U.S. v. Alisal Water Corp., C-97-20099-JF(EAI).

• Decision Date: 20 May 2004
• Docket Number: No. C-97-20099-JF(EAI).,C-97-20099-JF(EAI).
• Parties: UNITED STATES of America, Plaintiff, v. ALISAL WATER CORPORATION, et al., Defendants.
• Court: U.S. District Court — Northern District of California

326 F.Supp.2d 1032

UNITED STATES of America, Plaintiff, v. ALISAL WATER CORPORATION, et al., Defendants.

No. C-97-20099-JF(EAI).

United States District Court, N.D. California. San Jose Division.

May 20, 2004.

Lori Jonas, Matthew Fogelson, Environmental Enforcement Section, Environment and Natural Resources Division, U.S. Department of Justice, Washington, DC, for Plaintiff.

Marc P. Fairman, Law Offices of Marc P. Fairman, San Francisco, CA, for Adcock Defendants.

S. Gary Varga, Monterey, CA, for Trust Defendants.

ORDER IMPOSING CIVIL PENALTY; GRANTING MOTION TO STRIKE EXPERT'S REPORT AND OTHER WISE DENYING MOTION TO STRIKE EXTRINSIC EVIDENCE; AND DENYING MOTION TO STAY PENDING APPEAL

FOGEL, District Judge.

I. PROCEDURAL HISTORY

On August 23, 2000, the Court granted partial summary judgment with respect to counts 1-9 of the complaint, establishing the liability of the Individual and Corporate Defendants for hundreds of violations of the Safe Drinking Water Act ("SDWA"). On November 8, 2001, the Court granted partial summary judgment with respect to counts 11-13 of the complaint, establishing additional violations of the SDWA. The Court conducted a trial between December 4, 2001 and January 8, 2002 for the purpose of determining an appropriate remedy for the adjudicated violations.

On February 7, 2002, the Court issued a memorandum of intended decision concluding that an appropriate remedy would include divesting Defendants of all of their water systems except Alco and imposing "a very substantial civil penalty." The Court noted that this approach would be costly because it would require the appointment of a receiver to manage the smaller systems, to investigate the feasibility of selling Defendants' small water systems separately from their largest system, Alco, and to monitor Defendants' compliance with applicable laws and regulations with respect to Alco. The Court also noted that this approach would require a further trial on the government's fraudulent conveyance claim and would extend for an indefinite time the uncertainty regarding the ultimate resolution of the instant litigation. The Court suggested an alternative remedy that would include divestiture of all of Defendants' water systems, imposition of a civil penalty in the amount of $75,000 and dismissal of the government's fraudulent conveyance claim. The Court noted that, although the proposed penalty of $75,000 was far less than that sought by the government and substantially less than the Court was inclined to assess under the first approach, the alternative approach would be cost effective, would achieve finality and would further the government's primary goal of protecting public health. The Court gave the parties fifteen days to consider its suggested alternative remedy. Defendants rejected the alternative remedy, and the Court subsequently appointed a receiver with the duties described in the memorandum of intended decision.

On July 17, 2002, the Court commenced trial on the fraudulent conveyance claim. On May 2, 2003, the Court issued its findings of fact and conclusions of law, finding that the Individual Defendants had acted with actual intent to defraud the government by transferring substantial assets into various trusts in order to frustrate the government's ability to collect a potential civil penalty in this case. The Court therefore concluded that the trust assets properly could be considered in assessing Defendants' ability to pay a civil penalty.

At the suggestion of Defendants' counsel¹ and with the consent of the parties, the Court thereafter appointed Richard Pierotti and the accounting firm of Kokjer, Pierotti, Maiocco & Duck, LLP to determine the liquidation value of the assets owned by Defendants. The purpose of this appointment was to evaluate Defendants' ability to pay a civil penalty. Mr. Pierotti submitted his analysis on November 5, 2003. Defendants objected to Mr. Pierotti's analysis both orally at a hearing on January 21, 2004 and in written briefs. After considering Defendants' objections, and bearing in mind that the purpose of Mr. Pierotti's analysis was not to fix the precise market value of any asset but to provide the Court with a professional assessment of Defendants' overall financial condition, the Court concluded that the analysis is reasonable and not clearly erroneous.

The Court requested a final round of briefing on the issue of an appropriate civil penalty and heard approximately two hours of oral argument on May 7, 2004. Having considered the briefs submitted prior to that hearing,² the arguments presented by counsel and the record as a whole, the Court makes the following determinations:

II. DISCUSSION

A. Civil Penalty

1. Factors To Be Considered

Civil penalties under the Safe Drinking Water Act ("SDWA") are governed by 42 U.S.C. § 300g-3(b), which provides that the Court may assess a civil penalty not to exceed $25,000 per day per violation.³ The section states that the Court should take "into account the seriousness of the violation, the population at risk, and other appropriate factors."

If the Court treats each of the 232 violations of the SDWA at issue as a single-day violation, the maximum statutory penalty would be approximately $17 million. If the violations are treated as multi-day violations, the maximum statutory penalty would be in excess of $400,000,000. No court has imposed a civil penalty that even approaches sums of this magnitude. To the contrary, the few reported cases involving similar SDWA violations have resulted in civil penalties in thousands rather than millions of dollars. See, e.g., United States v. City of North Adams, 1992 WL 391318 (D.Mass.1992) ($67,200); United States v. Alder Creek Water Co., 823 F.2d 343 (9th Cir.1987) ($6,200).

The government asserts that the Court should look to another environmental statute, the Clean Water Act ("CWA"), for additional guidance in assessing a civil penalty. Under the CWA, courts consider the seriousness of the violation, the economic benefit (if any) resulting from the violation, any history of violations, any good-faith efforts to comply with applicable requirements, the economic impact of the penalty on the violator, and such other matters as justice may require. 33 U.S.C. § 1319(d). The government cites a number of CWA cases imposing penalties in millions of dollars. See, e.g., United States v. Marine Shale Processors, 81 F.3d 1329 (5th Cir.1996) ($ 3 million); United States v. Allegheny Ludlum Corp., 187 F.Supp.2d 426 (W.D.Pa.2002) ($8.2 million); United States v. Smithfield Foods, Inc., 972 F.Supp. 338 (E.D.Va.1997) ($ 12.6 million).

Defendants argue that the cases cited by the government are distinguishable in that they involve actual discharge of contaminants by large and wealthy corporations, while the instant case involves failure to report by a small family-owned operation. The Court concludes that the factors set forth under the CWA may be useful in determining a civil penalty here, but that a penalty of the magnitude imposed in the CWA cases is inappropriate because of the distinctions noted by Defendants.

This Court made express findings as to the seriousness of the violations and Defendants' history of non-compliance in its memorandum of intended decision issued February 7, 2002. It concluded that the violations were serious and not of a technical nature, stating as follows:

Defendants not only failed repeatedly to self-monitor as required by law but also failed repeatedly to make required reports to regulatory agencies and to their consumers. They submitted false test results, at best with gross negligence and at worst with conscious intent to deceive. Finally, by failing or refusing to cooperate with regulators, they unreasonably delayed in identifying and removing sources of contamination, forcing many consumers to rely upon boiled or bottled water for extended periods of time.

Feb. 7 Mem., 4-5. There was evidence at trial that the water in Defendants' smaller systems burned skin, caused gastrointestinal problems or had an unusual color or odor. Id. at 5. Moreover, there was evidence that "repeated exceedances of the MCL create a serious risk of harm, even in the absence of evidence showing how many users actually became ill." Id.

The Court found that the violations spanned approximately a decade, from the early 1990s to mid-2001, and that "Defendants' conduct reflects a persistent pattern of non-compliance with the most basic responsibilities of a public utility." Id. at 6. State and county regulatory personnel testified at trial that they made extensive efforts to resolve matters informally with Defendants, but that it was extremely difficult to obtain even the most basic cooperation from them. Id. Defendants responded at every turn with objections and litigation. Id.

Approximately 28,000 customers were served by Defendants' water systems during the period in question.⁴ Defendants concede that the violations were serious, but argue that many other small systems have had compliance issues and that in other cases larger numbers of people were affected.⁵ Defendants' point seems to be that, by comparison, their conduct was not so bad. Defendants even assert explicitly that "the violations in this case are far less serious than if hundreds of thousands of people had been affected." Defendants' Opening Memorandum, 7. This argument highlights what the Court has characterized as "[p]erhaps the most vexing aspect of this case," that is, Defendants' repeated attempts to minimize the significance of their own misconduct and/or to cast blame elsewhere. See Feb. 7 Memorandum, 6.

Defendants assert that their conduct is mitigated by good faith efforts to comply with applicable requirements. However, the record reflects that for the most part the efforts referenced by Defendants were in response to the Court's orders, which required specific improvements to be made and required more generally that Defenda...