431 F.3d 643 (9th Cir. 2005), 02-15907, United States v. Alisal Water Corp.

Docket Nº:02-15907, 04-16210.
Citation:431 F.3d 643
Party Name:UNITED STATES of America, Plaintiff-Appellee, v. ALISAL WATER CORPORATION; Toro Water Service, Inc.; North Monterey County Water Service, Inc.; Moss Landing Water Service, Inc.; Natholyn P. Adcock; Robert T. Adcock, Defendants-Appellants. United States of America, Plaintiff-Appellee, v. Alisal Water Corporation; Toro Water Service, Inc.; Robert T.
Case Date:October 13, 2005
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit

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431 F.3d 643 (9th Cir. 2005)

UNITED STATES of America, Plaintiff-Appellee,


ALISAL WATER CORPORATION; Toro Water Service, Inc.; North Monterey County Water Service, Inc.; Moss Landing Water Service, Inc.; Natholyn P. Adcock; Robert T. Adcock, Defendants-Appellants.

United States of America, Plaintiff-Appellee,


Alisal Water Corporation; Toro Water Service, Inc.; Robert T. Adcock; North Monterey County Water Service, Inc.; Moss Landing Water Service, Inc.; Natholyn P. Adcock, Defendants-Appellants,


Patricia Adcock; Bruce Pierson; David M. Simcho, Defendants,

John W. Richardson, Receiver.

Nos. 02-15907, 04-16210.

United States Court of Appeals, Ninth Circuit.

October 13, 2005

Argued and Submitted June 13, 2005.

Amended December 14, 2005.

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Appeal from the United States District Court for the Northern District of California, D.C. No. CV-97-2009-JF, Jeremy Fogel, District Judge, Presiding.


Marc P. Fairman, San Francisco, California, for the defendants-appellants.

Lori Jonas, Department of Justice, Washington, D.C., for the plaintiff-appellee.

Before: Richard C. Tallman, Jay S. Bybee, and Carlos T. Bea, Circuit Judges.


The Opinion filed on October 13, 2005, slip opinion at 14045, is amended by the opinion filed concurrently with this order. With these amendments, the panel has voted to deny the petition for panel rehearing.

The petition for panel rehearing is DENIED. No further petitions for panel rehearing or petitions for rehearing en banc will be entertained.


TALLMAN, Circuit Judge:

Appellants Robert and Natholyn Adcock and various private water systems they owned and operated in Monterey County, California, violated various public health and safety regulations under the federal Safe Drinking Water Act ("SDWA"), 42 U.S.C. §§ 300f - 300j. They appeal the district court's orders requiring divestiture of all except the largest water system and imposing financial penalties. We have jurisdiction under 28 U.S.C. §§ 1291 and 1292(a)(2) and affirm.

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Prior to this litigation, the Adcock family water system business was organized into four corporations. The largest, Alisal Water Corporation ("Alisal"), owned and operated several public water systems, some of which are named as defendants: Alco Water Service ("Alco"), Salinas Division, Blackie Road Water System # 18, Pine Canyon Division of Alco Water Service, Buena Vista Water System, Wildwood Water System, San Jerardo Water System, Vierra Canyon Water System, Vierra Estates Water System, and Langley/Valle Pacifico Water System. Alisal also wholly owned two subsidiary corporations: Moss Landing Harbor District, which operated the Moss Landing public water system, and North Monterey County Water Service, Inc. ("NORMCO"), which operated NORMCO public water system. The Adcocks held 82.5 percent ownership in Alisal. The fourth corporation was Toro Water Service ("Toro"), which owned and operated a public water system of the same name and was wholly owned by the Adcocks.1

The United States commenced this civil enforcement action in January 1997 on behalf of the United States Environmental Protection Agency ("EPA") against the Appellants. Numerous violations of SDWA regulations were asserted, including exceeding total coliform Maximum Contaminant Levels ("MCL"), failing to monitor for lead and copper, failing to take required monitoring samples, failing to give required agency and public notices, failing to report and falsifying monitoring reports, and failing to keep proper records. The action was initiated in response to an August 1996 written request from Dr. David Spath, Chief of the Division of Drinking Water and Environmental Management, California Department of Health Services ("DHS"). Twelve counts of multiple regulatory violations (totaling 232 violations) and one count of fraudulent conveyance were alleged.

The district court granted summary judgment to the government on the first nine counts in August 2000. See United States v. Alisal Water Corp., 114 F.Supp.2d 927, 939 (N.D.Cal.2000) ("Alisal I'). After trial, the district court again ruled for the government on the tenth count (fraudulent conveyance). In November 2002, the district court granted summary judgment against the corporate defendants, but not against Robert and Patricia Adcock individually, on the remaining three counts, eleven to thirteen. As to the regulatory violations, the Appellants challenge on appeal only the partial summary judgment on counts eleven and twelve against Moss Landing and Vierra Canyon.

The district court found that the proliferation of small water systems had stretched the Adcocks beyond their ability to manage effectively and remedy the continuing health violations, endangering their customers. To remedy the underlying violations the district court initially ordered that all of the smaller water systems, including NORMCO and Toro (collectively the "Small Utilities"), be placed in receivership

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and directed the receiver to investigate and make recommendations about selling the Small Utilities. See United States v. Alisal Water Corp., 326 F.Supp.2d 1010, 1028-32 (N.D.Cal.2002) ("Alisal II"). The Adcocks were permitted to remain in control of only the largest individual water system, Alco, and they were ordered to implement substantial improvements that had been recommended in a previously compiled consultant's report and to allow monitoring by the receiver. Id. at 1030-31. The district court denied the Appellants' motion to stay the order, and a prior panel of our court affirmed the denial of a stay. During this time, the district court held extensive formal hearings regarding the Appellants' stewardship and their course of dealings with federal and state health officials. See id. at 1019-22 (summarizing findings). The district court also held two public meetings (in August and December 2003), where utility customers were allowed to speak about their concerns, and the judge invited the public to send written suggestions.

In November 2003, the receiver filed his report and the district court subsequently adopted the recommended sale of the Small Utilities. The court ordered that most of the systems be sold to the highest bidders, but ordered three of the systems to be sold to a non-profit public entity, the Pajaro/Sunny Mesa Community Services District ("PSMCSD"). See United States v. Alisal Water Corp., 326 F.Supp.2d 1032, 1038-39 (N.D.Cal.2004) ("Alisal III"). PSMCSD did not have the highest bid, but the district court found that sale to PSMCSD would best serve the public interest. Id. at 1037 n.6. The district court denied the Appellants' motion to stay the sale order, and we affirmed the denial of a stay.

The district court also imposed monetary penalties against the Appellants. For purposes of determining the appropriate penalty amount, the district court appointed accountant Richard Pierotti to assess the liquidation value of all of the water utilities and the Adcocks' personal assets. The Appellants hired Dr. Joel Berk to review Pierotti's valuation methodology; Dr. Berk concluded that Alco was of substantially less value than Pierotti had found. The district court struck Dr. Berk's report as cumulative to evidence previously introduced by the Appellants. Id. at 1037-38. The district court imposed a penalty of $500,000, but then credited the Appellants $300,000 as an offset for the shortfall from not accepting all of the high bids on the sale of the Small Utilities, leaving a $200,000 total penalty due. Id. at 1038-39. The Appellants challenge the order appointing a receiver (No. 02-15907) and the order authorizing sale of the utilities and imposing penalties (No. 04-16210).


The Appellants also challenge the district court's jurisdiction over this entire eight-year litigation. They assert for the first time on appeal that the district court lacked subject matter jurisdiction because the controlling statute states that a federal EPA enforcement action must be requested by "the chief executive officer of the State" or "agency of [the] State which has jurisdiction over compliance by public water systems." 42 U.S.C. § 300g-3(b)(2). They challenge as legally insufficient Dr. Spath's request letter to demonstrate that the proper state agency requested EPA enforcement because: (1) Dr. Spath is not the head of the DHS, which they assert is the agency with primary jurisdiction over public water systems; and (2) there is nothing in the record establishing that DHS delegated such authority to him. See Cal. Health & Safety Code § 116325

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(granting DHS the authority to enforce state drinking water regulations).

"The existence of subject matter jurisdiction is a question of law reviewed de novo." Opera Plaza Residential Parcel Homeowners Ass'n v. Hoang, 376 F.3d 831, 833 (9th Cir.2004). "[District courts] are courts of limited jurisdiction. They possess only that power authorized by Constitution and statute." Exxon Mobil Corp. v. Allapattah Servs., Inc., --- U.S. ----, ----, 125 S.Ct. 2611, 2616, 162 L.Ed.2d 502 (June 23, 2005) (internal quotation marks and citation omitted). As a general matter, federal courts have subject matter jurisdiction over civil actions "arising under the Constitution, laws, or treaties of the United States." See 28 U.S.C. § 1331. By this principle, suits seeking compliance with, or remedies for, violations of federal water quality statutes and regulations present federal questions. Cf. Chasse v. Chasen, 595 F.2d 59, 61 (1st Cir.1979) (citation omitted) ("It is beyond dispute that validly issued...

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