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Lukens Steel Co. v. Klutznick

decided: August 19, 1980.



Before Seitz, Chief Judge, and Gibbons and Rosenn, Circuit Judges.

Author: Rosenn


One of the central factors stirring the economic maelstrom which has plagued the United States in recent years has been the inability of major American industries to compete with products produced more efficiently and economically by foreign competitors. A recent study of the American steel industry reveals major difficulties experienced by it because of high import penetration by Japanese, West German, and other foreign steel producers.*fn1 Resulting unemployment and the bleak prospects for future employment in the steel industry prompted a Presidential Task Force in 1977 to recommend federal assistance through the Public Works and Economic Development Act of 1965 (PWEDA or the Act), 42 U.S.C. § 3121 et seq. (1976), to assist struggling domestic steel producers in modernizing their steelmaking capabilities and improving their potential for competing with cheaper foreign imports. 43 Fed.Reg. 16360.

The Economic Development Administration (EDA), the agency charged with administering grants under PWEDA, has proposed to guarantee $29,039,400 of the rental obligation to be incurred by Phoenix Steel Corporation (Phoenix) under a leveraged lease of capital equipment to be used in the modernization of its steel plate production facilities. Phoenix had been experiencing severe financial difficulties. Lukens Steel Company (Lukens), a competitor, filed an action against EDA in the district court to set aside the agency's decision to guarantee the loan. It alleged that this decision violated various provisions of PWEDA and its implementing regulations. The district court granted Phoenix's motion to intervene and thereafter granted the defendants' motions for summary judgment. We reverse.


The PWEDA was passed by Congress in 1965 to provide "areas and regions of substantial and persistent unemployment and underemployment (with federal assistance) to take effective steps in planning and financing their public works and economic development." 42 U.S.C. § 3121. In response to a growing concern over large layoffs in the steel industry, a Presidential inter-agency task force in December, 1977 recommended federal assistance for the purpose of assisting the industry. EDA, pursuant to its authority and with funds provided by PWEDA, thereupon established a "special program to guarantee loans and leases financed by private lending institutions to firms in the basic steel industry." This program was viewed as a necessary vehicle for modernizing the facilities of domestic steel producers, waging battle with cheaper foreign imports and aiding the steel industry in coping financially with the increased cost of regulatory environmental regulations and the high cost of raising capital through private financial institutions.

"Steel Industry Lending Guidelines" were drafted, submitted to Congress, and published in the Federal Register, 43 Fed.Reg. 16360. According to the guidelines, an applicant for financial assistance under the steel program must meet all of the requirements of PWEDA and its regulations. An applicant must not only be in a "redevelopment area" designated by EDA,*fn2 but PWEDA also requires that the applicant be in such a financial position that the assistance it seeks from EDA is not available from other sources, whether private lenders or other federal agencies. 42 U.S.C. § 3142(b)(4).*fn3 EDA reiterated this requirement in the Steel Industry Lending Guidelines.

To qualify for assistance under the program, a steel company must have been experiencing financial difficulties and be in need of funds to upgrade the efficiency and productive capabilities of existing steel facilities. EDA funds, however, may not be used to assist an applicant in increasing its share of the marketplace at the expense of other domestic producers. Section 702 of PWEDA prohibits assistance to a company when the result would be "to increase the production of goods . . . or the availability of services or facilities" when "demand" is insufficient to employ the existing "efficient capacity" of competitive commercial or industrial enterprises. See 42 U.S.C. § 3212; 13 C.F.R. § 309.2 (1980). Simply put, EDA assistance is not to be used to expand the production of steel products if there already is excess capacity in the domestic steel industry.

Phoenix Steel is a small Eastern Pennsylvania steel company which commands only one-half of one percent of the domestic steel market. It fabricates seamless steel pipe and tube at its Phoenixville, Pennsylvania plant and steel plate products at Claymont, Delaware. Phoenix's severe financial distress, caused by unfavorable economic and market conditions in the 1970's as well as other factors, made it evident that without extensive modernization of existing steel facilities and equipment, it could not survive. In April 1978, Phoenix applied for EDA assistance. After an exhaustive review of Phoenix's financial condition and needs, including written submissions in opposition by Lukens and its attorneys, EDA made extensive findings and agreed to guarantee 90% or $29,039,400 of rental obligations to be incurred by Phoenix under a proposed leverage equipment lease.*fn4 The mechanics of the loan guarantee require a private lease lender to purchase interest-bearing notes from the equipment lessor. The lessor will use the proceeds of the purchase to buy modernization equipment which will then be leased to Phoenix at a rate sufficient to service the debt evidenced by the notes. The notes will be secured by a security interest in the equipment and the leases and by the EDA guarantee. EDA will be protected because if it should be required to meet the guarantee, it would be entitled to an assignment of the notes and the collateral.

Based on the loan guarantee, Phoenix planned to upgrade its facilities primarily in three areas: (1) Vacuum Degassing: Phoenix needed equipment which would enable it to produce more cheaply low hydrogen and oxygen content steel. The desired equipment is essentially a vacuum process by which the gaseous content in a ladle of steel is reduced. (2) Heavy Plate Equipment: Phoenix had the capability of producing large plates of steel only by welding two sheets together at a higher cost. Modern equipment would allow larger plates to be produced in single form and thus more economically. (3) Special Plate Finishing Equipment: Phoenix can produce heat treated steel but only by "thermal cycling," i. e., varying the temperature in the furnace. Proper finishing equipment would eliminate this inefficient process.

EDA, in approving Phoenix's application for assistance, concluded that (1) modernization was reasonably calculated to provide more than a temporary alleviation of under-employment or unemployment; (2) there was a reasonable assurance of repayment of Phoenix's lease obligation if it were to modernize its facilities; (3) Phoenix was unable to obtain adequate financing from alternative sources without EDA assistance; and (4) modernization would not violate the Act by causing a significant increase in Phoenix's production or enable it to manufacture any "new" products.

Lukens Steel is a substantially larger and more profitable competitor of Phoenix. It is concerned over the proposed EDA assistance to Phoenix because it fears Phoenix would gain a competitive advantage, particularly in specialty steel plate product lines which are the major source of competition between the two firms. Lukens commenced suit in the United States District Court to block the EDA guarantee, alleging that it would (1) create unfair competition in violation of section 702 of the Act; (2) violate the 15% equity contribution requirement of the Act; (3) violate section 202(b)(4) of the Act because Phoenix had the ability to modernize without EDA assistance; and (4) violate section 202(b)(4) because Phoenix could not assure repayment.

The district court sustained EDA and Phoenix concluding that EDA acted within the scope of its authority and that its findings concerning the need for the vacuum degasser and heavy plate equipment were not arbitrary and capricious. See Lukens Steel Company v. Kreps, 477 F. Supp. 444, 447 (E.D.Pa.1979). The court, however, found that EDA in making its section 702 findings, had failed to include projections of stainless steel conversion levels pertaining to Phoenix's proposed specialty plate finishing project. Also, the district court needed additional clarification of Phoenix's 15% capital contribution to the projects. The court, therefore, remanded the case to EDA to develop a more extensive record on this phase of the application. On all other issues, including Phoenix's ability to obtain funds from other sources, the district court found in favor of EDA and Phoenix.

Phoenix submitted additional data to EDA on remand to show that small projected production increases in the specialty plate finishing line would not be attributable to EDA funds for modernization. EDA thereafter resolved the section 702 question in Phoenix's favor along with the 15% contribution issue. The district court affirmed the findings of EDA. Lukens appeals.


Although Lukens challenged EDA's findings and conclusions in the district court on a number of grounds, its argument on appeal is that the district court erred in upholding EDA's conclusions that (1) assistance to Phoenix would not contravene the unfair competition provisions of section 702 and (2) that Phoenix did not have available other independent sources for long-term financing.

Before we may assess the merits of Lukens' argument, it is critical to note that the scope of the district court's and our review over EDA's action is exceedingly narrow, under which the agency's decision is entitled to a presumption of regularity. American Iron and Steel Institute v. EPA, 568 F.2d 284, 296 (3d Cir. 1977). Action taken by a federal agency under the authority of PWEDA is "informal" and the review of such decision making must be contrasted with de novo review and the substantial evidence test of 5 U.S.C. § 706(2)(E) for more formal agency proceedings. Thus, in reviewing EDA's findings, the court is limited by the Administrative Procedure Act, 5 U.S.C. §§ 551 et seq. (1976), to a determination whether the agency ...

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