October 26, 2020
Court allows case on indemnification for unpaid energy grants to go forward
In Pacific Wind, LLC v. United States, No. 19-612T (Fed. Cl. Oct. 6, 2020), the US Court of Federal Claims (court) ruled that a wind farm developer could sue the government for unpaid energy grants even though the developer had been indemnified by a third party.
Pacific Wind, LLC, applied for over $100 million in grants (energy grants) under Section 1603 of the American Recovery and Reinvestment Act of 2009 (Recovery Act) after placing a wind farm into service. Section 1603 of the Recovery Act allows taxpayers to apply for a 30% credit of the amount invested in certain costs of placing specified energy property into service.
In calculating the energy grants, the Treasury Department disallowed the costs related to extended warranties. Pacific Wind subsequently brought an action alleging the government underpaid it by over $8.4 million. The government moved to dismiss the case for lack of subject-matter jurisdiction, arguing that Pacific Wind lacked standing because it had been paid the money for the shortfall through an indemnification agreement with another party as part of a sale-leaseback transaction. Pacific Wind argued that it had standing because the injury was by the government, and thus the indemnification agreement was irrelevant.
Court refuses to dismiss case
The court refused to dismiss the case for lack of subject-matter jurisdiction, finding that the government's obligation to Pacific Wind was not affected by the fact that Pacific Wind had an indemnification agreement with another party.
In so finding, the court rejected the government's argument that ruling in favor of Pacific Wind would not redress Pacific Wind's loss because the award would go to the indemnifier. "In short, the Government gains no immunity for its actions by relying on an agreement to which it was not a party. Pacific Wind's indemnification agreement … is immaterial to the Government's liability and does not impact Pacific Wind's right to recover the loss for which the Government was responsible," the court said.
This ruling is particularly important to the renewable energy market in the United States. Almost every project finance transaction contains some level of guarantees and/or indemnities, which are necessary to help promote the flow of funds to projects. The value of the indemnity or the willingness of people to provide indemnities could be impacted if the indemnifier must be the party to challenge in court or the indemnity could not be paid until all legal avenues have been exhausted.