Lukens Steel Co. v. Kreps, Civ. A. No. 79-1053.

• Decision Date: 22 August 1979
• Docket Number: Civ. A. No. 79-1053.
• Citation: 477 F. Supp. 444
• Parties: LUKENS STEEL COMPANY v. Juanita M. KREPS, Secretary of Commerce, Robert T. Hall, Assistant Secretary of Commerce, and Phoenix Steel Corporation.
• Court: U.S. District Court — Eastern District of Pennsylvania

477 F. Supp. 444

LUKENS STEEL COMPANY v. Juanita M. KREPS, Secretary of Commerce, Robert T. Hall, Assistant Secretary of Commerce, and Phoenix Steel Corporation.

Civ. A. No. 79-1053.

United States District Court, E. D. Pennsylvania.

August 22, 1979.

Robert M. Landis, Dechert, Price & Rhoads, Philadelphia, Pa., for plaintiff.

Stanley D. Wright, U. S. Dept. of Justice, Washington, D. C., Robert S. Fastov, Economic Development Adm'n, U. S. Dept. of Commerce, Washington, D. C., for Federal defendants.

Robert S. Ryan, Drinker, Biddle & Reath, Philadelphia, Pa., for Phoenix Steel.

MEMORANDUM

RAYMOND J. BRODERICK, District Judge.

I. Introduction

Plaintiff, Lukens Steel Company (Lukens), a producer of specialty steel products with its principal facility in Coatesville, Pennsylvania, has brought this action for declaratory and injunctive relief to prohibit the Economic Development Administration (EDA) of the United States Department of Commerce and its officers and agents from providing direct loan guarantees to or for the benefit of Phoenix Steel Corporation (Phoenix), another producer of specialty steel with plants in Phoenixville, Pennsylvania and Claymont, Delaware. The EDA assistance to Phoenix which Lukens challenges is an offer, issued by EDA on March 19, 1979, to guarantee ninety percent (or $29,039,400) of the rental obligation to be incurred by Phoenix under a proposed "leveraged lease" of capital equipment. The specific projects for which Phoenix sought assistance are:

I. Claymont Delaware Plant

a. vacuum degassing

b. heavy plate

c. specialty finishing

d. pollution control equipment

II. Phoenixville Pennsylvania Plant

a. finishing expansion

III. Corporate Level

a. data processing facilities

Lukens challenges three of these projects— the vacuum degasser, the heavy plate program, and the specialty finishing program, all of which are planned for the Claymont plant.¹

Jurisdiction for this action has been predicated upon § 701 of the Public Works and Economic Development Act (the Act), 42 U.S.C. § 3211, § 10 of the Administrative Procedure Act, 5 U.S.C. §§ 701-6, and 28 U.S.C. §§ 1331, 1361, 2201 and 2202. Lukens contends that EDA's approval of the lease guarantee was beyond the scope of EDA's authority and that it was "arbitrary, capricious, an abuse of discretion and otherwise not in accordance with law" in that EDA:

1) violated the unfair competition provision of the Act, § 702 (42 U.S.C. § 3212);

2) violated the 15% contribution provision of EDA's regulations, 13 CFR § 306.14;

3) erroneously concluded that Phoenix does not have access to normal markets and cannot generate needed funds internally;

4) erroneously concluded that Phoenix can reasonably be expected to repay the loan;

5) generally violated other portions of the Act, regulations and guidelines.²

Lukens instituted this action against the federal defendants only, and the Court granted leave to Phoenix to intervene as a party defendant. The federal defendants, Phoenix, and Lukens have each filed motions for summary judgment. For the reasons hereinafter set forth, these motions will be denied and the Court will enter an Order, pursuant to Section 10(e) of the Administrative Procedure Act, 5 U.S.C. § 706, holding unlawful and setting aside the EDA's action, findings and conclusions and remanding the matter for further consideration in accordance with this Memorandum.³

II. History of the Project

The assistance sought by Phoenix is part of an administrative program to assist the United States domestic steel industry. The program began with the convening by President Carter of a task force, chaired by Undersecretary of the Treasury Anthony M. Solomon, to investigate the problem of increasing unemployment in the steel industry. The task force, in its report of December 6, 1977,⁴ identified the following problems faced by the steel industry.

1) serious erosion of its competitive position;

2) a need to reinvest heavily in modernization in order to remain competitive;

3) a need to make substantial expenditures to meet environmental regulations; and

4) a continued difficulty in raising capital for these expenditures under present market conditions, given the industry's recent unsatisfactory return on investment.

The task force concluded that federal assistance was needed to aid steel firms in financing the necessary capital expenditures for modernization and pollution control which would help to restore their profitability. The task force recommended that ". . . additional funds be made available for the current and future budget of the Economic Development Administration of the Department of Commerce for industrial loan guarantees and continue to provide further appropriations for this loan guarantee fund in the next few years. . . . We feel the use of EDA guarantees is the simplest and most direct way to assure that viable modernization projects of these firms actually receive the funds necessary for their completion." The task force further suggested that steel firms meeting all of the following criteria be considered eligible for loan guarantees and be given priority:

—firms with serious financial problems, with little or no access to capital markets;

—firms seeking funds for modernization of plants located in areas of high and rising unemployment or threatened massive layoffs; and

—firms with viable plans for modernization.

The EDA responded to the task force report by developing a program of loan guarantees for the steel industry, with funds to be provided under sections 202,⁵ 203⁶ and 204⁷ of the Act, and the regulations promulgated pursuant thereto at 13 CFR, Chapter III. Specific guidelines for the administration of the steel industry lending program were published at 43 Fed. Reg. 16360 (April 18, 1978). The guidelines set forth the purpose of the program as follows:

The purpose of this program is to assist in providing the necessary financing to make facilities competitive, restore employment or sustain existing employment, or to make possible the establishment of new jobs.

Assistance is available to steel companies for the following projects:

A. Modernization that will be reflected in improved profitability, including but not limited to, financing the following:

1. Production related improvements in plant, machinery and equipment, including the integrating of proven modern industrial technology into facilities which are obsolete or are approaching obsolescence. These improvements would be designed to lower unit costs, and to permit firms to re-establish prior levels of production on a profitable basis.

2. Product related capital and organizational improvements which enhance profitability by improving the quality of existing product(s) or by facilitating production of new product(s).

3. Financial efficiencies designed to provide solvency for a period of time sufficient to permit realization of profits on capital improvements thereby ensuring employee retention and continued operation of facilities during implementation of modernization plans.

4. Improvements in plant operations systems which will improve organizational efficiency and/or reduce overhead and thereby enhance profitability.

Applicants are cautioned that loan guarantees will not normally be available for installation of unproven technology. Technology new for the firm in question, or for the United States, is eligible for financing if it has been used and proven effective elsewhere. EDA is willing to consider scaling up of proven technology to volume levels contemplated by the firm.

B. Modernization which is required by law or regulations, but which is not directly reflected in improved profitability, including but not limited to the following:

1. Pollution control equipment.

2. Health and safety related improvements.

In order for these kinds of costs to be eligible for this program, the firm must demonstrate that it cannot finance these costs from cash flow or normal credit sources without seriously affecting its viability and its ability to maintain employment. (emphasis added).

In April, 1978, Phoenix applied for lease guarantee assistance under the steel program. On March 19, 1979, EDA issued its offer⁸ to guarantee ninety percent (or $29,039,400) of the rental obligations to be incurred by Phoenix under a proposed "leveraged lease" of capital equipment. Lukens challenges that part of the EDA guarantee which would assist Phoenix in acquiring the following equipment:

1. Vacuum Degassing—Vacuum degassing is a relatively economical method of manufacturing "degassed" steel—that is, carbon or alloy steel with low hydrogen or oxygen content, which is regarded as being of high quality.⁹ Phoenix proposes to acquire the basic equipment to perform a process known as "ladle degassing". In this process, a full ladle of steel is placed in a vacuum vessel, and the pressure is lowered.¹⁰

2. Heavy Plate—At the present time, Phoenix can manufacture steel plates in sizes up to six inches in thickness or "gage", 152 inches in width, and 720 inches in length.¹¹ However, when customers request the larger sizes (normally three to six inches in gage, weighing 25,000 to 30,000 pounds), Phoenix is required to supply two single plates to be welded together.¹² The heavy plate equipment Phoenix proposes to acquire, consisting largely of new pits to heat ingots and new cranes to handle the heavier plates, will permit it to manufacture the large plates in a single form.¹³ This is a less costly process than welding two smaller plates.¹⁴

3. Specialty Finishing—Currently, Phoenix processes three products in its 2100° Driver furnace—carbon and alloy plate, clad plate and stainless plate.¹⁵ Because the heat treatment of these products is accomplished at different temperatures, it is necessary to operate the furnace at alternately high and low temperatures—an inefficient and costly method. Phoenix proposes to acquire a new furnace for the heat treatment of carbon and alloy plate, continuing to...