril in relying on United States government obligations generally.

Indeed, from a practical standpoint it is hard to imagine what benefit might be gained from an invalidation of the Section 1705 Guarantees. Few of the renewable energy projects supported by DOE would survive the withdrawal of such credit support; and little, if any, of the billions of dollars already funded by the United States government would be recoverable from prematurely terminated projects. Indeed, the potential liability of the United States government to innocent investors, contractors and other parties who relied on DOE’s support could be substantially more than the value of the Section 1705 Guarantees themselves.

Messrs. Glaser and Porter are partners in the Washington, DC and New York City offices, respectively, of Haynes and Boone, LLP, and Ms. Garcia-Ribeyro is an associate in the firm’s Washington, DC office. Haynes and Boone, LLP has an active Projects practice that is regularly recognized by leading publications as one of the largest and most accomplished of its kind in the United States.  

The authors have represented both the U.S. Department of Energy and prospective borrowers in connection with the DOE programs described in this article. The opinions expressed herein represent only those of the authors, and have not been approved nor constitute the views of Haynes and Boone, LLP, the U.S. Department of Energy, or any other person or organization. The authors gratefully acknowledge the assistance of Lauren A. Perotti of Haynes and Boone, LLP in the preparation of this article.  


This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.  

©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.  

To view additional stories from Bloomberg Law® request a demo now