United States: State Water Resources Control Board Gets New Tools To Fight Fraud On Underground Storage Tank Cleanup Fund

Senate Bill No. 445 ("SB 445"), signed into law by California Governor Brown late last year, makes several significant changes to the Barry Keene Underground Storage Tank Cleanup Trust Fund Act of 1989 ("The Fund Act").  The Fund Act created a fund (the "Fund") that provides eligible owners and operators of petroleum underground storage tanks the means to meet federal and state financial responsibility requirements and pay for the costs of cleanup of petroleum releases. Significantly, SB 445 has given the State Water Resources Control Board (the "Water Board") a whole host of new enforcement tools to target those suspected of defrauding the Fund.

Important Changes to the Law

The new law extends the Fund's operations for an additional ten years.  Provisions of the Fund Act that were scheduled to be repealed on January 1, 2016, will now continue in effect until January 1, 2026. 

The bill makes several changes to the Fund Act, including requiring that owners and operators of single-walled underground storage tanks permanently close those tanks by December 31, 2025.  The law also lowers the maximum amount that the Water Board will pay for corrective action on a site from $1,500,000 to $1,000,000.

Perhaps most significantly, the changes to the Fund Act reflect a significant focus on targeting suspected Fund fraud.  Fund fraud typically arises in two ways: a claimant submits a false or fraudulent claim as part of a request for reimbursement, or as part of the Fund's investigation of the legitimacy of the claim, perhaps by conducting an audit, the claimant obstructs the audit by refusing to provide documents the claimant is required to provide or provides false documents.

The new provisions of the Fund Act include new, streamlined procedures for prosecuting claimants who are suspected both of obstructing justice during a Fund audit, and suspected of defrauding the Fund in connection with the submission of a request for reimbursement. In addition, the new law arms the Water Board with new penalties that may be imposed on claimants found guilty of those violations.

Generally speaking, the Water Board now has three different venues in which to seek redress for misconduct in connection with the Fund's operations instead of two: have the Attorney General's Office file criminal charges in a criminal court, have the Attorney General's Office file a civil complaint, or have the Water Board file an administrative complaint in front of an administrative law judge. 

With respect to a claimant who is suspected of filing a false or fraudulent claim, it was previously the case that the Water Board had to rely on the Attorney General to file a civil lawsuit for fraud, or an action under the California False Claims Act, which contains a treble damages provision and also allows for a civil penalty of between $5,500 and $11,000.

Pursuant to the new provisions of the Fund Act, the Water Board itself, without the involvement of the Attorney General, can file an administrative lawsuit against anyone who makes a misrepresentation in any claim or other document submitted to the Fund relating to a claim.  Significantly, the claimant may be subject to civil liability of up to $500,000 for each violation. 

In addition to these new civil remedies, the Fund Act now includes a provision that imposes criminal penalties on anyone who knowingly makes a false statement, material misrepresentation, or false certification to the Fund in support of any claim.  Previously, the Attorney General could only bring criminal charges under Penal Code 72, which criminalizes presenting false claims to the state.  The Fund Act now contains its own criminal penalty provision very similar to Penal Code 72 but very much more specific.  As before, only the Attorney General, not the Water Board, can initiate criminal prosecutions.

With respect to obstructing a Fund audit, it was previously the case that there was no civil liability that the Water Board could impose.  The Water Board's only recourse was to refer the matter to the Attorney General's Office for criminal prosecution under a general criminal obstruction of justice statute.  Now, for conduct that may not be egregious enough to result in a criminal prosecution, the Water Board has the option of initiating an administrative action against anyone who fails or refuses to furnish information or furnishes false information to the Fund.  Individuals who are guilty of this misconduct may be subject to civil liability of up to $10,000 for each violation. 

Furthermore, the Fund Act now contains a debarment provision that authorizes the Water Board to permanently disqualify from further participation in the Fund contractors or consultants who have been found civilly or criminally liable, and authorizes the Water Board to permanently disqualify claimants from further participation with respect to claims that are the subject of the civil or criminal action. Previously, permanent disqualification was something that the Fund could only achieve through negotiation.  

These enhanced enforcement powers follow on the heels of an April 1, 2013 decision to make permanent the Fraud, Waste and Abuse Prevention Unit in the Fund's Office of Enforcement.  There can be no doubt that enforcement of Fund fraud is here to stay. 

What These Changes Mean for Claimants

The changes recently made to the Fund Act empower the Water Board to proceed administratively in civil actions against claimants, rather than involve the Attorney General to bring a civil case in state court, as was previously required.  This means that the Attorney General's Office, the state's traditional litigation arm that previously was responsible for reviewing and litigating these matters, no longer needs to be involved.  As a result, the Water Board now has expedited power to sue claimants without having to involve the Attorney General's Office. 

Since these administrative proceedings are governed by common-law rules, they do not have to be conducted according to traditional court rules relating to evidence, discovery, or witnesses.  In typical court cases, these rules collectively provide important "due process" rights for defendants such as the right to conduct discovery, the right to have adequate time to prepare for trial, and the right to a jury trial.  The informal hearing procedures that will now be used by the Water Board in civil cases are intended to create a forum resembling a conference at which the parties have an opportunity to be heard by the presiding officer.  They are intended to be simpler and more expeditious than civil proceedings or formal hearings.  In these types of informal hearings, claimants will have very little, if any, ability to conduct discovery, and will not be entitled to a jury trial.  Parties appearing in these administrative hearings will in most cases be limited to presenting and rebutting evidence, including witnesses, and making closing statements; however, the presiding officer can limit or even eliminate any of these rights.

As a result of these changes, there is a greater possibility that a Water Board investigation, which typically includes an audit, can turn very quickly into an administrative complaint that can speedily result in a judgment against a claimant.  There will be much less time to get organized and prepared to respond than there has been in the past.  There may also be little legal ability to conduct discovery or obtain information from third parties such as subcontractors, local oversight agencies, and even the Water Board itself in order to prove one's innocence.  It is therefore imperative – now more than ever – that owners, operators and contractors be prepared for the possibility of an enforcement action before they even have notice of it.  This preparation should include keeping all records, including sub-contractors' records, up to date and organized, and to keep counsel informed of any Water Board inquiries or other actions regarding Fund claims.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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