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In late 2010, with Solyndra on the verge of bankruptcy, DOE refused to lend it more money -- the department had already tendered $535 million in a loan guarantee. Instead, in February 2011, it signed onto an agreement that brought Solyndra another $75 million.

The money would come from private investors, but it came with a condition: If Solyndra collapsed, these investors would be first in line to recover whatever they could from the remaining assets.

If the company recovered, DOE would reclaim the first spot in line. But Solyndra didn't recover, and today the private investors hold rights to the first $69 million that comes from dismantling the company.

Congressional staffers have scrutinized DOE's internal memos on the issue. They're studying tens of thousands of documents and requesting more emails from the White House and federal agencies. They're rereading the Energy Policy Act of 2005, which has the legal language governing DOE's loan program.

Section 1702(3) says that when DOE makes a loan, "The obligation shall be subject to the condition that the obligation is not subordinate to other financing."

In a Sept. 14 hearing, Jonathan Silver, then the executive director of DOE's Loan Programs Office, said DOE lawyers signed off on the legality of the move before it was made.

DOE claims authority to 'find other solutions'

Their argument, he said, was that DOE had to be the highest-ranking lender when a loan is made, "but that in the event that a project struggled, and there's no surprise as to the fact that projects struggle from time to time, we had the authority to figure out other solutions."

An aide to the Energy and Commerce Committee said staff members have examined the legal memo in which DOE explains this rationale. The document is not public. The committee's investigation is continuing, the aide said, but they currently believe DOE broke the law.

"It's our point of view that the reasoning in it is not supportable based on the statute," the aide said.

If DOE's first duty is to the taxpayer, the aide said, that doesn't change after a loan has been awarded; that would be "contrary to the intent of the statute."

Asked to clarify DOE's legal reasoning, spokesman Damien LaVera said Republicans are missing another part of the law that has to do with subordination.

"While one portion of the statute makes clear that the debt cannot be subordinate to other financing at the time of the initial loan, there is also a subsequent section that deals with the threat of default," he said. "That section provides the department with broad authority in a distressed situation to take action that will protect the taxpayer."

LaVera said congressional critics have focused solely on Section 1702(3), while career DOE lawyers, both within the Loan Programs Office and the Office of General Counsel, took the entire statute into account.

The possible outcome of the congressional inquiry remains murky, partly because there's no clear precedent. In his Capitol Hill testimony, Silver said DOE hasn't taken a subordinate position on any other loan.

David Hill, a former general counsel for DOE, said when he left in January 2009, no loans had been awarded, so the agency hadn't needed to answer the subordination question yet. Hill, currently a partner at Sidley Austin LLP, said he didn't know if DOE's action on Solyndra was legal.

Experts weren't sure where legal action could be brought against DOE. But if a court does eventually review the decision, it may consider Congress' intent in the Energy Policy Act of 2005.

Taxpayers wind up in 'second class' seats

A search of the Congressional Record revealed no discussion of subordination. However, Bud Albright, a former staff director for the Energy and Commerce Committee and a former undersecretary at DOE, said in an email: "The intent was to avoid EXACTLY what DOE did."

Albright was closely involved in the Energy Policy Act; his boss was Rep. Joe Barton (R-Texas), who chaired the Energy Committee at the time, and who was the lead sponsor of the bill.

"Regardless of, or perhaps because of, what may be commonplace in a commercial practice regarding subordination in a restructuring of a financial arrangement, 1702(3) specifically kept the taxpayer at the front [of the] repayment line," he said. "No one I know of intended to put taxpayers in the second-class repayment seats."

In late 2009, DOE reconsidered this aspect of the law. The nuclear industry, which has depended on loan guarantees to finance new plants, wanted DOE to have more flexibility. Instead of DOE always being superior on the loan, they wanted it to be allowed to stand on equal ground with private lenders.

After vetting public comments, DOE stated its position in December 2009: DOE didn't have to be senior on all parts of every loan. Instead, the Energy Secretary could strike financial deals with private lenders if this was "in the best interests of the United States."

Some lawyers say this only means DOE can stand shoulder-to-shoulder with private lenders. That is, if a project goes into default, for every dollar coming out of its liquidation, DOE and a private lender each get 50 cents.

Others, like Gerard Waldron, a partner at Covington & Burling LLP, believe DOE has even more latitude -- that it can be subordinate on a loan.

If a law is ambiguously written, he said, federal agencies get the benefit of the doubt in interpreting it -- what's known as the "Chevron standard."

When DOE reviewed subordination in December 2009, Waldron said, it found the law to be ambiguous. Under the Chevron standard, he said, a court would likely trust its judgment.

The legal debate contrasts sharply with the dialogue in Congress, where lawmakers have thundered that a crystal-clear statute was flouted.

The price of attracting a 'white knight'

At the Sept. 14 hearing, Rep. Morgan Griffith (R-Va.), himself a lawyer, said to Silver that "common English always trumps legal mumbo jumbo. And the common English makes it clear you are not to subordinate. But in January, when you were at the helm, your people subordinated $75 million of this money, American taxpayer dollars, to private investors."

The legal dust-up exposes a larger policy question: When should DOE act as a private actor would, and when should it be more conservative with the taxpayer dollar?

The question is even more significant in light of Silver's background: Before coming to DOE, he was a hedge fund manager and venture capitalist. He joined a class of DOE hires, under Secretary Steven Chu, considered to have top-tier experience in the private sector.

In that world, restructuring -- and subordination -- is commonplace. If a struggling company can't draw money from its usual funders, then to attract a "white knight" funder, it has to give this party first crack at recovering its money.

When Solyndra was struggling late in 2010, Silver and his team assessed the situation. China's steep ramp-up in solar panels, and Europe's drawback of its subsidies, had forced the company to reduce prices on its own solar sales.

To compete, Solyndra would have to ramp up production and hope to drive down costs even further. But the factory had just completed construction -- it was nowhere near the full gallop necessary.

Silver and his team asked this question: Would it be more lucrative to liquidate the company then and there? Or was it worth keeping the company alive, in the hope it could recover and net a larger return?

As Silver told Congress, a finished, full-throttle plant is worth more than an incomplete one. And DOE had received an independent market study suggesting Solyndra could make money again.

They concluded that pulling out of Solyndra, at that moment, would yield two to four times less than staying with it. That's when they agreed to a $75 million lifeline from private investors -- a deal they knew would involve subordination of DOE's claim.

Walter Howes, a former DOE official who was the Loan Guarantee Program's first director when it started in 2006, said "there's no way they could have done it if they did not have a legal standing and a legal basis."

Much ado over a 'rounding error'?

Howes is not a lawyer, but he said the decision would have gone through three DOE offices, the Office of Management and Budget, and the Treasury Department.

"You've got so many eyeballs and so many people in the process ... it's very, very hard to imagine that anything would be in any way illegal," said Howes, now owner of Verdigris Capital.

As an investment decision, he said, being subordinate to $75 million to rescue an investment of $535 million is a "rounding error."

"That would be a rather frightening decision to have to make," he said, adding: "From my point of view, that was a legitimate business decision to take that gamble and take a subordinated position to that money."

Now that Solyndra is bankrupt, the stakes are not just political but financial. Currently, a Delaware bankruptcy court is overseeing the dismantling of Solyndra's assets. On Oct. 27, Solyndra's factory, land and intellectual property will be auctioned off.

If a buyer agrees to buy the entire Solyndra operation, not its component pieces, DOE is no longer subordinate, Silver told Congress.

The more likely outcome, since Solyndra's operation failed, is that buyers will scavenge individual pieces. The possible proceeds of that are uncertain. Some of the equipment is highly customized, so it won't hold much value to other companies, analysts said. Other equipment may be usable by other companies, but the ailing market for thin-film solar may depress their value.

Could DOE leapfrog private investors to get repaid first? Douglas Baird, a law professor and bankruptcy specialist at the University of Chicago, said that wouldn't occur in the private sector, and it's not likely to occur here just because a public agency is involved.

"Once you're in bankruptcy, you respect whatever priorities existed," he said. "You made your bed and you live with it ... bankruptcy court was made to enforce deals that grown-ups made before the fact."

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