ABILITY TO PAY
FOR ATTORNEYS
ABEL and BEN
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EPA
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Instructor Biography:
Jonathan D. Libber
Jonathan D. Libber, U.S. EPA's BEN/ABEL Coordinator, is a senior attorney with the
Agency's Office of Enforcement and Compliance Assurance (OECA) in Washington, D.C. Mr.
Libber received his J.D. from the University of Maryland School of Law in 1978 and began his legal
career at the EPA shortly after graduation. He has devoted most of his time at the EPA to addressing
generic enforcement issues such as the imposition of civil penalties, environmental auditing, and
inspection targeting. He has authored or otherwise participated in the development of most of the
policies in the Agency's General Enforcement Policy Compendium. He also supervised the
development of the BEN, ABEL, INDIPAY, MUNIPAY, CASHOUT, and PROJECT computer
models.
His current areas of responsibility in OECA are: 1) providing advice to Federal, State, and
local government environmental enforcement personnel on penalty issues; and, 2) enhancing,
maintaining, and providing training on the Agency's financial analysis computer models.
Mr. Libber has been a guest lecturer on the subject of civil penalties at the Department of
Housing and Urban Development, Nuclear Regulatory Commission, the Food and Drug
Administration, the Federal Energy Regulatory Commission, the University of Maryland School of
Law, the California District Attorneys Association, the Association of Local Air Pollution Control
Officials, the Consumer Project Safety Commission and the National Environmental Agency of the
Peoples Republic of Vietnam. He authored an essay on the subject of EPA's penalty assessment
approach that appeared in the South Dakota Law Review and the National Environmental
Enforcement Journal. He also wrote an article on recapturing the economic benefit of
noncompliance that appeared in the November 1998 proceedings of the Fifth International
Conference on Environmental Compliance and Enforcement. He can be reached at
libber.jonathan@epa.gov or 202-564-6102.
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INDUSTRIAL ECONOMICS. INCORPORATED
2067 Massachusetts Avenue Cambridge, Massachusetts 02140 Telephone 617/354-0074 Facsimile 617/354-0463
Instructor Biography:
Shanika V. Amarakoon
Ms. Amarakoon has a strong background in both environmental engineering and financial
analysis. As an Associate at Industrial Economics, Incorporated ("EEc") she focuses on financial
analysis of firms and individuals that are the subjects of environmental enforcement actions,
litigation support, and natural resource damage assessments. EEc is an environmental and economic
policy consulting firm located in Cambridge, Massachusetts.
Ms. Amarakoon's current work involves providing litigation support to the U.S.
Environmental Protection Agency (EPA) and the U.S. Department of Justice (DOJ). Her work
involves assessing a violator's ability to pay an environmental penalty or Superfund contribution,
and performing legal analyses of case law in support of pending cases within EPA or the DOJ. Her
other work at IEc focuses on evaluating claims submitted by sovereign nations for environmental
damage, largely due to marine and terrestrial oil spills, caused by Iraq's invasion and occupation of
Kuwait in 1990 to 1991 for the United Nations Compensation Commission (UNCC).
Ms. Amarakoon holds a B.S. in Civil Engineering from Bucknell University and an M.E.M
(Master in Engineering Management), with a concentration in Environmental Management, from
the Thayer School of Engineering at Dartmouth College. Her Master's project involved an analysis
of the State of Vermont's regulations on air toxic emissions. Prior to joining Industrial Economics,
Ms. Amarakoon worked as an intern for ICF Kaiser, Inc., in their environmental remediation group,
and in the marketing group at Corning, Inc.
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Evaluation form for:
BEN & ABEL TRAINING COURSES FOR ATTORNEYS
Presented by:
H*M
O E C A
Office of Enforcement a ltd
Compliance Assurance
and
Industrial Economics
INCORPORATED
Location:
Date:
.200
This course evaluation is very important to us. Please fill in the appropriate
ratings and include any comments you may have. Provide your completed form
to an instructor. Thank you very much for your feedback.
Course:
Rating Scale:
BEN:
ABEL:
5 Excellent
4 Very Good
3 Good
2 Fair
1 Poor
Overall quality of written training materials:
Comprehensibility of written training materials:
Overall quality of computer model:
User-friendliness of computer model:
Overall quality of verbal presentations; Libber:
Amarakoon:
Adequacy of verbal explanations; Libber:
Amarakoon:
Instructor helpfulness during sample problems; Libber:
Amarakoon:
Overall rating for course:
Comments:
Optional; Name:
E-mail & Phone: @
( ) -
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OEPA
Ability to Pay for Attorneys
What attorneys need to know in order to deal effectively with
inability to pay claims from environmental violators
Contains Enforcement Sensitive Material
ATP for Attorneys: July 2002
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Confidentiality/Enforcement Sensitive Notice
The attached training materials contain enforcement sensitive and confidential information. They are
covered by one or more of the following Federal disclosure exemptions: attorney work-product,
deliberative processes privilege, and disclosure of enforcement techniques. You may use these
materials during the course, but you may not keep them unless your State is both legally permitted
and willing to protect this document from disclosure to outside parties. ("E.g.. The State of
Wisconsin's laws make it almost impossible to protect a document such as this from disclosure.)
If you are not sure about your State's law on this issue, please take this document for a review by
your State's information law specialists immediately upon your return to your office. If your
information law specialists do not feel your State can adequately protect this document, please mail
it to the following address as soon as possible:
Jonathan D. Libber (2248-A)
US EPA
1200 Pennsylvania Avenue, N.W.
Washington, DC 20460
Should you have any questions about this note or the EPA's concerns on disclosure, please contact
Jonathan Libber at 202-564-6102, or libber.jonathan@epa.gov.
Contains Enforcement Sensitive Material
A TP for Attorneys: July 2002
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TABLE OF CONTENTS
Page No.
Introduction 1
Ability to Pay Claims - General Overview 2
Step 1 - Obtaining Documents Needed for Ability to Pay Analysis 6
Step 2 - Running the Appropriate Computer Model 9
Step 3 - Other Things to Look at When the Models Give You an Indefinite
or Negative Answer 15
Step 4 - Involving an Expert Financial Analyst 17
Ability to Pay in Negotiations and Related Matters 18
Preparation for Trial or Hearing 19
Appendix A - IRS Forms
Appendix B - Model Interrogatories
Appendix C - Interlocutory Appeal
Appendix D - Ability to Pay Case Outline
Appendix E - Ability to Pay Case Law Update
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INTRODUCTION
I. How to Deal Effectively with Ability to Pay Claims
A. Course focuses on process rather than substance
1. Not comprehensive
2. More a broad outline of the issues environmental enforcers will need to deal
with in addressing ability to pay concerns
B. Course Outline
1.
Generic discussion of ability to pay claims
2.
Statutory/policy considerations
3.
Lay out process for dealing with them
4.
Offer some helpful rules in dealing with these issues
5.
Discussion of documents needed for ATP analyses
6.
Role of ABEL, INDIPAY and MUNIPAY in ATP cases
7.
Other things to look at when the models give you a negative or indefinite
answer
8.
Involving an expert financial analyst
9.
ATP in Negotiation and Related Matters
10.
Discussion of Case Law
n. A Few Preliminary Points
A. Party, defendant, PRP, violator meant interchangeably
B. ATP = ability to pay
C. Since the actual discovery process probably varies from state to state, and each state's
administrative process is varied, I have avoided getting into detail on these issues.
D. Each jurisdiction will vary as to what role each professional takes in the process.
1. I have avoided assigning roles unless it is obvious (e.g. cross examining
witnesses)
E. Contact information
1. E-mail: libber.jonathan@epa.gov; office phone: (202) 564-6102, fax: (202)
564-9001; cell (410) 262-1054.
1
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Ability to Pay Claims - General Overview
Arise in most EPA enforcement actions; suspect it is the same at the State and local levels
A. One must make the distinction between ability to pay and willingness to pay
B. After some analysis, we find that vast majority of defendants can afford the full
penalty and comply in a timely basis
1. In appropriate cases, some defendants will end up paying the penalty over
time
2. We add on interest to make sure they do not get an unfair advantage over the
firms that pay their penalties up front.
C. A smaller percentage of defendants get reduced civil penalties
1. Relatively rare, but we do reduce the penalty to 0 if appropriate
D. Rare cases where we actually demand the full penalty regardless of what their
financial status is:
1. Egregious violations, or
2. Refusal to comply in a timely basis
E. If party refuses to comply for any reason, we do not consider ability to pay
Statutory/Policy Considerations
A. No statute or regulation actually requires EPA to reduce the civil penalty when the
defendant establishes inability to pay
B. The factors in the statutes are considerations only
C. Example: Clean Water Act, Section 1319(g)(3)
In determining the amount of any penalty assessed under this subsection, the
Administrator or the Secretary, as the case may be. shall take into account the
nature, circumstances, extent and gravity of the violation, or violations, and, with
respect to the violator, ability to pay, any prior history of such violations, the degree
of culpability, economic benefit or savings (if any) resulting from the violation, and
such other matters as justice may require.
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D. EPA is not obligated to perform an ABEL, INDIPAY or MUNIPAY analysis and
limit itself to the results.
HI. Four Step Process
A. How the Issue Gets Raised
1. Defendant mentions to inspector that firm cannot afford to comply
2. Defendant mentions issue to investigator
3. Investigator in the course of his/her investigation that the violator seems
financially challenged
4. Representative of defendant raises issue in negotiations
5. Attorney asserts defense in court or hearing
6. Strategy in dealing with the issue will depend upon when it gets raised, and
the discovery and evidentiary rules of your jurisdiction
B. Step One: Obtain the Documents You Need: Voluntarily, Discovery, Public Sources
1. For each case it will be different to some extent
2. Certain things you will virtually always ask for: Signed tax returns, data
request form for individuals and municipal type defendants.
3. Other likely documents (discussed in more depth later)
A.
Recent bank statements
B.
Audited financial statements (even unaudited if audited ones are not
available)
C.
W-2 forms
D.
Recent loan applications
E.
Dunn and Bradstreet reports (available on line)
F.
FinCEN (Financial Crimes Enforcement Network) follows money
C. Step Two: Run the appropriate computer model ability to pay model on defendant.
Will hopefully allow you to determine ability to pay without resorting to expert help
1. ABEL for corporations and partnerships
2. INDIPAY for individuals
3. MUNIPAY for municipalities, towns, drinking water authorities, sewer
authorities
4. N.B. There is no model for nonprofit hospitals and schools.
5. Interplay of ABEL and INDIPAY in partnerships
D. Step Three: Other things to look at if the models give you indefinite or negative
answers, for example:
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1. Extravagant business expenses
2. Unrealistic salaries for corporate executives
3. Related entities
4. This is covered in more depth later
E. Step Four: Involve an expert if you are still not able to resolve the issue, or if the
issue seems to be headed to hearing, trial or intense negotiations
1. Financialanalystonstaff(couldbeinanotherpartofyouragency). Someone
familiar with these issues. Not someone who handles your agency's books.
2. NEIC (but they are heavily booked up)
3. Contract with a financial analyst
4. Come to Jonathan Libber if all else fails
IV. Burden of Proof - In administrative hearings (APA type), but probably not in court, the U.S.
EPA has the burden of proof on the firm's ability to pay if the defendant raises ability to pay
as an issue.
A. The New Waterbury case, decided in 1994, established this burden.
B. EPA has the burden of going forward with evidence of ability to pay. The burden
then shifts to the respondent to come up with evidence to the contrary. Then EPA
has the burden of persuasion based on the evidence submitted and the arguments of
the parties.
1. This issues is discussed in more depth at the end of Appendix D - Ability to
Pay Case Outline
2. This has major implications in the discovery phase of administrative cases.
This will be discussed later.
V. Some helpful guide rules in dealing with the issue
A. Rule number one: expect the unexpected
1. Defendants are holding most of the high cards in this poker game.
2. They know their business much better than any outsider like us
3. They think government people are stupid. Y ou can expect that many of them
will try to mislead you as to their true financial status.
4. You can expect that some will tell you that ability to pay is not an issue, and
then claim it at trial or hearing when you are totally unprepared
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5. Don't relax on this one unless the judge rules the defense has been waived,
or the violator stipulates that ATP will not be an issue
B. Rule number two: get as much information as you can from the defendant early in the
case
1. Many defendants, particularly the smaller ones, will be frightened when they
are notified that they are being sued/PRP notice
2. They see the whole weight of the Federal or State government coming down
on their heads
3. Explain to them that if they are willing to comply on a timely basis, and they
cannot afford to pay the penalty, you will work with them. But they need to
furnish you with the documents you need to do the analysis.
4. This presumes that the violations are not egregious. If they are, all bets are
off (at least at the Federal level)
5. Once the fear wears off, they are unlikely to be so cooperative
C. Rule number three: make them explain to you why they can't afford to pay
1. It will hope focus our investigation and analysis if we know what the problem
is (e.g. loss of major customer, major pending law suit by former CEO)
2. If you don't, then you have to go chasing down all sorts of blind alleys trying
to figure out what is going on
3. The problem might be something that is not reflected in the documents
submitted (e.g. plant burned down last month).
4. Former EPA person advises his clients to just give the documents to the
EPA/State and shut up.
Contains Enforcement Sensitive Material 5 ATP for Attorneys: July 2002
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Step 1 - Obtaining Documents Needed for an Ability to Pay Analysis
I. Step one of this process is to obtain the documents the government will need to do the ability
to pay analysis. The following is a list of the various documents and explanations why they
are important. Each document has its own bias.
A. Tax returns:
1. ABEL needs IRS forms 1120, 1120 A, 1120 S, and 1065 depending upon
what entity is being analyzed (C corporation, S Corporation or a Partnership)
2. INDIPAY needs the 1040 or 1040A forms
3. Even if you do not run the models, you need these returns as they are usually
a wealth of information about the financial capability of the defendant
4. Often just asking for copies of the returns is the end of the argument (hotline
to the IRS)
5. You cannot get them directly from the IRS in civil cases unless the violator
voluntarily releases them to you (see discussion below on forms 8821 (free)
and 4506 (S23 per copy))
6. Note that if signed, the return is self authenticating
7. Substantial increases in the submission of fraudulent returns.
A. EPA recommends also obtaining a company's tax returns directly
from the IRS, if possible.
B. To obtain summaries of returns from the IRS, you should have the
company sign and submit an IRS Form 8821.
C. You must submit Form 8821 to the IRS within 60 days after the form
is signed.
D. If you cannot wait for the IRS to respond (6-8 weeks), run ABEL with
the returns provided by the company, but verify the data when you
receive the firm's returns from the IRS.
E. By insisting on filing Form 8821, you will put the company on notice
that you mean business. This will greatly reduce the temptation to
give us fraudulent returns.
• Under no circumstances should vou accept unsigned returns upon which to run
vour ability to pav analyses and then relv on the analysis to reduce the civil
penaltw You need to verify the inputs from the information coming directly
from the IRS. In order to move things along, you can run ABEL on the unsigned
returns, and if they model indicates full ability to pay, then you do not need to wait
for the IRS information. But if ABEL indicates less than a full ability to pay, then
you need to wait for the IRS information.
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B.
Audited Financial Statements
1. Done by a CPA - usually very reliable (exception: Enron)
2. Contains some very valuable information in the notes (e.g. the land upon
which the factory is located is owned by the corporate president)
3. Even fairly unsophisticated companies will have audited financial statements
C. W-2 Forms
1. Corporate tax returns have a special section for executive salaries, but this is
not sufficient
2. Benefits other than actual salary have to be reported on W-2 forms (could be
substantial)
3. Will demonstrate to violator that you have a certain level of sophistication in
these matters.
D. Recent loan applications
1. Defendant may look poor, but recent loan application may show that the
company is expecting some major new business soon (perfected a patent on
a new oil eating microbe)
E. Recent bank statements
1. Shows where the money is coming from, and where it is going to.
2. Example, lots of money going to majority stock holder. Why?
F.- Dunn & Bradstreet reports
1. If you have access to system, D&B covers a very large percentage of all the
businesses in the US, even small ones.
2. Information on affiliated companies
3. Information supplied by company itself, almost an admission
4. Usually tries to paint a very rosy picture of itself
G. Insurance Policies
1. Remedial enforcement actions (oil spills, wetland filling, RCRA corrective
action, Superfund)
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2. Insurance payments could come even though the firm is completely broke
H. Other sources of information
1. On line data bases - State registry of corporations
2. B.J. Carney attorney asserted its client was out of business, but it was
maintaining its corporate status, D&B confirmed.
3. FinCEN (Financial Crimes Enforcement Network) Asset tracing
i Need SSN
ii. Other folks who come in later will be aware of your case, and could
shut down your case (i.e. criminal case)
iii. Criminal cases take precedent
iv. EPA Contact: John West at (703) 905-3556.
v. State and Local Gvt work through State Attorneys General's offices
or State Police Departments. Contact Gateway Project at:
1 (800) SOS BUCK.
I. EPA has developed some "canned" interrogatories and requests for production to
support this effort. See Appendix A..
J. Justification for documents.
1. Should you need to explain to an ALJ or a judge why you are asking each of
those items, EPA has model requests for production (see above).
2. Should the ALJ refuse to order the firm to provide the data, EPA also has a
canned interlocutory brief to be filed with Environmental Appeals Board.
(See Appendix B).
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Step 2 - Running the Appropriate Computer Model
I. Computer Models Allow Typical Enforcement Professionals to Take First Cut at
Determining Validity of Ability to Pay Arguments
A. Models are designed to be used by enforcement personnel without any finance
background.
B. Can be somewhat time consuming:
1. ABEL - 25 minutes
2. INDIPAY - 35 minutes
3. MUNIPAY -15 minutes
C. Most enforcement professionals find them quite helpful not only for the analysis fo
the central question, but for providing other analyses (e.g. how to spread payments
out over time)
D. Training courses are available for each model and for BEN and PROJECT.
1. Each one takes from 2 to 4 hours
2. New rule is that the receiving Regional office of State Agency has to pay for
the training
3. New distance learning approach should be ready in a few months
4. Contact Helpline for information: (888) 326-6778 or (888) ECON SPT.
Overview of ABEL, INDIPAY AND MUNIPAY
I Computer programs that run in the Windows™ operating environment, Windows 95 or
higher (e.g., 95, 98, 2000 or NT).
II Easy to use, especially with its many available forms of assistance:
A. A context-sensitive "help" feature within the model — accessed through the "F1" key
and help buttons — means that assistance is always only a keystroke away.
B. EPA's enforcement economics helpline provides personalized assistance from 8:00
a.m. to 6:00 p.m. (Eastern time) at 888-ECONSPT or benabel@indecon.com.
C. For Internal Revenue Service forms and publications: www.irs.gov.
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D. The respective User's Manuals provide complete installation instructions; you can
obtain a copy of the model from EPA's website
("http://www.epa.gov/oeca/datasvs/dsm2.html). You can also download the models
from that website.
E. Models evaluate the ability to pay of firms held liable for environmental penalties or
Superfund cleanups.
F. Models are screening tools in evaluating ability to pay claims made by defendants.
G. For trials or administrative hearings, an expert should provide independent financial
analysis. It may not include a model analysis, but it usually is not worth the trouble.
HI. ABEL presents a two-phase analysis of a company's financial health:
A. Financial Profile: Presents a summary of the firm's balance sheet, income statement,
and cash flow, as well as a financial ratio analysis.
B. Ability to Pay Analysis: Estimates future cash flow based on the company's past
performance.
C. ABEL requires three to five years of a firm's tax return data.
D. ABEL accepts tax data input directly from tax returns submitted by C corporations,
S corporations, and partnerships (i.e., IRS forms 1120, 1120 A, 1120 S, and 1065,
respectively).
IV. INDIPAY presents a two-phase analysis of an individual's financial health:
A. Phase 1 Analysis: Optional screen to eliminate applicants with no ability to pay.
B. Phase 2 Ability to Pay Calculations: Quantifies ability to afford sought amount based
on excess cash flow and debt capacity.
C. Requires more data than BEN or ABEL because individual tax returns do not contain
information about the individual's living expenses, assets, or liabilities.
1. INDIPAY requires one to three years of an individual's tax return data.
2. Individual Financial Data Request Form (i.e., questionnaire that you can print
out from within the INDIPAY model, and that the applicant must complete)
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V. MUNIPAY performs two different types of analyses, examining both the sociodemographic
background of the community and the financial strength of the municipal government. The
two analyses require separate data entry, and you can therefore run one without the other.
A. The Demographic Comparison evaluates the municipality relative to state and
national norms, providing general background on the community, which can
also be a factor in modifying affordability analysis run parameters.
B. The Affordability Analysis first determines whether the municipality can
apply any currently available funds toward the environmental expenditures.
MUNIPAY sets aside a percentage of anticipated expenditures as a safety
margin, then assumes the remainder is available to pay for environmental
expenditures. (This is a relatively straightforward calculation, and based
upon recommended practices for municipal financial management.)
C. The Affordability Analysis then (if necessary) determines how much
additional debt the municipality can take on to finance the environmental
expenditures, employing a multiple-constraint model to incorporate several
tests for debt capacity, which focus on both the municipal government's
finances and representative household burdens. (This relatively more
complex calculation is based upon the approach of bond rating agencies.)
THEORY AND METHODOLOGY OF ABEL, INDIPAY AND MUNIPAY
I. ABEL
A. Financial theory does not precisely define ability to pay.
1. Judgment by the analyst is necessary.
2. Some firms stay in business despite the fact that it makes more sense to
liquidate.
B. Alternative methods of determining ability to pay:
1. Liquidity — immediately available cash or other assets.
2. Ability to raise funds (additional debt and equity) to finance costs or penalty.
3. Solvency — ability to generate cash through ongoing business activities.
C. ABEL focuses only on solvency, or a firm's ability to pay using future available cash
flow.
D. ABEL estimates the probability that a firm can afford to pay for a penalty, Superfiind
site cleanup cost contribution, or pollution control equipment.
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E. ABEL assumes that the financial performance of a company in the immediate future
will resemble its performance in the immediate past and calculates the amount of
money ("cash flow") the firm can likely generate.
F. Cash flow differs from after-tax income. For tax purposes, companies can deduct
some expenses (e.g., depreciation) from income that do not require actual cash
outlay. Thus, after-tax income usually under-represents a firm's ability to pay. Cash
flow, as ABEL uses, estimates total income less all cash expenses, including taxes.
G. ABEL computes a firm's ability to pay on an after-tax basis, with different tax
treatments for different categories of environmental expenditures.
H. ABEL can analyze three types of companies: C corporations, S corporations,
partnerships.
1. An owner's liability for corporate debts is limited to the owner's investment
in the company for C corporations and S corporations.
2. Owners of a partnership are generally liable for any and all debts of the
partnership. For limited partnerships, the general partner is liable for any and
all debts of the limited partnership. Limited partners are liable only up to the
limit of their investments in the partnership.
3. If ABEL determines that a partnership lacks the ability to pay the entire
sought amount, you should evaluate the financial capabilities of a
partnership's owners or a limited partnership's general partner. Use ABEL
for any corporate owners and the Individual Ability to Pay (INDIPAY) Model
for individual owners.
II. INDIPAY
A. Alternative methods of determining ability to pay:
1. Liquidity — immediately available cash or other assets.
2. Ability to raise funds to finance costs or penalty.
3. Solvency — ability to generate cash in excess of expenses.
B. INDIPAY focuses only on the latter two items.
C. INDIPAY assumes that the individual's income and living expenses over the recent
past are indicative of the immediate future, and calculates the amount of money
("cash flow") that the individual can generate to pay for the sought penalty or
contribution.
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D. INDEPAY also calculates the additional debt payments that the individual could
support given current income level and existing debt payments.
III. MUNIPAY
A. Unlike the tax returns that are available for the other EPA ability-to-pay models (i.e.,
ABEL, INDIPAY), no such standardized documents exist for municipalities;
therefore MUNIPAY provides its own Data Request Form.
B. Unlike a business, municipalities do not strive to maximize profits, but rather to
provide services in a cost-effective manner to their citizens and ratepayers.
C. For accounting purposes, a local government is not treated as a single, integrated
entity. Rather, it is viewed as a collection of smaller, separate accounting entities
known as "funds"; hence, municipalities use "fund accounting" to monitor the flow
of funds for different activities. Fund accounting was developed to improve the
financial accountability of state and local governments.
D. Definition of a "fund": Fiscal and accounting entity with a self-balancing set of
accounts recording cash and other financial resources, together with all related
liabilities and residual equities or balances, and changes therein, which are segregated
for the purpose of carrying on specific activities or obtaining certain objectives in
accordance with special regulations, restrictions, or limitations.
E. A primary component of MUMPAY's analysis is to assess whether the fund relevant
to the violation at hand has any "excess funds" to apply toward penalty payment or
compliance costs.
F. The types of funds local governments typically use can be categorized into three
types. MUNPAY analyses often focus on Governmental funds (particularly the
General Fund) and Proprietary funds (particularly the Enterprise fund):
1.. Governmental funds — these funds account for an entity's
"govemmental-type" activities. For example, the "General
Fund" is the core fund of any local government and is used to
account for the primary financial resources and related
governmental activities of the entity. A "Special Revenue"
fund might be used to account for revenue sources earmarked
for a specific purpose (e.g., a gas tax whose proceeds are
targeted for road improvement). A "Capital Projects" fund
might be used to account for a significant acquisition or
construction of a facility.
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2. Proprietary funds — These funds account for an entity's "business-
type" activities (e.g., activities that receive a significant portion of
their funding through user charges). The primary example includes
the "Enterprise Fund," which is often used to account for operations
of public utilities (e.g., wastewater treatment).
3.. Fiduciary funds — These funds account for monies held or
managed by entities in an agent or fiduciary capacity. For
example, the local government might maintain a pension trust
fund for municipal employees.
G. The different funds employed by municipalities often have restrictions concerning
the ability to "co-mingle" resources across funds, or the application of these funds to
particular activities.
H. MUNPAY's focus varies slightly depending on which of the two municipality types
you select, corresponding to the different types of funds that may be relevant to the
case.
I. MUNIPAY runs its affordability analysis on financial data, which typically
concerns the municipality's Governmental Funds (i.e., the General Fund and
the ability to raise General Obligation debt). This corresponds to the
"City/Town/Village" selection under the "entity type" entry.
J. For a Clean Water Act or Safe Water Drinking Act case, the data probably
concern both the General Fund and the working capital balance of the
relevant Enterprise Fund, and the ability to raise Revenue debt. This
corresponds to the "Enterprise Fund" selection under the "entity type" entry.
K. For an independent and publicly owned utility, select the "Enterprise Type"
and simply enter zero for the two General Fund financial data inputs.
L. For Superfund cases, sometimes an Enterprise Fund accounts for the
municipal landfill operations; for RCRA cases, sometimes an Enterprise
Fund accounts for activities related to the violation. Both of these situations
are fairly rare, and even if such an Enterprise Fund exists, an analysis of the
municipality's Governmental Funds may be more relevant.
M. For other types of local and regional governmental jurisdictions, contact the
U.S. EPA Helpline at 888-ECONSPT for guidance on MUNIPAY's
applicability.
N. MUNIPAY is not for use with other types of not-for-profits, state
governments, or privately owned (yet publicly regulated) utilities.
Contains Enforcement Sensitive Material 14
A TP for Attorneys: July 2002
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STEP 3 - OTHER THINGS TO LOOK AT WHEN THE
MODELS GIVE YOU AN INDEFINITE OR NEGATIVE ANSWER
(Only relevant for violators that are businesses or individuals)
I. ABEL's and INDIPAY's conclusions are limited to the quality of the inputs taken directly
from the firm's returns: remember that these models do not evaluate the quality of the tax
return data, except in some minor areas.
II. Since firms and individuals have incentives to minimize taxable income to lower their tax
liabilities, ABEL and END IP AY generally provide a conservative estimate of ability to pay.
A. If ABEL or INDIPAY conclude that a firm has sufficient resources to pay the
penalty, you can be reasonably assured that the penalty payment will not burden the
firm with undue financial hardship.
B. One exception would be some factor not reflected in the tax returns is impacting
the analysis. But if you asked the defendant in the beginning about what the real
problem was, you should not be surprised here.
C. If ABEL or INDIPAY provide a negative or inconclusive result, vou should not
assume the defendant cannot pay the penalty without first conducting
additional research and analysis.
IE. ABEL and INDIPAY focus on only one area of ability to pay, cash flow. Corporations,
partnerships and sole proprietorships may have other potential sources of funds that the
models does not capture. For example, a firm's available cash flow may be understated if
it has inflated or nonessential business expenses and distributions, which might include,
among others:
A. Extravagant or unnecessary compensation of officers;
B. Extravagant or unnecessary travel and entertainment expenses (note tax fraud
potential);
C. Contributions to charitable and other organizations; and
D. Cash dividends paid out to shareholders.
E. Note that these would probably affect each year of the analysis. Thus if you looked
at 3 years of extravagant officer compensation of S100,000 per year, you would have
about S300,000 more for penalties and compliance costs.
N.B. We never tell them how to come up with the money. We only tell them that as far as
we are concerned, there is money to pay for the compliance, clean-up or civil penalty.
How they come up with the money is their decision. The boss may decide to keep his
bloated salary and cut everyone else's to come up with the cash, but that is his decision.
Contains Enforcement Sensitive Material
15
ATP for Attorneys: July 2002
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IV. The firm or individual may have assets that are not essential to its business operations and
that could therefore be liquidated to pay for environmental expenditures.
A. Make sure the trier of fact is well aware that the defendant is trying to hold on to any
of its luxury assets (e.g. corporate jet, Mercedes, etc.) at the same time it is pleading
poverty.
V. If the firm has loaned funds to its owners or officers, it may be able to call in the loans.
VI. The firm may have additional debt capacity, allowing it to acquire additional loans.
VII. The firm may have close relations with its parent entities, subsidiaries, and other affiliates,
all of which could potentially provide an additional source of funds.
A. This does not mean you need to "pierce the corporate veil." It means that in
considering this firm's ability to pay, merely consider that it is, for example, a wholly
owned subsidiary of Ford Motor Company.
B. This does not imply that Ford must cover the environmental expenditures — which
would require either naming Ford in the compliant and showing Ford is liable, or
piercing the corporate veil — but merely that if the wholly owned subsidiary faces
difficulty in making a one-time payment, then its corporate parent will be able to
cover it.
Vm. If the firm's operators are its owners, a very legitimate tax strategy is to make sure the firm
does not have any cash left over at the end of the year, thus limiting the double taxation
problem. Such a strategy makes a firm look artificially poor.
A. Almost every firm in this category shows little taxable income or a loss.
B. Firms may spend excess cash on increases in executive salaries, benefits, or other
discretionary items.
IX. ABEL's Financial Profile section provides a good place to start an investigation of these
issues. The summary financial information can identify large or highly variable asset
holdings and expenses, or determine whether the company is carrying large amounts of debt.
X. For assistance with the selection of an expert on ability to pay and financial analysis to help
you identify other sources of funds, EPA staff should contact Jonathan Libber, the
BEN/ABEL coordinator, at 202-564-6102 or libber.jonathan@epa.gov.
XI. For other questions related to ability to pay issues, use EPA's Economic Support Helpline
at 888-ECONSPT (326-6778) or benabel@indecon.com
Contains Enforcement Sensitive Material 16
A TP for Attorneys: July 2002
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STEP 4 - INVOLVING AN EXPERT FINANCIAL ANALYST
I. If you go to court, remember that ABEL is merely a screening tool.
A. Don't put your civil investigator on the stand to explain the .ABEL run he made
1. Civil investigator is not a financial expert, he/she cannot offer opinion, model
cannot be cross examined.
2. Even if you could get away with it, you would have trouble to effectively
cross examine of the defendant's expert witness, and you would have a hard
time rehabilitating your witness if the defense attorney nailed him or her on
cross ex.
B. Use an expert to explain where the firm may obtain funds for compliance, clean-ups,
or penalties based on the data you obtained from the company.
C. If the company refused to cooperate, and you failed to get the ALJ to order the release
of the needed information, you should try to base your argument on publicly available
data such as Dun & Bradstreet reports.
1. Dunn and Bradstreet reports tend to paint defendant's financial capability in
rosy terms, although defendant may try to claim things have changed a lot
since the report was made.
2. Don't say to judge because you did not order the tax returns, we cannot do a
competent analysis of ability to pay.
3. Make your objection, and do the best you can with the information you have.
D. For assistance in hiring an expert, contact Jonathan Libber at 202-564-6102 or
libber.jonathan@epa.gov.
Contains Enforcement Sensitive Material
17
A TP for Attorneys: July 2002
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ABILITY TO PAY IN NEGOTIATIONS AND RELATED MATTERS
I. Models are generally not amenable to negotiations.
A. Data inputs are fixed.
B. Models are some of several informational tools available to the enforcement
professional.
C. Models are designed to be used as a screening tools.
D. ABEL and INDIPAY (but not MUMP AY) are biased in violator's favor because
based on conservative financial reports (i.e. tax returns)
II. If ABEL and INDIPAY indicate that the party can afford the full penalty, then you can
virtually take it to the bank with the following caveats:
A No financial disasters have occurred that were not reflected in the financial data you
relied upon (e.g. the factory burned down last week)
B. There are no unusual financial events coming up soon that were not reflected in the
financial data (e.g. the first balloon payment is due this year)
C. There has been no change in financial status (e.g. lost its biggest customer in
December of last year)
D Keep in mind, you should know these things if you asked them to explain why they
cannot afford to pay
EI. Watch out for:
A. Financial actions that take place after the environmental complaint was issued (e.g.,
rapid outflow of funds). The attorney responsible for the case may wish to pursue a
"fraudulent conveyance" action to reverse these types of financial transactions.
B. Firms that shifted income or expenses from related entities to its tax returns, to make
it appear poorer.
Contains Enforcement Sensitive Material
18
A TP for Attorneys: July 2002
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PREPARATION FOR TRIAL OR HEARING
I. A Large Percentage of Judges Are Averse to Serious Math
A. Clipping nails during testimony
B. Tune out
C. Penalties are items within the discretion of the judge, hard to overturn penalty
decisions on appeal
D. Discovery is also within the discretion of the judge, also hard to overturn on appeal
E. Make your best arguments, preserve your objections, but keep the above in mind
n. Find a witness who can talk
A. Someone who knows his or her stuff, but also can give an interesting presentation.
B. Try to avoid complexity if at all possible
C. Colonial Processing - ABEL presentation
D. When you are making a motion for production (or your jurisdiction's equivalent),
make sure there is a persuasive memorandum of law that accompanies it.
En. Learn Your Subject
A. We are all very busy, never enough time to put into trial prep that we want.
B. But if you do not, here is what probably will happen
1. Scripted questions and answers
2. Unable to rehabilitate your own expert
3. Unable to effectively cross examine the opposing expert
IV. Work closely with your expert
A. Understand what to look for at trial
B. Have witness sit with you at trial table during cross examination of their expert so
he/she can feed you questions, or give you advice
C. Make sure expert has adequate input into what documents you are requesting for
discovery
D. Make sure expert has adequate time to review them
E. Make sure you spend time preparing the expert before hearing/trial
Contains Enforcement Sensitive Material
19
ATP for Attorneys: July 2002
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APPENDIX A
IRS FORMS
-------
Form 4506
(Rev May 1997)
Deoartmeni of tne Treasury
internal Revenue Service
Request for Copy or Transcript of Tax Form
~ Read instructions before completing this form.
~ Type or print clearly. Request may be rejected if the form is incomplete or illegible.
OMB No 1545-W29
Note: Do not use this form to get tax account information. Instead, see instructions below.
la Name shown on tax form If a joint return, enter the name snown first
lb First social security number on tax form or
employer identification number (see instructions)
2a If a joint return, spouse's name shown on tax form
2b Second soc
:ial secun
ty number on tax form
3 Current name, adaress (including apt. room, or suite no.), crty. state, and ZIP coae
4 Adaress, (including apt. room, or suite no.), city, state, and ZIP code shown on the last return filed if different from line 3
5 If copy of form or a tax return transcript is to Pe mailed to someone else, enter the third party s name and address
6 If we cannot find a record of your tax form and you want the payment refunded to the third party, check here
~ ~
7 If name in third party's records differs from line la above, enter lhat name here (see instructions) ~
8 Check only one box to show what you want. There is no charge for items 8a, b, and c
a CD Tax return transcript of Form 1040 series filed during the current calendar year and the 3 prior calendar years (see instructions)
b ~ Verification of nonfiling,
c ~ Form(s) W-2 information (see instructions)
d O Copy of tax form and all attachments (including Form(s) W-2, schedules, nr other forms) The charge is S23 for each period requested.
Note: If these copies must Pe certified for court or administrative proceedings, see instructions and check here ~ Q
If this request is to meet a requirement of one of the following, check all boxes that apply
Q Small Business Administration [H Department of Education ~ Department of Veterans Affairs
~ Financial institution
10 Tax form number (Form 1040, 1040A. 941, etc.)
12
Complete only if line 8d is checked
Amount due
11
Tax period(s) (year or period ended date),
instructions
more than four, see
a Cost for each period
b Number of tax periods requested on line 11
c Total cost Multiply line 12a by line 12b. .
Full payment must accompany your request. Make check
or money order payable to "Internal Revenue Service."
23.00
Cauuon: Before signing, make sure all items are complete and the form is dated.
I Declare that I am either the taxpayer whose name is shown on line la or 2a. or a person authorized to obtain the tax information requested. I am
aware that based upon this form, the IRS will release the tax information requested to any party shown on line 5 The IRS has no control over what
tnat party does with the information
Telephone number of requester
( )
J
Sign y
>
Please
Here
Signature See instructions It other man taxpayer, aaacn authorization document
Date
Best time to call
Title (if line la aDove is a corporation, partnership, estate, or trust!
Spouse's signature
Date
TRY A TAX RETURN
TRANSCRIPT (see line
8a instructions)
Instructions
Section references are to the Internal
Revenue Cooe
TIP: If you had your tax form filled in by a
paid preparer, check first to see if you can
get a copy from the preparer. This may save
you both time and money
Purpose of Form.—Use Form 4505 to get a
tax return transcript, venfication that you did
not file a Federal tax return. Form W-2
information, or a copy of a tax form Allow 6
weeks after you file a tax form before you
request a copy of it or a transcript. For W-2
information, wait 13 months after the end of
the year in which the wages were earned For
example, wait until Feb 1999 to request W-2
information for wages earned in 1997
Do not use this form to request Forms
1099 or tax account information See this
page for details on how to get these items.
Note: Form 4506 must be received by the
IRS within 60 calendar days after the date you
signed and dated the request
How Long Will It Take?—You can get a tax
return transcript or verification of nonfiling
within 7 to 10 workdays after the IRS receives
your request. It can take up to 60 calendar
days to get a copy of a tax form or W-2
information To avoid any delay, be sure to
furnish all the information asked for on Form
4506
Forms 1099.—If you need a copy of a Form
1099. contact the payer If the payer cannot
help you. call or visit the IRS to get Form
1099 information
Tax Account Information.—If you need a
statement of your tax account showing any
later changes that you or the IRS made to the
original return, request tax account
information Tax account information lists
(Continued on back)
For Privacy Act and Paperwork Reduction Act Notice, see back of form.
Cat No 41721E
Form 4506 (Rev. 5-97)
-------
Form 4506 (Rev 5-97)
Paoe 2
certain items from your return, including any
later changes
To request tax account information, wnte or
visit an IRS office or call the IRS at the
number listed in your telephone directory
If you want your tax account information
sent to a third party, complete Form 8821,
Tax Information Authorization. You may get
this form by phone (call 1-800-829-3676) or
on the internet (at http://www.ffs.ustreas.gov).
Line lb.—Enter your employer identification
number (EIN) only if you are requesting a
copy of a business tax form Otherwise,
enter the first social security number (SSN)
shown on the tax form
Line 2b.—If requesting a copy or transcnpt of
a joint tax form, enter the second SSN shown
on the tax form
Note: If you do not complete line 7 b and if
applicable, line 2b. there may be a delay in
processing your request.
Line 5 —If you want someone else to receive
the tax form or tax return transcriot (such as
a CPA. an enrolled agent, a scholarship
board, or a mortgage lender), enter the name
and aadress of the individual If we cannot
find a record of your tax form, we will notify
the third party directly that we cannot fill the
request.
Line 7.—Enter the name of the client,
student, or applicant if it is different from the
name shown on line la For example.;the
name on line la may be the parent of a
student applying for financial aid In this case,
you would enter the student's name on line 7
so the scholarship board can associate the
tax form or tax return transcnpt with their file.
Line 8a.—If you want a tax return transcnpt.
check this box. Also, on line 10 enter the tax
form number and on line 11 enter the tax
period for which you want the transcript.
A tax return transcript is available only for
returns in the 1040 series (Form 1040. Form
1040A, 1040E2. etc ) It shows most line
items from the original return, including
accompanying forms and schedules In many
cases, a transcript will meet the requirement
of any lending institution such as a financial
institution, the Department of Education, or
the Small Business Administration It may
also be used to verify that you did not claim
any itemized deductions for a residence
Note: A tax return transcript does not reflect
any changes you or the IRS made to the
original return If you want a statement of your
tax account with the changes, see Tax
Account Information on page 7
Line 8b.—Check this box only if you want
proof from the IRS that you did not file a
return for the year Also, on line 11 enter the
tax period for which you want verification of
nonfiling
Line 8c.—If you want only Form(s) W-2
information, check this box. Also, on line 10
enter "Form(s) W-2 only" and on line 11 enter
the tax period for which you want the
information
You may receive a copy of your actual
Form W-2 or a transcript of the information,
depending on how your employer filed the
form However, state withholding information
is not shown on a transcript If you have filed
your tax return for the year the wages were
earned, you can get a copy of the actual
Form W-2 by requesting a complete copy of
your return and paying the required fee.
Contact your employer if you have lost your
current year's Form W-2 or have not received
it by the time you are ready to prepare your
tax return
Note: If you are requesting information about
your spouse 's Form W-2. your spouse must
sign Form 4506
Line 8d.—If you want a certified copy of a
tax form for court or administrative
proceedings, check the box to the nght of
line 8d It will take at least 60 days to process
your request.
Line 11.—Enter the year(s) of the tax form or
tax return transcnpt you want. For fiscal-year
filers or requests for quarterly tax forms, enter
the date the period ended, for example.
3/31/96. 6/30/96. etc If you need more than
four different tax penods. use additional
Forms 4506 Tax forms filed 6 or more years
ago may not be available for making copies
However, tax account information is generally
still available for these penods.
Line 12c.—Write your SSN or EIN and "Form
4506 Request" on your check or money
order. If we cannot fill your request, we will
refund your payment.
Signature.—Requests for copies of tax forms
or tax return transcripts to be sent to a third
party must be signed by the person whose
name is shown on line la or by a person
authonzed to receive the requested
information.
Copies of tax forms or tax return transcripts
for a jointly filed return may be furnished to
either the husband or the wife Only one
signature is required However, see the line
8c instructions. Sign Form 4506 exactly as
your name appeared on the onginal tax form.
If you changed your name, also sign your
current name.
For a corporation, the signature of the
president of the corporation, or any pnncipal
officer and the secretary, or the principal
officer and another officer are generally
required For more details on who may obtain
tax information on corporations, partnerships,
estates, and trusts, see section 6103.
If you are not the taxpayer shown on line
la. you must attach your authonzation to
receive a copy of the requested tax form or
tax return transcnpt. You may attach a copy
of the authorization document if the onginal
has already been filed with the IRS This will
generally be a power of attorney (Form
2848). or other authonzation, such as Form
8821. or evidence df entitlement (for Title 11
Bankruptcy or Receivership Proceedings). If
the taxpayer is deceased, you must send
Letters Testamentary or other evidence to
establish that you are authonzed to act for
the taxpayer's estate.
Where To File.—Mail Form 4506 with the
correct total payment attached, if required, to
the Internal Revenue Service Center for the
place where you lived when the requested tax
form was filed
Note: You must use a separate form for each
service center from which you are requesting
a copy of your tax form or tax return
transcnpt.
If you lived in:
Use this address:
New Jersey. New Vorx
(New York City and
counties of Nassau.
Rockland. Suffolk, and
Westchester)
1040 Waverly Ave
Photocopy linn
Stop 532
Holtsville. NY 11742
New York (all otner
counties). Connecticut
Maine. Massachusetts.
New Hampshire.
Rhode Island. Vermont
310 Lowell St
Photocopy Unit
Stop 679
Andover. MA 01 BIO
Florida. Georgia.
South Carolina
4800 Buford Hwy
Photocopy Unit
Stop 91
Doraville. GA 303E2
Indiana Kentucky.
Michigan. Ohio.
West Virginia
PO Box 145500
Photocopy Unit
Stop 521
Cincinnati OH 45250
Kansas New Mexico
Oklanoma Texas
3651 Soutn Inienegionai
Hwy
Pnotocopy Unit
Stop 6716
Austin TX 73301
Alaska Arizona. California
(counties of Alpine.
Amador. Butte.
Calaveras. Colusa
Comio Costa Dei Norte
El Dorado. Glenn.
HumDoldL Lake Lassen.
Mann. Mendocino
Modoc Napa. Nevada.
Placer, Plumas.
Sacramento. San Joaquin.
Shasta. Siena Siskiyou.
Solano. Sonoma. Sutter,
Tehama, Trinity. Yolo,
and Yuba). Colorado,
idano. Montana.
Nebraska. Nevada.
North Dakota. Oregon.
Soutn Dakota. Utah.
Washington. Wyoming
P.O Box 9941
Photocopy Unit
Stop 6734
Ogden UT 84409
California (all other
counties). Hawaii
5045 E Butler Avenue
Pnotocopy Unit
Stop 52180
Fresno. CA 938BB
lllinots. Iowa. Minnesota.
Missoun. Wisconsin
2306 E. Bannister Road
Photocopy Unit
Stop 6700. Annex 1
Kansas City. MO 64999
Alabama. Arkansas.
Louisiana. Mississippi.
North Carolina.
Tennessee
P.O Box 30309
Photocopy Unit
Stop 46
Memphis. TN 38130
Delaware.
District of Columbia.
Maryland. Pennsylvania.
Virginia, a foreign
country or A P 0 or
F P 0 address
11601 Roosevelt Btvd
Pnotocopy Unit
DP 536
Philadelphia. PA 19255
Privacy Act and Paperwork Reduction Act
Notice.—We ask for the information on this
form to establish your nght to gain access to
your tax form or transcnpt under the Internal
Revenue Code, including sections 6103 and
6109 We need it to gain access to your tax
form or transcript in our files and properly
respond to your request. If you do not furnish
the information, we will not be able to fill your
request We may give the information to the
Department of Justice or other appropriate
law enforcement official, as provided by law.
You are not required to provide the
information requested on a form that is
subject to the Paperwork Reduction Act
unless the form displays a valid OMB control
number Books or records relating to a form
or its instructions must be retained as long as
their contents may become matenal in the
administration of any Internal Revenue law.
Generally, tax returns and return information
are confidential, as required by section 6103.
The time needed to complete and file this'
form will vary depending on individual
circumstances The estimated average time
is Recordkeeping, 13 min.. Learning about
the law or the form, 7 min.. Preparing the
form, 26 min : and Copying, assembling,
and sending the form to the IRS, 17 min.
If you have comments concerning the
accuracy of these time estimates or
suggestions for making this form simpler, we
would be happy to hear from you. You can
write to the Tax Forms Committee. Western
Area Distribution Center. Rancho Cordova.
CA 95743-0001. DO NOT send the form to
this address Instead, see Where To File on
this page.
©
-------
Form 8821
(Rev January 2000)
Department of tne T msury
internal Revenue Service
Tax Information Authorization
~ IF THIS AUTHORIZATION IS NOT SIGNED AND DATED. IT WILL BE RETURNED.
1 Taxpayer information.
OMB *tc Ufev
For IRS Uw Only
ftwaiwo by
Vurcwn
Oatr
Taxpayer nameis) and aadress (please type or print)
Social security numberts)
Daytime teiepnone number
I
Employer identification number
Plan number (if applicable)
2 Appointee.
Name ana aoaress (please type or pnnt)
!
CAF No.
Telephone No [
Fax No [
Check if new Address Q
Telephone No CD
3 Tax matters. The appointee is authorized to inspect and/or receive confidential tax information in any office of the IRS for
the tax matters listed on this line.
(a)
Type of Tax
(Income, Employment. Excise, etc.)
(b)
Tax Form Number
(1040. 941, 720, etc.)
(c)
Year(s) or Period(s)
-------
Form 8821 (Rev 1-2000)
Page 2
Partnership items. Sections 6221—6231 authorize a Tax Matters
Partner to perform certain acts on behalf of an affected partnership
Rules governing the use of Form 8821 do not replace any provisions
•of these sections.
When to Tile. Form 8821 must be received by the IRS within 60 days
of the date it was signed and dated by the taxpayer.
Where to file. Generally, mail or fax Form 8821 directly to the
Centrafized Authorization FBe (CAF) Unit at the service center where
the related return urns, or wfll be. fled. To find the service center
ackfeess. see the related tax return instructions. To get the fax
number, can 1-800-829-1040.
If Form 8821 is for a specific tax matter, mail or fax it to the office
handling that matter. For more information, see the instructions for
line 4.
Specific Instructions
Line 1—Taxpayer information
Individuals. Enter your name. TIN, and your street address in the
space provided Do not enter your appointee's address or post
office box. If a joint return is used, also enter your spouse's name
and TIN. Also enter your EIN if applicable
Corporations, partnerships, or associations. Enter the name.
EIN. and business adoress
Employee plan. Enter the Plan name. EIN of the plan sponsor,
three-digit plan number, and business address of the plan sponsor.
Trust Enter the name, title, and address of the trustee, and the
name and EIN of the trust.
Estate. Enter the name, title, and address of the decedent's
executor/personal representative, and the name and identification
number of the estate. The identification number for an estate
induces both the EIN, if the estate has one, and the decedent's TIN.
Line 2—Appointee. Enter your appointee s full name. Use the
identical full name on all submissions and correspondence. If you
wish to name more than one appointee, indicate so on this line and
attach a list to the form.
Note: Only the first three appointees you list will be input on the CAF
Enter the nine-digit CAF number for each appointee. If an
appointee has a CAF numDer for any previously filed Form 8821 or
power of attorney (Form 2848). use that number If a CAF number
has not been assigned, enter "NONE,'' and the IRS will issue one
directly to your appointee.
The CAF number is a number that the IRS assigns to appointees
The appointee's CAF number must be used on all future Forms 8821
or 2848. The IRS does not assign CAF numbers to requests for
emoloyee plans and exempt organizations.
Line 3—Tax matters. Enter the tyoe of tax. the tax form number,
the years or periods, and the specific tax matter Enter "Not
applicable." in any of the columns that do not apply
In column (c), write the years using the YYYY format, for example,
"2000" Do not use general references such as "all years." or "all
periods " If you do. your application will be returned.
You may list any prior years or periods, but for future periods, you
are limited to the 3 future periods that end no later than 3 years after
the date Form 8821 is received by the IRS For employment tax or
excise tax returns, enter the applicable quarters of the tax year. For
estate tax returns, enter the date of the decedent's death instead of
the year or period
In column (d), enter any specific information you want the IRS to
provide Examples of column (d) information are. transcript of an
account, a balance due amount, a specific tax schedule, or a tax
liability.
For requests regarding a foreign certification shown on Form
6166. Certification of Filing A Tax Return, enter "Form 6166" in
column (d) and check the box on line 4
Line 4—Specific use not recorded on CAF. Generally, the IRS
records all tax information authorizations on the CAF system.
However, authonzations relating to a specific issue are not recorded.
Check the box on line 4 if Form 8821 is filed for any of the
following reasons. (1) requests to disclose information to loan
companies or educational institutions. (2) reauests to disclose
information to Federal or state agency investigators for background
checks. (3) civil penalty issues. (4) trust fund recovery penalty.
(5) application for EIN. or (6) claims filed on Form 843, Claim for
Refund and Reauest for Abatement If you check the box on line 4.
your appointee should mail or fax Form 8821 to the IRS office,
handling the matter Otherwise, your appointee should bnng a copy
of Form 8821 to each appointment to inspect or receive information
A specific use tax information authonzauon does not automatically
revoke any pnor tax information authonzations
Line 6—Retention/revocation of tax information authorizations.
Check the box on this line and attach a copy of the tax information
authorization you do not want to revoke
To revoke an existing authonzation. send a copy of the previously
executed Form 8821 to the IRS office where it was filed. Write
"REVOKE" across the top of the form and sign your name again
unoer the existing signature (line 7). If you do not have a copy of the
pnor Form 8821. send a letter to the IRS office where you filed it.
The letter must indicate that the authority of the tax information
authonzation is revoked and must be signed by the taxpayer Include
the name and address of each appointee whose authority is
revoked.
Note: Filing Form 8821 does not revoke any Form 2848 that is in
effect
Line 7—Signature of taxpayers)
Individuals. You must sign and date the authonzation Either
husband or wife must sign if Form 8821 applies to a joint return.
Corporations. Generally. Form 8821 can be signed by: (1) an
officer having legal authonty to bind the corporation, (2) any person
designated by the board of directors or other governing body. (3) any
officer or employee on written request by any pnncipal officer and
attested to by the secretary or other officer, and (4) any other person
authonzed to access information under section 6103(e).
Partnerships. Generally, Form 8821 can be signed by any person
who was a member of the partnership during any part of the tax
penod covered by Form 8821. See Partnership Items above.
All others. See section 6103(e) if the taxpayer has died, is
insolvent, is a dissolved corporation, or if a trustee, guardian,
executor, receiver, or administrator is acting for the taxpayer.
Privacy Act and Paperwork Reduction Act Notice. We ask for the
information on this form to carry out the Internal Revenue laws of the
United States Form 8821 is provided by the IRS for your
convenience and its use is voluntary. If you designate an appointee
to inspect and/or receive confidential tax informauon. you are
required by section 6103(c) to provide the information requested on
the form. Under section 6109, you must disclose your social security
number (SSN). employer identification number (EIN). or individual
taxpayer identification number (ITIN) If you do not provide all the
information requested on this form, we may not be able to honor the
authorization
Routine uses of this information include giving it to the Department
of Justice for civil and criminal litigation, and to cities, states, and
the District of Columbia for use in administenng their tax laws We
may also give this information to other countries pursuant to tax
treaties
You are not required to provide the information requested on a
form unless the form displays a valid OMB control number. Books or
records relating to a form or its instructions must be retained as long
as their contents may become material in the administration of any
Internal Revenue law. Disclosure of the information on this form may
be made as provided in section 6103
The time needed to complete and file this form will vary depending
on individual circumstances The estimated average time is:
Recordkeeping, 7 mm., Learning about the law or the form, 12
min.: Preparing the form, 24 min.: Copying, assembling, and
sending the form to the IRS, 20 min
If you have comments concerning the accuracy of these time
estimates or suggestions for making this form simpler, we would be
happy to hear from you You can write to the Tax Forms Committee,
Western Area Distribution Center, Rancho Cordova. CA 95743-0001.
DO NOT send Form 8821 to this address. Instead, see Where to fik
on this page.
®
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APPENDIX B
MODEL INTERROGATORIES
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
August 28. 1996
MEMORANDUM
From: Jonathan Libber,1 BEN/ABEL Coordinator Multimedia Enforcement Division
Office of Enforcement and Compliance Assurance
To: BEN & ABEL Users
Subject: Model Interrogatories and Requests for Production for Corporate and
Individual Defendants: Ability to Pay
The attached document provides model interrogatories, requests for production, and judicial and
administrative subpoenas. These instruments are used for discovery of information and
documents related to ability to pay. Model certificates of service which accompany
interrogatories in the discovery process are included at the end of the document..
Purposes of Interrogatories:
Interrogatories are written questions used as part of discover}'.2 This device can only be served
on parties and not non-party witnesses.3 They can not be served until discovery begins, which
requires parties to confer and discuss discovery issues.4 The federal rules restrict the number of
interrogatories to 25 and there is a 30 day turnaround period for the opposing side to respond.
The number of interrogatories and turnaround time can be altered by the attorneys or by the
judge. This is usually done at the pretrial conference.
A general understanding of the case becomes clearer through the use of interrogatories.
Interrogatories are most effective in obtaining basic background information, which is best
'Brian Perlberg, Craig Spencer, and Matthew Azrael assisted in creating this document as legal
interns, under my supervision.
2Discovery is the litigation process in which parties exchange information and documents.
Rule 26 of the Federal Rules of Civil Procedure governs discovery. Generally speaking,
discovery is quite broad and applies to all information which is not privileged and is reasonably
calculated to lead to evidence at trial. Fed.R.Civ.P. 26(b)(1).
3Fed.R.Civ.P. 33(a).
4Fed.R.Civ.P. 26(f).
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
employed in the early stages of discovery. They are especially effective at identifying which
persons are qualified to answer questions. These individuals must then reveal accurate and
complete information. Interrogatories can also be useful in obtaining documents.
Federal Rule of Civil Procedure 26 (a)5 requires an initial mandatory release of information and
documents. Requests for documents can be made alter each interrogatory or at the end of a set of
interrogatories, as in the following model. The utility of interrogatories are somewhat limited.
Unlike a deposition, interrogatories are not interactive.6 Therefore, special attention must be paid
in the wording of an interrogatory because it must stand by itself. An interrogatory must directly
ask a question anticipating circumstance not yet discovered. Interrogatories do not have to be
sent all at once. Often, it is strategically advantageous to send them in batches. Interrogatories
can be used to compliment other discovery devices, building upon information and asking
different types of questions. One caveat is the turnaround time, which is 30 days if not altered.
A case can slow down if it relies on answers to interrogatories. Interrogatories do not have to be
answered if they are not filed 30 days before the end of discovery.
Documents and information obtained from interrogatories may provide a realistic and informed
position without expending resources. This information may be enough to agree to a settlement
or stipulated facts. Further discovery should become more refined and specific. Follow-up
interrogatories can provide an effective means to obtain further information without expending
unnecessary time and resources.
General Guidance in Using These Interrogatories:
These interrogatories provide general guidance for obtaining ability to pay information.
However, interrogatories are most effective when tailored to a particular case. The size and
structure of the violating entity are crucial factors when developing questions.
Answering interrogatories should not cause an undue burden on the violator. There is a real
concern that opposing counsel with object to an over-reaching interrogatories. According to 40
C.F.R. §22.19(f) "Other Discovery" (1) must not unreasonable delay the proceeding (2) the
information sought is not otherwise obtainable; and (3) such information must have significant
Please note all states have either adopted the Federal Rules of Civil Procedure or parallel
rules. Therefore, the same rules and concepts apply for the use of interrogatories for state
litigation as they do in the federal arena. You must conform with additional or different local
discovery rules when applicable. This concern is of greater concern when filing motions with the
court or the procedures involved in a Federal Rule of Civil Procedure, Rule 12, regarding pre-
trial conference.
Depositions are generally governed by Fed.R.Civ.P.33(a). Under 40 C.F.R. §22.19 (f)(2),
oral questions are only given upon a showing of good cause requiring a finding the information
can not be obtained by alternative means or the witnesses testimony may otherwise not be
preserved for a hearing.
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
probative value. Therefore, some of the model interrogatories require greater specificity to
extract only the information relevant to the case at hand.
Requests for financial and tax information, particularly from small, privately owned corporations,
partnerships, and individuals, may be refused based on privacy matters, or business
confidentiality. In civil enforcement actions, the Agency often cannot obtain this information
without the violator's cooperation. An appropriate response upon refusal is to inform the
business that without requested information, EPA will be forced to make its inability to pay
analysis based upon limited information that strongly indicates the defendant is able to
afford the cost of compliance, clean-up, and civil penalties.7 Without cooperation in
ascertaining information, it is highly unlikely the EPA will make any adjustment for
inability to pay (Note, the EAB's decision in the New Waterburv case requires an ability to pay
evaluation even when the defendant does not cooperate). This provides an effective means to
persuade violators' cooperation.
Concerns for business confidentiality are governed 40 C.F.R. §2.203(b). Information subject to
business confidentiality will only be made public under the procedures set forth in 40 C.F.R. §
22.02 (2)(B). If business confidentiality is not asserted when submitting information, the
information may make this information public without further notice to the defendant.
These model interrogatories aitempt to include all relevant concerns in ascertaining ability to pay
information. It is not necessary to include all of the interrogatories to ascertain relevant
information. The interrogatories are not listed in order of importance. Rather, the particular
facts of each case and the discretion of the user will determine which questions are most relevant.
Users of these interrogatories must exercise discretion in determining whether the size of a
defendant's company merits such an inquiry or is unnecessarily burdensome.
Please note; anyone with additional interrogatories or comments pertaining to this document is
encouraged to send them to me. My mailing address is: (2248-A); USEPA; 401 M Street, S.W.;
Washington. D.C. 20460. My e-mail address is: Libber.Jonathan@EPAMAIL.epa.gov. If you
wish to discuss them with me, please call me at (202) 564-6011.
7The Agency may obtain data from public data bases, such as Dunn and Bradstreet. This
information is usually submitted by the defendant. When supplying public reports, companies
emphasize the positive aspects to instill confidence and attract potential shareholders. Therefore,
these public reports generally make a company appear financially strong. N.B. Although
anyone requesting financial data from Dunn & Bradstreet will get the same report EPA
does, Dunn & Bradstreet does not want its reports introduced in court. Enforcement
professionals can certainly use the report in negotiations with a violator, but if you need to
get that information before a trier of fact, you will have to do one of two things. You must
either get the violator to stipulate to their use in a hearing or court, or you must obtain the
information from a public source.
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
MODEL INTERROGATORIES AND REQUEST FOR PRODUCTION:
ABILITY TO PAY
TABLE OF CONTENTS
Pages
I. Instructions 5-7
Definitions 8-10
II. Interrogatories for Corporations
Corporate Structure and Management 11
Equity and Debt 13
Parent and Subsidiary Entities 14
Property and Casualty Insurance 15
Tax and Financial Information 16
Assets 20
Liquidation of Assets 23
Claims and Adjustments 24
Life Insurance 24
Estates and Trusts 25
ID. Interrogatories for Individuals and Sole
Proprietors 28-33
IV. Requests for Production of Documents for
Corporations 35-36
V. Requests for Production of Documents for
Individuals 37-39
VI. Subpoena for Discovery in Administrative
Proceedings 40-41
VII. Subpoena for Discovery: Non-Party 42
Vm. Certificates of Service 43-44
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
I. INSTRUCTIONS:
Explanation: Instructions are very important to include with interrogatories. This allows less
room for an attorney to omit critical information. Also, instructions clarify the manner in which
you expect the other partly to respond. Further, they remind the other party of their obligations in
responding. The following provide a model listing of instructions.
1. Plaintiff requests the defendant answer the following interrogatories in writing and under
oath pursuant to Rule 33 of the Rules of Civil Procedure and that the answers be served
on the plaintiff within thirty (30) days after service of these interrogatories.
2. The time period for which the following information is requested is from (Month. Dav
19_) to the present.
3. In answering these interrogatories and Requests, furnish all information and
documentation, however obtained, including hearsay that is available to you and
information known by or in possession of yourself, your agents or attorneys, or appearing
in your records. This includes information and documents not in your possession but that
you have a right to inspect or can be ascertained with due diligence, including, but not
limited to, all documentation in the possession of experts or consultants.
4. If you cannot answer the following interrogatories in full after exercising due
diligence to secure the full information to do so, so state and answer to the extent
possible, specifying your inability to answer the remainder, stating whatever information
or knowledge you have concerning the unanswered portion and detailing what you did in
attempting to secure the unknown information.
5. A question seeking information contained in or information about or identification of
any documents may be answered by providing a copy of such document for inspection
and copying or by furnishing a copy of such document without a request for production.
When offering a copy of an original document please specify as such.
6. These interrogatories shall be deemed to be continuing until and during the course of
trial. Information sought by these interrogatories and that you obtain after you serve
your answers must be disclosed to the plaintiff by supplementary answers.
7. Documents produced pursuant to this request shall be segregated by the request
numbers to which they are responsive and grouped and labeled accordingly.
8. Each lettered sub-part of a numbered interrogatory is a separate interrogatory for
purposes of answering and objecting. Defendant must object separately to each sub-
part, and, if he objects to less than all sub-parts of a numbered interrogatory, he must
answer the remaining sub-parts. In addition, if defendant objects to an interrogatory
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
or sub-part thereof because it calls for information beyond the scope of discovery, he
must answer the interrogatory or sub-part thereof to the extent it is not objectionable.
9. The singular includes the plural and vice versa. The masculine includes the feminine
and neuter genders and vice versa. The past tense include the present tense and vice
versa.
10. These Requests are propounded separately to each defendant. Each defendant must
prepare his/its own response to them. Unless the Request states specifically that it is
directed to an individual defendant or defendants, each defendant shall answer each
Request.
(Relevant only for multiple defendants).
11. If any document requested is no longer in your possession, custody or control, state:
(a) what was done with the document;
(b) when this action occurred;
(c) the identity or address of the current custodian of the document;
(d) the person who made the decision to transfer or dispose of the document; and
(e) the reasons for transfer or disposal.
Plaintiff regards document in the possession or control of any bankruptcy counsel as
still within your access and control.
12. Where anything has been deleted from a document produced in response to a Request,
state:
(a) the specific nature of the material deleted;
(b) the reason for any and all deletion/s;
(c) the date/s of any and all deletion/s;
(d) the identity of the person responsible for the deletion.
13. If you object to producing any document on the basis of any claim of privilege, you
must specify the following in sufficient detail to allow the Court to rule on your
objection:
(a) the title of the document;
(b) the nature of the document (interoffice memorandum, correspondence, report,
etc.), including the number of pages in it;
(c) the author or sender;
(d) the date of the document;
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
(e)
the name of each person to whom the original
or a copy was shown or circulated;
(f)
the names appearing on any circulation list
relating to the document;
(g)
the basis upon which privilege is claimed; and
(h)
a statement of the subject matter of the document in sufficient detail to permit
the Court to rule on the objection.
(i)
Answer all information not claimed as privileged.
14. Whenever you are unable to produce documents in response to a Request, state in
detail all steps taken to locate responsive documents.'
15. For each document produced, identify the source of the document and its record
keeper.
16. The final version and each draft of each document should be identified separately.
Each original and each non-identical copy (bearing marks or notations not found on the
original) of each final version and draft of each document should be identified
separately.
17. The information you provide may by used by EPA in administrative, civil, or criminal
proceedings. And fictitious information or documentation will be used against the
defendant for criminal or civil penalties.
18. The definitions in the accompanying Interrogatories of Plaintiff, the United States of
America, to Defendant are incorporated here by reference.
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
DEFINITIONS:
Explanation: This is a general sample of definitions that may be useful. You should select
those that will be useful to your specific case. Definitions give precise meaning to terms that
may mean something else to another attorney. If done correctly a definition can reduce the
number of questions needed to obtain information. If not done correctly, then interrogatories can
be objected to on grounds they are vague or over broad. A well-written definition can make the
difference between a party releasing information or withholding it.
1. The word Document or Documents means any written, typewritten, printed, or graphic
matter of any kind or nature however produced or reproduced, any form of collected data
for use with electronic data processing equipment and other data compilations from
which information can be obtained, translated, if necessary, by defendant through
detection devices into reasonably usable form, now or formerly in the possession, custody
or control of defendant, including all documents as defined in the broadest sense
permitted by Rule 34, Fed.R.Civ.P. Documents include, among other things, all letters,
correspondence, computer disks of any sort, records of conferences or meetings,
memoranda, notes, telegrams, telephone logs and records, teletypes, telexes, banking
records, notices of wire transfer of funds, canceled checks, books of account, budgets,
financial records, contracts, agreements or proposed agreements, invoices, speeches,
transcripts, depositions, affidavits, communications with government bodies, interoffice
communications, E-mail, LAN messages, and other electronic communications, paper or
magazine articles, electronic data, including but not limited OT computer disks, tax
returns, vouchers, papers similar to any of the foregoing and other writings of every kind
and description (whether or not actually used) and other records of voice recordings, film,
tapes, and other data compilations from which information can be obtained.
2. The word Identify, when used with reference to a natural person, means to state each of
the following: (a) the person's full name; (b) the person's present home and business
addresses; and © his or her present employer, title, and substantive responsibility; (d) the
relationship, business or otherwise, between such person and the person answering the
interrogatory.
The word Identify, when used with reference to an entity other than a natural person,
means to state each of the following: (a) the full name of the entity; (b) the present or last
known address of the entity's principal office or place of business; and © the type of
entity (e.g.. corporation or partnership).
The word identify, when used with reference to a document, means to state each of
the following: (a) the full name of the authors) or person(s) by whom the document was
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
written, prepared, recorded, or made (and signed, if different); (b) the employees) of the
author(s) or person(s) by whom the document was written, prepared, recorded, or made
(and signed, if different); (c) the title and substantive responsibility of the author(s) or
person(s) by whom the document was written, prepared, recorded, or made (and signed, if
different); (d) the present home and business addresses of the author(s) or person(s) by
whom such document was written, prepared, recorded, or made (and signed, if different);
(e) the issuing organization or entity; (f) the date of the document; (g) the type of
document; (h) the title of the document; (i) a brief description of the subject matter or
substance of the document; (j) the serial, reference, or file number of the document; (k)
the number of pages of the document; (1) the full name of each person who received a
copy of the document and, where applicable, the full name and address of each addressee
of the document, unless the document was distributed to members of a large class, in
which case it shall be sufficient to identify the class rather than the individual members;
and (m) the name(s), employer(s), title(s), and present business address(es) of the
person(s) who have possession, custody, or control of the document. In the event any
such document was, but is no longer, in your possession, custody, or control, state what
disposition was made of it and when, by whom, and why such disposition was made.
3. The word relating or relate or connection or connected means
any document or communication that constitutes, contains, embodies, comprises, reflects,
identifies, states, refers to, deals with, comments on, responds to, describes, analyzes, or
is in any way pertinent to that subject, including, without limitation, documents
concerning the presentation of other documents.
4. The word Corporation means, unless otherwise noted, the Defendant,
, together with its respective officials, employees, agents, servants, affiliates,
subsidiaries, and attorneys.
5. The word Persons means all natural persons and all entities including, but not limited to,
corporations, associations, companies, partnerships, banks, joint ventures, firms,
agencies, authorities, and commissions.
6. The word You or Your, unless specifically designated otherwise, means each defendant
to this action and that defendant's employees, agents, servants, attorneys, assigns, and
past and present representatives. For corporate defendants, "you" or "vour's" also
includes all officers, directors and successors and assigns.
7. The word Explain means to provide details, reasons, and justifications, circumstances,
and nature of characteristics surrounding a decision, action, object, person or institution.
8. The word Compensate or Compensation refers to anything given or received that
potentially has value, tangible or intangible, including but not limited to currency, stocks,
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
bonds, profit sharing, royalties, stock option or other deferred compensation rights, any
type of insurance benefit for an individual or their kith and kin, or any other form of
payment.
9. The word Income includes anything with of monetary value, including, but not limited
to, gross earnings, salary, commissions, royalties, gains from dealings in property,
interest, dividends; health, dental, insurance and pension benefits, stock options, or
receiving any goods in exchange for other goods or services.
10. The word Key when referring to employees mans those employees who play a major role
in directing the corporation.
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
H. SAMPLE INTERROGATORIES: CORPORATIONS
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF
UNITED STATES OF AMERICA,
Plaintiff,
v.
Defendant.
***************
Civil Action No.
INTERROGATORIES OF PLAINTIFF THE UNITED STATES OF AMERICA TO
DEFENDANT ("insert name)
Plaintiff, United States of America, pursuant to Fed.R.Civ.P. 69 and 33(a), hereby instructs the
defendant, , to answer each of the following interrogatories under oath. You are hereby
advised that Rule 33 requires that each interrogatory be answered separately and fully in writing
under oath, that the answers be signed by the person making them, and that, within thirty (30) days
after service of these interrogatories, you shall serve a copy of the answers upon the undersigned
attorney for the United States. These interrogatories shall be deemed continuing in nature, so as to
require supplemental answers in accordance with Rule 26(e) of the Federal Rules of Civil Procedure.
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
INTERROGATORIES OF PLAINTIFF THE UNITED STATES OF AMERICA TO
DEFENDANT ("insert name)
INSTRUCTIONS AND DEFINITIONS
(SEE SECTION I)
Corporate Structure and Management
Purpose of the Section: Determine extent of a company's resources and assets.
Company may in reality hold a financially secure position, because it harbors resources through
various arrangements. Furthermore, it is important to identity those persons in a position of
power and influence within company. These actors could possibly be the subject of fines or
could be in a better position to inform the Agency of the companies past and present actions.
********************************************************************
1. State the full name, age, Social Security number, address, and telephone number,
position/s held by and tenure of the individual(s) answering any of these interrogatories
on behalf of the Corporation.
2. Identify all current business addresses for the Corporation, and identify any of its
divisions, subsidiaries, companies in which more than 5% ownership is held, shares at
least one common chairperson, or branch offices, regardless if foreign or domestic.
3. Identify the registered agent of the Corporation in (State of action') and in all other states
or foreign countries where the Corporation, or its parent orsubsidiaryy companies
conducts business.
("Large corporate defendants mav object to this).
4. Identify and explain the present operational status of the Corporation, and identify and
explain whether it is active, void and/or terminated by any state authority, or otherwise
dissolved. If it is terminated or dissolved identify the date of same, by whom and for
what reason.
5. (a) List the names and current addresses of all individuals who are currently or were
officers, directors, and/or shareholders of the Corporation at anytime from to
the present.
(b) List the duties, compensation, and benefits of each former officer and director and
state the dates between which each officer and director held their position.
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
(c) For current officers and directors, list the expiration dates for the terms of office
and the number and fair market value of shares held by each, respectively.
(d) If the Corporation's shareholders are more than (insert appropriate number) too
numerous to identify in full, identify all persons owning at least a five percent
interest in the ownership of the Corporation.
6. (a) Identify and explain the Corporate salaries, bonuses, other compensation and/or
drawings, specified by position and year, for the last five taxable years to the
President, Chairman of the Board, Secretary and Treasurer of the Corporation,
or equivalent positions as applicable to the Corporation, and provide the
percentage of time devoted to the company for each of the above.
(b) Identify and explain the five most highly compensated employees, or officers
agents other than those set out above, describe the position held, and set forth the
salaries, bonuses, other compensation and/or drawings, specified by position and
year, for the last five taxable years, and provide the percentage of time devoted to
the company for each of the above.
(c) Identify and explain the nature of the compensation paid to the persons listed
in (a) and (b) above and set forth any stock options, pensions, profit sharing,
royalties, or other deferred compensation rights of said persons.
(Request should be limited to small corporate defendants')
Equity and Debt
Explanation: The purpose of this section is to evaluate the health of a corporation based
upon its outstanding debts, ability to raise fluids from various sources.
*************************************************************
7. (a) Identify and explain the date of registration and/or delisting of the Corporate
stock on any national or local stock exchange(s).
(b) On each type of stock, identify and explain the total authorized shares issued, and
identify and explain the present market value per share.
(c) On each type of stock, identify and explain the total outstanding number of shares
being held as Treasury Stock.
(d) On each type of stock, identify and explain the total amount of bonded debt and
the principal bondholders.
8. Identify and explain any loans, mortgages, and financing or borrowing agreements
entered into by or on behalf of the Corporation since 19 . Please state the following:
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
(a) the terms and amount of the loan or agreement;
(b) the purpose for the loan or agreement;
(c) the amount outstanding, if any;
(d) what was submitted to the lender to demonstrate financial stability of the
borrower.
fLarge corporate defendants mav object to this request')
9. Identify and explain any and all mergers, acquisitions, takeovers, or investments in
another company or corporation equating to 5% or more of that company, by your
company, subsidiary, or parent corporation therein, including the name and address of
each company, the amount invested, and how these funds were obtained.
(Large corporate defendants mav object to this request)
10. Identify and explain any and all instances where the Corporation has acted as
guarantor or surety on a loan or mortgage to another corporation, partnership, or
individual. Attach any documents relating to the same. Please state:
(a) the terms of the loan, mortgage or agreement;
(b) the name and address of the borrower or mortgagor;
(c) the purpose of the loan, mortgage, or agreement;
(d) the address or location of the guaranteed property; and
(e) the amount outstanding, if any.
Parent and Subsidiary Entities
Explanation: Evaluate the corporate structure to determine whether the defendant is linked to
related business entities with substantial assets.
11. Identify and explain all parent corporations of Corporation, past and present,
specifying the dates of any and all such affiliations.
12. Identify and explain all subsidiaries and sister corporations of
corporation, past and present, and all corporations engaged in joint ventures with the
Corporation, specifying the dates of any all such affiliations.
13. For each of the entities identified in Interrogatory No. 10 and Interrogatory No. 11,
please state:
(a) the date and state of organization, present financial, operational, and legal
status;
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(b) a description of all business operations at any location and State of incorporation;
(c) the names of all officers and directors, their duties and years of service, and the
method in which they were selected.
(d) the relationship between the Corporation and the related entity with respect to
control and assignment of work, exchange of revenue or earnings, and the
assumption of outstanding debt.
("This request mav be limited to small corporate defendants')
14. Identify and explain any and all instances of the Corporation's assumption of any
outstanding debt, claim, cause of action, demand, liability, or duty belonging to a parent,
subsidiary corporation, or any shareholder of 5% or more.
15. Identify and explain the Corporation's assignment of any and all outstanding debt, claim,
cause of action, demand, liability, or duty to an affiliate or subsidiary corporation, or any
shareholder with 5% or more ownership interest.
Property and Casualty Insurance8
16. Provide a list of all property and casualty insurance purchased by the corporation9
(e.g., Comprehensive General Liability, Environmental Impairment Liability, Automobile
Liability policies, and Directors and Officers policies) for the period from [date disposal
8This group of interrogatories applies any time remediation is involved. These questions
will be most relevant for cases invovling RCRA and CERCLA.
9The previous version of this portion of the interrogator}' read:
"Identify and explain and insurance purchased for the Corporation or for the
operations conducted by the Corporation that the Corporation claims or may
claim provides coverage for the liability alleged in this lawsuit."(emphasis
added)
The purpose of the new version is to avoid requiring an insured to construe the
coverage of its policies. Instead, the request is intended to elicit a more general
response which will provide the Agency the necessary information to make an initial
determination about insurance coverage. If a request is overly specific, the insured
may fail to identify other insurance that may afford coverage regarding a response
action. The insurer could then attempt to use that failure to identify the policy in the
information request to avoid payment under the policy. To prevent such problems,
requests for information about insurance policies should be as neutral as possible.
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
site first became disposal site] through the present. Please specify the name and address
of the insurer; policy number/account; effective dates of the policy, and per occurrence
limits for each policy. Copies of policies may be provided in lieu of a narrative response.
17. Is the Corporation claiming a defense under any of the above mentioned policies for this
litigation?
18. If your answer to the foregoing is in the affirmative, please state:
(a) The name of the insurance company providing the defense.
(b) The type of insurance policy under which the defense is being provided.
(c) Whether any reservation of rights letter was sent referable to a defense being
provided to the Corporation.
19. If your answer to the above Interrogatory is in the negative, please state:
(a) The name of the insurance company that is not providing a defense.
(b) The name, title and address of any insurance company employee or agent who
authorized a letter denying a defense to the Corporation if not clearly stated in the
requested letter.
Tax and Financial Information
Explanation: The purpose of this section is to identify the corporation's financial health as
evidenced by gross and net earnings and taxes paid. These questions may discover
information of other wrong doing in the corporations tax statements. In regards to
non-corporate defendants, the Agency should consult privacy of information
implications before reporting information to another agency, such as the I.R.S.10
***********************************************************************+*****
20. Identify and explain the State, states and/or Municipalities to which taxes have been
paid during the past f specify the number of vearsl and/or are being paid by the
Corporation, and identify and explain the nature and amount of such taxes, the most
recent year of payment, and whether the tax payments are current.
21. Please attach copies of any and all documents that were filed as for United States
Corporate Income Tax Returns during the last five (5) years, including, but not limited to,
all schedules attachments, audit reports. Also, identify which I.R.S. Office(s) and for
what years of the above documents, as well as identify and explain whether the Federal
Taxes are current.
Corporations do not possess the right against self-incrimination, protected by the Fifth
Amendment. Furthermore, corporations are not protected by the Privacy Act.
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
22. For each of the taxing bodies identified in Interrogatory No. 20 and Interrogatory No.
21, list the type of return filed, the dates of each return, and state whether or not the
returns have been signed. If any of the returns have not been signed, indicate for what
reason the signature was omitted. If you signed any or all of the returns, state in what
capacity you signed the returns.
(Defendant mav object to Interrogatories 20-22. An appropriate response upon refusal is
to inform the business that without requested information. EPA will be forced to make its
inability to pav analysis based upon limited information that strongly indicates the
defendant can afford costs for compliance, clean-up and civil penalties. Without
cooperation in ascertaining information, it is highly unlikely the EPA will make anv
adjustment for inability to pav Note, the EAB's decision in the New Waterburv case
requires an ability to pay evaluation even when the defendant does not cooperate).
23. Identify the Corporation's independent certified public accountant(s) retained by the
Corporation during the past five years.
24. Excepting the individuals identified above, identify even' present and past employee,
officer, director, or shareholder who, while affiliated or employed with the Corporation,
had responsibilities including financial, legal, accounting, bookkeeping, and tax.
("This request should be limited to small corporate defendants)
25 Identify and explain the Corporation's filing of Financial Forms with any organization
or government entity (e.g. Small Business Administration, banks, lending institution).
26. Identify documents and witnesses which reflect the financial condition of the Corporation
for the last five annual or fiscal years, including but not limited to: tax returns, income
statements, balance sheets, statements of changes in financial position (cash-flow
statements), retained earnings statements, loan applications, financing agreements,
security agreements, annual and quarterly reports to shareholders and SEC (including, but
not limited to 10 K reports), data compiled for or submitted to financial services (e.g.,
Compustat, Dun & Bradstreet), depreciation schedules, and any other financial
performance documents of the Corporation for the last five (5) years. Please attach a
copy of each of the above-referenced documents.
(Defendant mav object to this Interrogatory. .An appropriate response upon refusal is to
inform the business that without requested information. EPA will be forced to make its
inability to pav analysis based upon limited information that strongly indicates the
defendant can afford costs for compliance, clean-up and civil penalties. Without
cooperation in ascertaining information, it is highly unlikely the EPA will make anv
adjustment for inability to pav (Note, the EAB's decision in the New Waterburv case
requires an ability to pay evaluation even when the defendant does not cooperate)
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
27. If the documents requested in Interrogatory No. 25 do not exist for the Corporation,
please provide the following information:
Assets Amount
Year 19 19 19 19 19
Cash
Securities
Existing Facilities
Equipment (cost)
(depreciation)
Inventory
Accounts Receivable
Loans from Shareholders
Other Assets
Total Assets
Liabilities Year 19 19 19 19 19
and Stockholders'
Equity
Loans Payable
Principal $
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
Monthly Payment
Mortgages
Principal
Monthly Payment
Accounts Payable
Loans to Shareholders
Deferred Taxes
Insurance premiums
Other Liabilities
Stockholders' Equity
Common Stock
Paid-in Capital
Retained Earnings
Total Liabilities and
Stockholders' Equity S
Dividends Paid
Loans Payable: Owed to Interest Rate Collateral Balance
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
Mortgages Payable: Address Interest Rate Collateral Balance
Incom e/Expenses
Gross Income Year 19 19 19 19 19
Net Sales $
Interest Income
Dividends
Other
Operating Expenses
Wages S
Overhead
Lease Payments
Interest Expense
Cost of Sales
Net Income S
Assets
Explanation: Identify all assets in which the company has a legal right to obtain.
28. Identify Banks, Savings and Loan Associations and other such entities, within the United
States or located elsewhere, where this Corporation maintains bank accounts (whether
checking account, savings account, payroll account, trust account, escrow account,
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
money-market account or other account), and for each such account, state the present
balance, name of the account and number of the account.
(Request should be limited to small corporate defendants or revised to be more specific
when dealing with large corporations)
29. Identify any safe deposit box, whether rented, owned or accessed, or other depository for
securities, cash or other valuables to which the Corporation has access, specifying the
location, identification number, and contents of the above.
30. Identify all commercial paper, negotiable or non-negotiable, in which the Corporation
has any interest whatsoever, presently in transit or in the possession of any banking
institution, and for each such paper, describe the paper, the Corporation's interest therein,
and identify its present location and fair market value.
31. Identify all accounts and loans receivable in excess of S500, and specify if due from
an officer, stockholder, or director of the Corporation. For each entry, please list:
(a) the nature of this loan or account;
(b) the amount of each entry shown on the tax return;
(c) the year of the tax return listing the entry; and
(d) the interest rate being charged.
(Request should be limited to small corporate defendants or revised to be more
specific when dealing with large corporations')
32. Identify all real estate and personal property of an estimated value in excess of
S500.00, owned or under contract to be purchased by the Corporation, identifying and
describing in detail, any and all, encumbrances (including, but not limited to, mortgages,
security interests, liens) against the real and personal property owned by the Corporation.
Attach any documents relating to the same. In your identification for real property, please
include:
(a) the address and legal description of the property;
(b) the size of the property;
(c) a description of each structure and other improvement on the property;
(d) the name and address of each person or business, other than the Corporation,
with an ownership interest in the property;
(e) the name and address of the seller of any property
under contract to be purchased by the Corporation.
(f) the ownership of the property as stated in the documents
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
of title, and the location of such document;
(g) the present value of your equity interest in the property;
(h) the name and address of each person who holds an encumbrance; and
(i) the consideration received for each encumbrance.
fReauest should be limited to small corporate defendants or revised to be more
specific when dealing with large corporations')
33. Identify and explain the Corporation's ownership of any stocks, bonds, or other
securities of any class in any government, governmental organization, company, firm or
corporation, whether foreign or domestic.
(Request should be limited to small corporate defendants or revised to be more specific
when dealing with large corporations'!
34. In all instances of equity participation in other organizations as set out above, list the
type of interest the Corporation holds and the amount (both in the original cost and
current fair market value and percentage of the full interest issued by the organization)
and terms of such interest.
(Request should be limited to small corporate defendants or revised to be more
specific when dealing with large corporations')
35. Identify and explain the Corporation's ownership of any interest of any kind in any
patent or copyright or in the process therein. For each interest owned, state:
(a) the registry number of the patent or copyright;
.(b) a description of the item patented or copyrighted; and
(c) the amount of income the Corporation receives from the patent or copyright
per year.
(d) the expiration date of patent
Liquidation of Assets
Explanation: To identify if company has been dumping assets or partaking in other unusual
activity to hide financial strength.
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
36. Identify the Corporation's current amount of accounts receivable, as reflected in the
Corporation's business records.
37. Identify and explain any assignment or disposal of the Corporation's accounts
receivable, other than by collection within the past years/months.
{TVfffnriant mav object to Interrogatories 35 and 36. An appropriate response upon
refusal is to inform the business that without requested information. EPA will be forced
to make its inability to pav analysis based upon limited information that strongly
indicates the defendant can afford costs of compliance, clean-up. and civil penalties.
Without cooperation in ascertaining information, it is highly unlikelv the EPA will make
anv adjustment for inability to pav Note, the EAB's decision in the New Waterburv case
requires an ability to pay evaluation even when the defendant does not cooperate).
38. Identify and explain the Corporation's disposition of any property, other than in the
ordinary course of business, real or personal, since 19 either by sale, gift, or otherwise.
Please state:
(a)
a description of the property disposed of;
(b)
initial purchase price;
(c)
date of purchase;
(d)
the date of disposition;
(e)
how the disposition was made;
(f)
to whom the disposition was made; and
(g)
what consideration was received.
39. Identify and explain any instances where the Corporation has either sold, transferred,
or assigned, in bulk, all or a substantial part of the Corporation's stock or trade fixtures.
(Defendant mav object to Interrogatories 37 and 38. An appropriate response upon
refusal is to inform the business that without requested information. EPA will be forced
to make its inability to pav analysis based upon limited information that strongly
indicates the defendant can afford costs for compliance, clean-up and civil penalties.
Without cooperation in ascertaining information, it is highly unlikelv the EPA will make
anv adjustment for inability to pav Note, the EAB's decision in the New Waterburv case
requires an ability to pay evaluation even when the defendant does not cooperate).
Claims and Judgments
40. Identify and explain any and all judgments, settlement agreements, or any notices against
or in favor of the Corporation, its subsidiaries, parent corporations, any board member,
executive officer, shareholders of 5% or more of the Corporation's stock, the five highest
paid employees or agents of the corporation brought by a government agency or private
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
actor, of any possible or actual violation of state, local or federal laws. Please identify the
parties, dates, relief granted and/or dollar amounts of the judgments, name of and case
number, the court entering the judgment, date of record, and identify and explain whether
the judgment is recorded or unrecorded. Attach any documents relating to the same.
(Request should be limited to smaller corporate defendants)
41. Identify and explain any pending legal actions brought, or claims filed, against the
Corporation, subsidiaries, parent corporation, any of its directors, officers or employees,
stock holders of 5% or more of the Corporation's stock with regard to the operation of
the Corporation.
42. Identify and explain whether the Corporation is presently a debtor in any pending Federal
bankruptcy proceeding under the Federal Bankruptcy Act, as amended, or any State
insolvency law, and if so, identify the case name, case number, name and address of any
trustee appointed therein, name of the court where the case is pending. If the case has
terminated, identify and explain the disposition of the case, and the operative effect
thereof.
43. Identify and explain whether the Corporation is presently the petitioner in any state
law related insolvency or liquidation proceeding, and if so, identify the case name, case
number, name and address of any assignee for the benefit of creditors (or other state court
appointed officials) and name of the court where the case is pending. If the case has
terminated, identify and explain the disposition of the case, and the operative effect
thereof.
Life Insurance
44. List all life insurance policies now in force on any or all officers, directors, and/or "key"
employees of the Corporation, setting forth face amounts, names of life insurance
companies and policy numbers where this Corporation has an "insurable interest," and/or
is paying the premium or part of the same11. Where applicable, please indicate:
(a) under which policy(s) this Corporation is a beneficiary;
(b) the type of policy(s);
(c) the yearly premium; and
(d) the location of policy(s).
(e) the amount of coverage, including amounts for various types of death.
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Estates and Trusts
Explanation: It is important to determine all ownership interests in the violating company and
what is owned by these owners. To ascertain all possible information requires the right
question.
45. Identify and explain any property held by the Corporation as executor of a testamentary
or inter vivos trust. Please state:
(a) a description of the property;
(b) the name and address of the trustor or settlor;
(c) the name and address of each beneficiary of
the trust; and
(d) the date the trust was created.
46. Identify and explain any instances whereby the Corporation has been listed as a
beneficiary under the terms of the will of any person now deceased.
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
PLAINTIFF, UNITED STATES OF AMERICA
(insert name)
United States Attorney
District of (name of district)
By:
(Name)
(title)
(address)
(Name)
(title)
Attorney
Environment and Natural Resources Division
United States Department of Justice
9th and Pennsylvania Avenue, N.W.
Washington, D.C. 20530
(phone)
Of COUNSEL: (if necessary)
Assistant Regional Counsel
U.S. Environmental Protection Agency
Region (#)
(name)
(Street)
(city)
(Name)
Attorney-Advisor
U.S. Environmental Protection Agency
401 M Street, N.W.
Washington, D.C. 20460
(Phone)
m. SAMPLE INTERROGATORIES: INDIVIDUALS AND SOLE PROPRIETORS
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF
UNITED STATES OF AMERICA,
Plaintiff,
v.
Defendant.
Civil Action No.
INTERROGATORIES AND REQUEST FOR PRODUCTION OF DOCUMENTS OF
PLAINTIFF THE UNITED STATES OF AMERICA TO DEFENDANT
(insert name)
Plaintiff, United States of America, in the above captioned proceedings hereby propounds
to defendant (name) the following interrogatories and production requests. Pursuant to Rules
26, 33 and 69 of the Federal Rules of Civil Procedure, plaintiff requests that defendant answer
separately and fully, in writing and under oath, each of the interrogatories set forth herein, within
thirty (30) days after service of these interrogatories. Pursuant to Rule 34, plaintiff requests that
defendant produce copies of, or make available for inspection and copying, at the office
of , the documents listed below. Production
shall be made within thirty days (30) of this request, or at such other time and place or in such
other manner as may be mutually agreed upon by counsel prior to the expiration of the thirty-day
(30) period.
INSTRUCTIONS AND DEFINITIONS
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
(SEE SECTION I)
INTERROGATORIES
1. State your full name, age, Social Security Number, permanent and temporary address,
and telephone number.
2. State and identify the names, ages, relationships, and addresses of your spouse and
dependents.
3. If you rent the premises you occupy, state and identify the amount of rent you pay
and other services or material objects that are given as consideration for rent and how
often this rent is paid.
4. State your landlord's name, address, and telephone, and identify any personal, business,
or familial relationship you and the landlord share?
5. If you own the premises where you live, state and indentify the legal description, who
paid for it and when (i.e., whose money or trade-in was used), in whose name or names
title is held, and whether it is held by joint tenancy, tenancy by the entireties, or
otherwise.
6. State the date upon which your home was purchased, the purchase price, costs of all
improvements the present assessed valuation, and its present fair market value.
7. State the address, area, legal description, and fair market value of any property
presently claimed by you as a homestead in accordance with (insert state) law, and
describe the improvements included thereon.
8. State the name/s and address/es of any and all of your employers, the positions held by
• you, the schdule for distributing compensation, and income derive therefrom.
9. State and indentify any and all self-generated revenues you have obtained as, but not
limited to, part or sole ownership in a business, partnemership, or stockholder?
10. If there are any self-generated funds, please state the name and address of the business,
the type of business conducted, the form of business organization (e.g., corporation, sole
proprietorship), the date you acquired your interest in the business, the nature of your
ownership interest and distributions of revenues, the present value of your interest, how
and when you draw from it, your office or position in the business, the name and address
of each officer, director, or partner of the business, and the name and address of each
location at which business is conducted.
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
11. (a) Were any articles of incorporation, partnership or certificates of doing business
under a fictitious name filed with any governmental agency by any of the
enterprises mentioned in the preceding interrogatory.
(b) If so, for each such filing, state:
i. the nature of the document filed;
ii. the location of the office where filed; and
iii. the date of filing.
12. If your spouse or any dependent claimed by you is employed, state his or her name,
employer, the position held, and all income derived from his or her services.
13. If your spouse or any dependent claimed by you is self-employed or owns all or any
part of a business, state the name and address of the business, the nature of his or her
ownership interest therein, and the amount of income derived therein.
14. Give an accurate account of the financial condition of the above business for the last five
(5) years, including a statement of assets, inventories, liabilities, gross and net income,
and the amount of any undistributed profits in the business.
15. State the source and amount of any income received including gifts by (1) you, (2) your
spouse, and (3) your dependents, other than that stated heretofore.
16. State the date and location in which you last filed a Federal or state income tax return for
the last five years, and the amount of gross income reported therein? Please, attach
copies of any and all such documents with this answer. Also, indicate whether the taxes
are current.
17. Identify and state (1) your (2) your spouse (3) your dependents current income on a
monthly basis, including;:
a) gross and net wages/slaries
b) interests and dividends
c) net business income
d) rental income
f) child support
h) alimony
18. Describe, give the present license number, value, and ownership of any any motor
vehicles owned by (1) you, (2) your spouse, and (3) your dependents.
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
19. Describe the cash, jewelry, stocks, bonds, or other securities, and any other personal
property that (1) you, (2) your spouse, and (3) your dependents, own or hold as
pledgee or otherwise, whether held in your name or the name of another, where such
property is located, and its value.
20. Identify any and all accounts receivable, notes receivable, checks for $500.00 or more,
mortgages, liens, leases, royalties, or pledges of personalty (1) you, (2) your spouse, or (3)
your dependents own or hold, whether in your name or in the name of another.
Identifying the fair market value of the above as well attaching documents evidencing
ownership?
21. Identify and desribe any safe deposit boxes and all the contents therein that (1) you,
(2) your spouse, or (3) your dependents own, rent, or have access.
22. Indentify and describe and any and all ownership and value of any bank or finnancial
account or shares owned by (1) you, (2) your spouse, (3) your dependents, or (4) anyone
on your or their behalf in any bank, building and loan association, savings institution,
cooperative, or credit union. Please include;
(a) the name and address of all institution/s,
(b) credit limit
(c) amount owed
(d) credit available
23. Identify the date and value of any money or personal property (1) you, (2) your spouse,
or (3) dependents have received from anyone since the date of the judgment (or initiation
of this action) herein, identifying who gave the money or personal property and what (1)
you. (2) your spouse or (3) your dependents have done with it.
24. List the names and thier addresses of any and all insurers with whom you have
policies of life or accident insurance; give the date, face value, and cash surrender value
of each policy, and specify which policies are payable to your estate.
25. State and identify any pension, disability compensation, retirement pay, or other
benefits you receive or are projected to receive from the United States or any other
source, currently or within the next five years.
26. Please describe the nature and amounts of the above question, stating whether you are
willing to voluntarily assign all or any part thereof for application upon the penalty
herein.
27. Give the address, nature of interest, date of acquisition, cost, assessed value, fair
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
market value, legal description, and the income derived from any real estate or interest
therein owned or held, in whole or in part, by (1) you, (2) your spouse, or (3) your
dependents between 19 and the present, whether in your name or that of another,
wherever located, and identify who paid for it (i.e., whose money or trade-in was used).
28. For each property or interest in property set forth in response to Interrogatory No. 27
which you no longer own, state:
(a) the date upon which you ceased to own or have interest in the property;
(b) the name(s) of the person(s) to whom property or property interest was
conveyed and their relationship, if any, to you:
(c) what consideration, if any, received by you for the property or interest;
(d) the fair market value and the assessed value at the time of the transfer; and
(e) whether you retain any remnants of ownership or interest.
29. Identify any lien that you have made, own or hold, or any lien you hold upon any claim
by suit or otherwise against the United States or any other party.
30. (a) Do you expect to receive anything by inheritance or from any existing
decedent's estate or otherwise?
(b) If so, state what, when, and from whom, and give its probable value.
31. (a) Do you have any vested or contingent future interest in any property, or to the
payment of any money, for any reason whatsoever?
(b) If so, state the nature and source of such interest, the location of the property,
the identity and address of any person or institution that may be involved, the
circumstances that will cause the property or money to inure to your benefit, and
the probable value or amount thereof.
32. (a) Is any money or property held in trust for (1) you, (2) your spouse, or (3)
your dependents?
(b) If so, state the name and address of the trustee or other fiduciary, identify the
trust, state what monies or property are held in trust, the value thereof, and the
date upon which the trust is to terminate.
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
33. If monies or property are held in trust for (1) you. (2) your spouse, or (3) your
dependents, state the amount of income which is or may be received therefrom, the
timing of such payments, give the value of the corpus of the trust which may be
distributed to (1) you, (2) your spouse, or (3) dependents, and
the expected date of distribution.
34. Identify and explain any and all sources that your are a participant, beneficiary, grantor or
settlor of any trust, estate, profit sharing plan or other actual or potential income-
producing entity that (1) you, (2) your spouse, or (3) your dependents have which you
have not disclosed in answering the previous questions, and what is the value or potential
value thereof?
35. Identify any and all currency that (1) you, (2) your spouse, or (3) your dependents paid,
including any and all checks written, by the above, and any property in your name or of
another that you or the above have sold, transferred by any means for value or as a gift:
(a) since the date of the judgment in the captioned matter, and what was the
consideration received therefrom, if any?
(b) since the first date of demand for payment?
(c) since the date of suit against you in the captioned matter.
(d) since service of notice of the taking of this deposition?
(e) give full details as to dates, names, addresses, consideration, who has use, who
has possession, who receives the income therefrom, and who pays the taxes and
insurance thereon in each instance.
36. (a) Identify any and all bank or other account closed or withdrawn, any cash, bonds,
or other assets from a safe-deposit box by (1) you (2) your spouse (3) your
dependants since you or became aware of the possibility the EPA or private actor
was investing you or your company, or that you might become indebted to the
United States or any agency thereof?
(b) If so, give the name and address of the bank or other institution and state the
monies, bonds and other assets withdrawn therefrom and their value.
37. Identify any suits or judgments pending against you, including identifying the full
details surrounding the suite or judgment, including the dates and amounts of recent
payments thereon made by you and whether your salary has been garnished and by whom.
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
38. Identify and describe any transfer, assignment, sale, or conveyance by you or your
spouse after you became aware of a possible investigation against you or your company
or that you might become indebted to the United States or any agency thereof. Please
identify and describing the asset involved, in addition to identifying the transferee(s), and
describe the asset, including the date and circumstances and facts surrounding the
transaction, as well as identifying the transferee(s).
39. State the dates and amounts of any mortgages, deeds of trust, or other liens outstanding
against any properties owned by (1) you, (2) your spouse, or (3) your dependents, giving
the name and address of the mortgagee, trustee, or lienor, the remaining term thereof, the
unpaid balance thereof, and the specific property affected in each instance.
40. State the date, amount, and purpose of each fixed installment obligation now being
paid by you.
41. Identify and describe any written representations regarding your or your spouse's
financial position during the past five (5) year by you or your spouse, providing (for
example, in a application for a loan, credit card, or lease application)
a) the nature and date of the representations
b) the nature of the transactions giving rise to the representation.
c) The name, address and telephone number to whom the representation were made
42. Identify any and all legally enforceable obligations you are liable for, identifying to
whom these obligations are owed and in what amounts.
43 Identify and describe any other fixed monthly or periodic living expenses that you are
paying?
44 Identify and describe any and all loan forgiveness, or tax write-offs of more than $500
received within the last five years
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
IV. REQUESTS FOR PRODUCTION: CORPORATE DEFENDANTS
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF
UNITED STATES OF AMERICA,
Plaintiff,
v.
Defendant.
Civil Action No.
************
REQUESTS FOR PRODUCTION OF DOCUMENTS FROM
PLAINTIFF THE UNITED STATES OF AMERICA TO DEFENDANT
("insert name)
Plaintiff, the United States of America, requests each defendant, pursuant to Rules 26 and
34 of the Federal Rules of Civil Procedure, to produce and permit plaintiff to inspect and copy or
photograph each of the following documents which may be in the Corporation's possession,
custody or control. These documents are to be produced within 30 days after service of this
Request at or at any other location agreed upon by counsel for
all parties.
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
INSTRUCTIONS AND DEFINITIONS
(SEE SECTION I)
REQUESTS FOR PRODUCTION
1. All documents identified in response to each interrogator)' of the United States in
accompanying Interrogatories of Plaintiff the United States of America to Defendant
, including but not limited to tax returns, income statements,
balance sheets, statements of changes in financial position (cash-flow statements),
retained earnings statements, loan applications, financing agreements, security
agreements, annual reports, data compiled for or submitted to financial services (e.g.,
Compustat, Dun & Bradstreet), any other financial performance documents of the
Corporation for the last five (5) years, all insurance policies for or relating to the
operations of the Corporation or policies pertaining to life insurance covering officers,
directors, and "key" employees of the Corporation, schedules of officer and director
duties and compensation, trade agreements and debt transfers, bank account statements,
canceled checks, evidence of titles, mortgages, liens, and other encumbrances on real
property owned by the Corporation, judgments and pending claims involving the
Corporation, and evidence of loans, financing and borrowing agreements, and other forms
of indebtedness.
2. All business arrangement agreements (e.g., partnership agreements, joint venture
agreements, leases, etc.) relating to all operations of the Corporation.
3. All business arrangement agreements (e.g., partnership agreements, joint venture
agreements, leases, etc.) between all parent and subsidiary business entity defendants in
this action and business entities identified in the accompanying Interrogatories of Plaintiff
the United States of America to Defendant
4. All liability, debt or financing assumption agreements of any kind between the
Corporation and any other persons or business entities identified in the accompanying
Interrogatories of Plaintiff the United States of America to Defendant
5. Current balance sheets and account books for any and all parent and subsidiary
corporations identified in the accompanying Interrogatories of Plaintiff the United States
of America to Defendant .
6. The minutes of all shareholder meetings of the Corporation and all parent and
subsidiary corporations identified in the accompanying Interrogatories of Plaintiff the
United States of America to Defendant .
35
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
7. The minutes of all directors meetings of the Corporation and all parent and subsidiary
corporations identified in the accompanying Interrogatories of Plaintiff the United States
of America to Defendant .
8. If the Corporation intends to raise a claim of "Inability to Pay," please attach all other
documents not previously identified and requested above on which the Corporation
intends to justify an inability to pay claim.
Respectfully submitted,
(Name)
(Title)
(Attach Certificate of Service if Requests for Production filed apart from Plaintiffs
Interrogatories. See sample Certificates of Service at the end of this document.)
36
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
V. REQUESTS FOR PRODUCTION: INDIVIDUALS AND SOLE PROPRIETORS
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF
UNITED STATES OF AMERICA,
Plaintiff,
v.
Defendant.
Civil Action No.
********************
REQUESTS FOR PRODUCTION OF DOCUMENTS FROM
PLAINTIFF THE UNITED STATES OF AMERICA TO DEFENDANT
("insert name)
Plaintiff, the United States of America, requests each defendant, pursuant to Rules 26 and
34 of the Federal Rules of Civil Procedure, to produce and permit plaintiff to inspect and copy or
photograph each of the following documents which may be in that defendant's possession,
custody or control. These documents are to be produced within 30 days after service of this
Request at or at any other location agreed upon by counsel for
all parties.
37
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
INSTRUCTIONS AND DEFINITIONS
(SEE SECTION I)
PRODUCTION REQUESTS
Produce the following documents:
1. All documents which in whole or in part relate to or support the responses to
Interrogatory No. 6 -9.
2. All documents which in whole or in part relate to or support the responses to
Interrogatory No. 13 or Interrogatory No. 14.
3. All documents which in whole or in part relate to or support the responses to
Interrogatories No. 16-45.
4. If you intend to claim "Inability to Pay," please attach all other documents on which
you intend to rely excepting those previously addressed and requested herein.
Note: These requests should be structured so that each document request responds to a
specific interrogatory or a set of related interrogatories. The exact structure will depend
on your preference.
Respectfully submitted,
( insert name)
United States Attorney
District of (name of district)
By:
(Name)
(title)
(address)
(Name)
(title)
Attorney
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
Environment and Natural Resources Division
United States Department of Justice
9th and Pennsylvania Avenue. N.W.
Washington, D.C. 20530
(202) (phone)
OF COUNSEL: (if necessary)
(name)
U.S. Environmental Protection
Agency, Headquarters
401 M Street, S.W.
Washington, D.C. 20460
(name)
U.S. Environmental Protection
Agency, Region _
(address)
39
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
VI. MODEL SUBPOENA FOR ADMINISTRATIVE PROCEEDINGS
UNITED STATES OF AMERICA
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
(address)
TO: (ADDRESSEE)
For the purpose of collecting information to facilitate the potential settlement of certain
claims of the United States under the Act, concerning the _
Corporation, located at , YOU ARE HEREBY
COMMANDED, pursuant to Section of (insert relevant statute ),
TO GIVE TRUTHFUL ANSWERS in writing to all questions set forth on the attached pages.
YOU ARE COMMANDED FURTHER TO PRODUCE all documents identified and
described on the attached pages.
Your written answers to the attached questions and the production of the requested
documents shall be made within 30 days of service of this subpoena on you to the following
individual:
(name)
(address)
U.S. Environmental Protection Agency
40
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
fphonel
NONCOMPLIANCE WITH THIS SUBPOENA MAY SUBJECT YOU TO A CIVIL ACTION.
Issued at , this day of , 19_.
Regional Administrator
41
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
VII. MODEL SUBPOENA: NON-PARTIES
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF
UNITED STATES OF AMERICA, *
*
Plaintiff, *
SUBPOENA
YOU ARE HEREBY COMMANDED TO Answer Interrogatories and Produce Documents
v.
Civil Action No.
Defendant.
**********
at
on
the . 19_within days of your
receipt of this notice.
This Subpoena requested by
(plaintiff!
Date Issued
Judge
42
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
VIII. MODEL CERTIFICATES OF SERVICE
A. Individual or Sole Proprietor
CERTIFICATE OF SERVICE
I hereby certify that service of the foregoing Interrogatories and Request for Production of
Documents of Plaintiff The United States of America to Defendant , has this
day of , 19 , been made on counsel of record, by depositing copies in the United
States mail, postage prepaid, addressed to the following:
(Attorney)
(Firm Name)
(Address)
( name )
For the Plaintiff
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
B. Corporation
I hereby certify that on the day of , 19 , I served a copy of the
foregoing pleading on Defendant, , Inc., by placing a copy of the same in first class
mail, postage prepaid, to counsel for the Defendant, as follows:
(Attorney)
fFirm name)
(Address)
(name)
for the Plaintiff
44
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APPENDIX C
INTERLOCUTORY APPEAL
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United States Environmental Protection Agency
Before the Environmental Appeals Board
In Re: )
)
) Docket No.
)
Respondent )
)
Complainant's Motion For Interlocutory Review of Ruling and Order of Presiding Officer
By this Motion, Complainant requests that the Environmental Appeals Board (EAB.)
grant immediate interlocutory review of a ruling and order by the Presiding Officer (PO) in the
above- captioned matter. The PO in this matter denied Complainant's request for additional
discovery. The PO denied Complainant's request for Certification of Interlocutory Appeal on
The PO's ( date ) ruling denying complainant's motion for reconsideration of the PO's
(date) Deposition discovery order was in error: as a matter of law. The PO's discovery order
denied Complainant's request for additional tax and financial documents sought by Complainant
in order to establish the extent of Respondent's's ability to pay the proposed penalty. The PO's
ruling should be reviewed by the EAB because, as set forth in detail in the attached
memorandum, exceptional circumstances exist which warrant such review and because delay in
review of this ruling would be contrary to the public interest. 40 C.F.R. section 22.29(c).
Respectfully submitted,
Of Counsel
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United States Environmental Protection Agency
Before the Environmental Appeals Board
IN RE:
DOCKET NO.
Respondent
MEMORANDUM IN SUPPORT OF COMPLAINANT'S MOTION FOR
INTERLOCUTORY REVIEW OF RULING AND ORDER OF PRESIDING OFFICER
Complainant, the United States Environmental Protection Agency (U.S. EPA or
Agency), hereby moves, pursuant to section 22.29(a) of the Consolidated Rules of Practice
Governing the Administrative Assessment of Civil Penalties and the Revocation and Suspension
of Permits (Consolidated Rules), for the Environmental Appeals Board (EAB..) to reverse the
ruling of the Presiding Officer (PO) dated , which denied Complainant's date ,
Motion For Discovery. Complainant requests that the EAB immediately stay proceedings in this
matter pending a determination of this interlocutory appeal.
The request for Interlocutory Appeal meets the requirement of the consolidated rules
Section 22.29, which sets forth the requirements on the availability of the appeals process.
Specifically section 22.29 permits the Presiding Officer to certify any ruling for appeal to the EA.
when (1) the order or ruling involves an important question of law or policy concerning which
there are substantial grounds for differences of opinion and either (2) immediate appeal from the
order or ruling will materially advance the ultimate termination of the proceeding or (3) review
after the final order is issued will be inadequate or ineffective.
Background
Section 22.22 of the Consolidated Rules states that the Complainant has the burden of
going forward with and proving that the violation occurred and that the proposed civil penalty is
appropriate. The EAB's decision in New Waterbury requires EPA to present evidence of a
respondent's ability to pay the proposed penalty.1 Complainant requested that Respondent
voluntarily disclose certain tax and financial records to substantiate its claimed inability to pay.
Upon Respondent's refusal to provide the documents requested, Complainant filed on date , a
motion for discovery seeking these documents. Respondent opposed this discovery motion, and
the PO denied this discovery motion on date . The PO's decision denying these additional
discovery items puts the EPA in an almost impossible situation: EPA is obligated to support a
1 In re : New Waterbury. Ltd , Docket No. 1994 TSCA 83; 5 E.A.D. 529, Oct. 20, 1994.
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proposed penalty with evidence of ability to pay, yet must rely upon respondent to provide this
otherwise unobtainable information.
A. The order involves an important legal or policy issue for which there mav be
substantial grounds for differences of opinion
The appropriateness of the penalty is largely an issue of statutory interpretation. The
interpretation of statutory language is generally an issue of law and policy. See eenerallv Stissi v.
Interstate and Ocean Transport, and International Society for Knsha Consciousness v Rochford.
In International Society for Krishna Consciousness v. Rochford. a dispute involving
airport regulations and first amendment freedoms in a public area was held to be an issue
concerning statutory construction. Similarly the matter before the EA. concerning the
appropriateness of a civil penalty is properly determined by statutory interpretation and is not a
material fact. As such the board has de novo review authority over the Presiding Officers factual
and legal conclusions and should determine if the penalty assessment is meritorious through legal
and policy arguments.( 40 C.F.R. section 22.31a).
Establishing the proper amount of the penalty is the one of the most important parts of
this case, rivaled only by establishing that a violation occurred and that respondent is liable for
the violation. Respondent has asserted as an affirmative defense that the proposed penalty
exceeds its ability to pay. Accordingly, Respondent's ability to pay the proposed penalty is a
substantial legal and policy issue. The EPA's Policy on Civil Penalties establishes deterrence as
an important goal of penalty assessment. If the penalty does not properly correspond to
respondents ability to pay and is too light, there could be economic incentives for violating
environmental regulations. If a proper penalty assessment cannot be made, ineffective
enforcement of environmental regulations would result.
Resolution of the inability to pay issue depends on facts that are not in evidence and
which are presently unknown to Complainant. The documents identified in Complainant's
motion for discovery would provide reliable, probative evidence of Respondent's ability to pay
the proposed penalty.
Explanation of Document Request.
The following is a description of the financial information requested, its necessity,
relevance, and a explanation as to how the information requested will be used in determining
Respondent's ability to pay the proposed penalty.
Listing of Documents Included in Discover}' Motion/Attachment
General Documents
1. Year- End Trial Balances
2. Chart of Accounts
2 425 F. Supp. 734, 739 (N.D. 111. 1977).
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3. General Ledger
4 Tax Returns
5. Financial Statements
6. Depreciation Schedule
Specific Documents
1.Tax Returns and Schedules :1099's, 1080s and W-2's
1099- Div.
1099-B
1099-S
1099-MISC.
1098
W-2
2. Lease Agreements
3. Financial Institutions Identification and Disclosure
4. Assets - Sold or Transferred
5. Assets - Bought
6. Bank Statements
7. Outstanding loans
8. Shareholder loans
9. Management Representation Letter
10. Other Investments
11. Liabilities
12. Interest Income
13.Leases
Financial Statements
They reflect a firm's recent financial history and indicate its likely future condition. The
financial statements are according to Generally Accepted Accounting Principles ( GAAP) when
prepared by a certified public accountant. This produces a substantially objective analysis of the
firm. In addition, the notes in the financial statement are a valuable source of information.
Analysis of Financial Statements are important in determining if recent changes in the firms
financial status should be part of the ability to pay discussion..
Year End Trial Balances
A vear-end trial balance is a listing of all the accounts maintained by a company for
accounting purposes and the respective year-end balances in each of the accounts. A number of
these accounts may be grouped together prior to transferring the total dollar amount balances to
the tax return and or financial statements. To illustrate, a company may maintain numerous labor
accounts, including dollars paid to outside contractors, corporate officer's salaries, and year- end
bonuses paid to corporate officers. In the tax return however, these three accounts may be
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combined, and listed under a single heading " cost of labor" and included as part of cost of goods
sold. To analyze a firm's ability to pay a proposed penalty, knowledge of the components that
make up each of the specific accounts listed on the tax return is necessary so that the relevant
assets, expenses, and liabilities may be evaluated to determine the necessity' and appropriateness
of each. The trial balance must be reviewed first to identify those accounts that are relevant to the
firm's ability to pay analysis.
Chart of Accounts
A chart of accounts is a listing, by account number and description, of each account
included in a company's financial records. Certain company generated documents including
entries in the general ledger, and sometimes the trial balance may identify accounts by account
number only. If the account description associated with the account number is unknown, a proper
analysis of the accounts and substantiating documents cannot be performed since the analyst will
be unable to determine which accounts are relevant. The chart of accounts will be used to
facilitate the financial analysis by making the process as quick and efficient as possible.
General Ledger
The General Ledger is used to record increases and decreases in assets, expenses,
liability, or equity. The entire grouping of accounts is identified as the General Ledger.
This document will provide a detailed summary of transactions pertaining to a specific
time period. For example, if account # 101 reflects loans made by the company to corporate
officers, a review of the ledger account would indicate additional loans made and payments
received with respect to outstanding loans. A recent flurry of loans could indicate that the
company has excess cash and this would make it difficult to maintain an inability to pay claim.
The General Ledger is useful because it provides an in- depth summary and allows for an
evaluation of specific expenditures.
The general ledger for the time periods identified represent a sample, which will be used
in conjunction with the other documentation requested to make numerous determinations
including the necessity of specific expenditures, the accuracy of the accounts being analyzed, and
the validity of the amounts identified.
Depreciation Schedule
A depreciation schedule is a detailed list of assets which have a useful life of one year or
more. The schedule includes a description of each asset, acquisition date, cost, expected life,
amount of depreciation expense taken, accumulated depreciation to date, and current book value.
Depreciation reduces profits net income but depreciation however is not a real expense cash
charge so higher depreciation does not reduce cash flows but ultimately lowers the firm's tax bill.
The depreciation schedule is very important in the ability to pay analysis for the following
reasons :
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1. The schedule will reveal if the company has recently purchased any items. A recent flurry of
activity suggests the company is expanding and has adequate resources to pay a penalty. New
purchases also suggest that the money is not needed to meet financial obligations. The
corporation could also use the assets that were paid for in cash to secure loans to pay off the
penalty.
2. The depreciation schedule will also indicate if the company has unnecessary or luxury items,
property', condominiums, luxury automobiles, boats, or other items which are not considered
essential to the business operations. These items could be sold to pay a proposed penalty.
3. The depreciation schedule will show the actual amount that the company paid for an asset.
This amount generally does not represent the current market value of the asset. Fair market value
may be substantially higher than the asset's historical cost to the corporation. If that is the case,
such assets listed on the depreciation schedule may be used to obtain a new loan, the proceeds of
which may be used to pay the penalty. Or, the assets may be liquidated, in which case there
would be additional funds for payment of a penalty.
Specific Documents
The amount reported on each of the following tax forms represents the total amount paid
by the corporation to a shareholder/ officer for a particular income category.
1. Form 1099-INT shows how much loan interest a shareholder has received from the firm. The
validity of the underlying loan and the interest rate must be examined. If the interest paid is
excessive in comparison to the market rate, the excess should be allocated back to the firm and
be considered as additional funds that are available to meet compliance requirements and/or pay
a civil penalty.
2.Form 1099- DIV will show how much each shareholder received in dividends for the year.
Corporations generally issue dividends: (1) in times of strong financial health because the income
is not needed to meet financial obligations, or (2) when corporate assets have been liquidated and
the proceeds received from such liquidation are being distributed to the shareholders. The
issuance of dividends is, thus, a strong indication that the firm will be able to meet it's penalty
obligations. Also, dividends can be held back from being distributed and be considered as
additional funds that are available to meet compliance requirements and/or pay a civil penalty.
3. Form 1099-B identifies the value of any bartering exchanges which have occurred. The fair
market value of the transactions or exchange of goods for services must be determined. If the
transactions is not arms-length, a receivable representing the difference between the value
received and fair market value would be set up.. This receivable would provide additional
income to be considered as additional funds that are available to meet compliance requirements
and/or pay a civil penalty.
4. Form 1099-S identifies the dollar amount a shareholder or officer received from the
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corporation as a result of the sale of real estate. Sales and exchanges of real estate must be
conducted as an arms- length transaction. If the actual sales price is above fair market value, the
difference between the sales price and fair market value would be reclassified as a receivable to
the corporation. This money could then be considered additional funds that are available to meet
compliance requirements and/or pay a civil penalty.
5. Form 1099- MISC shows how much money a shareholder or officer has received for rent or
.other payments. The fair market value must be determined. If the payment to the shareholder
substantially deviates from market value of similar type property, the difference between the
payments should be classified as a receivable to the corporation. This receivable can be
considered additional funds that are available to meet complaint requirements and/or pay a civil
penalty.
6. Form 1098 will show if there is a mortgage being held by the corporation and officers/
shareholders. If the interest rate is below market rate on property owned, a receivable for
additional interest or sale proceeds would be established. This receivable would be considered as
additional funds that are available to meet complaint requirements and/or pay a civil penalty.
7. Form W- 2 will show the amount of wages received by the shareholders and officers as well as
fringe benefits. The W-2 form will indicate if officers/ shareholders are being paid reasonable
salaries respective to the time they devote to the business. If a salary is determined to be
excessive, a portion should be allocated back to the corporation. This reallocation would provide
additional income to be considered as additional funds that are available to meet compliance
requirements and/or pay a civil penalty. While officer's salaries are usually reported on the firm's
tax returns, they are often understated. The W-2 form provides complete information.
Three years of documentation for each of the above categories is necessary to determine
any significant increases or decreases in reportable amounts. A three year comparison will allow
us to determine if a firm has authorized any such increases. Salary increases, dividend payments,
and additional fringe benefits are indications of a financially secure corporation that has the
ability lo meet its penalty obligation. If the corporation is able to steadily increase salaries,
benefits and declare dividends, it is a clear indication that the corporation is experiencing growth
and is in a strong financial position.
Lease Agreements
Lease agreements will show the parties to the lease arrangement and identify related party
transactions. The lease agreements which involve related parties must be reviewed to deteimine
if they are consistent with fair rental value. If the companies lease payments are in excess of fair
rental value, the difference between the payments and the fair rental value can be allocated back
to the corporation and made available to pay the penalty. The leases may also show that the
corporation is leasing luxury automobiles or nonessential assets. In such circumstances, the
leases could be canceled, freeing up additional cash which could be used to pay the penalty.
Disclosure Authorization Forms
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The disclosure authorization form allows for the financial institution to release
information about a corporation's loans, liabilities, and credit.
This disclosure is useful because it gives the EPA an opportunity to verily the accuracy of
the liabilities reported on the tax return. Actual liabilities that a company reports on the tax return
are often quite different to what is reported to financial institutions. If liabilities are less than
what is reported on the tax return, the company may be in a better financial than it portrays.
Reviewing disclosure forms may also reveal additional assets that are not listed on the
depreciation schedule. These assets could be sold or leveraged to pay a penalty.
Assets sold or transferred
This document describes the assets sold, date sold, sales price, parties to the transaction,
date of transfer, and the terms of the sale.
The information is necessary to analyze asset transfers which have taken place. This
information will shed light on the following issues :
1. If the asset was transferred at a sales price that was below fair market value, a receivable for
the difference should be established. This receivable would provide the firm with additional
income to pay its penalty obligation.
2. If the firm financed the sale of one of its assets and is holding the note on the asset, the
payments the firm is receiving pertaining to the note would be a source of cash available for
payment of penalties.
Assets bought
This will reveal if any assets have been purchased by the corporation within a specified
period of time. Important supporting documents include copies of the sales agreement, bill of
sale, deeds transferred, and any other purchase information.
Analysis of these documents will provide:
1. Verification of the accuracy of the cost of the assets reported on the balance sheet and
depreciation schedule. If the purchase price is higher than the amount reported on the balance
sheet and depreciation schedule, it is an indication that the corporation is in better financial
position than it appears. The value of the corporations assets would be higher than reported.
2. Information as to whether the assets purchases are essential to the business. If the assets are
not essential to the business, they can be sold. The cash generated from the sale could be used to
pay the penalty.
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Bank Statements
Bank statements provide a detail of banking activity during a particular month. We need
copies of bank statements for three years to determine any significant increases or decreases in
reportable amounts. An analysis of bank records may :
1. Uncover unreported income which may be used as additional income to pay a penalty.
2. Disclose an installment sale which was reported in the previous year for which payments are
being currently received. These payments are an influx of cash and can be used to pay the
penalty.
3. Disclose large or unusual withdrawals or checks. This may lead to the discovery of luxury or
unnecessary items. These purchases could then be sold and the withdrawals reclassified, making
additional funds available to pay the penalty.
Documentation of bank accounts also allows for review of money market, certificate of
deposit and any other investment accounts. These accounts are typically liquid and represent a
source of funds, to pay a penalty.
Outstanding Loans
The EPA needs to review copies of loan applications, documents etc as the information is
useful in:
1. Disclosing unrecorded assets. These assets could be used to secure additional loans or be sold
to generate additional funds.
2. Identifying loans that are not arms-length transactions. If the interest rate is excessive, the
difference between the stated interest rate and the current market rate can be reclassified thereby
providing the corporation with additional income to pay the penalty.
3. Revealing the firm is in possession of valuable assets such as patents. Such assets might
indicate strong ability to pay.
Loans from shareholders
This pertains to loans made between the corporation and a shareholder. EPA needs to see
copies of canceled checks written to the corporation and loan documents.
The information:
1. Will allow verification that a reported loan was actually made and that the loan was an arms
length transaction. If payment was not made then the corporation will not be responsible for the
loan payments. This reduction of liabilities will allow additional funds to be used to meet the
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penalty obligation.
2. May reveal that the money was not a loan but rather an infusion of capital. This would reduce
the liabilities of the corporation and allow for additional capital to be used for the penalty
obligation.
Management Representation Letter
This letter addresses representations between management and independent auditors
about various issues such as pending litigation involving the company that could have a material
impact on the financial statements and the ability of the company to stay in business. This letter
also includes managements perspective regarding loss contingencies, litigation claims,
assessments, and possible violations of laws or regulations.
The representations of management to the independent auditor suggest if lawsuits or
possible penalty's are legitimate claims against the company. If the company is claiming an
inability to pay based on a few pending lawsuits but fails to disclose the suits in the management
representation letter, then the suits may not be meritorious and hence damaging to the company.
Thus EPA could disregard them
Other Investments
Refers to assets such as stocks, bonds, and certificates of deposits. These assets can be
sold or used as collateral to obtain loans. A estimate of fair market value is necessary since the
purchase price may not adequately reflect the current value. The IRS Form 1099 will also provide
information about dividends generated by these investments. These assets represent a source
from which the company could use to pay a penalty obligation
The documents requested include the broker statement and broker identification
information. This information will verify whether the company has provided a complete list of its
investments and verify that the assets have not been distributed to shareholders. This information
will also illustrate what type of return the company is getting with regard to these investments
which may be available for payment of the penalty in the future.
Liabilities
All documents and information that describe new loans should be provided. The updated
information must be taken into account in evaluating the company's ability to pay the proposed
penalty. Specific documents needed include loan documents, settlement sheets, closing
statements. An explanation as to why the loan was necessary and what the proceeds were used
for is also needed.
The documents identified in Complainant's motion for discovery are would provide
reliable, probative evidence of Respondent's ability to pay the proposed penalty. Accordingly,
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the requested discovery is necessary in order to resolve this important legal and policy issue.
B. Immediate appeal of the ruling will materially advance the ultimate termination of
the proceeding.
The financial documents requested by the EPA will materially advance the ultimate
termination of the proceedings. Without these documents, the Respondents financial position and
abiliw to pay cannot be properly assessed. Enforcement will be ineffective and lengthened by the
appeals process. If the aforementioned discovery is denied, a new hearing must necessarily
follow in light of the incomplete enforcement process. If undisclosed evidence does in fact
demonstrate an inability to pay, then EPA will promptly resolve the case by adjusting the penalty
as appropriate. The immediate appeal for financial documents if granted will materially advance
the proceedings. Without these documents, a complete assessment of the Respondent's financial
position and ability to pay cannot be made. Without these documents the EPA will have great
difficulty satisfying its burden of proof regarding the appropriateness of the penalty. These
documents will allow the proceedings to move forward and be decided by the preponderance of
the evidence (section 22.22).
C. Review after the Final Order Is Issued Will Be Inadequate or Ineffective
Without the requested documents, review will be inadequate. The information being
requested has significant probative value. The financial documents will allow EPA to confirm the
appropriateness of the penalty and adjust if necessary. While the information which Respondent
has provided includes some evidence regarding the ability to pay issue, it does not allow for a
complete assessment of Respondent's financial position.
Documents Requested
List the documents that are being requested.
Conclusion
The PO's date, ruling should be reviewed by the EAB. because, in accordance with 40
C.F.R. 22.29(c), exceptional circumstances exist which warrant such review and because delay in
review would be contrary to the public interest.
Respectfully Submitted,
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APPENDIX D
ABILITY TO PAY CASE OUTLINE
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Enforcement Confidential
Draft 3/15/00
ABILITY TO PAY
CASE LAW OUTLINE
Note: This outline is intended to be a representative, but not an exhaustive,
compilation of ability to pay cases. Further research may uncover other case law
on point
I. SUMMARY
In assessing civil penalties, Congress has recognized ability to pay as a mitigating
factor that must be considered in most environmental statutes. And even in those statutes
that it is not a factor, EPA considers it anyway. Courts and administrative law judges
(ALJs) have consistently addressed the issue in their decisions. The EPA's Policy on
Civil Penalties, issued on February 16, 1984, and codified as EPA General Enforcement
Policy PT.1-1, lists ability to pay as an adjustment factor when assessing penalties against
a violators, as does A Framework for Statute-Specific Approaches to Penalty
Assessments, also issued on February 16, 1984, and codified as EPA General
Enforcement Policy PT.1-2. The guidance contained in these two documents was
amplified in the document issued on December 16, 1986, "Guidance on Determining a
Violator's Ability to Pay a Civil Penalty" and codified as PT.2-1. This 1986 document
introduced the ABEL model, and modified slightly the 1984 policy statement on ability to
pay. Whereas initially the Agency refused to mitigate the benefit portion of the penalty
for ability to pay, the 1986 Guidance allowed mitigation of the entire penalty in
appropriate circumstances.
Ability to pay is not a precisely defined financial term. The Agency generally
focuses on a review of a violator's solvency to determine the effect a given penalty will
have on the firm's ability to continue in business. A Framework for Statute-Specific
Approaches to Penalty Assessments, at page 17. In assessing ability to pay, courts
generally refer to the violator's income, dividends paid, net worth, or sales. Courts will
also look at a firm's size and financial stability. Penalties generally will be reduced for
financially troubled firms. If a firm cannot afford a lump-sum payment, the court may
require the payments to be made in installments.
When determining ability to pay, courts also examine the structure of the violating
entity, and the relationship it has to its owners and to other entities. For example, sole
proprietors are personally responsible for their entity's violations. Similarly, courts may
consider the financial strength of parent corporations in determining the ability to pay of
their subsidiaries and divisions.
In a civil judicial enforcement action, the violator must demonstrate an inability to
pay. If the violator fails to meet its burden of proof, the issue will not be considered. If
the violator can proffer evidence of an inability to pay, the government may rebut this
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claim with evidence from the firm's financial statements, tax returns, or other documents
that suggest that the penalty actually is within the means of the violator.
In administrative enforcement actions (APA-type hearings), the burden of proof is
on the Agency. This means that EPA has the burden of going forward with a prima facie
case demonstrating the respondent can afford compliance, clean-up and/or a penalty, and
the Agency has the ultimate burden of persuasion on the issue.
The ABEL program is utilized for settlement purposes only in order to rebut a
violator's claim of inability to pay. ABEL provides a fast, conservative estimate of a
firm's ability to borrow money and pay current and long-term expenses.1 However,
defeating a polluter's claim in court requires a more extensive analysis of the firm's
business records, and the testimony of an expert witness to explain the data.
When ability to pay is a legitimate issue, EPA's policy is to first allow payment of
the penalty in installments with interest. If the violator cannot even afford the penalty in
installments. EPA's policy is to reduce its penalty assessment and permit the entity to
remain in business and come into compliance. However, EPA need only consider the
violator's ability to pay; it is not required to make a reduction even if the violator proves it
cannot afford clean-up costs, compliance costs or civil penalties. EPA reserves the right
to impose a penalty that may shut down a violator if the violations are egregious or the
violator is not willing to comply. EPA penalty policy GM-22 states:
The Agency will generally not request penalties that are clearly beyond the means
of the violator. Therefore EPA should consider the ability to pay a penalty in
arriving at a specific final penalty assessment. At the same time, it is important
that the regulated community not see the violation of environmental requirements
as a way of aiding a financially troubled business. EPA reserves the option, in
appropriate circumstances, of seeking a penalty that might put a company out of
business ... it is unlikely that EPA would reduce a penalty where a facility refuses
to correct a serious violation. The same could be said for a violator with a long
history of previous [repeated] violations. Id. at 23.
It is important to note that ABEL only looks at a violator's cash flow. If the
violator "passes" ABEL, then one can safely assume the violator can pay the amount
ABEL indicates unless the violator's financial status has changed dramatically since the
end of the period covered by the last tax return. If ABEL is negative or indeterminate, the
government must look further as there are many other potential sources of income from
which penalties can be funded.
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In practice, very few polluters are penalized beyond their means. If, after consideration of
ability to pay, a decision is made to lower a penalty, the reduction may apply to both the
gravity component of the penalty as well as the economic benefit of noncompliance.2
II. CASE LAW OUTLINE
A. Statutory Requirements
Ability to pay is required to be considered in assessing a civil penalty under most
environmental statutes. As a matter of policy, the Agency requires that ability to pay always
be considered, whether mandated by statute or not. In general, courts will assess a penalty
that is significant enough to convey a deterrent message, without causing undue hardship or
threatening the defendant's ability to continue operations.
1. Failure to consider all statutory factors is an abuse of discretion
United States v. Dell'Aquilla. No. 96-5761 (3rd Cir. Aug. 5, 1998): Holding that the
district court's refusal to consider defendant's financial records, even though
defendant only submitted financial statements after judgment without any showing
that the documents could not have been provided earlier, was error because the court
had a statutory obligation to consider ability to pay.
Atlantic States Legal Foundation v. Tvson Foods. Inc.. 897 F. 2d 1128 (11th Cir.
1990)
PIRG of New Jersey v. Powell Duffrvn Terminals Inc.. 913 F.2d 64 (3rd Cir. 1990)
2. Penalties Not Imposed That Would Create Undue Hardship
United States v. Harrison Warehouse Services Co.. Civil Action No. 1:90-CV-0082
(N.D. W. Va. Mar. 6, 1995): Penalty should be "substantial enough to hurt...but not
so great as to obliterate" defendants.
SPIRG of New Jersey. Inc. v. Hercules. Inc.. Civil Action No. 83-3262 (D.N.J. April
6, 1989): Suggesting that a penalty ceiling might exist at the point where a penalty
becomes an undue hardship or interferes with ability to continue operation.
2 As mentioned above, this policy change was implemented in the 1986
"Guidance on Determining a Violator's Ability to Pay a Civil Penalty."
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EPA v. Environmental Waste Control. Inc.. 710 F. Supp. 1172. 1244 (N.D. Ind.
1989): Penalties should provide a meaningful deterrence without being overly
punitive; it should be large enough to hurt.
In the Matter of Timothv R. Ward. TSCA Docket No. V13-86-T-635 (November 24,
1987): Reduced penalty because violator's sole source of income was his job as a
truck driver and was having significant financial troubles.
But
In the Matter of All Regions Chemical Labs. Inc.. Docket No. CERCLA-I-88-1089
(Dec. 1, 1989): Fact that company was out of business because of a fire was not
considered a basis for inability to pay reduction because the penalty had not forced
company out of business and company had produced no other evidence of financial
difficulty.
3. Inability to pay does not require non-assessment of a penalty
In re: New Waterburv. Ltd. 5 E.A.D. 529. 540 (1994): Stating that "a
successful demonstration of inability to pay a proposed penalty would not
automatically justify the non-assessment of a penalty."
In the Matter of Mark Fastow. Docket No. EPCRA-09-97-0013 (Oct. 28,
1998): Inability to pay is a mitigating circumstance and does not preclude
assessment of a penalty.
B. Burden of Proof
The burden of proof on the ability to pay issue will be different depending upon the
arena in which the Agency finds itself. In civil judicial cases, the Agency's responsibility is
to make an argument to the trier of fact regarding the size of the penalty. While that
argument may not necessarily follow the applicable penalty policy for that particular case, it
is certainly influenced by that policy. But if the defendant raises its inability to pay as an
issue, it has the burden to produce evidence to support its contention, which the Agency can
then rebut or discredit.
In administrative proceedings covered by the Administrative Proceedings Act (APA),
the burden of proof is on the Agency. Until 1994, the Agency's position was that the burden
of proof for ability to pay defenses was on the respondent, and the ALJs agreed. In In re:
New Waterburv. the Environmental Appeals Board (EAB) adopted the approach established
by the Supreme Court in Department of Labor v. Greenwich Collieries. 512 U.S. 267 (1994),
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that the burden of proof ("i.e.. the burden of persuasion and the burden of going forward with
evidence) rests with the administrative agency.
The EAB offered significant amount of guidance on the issue of relative burdens. A
summary of that guidance is attached as Appendix A. The essence of the Board's holding is
as follows: First, the Agency has the burden of production (i.e. the burden of going forward
on the issue). That is, the Agency must at least make a prima facie showing that the
respondent can afford to pay. If it fails to do so, then the Agency automatically loses the
issue. Once the Agency has met its burden of production, the burden shifts to the respondent
to go forward with evidence rebutting or discrediting the government's evidence. Once the
respondent has met the burden of production, the burden of persuasion now rests on the
Agency. While this may not seem radically different from the civil judicial approach, it has
some very significant ramifications in the discovery phase of the case, which can then
directly impact the overall case.
It is an open question what effect Greenwich Collieries will have on the Agency's
non- APA type hearings. The presiding officers are regional judicial officers, and a strong
argument can be made that the burden is on the defendant/respondent.
The case discussion will be divided into two major sections: civil judicial and
administrative. All the administrative cases are from the APA-type hearings as there are no
reported decisions from informal hearings.
1. Civil Judicial Cases: Burden of proof is on the defendant
United States v. Gulf Park Water Co.. Civil Action No. 1:93-cv-622(Br)(R)
(S.D. Miss. March 11, 1998): Defendant has the burden of showing that the
impact of a penalty would be ruinous or otherwise disabling; evidence requires
more than speculation.
United States v. Roll Coater. Inc.. Cause No. IP 89-828 C (S.D. Lnd. March
22, 1991): Court would not reduce penalty due to inability to pay because the
violator had failed to introduce evidence of a material adverse effect on its
operations.
PERG v. Powell-Duffrvn Terminals Inc.. 720 F. Supp. 1158, 1166 (D.N.J.
1989): Utilizing EPA's penalty policy to place principal burden of
establishing inability to pay on the violator.
2. Administrative Cases (APA-Type Hearings): Agency has burden to establish
appropriateness of penalty
In re: New Waterburv. Ltd.. 5 E.A.D. 529, 536-37 (1994): The Agency bears
the burden of proving the appropriateness of a penalty taking all factors,
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including ability to pay, into account, and the respondent then assumes the
burden of introducing evidence to rebut the Agency's penalty assessment. The
Agency does not, however, have to separately prove that a respondent has the
funds to pay a proposed penalty.
In re: James C. Lin. 5 E.A.D. 595, 599 (1994): Ability to pay may be
presumed, but if respondent puts its ability to pay at issue, the Agency must
show appropriateness of penalty in light of respondent's ability to continue in
business.
In the Matter of Chempace Corp.. Docket No. 5-FIFRA-96-017 (Feb. 25,
1999): Clarifying that, while the burden of going forward with evidence may
shift if the respondent raises ability to pay, the Agency always bears the
ultimate burden of proof or persuasion that its proposed penalty is appropriate.
In the Matter of Chempace Corp.. Docket No. 5-FIFRA-96-017 (Jan. 12,
1997): Rejecting Agency's request for detailed financial records after already
receiving five years of tax returns and statements, noting that such discovery
was premature. Documents already disclosed should be sufficient to satisfy
Agency's burden of producing "some evidence" of ability to pay and other
information will only be necessary if respondent rebuts Agency's showing
with specific evidence.
In the Matter of Bil-Drv Corp.. Docket No. RCRA-HI-264 (Oct. 8, 1998):
Finding that, other than making "conclusory comments" that a full penalty
would put it out of business, respondent failed to provide "the type of detailed
analysis required" to establish inability to pay (respondent could only point to
two years of income tax statements showing taxable income losses).
In the Matter of Safe & Sure Products. Inc.. Docket No. I.F. & R. 04-907003-
C (June 26, 1998): Letter submitted by respondent containing general
assertions about potential bankrupting effect of penalty, but without
supporting documentation, rejected from consideration
Tavlor-Mcllhennv Operating Co.. Docket No. OPA-09-95-01 (Feb. 18, 1997):
Failure of respondent to provide financial information will preclude it from
offering such evidence at hearing to claim an inability to pay.
In the Matter of Britton Construction Co.. Docket No. CWA-ID-096 (Oct. 9,
1996): Granting respondents' motion to hold the record open after hearing in
order to submit tax returns into evidence, despite the fact that they did not
comply with the Prehearing Order to submit the returns, because respondents
had clearly raised inability to pay in their answer and prehearing exchanges
and no prejudice would result from the late submission.
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C. Assessing Ability to Pay
Among the factors to be considered in assessing a violator's ability to pay a civil
penalty are: (1) finn size; (2) firm structure and (3) financial solvency. Firm size refers to the
reality that different size firms are deterred by different size penalties and smaller firms may
not have the resources to pay as large a penalty as larger operations. Firm structure involves
consideration of whether the violator is a sole proprietor or a corporation and the different
types of available assets - personal assets and earnings potential versus corporate assets,
including those of parent corporations. A violator's financial solvency is also a critical
component of an ability to pay assessment. Penalties should be large enough to deter without
jeopardizing a violator's continued operation. Installment payments are used to ease the
burden of significant penalties.
A. Firm Size
United States v. Hoee Lumber Co.. Case No. 3:95 CV 7044 (N.D. Ohio Nov.
5, 1997): Ignoring substantial size of business because net worth of company
showed a large penalty would jeopardize business.
United States v. Shevenne Tooling & Manufacturing Co.. 952 F. Supp. 1420,
1426 (D. N. Dak. 1997): Rejecting the government's use of averages and
generalizations which did not reflect that defendant was a small company in a
sparsely-settled community, stating that the principle of requiring that persons
at fault be held to a level playing field "means that the defendant must be held
to the conditions of his field, not that of larger or more wealthy players."
In the Matter of Ocean State Asbestos Removal. Inc.. Docket No. CAA-I-93-
1054 (Jan. 24,1997): Rejecting Agency's automatic addition to penalty based
on the size of respondent's business, even though the Agency was applying
formula in accordance with CAA Penalty Policy, stating that nothing in statute
or record supported arbitrary increase in the amount of all penalties based on
the size of a respondent's business.
United States v. SCM Corp.. 667 F. Supp. 1110, 1126 (D. Md. 1987): Finding that,
because violator was a major corporation, only a "substantial" penalty would have any
economic impact or serve as any deterrent.
In the Matter of Timothy R. Ward. TSCA Docket No. VD-86-T-635 (November 24,
1987): Firm size taken into account to reduce penalty for smaller firm, stating that
penalty "should be in such amount that respondent, and others similarly situated, will
choose to comply with pertinent regulations."
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Ohio ex rel. Brown v. Davton Malleable. Inc.. Case Nol. 78-694 (Oct. 10,
1979): Refusing to reduce penalty because the amount suggested by
defendant, considering its size, would "amount to little more than a slap on the.
wrist."
2. Firm Structure
a. Sole Proprietorship
In re: Rav Bimbaum Scrap Yard, TSCA Appeal No. 92-5 (March 7, 1994):
Looking at sole proprietor's individual assets and income to determine
assessed penalty would be unduly harsh.
United States v. A. A. Mactal Construction Co.. Civil Action No. 89-2372-V
(D. Kan. March 31,1992): Recognizing that defendant was a sole proprietor
with limited ability to pay, but refusing to allow that factor to mitigate the
penalty below the economic benefit of noncompliance.
In the Matter of Dr. Marshall Sasser. CWA Appeal No. 91-1, 10 (Nov. 21,
1991): After finding him personally responsible for illegal activity, looking to
sole proprietor's personal income to reject claim that penalty would bankrupt
him.
In the Matter of Timothv R. Ward. TSCA Docket No. VH-86-T-635
(November 24,1987): Presiding Officer considered sole proprietor's personal
financial condition in concluding respondent was unable to pay proposed
penalty.
b. Corporations
United States v. Municipal Authority of Union Township. No. 97-7115 (3rd
Cir. July 20, 1998): Upheld district court's consideration of parent company's
role in subsidiary violator's operations as a factor in subsidiary's ability to
pay, noting that consideration of parent's financial status was not the same as
piercing the corporate veil.
In re: New Waterburv. Ltd.. 5 E.A.D. 529, 536-37 (1994): Presiding Officer
erred in rescinding penalty based on inability to pay despite respondent's
negative income, because it was closely entwined with other companies that
could be properly considered in assessing ability to pay.
In the Matter of 1836 Realty Corp.. Docket No. CWA-2-I-98-1 (Nov. 6,
1998): Granting EPA's Motion for Issuance of a Discovery Order seeking
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financial information regarding financial interrelatedness between respondent
and specified companies that had same person as corporate officer or sole
shareholder, noting that the EAB decision in New Waterburv concerning EPA
access to financial records is not limited to parent-subsidiary relationships.
In the Matter of Safe & Sure Products. Inc.. Docket No. I.F. &. R. 04-907003-
C (June 26, 1998): Piercing the corporate veil to find individual personally
liable for violations (but basing penalty on company's financial records in
absence of any financial documentation for the individual).
In re: Predex Corp.. FEFRA Appeal No. 97-8 (May 8, 1998): Upholding
Presiding officer's issuance of a warning in lieu of a penalty based on
evidence that Predex's parent company had sustained continuing losses and
had no value. Also upheld Presiding Officer's determination not to look at
company's President as potential source of penalty, distinguishing Predex
from facts in In re: New Waterburv.
PIRG of New Jersey v. Magnesium Elektron. Inc.. 40 E.R.C. 1917 (D.N.J.
March 9, 1995): Because defendant was a wholly-owned subsidiary of Alcan
Aluminum of Canada, Alcan's ability to pay rather than the defendant's
should be considered in determining the size of the penalty.
In the Matter of AZS Corp.. Docket No. TSCA-90-H-23 (March 18, 1993):
wholly-owned, but now-dormant subsidiary's claim of inability to pay does
not state cause of action to pierce corporate veil; motion to include U.S. and
Japanese parent corporations denied.
In the Matter of Universal Circuits. Inc.. Docket No . CWA-IV-88-001 (April
11, 1990): Holding that a parent corporation is legally responsible for its
division and cannot insulate itself from a violating division's liabilities.
PIRG of New Jersey v. Powell Duffrvn Terminals Inc.. 720 F. Supp. 1158,
1166 (D.N.J. 1989), affd, 913 F.2d 64 (3d Cir. 1990): wholly owned
subsidiary's claim of inability to pay rejected as the company was owned and
controlled by a British Corporation traded on the London Stock Exchange.
Ohio ex rel. Brown v. Davton Malleable. Inc.. Case No. 78-694 (Oct. 10,
1979): Financial well-being of a division is irrelevant as "it is appropriate to
assess the civil penalty against the company as a whole."
3. Financial Solvency
United States v. DeH'Aquilla. No. 96-5761 (3rd Cir. Aug. 5, 1998): Finding
district court's refusal to consider defendant's bankruptcy in considering
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appropriate penalty to be abuse of discretion because it was inconsistent with
statutory mandate to consider ability to pay.
United States v. Hoge Lumber Co.. Case No. 3:95 CV 7044 (N.D. Ohio Nov.
5,1997): Rejecting government's penalty even if paid over time, finding that
penalty roughly seven times annual net income over the last ten years would
make continued operation "difficult, if not impossible."
United States v. Harrison Warehouse Services Co.. Civil Action No. 1:90-CV-
0082 (N.D. W. Va. Mar. 6, 1995): Reducing penalty because the enormous
legitimate debt incurred by company meant that government's proposed
amount would cause defendant to suffer "substantial economic harm," but still
assessing a penalty even though it might require defendant to sell or otherwise
encumber a business interest.
In the Matter of Mark Fastow. Docket No. EPCRA-09-97-0013 (Oct. 28,
1998): Reducing the proposed penalty by 20% to strike a balance between the
uncertain future of the corporate respondent, which had experienced a marked
decline in sales over the past three years while its cost of sales had risen, and
the significant personal assets of the individual respondent (and president of
the corporate respondent).
In the Matter of Pacific International Group. Inc.. Docket No. FIFRA-09-
0890-C-98-15 (June 22, 1999): Rejecting EPA's application of the 4% ability
to pay formula in the Enforcement Response Policy because declining sales
indicated such a penalty would jeopardize the respondent's ability to continue
in business, but also finding that the decline did not justify a warning instead
of a penalty.
In the Matter of Chempace Corp.. Docket No. 5-FEFRA-96-017 (Feb. 25,
1999): Rejected EPA's penalty of 5200,000 because funds were not available
without the business having to liquidate assets needed to continue in business,
and that the violations were not so egregious as to warrant forcing the
respondent into bankruptcy.
In the Matter of Skarda Flying Service. Docket No. FIFRA VI-672C (Oct. 17,
1996): Despite health of business, ALJ noted that penalty would likely be
reduced for inability to pay because it would be a major expense to a small
business already heavily indebted and would leave company no reserves to
meet unanticipated expenses. (Penalty actually reduced on other grounds.)
In the Matter of Hanlin Chemicals-West Virginia. Inc.. Docket Nos. I.F.&.R HI-425-C,
TSCA-IH-651 and EPCRA-ID-091 (Nov. 9, 1995): Mere fact that respondent was
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under the protection of the Bankruptcy Court was insufficient reason to reduce the
penalty.
In the Matter of K-I Chemical U.S.A.. Inc.. Docket No. TSCA-09-92-0018 (June 7,
1995): Noting, in rejecting respondent's inability to pay argument, that respondent
had not alleged an inability to pay, but had merely stated that proposed penalty would
seriously hamper its operations and might force layoffs.
In the Matter of All Regions Chemical Labs. Inc.. Docket No. CERCLA-I-8S-1089
(Dec. 1, 1989): Refusing to take into account that company had gone out of business
due to a fire, stating that there was "no basis to take that fact into consideration in
setting the penalty....The threat of a civil penalty did not force All Regions out of
operation...."
4. Installment Payments
In re: New Waterburv. Ltd.. 5 E.A.D. 529, 549 (1994): Stating that if a penalty
cannot be paid in a lump sum, a respondent may request a penalty payment schedule.
In the Matter of Mark Fastow. Docket No. EPCRA-09-97-0013 (Oct. 28, 1998):
Stating that if a penalty cannot be paid in a lump sum, a respondent may request a
penalty payment schedule.
In the Matter of Chempace Corp.. Docket No. 5-FIFRA-96-017 (Feb. 25, 1999):
Rejecting EPA's argument that the respondent must prove it could not pay the
proposed penalty in installments, explaining that such an approach would
inappropriately shift the burden of persuasion to the respondent.
In the Matter of Dr. Marshall Sasser. CWA Appeal No. 91-1, 10 (Nov. 21, 1991):
Recommending an installment payment schedule after reviewing the substantial debt
the violator incurred in purchasing his house and office building.
In the Matter of Timothv R. Ward. TSCA Docket No. VD-86-T-635 (November 24,
1987): Giving defendant option of presenting an installment payment plan for
Agency consideration.
D. Evidentiary Issues
The most frequently referenced measure of ability to pay is the violator's profits or
net earnings. This can be found on a firm's financial statements or its tax returns. Other
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indications of a firm's financial condition include the distribution of dividends, which can
reflect a financially-healthy corporation. Net assets represent the value of the corporation
after liabilities have been subtracted. An analysis of net assets would reveal whether a
violator had accumulated large stockpiles of inventory or capital, for example, to decrease net
income for tax purposes. Sales represent the gross income generated by the firm before the
cost of goods sold, expenses, depreciation, and taxes are deducted. Courts may review this
figure if net income has been reduced through excessive expensing, such as inflated salaries,
or suspiciously low reported income. Acquisition activity has also been used to show a
violator's relatively stable economic condition. Luxury items owned by firms or individuals
may also provide evidence of ability to pay. The practitioner is strongly advised to bring out
the fact that the respondent is holding luxury assets while claiming an inability to pay.
Demonstrating such an incongruity should greatly undercut the credibility of any respondent
claims in this area.
Before discussing the cases, it is important for the practitioner to realize that this is a
fairly complex area, and the assistance of a competent accounting or finance professional is
crucial. Otherwise, defendant/respondent "demonstrations" of inability to pay may be
accepted by the trier of fact even though those demonstrations are totally bogus.3
A. Scope of Discovery
In the Matter of Chempace Corp.. Docket No. 5-FIFRA-96-017 (Feb. 25, 1999):
Rejecting respondent's position that the penalty should be calculated using the
information only up to the time of filing the complaint, instead stating that the most
recent available financial information should be used.
In the Matter of Tex Tin Corp.. TSCA Docket No. VI-503C (Nov. 2. 1994):
Rejecting Agency's request for information regarding how respondent ran its
business in the past, including whether it got fair value in certain transactions,
stating that past transactions were irrelevant to current ability to pay absent a
showing that assets were transferred fraudulently in anticipation of a penalty
assessment.
2 For example, almost all small, closely-held corporations will pay either very
low taxes or pay no taxes at all because they lost money. But this status is often
legitimately created by the owners of profitable corporations in order to avoid the "double
taxation" problem. The double taxation problem occurs when one of these small
corporations declares a profit. First the corporation pays taxes on the profit. Then when
the owners take the money into income, they pay tax again on that same money. If the
owners see that there may be a lot of profit left toward the end of the year, they will
generally remove all the profits in the form of increases in salary and other benefits.
When the tax year closes, there is no money in the corporation to be taxed.
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2. Income Statements, Profits and Earnings
Relvinp on violator's net earnings to prove ability to pav
In re: James C. Lin. 5 E.A.D. 595, 599 (1994): EAB found respondent able to pay a
538,000 penalty despite income of only 535,000 (on sales of 54 million) because the
capital account appeared large enough to cushion any adverse impact on the business.
In the Matter of Universal Circuits. Inc.. Docket No. CWA-IV-88-001 (April 11,
1990): Comparing company's current profitability to three previous years of
substantial losses to find that a penalty of 5100,000 would tend to exacerbate the
company's unstable financial condition.
EPA v. Environmental Waste Control. Inc.. 710 F. Supp. 1172, 1244 (N.D. Ind.
1989): Looking at defendant's gross receipts to establish appropriate penalty.
SPIRG of New Jersey. Inc. v. Hercules. Inc.. Civil Action No. 83-3262 (D.N.J. April
6,1989): Looking at net earnings and sales to establish appropriate penalty:
Income statements not relied upon
In the Matter of K-I Chemical U.S.A.. Inc.. Docket No. TSCA-09-92-0018 (June 7,
1995): Finding ability to pay despite negative profits based on strong sales figures.
Chesapeake Bav Foundation v. Gwaltnevof Smithfield . Inc.. 611 F. Supp. 1542,
1562 (E.D. Va. 1985)4: Court rejected claim of large after-tax loss, finding that the
company was earning a substantial dollar amount regardless of whether its profit
margin was "thin."
United States v. J.B. Williams Co.. 354 F. Supp. 521, 549 (S.D.N.Y. 1973):
Violator's financial statement held to not accurately reflect the financial condition of
the firm, because an exclusive arrangement between the parent and subsidiary
companies permitted the violator to report a modest profit whole actually handling
large quantities of business and generating substantial income.
3. Dividends
AfTd. 791 F.2d 304 (4lh Cir. 1986), vacated and remanded on other grounds.
108 S.Ct. 376 (1987), reaff d and remanded in part on other grounds. 844 F.2d 170 (4th
Cir. 1988).
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Ohio ex rel. Broun v. Davton Malleable. Inc.. Case No. 78-694 (Oct. 10, 1979):
Court referred to the violator's distribution of substantial dividends over a four year
period as indicative of a healthy and profitable corporation.
4. Net Assets (value of corporation after Iiabilities)/Net Worth (value of an
individual, all equity minus all debt)
United States v. Gulf Park Water Co.. Civil Action No. 1:93-cv-622(Br)(R)
(S.D. Miss. March 11, 1998): Because financial statements of defendant were
contradictory and defendants refused to explain discrepancies, court relied on
assets owned that could be liquidated without having ruinous effect.
SPIRG of New Jersey. Inc. v. Hercules. Inc.. Civil Action No. 83-3262 (D.N.J. April
6, 1989): Court pointed out Hercules' substantial net assets in holding that the
penalty, SI.68 million, would have no significant economic impact on the firm's
ability to conduct business.
In the Matter of Dr. Marshall Sasser. CWA Appeal No. 91-1, 10 (Nov. 21, 1991):
Recommending an installment payment schedule after reviewing the substantial debt
the violator incurred in purchasing his house and office building.
5. Sales
In the Matter of Pacific International Group. Inc.. Docket No. FIFRA-09-0890-C-98-
15 (June 22, 1999): Rejecting EPA's application of the 4% ability to pay formula in
the Enforcement Response Policy; even though an average of four years of gross sales
indicated a penalty between $30,000 and 532,0000, the dramatic downturn in sales
over the latter two years indicated that the respondent was not in financial shape to
pay more than $7,500.
In the Matter of K-I Chemical U.S.A.. Inc.. Docket No. TSCA-09-92-0018
(June 7, 1995): Finding ability to pay despite negative profits, based on strong
sales figures.
In the Matter of Sav-Mart. Inc.. Docket No. FIFRA-09-0819-C-92-36 (June
30, 1994): Despite significant documented decline in sales, net worth and
working capital figures were solid enough that the respondent failed to
establish an inability to pay.
In re: Rav Bimbaum Scrap Yard. TSCA Appeal No. 92-5 (March 7, 1994):
Upholding Presiding Officer's reduction of penalty against sole proprietorship to a
number below the 4% of gross sales formula in penalty guidelines, where deduction
of costs showed that respondent was barely making a living and that "blind adherence
-------
Enforcement Confidential
15
Draft 3/15/00
to the Guidelines in this case would be unjust and inconsistent with the statute's
remedial, as opposed to punitive, purposes."
United States v. J.B. Williams Co.. 354 F. Supp. 521, 549 (S.D.N.Y. 1973): Court
considered the sales generated because of the artificially low income reported on the
company's financial statements.
6. Accounts Receivable
United States v. J.B. Williams Co.. 354 F. Supp. 521, 549 (S.D.N.Y. 1973): Court
considered volume of accounts receivable generated by the violator.
7. Acquisition Activity and Expansion
PIRG v. Powell Duffrvn Terminals. Inc.. 720 F. Supp 1158, 1166 (D.N.J. 1989):
Court pointed to defendant's expansion to a facility twice its original size and to a
joint venture in rejecting contended inability to pay.
United States v. Swineline. Inc.. 371 F. Supp. 37, 47 (E.D. N. Y. 1974): Court
rejected inability to pay argument, noting violator's involvement with two
acquisitions and one merger during the period of alleged "financial difficulties."
8. Luxury Items/Imprudent Expenditures
In the Matter of Bil-Drv Corp.. Docket No. RCRA-HI-264 (Oct. 8, 1998): While
respondent's tax returns showed taxable income losses, such losses were the result of
questioned discretionary expenses (such as excessive payments to a 17% minority
shareholder) and respondent submitted no examples of "austere measures" being
taken at the company.
In the Matter of Commercial Cartage Co.. Docket No. CAA-93-H-002 (Aug. 22,
1996): Denying Agency's discovery request for depreciation schedule to determine if
company had paid for any "luxury" items or had unreasonable or unnecessary
expenses or transfers that could be considered assets, stating that such inquiry was
speculative and would be of little value.
United States v. Harrison Warehouse Services Co.. Civil Action No. 1:90-CV-
0082 (N.D. W. Va. Mar. 6, 1995): Court refused to consider financial
obligations incurred when defendant knew of his potential personal liability
for penalty.
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APPENDIX E
ABILITY TO PAY CASE LAW UPDATE
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Enforcement Sensitive and Confidential
Case Law Update - Ability to Pav
6/24/02
Use of Nonexperts to do the Financial Analysis
In re: Industrial Chemicals Corp.. Docket No. CWA-02-99-3402 June 16, 2000 2000 WL
793949 (EPA ALJ) - EPA used an engineer as its "financial expert" on both the benefit and
ability to pay issues before Judge Nissen, and it worked. All the engineer did was introduce into
the record a December 31, 1998, Dunn and Bradstreet report and point out 1) that the
Respondent's gross sales were 52,660,000 and that net income was over S450,000. The engineer
then stated that a penalty of S50,000 was just over 10% of profit was within the violator's ability
to pay. The Respondent, who appeared in pro se, never challenged the analysis. The PO
accepted this analysis. Decision at page 41. While the PO reduced the penalty to only 58,096, he
did so for other reasons.
Analysis
The Agency was probably fortunate in this case to have prevailed on the ability to pay
question. This should not be seen as an encouragement to put engineers on the stand to perform
ability to pay analyses.
Trier of Fact Rejects Expert Testimony and Relies on His Own Expertise
In re: Robert Wallin D.B.A. Bob Wallin Dairy. Docket No. 10-98-0069-CWA/G, May 9, 2000.
This was a Class I Clean Water Act administrative action against a dairy in Washington State
with an animal confinement lot. The animal wastes were being discharged via a ditch into a
wetland area, and the Presiding Officer, RJO Alfred Smith, found Respondent liable. The
Region sought a penalty of 511,000, but the RJO limited the penalty to S3.000 for ability to pay
reasons. This decision was not published, and I think its precedential value is limited to other
Class I proceedings. But I have included it here because it follows the trend established in some
of the APA type hearings. Robert Wallin was initially represented by counsel, but before the
hearing he dismissed the attorney, and appeared in pro se. Wallin advanced no reason at hearing
why he dismissed the attorney.
The ability to pay issue was the limiting factor in the case. Dr. B.J. Henderson was the
Region's expert witness on ability to pay and economic benefit. The RJO never got the benefit
1
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issue because he already determined that the gravity of S5.500 had to be reduced to S3.000
because of ability to pay issues. Dr. Henderson analyzed Wallin's tax returns, and noted that he
could have deferred certain purchases in the recent past costing far more than SI 1,000. and that
he could defer other similar purchases in the future in order to pay the full penalty. Robert
Wallin at no time countered this evidence, nor did he attack Dr. Henderson's analysis. But the
RJO rejected the Agency's expert witness' analysis and substituted his own. He pointed out that
since "these purchases were business related, there is a strong presumption that they were
necessary for the Respondent to stay in business. The Complainant introduced no evidence to
overcome the presumption that the purchases were business related and necessary to stay in
business." He also stated that the Respondent lacked sufficient funds to continue the services of
his attorney. (Although there was no evidence of that in the record.) That also proved inability
to pay. Then he declared that Wallin could only afford S3,000, but it is clear the figure was
pulled from thin air.
Analysis
This RJO introduces a new standard by which to analyze ability to pay questions: since all
expenses in a business' tax return are business related, an expense will only be considered
available for penalty purposes if it so frivolous that it cannot be deducted from its income taxes
as a business expense. Under this rule, virtually every corporation in American could minimize
or even eliminate its civil penalty on ability to pay grounds. Successfully appealed to EAB.
In the Matter of Robert Wallin. CWA Appeal No. 00-3 (May 2001). On May 30, 2001 the EAB
issued a Final Decision in this CWA Section 301(a) proceeding in which Appellee Wallin was
found liable as a Concentrated Animal Feeding Operation for discharging manure-laden
wastewater, a pollutant, through a manmade ditch into a navigable water without a permit. A
Regional Judicial Officer had reduced the Region's proposed penalty from SI 1.000 to $3,000
stating that EPA had not demonstrated a risk of environmental harm nor had ability to pay been
adequately considered. EPA appealed arguing that the statutory penalty factors were misapplied
with respect to economic benefit, gravity and ability to pay.
The EAB held that the Regional Judicial Officer misapplied the respective burdens of proof
with regard to ability to pay when he lowered the penalty based on this factor. It is well settled
that EPA need not specifically prove that a Respondent has the ability to pay a penalty, rather it
must be shown that ability to pay was considered. The EAB held that the Region satisfactorily
met its burden of production on ability to pay. When the burden shifted to Respondent, it failed
to provide sufficient evidence of inability to pay. The EAB rejected vague statements of
financial hardship as Respondent's proof of inability to pay. The penalty was raised to $5,500 to
reflect an upward adjustment for ability to pay.
2
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Avoiding the "Late Hit" of Financial Documents that Show Up for the First Time at the
Hearing
In the Matter of CAS Equity. Inc. Docket No. TSCA-3-2000-0019. Counsel for Complainant
sought an order from Judge Gunning requiring Respondent to file witness summaries with regard
to ability to pay defenses as well as a written documentation of its financial condition. Both
parties had filed prehearing exchange documents but Respondent failed to include relevant
information and exhibits to support its claim that it is unable to pay the proposed penalty. Since
both parties reserved the right to supplement their prehearing exchange (and the rules at 40 CFR
22.22(a) allow supplementary documents to be filed no later than 15 days before the hearing
date), EPA counsel Ben Fields, anticipating a possible late hit in this action, properly attempted
to require that Respondent provide relevant material in a timely manner, noting that he would be
would consider filing a motion in limine to bar Respondent from introducing at the hearing any
new information concerning the alleged inability to pay defense.
Judge Gunning agreed that failure to file timely prehearing exchange information could
preclude Respondent from introducing such information into the record at trial. Citing a long line
of administrative cases, including New Waterbun'. Judge Gunning articulated the respective
burdens on Complainant and Respondent with respect to penalty and ability to pay
considerations. Judge Gunning rejected the Complainant's effort to request that she establish
firm deadlines for the Respondent to comply with the pre-hearing order, finding that it is not the
"appropriate method for achieving this goal..." Judge Gunning noted that the failure of
Respondent to timely file information "may well" preclude it introducing such information into
the record at hearing.
Analysis
While the Agency did not get exactly what it sought, it put the ALJ on notice that EPA
opposed allowing the Respondent to introduce financial documents into evidence at hearing that
the Agency had not yet seen. This is an all to common problem faced by our litigators. Expert
witnesses need to time to evaluate such documents. Experts should work closely with their
attorneys to make sure the judge is aware that the expert needs time to evaluate such documents .
The EPA attorney should do what Ben Fields did here or something similar well before the start
of the hearing.
But Respondent's Late, Seriously Deficient, Submission of Financial Data Accepted by ALJ
In In re: CDTLandfill Corporation (Docket No. CAA-5-99-047) April 2002, Judge Nissen
held that the violator could not afford any penalty despite the fact that it had repeatedly failed to
submit financial documents to the EPA as called for by the Consolidated Rules of Practice and
Judge Nissen's order of April 18th, 2000.
3
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EPA notified CDT of its intention to bring and enforcement action and requested financial
documents. CDT responded with some useless financial information. The request was renewed
in Judge Nissen's prehearing exhange order of April 18th, 2000. but the Respondent submitted
nothing. Fifteen days prior to hearing, EPA had still not received any financial documents, and
on January 9,2001, with the hearing only eight days away, the EPA filed a Motion to Limit
Evidence at Hearing. The motion pointed out that the CRP required submission of such
documents at least 15 days prior to hearing, and the EPA argued that any submission at this point
would prejudice the government's ability to present its case in chief since it would have no time
to analyze the information. EPA thus requested the judge to bar Respondent from presenting
financial information at hearing. The next day, the EPA received a one-page document entitled,
Combined Balance Sheet of September 30, 2000.. This document was clearly not responsive,
and submitted far too late to be of help.
Despite all that was wrong with what the Respondent had done, Judge Nissen actually
allowed the document into evidence while acknowledging that "additional evidence would be
helpful." (Trans, at 21.) He then ruled that since the Agency had failed to introduce any
evidence on the Respondent's ability to pay, EPA had failed to meet its burden of persuasion.
Analysis
This a very disturbing result. Here the Respondent, which holds virtually all of the financial
information, deliberately flouts an ALJ's order to produce financial documents, and gets away
with it. This case is under appeal to the EAB.
Administrative Law Judge May Allow EPA to Pierce the Corporate Veil
In the Matter of Jerrv L. Kom and Dairv Health. Docket No. FEFRA 10-2000-0061. EPA
brought and administrative enforcement action for an alleged 19 FIFRA violations and a
proposed penalty of S83.600. On July 13, 2001 Judge Bullock granted the EPA's motion to
amend its complaint to add two individuals to the corporate and individual respondent initially
named. By doing so, EPA is seeking to pierce the corporate veil and attach liability to two
individuals who were involved in operating the corporation.
EPA sought to add additional parties after the Answer was filed. The Respondent's opposed
the motion arguing "futility" and asserting that Complainant was attempting to impermissibly
pierce the corporate veil. Judge Bullock granted the Motion since, generally, leave to amend is
liberally given. The "futility" argument was rejected and the ALJ held that leave to amend is
futile only if the complaint would not survive a motion to dismiss or if the claim is frivolous.
The violations alleged involve selling pesticides which were misbranded, adulterated or
unregistered. EPA argued that the individual respondents meet the definition of "a person@
under FIFRA and that the facts in this case justify piercing the corporate veil. In his decision,
Judge Bullock indicated that EPA's motion sets forth allegations which are sufficient to
4
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constitute a colorable claim against each of the respondents. Substantive arguments by
Respondent were rejected because the proceeding is still at an early stage and the record has not
yet been developed fully. The corporation has only two shareholders. Both are now individual
respondents. The third individual respondent, the wife of the company president, appears to be
actively involved in company operations. Judge Bullock's order has the effect of holding
accountable the officers who arguably had the authority to control the corporation's allegedly
unlawful behavior and the individual who was actively involved in this behavior.
Analysis
This was only a preliminary ruling, and the ALJ could later find that the EPA did not
establish that these individuals were liable. But the potential is there for a conclusion that the
corporate structure was compromised in such a way that piercing would be appropriate. To my
knowledge, this would be first in EPA administrative cases. We will have to a keep an eye on
this case.
Is a Closed Business Necessarily Out of Money?
In re: Carroll Oil Company Inc. - 2001 WL 459117 (Docket No.: RCRA-8-99-05) April 30,2001
The respondent conceded that it had three underground storage tanks (USTs) that held gasoline,
which were never permanently closed although were not actively used for ten years. Therefore,
the hearing focused on the size of the penalty. While Carroll Oil was not operational over this 10
year period of time, there were other related entities that were operational and profitable. In
addition. Respondent had steadfastly refused to comply with the UST requirements. EPA,
realizing that the named Respondent was unlikely to have any funds, attempted to add the related
entities which Judge William Moran rejected.
Judge Moran then turned to the proposed penalty, and substantially reduced it for inability to
pay reasons. He stated in regard to EPA's proposed penalty:
EPA's analysis, by not facing the reality that Carroll Oil has been out of business
since 1992 has an otherworldly sense to it. Counsel's castigation of Respondent's
continual failure over many years to do what the regulation requires ignores this
fact and proceeds as if the corporation was a healthy concern. Yet, in reality, EPA
has been fully aware of Carroll's condition in extremis, as evidenced by its
eleventh hour attempt to add other respondents. Thus, the Court concludes that,
as applied by EPA in this instance, the basic propositions of the Policy did not
yield an appropriate penalty.
In the end, the ALJ imposed a penalty of S 3,500. For each of the three USTs originally
identified- SI ,000. He added S500 for the tank the respondent voluntarily identified at the
hearing. EPA appealed this decision to the EAB.
5
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Analysis
While the Respondent may have been closed for 10 years, the rule of law established by In
re: New Waterburv is that you consider the ability to pay of the related entities, not just the
Respondent Even if the parties are not named, the rule is to consider their financial status. The
problem is that the penalty must be collected from the named parties. So failing to get the
financially strong related entities named in the complaint would limit the EPA's ability to get the
penalty unless the ALJ permitted piercing the corporate veil.
6
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K
W
2
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Training Materials
A model to calculate the
BEN: economic benefit of
noncompliance
What Lawyers Need to Know about the BEN Model and
Some Related Topics
Contains Enforcement-Sensitive Material
BEN for Attorneys: July 2002
-------
Confidentiality/Enforcement Sensitive Notice
The attached training materials contain enforcement sensitive and confidential information.
They are covered by one or more of the following Federal disclosure exemptions: attorney work-
product, deliberative processes privilege, and disclosure of enforcement techniques. You may use
these materials during the course, but you may not keep them unless your State is both legally
permitted and willing to protect this document from disclosure to outside parties. (E.g.. The State
of Wisconsin's laws make it almost impossible to protect a document such as this from disclosure.)
If you are not sure about your State's law on this issue, please take this document for a review by
your State's information law specialists immediately upon your return to your office. If your
information law specialists do not feel your State can adequately protect this document, please mail
it to the following address as soon as possible:
Jonathan D. Libber (2248-A)
U.S. EPA
1200 Pennsylvania Avenue, NW
Washington, DC 20460
Should you have any questions about this note or the EPA's concerns on disclosure, please contact
Jonathan Libber at 202-564-6102.
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TABLE OF CONTENTS
Page No.
SECTION I: OVERVIEW OF BEN
What Is BEN? 1-1
Civil Penalty Policy Summary 1-2
Strategic Considerations 1-3
Benefit Recapture Background 1-4
Underlying Financial Theory 1-5
"Time Value of Money" Example 1-6
"On-Time" and "Delay" Scenarios 1-7
Economic Benefit Example 1-9
Discount / Compound Rate Controversies 1-12
SECTION II: ISSUES THAT ARISE WHILE USING BEN
Civil Penalty Calculations II-1
Settlement Negotiations D-2
Dates, Rates, and Data II-3
Common Violator Arguments D-4
Trial Preparation II-6
Rule of Thumb Benefit Calculation Model 11-7
Statute of Limitations Issues II-11
SECTION III: LATEST DEVELOPMENTS IN BENEFIT RECAPTURE
Status of Public Comment Process HI-1
Illegal Competitive Advantage IH-2
Upcoming Illegal Competitive Advantage Strategy IH-3
SECTION IV: JUDICIAL TREATMENT OF THE BENEFIT RECAPTURE ISSUE
APPENDIX A: MODEL INTERROGATORIES
APPENDIX B: DRAFT CASE MEMORANDUM
APPENDIX C: DRAFT BRIEF ON STATUTE OF LIMITATIONS ISSUE
APPENDIX D: CASE LAW UPDATE
APPENDIX E: SAMPLE EXPERT WITNESS REPORT
Contains Enforcement-Sensitive Material
BEN for Attorneys: July 2002
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SECTION I:
OVERVIEW OF BEN
Contains Enforcement-Sensitive Material
BEN for Attorneys: July 2002
-------
WHAT IS BEN?
• The BEN Model is a computer program that runs in the Windows™ operating environment,
(Windows 95, 98, or NT).
• BEN is easy to use, especially with its many available forms of assistance:
• EPA's enforcement economics helpline provides personalized help from 8:00
a.m. to 6:00 p.m. (Eastern time) at 888-ECONSPT orbenabel@indecon.com.
• Jonathan Libber ofEPA's Office ofEnforcement and Compliance Assurance
is available to answer policy and legal questions at libber.jonathan@epa.gov
or 202-564-6102.
• Related models:
PROJECT calculates the present value of supplemental environmental projects, used to
mitigate a proposed civil penalty.
ABEL, INDIPAY, and MUNIPAY assess the ability to afford environmental expenditures
of corporations, individuals (including owners of partnerships and sole proprietorships), and
municipalities, respectively.
• Website for all the models and user manuals: www.epa.gov/oecaydatasys/dsm2.html.
Contains Enforcement-Sensitive Material 1-1
BEN for Attorneys: July 2002
-------
CIVIL PENALTY POLICY SUMMARY
• Economic benefit components:
• Benefit from delayed pollution control costs.
• Benefit from avoided pollution control costs.
• Benefit from illegal competitive advantage.
• Gravity component:
• Actual or possible harm.
• Importance to regulatory scheme.
• Size of violator.
• Adjustment factors:
• Degree of willfulness and/or negligence.
• Degree of cooperation/noncooperation.
• History of noncompliance.
• Ability to pay.
• Other unique factors.
• In criminal context, BEN can enhance presentation of intent argument, and for sentencing
show how violator saved money.
(ttA)
• Illegal competitive advantage and BEN:
• BEN — or any computer model — is incapable of calculating economic benefit from
illegal competitive advantage, leading to possible underestimate of economic benefit
in certain cases.
• BEN asks questions for case attributes indicative of illegal competitive advantage,
providing suggestions for further research and analysis (see Section II).
• EPA developing guidance for cases that involve illegal competitive advantage.
• In criminal cases, forfeiture might be more appropriate for illegal operators.
• Illegal competitive advantage sources:
o Gain market share from compliant competitors
• Establish self in market prior to government approval ("early mover"
advantage).
• Bring extra product to market
• Sell prohibited products (as opposed to legal products produced in
noncompliant process, for which BEN is still appropriate).
Contains Enforcement-Sensitive Material 1-2
BEN for Attorneys: July 2002
-------
STRATEGIC CONSIDERATIONS
• No statutes or regulations require EPA to calculate economic benefit of noncompliance
(except for Clean Air Act Section 120, which mandates a specific computer model similar
to BEN).
• The most EPA is required to do is consider benefit in assessing penalties.
• Try not to be drawn into the argument that BEN isn't "precise" enough.
• In court/hearing, try to persuade trier-of-fact that this is more than just reasonable, although
all we need to show is reasonableness. Clean Water Act cases set helpful standard:
reasonable approximation. Comes form Senate Report that accompanied amendments in
1986 directing EPA to consider economic benefit. Clean Air Act has similar language in its
Senate report from its analogous amendments in 1991. But there is no case law as yet. But
an economic benefit analysis should be no different no matter what media is involved.
• Can never determine economic benefit as precisely as determining the money a bank robber
stole (i.e., violator's financial statements have no line item for "economic benefit from
pollution control noncompliance"), but for almost all cases BEN's economic benefit
methodology is as accurate as an economic benefit methodology can possibly be.
• Judges generally want to recapture the benefit, and therefore may feel a greater obligation to
be more precise, demanding greater precision from the enforcement agency.
• State judges may tend to give EPA greater deference than do Federal judges.
Contains Enforcement-Sensitive Material 1-3
BEN for Attorneys: July 2002
-------
BENEFIT RECAPTURE BACKGROUND
• Objective is to cancel economic gains from delayed compliance; hence, minimum penalty
is amount of economic gain plus a nontrivial gravity component.
• Impact of BEN on penalty numbers:
• 33 percent of all dollars assessed from 1975 to 1985 were assessed in 1985, the first
year of BEN use.
• 66 percent of all dollars assessed from 1975 to 1987 were assessed in 1985 to 1987,
the first three years of BEN use.
• Average total annual penalties for 1981 to 1984 were $6 million per year; for
1985-1991, average was $37 million per year.
• 1999 all time record of over $166 million of penalties collected.
• 2000 dropped to $75 million
• 2001 up to $125 million
• State use:
• Active consideration within EPA of whether to make benefit recapture obligatory for
states via federal/state agreements.
• Air: already underway.
• GAO pushing the states to recapture.
• Laidlaw case indicates that judges will look at how States treat benefit recapture in
deciding whether there is an effective State enforcement action. Both the district
court judge and Justice Ginsberg focused on benefit.
• Assistance for state use available from EPA helpline (888-ECONSPT).
Contains Enforcement-Sensitive Material 1-4
BENfor Attorneys: July 2002
-------
UNDERLYING FINANCIAL THEORY
• A violator that delays installation of pollution control equipment saves money, thus gaining
an economic advantage over other regulated entities (e.g., companies, municipalities) who
comply on time; these savings can come from:
• Delaying purchase of equipment;
• Avoiding annually recurring costs of operating and maintaining equipment over
period of noncompliance; and
• On less frequent occasions, avoiding purchase of equipment altogether.
• When violator delays spending money on pollution control, it can use the money it saves for
other, revenue-producing activities and thereby gain an economic benefit.
• When violator delays spending money on pollution control, it can use the money it saves for
other, revenue-producing activities and thereby gain an economic benefit.
• If a complying firm spends $ 1,000,000 to comply, the "opportunity cost" of that $ 1 m
is based on what it could earn if it plowed that money back into the company.
• If the complying firm's cost of money is 10%, then the opportunity cost of that
money is also 10%.
• Personal finance example: checking account has 0.5% return, mutual fund has 9%
average yield. Opportunity cost of money not saved is based on the anticipated rate
of return for your mutual fund, not your checking account's 0.5%.
• Enforcement agency's goal is to recover at least any economic benefit that violator may have
accrued as a result of delayed pollution control, thus removing economic advantage that
violator gained vis-a-vis competitors who complied on time.
• Key financial concept in BEN is "time value of money."
• A dollar today is worth more than a dollar one year from now, because of alternative
investment possibilities.
• Time value of money is quantified by "discounting" or "compounding" compliance-
related after-tax "cash flows" from different years to "net present value" (NPV) as
of some common date.
• This allows comparison of cash flows from different years on same basis.
Contains Enforcement-Sensitive Material 1-5
BEN for Attorneys: July 2002
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"TIME VALUE OF MONEY" EXAMPLE
Assuming a discount rate of 10 percent, $1.00 one year from now has a net present value
(NPV) of $0.91; $1.00 five years from now has a NPV of $0.62:
With a discount rate of 15 percent, respective results are $0.87 and $0.50:
$ 1 .20
$0 00
Time Value of Money
10% Discount Rate
Present
Next Year
Five Years From Present
$1 20
$0 00
Time Value of Money
15% Discount Rate
P resent
Next Year
Five Years From Present
Contains Enforcement-Sensitive Material 1-6 BEN for Attorneys: July 2002
(-jvisj s•
Ut&T} (-£> AooIqUL
r^s I
-------
"ON-TIME" AND "DELAY" SCENARIOS
• Before we can discount or compound any cash flows, we must determine "on-time" and
"delay" scenarios, i.e., what actions and associated costs were necessary for on-time
compliance, and for delayed compliance.
• Economic benefit is difference between net present values (NPVs) of the two scenarios.
• Fundamental definition of economic benefit — difference between NPVs of on-time and
delay scenarios — is same regardless of whether economic benefit is from delayed/avoided
pollution control expenditures (i.e., BEN's calculations) or from illegal competitive
advantage (i.e., expert using even more complex calculations).
• Compliance scenarios can sometimes be complex and require many customized calculations:
/1/92
/1/93
or
/I/94
S'-TIME SCENARIO
/I/95
-lie S250
jermit
/1/92
-lire 1
>3,000
onsultant
/1/93
'aySlmto !
quipment
vendor
E
/1/94
250k for
ystem upgrade
o meet new regu
ELAY SCENA
/1/95
ations
RIO
/1/96
/1/97
/1/98
-ile S100
:xtension
equest
1100k extra
evenue from
loncompliance
-lire I
55,000
onsultant
>ay $300k
n pollution
harges
5ay $1,3m to
quipment
/endor
• Here the violator should have started taking actions for compliance in 1992, but did not start
taking any actions (and hence incurring any costs) until a year later, in 1993.
• But because of the violator's delay, required actions for delay scenario are very different
(perhaps because of new regulations) than for on-time scenario (as opposed to differing
merely by inflation).
• Therefore, such scenarios are probably not amendable to a BEN analysis. More customized
calculations are necessary.
• Fortunately, although you should be aware that such complex situations exist — and require
expert assistance — most scenarios are far more simple and hence amenable to BEN . . .
Contains Enforcement-Sensitive Material 1-7
BEN for Attorneys: July 2002
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"ON-TIME" AND "DELAY" SCENARIOS (continued)
• Here is one such simple example:
/1/92
/1/93
or
/1/94
S'-TIME SCENARIO
/1/95
<
>lm non-
epreciable
xpenditure
nm
/1/93
E
/1/94
>ELAY SCENARIO
/1/95 1/1/96 1/1/97 1/1/98
SI .lm non-
depreciable
expenditure
• Violator should have spent $1 million in 1992, but did not comply until 1997 (when inflation
increased the cost of compliance slightly to $1.1 million).
• Such simple scenarios are amenable to BEN.
• The following pages provide a graphical illustration of the calculations BEN performs to
calculate the economic benefit of noncompliance in such a case.
Contains Enforcement-Sensitive Material 1-8 BEN for Attorneys: July 2002
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ECONOMIC BENEFIT EXAMPLE
• ABC company should have made a one-time, nondepreciable expenditure of $1.0 million
(after-tax) in January of Year "0," but did not actually incur the expenditure until January of
Year "5," and will not pay a penalty until January of Year "7." What is the economic benefit
that ABC gained?
To answer this, we need to compare what should have happened for on-time compliance with
what actually happened for delayed compliance.
First step is to (adjust for inflation: !
• Cost of complying on-time (in January of Year 0) is $1 million (assuming cost
estimate is already expressed in Year 0 dollars).
• Cost of complying late (in January of Year 5) is approximately $1.1 million.
• Increase is calculated from an assumed inflation rate of 2%, or alternatively from cost
index values (i.e., $1 million divided by January of Year 0 cost index value, then
multiplied by January of Year 5 value).
The calculation is therefore:
$X x (l+InflRate)A#ofYrs
$1,000,000 x (1.02)A5
$1,000,000 x 1.10
$1,100,000
$X / CostEstimateDatelndex x TargetDatelndex
$1,000,000 / 230 x 253 (Year 0 & Year 5 values, resp.)
$1,000,000 x 1.10
$1,100,000
$1,200,000
$1,000,000 -
$800,000
$600,000 --
$400,000 --
$200,000
Contains Enforcement-Sensitive Material 1-9
BEN for Attorneys: July 2002
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ECONOMIC BENEFIT EXAMPLE (continued)
Inflation hence increases nominal cost of complying late. If inflation were the only factor,
complying on-time would make more sense for violator, since it would be less expensive
than complying late. Instead, we also need to account for violator's time value of money,
and therefore adjust the separate costs from on-time and delay scenarios to a common present
value, as of a common date (i.e., January of Year 0 noncompliance date).
On-time scenario cost of $1 million is already expressed at January of Year 0 but we need
to discount delay scenario cost of $1.1 million back to January of Year 0 (from January of
Year 5). With a 9.5% rate, the present valuepf delay scenario is only $700,000.
The calculation is therefore:
$X / (1 + DiscountRate) A NumberOfYears
$1,100,000/ 1.095 A 5
$1,100,000/ 1.57 = $700,000
Thus in order to pay for $1.1 million in compliance costs in Year 5, the violator need set
aside only $700,000 in Year 0.
Economic benefit at January of Year 0 is the difference between on-time and delay scenario
present values: $1,000,000 minus $700,000, which equals $300,000.
$1,200,000
51,000,000 --
$800,000 --
$600,000 -
$400,000
$200,000 --
$0
(letter designations correspond to BEN output labelsj
c
a
cc
c
a
F
2 N
c
a
O
C
<
a
Discounting
-+-
-+-
>
C3
a>
2 3 4
Year
Contains Enforcement-Sensitive Material I-10
BEN for Attorneys: July 2002
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ECONOMIC BENEFIT EXAMPLE (continued)
• However, we need to calculate economic benefit as of when violator will pay a penalty,
which is January of Year 7 (not Year 0).
• Using the same 9.5% rate, we compound the initial economic benefit of $300,000 forward
from Year 0 to Year 7, to arrive at a final economic benefit of $567,000.
• The calculation is therefore:
$X x (1+DiscountRate) A NumberOfYears
$300,000 x 1.095A7
$300,000 x 1.89= $567,000
(letter designations correspond to BEN output labels)
Year
Contains Enforcement-Sensitive Material I-11 BEN for Attorneys: July 2002
-------
DISCOUNT/COMPOUND RATE CONTROVERSIES
Firm with large cash reserves:
• "I have all the money needed for compliance in the bank. All I need to do is write
the check. Therefore my cost of capital (i.e., the discount rate) is 0% (or low interest
rate on account)." (Smithfield argument).
> But cash must be replenished to target level at average cost of debt & equity, hence
true opportunity cost of capital is still the WACC. v ,
Small firm: ^ c, ^
• "We have not issued a share of stock in 25 years. Whatever we need for compliance
costs we just take out of the cash coming into the firm from the sales of our
products." (Spang argument).
> But even if company never borrows money or issues equity, its opportunity cost of
capital is still the WACC, since equity is tied up in company and carries implicit
required rate of return.
Unprofitable firm:
• "We lost money during noncompliance, hence no economic benefit."
> The economic benefit may take the form of lower losses than would otherwise been
incurred (but for the noncompliance), as opposed to higher profits, but the company
is nevertheless financially better off because of its noncompliance.
PHB & The Brattle Group risk-free rate approaches based on 30-day U.S. T-bill rate :
• Older approach: WACC back to NCD for initial economic benefit, then compound
forward at risk-free to PPD. Much smaller results than BEN.
• Most currently seen (and more aggressive) approach: Future cash flows back to PPD
at WACC or other risk-adjusted rate. Past cash flows forward to PPD at risk-free
rate. Much smaller results than BEN, even negative sometimes!
> Both approaches focused incorrectly on tort damages literature (i.e., EPA removing
violator's economic benefit, not reimbursed for damages).
> Ignores reality that companies will on average over time earn at least their WACC
—far in excess of risk-free rate. Leads to counter-intuitive results.
Court opinions on discount/compound rates:
• Most cases settle before trial, with very few opinions addressing issue.
• The only three recent court opinions commenting specifically on discount/compound
controversy have adopted three different approaches.
• Laidlaw adopted plaintiffs equity, explicitly rejected plaintiffs alternative WACC,
and implicitly rejected defendant's risk-free.
• Smithfield adopted plaintiffs WACC, and explicitly rejected defendant's risk-free.
• WCI Steel adopted defendant's risk-free, and implicitly rejected plaintiff s WACC.
• Allegheny Ludlum case clearly rejected risk-free and endorsed WACC.
Contains Enforcement-Sensitive Material 1-12
BEN for Attorneys: July 2002
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Discount/Compound Rate Calculation
Notes.
(1) Corporate Bonds: All Industries; Federal Reserve Bulletin, Table 1.35. [Average industry cost of debt]
(2) Combined State/Federal Marginal Tax Rates: federal+(state*(1-federal)); Federation of Tax Administrators.
(3) Calculated as: (1) * (100%-(2)).
(4) Standard & Poor's Analyst's Handbook, S&P Industrials Sample Balance Sheet, Liabilities section. [Average Industry
debt weight]
(5) Federal Reserve Bulletin Table 1.35. [Used as a risk-free rate, Capital Asset Pricing Model (CAPM)]
(6) Beta is a measure of risk relative to the overall market. [A value of I 00 assumes risk is same as overall market]
(7) Differences of historical arithmetic mean returns from 1926 to prior year; Ibbotson Associates Handbook,
[Representing expected return on an average risk investment]
(8) Calculated as (6) * (7). [This equals (7) for average risk, because average risk has a beta of 1]
(9) Calculated as (5) + (8). [Risk-free rate of return plus the risk premium]
(10) Calculated as 100% - (4). [Total financing - debt = equity financing]
(l l) Calculated as (3) * (4) + (9) * (10). [(Debt cost x debt weight) + (equity costx equity rate)]
average 1992 to: 1998 = 10.0%
from: [Final
result]
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
5-Year
Intermed.
Company
Cost of
After-Tax
Debt
Treasury
Horizon
Risk
Equity
Equity
YEAR
Debt
Tax Rate
Debt Cost
Weight
Notes
Beta
Risk
Premium
Cost
Weight
Rate
Prem
1987
9.9%
40.3%
5.9%
43.0%
7.94%
1.00
7.7%
7.7%
15.6%
57.0%
1988
10.2%
40.3%
6.1%
52.0%
8.47%
1.00
7.3%
7.3%
15.8%
48.0%
1989
9.7%
40.3%
5.8%
49.0%
8.50%
1.00
7.4%
7.4%
15.9%
51.0%
1990
9.8%
40.3%
5.9%
50.0%
8.37%
1.00
7.8%
7.8%
16.2%
50.0%
1991
9.2%
40.3%
5.5%
49.0%
7.37%
1.00
7.5%
7.5%
14.9%
51.0%
1992
8.6%
40.3%
5.1%
47.0%
6.19%
1.00
7.7%
7.7%
13.9%
53.0%
9.8%
1993
7.5%
41.2%
4.4%
47.0%
5.14%
1.00
7.6%
7.6%
12.7%
53.0%
8.8%
1994
8.3%
41.2%
4.9%
44.0%
6.69%
1.00
7.6%
7.6%
14.3%
56.0%
10.2%
1995
7.8%
41.2%
4.6%
42.0%
6.38%
1.00
7.4%
7.4%
13.8%
58.0%
9.9%
1996
7.7%
41.2%
4.5%
37.0%
6.18%
1.00
7.8%
7.8%
14.0%
63.0%
10.5%
1997
7.5%
41.2%
4.4%
37.0%
6.22%
1.00
7.9%
7.9%
14.1%
63.0%
10.5%
1998
7.0%
41.2%
4.1%
37.0%
5.50%
1.00
8.2%
8.2%
13.7%
63.0%
10.2%
Contains Enforcement-Sensitive Material 1-13
BEN for Attorneys: July 2002
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DISCOUNT/COMPOUND RATE CONTROVERSIES (continued)
• Academicians' views on discount/compound rates: all over the map
• James Van Home (endowed chair in finance at Stanford Business School) endorses
WACC throughout calculation, although compounding should switch to the
violator's debt rate once the violator eventually comes into compliance and escrows
the penalty amount.
• Stewart Myers (MIT, Sloan) signs off on Brattle Group risk-free rate articles, but
many years earlier in an EPA review endorsed WACC back/debt-rate forward as well
as implicitly endorsed WACC back/WACC forward.
• Charles Upton (Kent State) wrote somewhat confusing article for BEN public
comment process, but seems to endorse WACC back/debt-rate forward, disagreeing
with Brattle Group approach.
• Colin Blaydon (Dartmouth, Tuck Business) co-authored expert report for PHB with
WACC back/risk-free forward, but then repudiated approach in deposition for
another PHB case, endorsing the other risk-free rate approach.
• Wendy Morrison (Middlebury College) endorsed WACC in her public comment.
• Eugene Brigham (Florida) in earlier EPA review endorsed WACC.
• Lawrence Schall (Washington) in earlier EPA review endorsed contrarian and
complicated view that other reviewers strongly criticized
Graphical illustration of competing methodologies follows, using the same inputs as example
problem but with the capital investment changed to no replacement cycles, and without any
one-time nondepreciable expenditure or annually recurring costs.
Capital Investment =
Noncompliance Date (NCD) =
Compliance Date (CD) =
Penalty Payment Date (PPD) =
Tax Rate
Inflation Adjustments =
WACC =
After-Tax Risk-Free Rate =
Equity Cost of Capital =
$1,000,000 (in 1992 dollars)
January 1, 1992
January 1, 1997
January 1, 1999
C-Corporation in Massachusetts (-41%)
Plant Cost Index (PCI)
10.0%
2.6%
13.8%
Contains Enforcement-Sensitive Material 1-14
BENfor Attorneys: July 2002
-------
Current Agency Approach: WACC Rate (10.0%) in Both Directions
First discount all cash flows back to the NCD at the WACC for an initial economic benefit of
$234,114. Then compound the initial economic benefit forward to the PPD at the WACC for a final
economic benefit of $456,461.
Current Agency Approach
¦ Delay Scenario
E] On-Time Scenario
~ Economic Benefit
Formerly Chief Competing Theory: WACC (10.0%) back to NCD, then Risk-Free rate (2.6%)
forward to PPD
First discount all cash flows back to the NCD at the WACC for an initial economic benefit of
$234,114. Then compound the initial economic benefit forward to the PPD at a risk-free rate for a
final economic benefit of $280,233.
Formerly Competing Theory
¦ Delay Scenario
~ On-Time Scenario
~ Economic Benefit
Contains Enforcement-Sensitive Material 1-15
BEN for Attorneys: July 2002
-------
Currently Chief Competing Theory: Risk-Adjusted back to PPD & Risk-Free forward to PPD
NCD
CD
PPD
Compound past cash flows forward to the PPD at a risk-free rate,
and discount future flows back to the PPD at a "risk-adjusted" rate:
Risk-Free
>
>
>
>|<-—Risk-Adjusted (e.g., WACC)
Final Economic Benefit = -$13.910
The negative economic benefit estimate results from combining:
- small yet positive economic benefit of $34,630from initial capital investment cash outflow; with,
- negative economic benefit of $48,541 from the depreciation cash inflows. Using the other
methodologies, the violator similarly gains from delaying the actual expenditure, but then losesfrom
delaying the taxation advantages. This methodology, however, generates only a very small gain
(since the risk-free rate barely exceeds the inflation rate), which is more than offset by a larger loss.
(See spreadsheet printout pn facing page.)
Old EPA Approach: Equity Rate (13.8%) in Both Directions
First discount all cash flows back to the NCD at equity, for an initial economic benefit of $317,253.
Then compound the initial economic benefit forward to the PPD at equity, for a final benefit of
$784,710.
Old Agency Approach
$1,000,000
$800,000
$600,000
¦ Delay Scenario
~ On-Time Scenario
~ Economic Benefit
$400,000
$200,000
$0
1992 1993 1994 1995 1996 1997 1998 1999
Contains Enforcement-Sensitive Material 1-16
BEN for Attorneys: July 2002
-------
SECTION II:
ISSUES THAT ARISE WHILE USING BEN
Contains Enforcement-Sensitive Material
BEN for Attorneys: July 2002
-------
CIVIL PENALTY CALCULATIONS
• Two components for most penalties; see Policy on Civil Penalties (2/16/84, General
Enforcement Policy Compendium P.T. 1-1 andP.T. 1-2).
• Economic benefit of noncompliance: apply BEN model (as per Guidance for
Calculating the Economic Benefit of Noncompliancefor a Civil Penalty Assessment,
11/05/84, PT. 1-5.)
• Gravity, reflecting seriousness of the violation (consult applicable medium-specific
penalty policy).
• Gravity adjusted for: history of violation, cooperation/noncooperation, negligence/
willfulness, and ability to pay. (Ability to pay analysis may also apply to economic
benefit portion; see Guidance on Determining a Violator's Ability to Pay a Civil
Penalty, 12/16/86, PT. 2-1.)
• Add economic benefit and adjusted gravity to yield initial penalty target figure.
• Absolute bottom line is economic benefit component plus some nontrivial gravity
component, unless reasons to settle below this amount are compelling (Policy on Civil
Penalties, supra).
Contains Enforcement-Sensitive Material II-1
BEN for Attorneys: July 2002
-------
SETTLEMENT NEGOTIATIONS
• General Strategy for Settlement Negotiations (may not apply to unilateral orders): develop
several penalty calculations — not arbitrary ones, but instead each with its own rationale.
• But first and foremost, never apologize for your penalty figures:
A request made with diffidence and timidity is easily denied because the petitioner himself
seems to doubt its fitness. — Samuel Johnson
• Statutory Maximum (e.g.. $2.5 million) and Adjusted Penalty (e.g.. S2.45 million-)
• Include statutory maximum injudicial complaint (e.g., 100 days x $25,000).
• For EPA administrative cases, complaint should contain already-adjusted penalty
figure (e.g, $2.45 million), but you still need to calculate statutory maximum to
ensure your penalty calculation does not exceed this amount.
• Tactic for administrative cases: calculate penalty number for complaint using very
aggressive assumptions, resolving all doubts against violator. (Katzen Brothers
requires that all penalty factors be addressed.)
• Counter Offer #1 (e.g.. $1.82 million)
Applies penalty policy very aggressively against violator, but falls well short of statutory
maximum; should contain your maximum BEN figure.
• Counter Offer # 2 (e.g.. SI .63 million'!
Applies penalty policy less aggressively against violator; may have a lower BEN figure (e.g.,
based on a shorter period of violation).
• Negotiation Bottom Line (e.g.. $1.22 million)
Represents what the litigation team feels the case is worth; unless the team is convinced its
numbers are wrong, the government will not settle below this number.
• Penalty Policy Bottom Line (e.g.. $1.11 million)
Agency's penalty policy is never to settle below economic benefit of noncompliance;
litigation team in some cases can reduce penalty below Negotiation Bottom Line, but they
cannot reduce it below economic benefit unless highly compelling reasons are present.
• Flow of Negotiations: As you move from aggressive assumptions to less aggressive posture
on each penalty issue, obtain something in return, unless other side convinces you that your
assumptions are incorrect (e.g., compromise on penalty in return for better compliance
schedule or agreements to institute environmental auditing program).
• Common misconception is that BEN is totally objective and not a subject for negotiation:
financial theory behind the model's methodology is not negotiable, but sometimes certain
data inputs may be negotiable. (See following page.)
Contains Enforcement-Sensitive Material 13-2 BEN for Attorneys: July 2002
-------
DATES, RATES, AND DATA
• Period of violation (i.e., time between noncompliance and compliance dates) is major issue:
as interval increases, economic benefit increases.
• In practice, period of violation often not clear; if evidentiary problems, use sensitivity
analysis (i.e., multiple runs) to see impact of different assumptions.
• When violator not yet in compliance, must estimate a future date; tell violator your
assumption and avoid "unpleasant surprises."
• Be pessimistic: Things always take longer than they take. — Yogi Bera;
far easier to lower penalty for violator who beats schedule than increase it for one
that fails to meet schedule (i.e., don't get caught in "close and bump" situation).
• Might want to use date from proposed consent decree.
• Further compliance delays will increase BEN; faster schedules reduce BEN.
• Similarly, as penalty payment date extends further into future, economic benefit increases.
Tell violator BEN's penalty payment date, and that if date actually later, BEN will be higher
(and vice versa).
• Again, far easier to reduce a penalty for violator that agrees to pay earlier than to raise it for
one that pays later than you assumed. Also, inform violator that economic benefit will no
longer continue to be compounded forward if penalty amount is escrowed.
• BEN's discount/compound rate based upon a typical violator's cost of capital (WACC for
companies; municipal bond interest rate for not-for-profits); basis not open to negotiation,
but violator may argue for rate tailored to itself, industry, or specific division.
• Involve a financial analyst or contact U.S. EPA enforcement economics toll-free
helpline at 888-ECONSPT if violator raises an issue about calculation for discount/
compound rate (i.e., cost of capital).
• Might want to warn violator that case-specific cost of capital could result in higher
discount/compound rate, which will increase economic benefit.
• For cost estimates, aim high as negotiation ploy; common data sources include:
• Discovery for evidence of violator's actions: daily logs, consultant's reports,
discharge monitoring reports (DMRs), model interrogatories, request for production.
(See Appendix A for Interrogatories and Motions for Production)
• Administrative subpoena.
• Ask engineering experts, both in-house, and contractors, or even similar regulatee.
• Clean Air manual at http://www.epa.gov/ttn/catc/products.html.
• Vendor lists at http://es.epa.gov/vendors and http://eco-web.com.
• Computer model in development for standardized RCRA compliance costs.
Contains Enforcement-Sensitive Material D-3
BEN for Attorneys: July 2002
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COMMON VIOLATOR ARGUMENTS
1. Cost of roof on new treatment building should be excluded since roof is not needed to
operate treatment system.
• In virtually all cases, BEN should include the cost of the roof unless the violator can
conclusively prove that the treatment system would operate just as effectively and efficiently
without the roof (all else being equal) and that the roof is not a customary part of such
treatment systems. A violator can almost never support this claim, since it must essentially
argue that installing a roof was a waste of money (serving no sensible business purpose).
2. Cost ofpainting walls and landscaping treatment building should be excluded since they are
unnecessary for compliance.
• While such items may not be directly necessary to achieve compliance, if these items are
normally part of such projects, then BEN should include their costs. Such expenditures often
provide intangible and tangible benefits, such as improving the appearance of the facility,
reducing erosion and dust, preserving the building, and creating a more attractive
environment for employees, visitors, and customers. Presumably these expenditures would
have been necessary for on-time compliance, and hence the violator benefitted by delaying
them.
3. Cost of an extra (backup) pump should be excluded, since it is unlikely ever to be used.
• While the pump may never be used, if reasonable engineering practice would include an
extra pump (or any other backup systems), then BEN should include its cost. Given that the
violator did (or will) purchase the extra pump, the burden is on the violator to show that it
is unnecessary to achieve and consistently maintain compliance. Further, even if the cost of
the extra pump were subtracted from the capital investment, annual operation and
maintenance costs might need to be increased to reflect the greater importance of maintaining
the existing pumps.
4. Cost of building second floor above treatment plant should be excluded since it is used
exclusively for purposes unrelated to compliance.
• If the second floor does not support the pollution control system, then the incremental cost
of building the second floor may be subtracted from the capital investment.
Contains Enforcement-Sensitive Material II-4
BEN for Attorneys: July 2002
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COMMON VIOLATOR ARGUMENTS (continued)
5. Cost of building tertiary treatment system should be excluded since only primary and
secondary treatment systems were necessary to remedy violations.
• If the tertiary treatment system really was unnecessary to prevent the violations alleged in the
complaint, but rather is necessary for achieving compliance with future standards, then
subtract its cost from the capital investment. Recall that the capital investment should reflect
the pollution control system that was necessary to remedy the violations at the time and under
the conditions alleged in the complaint. The violator, however, must convince EPA that the
additional cost is truly unrelated to remedying the violations alleged in the complaint.
6. No additional labor is necessary to operate new pollution control system, since existing
employees operating old system will operate it.
• If the existing employees were operating an old pollution control system replaced by the new
system, then this claim may be correct. Presumably the total labor costs associated with the
old pollution control system (replaced by the new system) are less than or equal to the labor
costs for the new system. If the new system is more efficient to operate, even less labor may
be required. Your entry for annually recurring costs should reflect this and can even be
negative.
7. Labor costs for new system are really zero because we are reassigning workers from another
part of plant; thus, since we are not hiring additional workers to run system, we have no
incremental labor costs.
• This claim is not correct since the employees who will operate the new system are not
coming from the old pollution control system that is being replaced. Rather, they are coming
from another part of the facility and the facility will be deprived of the productive work these
employees were doing. If the violator had complied on-time, it would have had to shift these
employees to pollution control and given up the work these employees otherwise would have
done somewhere else (e.g., the production line) during the period of noncompliance. This
is the concept of opportunity cost: the cost of resources for a particular use is measured by
the benefit lost in forfeiting their best alternative use.
Contains Enforcement-Sensitive Material II-5
BEN for Attorneys: July 2002
-------
TRIAL PREPARATION
Expert Witness — whether in-house employee or outside consultant — presents analysis of
benefit, with calculations using whatever analytical tool expert thinks is appropriate (e.g.,
BEN, computer spreadsheets, calculator).
• Many cases may involve complex compliance scenarios for which customized
computer spreadsheets more flexible than BEN are necessary, other cases may
involve very simple calculations that can be presented in an even more streamlined
format than BEN, while some cases may be perfectly amenable to BEN.
• If BEN model is used to calculate economic benefit, person who ran BEN should be
the testifying expert if and only if that person can explain it to judge and handle
cross-examination.
• Focus trial preparation on key differences between defendant's analysis and
enforcement agency's.
• While you are still in negotiation, obtain necessary documents to support benefit
analysis at trial — if you wait until after settlement fails to begin discovery, then you
will probably not have enough time to obtain documents you need.
• Attorney who is handling the expert witness must understand the underlying financial
theory. There are there reasons:
• Judges need to see that you understand the finance issues, and the can tell
when all you are doing is asking scripted questions and getting scripted
answers.
• You need to able to rehabilitate your expert if defendant's counsel shake his
or her testimony.
• You need to effectively cross examine the opposing expert witness, many of
whom are vulnerable.
• Consider using the rule of thumb approach, presented at the end of this section, if the
benefit component is small (under $10,000) and the other side does not have an
expert witness.
Contains Enforcement-Sensitive Material 13-6
BEN for Attorneys: July 2002
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RULE OF THUMB BENEFIT CALCULATION MODEL
• Only use this when the following criteria are met:
• Violator is not using an expert witness.
• The benefit is relatively small (probably under SI 0,000 or if the benefit represents
only 10% of the entire penalty).
• Advantages
• You can have anyone present the calculation as long as they can explain it clearly.
• Remember that reasonable "approximations will suffice" in Clean Water Act cases,
and perhaps others.
• Presents the trier of fact with a fairly simple calculation, and should conserve trial
time and enforcement resources.
• Presents a conservative calculation of benefit as it understates benefit (in comparison
with BEN) in almost all typical cases.
• Rule of Thumb has actually been around since 1984 (contained in Framework
document).
Contains Enforcement-Sensitive Material 13-7
BEN for Attorneys: July 2002
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2/22/01 Draft: Predecisional and Enforcement Sensitive, not Subject to FOIA Release
Explanation of Rule of Thumb Calculation
EPA established the economic benefit recapture requirement in its Policy on Civil Penalties
and the accompanying document, A Framework for Statute-Specific Approaches to Penalty
Assessments. These 1984 policies were codified in the General Enforcement Policy Compendium
as P.T. 1-1 and P.T. 1-2, respectively. On pages 7-8, the Framework document presents a simple
formula for calculating the economic benefit from delayed expenditures, and on page 9, the
Framework document presents a simple formula for calculating the benefit from avoided
expenditures. Both of these formulae are contained in the Rule of Thumb Economic Benefit
Spreadsheet. A sample analysis using that Spreadsheet is attached. The following presents some
guidance in using the Spreadsheet.
Operation of the Rule of Thumb Spreadsheet
All you will need to use this Spreadsheet are the costs avoided and/or delayed, the amount
of time the entity was in violation, and the combined Federal and State tax rate from the State where
the violating facility is located. This information is available from the BEN model, but if for some
reason that information is unavailable, the user can use 39.5% as the tax rate as it is an average of
all combined Federal and State tax rates. The tax rate needs to be entered as a decimal (e.g. 39.5%
would be entered as 0.395).
Advantages of the Rule of Thumb Spreadsheet
The Spreadsheet approach has several advantages over using the BEN model. First its
simplicity allows our enforcement personnel without finance backgrounds to present a benefit
calculation in a hearing. The BEN model is somewhat complex and beyond the expertise of most
enforcement professionals to explain from the witness stand. The Spreadsheet, in contrast, could
be explained by almost all of our enforcement professionals. While this approach is not nearly as
accurate as the BEN model or the approaches we normally use at trial or hearing, it is adequate as
the standard for Clean Water Act cases for the calculation of economic benefit is a "reasonable
approximation". That standard should eventually be adopted in other media as there is no difference
between the calculation of benefit in a Clean Water Act case and a case involving TSCA, RCRA,
CAA, etc. The Rule of Thumb Spreadsheet also presents the trier of fact with a simple calculation
and should reduce hearing time and conserve litigation resources.
Contains Enforcement-Sensitive Material II-8
BEN for Attorneys: July 2002
-------
Limitations
The Spreadsheet has some limitations. The first is, as mentioned above, it is not nearly as
accurate as the BEN model or the other approaches we normally use at trial or hearing. Because of
that, you should not use it if the respondent is using an expert witness to oppose the benefit
calculation. Although we only have to come forward with a reasonable approximation of benefit,
the Spreadsheet will probably not compare favorably with a sophisticated analysis. As a practical
matter, you should also not use the Spreadsheet if the benefit component is significant (i.e. over
SI 0,000). For a small benefit calculation, the inaccuracies are de minimis, but as the size of the
benefit increases, the inaccuracies become more significant and will substantially understate the
economic savings from noncompliance.
Comparison with BEN
The Rule of Thumb Spreadsheet will yield more conservative calculation of economic benefit
in the vast majority of cases because of the following factors:
• The delayed cost calculation assumes a 5% time value of money (i.e., the discount
rate). This is nearly half of the typical discount rate in the BEN model.
• The avoided cost calculation makes no adjustment for the time value of money. This
is just a straight calculation of the after-tax value of the avoided expenditures. No
attempt is made to include the benefit the violator derived from internally reinvesting
that money even at the delayed-expenditure calculation's meager 5% rate.
Some aspects of the Spreadsheet that are less conservative than the BEN model, but their
combined impact does not fully mitigate the impact of the conservative assumptions discussed
above. Just for the record those aspects are:
• No adjustment is made for inflation. Inflation usually reduces economic benefit
because it makes complying late more expensive than complying on time. (I.e., the
equipment in 2001 costs more than if it had been purchased on time in 1996.)
• No adjustment is made in the delayed cost calculation for taxes. Since the equipment
is depreciable, and the one-time nondepreciable expenditures are usually tax
deductible, the Spreadsheet's cost figures are higher than BEN would use. If a firm
can depreciate and/or deduct its pollution control expenditures, it can reduce the cost
of compliance, and the economic benefit from delaying compliance will be
consequently lower. The higher the firm's tax rate, the lower the economic benefit.
But for the typical delayed cost calculation, the Spreadsheet will usually be 40-50% less than
BEN. For the typical avoided cost calculation, the Spreadsheet will usually be about 15-25% less.
Contains Enforcement-Sensitive Material II-9
BEN for Attorneys: July 2002
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Rule of Thumb Economic Benefit Spreadsheet
Benefit from Delayed Expenditures
Cost 5% Gain Years of NC Total
10000 500 5 2500
Benefit from Avoided Expenditures
Cost Tax Rate After Tax Cost Years of N/C Total
1000 0.405 595 5 2975
Grand Total
5475
Contains Enforcement-Sensitive Material 11-10
BEN for Attorneys: July 2002
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STATUTE OF LIMITATIONS CONCERNS
• Economist's view: SOL is irrelevant.
• DOJ view: uncomfortable with going past SOL date, i.e., five years before complaint filed,
but does show some interest in taking the more aggressive approach. In Sheyerne Tooling,
judge calculated benefit going back 10 years before complaint filed.
• Not settled policy or law.
• Probably should go beyond SOL, but need to be careful which cases:
• Purpose of SOL is prevent parties from having to defend themselves from stale
claims (e.g., evidence not clear when violations started and stopped).
• But if whole basis is that violator never installed equipment that was required in 1984
and still has not, can't be surprised if brought into a 1998-filed case.
• Arbitrary to cut off benefit at five years before complaint was filed.
• Economic benefit is a factor to consider, not a jurisdictional question:
• This is the language of the statute.
• Other factors are considered even beyond five years.
• History of violation — should judge ignore fact that the defendant committed the
same violation 3 years ago, 8 years ago and 10 years ago?
• Should judge ignore fact that defendant has letter from 1984 from EPA stating it was
exempt?
• Canned brief available on SOL issue attached as Appendix C.
Contains Enforcement-Sensitive Material II-11 BEN for Attorneys: July 2002
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SECTION III:
LATEST DEVELOPMENTS IN BENEFIT RECAPTURE
Contains Enforcement-Sensitive Material
BEN for Attorneys: July 2002
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STATUS OF PUBLIC COMMENT PROCESS
• In October 1994, several industry groups (now calling themselves the "BEN Coalition")
submitted a petition for rulemaking concerning recovery of economic benefit, arguing that
the BEN model constitutes a rule.
• Partly in response to this petition (which the BEN coalition is no longer pursuing), in an
October 1996 Federal Register Notice, EPA requested public comment on its economic
benefit recapture approach, including the BEN model.
• Specific areas for requested comment included:
• Broad Economic Benefit Recapture Issues
(including Alternatives to BEN and Illegal Competitive Advantage)
• BEN's Calculation Methodology
• Improving BEN's User Friendliness
• FR Notice responded to public comments and proposed revisions to BEN on June 18,1999.
• FR Notice also requested comment on EPA's proposed revisions to BEN.
• EPA's response
Federal Register; Vol. 64, No. 117; Friday, June 18, 1999; "Civil penalty
enforcement cases; calculation of economic benefit of noncompliance," 32947-32972
[FR Doc. 99-15271]
http://frwebgate4. access, gpo.gov/cgi-bin/waisgate.cgi?WAISdocID=27935219219
+0+0+0&WAISaction=retrieve
• Final notice containing responses to second set of comments along with final Agency
decisions on changes to the benefit recapture approach has been ready since the summer of
2000, but has been held up due to language in EPA's 2001 appropriation suggesting the
model be put through a third peer review.
• ICA peer review in early FY 2003.
• N.B. Nothing should be construed to indicate less full application of BEN and ICA
concepts.
Contains Enforcement-Sensitive Material IH-l
BEN for Attorneys: July 2002
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ILLEGAL COMPETITIVE ADVANTAGE
• Although BEN does not calculate the economic benefit from illegal competitive advantage,
it does ask certain questions concerning its possible presence.
• Below are the questions that BEN asks, along with the responses that appear in BEN's results
if you answer affirmatively.
1. Did violator's noncompliance allow it to begin production or sales sooner than it should?
Violator may have received "early-mover advantage" by beginning production or sales
sooner than it should.
2. Did violator sell prohibited products?
Violator' s net profits from illegally sold products may constitute economic benefit, and if the
violator continues to sell similar now-legal products in same market, then lasting market
share effect may constitute an additional benefit.
3. Are compliance costs a significant percentage of total production costs?
Violator may have benefitted from market share gains by undercutting its competitors
through price advantages from noncompliance.
4. Does violator sell products that can develop "brand loyalty " or high switching costs?
Violator may have benefitted from market share gains because it sells products that can
develop "brand loyalty" or high switching costs.
5. Has violator developed or sold new products while in noncompliance?
Violator may have gained "early mover" market share and been able to discourage
competitors by keeping prices low, since it developed or sold new products while in
noncompliance.
6. Could violator have complied cost-effectively by reducing output/throughput?
Incremental net profit from higher output/throughput could constitute economic benefit,
since violator could have complied cost-effectively by output/throughput reduction.
• If you answer affirmatively to any of these questions, further research and analysis is
necessary to determine the full extent of the violator's economic benefit.
• You might wish to consult U.S. EPA's guidance on illegal competitive advantage, or
contact EPA's enforcement economics support helpline, at 888-ECONSPT (326-6778).
Contains Enforcement-Sensitive Material HI-2
BEN for Attorneys: July 2002
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UPCOMING ILLEGAL COMPETITIVE ADVANTAGE STRATEGY
• EPA preparing guidance document to assist enforcement staff in evaluating illegal
competitive advantage (picking up where BEN's questions leave off).
• Goal is not to provide fixed approach to calculating economic benefit from illegal
competitive advantage; rather, educate enforcement staff on types of illegal competitive
advantage that arise in enforcement actions, and provide framework for EPA analysts and
outside experts who perform actual calculations.
• EPA proposes the following general outline for discussion and assessment of illegal
competitive advantage.
I. Introduction to Illegal Competitive Advantage
A. Economic Benefit From Delaying or Avoiding Compliance Costs
B. Economic Benefit from Illegal Competitive Advantage
II. How to Determine When BEN is Insufficient
A. Examples and Counterexamples
1. Violator Gains Additional Market Share
2. Violator Sells Products or Services Prohibited by Law
3. Violator Initiates Construction or Operation Prior to Government Approval
4. Violator Operates at Higher Capacity
B. BEN Model Screening Questions
1. Did noncompliance create a cost advantage that allowed market share gains?
2. Did violator sell prohibited products/services that no additional costs could
have made legal?
3. Did noncompliance allow start of production/sales earlier than under
hypothetical compliance?
4. Would permit have affected operations so significantly as to alter gross
revenues?
5. Did compliance *require* a reduction in throughput/output?
III. How to Calculate Illegal Competitive Advantage
A. Fundamental Guidelines
B. Examples
1. Violator Gains Additional Market Share
2. Violator Sells Products or Services Prohibited by Law
3. Violator Initiates Construction or Operation Prior to Government Approval
4. Violator Operates at Higher Capacity
• Agency will probably seek public comment on its approach.
Contains Enforcement-Sensitive Material m-3
BEN for Attorneys: July 2002
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SECTION IV:
JUDICIAL TREATMENT OF THE BENEFIT RECAPTURE ISSUE
Contains Enforcement-Sensitive Material
BEN for Attorneys: July 2002
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JUDICIAL TREATMENT OF BENEFIT RECAPTURE ATTEMPTS
I. Legislative Consideration of Economic
A. No Statute or regulation actually requires recapture (exception: CAA Section 120)
B. Most that is required is'consider"
C. Very helpful language in Clean Water Act cases:
1. Reasonable approximation standard
2. I would argue that we can apply this standard in any medium
II. Calculation of Economic Benefit by the courts
A. Judicial perspective on egregious facts
B. Disputed Input Values
1. Discount Rate
a.
Preference for company-specific discount rates
b.
Courts that have adopted an equity discount rate even after the EPA
adopted a WACC based rate
c.
Use of a Standard Discount Rate
d.
No Benefit Assessed
e.
Summary of the Discount Rate Issue
f.
WCI case
2. Date of Noncompliance/Compliance
a. Date of noncompliance
b. Date of Compliance
3. Cost of equipment
a. Less costly alternatives
b. Challenges to the underlying engineering
c. Consideration of interim compliance costs
d. Offsetting illegal compliance costs
4. Refusal to disclose information relevant to the calculation
5. Competitive advantage trends
IE. Effectiveness of the Methodology
A. Establishing a Prima Facie Case - get expert report into the record. Timely submission
critical.
B. Failure of approach due to complexity - try to keep it as simple as possible.
(Let the other witness introduce the complexities.)
Contains Enforcement-Sensitive Material IV-1
BEN for Attorneys: July 2002
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APPENDIX A
Model Interrogatories
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
August 30, 1996
MEMORANDUM
From: Jonathan Libber,1 BEN/ABEL Coordinator Multimedia Enforcement Division
Office of Enforcement and Compliance Assurance
To: BEN & ABEL Users
Subject: Model Interrogatories and Requests for Production for Corporate and
Individual Defendants: Economic Benefit
The attached document provides model interrogatories, requests for production, and judicial and
administrative subpoenas. These instruments are used for discovery of information and
documents related to economic benefit issues. Model certificates of service which accompany
interrogatories in the discovery process are included at the end of the document..
Purposes of Interrogatories:
Interrogatories are written questions used as part of discovery.2 This device can only be served
on parties and not non-party witnesses.3 They can not be served until discovery begins, which
requires parties to confer and discuss discovery issues.4 The federal rules restrict the number of
interrogatories to 25 and there is a 30 day turnaround period for the opposing side to respond.
The number of interrogatories and turnaround time can be altered by the attorneys or by the
judge. This is usually done at the pretrial conference.
A general understanding of the case becomes clearer through the use of interrogatories.
Interrogatories are most effective in obtaining basic background information, which is best
'Brian Perlberg, Craig Spencer, and Matthew Azrael assisted in creating this document as legal
interns, under my supervision.
2Discovery is the litigation process in which parties exchange information and documents.
Rule 26 of the Federal Rules of Civil Procedure governs discovery. Generally speaking,
discovery is quite broad and applies to all information which is not privileged and is reasonably
calculated to lead to evidence at trial. Fed.R.Civ.P. 26(b)(1).
3Fed.R.Civ.P. 33(a).
4Fed.R.Civ.P. 26(f).
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
employed in the early stages of discovery. They are especially effective at identifying which
persons are qualified to answer questions. These individuals must then reveal accurate and
complete information. Interrogatories can also be useful in obtaining documents.
Federal Rule of Civil Procedure 26 (a)5 requires an initial mandatory release of information and
documents. Requests for documents can be made after each interrogatory or at the end of a set of
interrogatories, as in the following model. The utility of interrogatories are somewhat limited.
Unlike a deposition, interrogatories are not interactive.6 Therefore, special attention must be paid
in the wording of an interrogatory because it must stand by itself. An interrogatory must directly
ask a question anticipating circumstance not yet discovered. Interrogatories do not have to be
sent all at once. Often, it is strategically advantageous to send them in batches. Interrogatories
can be used to compliment other discovery devices, building upon information and asking
different types of questions. One caveat is the turnaround time, which is 30 days if not altered.
A case can slow down if it relies on answers to interrogatories. Interrogatories do not have to be
answered if they are not filed 30 days before the end of discovery.
Documents and information obtained from interrogatories may provide a realistic and informed
position without expending resources. This information may be enough to agree to a settlement
or stipulated facts. Further discovery should become more refined and specific. Follow-up
interrogatories can provide an effective means to obtain further information without expending
unnecessary time and resources.
General Guidance in Using These Interrogatories:
These interrogatories provide general guidance for obtaining economic benefit information.
However, interrogatories are most effective when tailored to a particular case. The size and
structure of the violating entity are crucial factors when developing questions.
5Please note all states have either adopted the Federal Rules of Civil Procedure or parallel
rules. Therefore, the same rules and concepts apply for the use of interrogatories for state
litigation as they do in the federal arena. You must conform with additional or different local
discovery rules when applicable. This concern is of greater concern when filing motions with the
court or the procedures involved in a Federal Rule of Civil Procedure, Rule 12, regarding pre-
trial conference.
Depositions are generally governed by Fed.R.Civ.P.33(a). Under 40 C.F.R. §22.19 (f)(2),
oral questions are only given upon a showing of good cause requiring a finding the information
can not be obtained by alternative means or the witnesses testimony may otherwise not be
preserved for a hearing.
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
Answering interrogatories should not cause an undue burden on the violator. There is a real
concern that opposing counsel with object to an over-reaching interrogatories. According to 40
C.F.R. §22.19(f) "Other Discovery" (1) must not unreasonable delay the proceeding (2) the
information sought is not otherwise obtainable; and (3) such information must have significant
probative value. Therefore, some of the model interrogatories require greater specificity to
extract only the information relevant to the case at hand.
Concerns for business confidentiality are governed 40 C.F.R. §2.203(b). Information subject to
business confidentiality will only be made public under the procedures set forth in 40 C.F.R. §
22.02 (2)(B). If business confidentiality is not asserted when submitting information, the
information may make this information public without further notice to the defendant.
These model interrogatories attempt to include all relevant concerns in ascertaining economic
benefit of noncompliance information. It is not necessary to include all of the interrogatories to
ascertain relevant information. The interrogatories are not listed in order of importance. Rather,
the particular facts of each case and the discretion of the user will determine which questions are
most relevant. Users of these interrogatories must exercise discretion in determining whether the
size of a defendant's company merits such an inquiry or is unnecessarily burdensome.
Please note; anyone with additional interrogatories or comments pertaining to this document is
encouraged to send them to me. My mailing address is: (2248-A); USEPA; 401 M Street, S.W.;
Washington, D.C. 20460. My e-mail address is: Libber.Jonathan@EPAMAIL.epa.gov. If you
wish to discuss them with me, please call me at (202) 564-6011.
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
MODEL INTERROGATORIES AND REQUEST FOR PRODUCTION:
ECONOMIC BENEFIT
TABLE OF CONTENTS
Pages
I. Sample Interrogatories 4-10
II. Sample Interrogatories 11-14
HI. Requests for Production 15-16
IV. Subpoenas for Discovery 17
V. Certificates of Service 18
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
INTERROGATORIES OF PLAINTIFF THE UNITED STATES
OF AMERICA TO DEFENDANT, (insert name)
ECONOMIC BENEFIT
1. Describe all actions taken or considered by (defendant) to comply with (statute) or
any other environmental statute, federal or state, that (defendant) is not in compliance.
a) For each action taken:
i. describe the implementation of the action/s;
ii. state the date(s) of such action/s;
iii. state an itemized list and describe the cost of each particular action;
iv. identify all persons responsible for implementing the action;
v. identify all documents relating to the action.
b) For any and all action considered but ultimately not implemented to completion:
i. identify and describe why the action was not taken, including all relevant
considerations, including, but not limited to, cost, difficulty, publicity;
ii. state the estimated cost of each action;
iii. identify all persons responsible for the decision not to take the action;
iv. identify all documents relating to the decision not to take the action,
providing an explanation of their significance.
2. Identify and describe the actions, including, but not limited to, purchasing and installing
additional equipment, employing more management and maintenance, that would be
necessary for (defendant) to achieve full compliance with (statute) . and for each such
action:
a. Estimated the time for each particular action that could be achieved in regards to
actually coming in full compliance;
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
b. state the estimated costs of each action, indicating separately capital costs and
operation and maintenance costs;
c. identify all document relating to action needed to compliance.
Identify and describe any capital equipment already installed, which is designed to and
actually does facilitate compliance. For each measure taken:
a. Identify and describe how the equipment assists in achieving full compliance as
well as any other function of the equipment;
b. Identify specific date(s) of purchase(s) and when it became fully operational;
c. Identify its current fair market value and the actual price paid;
d. Identify the date of installation;
e. Identify the useful life of equipment;
f. Identify any and all operation and maintenance costs for each year.
If any of the capital equipment described in interrogatory #3 is not fully operational:
a. Identify the nature of the equipment;
b. Identify why the equipment is not fully operational;
c. Identify the specific date the equipment will become fully operational, if ever..
Describe any capital equipment that will be installed to achieve compliance.
a. Identify the nature of the equipment;
b. Identify when it will be purchased;
c. Identify its cost;
d. Identify the specific date it will be installed;
e. Identify the specific date it will become fully operational;
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
f. Identify the equipment's useful life, describing how this approximation was made
and providing the useful life of comparable equipment in function and cost;
g. Identify any and all operation and maintenance costs for each year.
6. For any and all capital equipment listed in answers to interrogatories #3, 4, or 5, identify
any and all actual and expected costs associated with:
a. The purchase of the equipment;
b. The installation of the equipment;
c. Making the equipment fully operational.
7. For any and every expenditure, that is in any way related to environmental matters or
compliance, that is not listed in response to interrogatories #3, 4, 5, or 6, identify and
explain:
a. The nature of the expense;
b. The amount of the expense;
c. The date the expense was incurred;.
d. Any expense that will be incurred again:
i. At what interval (i.e. monthly, annually)?
ii. For what period of time (i.e. one year, ten
years, indefinitely)?
8. For every expenditure listed in response to interrogatories #3, 4, 5, 6, or 7, identify and
explain any and all documentation of each and every transaction involved in the
expenditure.
9. Identify any and all consultants, including but not limited to, engineering, environmental,
or financial consultants, that (defendant) has retained, or that have been retained on _
(defendant's) behalf, to achieve or assist full compliance with (statute). For each such
consultant:
a. state the date the consultant was retained;
b. describe the consultant's work that has been or will be performed;
7
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
c. state and itemize the cost or estimated cost of this specific work, indicating any
and all fees overlapping with other projects or whether there has been any
reduction or discounting in fees due to other retained work by the consultant or
the consultant's company.
d. list the schedule or proposed schedule for that work;
e. identify all documents related to that work, including any reports or draft reports
prepared by the consultant; and
f. identify all persons who prepared or assisted in the preparation of each such
report or draft report and state each such person's area of responsibility.
10. List any and all expenditures, including all capital expenditures, and all expenditures for
consultants or engineers, made to achieve compliance with ("statute) .
a. For each such expenditure:
i. identify the item;
ii. state the date of the expenditure; and
iii. state the amount of the expenditure.
b. For each capital expenditure:
i. state whether the expenditure is recurring or non-recurring
ii. if the expenditure is recurring, state its useful life.
11. Identify and describe any and all documents, reports, monitoring data or any
memorandum relating to (defendant's) violation, including but not limited to the date,
results, and conclusions of such information, whether the above information was
submitted to any person or entity, the dates of the submission, and identity of any person
or entity to whom the submissions were made.
12. Identify and explain any and all of the Corporation's documents, daily logs, records,
diaries, other forms of record keeping pertaining or relating to environmental matters at
any of the Corporation's locations, as recorded by on-site supervisors, engineers,
managers, or other employees or representatives of the Corporation, as well as identifying
any person involved in the production, storage or organization of such documents.
8
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
13. At (the site involved) , Identify any and all persons that:
a. Monitor the discharge of any pollutant in any amount from (date) until the
present. Describe the monitoring process.
b. Maintain records, logs, diaries, or any other record keeping device that relates to,
or in any other way involves environmental matters or compliance. Identify any
such document.
c. Is in any way involved in reporting information that relates to, or in any other way
involves environmental matters or compliance, to any agency, firm, or individual.
Identify any such reports, and to whom the report was made.
14. Identify and explain in detail how the Corporation is financing or intends to finance the
pollution control expense or investment, that will bring (defendant) in full compliance
and any other pollution control measures that go beyond compliance.
15. Identify and explain the Corporation's use of the following, if applicable;
a. internal discount rate
b. anticipated rate of return on equity
c. anticipated rate on debt.
16. Identify and explain how (defendant) became aware of its noncompliance, and provide
the date of discovery.
17. Identify and describe any and all complaints, citations, letters, or any type of notice
relating to (defendant's) violation, including the date of such notice, identification of
who brought forth the information, including but not limited to concerned citizens,
businesses, local, State, or federal governments.
9
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
PLAINTIFF, UNITED STATES OF AMERICA
( insert name)
United States Attorney
District of (name of district)
By:
(Name)
(title)
(Name)
(title)
Attorney
Environment and Natural Resources Division
United States Department of Justice
9th and Pennsylvania Avenue, N.W.
Washington, D.C. 20530
(202) (phone)
OF COUNSEL: (if necessary)
(e-g.)
Assistant Regional Counsel
U.S. Environmental Protection Agency
Region (#)
(name)
(Street)
(city)
(Name)
Attorney-Advisor
U.S. Environmental Protection Agency
401 M Street, N.W.
Washington, D.C. 20460
(Phone)
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
III. REQUESTS FOR PRODUCTION
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF
UNITED STATES OF AMERICA,
Plaintiff,
v.
Defendant.
********************
REQUESTS FOR PRODUCTION OF DOCUMENTS FROM
PLAINTIFF THE UNITED STATES OF AMERICA TO DEFENDANT
(insert name)
Plaintiff, the United States of America, requests each defendant, pursuant to Rules 26 and
34 of the Federal Rules of Civil Procedure, to produce and permit plaintiff to inspect and
copy or photograph each of the following documents which may be in the Defendant's
possession, custody or control. These documents are to be produced within 30 days after service
of this Request at or at any other location agreed upon by
counsel for all parties.
*
*
*
*
*
* Civil Action No.
*
*
*
*
*
*
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
REQUESTS FOR PRODUCTION
1. All documents identified in response to each interrogatory of the United States in
accompanying Interrogatories of Plaintiff the United States of America to Defendant
, including but not limited to:
a. invoices, purchase orders, receipts, canceled checks, or any other documentation
related to the purchase, installation, maintenance or repair of pollution control
equipment;
b. invoices, purchase orders, receipts, cancel checks, or any other documentation
related to any other expenditure related to, or in any other way involving,
compliance efforts;
c. inter- or intra-office memoranda, notes, letters, monitoring reports, logs, diaries,
or any other documentation relating to, or in any other way involving,
(defendant's) compliance, or lack thereof;
d. any and every document related to any and every financing agreement, loan or
loan application, equity holding, debt holding, or other financial investment.
2. Produce all engineering or environmental reports or studies relating to (site in violation-)
including, but not limited to, any reports or studies relating to any means to achieve
compliance with (statute) .
3. Produce all reports or studies relating to financing any pollution control measure taken by
(defendant) .
4. Produce any and every document relied on in any way in answering any of the attached
interrogatories. Identify each and every document by the number of the interrogatories to
which it is responsive.
Respectfully submitted,
(Name)
(Title)
(Attach Certificate of Service if Requests for Production filed apart from Plaintiffs
Interrogatories. See the sample Certificates of Service at the end of this document.)
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
OF COUNSEL: (if necessary)
(name)
U.S. Environmental Protection
Agency, Headquarters
401 M Street, S.W.
Washington, D.C. 20460
(name)
U.S. Environmental Protection
Agency, Region _
(address)
13
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IV.
ENFORCEMENT SENSITIVE AND CONFIDENTIAL
SUBPOENAS FOR DISCOVERY
A. Administrative Proceedings
UNITED STATES OF AMERICA
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
(address)
TO: (ADDRESSEE)
For the purpose of collecting information to facilitate the potential settlement of certain
claims of the United States under the Act, concerning the _
Corporation, located at , YOU ARE HEREBY
COMMANDED, pursuant to Section of (insert relevant statute },
TO GIVE TRUTHFUL ANSWERS in writing to all questions set forth on the attached pages.
YOU ARE COMMANDED FURTHER TO PRODUCE all documents identified and
described on the attached pages.
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
Your written answers to the attached questions and the production of the requested
documents shall be made within 30 days of service of this subpoena on you to the following
individual:
(name)
(address)
U.S. Environmental Protection Agency
(phone)
NONCOMPLIANCE WITH THIS SUBPOENA MAY SUBJECT YOU TO A CIVIL ACTION.
Issued at , this day of
19_.
Regional Administrator
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
B. Non-Party
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF
UNITED STATES OF AMERICA,
Plaintiff, *
*
*
v. * Civil Action No.
*
*
*
5
*
Defendant. *
*
********************
SUBPOENA
YOU ARE HEREBY COMMANDED TO Answer Interrogatories and Produce
Documents at on the . 19 within
days of your receipt of this notice.
This Subpoena requested by (plaintiff)
Date Issued Judge
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ENFORCEMENT SENSITIVE AND CONFIDENTIAL
V. MODEL CERTIFICATE OF SERVICE
CERTIFICATE OF SERVICE
I hereby certify that service of the foregoing Interrogatories and Request for Production of
Documents of Plaintiff The United States of America to Defendant , has this
day of , 19 , been made on counsel of record, by depositing copies in the United
States'mail, postage prepaid, addressed to the following:
(Attorney')
(Firm Name)
(Address)
( name )
For the Plaintiff
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APPENDIX B
Draft Case Memorandum
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Enforcement Sensitive and Confidential - Draft - FOIA
Exempt
I. INTRODUCTION: ECONOMIC BENEFIT CONCEPT AS
GENERALLY HANDLED BY THE COURTS
A. Economic Benefit Factor In Penalty Calculations
Most environmental statutes require courts to consider the
economic benefit of noncompliance when assessing penalties
against violators. Courts, in general, attempt to follow
statutory language in their appraisal of the economic benefit
issue. In this context, EPA's generic penalty policy and the BEN
model have received varying degrees of deference in the courts'
formulation of civil penalties.
The EPA's Policy on Civil Penalties,(February 16, 1984,
codified as PT-1-1 in the EPA's revised General Enforcement
Policy Compendium) has served as a guide in a string of cases in
determining what factors need to be considered in civil penalty
calculations. The goals of deterrence, restitution and
retribution that are explicitly outlined in the policy have been
widely accepted by the courts. Judges, on occasion, have adopted
the elements of economic benefit as outlined in the EPA Policy:
First, by delaying the expenditure of funds on compliance, a
violator obtains the use of the money for other purposes in
the meantime. Second, a violator may also avoid some costs
altogether - for example, the costs of maintaining and
operating the pollution control system until it is
implemented. Third, a violator may, in addition, obtain a
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competitive advantage as a result of its violation. For
example, it may be able to offer goods at a lower price,
thereby possibly increasing its sales and profits.
Chesapeake Bay Foundation v. Gwaltnev of Smithfield. 611 F.
Supp. 1542 (D.Va. 1985)aff'd 791 F.2d 304 (4th Cir. 1986),
rev'd on other grounds, 484 U.S. 49 (1987).
The importance of recovering each element of economic
benefit in a civil penalty has crucial significance in serving
the goal of deterrence. Courts generally do appreciate the fact
that a penalty that does not recover economic benefit cannot
offer an effective deterrent to a violator.
Although the Consolidated Rules of Practice 40 CFR Part 22
require the ALJ to consider the applicable penalty guidelines
such as the economic benefit of noncompliance, the ALJ is not
required to make the penalty recapture the economic benefit of
noncompliance in any particular case.1 If the ALJ decides not to
account for the economic benefit of noncompliance in his penalty
calculation, he must proffer a reasonable explanation for his
decision.
To discourage future violations, the amount of civil
penalty must be high enough to insure that polluters cannot
simply absorb the penalty as a cost of doing business.
Otherwise, a rational profit maximizing company may choose to pay
the penalty rather than incur the compliance costs. Friends of
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the Earth. Inc. v. Laidlaw Environmental Services (TOC), Inc..
890 F.Supp. 470, 491 (D.S.C. 1995) ("A penalty serves as a
successful deterrent only if potential violators believe that
they will be worse off by not complying with the applicable
requirements").
There are three basic approaches used to calculate the
economic benefit of noncompliance. The first, and most well-
known is the BEN computer model. This model, created in November
of 1984, is used to calculate a violator's economic savings from
violating the law. It requires case-specific information on the
cost of compliance and the dates of noncompliance, compliance and
penalty payment. The model applies default rates for inflation,
the violator's cost of money (discount rate) and violator's tax
rate. Although these rates can be replaced by violator specific
information. The second approach is to use something called a
rule of thumb. It predates the BEN model by about nine months,
and only requires cost data and some more rudimentary date
information. It applies a very low discount rate and ignores all
tax and inflation effects. While it produces a significantly
less accurate calculation than BEN, it is much easier to explain
and is designed for use in small uncomplicated benefit cases. It
is rarely used, but we anticipate more frequent use in the future
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as the Agency tries to conserve litigation resources. The third
approach, illegal competitive advantage (ICA), is actually a
series of four different methodologies. In the first two
approaches the product produced is legal, but the way it was
produced was not. In ICA cases, the product itself is illegal.
For example: a firm smuggles chlordane into the country for
illegal distribution to pesticide applicators in the region.
There is no way to make that activity legal. In such a case
there is no real benefit from delayed or avoided expenditures as
the entire activity is prohibited. The measure of benefit is at
least the total net sales and perhaps even the total gross sales.
Other types of ICA are illegal capture of increased market share;
marketing a product before it is legal to do soproducing,
processing or shipping more product than is legally permitted.
B. Using the BEN Model To Assess the Economic Benefit
The BEN model is essentially a settlement tool and should
not be used in court or a hearing unless the violator stipulates
to its use.2 But expert witnesses have had some success using
BEN's methodology to explain the economic benefit calculation at
penalty trials and hearings. Uncontroverted, expert testimony
utilizing a methodology similar to that used in the BEN model can
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satisfy the agency's burden of proving that the violator derived
a specific dollar value of economic benefit from delayed and
avoided compliance costs.3 Courts occasionally treat this
economic benefit figure as a floor below which civil penalties
cannot be reduced. In re: Newell Recycling Company, Inc., TSCA
Docket No. VI-659C, 1999 EPA App. LEXIS 28, at *85 (Sept. 13,
1999).
However, it is clear that the financial calculations
involved in an economic benefit analysis can confuse judges.
This confusion has been amplified by disputes over the
methodology in computing economic benefit, the types and cost of
equipment, inflation rates, interest rates, investment discount
rates, and dates of compliance and noncompliance. In the most
extreme cases, the dispute has resulted in the judge discarding
the economic benefit issue altogether. See Student Public
Interest Research Group of New Jersey v. Monsanto Co.. 2 9 ERC
1078 (D. N.J. 1988), aff'd 870 F.2d 652 (3d Cir. 1989).
II. LEGISLATIVE SUPPORT FOR CONSIDERATION
OF ECONOMIC GAINS FROM NONCOMPLIANCE
The principal goals in imposing civil penalties are to
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provide restitution, deterrence and retribution. Tull v. United
States. 481 U.S. 412, 422 (1987). Environmental statutes use
language that requires, or at least encourages, courts to
consider economic benefit when assessing penalties for
noncompliance. The one exception to this is Section 120 of the
Clean Air Act, (CAA) § 120(d)(2)(A); 42 U.S.C. 7420(d)(2)(A).
That section states, "The amount of the penalty . . . shall be
equal to ... no less than the economic value which a delay in
compliance . . . may have to the [violator]". This section
actually requires benefit recapture, and it has its own computer
model that went through rulemaking. But this section is rarely
used.1 The Federal Water Pollution Control Act, (FWPCA) §
309(d); 33 U.S.C. 1319(d), and the Comprehensive Environmental
Response, Compensation, and Liability Act, (CERCLA) § 109(a)(3);
/
42 U.S.C. 9609(a)(3), say the courts "shall" consider the
economic benefit of noncompliance in their penalty
determination.4 The Toxic Substances Control Act, (TSCA) section
16(a) (2) (B); 15 U.S.C. 2615(a) (2) (b), allows the court to
consider "other matters as justice may require". Clearly,
preventing violators from benefitting from their noncompliance
requires that economic benefit be considered.
The Resource Conservation and Recovery Act, (RCRA)
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§ 3008(a)(3); 42 U.S.C. 6928(a)(3), does not contain
specific language mentioning economic benefit. RCRA
only requires that the seriousness of the violation and
the violator's good faith efforts to comply be
considered. But the courts have consistently held that
it is appropriate for a penalty brought under RCRA to
deprive a violator of the economic benefit of
noncompliance. United States v. Ecko Housewares.
Inc.,62 F.3d 806, 817 (6th Cir. 1995); United States
v.T & S Brass and Bronze Works, Inc.. 681 F. Supp. 314,
322 (D.S.C. 1988), aff'd in part mem, and vacated in
part on other grounds mem., 865 F.2d 1261 (4th Cir.
1988), reported in full, 28 Env1t Rep. Cas. (BNA) 1649;
U.S. v. WCI Steel, 72 F. Supp.2d 810 (N.D. Ohio 1999);
In re: Titan Wheel Corporation of Iowa, No.
RCRA-VII-98-H-0003, 2001 WL 499328 (May 4, 2001).
Additionally, the court in United States v. The
City of North Adams, Civil Action No. 89-30048-F, 77
F.Supp. 61 (D. Mass. 1992) stated that:
Any economic benefit to a violator of the SDWA [Safe
Drinking Water Act] regulations may be considered in
determining the amount of a civil penalty under 42 U.S.C. §
300g-3(b). A penal award serves a proper function when it
deters the punished from pursuing a wrongful course of
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conduct. Id. at 7.
Congressional recognition and support of the importance of
denying violators economic gains from noncompliance, while
forcing courts to consider the issue, still leaves the treatment
of economic benefit to the discretion of the court. Louisiana-
Pacific Corporation. 682 F.Supp. 1141, 1163 (D. Colo. 1988). But
failure by the trial court to consider all factors statutorily
required is an abuse of discretion and grounds for reversal.
Atlantic States Legal Foundation. Inc. v. Tyson Foods. Inc.. 8 97
F. 2d 1128, 1141-42 (11th Cir. 1990).
The district court in Friends of the Earth v. Laidlaw
Environmental Services (TOC), Inc.. 8 90 Supp 470 (D.S.C. 1995),
rev'd on other grounds 149 F.3d 303 (4th Cir, 1998), rev'd, 528
U.S. 167 (2000), raised the recapture of economic benefit in a
different context. In that case, an environmental group claimed
the State of South Carolina had failed to diligently prosecute an
environmental violator. The court found that it is not necessary
for a state to actually recover economic benefit in order to show
that its enforcement action amounted to a diligent prosecution,
but that it does represent a significant factor. The court found
the Department of Health and Environmental Control's (DHEC)
failure to consider Laidlaw's economic benefit of noncompliance
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as evidence of non-diligent prosecution under section
505(b)(1)(B) of the Clean Water Act (CWA), thus allowing a
citizen suit to proceed. Id. The court determined that because
"recoupment of a violator's economic benefit of noncompliance is
central to the enforcement of the CWA, failure of the state
enforcement agency to recover, or even to determine, a violator's
benefit is strong evidence that the agency's prosecution of that
violator was not diligent for purposes of section 505(b)(1)(B) of
the CWA". Id. at 4 97.
The case eventually reached the Supreme Court on the issue
of standing. However, the Court did refer to the issue of
economic benefit when it stated in footnote 2 of its decision:
The dissent suggests that there was little deterrent work for
civil penalties to do in this case because the lawsuit brought
against Laidlaw by DHEC had already pushed the level of
deterrence to "near the top of the graph." This suggestion
ignores the District Court's specific finding that the penalty
agreed to by Laidlaw and DHEC was far too low to remove
Laidlaw's economic benefit from noncompliance, and thus was
inadequate to deter future violations. And it begins to look
especially farfetched when one recalls that Laidlaw itself
prompted the DHEC lawsuit, paid the filing fee, and drafted
the complaint. 528 U.S. at 186.
The judge refused to award benefit because he
thought it was inappropriate, not because the statute did
not support it. In re: Carroll Oil Company Inc.. No.
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RCRA-8-99-05, 2001 WL 459117 (Apr. 30, 2001) .
There appears to be a disturbing recent trend in the
opposite direction in some recent administrative
decisions . In a—T3CA case,—the EPA Administrative—fcaw
Judge—refused—assess—any—benefit—component—because
benefit—w^s—not—mentioned—in—T3CAf s—penalty—criteria .
This is particularly disturbing as the statute does allow
¦for—"other—factors—as—justice—may—require" ,—an the
applicable penalty—pol icy—which should have been
considered did factor in economic savings.—[Find the two
new—cases . 1—think—Judge—Moran did—the—T5CA—case .—We
also need -t O CO nfirm that the penalty policy did in fact
say this and that—"other factors as justice may require"
irs—relevant. ] Yet—the—AfenF—still—refused—to—assess
benefit. In this case, EPA referred to the wrong penalty
criteria. EPA should have cited to TSCA § 16(a)(2)(b)
and as a result, the Agency failed to list all the
penalty criteria that can be considered, such as "other
factors as justice may require." EPA omitted this factor
and never corrected this error even after the Court
called it to its attention. In re: AE Associates. Inc.,
No. TSCA -10-99-0262, 2001 EPA ALJ LEXIS 170 (Nov. 30,
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2001).
III. CALCULATION OF ECONOMIC BENEFIT
BY THE COURTS AND ADMINISTRATIVE TRIBUNALS
A. Economic Benefit in the Courts
The concept of recapturing economic benefit has been widely
recognized by courts and administrative law judges. The following
list is not exhaustive, but it does capture most if not all the
major cases in this area:
1. FEDERAL JUDICIAL DECISIONS: Friends of the Earth v. Laidlaw
Environmental Services, 890 F.Supp. 470, 497 (D.S.C. 1995), rev'd
on other grounds 149 F.3d 303 (4th Cir, 1998), rev'd 528 U.S. 167
(2000); Tull v. United States. 481 U.S. 412, 423 (1987); U.S. v.
Smithfield Foods. Inc., 191 F.3d 516 (4th Cir. 1999); United States
v. Municipal Auth. of Union Township. 150 F.3d 259, 264 (3rd Cir.
1998) ; Sierra Club v. Cedar Point. 73 F.3d 546 (5th Cir. 1996) ;
Atlantic States Legal Foundation, Inc. v. Tyson Foods, Inc.. 8 97
F.2d. 1128, 1141 (11th Cir. 1990); Public Interest Research Group
of New Jersey, Inc. v. Powell Duffrvn Terminals Inc., 72 0 F.Supp.
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1158, 1166 (D.N.J. 1989), aff'd in part and rev'd in part. 913 F.2d
64, 79 (3d Cir. 1990), cert, denied. 498 U.S. 1109 (1991) ; Duguesne
Light Co. v. EPA. 791 F.2d 959, 960 (D.C. Cir. 1986); Duguesne
Light Company v. EPA. 698 F.2d 456, 462 (D.C. Cir. 1983); Pinev
Run Preservation Ass'n v. County Comm'rs of Carroll County. Md. . 82
F. Supp.2d 4 64(D. Md. 2000)rev'd on other grounds 268 F.3d 255 (4th
Cir. 2001); U.S. v. Hill. No. 95-CV-1716, 2000 U.S. Dist. LEXIS
9182, (N.D.N.Y. 2000); U.S. v. WCI Steel. 72 F. Supp.2d 810 (N.D.
Ohio 199 9) ; Borden Ranch Pshp. v. United States Army Corps, of
Engineers. 1999 U.S. Dist. LEXIS 21389 (E.D. Cal. 1999); United
States v. Ekco Housewares. Inc..853 F.Supp. 975 (N.D. Ohio 1994)
aff'd in part, rev'd in part 62 F.3d 806 (6th Cir. 1995); Hawaii's
Thousand Friends and Sierra Club v. City and County of Honolulu.
821 F. Supp. 1368 (D. Haw. 1993); United States v. Bethlehem Steel
Corporation. 829 F.Supp. 1047 (N.D. Ind. 1993)); United States v.
Vista Paint Corporation. 976 F.2d 739, (9th Cir. 1992) ; United
States v. City of North Adams. 777 F. Supp. 61 (D. Mass. 1992);
Atlantic States Legal Foundation. Inc. v. Universal Tool & Stamping
Co.. Inc.. 786 F. Supp. 743 (N.D. Ind. 1992); United States v. Roll
Coater. Inc.. 1991 U.S. Dist. LEXIS 8790, 21 ELR 21073, 21075
(S.D. Ind. 1991); United States v. A. A. Mactal Construction. 1992
U.S. Dist. LEXIS 21790 (D. Kan. 1992); United States v. Vineland
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Chemical Co.. Inc., 31 Env't Rep. Cas. (BNA) 1720 (D.N.J. 1990),
aff'd 33 Env't Rep. Cas. (BNA) 1316 (3d Cir. 1991); United States
v. Crown Roll Leaf, Inc.. No. 88-831, 29 Env't Rep. Cas. (BNA) 2 025
(D.N.J. 1989); Student Public Interest Research Group of New
Jersey, Inc. v. Hercules Inc., 29 Env't Rec. Cas. (BNA) 1417
(D.N.J. 1989); United States v. Louisiana-Pacific Corporation, 682
F.Supp. 1141, 1164 (D. Colo. 1988); Student Public Interest
Research Group of New Jersey, Inc. v. Monsanto Co., 2 9 Env't Rep.
Cas. (BNA) 1078, 1089 (D.N.J. 1988); Proffitt v. Lower Bucks County
Joint Municipal Authority, Civil Action No. 86-7220, 12 (E.D. Pa.
1988), rev'd and remanded 877 F.2d 57 (3rd Cir. 1989), aff'd mem.,
908 F.2d 963 (3d Cir. 1990); United States v. T & S Brass and
Bronze Works, Inc., 681 F.Supp. 314, 322 (D.S.C.), aff'd in part
mem, and vacated in part on other grounds mem.. 865 F.2d 1261 (4th
Cir. 1988), reported in full 28 Env't Rep. Cas. (BNA) 1649; United
States v. Mac's Muffler Shop, Inc.. 25 Env't Rep. Cas. (BNA) 1369
(D. Ga. Nov. 4, 1986); Chesapeake Bay Foundation v. Gwaltney of
Smithfield, Ltd.. 611 F.Supp. 1542, 1557 (D. Va. 1985), aff1d. 791
F.2d 304 (4th Cir.1986), rev' d on other grounds, 484 U.S. 49
(1987); Student Public Interest Research Group of New Jersey, Inc.
v. AT&T Bell Laboratories. 617 F.Supp. 1190, 1201 (D.N.J. 1985);
United States v. Phelps Dodge Industries, Inc., 58 9 F.Supp. 134 0,
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1365 (S.D N.Y. 1984) [note: action brought under Federal Trade
Commission cease-and-desist order].
2. FEDERAL ADMINISTRATIVE DECISIONS:
a. Decisions of the Chief Judicial Officer and
the Environmental Appeals Board
In re: Britton Construction Co., BIC Investments,
Inc. , and William and Mary Hammond. No. CWA-III-096, 1999
EPA App. LEXIS 9 (Mar. 30, 1999) ; In re: B.J. Carney
Industries, Inc.. No. [CWA] 1090-09-13-309(g), 1997 EPA
App. LEXIS 7 (June 9, 1997); In re: Burlington Northern
Railroad, CAA Appeal No. 93-3 Company Docket No. CAA
VI11-92-12 (Final Decision and Order, Feb. 15, 1994); In
the Matter of: Grumman St. Augustine Corp., No. RCRA 87-
18 -R (May 10, 1989); In the Matter of A.Y. McDonald
Industries, Inc., No. RCRA 85-H-0002, 1987 EPA App.
LEXIS 5 (July 23, 1987 ) aff'd in part and rev'd in part,
RCRA (3008) Appeal No. 86-2 (July 23, 1987).
b. Decisions of Administrative Law Judges
In re: Lawrence John Crescio III, No. 5-CWA-98-004, 2001 WL
537494 (May 17, 2001); In re: Titan Wheel Corporation of Iowa,
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No. RCRA-VII-98-H-0003, 2001 WL 499328 (May 4, 2001); In re:
Carroll Oil Company Inc.. No. RCRA-8-99-05, 2001 WL 459117 (Apr.
30, 2 001); In the Matter of Industrial Chemicals Corporation. No.
CWA-02-99-3803, 2000 EPA ALJ LEXIS 84 (Sept. 22, 2000); In re:
City of Salisbury, No. CWA-III-219, 2000 WL 190658 (Feb. 8,
2000); In re: Pleasant Hills Authority. No. CWA-III-210, 1999 WL
1120327 (Nov. 19, 1999); In re: Sunbeam Water Company. Inc.. No.
10-97-0066-SDWA, 1999 WL 1013077 (Oct. 28, 1999); In re: Britton
Construction Co.. No. CWA-III-096, 1999 WL 362870 (Mar. 30,
1999), aff'd CWA Appeal Nos. 97-5 & 97-8, 1999 EPA App. LEXIS 9
(Mar. 30, 1999); In re: Chempace Corporation, No. 5-IFF RA-96-
017, 1999 WL 3 62 844 (Mar. 25, 1999); In the matter of Harmon
Electronics. Inc.. No.. RCRA-VII - 91-H-003 7 , 1997 WL 133778 (Dec.
12, 1994); In the Matter of Romero & Busot. Inc. Civil No. 91-
1921 (Feb. 12, 1992); In the Matter of Universal Circuits. Inc..
No. CWA-IV-88-001, 31 (Apr. 11, 1990); In the Matter of All
Regions Chemical Labs, Inc.. No. CERCLA-1-88-1089, 31 (Dec. 1,
1989); In the Matter of Federal-Hoffman, Inc.. No. V-W-87-R-001,
23 (Aug. 12, 1987).
STATE JUDICIAL DECISIONS: Holbrook v. Cadle Props. Of Conn.. No.
CV97 0567429, 2000 Conn. Super LEXIS 3206 (Nov. 30, 2000); Roccrue
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v. Devon Oil & Energy Corp.. No. CV990590277S, 2000 Conn. Super
LEXIS 3036 (Nov. 8, 2000); Barrett Ref. Corp. v. Mississippi
Comm'n on Envtl. Quality. 1998-SA-0107 0-COA (Miss. Ct. App.
1999); Kenney v. Durable Wire, Inc.. No. CV91 0399750S, 1995
Conn. Super LEXIS 2541 (Aug. 30, 1995); State of New Jersey, PEP
v. J.T. Baker Chemical Company. No. C-6597-87 (Jan. 3, 1990);
Ohio v. K & S Circuits, Case No. 79-950 (Sept. 5, 1984); Ohio ex
rel. Brown v. Dayton Malleable, Inc., Case No. 78-694, 8 (Oct.
10, 1979), rev'd. No. 6722 (Ct. App., Montgomery County, 1979),
rem'd for partial reinstatement. 1 Ohio St. 3d 151, 438 N.E.2d
120 (1982).
These decisions represent a wide variety of reasoning in
determining what value is appropriate in assessing civil
penalties based on the economic benefit of noncompliance. The
issues .involved in that calculation and the disputes that
surround them will be discussed in turn in the following
sections.
B. CALCULATING ECONOMIC BENEFIT: DISPUTED INPUT VALUES
The courts have given little guidance to lawyers in choosing
the input values that make up the economic benefit calculation.
As we have seen, it is exactly this choice that determines the
size of the penalty. One suggestion was offered by the Gwaltnev
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court:
Proving the extent of some of these types of economic
benefits will often be impossible; thus, any objective
formulation of economic benefit is likely to underestimate
that benefit. The Court need not painstakingly determine
such an amount, however. The purposes behind including an
economic benefit component in a penalty assessment are to
ensure that the violator disgorges at least its economic
benefit, while also providing some objective basis for at
least part of the penalty assessment. In light of these
purposes and the difficulty of demonstrating all elements of
economic benefit, the Court shall incorporate any objective
evidence to arrive at what it hopes is a rational estimate
of Gwaltney's economic benefit, resolving uncertainties in
favor of a higher estimate. Gwaltnev. 611 F.Supp. at 1558.
The approach adopted in the Gwaltnev case seems to have
influenced Congress when it amended the Clean Water Act and Clean
Air Act in the mid 1980's. Congress added language in both
statutes directing judges to consider the violator's economic
benefit from violating the law. In so doing, the Senate was
concerned about what amount of evidence the government would need
to show in order to establish economic benefit. The Senate
conference report for both statutes stated that the Senate did
not want the Agency to be forced into "burdensome evidentiary-
showings" on the benefit of noncompliance, therefore a
"reasonable approximation" will suffice. S. Rep. No. 99-50, at 25
(1985). Courts in Clean Water Act cases have adopted this
language. U.S. v. Smithfield Foods. Inc.. 191 F.3d 516 (4th Cir.
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1999); United States v. Municipal Auth.. 150 F.3d 259, 264 (3rd
Cir. 1998) ; Sierra Club. Lone Star Chapter v. Cedar Point Oil
Co.. 73 F.3d 546 (5th Cir. 1996); Pinev Run Preservation Ass'n v.
County Comm'rs of Carroll County. Md.. 82 F. Supp.2d 4 64 (D. Md.
Feb. 10, 2 000); Borden Ranch Pshp. v. United States Army Corps,
of Engineers. 1999 U.S. Dist. LEXIS 21389 (E.D. Cal., Nov. 8,
1999); United States v. Shevenne Tooling & Mfg. Co.. 952 F. Supp.
1420 (D.N.D. Dec. 30, 1996); Friends of the Earth v. Laidlaw
Environmental Services. 890 F. Supp. 470, 497 (D.S.C. 1995),
rev'd on other grounds 149 F.3d 303 (4th Cir, 1998), rev'd 528
U.S. 167 (2000); In re: B.J. Carney Industries. Inc.. No. [CWA]
1090-09-13-309(g), 1997 EPAApp. LEXIS 7 (June 9, 1997); Pleasant
Hills. 1999 EPA ALJ LEXIS 87; In re: E.I. Dupont de Nemours &
Co.. Inc.. No. FIFRA-95-H-02, 1998 EPA ALJ LEXIS 129 (Apr. 30,
1998 ) .
As of the time of this writing, there were no Clean Air Act
cases on point even though the same language about reasonable
approximations is in the corresponding Senate Report on the Clean
Air Act amendments of 1990. S.Rep. No. 101-1630 (1990). The
practitioner should note that benefit calculations for any case,
regardless of the statute, are the same. Therefore even if the
practitioner does not have a Clean Air Act or Clean Water Act
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case, he or she should make the argument that the reasonable
approximation standard should apply for any benefit calculation.
The significance of this language cannot be underestimated. This
means that if the violator were somehow able to come up with a
more accurate measure of benefit than the Agency, and the Agency
had a methodology that produced a reasonable approximation of
benefit, then the Agency's view of economic benefit should
prevail over the more accurate violator's calculation.
A case in which the court took this reasonable approximation
standard to the extreme was Pinev Run Preservation Ass'n v.
County Comm'rs of Carroll County, Md.. 82 F. Supp. 2d 464 (D. Md.
2 000) rev'd on other grounds 268 F.3d 255 (4th Cir. 2001) . The
respondent was cited for discharging wastewater that exceeded the
allowable temperature into a stream. Neither side presented any
expert testimony regarding the calculation of economic benefit.
The court found that air-cooled chillers could have been used to
avoid the discharge of the heat and, therefore, its value
provided a fair estimate of the County's avoided cost or economic
benefit. Initial and annual costs were obtained from an
engineering consultant hired by the plaintiff. The consultant
adjusted the figures to reflect 1998 dollars and the annual cost
figure was based on a 7% interest rate on the initial cost spread
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over ten years, plus operational costs. The result was an
installation cost of $967,500 and annual costs totaling $208,000
per year. The court stated that these costs should be calculated'
from November 1998 - the date a feasibility study was performed.
Since the court listed the date of compliance as November 1999 it
simply added one year's annual cost to the initial figure and
rounded upward to reflect 1999 dollars. The result was a
"reasonable approximation" of the economic benefit to $1.2
million. However, the judgement was later vacated. See 268 F.3d
255 (4th Cir. Md. 2001) .
The insight that input values may not be exact, as long as
they are reasonable, was echoed in The City of North Adams. 77
F.Supp. 61 (D. Mass. 1992). "The court nonetheless concludes
that plaintiff's data, though far from perfect, reasonably show
that defendant enjoyed an economic benefit worth several million
dollars". Id. at 85
In In re: B.J. Carney Industries, Inc.. No. [CWA] 1090-09-
13-309 (g), 1997 EPA App. LEXIS 7 (June 9, 1997), the EAB
reaffirmed the reasonableness standard. In this decision, the
EAB noted that "it would eviscerate the act to allow violators to
escape civil penalties on the ground that such penalties could
not be calculated with precision." citing Municipal Authority of
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Union Township. 929 F.Supp. at 806-07. It was noted however that
unsubstantiated guesswork or broad statements lacking any
reasonable foundation are not sufficient to demonstrate economic
benefit. A complainant must provide a reasoned explanation on
the record about how the economic benefit was derived. Id. at
57.) If this is in fact the standard the Agency needs to meet in
administrative proceedings, then it seems reasonable to assume
that the Agency's "rule of thumb" calculation approach, discussed
in Section III, Part E, would meet that standard.
These decisions appreciate the difficulty of choosing the
input values involved in the economic benefit calculation. When
a precise number is available, it should be given deference.
The recapture of a violator's economic benefit is crucial to
achieving deterrence, but it is not a simple matter to calculate.
When Congress amended the Clean Water Act in 1986, it added the
economic benefit of noncompliance as a factor Courts must
consider in imposing civil penalties. Congress suggested the use
of simplified evidentiary provisions for demonstrating economic
benefit:
Violators should not be able to obtain an economic benefit
vis-a-vis their competitors due to their noncompliance with
environmental laws. The determination of economic benefit
or other factors will not require an elaborate or burdensome
evidentiary showing. Reasonable approximations of economic
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benefit will suffice. S.Rep. No. 50, 99th Cong., 1st Sess.
25 (1985) (emphasis added).
[NB: This needs to be better meshed with the previous discussion
of reasonable approximation.]
Gwaltnev went farther than avoiding "burdensome evidentiary"
showings. The court held that if presented with a lower benefit
figure from the defendant and a higher one from the plaintiff, it
would give deference to the plaintiff's higher figure. In
practice, however, courts have not followed that part of this
decision. And in most cases, when a rational explanation can be
offered by each side, judges tend to go with the smaller of the
two numbers. In In re: Harmon Electronics. Inc.. No. RCRA-VII-
91-H-0037, 1997 WL 133778 (Dec. 12, 1994), aff'd 1997 EPA App.
LEXIS 6 (March 24, 1997), demonstrates the impact of disputed
cost input values. In this case the violator was continuously
dumping small amounts of hazardous waste onto a part of its
property. The Agency argued that in order to comply, the
violator should have constructed a small waste treatment facility
on site. The Agency's benefit figure was over $200,000. The
respondent argued that all it needed to do was ship only one
barrel of waste to a treatment facility on a monthly basis. The
respondent's benefit figure was about $6,000. Since the
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respondent's argument, made sense, the ALJ accepted the
respondent's view of benefit.1 [The foot notes are all messed up.
This is footnote one, but there are also end notes mixed in.]
As a general rule, if the violator has not yet complied, and
there are two different approaches that will achieve compliance,
the for benefit purposes, the Agency should analyze the lesser of
the two numbers. It is unrealistic to expect a trier of fact to
expect a defendant to spend more than is necessary to comply.
But it is potentially a very different case if the violator had
two different approaches to choose from, and it selected the more
expensive of the two. Here careful judgment is required. EPA's
perspective is that there is a rebuttable presumption that
whatever a violator does to comply should be the basis of the
benefit calculation. Even though there was a cheaper option, we
.will run the benefit analysis on the higher cost figures. Since
most regulatees are going to minimize compliance costs, there
usually is a very good reason why it installed the more expensive
system. It might be more reliable; it may be serviced by a more
'Note that although the respondent's expert witness, Dr. Kenneth Wise of the Brattle
Group, applied its highly defective risk-free rate forward approach in this case, the ALJ's
decision did not get into this issue. The deciding factor was that the respondent's compliance
scenario was a lot more realistic than the Agency's. Had the Agency applied its standard BEN
approach to respondent's compliance scenario, the Agency's benefit calculation would only have
been about $12,000.
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reliable firm; it may fit better with its existing systems. If
the violator installed the more expensive system for any of the
above reasons, then one should argue for the more expensive cost
scenario even though a cheaper one would have worked.
Nevertheless, sometimes the reason why the violator chose the
more expensive system is that it removed more pollutants than
required, or it applied a more expensive pollution prevention
approach. If that is the case, then if EPA argued for the more
expensive scenario, we would be penalizing the violator for
trying to be a responsible regulatee. Thus if the practitioner
is convinced that the violator is spending more money than
required to be a good citizen, then the EPA should analyze the
case using the cheaper method that would have worked.
In a typical case involving economic benefit, the
plaintiff's expert witness will present testimony supporting one
value of economic benefit based on one set of inputs, and the
respondent's expert witness will present a much smaller estimate
based on another set of inputs. The dispute, in many cases, is
not about the methodology used, but about the choice of inputs.
The most dramatic example of how the "expert battle" can confuse
the economic benefit issue is New Jersey v. J.T. Baker Chemical
Company. No. C-6597-87 (Jan. 3, 1990). In this case, plaintiff's
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expert calculated an economic benefit component of $6.9 million,
while respondent's expert's number ranged from a $37,000 gain to
a $191,000 loss. The disparity was caused completely by the
choice of input values; the methodologies used were basically
identical. But what did the judge do??? Perhaps Monsanto is
anther example. We need to add in the recent cases where the EPA
failed to get the evidence in the record. McClukin??
1. The Discount Rate
The choice of a discount rate is crucial to the economic
benefit calculation because it determines the benefit derived
from the investment of money that should have been utilized to
bring a pollution source into compliance. The higher the
discount rate, the greater the benefit. The discount rate a major
issue the benefit calculation in Cmtv. Ass'n for Restoration of
the Env't v. Henry Bosma Dairy. No. CY-98-3011-EFS, 2001 U.S.
Dist. LEXIS 3579 (Feb. 27, 2001). Plaintiffs sued defendants for
violation of the water quality laws of Washington. Before the
Courc was che penalty phase of the court. The two experts used
the BEN model to calculate economic benefit to Bosma; however,
different input values were utilized. Mr. Dennis was the dairy's
expert, and Mr. Mason was the citizen group's expert. Both
witnesses used $111,872.01 as the current cost of compliance.
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Mr. Dennis was the one who arrived at this figure based on the
amount of money the defendant spent trying to come into
compliance in 1996 and 1997. Both experts used the year Bosma
was required to obtain the NPDES permit, 1996, as the
noncompliance date and 1997 as the compliance date. The
difference in the.experts' results stemmed from the fact that Mr.
Dennis used a discount rate of 5.3% while Mr. Mason used the
default rate of 10.6%. Therefore, Mr. Dennis arrived at an
economic benefit result of less than $10,000 while Mr. Mason's
result was slightly over $100,000. The court stated that the
actual economic benefit was much greater than $10,000 but less
than $100,000 and concluded that there should be no reduction in
the final penalty amount.
Up until November 1992, the EPA's BEN model incorporated a
discount rate of 18.1% based on the equity cost of capital for an
average firm. In essence the Agency's position was that firms
financed pollution control investment totally through selling
shares of stock. This rate represented the average return
companies, and their shareholders, anticipated receiving when
investing using equity capital. The EPA default discount rate
had been disputed in a number of ways, and on occasion, had been
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preempted for another rate when the alternative was based on more
specific data.
As a result of the Agency's experience in litigation and a
very thorough external peer review of the assumptions behind the
discount rate, the Agency decided to take a more conservative
approach. On November 15, 1992, the Agency officially adopted a
discount rate based on the weighted average cost of capital
(WACC) instead of assuming that pollution control investments
were financed solely by selling shares of stock. By going to
WACC, the Agency now assumes that pollution control investments
are financed by a weighted average of issuing bonds, and selling
shares of stock. While the Agency did not feel that the equity
assumption was wrong, it did feel that the WACC approach was more
persuasive.
The following is a review of the cases that addressed the
discount rate issue. While the Agency no longer takes the equity
position, it is instructive to review how courts have handled the
equity financing issue when raised by citizen groups. At the end
of the section, there is a summary of what the cases say, and
some advice on how to handle this issue in negotiation and
litigation.
a. Preference for company-specific discount rates
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One theme that runs through the cases that address the
discount rate issue is that courts prefer company-specific
discount rates to a standard or default rate. The following case
does not fit here. Gwaltney is a dispute over two different cost
of capitals, one for the company as a whole, and the other for
just the division being sued. I am not so sure this was a valid
distinction. I find it hard to believe there would be two very
different discount rates for the defendant and its parent. We
need to check this out with the contractor before we explain it
here. In Gwaltney, 611 F.Supp. at 1559, the court favored the use
of the violator's 13% actual interest rate on borrowed funds over
the Chesapeake Bay Foundation's proffered 18.7%, which
represented the ten-year average rate of return on equity for
Gwaltney's parent corporation, Smithfield Foods, Inc. The court
reasoned that this lower rate was a more accurate and specific
estimation of Gwaltney's rate of return.
In Davton Malleable, Case No. 78-694 at 9, the court opted
for the polluter's actual rate of return during the period of
noncompliance over the State of Ohio's higher recommended
historic (presumably industry-wide) rate of return on equity
(averaged over the four previous years).
These decisions did not invalidate EPA's methodology because
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the court selected a company-specific rate of return. The rate
of 18.1% used in the BEN model at that time was a default rate
used if no other reliable, company-specific number is available.
In Roll Coater, Cause No. IP 89-8828-C, 1991 U.S. Dist.
LEXIS 8790 (S.D. Ind. 1991), the district court selected the
defendant's Weighted Average Cost of Capital method (WACC) over
the EPA's equity rate calculation. The WACC rate focuses on the
average risk of an investment utilizing a mixture of both debt
and equity, and is consequently always lower than the Agency's
100% equity rate. In deciding between the two discount rates in
Roll Coater. the court stated:
[WACC] concentrates on the return for a given industry and
does not look at investments in general. Because Roll
Coater should not be punished for not investing its capital
in other industries, [I] hold that Roll Coater"s discount
factor of 10.84 percent (WACC) is applicable in this
situation. Id. at ll.2
Although this decision apparently favors the WACC method
over 100% equity financing, the judge focused on which discount
rate yielded the most company-specific estimate, not the formula
applied. In fact, it is quite possible that the judge would have
accepted a company-specific equity number.
The final penalty award was based on a reduction of the
statutory maximum penalty. Id. at 18-21. The judge first
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calculated the statutory maximum and applied adjustments based on
a lack of actual damage to the environment and Roll Coater's good
faith. He then compared the resulting figure with the economic
benefit figure using the WACC rate. He determined that since the
final figure exceeded the WACC number, that was no reason to
increase the penalty to achieve deterrence. It is important to
note that the final penalty figure also substantially exceeded
the EPA's figure based on the equity rate. Therefore, one could
argue that the WACC-equity discussion was merely dicta.
In Atlantic States Legal Foundation Inc. v. Universal Tool &
Stamping Co.. Inc., 786 F. Supp. 743 (N.D. Ind. 1992), the court
opted for a company- specific equity rate of 16.1%. The court
stated, "The defendants had the use of these funds for a four
year period which based upon the defendant1s average return on
equity of 16.1 percent, amounted to an economic benefit of
approximately $ 85,000.00." Id. at 751. The judge made no
adjustment for tax deductions due to depreciation, and therefore,
derived an economic benefit number greater than that which would
have been generated by the BEN model.
b. Courts that have adopted an equity discount rate even
after the EPA adopted a WACC based rate.
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As previously discussed, the EPA in 1992 adopted a WACC based
discount rate as opposed to the equity based rate it had used up
to that point. The essential difference is that an equity rate
assumes that the regulatees finance pollution control
investments by selling shares of stock, the most expensive type
of financing. The WACC approach assumes that companies finance,
pollution control expenditures with a weighted average of
issuing bonds and selling shares of stock. By shifting to a
WACC based rate, the discount rate dropped from about 17% to
11%. This resulted in a reduction in the typical BEN analysis
of about 30%. Despite this shift, some courts have still
applied an equity discount rate.
The district court in Friends of the Earth. Inc. v. Laidlaw
Environmental Services (TOC). Inc. 8 90 F.Supp 470 (D.S.C. 1995),
vacated. 149 F.3d 303 (4ch'Cir. 1998), rev'd. 528 U.S. 167
(2000), preferred the equity rate to the defendant's WACC
backward and risk-free rate forward approach to determine the
economic benefit. WACC was based on the cost of obtaining the
money that should have been spent on pollution control. The
court stated, "An equity rate, such as employed by the capital-
asset pricing model, provides the best approximation of the
return the violator could have earned delaying or avoiding
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expenses that are necessary for compliance with its permit." Id.
at 518. One must keep in mind that this decision was in response
to defendant's summary judgment motion. All the judge only
needed to decide was whether the citizen action in this case
could go forward. In a subsequent hearing, both the plaintiff
and defendant applied the equity rate in their respective benefit
calculations, and the judge made his penalty decision
accordingly. Interestingly, the judge did not require the
recapture of the defendant's economic savings. He reasoned that
the defendant had probably spent a lot of money on attorneys'
fees, and he reduced the benefit by a substantial amount. This
is the only case to our knowledge where a judge in an enforcement
action against a for-profit entity did not support recapture of
the clearly established economic savings. Friends of the Earth
v. Laidlaw Environmental Services (TOC). Inc., 8 90 Supp. 4 70
(D.S.C. 1995, rev'd on other grounds 149 F.3d 303 (4th Cir.
1998), rev'd 528 U.S. 167 (2000).
PIRG of New Jersey Inc. v. Magnesium Elektron Inc., 1995
U.S. Dist. LEXIS 20748 (D.N.J. 1995), rev'd on other grounds 123
F.3d 111 (3d Cir. N.J. 1997), provides some additional support
for the equity discount rate. The court adopted the plaintiff's
methodology which the court felt was virtually identical to the
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methodology used by EPA. The plaintiffs presented the approach
of Dr. Michael Kavanaugh in which he calculated the after-tax,
net present value of avoided expenditures by determining the
total amount of expenditures, applying an "opportunity cost" to
determine the present value of those expenditures, and
subtracting the money which the company would have saved in taxes
if it had actually made those expenditures and been able to
deduct them from its taxable income. Id. In order to determine
the opportunity cost, Kavanaugh used an equity rate which
reflects how much money the company would have been able to earn
on the money it saved as a result of not making those
expenditures. Id. While Dr. Kavanaugh's approach tracked EPA's
closely, one substantial difference was his use of a discount
rate based solely on an equity rate. This approach produces much
larger BEN numbers than EPA's current approach. EPA assumes the
discount rate is the weighted average cost of capital, about 30%
less than equity. It is important to note that there was no
expert testimony from the defendant on the discount rate issue,
c. Use of a Discount Rate Established by
Regulation
The third circuit court of appeals accepted the use of a
standardized discount rate as utilized by a CAA § 120 model, in
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Duquesne Light. 698 F.2d 456 (1983). But this is not really in
contrast with the earlier line of cases demonstrating judges'
preferences for company-specific information. The difference
here is that the Section 120 computer model is an actual
regulation, not a discretionary model to help promote settlement.
Nonetheless, the court's reasoning is instructive. In this case,
petitioners challenging the "rule" claimed that the industry-
specific rate inaccurately reflected an individual firm's
anticipated return, and that was "unreasonable to assume that the
investment opportunities available to an industry as a whole
represent the opportunity available to a particular source." Id.
at 483. The EPA argued that "the past performance of an
individual firm may have been influenced by non-recurring factors
and . . . the industry-wide averages can be verified far more
easily." Id. The court upheld the use of the EPA's proffered
industry standard, stating that it was not arbitrary.3 It must
be noted, however, that no alternative methodology was offered by
the petitioners in this action. In addition, the section 120
model had gone through rulemaking and the judge appropriately
treated that model as a regulation.
d. Refusal to Assess Benefit Component
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In some enforcement actions, as the following cases
illustrate, courts have occasionally refused to assess any
economic benefit component. This usually occurs either as a
reaction to the government's presentation of the discount rate
issue in the hearing or trial or because the government failed to
get the necessary evidence in the record. In Hercules, 2 9 Env't
Rep. Cas. (BNA) at 1420, Judge Bissell ignored the discount rate
altogether by deciding that Hercules could generate the money
necessary for pollution equipment from retained earnings.4
Judge Bissell calculated the economic benefit from Hercules'
savings from delaying the purchase of equipment, and he failed to
consider Hercules' actual or expected return on that savings
which was substantial.
In Student Public Interest Research Group v. Monsanto. 29
Env't Rep.Cas. (BNA) 1078 (D.N.J. 1988), both the plaintiff and
defendant presented widely divergent and complex expert testimony
regarding economic benefit. Id. at 1089. The expert testimony
appeared to confuse the judge. The court refused to assess any
economic benefit component because the evidence presented failed
"to provide any satisfactory method of quantifying such benefit
..." Id. at 1090.
The benefit argument failed in In re: Pleasant Hills
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Authority. No. CWA-III-210, .1999 WL 1120327 (Nov. 19, 1999)
because the government failed to get the needed evidence in the
record in two different areas. In the first area, the benefit
component was small, and the litigation team tried to qet the BEN
result entered in evidence without any supporting documentation
or explanation. The ALJ stated:
On its penalty calculation worksheet, Complainant proposes
an economic benefit to Respondent of $2,000 as a "BEN
program calculation." Finding of Fact 55. Complainant
asserts on the penalty calculation worksheet that the
average cost to develop a pretreatment program is $25,000.
Finding of Fact 55. There was no testimony addressing this
issue at the hearing, and there is nothing else in the
record to explain the relationship between the figures of
$2,000 and $25,000. One may presume that $2,000 is the
amount Respondent may have saved by delaying submittal of
the pretreatment program. However, a calculation of economic
benefit or savings should be based upon evidence of record,
not on a mere presumption or notation on a penalty
calculation worksheet. Therefore, no increase in the
penalty will be made for the criterion of or savings. 1999
EPA ALJ LEXIS 87 at *23.
When the government is faced with presenting small economic
benefit figures to trier of fact, it makes sense to apply the
rule of thumb approach. This is a very simple lotus spreadsheet
calculation of benefit that any enforcement professional should
be able to explain on the witness stand. It substantially under
calculates the actual economic benefit. But in small benefit
cases (under $10,000) the difference is insignificant. For more
information on this approach, contact the Multimedia Enforcement
Division at (202) 564-6102.
In the second area, the Agency failed to get needed factual
information about the cost of compliance in the record. The ALJ
stated:
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Complainant claims . . . that it would have been more
expensive for Respondent to have samples analyzed with lower
detection limits. Finding of Fact 50. However, there is no
evidence in the record showing that another laboratory, or
Mack Laboratories, would have charged more to analyze
samples with a lower detection limit, or showing how much
more it would have cost Respondent to have such analyses
conducted. It is not clear whether the "minimum cost of
sampling" asserted by Complainant (Finding of Fact 50) is
the increased cost or the total cost to Respondent for the
correct analyses to be conducted. Such a record does not
provide a reasonable approximation of any economic benefit,
and therefore there is no support in the record for
calculating any economic benefit or savings from
Respondent's noncompliance pertaining to Count II.
A similar result occurred in In re: Mr. C.E. McClurkin. No.
VI-UIC-98-0001, 2000 WL 436237 (Feb. 10, 2000). The Regional
Judicial Officer (RJO) actually quoted the BEN User's Manual at
1-1 (April 1999) to emphasize that "an expert is necessary to
explain [the model's] methodology and calculations". The Agency
submitted the expert's affidavit that the violator gained an
economic benefit of $108. But the RJO rejected it because the
actual BEN calculations were not included in either the
Complainant's Prehearing Exchange or Motion for Accelerated
Decision. The judge also stated that there was no evidence in
the record providing a foundation for the use of the BEN model in
calculating the economic benefit. As mentioned above, for a
small benefit component (in this case only $108) it makes more
sense just to have the penalty witness or case development
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officer apply the rule of thumb approach arid explain it to the
trier of fact.
A far more disturbing result occurred in In re: B.J. Carney
Industries. No. [CWA] 1090-09-13-309(g) (Mar. 12, 1996). Here
there was no clash of experts. The government presented its
expert, and the respondent presented none. Yet the presiding
officer ignored the uncontroverted testimony and the
Congressional intent to avoid an "elaborate or burdensome
evidentiary showing"5 and rejected EPA's benefit calculation. He
found instead that, for various reasons, "a reasonable
approximation of economic benefit cannot be made in this cause
[sic] ." Id. at 30-32. However, on appeal by the EPA, the
Environmental Appeals Board (E.A.B.) held that the presiding
officer erred in finding that no economic benefit could be
assessed based on the testimony of the EPA's witness. In re:
B.J. Carney Industries. Inc.. 1997 EPA App. LEXIS 7 at 60, CWA
Appeal No. 96-2 (June 9, 1997). The E.A.B. remanded the case to
determine the economic benefit and to recalculate the penalty
accordingly. [Carroll Oil and City of Athens may be contra
authority.]
e. Summary of discount rate issue
The choice of a discount rate has a tremendous impact on the
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size of the benefit portion of a civil penalty. The above
decisions suggest that: (1) rates based on firm-specific data
inputs are more widely accepted by courts and ALJs than
standardized discount rates. Judges are much more comfortable
with actual numbers; (2) any economic benefit argument must be
theoretically sound; and (3) plaintiff's expert witness must be
able to articulate a relatively simple position. If there must
be complexity, let the defendant's expert introduce it.
One challenge enforcement professionals may face is how to
present a violator-specific discount rate when the violator is a
small entity. In those situations, the government's expert
should offer to calculate a violator-specific rate. However, the
violator may object to revealing some sensitive financial data in
order for EPA to make such a calculation. If we try to obtain
the information we need, but the violator refuses to cooperate,
the expert witness should derive a discount rate by comparing the
violator with similar firms in the same SIC code. In addition,
there is case precedent discussed later in section IV (A) of this
memorandum which suggests that the presiding judge should
construe the noncooperation against the violator.
2. Date of Noncompliance/Compliance
The period of noncompliance, as stated in the EPA generic
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civil penalty policy, "begins with the earliest provable day of
violation and ends with the projected or, if available, actual
date of compliance." A Framework Statute-Specific Approaches to
Penalty Assessments, app. at 7 (Feb. 16, 1984 and codified as PT-
1-2 in the EPA's General Enforcement Policy Compendium,
hereinafter cited as the Framework guidance). This interval is
the period of time a violator has use of delayed and avoided
expenditures. The longer a violator is out of compliance, the
more economic benefit accrues to that violator.
a. Date of Noncompliance
There are several issues to consider in determining the
first date of noncompliance. The first issue is notice. In
assessing a civil penalty, can a violator be held responsible for
violations that pre-date a notice of violation (NOV)? First of
all, most violations neither require nor receive NOV's, but in
those that do, the NOV does not represent the first date of
noncompliance. If the violator remains out of compliance for the
grace period allowed by the NOV, he is liable for any provable
violation. "[The availability of penalties for pre-NOV
violations supports the purpose of the Clean Air Act, enhances
the court's discretion to fashion an appropriate penalty, and is
consistent with the decisions of other federal courts". United
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States v. SCM Corp.. 667 F.Supp. 1110, 1122 (D.Md. 1987). The
burden of proving pre-NOV violations rests on the plaintiff.
Roll Coater, Cause No.IP 89-828 C at 12.
A second issue is government inaction. In some cases,
violators have been out of compliance for long periods of time
before the EPA filed any action. In Roll Coater. the penalty was
assessed starting on August 30, 1988, the first date of EPA's
involvement. The state of Indiana had "recognized and excused
the noncompliance. . . . [And] Roll Coater, in good faith, relied
on Indiana's directives". Id. at 17. The court held that
"[justice requires that Roll Coater not be penalized for any
violations before August 30, 1988, because it could not have
reasonably known that satisfaction of state requirements did not
satisfy the USEPA". Id. at 18. Had EPA gotten involved in May
1986, when then violation started, the date of noncompliance
would most likely have been two years earlier.
Another case that resulted in a favorable outcome for the
violator on the date of noncompliance issue was Pinev Run, 82 F.
Supp. 2d 464. The court decided to use November 1998 as the
noncompliance date because that is when the County performed a
feasibility study to evaluate options for cooling the wastewater.
The court admitted that the respondent may have been aware of the
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violations at an earlier date, but, "the feasibility study is the
clearest indicator of the time the County recognized it as a
problem". Id. at 470. Therefore, it seems that the court was
using the date the respondent realized that his activities were
illegal as a starting point - a requirement inconsistent with
case law in this area. Furthermore, the court stated that
pushing the date forward would also cover the amount of time that
would have been spent on paperwork before the chillers could be
installed.
In another case, the RJO rejected the economic benefit
analysis altogether based on compliance/noncompliance date
issues. In re: Robert Wallin. No. 10-98-0069-CWA/G, 2000 EPA RJO
LEXIS 213 (May 9, 2000) involved a dairy cattle operation that
was inspected by the EPA in February of 1998. The presiding
officer (PO) declined to increase the penalty to recover any of
the $15,418 of economic benefit the Region alleged the Dairy
saved by delaying expenditures needed to achieve CWA compliance
over the five-year period. The EAB affirmed the PO's conclusion
that there was not sufficient information to support the idea
that the violator was in noncompliance over an extended period of
time. It rejected the Region's contention that noncompliance
started on May 29, 1993 - the date the Diary first became subject
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to CWA requirements - because there was no evidence that the
Diary had maintained a similar scale of production, and thus
waste production, during that time, or that the discharge would
have reached the river, or that the Diary was regulated as a
concentrated animal feeding operation (CAFO) over this time. The
EAB stated that the violation was only documented on February 13,
1998 - the day the operations were inspected. Furthermore, the
record only showed that the Dairy waited until November 30, 1998
to Install its new storage facility, but the court felt that
there was no adequate basis to compute whatever economic benefits
may have been achieved during those several months. Therefore,
the court decided not to increase the penalty based on economic
benefit.
b. Date of compliance
Some courts have followed the Framework guidance in
determining that the "date of compliance" is the date when
pollution control equipment is paid for, installed, and
operational. Louisiana-Pacific. 682 F.Supp. at 1165; Gwaltnev.
611 F.Supp. at 1558. Likewise, in U.S. v. B&W Investment
Properties. Inc.. 1994 U.S. Dist. LEXIS 1751 (N.D. 111. 1994),
aff'd. 38 F.3d 362 (7th Cir. 1994), the court held that "the days
of violation would continue to run until the cleanup was
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completed (or an earlier date if the violator showed compliance
in advance of the completion date)". However, in A.Y. McDonald
Industries, the Chief Judicial Officer (CJO) construed "date of
compliance" more favorably to violators: "The economic benefit
component includes only the interest on costs that were delayed
until McDonald began to bring the site into compliance." RCRA
Appeal No. 86-2, 2 E.A.D. 402 (July 23, 1987). In addition, the
CJO suggested that penalties assessed to recoup economic benefit
accrue only until the violator begins its efforts to comply. Not
only did the CJO give the respondent an earlier date of
compliance than the EPA would have given, but he also indicated
that whatever the compliance date was, the benefit would stop
accruing once the respondent began to spend the money.
Also construing the "date of compliance" more
favorably to violators, the ALJ in In re: B.J. Carney
Industries. Inc.. No. [CWA] 1090-09-13-309(g) (Mar. 12,
1996), rejected the EPA's theory that violators earn a
benefit from delaying payment while contesting a
complaint. The presiding officer held that it would
not be equitable to increase the economic benefit to
the violator by having the calculation run during the
period of litigation.6 According to the presiding
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officer, such an increase in the economic benefit would
only be warranted had the violator remained in
violation until the date of the hearing. However, the
Environmental Appeals Board reversed the determination
of the presiding officer, holding that,"[A] violator's
economic benefit ends when the benefit is disgorged,
even if that occurs well after compliance is achieved."
In re: B.J. Carney Industries. Inc.. 1997 CWA LEXIS 1,
CWA Appeal No. 96-2 1997 EPA App. LEXIS 7 (June 9,
1997). This result is warranted because "until a
violator disgorges the economic benefit it received as
a result of noncompliance, it still enjoys the benefit
of having those funds available for its use and/or
competitive advantage, presumably in an interest-
bearing or otherwise profitable fashion." Id. at 81.7
3. Cost of Equipment
a. Less costly alternatives [Need to cross
reference Harmon]
The weight of authority supports assessing only the cost
necessary for compliance. Gwaltnev. 611 F.Supp. at 1563; Roll
Coater. Cause No. IP 89-828 C at 12. In Gwaltnev. the court
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states, "Gwaltney's benefit from delaying expenditures is the
benefit from delaying those expenditures that are necessary to
achieve compliance". 611 F.Supp. at 1563 n.25. In Roll Coater.
the judge stated: " [A] company should not be penalized for
building more than the act requires .... [it] is only
penalized for the facility they were mandated to build." Cause
No. IP 89-828 C at 12.
The CJO in In re: A.Y. McDonald Industries. RCRA (3 008)
Appeal No. 86-2, 1987 EPA App. LEXIS 5 (July 23, 1987) at *45,
supported the minimum cost to comply rule, but suggested that the
polluter has the burden to prove the BEN model incorrect and put
forth a reasonable, less costly alternative:
It would be unreasonable to expect the complainant
. . .to prove that every conceivable compliance alternative
would have been more costly than the one on which the
economic benefit calculation is based. If McDonald's
benefit was actually lower due to a cheaper means of
compliance, McDonald had the burden to produce evidence to
that effect.
Thus, the CJO determined that the burden of production
should rest on the defendant. Once the defendant, however, meets
the burden that there is a cheaper alternative, the EPA must
carry its burden of persuasion.8
In In the matter of Harmon Electronics. Inc., No. RCRA-VII-
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91-H-0037, 1994 RCRA LEXIS 52 (Dec. 12, 1994), rev'd on other
grounds 1997 EPA App. LEXIS 6 (March 24, 1997), the ALJ followed
the reasoning of McDonald and agreed that economic benefit should
include only the cost of the cheapest alternative of compliance.
In Harmon Electronics, the EPA computed the defendant's economic
benefit based on the costs associated with operation of an on-
site hazardous waste disposal facility in order to comply with
RCRA. Both parties agreed, however, that the defendant could
have also complied by electing to send its waste off-site for
disposal. The latter alternative was only a tiny fraction of the
cost of the more expensive approach. The defendant argued that
calculating its economic benefit based on-site disposal did not
accurately reflect what the company would have done to comply
with RCRA. The ALJ agreed, holding that the defendant met its
burden of establishing that off-site disposal was the cheaper
alternative and'that the burden was shifted to the EPA to rebut
the defendant's claims (a burden the EPA failed to meet in this
case).9
Where there is no effort by a defendant to rebut BEN's cost
estimates, they are inferred to be correct. In re: Federal-
Hoffman. No. V-W-87-R-001, 1987 EPA ALJ LEXIS 14, at *30.
Likewise in a nonEPA case, United States v. Phelps Dodge
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Industries. Inc.. 589 F.Supp. 1340, 1366 (1984) the judge, upheld
the government's penalty assessment, stating that the defendant
had provided little assistance in outlining an alternative
methodology for the calculation of an SEC-imposed price-fixing
penalty.
These cases hold that the court should assess the lower cost
option in the economic benefit calculation when a company is
capable of meeting compliance through more than one viable means.
Because the defendant is a "rational economic entity", the lower
cost reflects the company's true economic benefit as the company
would have chosen the cheaper route had it taken the proper steps
to meet compliance. Public Interest Research Group of New
Jersey. Inc. v. Magnesium Elektron, Inc.. 1995 U.S. Dist. LEXIS
20748, at 47 (D.N.J. Mar. 9, 1995), rev'd on other grounds. 123
F.3d 111 (3d Cir. 1997) .
In U.S. v. WCI Steel. 72 F. Supp. 2d 810 (N.D. Ohio 1999)
the defendant was accused of using three wastewater ponds at its
steel-making factory as hazardous waste units. The U.S. sought to
measure benefit as "the current value of the capital cost of the
various expenditures needed to avoid RCRA violations, and the
annual operating costs that would have attended earlier
compliance, all expressed in today's dollars". Its calculations
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resulted in a figure of $6,427,000 for delayed capital
expenditures and a figure of $2,631,000 for avoidance of
maintenance and operating costs - a total of $9.1 million.
However, the court relied on WCI's testimony to conclude that the
sludge could simply be stabilized and covered - a significantly
less expensive alternative. In addition, as discussed below in
the methodology section, the court adopted the highly defective
"Brattle Group" approach for making the calculations. The court
therefore found credible the WCI experts' testimony that based on
this cost entry and methodology, WCI achieved a present value
economic benefit of only $732,065, including the cost of the
storage tank.
[This has already been discussed above after Harmon. Need to
mesh this better.]
Using the lower compliance costs makes sense from a policy
perspective as well. If some violator wants to install a
Cadillac system instead of a Chevy, the Agency should not punish
the firm by using the higher costs in the benefit analysis. On
the other hand, the companies we are likely to deal with are not
usually motivated by environmental idealism. There is usually a
very good business reason for making the larger compliance
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expenditures. It could be the more expensive equipment is more
reliable or fits better with their existing systems. It could be
that vendor handling the more expensive equipment is more
reliable. In any case, the decision is probably motivated by
prudent business sense, not bettering the environment. EPA feels
that the best evidence of the compliance costs is what the
violator actually spent or will spend. If the benefit analysis
is being after the more expensive equipment has been purchased,
then the practitioner should make the violator convince the
Agency that it was motivated by some environmental reason. If
the equipment is not yet purchased, then you should probably give
the violator the benefit of the doubt. In the extreme case, if
the proposed Cadillac system does more than the law requires,
then the extra incremental cost is eligible for SEP credit. For
guidance on whether the SEP is acceptable and how much mitigation
to offer the practitioner should consult the EPA Final
Supplemental Environmental Projects (SEP) Policy. 63 F.R. 24796
(May 5, 1998). There must be very good economic reasons why a
violator deliberately chooses the more expensive alternative.
b. Challenges to the underlying engineering
Where a plaintiff's estimated cost of equipment is brought
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into question, justification for the recommended equipment may be
required by the court. In Atlantic States Legal Foundation. Inc.
v. Universal Tool & Stamping Co.. Inc., 706 F. Supp. 743 (N.D.
Ind. 1992), the plaintiff's environmental engineer, Dr. Donald
Hughes, suggested that Universal should have installed an
ultrafiltration system at or before the time of noncompliance to
avoid exceedances of the defendant's NPDES permit. Id. An
economic benefit estimate of $l-$2.5 million was calculated based
on this recommendation. The court held that Hughes' familiarity
with Universal's operations was insufficient to offer a worthy
opinion on the equipment needed. Further, due to the types of
discharges at Universal, "installation of an ultrafiltration
system . . . would not have corrected Universal Tool's. problem
with its BOD [biochemical oxygen demand] permit limitations."
Id. at 14.
Because of this, the court found the economic assumptions
were flawed as well. The economic benefit calculation
incorporated cost figures for inappropriate equipment. The
assessment also failed to account for decreased discharges from
production changes occurring during the violation period which
resulted in the need for less pollution-control equipment. With
no further guidance, the court limited the benefit assessment:
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The evidence revealed that the defendant spent $131,357.16 for
the installation of a Lamella clarifier and supporting equipment.
The defendants had the use of these funds for a four year period
which based upon the defendant's average return on equity of 16.1
percent, amounted to an economic benefit of approximately
$85,000.00. Id. at 16. The court also failed to consider
operations and maintenance costs for the four years of
noncompliance.
c. Consideration of interim compliance costs
A related issue is the use of "short-term" compliance
measures to offset the net economic benefit figure. The Gwaltnev
court, in valuing the delay of necessary compliance expenditures,
based its calculation on the cost of Gwaltney's "interim
solution", refuting the citizen-plaintiff's contention that
calculations should be based on the cost of "permanent solution
measures." 611 F.Supp. at 1563 n.25. This is not to suggest,
however, that the cost of "patch-work" remedial action should be
deducted from the economic benefit calculation. In Dayton
Malleable. the court refused to consider the violator's costs
incurred to rebuild old sludge tanks in order to comply for a
particular month. The judge stated:
This was a stop-gap measure and had nothing to do with DMI's
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actual compliance with the OEPA schedule. Had it complied
with the schedule this expense would not have been necessary
. . . accordingly this Court will not consider that amount
deductible [from the total penalty]. Case No. 78-694 at 9.10
In Smithfield Foods. Inc.. 191 F.3d 516 (4th Cir. 1999), the
defendant argued that the lower court erred as a matter of law by
failing to give it credit for certain capital costs incurred and
user fees paid when calculating economic benefit. The court
replied:
Smithfield further alleges that even under the cost-avoided
method, the district court should have given Smithfield
credit for (1) capital expenses incurred to build a
pretreatment facility and to modify a sludge lagoon in
preparation for connecting to [Hampton Roads Sanitation
District (HRSD)], and (2) future user fees paid that
Smithfield claims allowed HRSD to construct the necessary
facilities for Smithfield's connection. In support of this
argument, Smithfield repeatedly asserts that these are
expenses it would have gotten credit for had it built its
own direct-discharge treatment system. Smithfield decided
to connect to HRSD in 1991 and from that time until HRSD
became available in 1996 and 1997, Smithfield was
responsible for complying with its 1992 permit requirements.
Its decision to ignore these requirements in the interim
certainly benefitted Smithfield financially because, by
failing to comply with the 1992 permit limits, Smithfield
avoided the costs of pollution control its competitors were
simultaneously incurring by complying with the law. It is
these costs that constitute Smithfield's economic benefit.
These capital expenses and user fees can reduce the economic
benefit that Smithfield experienced from 1991 to 1996 or
1997 only in so far as they are duplicative of costs
Smithfield should have incurred for interim compliance. The
building of its pretreatment facility and the paying of user
fees for future HRSD use were not costs Smithfield incurred
to aid in compliance from 1991 to 1996 or 1997 and,
therefore, should not have been credited to Smithfield
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during the district court's economic benefit calculation.
Id. at 53 0.
d. Offsetting illegal compliance costs
The position of the courts on the issue of whether courts
should deduct the costs of illegal expenditures in calculating
economic benefit is unclear. The EAB's position is that the
presiding officers should not deduct costs of illegal
expenditures in calculating economic benefit. In re: Burlington
Northern Railroad. CAA Appeal No. 93-3 Company No. CAA VIII-92-12
(Final Decision and Order) (Feb. 15, 1994). In Burlington
Northern, the defendant illegally burned railroad ties in
violation of the Clean Air Act. The ALJ calculated the
violator's economic benefit as the difference between the cost to
haul the railroad ties to a furnace for incineration (what the
violator should have done to comply) and the cost for open
burning (the illegal act). The EPA, on the other hand, contended
that no credit should be given for illegal expenditures (the
illegal burning of the ties) . Because the ALJ instated the
maximum penalty in his initial decision, the E.A.B. did not
decide the issue of whether EPA should have credited the cost of
the illegal burning against the legal compliance costs. Rather,
the E.A.B. modified presiding officer's initial decision to
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eliminate language providing for a credit for the costs of
illegal burning of railroad ties in order to eliminate any
precedential effect of such language.
4. Federal Subsidies
A possible variable in economic benefit analysis is the
inclusion of a federal subsidy as part of the calculation. In
Hawaii's Thousand Friends and Sierra Club v. City and County of
Honolulu. 821 F. Supp. 1368 (D. Haw. 1993), the city's economist
reasoned that missing the subsidy program meant the city spent
more of its own funds which shrunk their benefit numbers. As a
result, there was a $34 million gap between the plaintiffs'
calculation and the city's.
The court decided that it "would be illogical, however, to
reward the city for losing a federal subsidy. . . . Therefore,
the court will not adopt the city's assumption that it enjoyed no
benefit because it lost its opportunity to obtain federal
subsidies." Hawaii's Thousand Friends and Sierra Club. 821 F.
Supp. at 1388 (D. Haw. 1993) .
E. RULE OF THUMB APPROACH
[I will be adding this section later. We should use the
second Industrial Chemicals case as support as it is the
only one on point right now.]
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F. COMPETITIVE ADVANTAGE
While the Agency routinely seeks the recapture of
economic benefits derived from delayed and avoided
costs, it rarely even considers benefits derived from
an illegal competitive advantage (ICA). Yet often the
competitive advantage benefits are substantial and can
even dwarf those derived from delayed or avoided
costs.11 The Agency's guidance on this issue clearly
states that EPA will consider such benefits. The EPA's
Framework guidance at page 10 addresses some of the
situations where competitive advantage may be an issue.
For most violations, removing the savings which accrue
from noncompliance will usually be sufficient to remove
the competitive advantage the violator clearly has
gained from noncompliance. But there are some
situations in which noncompliance allows the violator
to provide goods or services which are not available
elsewhere or are more attractive to the consumer.
Examples of such violations include:
* Selling banned products
* Selling products for banned uses
* Selling products without required labeling or
warnings
* Removing or altering pollution control
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equipment for a fee, (e.g., tampering with
automobile emission controls).
* Selling products without required regulatory-
clearance, (e.g., pesticide registration or
premanufacture notice under TSCA).
The Agency also recognizes that there are other types
of illegal competitive advantage:
* improving market share by violating the law;
* illegally exceeding production or throughput
limits.
Courts have recognized that violators do obtain economic
benefits from illegal competitive advantages. Tull v. U.S.. 481
U.S. 412, 423 (1987); Borden Ranch Pshp. v. United States Army
Corps, of Engineers, 1999 U.S. Dist. LEXIS 21389 (E.D. Cal.
1999); Chesapeake Bay Foundation v. Gwaltnev of Smithfield. Ltd.,
611 F. Supp. 154 2 (E.D. Va. 1985) ; In re: Lawrence John Crescio
III. No. 5-CWA-98 - 004, 2001 WL 537494 (May 17, 2001); In the
Matter of Chempace Corp., No. 5-IFFRA-96-017, 1999 EPA ALJ 110
(March 25, 1999). A Senate report accompanying the 1987 CWA
amendment states in part:
Violators should not be able to obtain an economic benefit
vis-a-vis their competitors due to their noncompliance with
environmental laws. S.Rep. No. 50, 99th Cong., 1st Sess. 25
(1985) .
Despite this acknowledgment of the issue, however, courts
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have been reluctant to include economic benefit from competitive
advantage in civil penalty calculations. The court in Hercules,
29 Env't Rep. Cas. (BNA) at 1420, stated that it would "not
attempt to assess the advantages of delay to Hercules'
competitive position in its industry." In fact, until 1996, no
court had ever assessed significant penalties based on the
illegal competitive advantage concept.
The first ICA case was United States v. Mac's Muffler Shop,
Civ. A. No. C85-138R, 1986 WL 15443 (N.D. Ga. Nov. 4, 1986).
Here the court found that the defendants derived substantial
economic benefits from removing catalytic converters in violation
of the Clean Air Act. The defendants charged $20 to $50 per
removal to "increase the income" of their muffler shop.
It was only after competitive pressures became extremely
demanding that the defendants made the hard decision to
begin removing catalytic converters as their competitors
were already doing. Since it was not illegal for the
consumer to have the catalytic converter removed from his
automobile, the consumer could not understand the
defendants' refusal to accommodate him. The defendants'
refusal to accommodate a consumer typically led to the loss
of the future business of that consumer. Id. at *1
The government presented the testimony of an accountant who
performed a straightforward calculation of how many converters
were removed over the period of noncompliance. He established
that the range of illegal profit was from $36,000 to $90,000.
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The court stated the violator gained at least $35,000 in benefit
but the court imposed a final penalty of only $21,000 based on
the defendant's ability to pay.
The leading case in this area is United States v. Municipal
Authority of Union Township. 929 F.Supp. 800 (M.D. Pa. 1996)
af f' d 150 F.3d 259 (3rd Cir. 1998) . It is an example deriving
and ICA from illegally exceeding production limits. Union
Township settled with the government before trial, and the
remaining violator, Fairmont (or Dean Dairy) refused to settle.
The case is usually referred to as Dean Dairy. Dean Dairy
decided to continue to produce at a volume which it knew would
generate levels of BOD and TSS far beyond that allowed by its IU
permit in order to keep its main customer supplied with processed
milk. It could have complied by constructing a wastewater
treatment plant or cutting production by about 50%, but the cost
for the treatment plant was substantial, and cutting production
by 50% would lead to the loss of its main customer, Penn Maid.
The violator instead cut a deal with Union Township to accept its
industrial wastes for in return for the payment of substantially
increased sewer fees. The only problem with this arrangement was
that both Union Township and the dairy knew that the municipal
sewage plant could not handle the industrial wastes. Thus large
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amounts of untreated industrial wastes got discharged into the
receiving waters causing massive environmental damage over many
miles of this body of water.
In concluding that an economic benefit was achieved, the
court stated:
Fairmont itself concluded, in assessing its wastewater
treatment options, that to comply with its IU permit by
reducing volume would have caused a reduction in earnings of
$417,000 in its 1994 fiscal year. Production volume at
Fairmont was higher in each year from 1989 to 1993 than it
was in 1994, and, therefore, it is reasonable to believe
that Fairmont gained at least $417,000 in earnings annually
during the period of its violations. On this basis, the
court concludes that between July 1989 and April 1994,
Fairmont gained approximately $ 2,015,500 by violating its
IU permit. Id. at 805.
The judge then doubled the economic benefit amount and assessed a
penalty of over $4 million which was upheld on appeal. Id. at
269 .
In Borden Ranch Pshp., 1999 U.S. Dist. LEXIS 21389 (E.D.
Cal. 1999), presented the Agency with an ICA based upon getting
into the market early. The EPA noted that the violator saved
interest costs that would have accrued had he gone through with
the permitting process. Consequently, it would not have been
able to sell several parcels of land as quickly as he did. Also,
it received profit from those sales sooner than he would have if
a permit application had been properly submitted and processed.
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The total economic benefit amounted to $1,039,628, which included
$601,359 in early sales. The court noted that the defendant's
owner, Tsakopoulos, "did save money by selling the relevant
parcels earlier than he would have realized had he taken the time
to comply with the Act". In conclusion the court stated:
The economic benefit Tsakopoulos obtained from his haste
enabled him to realize a quicker sale of deep ripped
property, which included deep ripped jurisdictional
wetlands. Reaping such benefits at the expense of
damaging rare federal wetlands is intolerable under the
Act and preponderates toward a significant penalty to
achieve the goal of deterrence. Id. at 70
In In re: Lawrence John Crescio III. No. 5-CWA-98-0 04, 2 001 WL
537494 (May 17, 2001) the EPA sought economic benefit based on
both the BEN type (delayed and avoided costs) and ICA. The Agency
first calculated the BEN type of economic benefit at $5,000
representing the savings the respondent realized by not
monitoring and restoring a site on which soils and organic
material were discharged into wetlands.
But after the hearing, EPA included an additional economic
benefit of approximately $27,000 to $29,700 minus costs, which
reflected income gained through the sale of the mint oil grown on
the land. Since the violations made production of the mint oil
possible, the EPA argued for an additional benefit component
based on ICA. The ALJ assumed from the respondent's testimony
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that he was able to purchase the site in 1988 for about 1/4 the
cost per acre of already developed farmland. He also determined
that the current value of the site was attributable to its
conversion into property suitable for and actively engaged in
agricultural production.
The respondent did not dispute the figures but argued that
the calculations were "a nonsensical use of a factor that
obviously has to do with economic gain, not simply the EPA's
allegations of what could have been a hypothetical return on
money EPA claims would have been needed to restore the property."
The ALJ rejected this argument and ruled that the economic
benefit from the mint oil consisted of at least $2,400 in
"wrongful profits". The thus combined the two economic benefit
components to produce a figure of $7,400.
The economic benefit assessment in In re: Chempace
Corporation, was based on illegal sales of pesticides. No. 5-IFF
RA-96-017, 1999 WL 362844 (Mar. 25, 1999) . [Add more detail.]
In In re: Britton Construction Co.. No. CWA-III-096, 1999 EPA
App. LEXIS 9 (Mar. 30, 1999), the court failed to assess an
economic benefit component in his penalty, but he came to that
conclusion after examining if the violator gained any illegal
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competitive advantage. The ALJ addressed the issue of wrongful
profits by comparing the construction costs of the townhouses to
their sale price. His results revealed that no significant
profit was attained. The construction costs totaled $455,000.
But while the townhouses were purchased for $479,000, there were
realtor commissions and closing costs. The PO concluded that the
economic benefit amounted to zero. The EAB held that while there
were significant errors in the PO's analysis of the respondent's
cost figures, wrongful profits was not an appropriate
approximation of economic benefit in this case anyway. The EAB
pointed the fact that the Army Corps of Engineers gave the
respondent authorization to construct houses when it allowed the
respondent to mitigate the damage instead of fully restoring the
site. Thus any profit obtained by the respondent was legal. Id.
at *68.
While some ICA cases may be relatively easy to prove (e.g.
United States v. Mac's Muffler Shop), one type that will probably
present a substantial challenge to ICA is based on increased
market share. If the practitioner elects to take this approach,
he or she will need strong expert witness support. The Antitrust
Division of the Department of Justice may provide some helpful
advice here since they often look at market share evaluation in
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the context of antitrust cases. In addition, the Agency is in
the process of developing a strategy that will address this
issue.12
IV. EFFECTIVENESS OF BEN METHODOLOGY
A. ESTABLISHING A PRIMA FACIE CASE
In establishing a prima facie case of an appropriate
penalty, the burden of proof includes two concepts: the burden of
production and the burden of persuasion. The side with the
burden of production must put forth the initial approximation of
economic benefit. See Sierra Club v. Cedar Point. 73 F.3d. 546 at
576. The burden of production falls on the EPA, and the EPA must
produce the initial evidence. In the case where the EPA fails to
produce this evidence, the other side will prevail. But once the
EPA satisfies its burden of production, the burden shifts to the
violator. If the violator fails to produce evidence to rebut the
opposing argument, the EPA prevails on the issue. On the other
hand, if the violator does meet its burden of production, the
side with the burden of proof (here, the EPA), now has the burden
of persuasion. More specifically, this means that the EPA's
argument and evidence would have to be more persuasive than the
violator's in order to prevail on the issue. See In the Matter of
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New Waterburv, Ltd.. No. TSCA-1-88-1069. This means that even
though the EPA may be the only side presenting evidence on the
issue of benefit, EPA will not automatically prevail on the
issue. If the violator can effectively undermine the expert's
testimony with effective cross examination or can present
persuasive logical argumentation against EPA's position
(e.g.,errors in the calculation, In the Matter of: Grumman St.
Augustine Corp., No. RCRA 87-18-R (May 10, 1989)) then EPA will
not meet its burden. In re: B.J. Carnev Industries. Inc.. CWA
Appeal No. 96-2, 1997 EPA App. LEXIS 7 (June 9, 1997).
Expert testimony based on the BEN methodology is widely
accepted by the courts in meeting the Agency's burden of
production in establishing the economic benefit 'of
noncompliance.13 Even far less sophisticated methodologies have
been accepted by triers of fact. In In re: City of Salisbury.
No. CWA-III-219, 2000 WL 190658 (Feb. 8, 2000) the Agency's
penalty witness provided a very crude analysis of benefit, and
Chief Judge Biro found it acceptable. Similarly in In re:
Industrial Chemicals. No. CWA-02 - 99-38 03, 2000 EPA ALJ LEXIS 84
(Sept. 22, 2000) the Agency successfully applied the rule of
thumb approach in calculating the economic benefit.
Although it should be noted that the ALJ thought he was
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hearing BEN testimony, not the rule of thumb. It is
possible that he might have ruled differently had he
known it was something less than BEN.
To meet its burden of production, the EPA need only
establish a "reasonable approximation" of the benefit in Clean
Water Act cases. Sierra Club v. Cedar Point Oil Co.. Inc.. 73
F.3d 546, at 576 (5th Cir. 1996).14 "It would eviscerate the Act
to allow violators to escape civil penalties on the ground that
such penalties cannot be calculated with precision." United
States v. Municipal Authority of Union Township. 929 F. Supp. at
806-807. [We need to weave in Smithfield and BJ Carney as they
are more recent. Need to mention that it comes from the Senate
report on CWA amendments and that the air ones should be the same
and that other programs should have. But this might have been
done already in this memo.]
In In re: Federal-Hoffman. Inc.. No. V-W-87-R-001, 1987 EPA
ALJ LEXIS 14, at *30 (Aug. 12, 1987), the ALJ indicated that the
penalty figures proffered by the government's expert witness
seemed "reasonable enough to be prima-facie correct .... Since
FHI made no attempt to rebut these estimates, the reasonable
inference is that they are not out of line with actual expenses".
The judge went on to state that the expert's recommendations for
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calculating economic benefit, which included an annual operations
and maintenance cost estimate of ten percent of the original
equipment cost, were reasonable. Id. at 24. In Cedar Point Oil.
73 F.3d. at 576, the court held that one need only make a
"'reasonable approximation' for economic benefit when calculating
a penalty under the [Clean Water Act]" (citing PIRG v. Powell
Duffryn Terminals, Inc.. 913 F.2d 64, 80 (3d Cir. 1990) and S.
Rep. No. 50, 99th Cong., 1st Sess. 25 (1985)).
The legal standard appears to be "reasonable approximation"
for calculating economic benefit in Clean Water Act cases and
probably Clean Air Act cases. Nevertheless, litigators are
advised not to merely introduce BEN model analyses in a hearing
without the benefit of a witness to explain how the model works.
One such case in which the EPA failed to provide an adequate
derivation of the economic benefit was in In the Matter of
Universal Circuits. Inc.. No. CWA-IV-88-001 (Apr. 11, 1990). The
EPA refused to supply the working papers concerning the penalty
or the formula used in calculating the proposed penalty. It
provided instead a witness to explain the penalty calculations.
Id. at 26. Judge Vanderheyden, in deciding to disregard the
economic benefit element entirely, emphasized that the violator
"is entitled legally to know the data in support of this amount
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in order to answer same." Id. at 33. Thus, without reasonable
support for the figures generated by BEN, the burden of proving
that the proposed civil penalty is appropriate is not satisfied.
Id. at 34.15
Another such case where ALJ found evidence of the economic
benefit of noncompliance insufficient was in In the matter of
Gary Development Company. No. RCRA-V-W-86-R-45, 1996 EPA ALJ
LEXIS 46 (Apr. 8, 1996). In this case, the record showed only
the figure "$21,759" written on the penalty calculation
worksheet, and a written note thereon that "BEN's figure is
$22,271" and "slightly reduced". Because the ALJ could not make
an independent review from the evidence in the record, the ALJ
determined that the penalty for this violation could not take
into account any economic benefit of noncompliance.
These cases indicate that EPA may satisfy its burden of
production for establishing economic benefit using calculations
similar to those in the BEN model, as long as the calculations
are adequately explained and not effectively rebutted by the
violator. Thus, the EPA should provide the ALJ with a thorough
and fact specific assessment of the economic benefit of
noncompliance in order to convince the ALJ to adjust the penalty
according to the benefit accrued.
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Weave in Rule of Thumb
In a much older case, the ALJ in A.Y. McDonald Industries.
No. RCRA 85-H-0002, 1987 EPA App. LEXIS 5 (July 23, 1987),
refused to address this issue head-on, instead indicating that
the EPA had met its burden through the testimony of one of its
engineers, Donald Sandifer-, and his application of the Geraghty &
Miller costs estimates to the BEN model. The burden of
production then shifted to McDonald to show the unreasonableness
of the EPA's reliance on the 'estimates, which it did to a small
extent through the use of actual data. Id. at 36. See also
Davton Malleable. Case No. 78-694 at 9 (court accepted the
estimate generated by a predecessor of the BEN model using the
violator's actual discount rate in place of BEN's standard
default value).
[It is probably worth noting the City of Salisbury and Industrial
Chemicals cases where nonBEN approaches were used, or just refer
reader back to the rule of thumb section.]
Start here next time/
B. FAILURE OF BEN APPROACH DUE TO COMPLEXITY
In citizen suit cases, the absence of a coherent methodology
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has often resulted in confused presentations and penalty
assessments that underestimate economic benefit. In Student
Public Interest Research Group of New Jersey v. Monsanto Company,
29 Env't Rep. Cas. (BNA) 1078 (1988), SPIRG brought a citizen
suit under the Clean Water Act. In their attempt to serve the
goals outlined in the EPA penalty policy, SPIRG's expert witness
failed to present a clear explanation of the calculations he used
to determine economic benefit. The expert continually adjusted
his model with the addition of new testimony and proceeded to
thoroughly confuse the judge. Id. at 1089. Thus, although the
judge strongly supported the policy of recouping all economic
benefit derived from noncompliance, and admitted that Monsanto
had probably gained some economic benefit, he held that "the
evidence failed to provide any satisfactory method of quantifying
such benefit." Id. at 1090. The judge's only reference to the
BEN model presented by SPIRG was "it is complex". Id. at 1089.
In Hercules. 29 Env't Rep. Cas. (BNA) 1417 (D.N.J. 1989),
the court elected not to follow "the complex so-called BEN
model". id. at 1420. In assessing an economic benefit amount of
$490,000 (far below the $1.1 million BEN estimation), the judge
erroneously excluded the cost of borrowing for capital
expenditures, reasoning that Hercules did not need to borrow to
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cover the investment. This mistake contributed to the reduction
of the economic benefit figure. Id. at 10. This omission
contradicts the EPA's penalty policy by allowing a violator to
benefit by delaying compliance. The court assumed that the money
saved by delaying compliance had no time-value because it was not
borrowed money, but came from retained earnings.16 Not only does
such money have a time value, but even if the violator has the
cash "on hand", it will need to raise capital to replace what was
spent. This holding allowed Hercules to retain a large portion
of the economic benefit derived from delayed compliance.
A similar result occurred in Student Public Interest
Research Group v. Monsanto. 29 Env't Rep. Cas. (BNA) 1078 (D.N.J.
1988). In that case both the citizen plaintiffs and the
defendants presented widely divergent and complex expert
testimony regarding economic benefit. Id. at 1089. The court
refused to assess any economic benefit component because the
evidence in that case failed "to provide any satisfactory method
of quantifying such benefit. . ."
In cases that go to trial (or an administrative hearing),
the presentation of the economic benefit argument rests on an
expert witness' ability to explain where the EPA's number comes
from. If the trier of fact does not understand where the number
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comes from, he is likely to reject the entire analysis. If the
analysis is clear and simple, it stands a much better chance of
receiving the court's approval.
Practitioners are strongly advised to choose their expert
witnesses carefully to make sure they can present their views
clearly. They are further advised to begin working closely with
those witnesses long before trial or hearing. This is necessary
first to make sure the witnesses have the documents they need for
their expert testimony. If those documents are not in the
government's hands, then the practitioner will at least have
sufficient time to obtain them in discovery. The second reason
for the practitioner to begin to work closely with the witness
early in the litigation process is to allow sufficient time for
the practitioner to become very conversant in corporate finance.
Direct examinations consisting of scripted questions and answers
that the practitioner does not understand undermine the
credibility of the attorney in eyes of the trier of fact. In
addition, practitioners that do not understand the corporate
finance issues are incapable of rehabilitating expert witnesses
following tough cross examinations. And finally, government
attorneys unfamiliar with corporate finance cannot effectively
cross examine defendant's expert witnesses despite the fact that
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those witnesses may be expressing opinions based upon very
dubious methodologies.
C. Alternative Methodologies
In U.S. v. WCI Steel. 72 F. Supp. 2d 810 (N.D. Ohio 1999)
the parties presented two vastly different methodologies for the
calculation of economic savings. The U.S. argued for a weighted
average cost of capital rate of 8.5% for both "past amounts
benefitted and for future benefits". Id. at 830. In the end,
however, WCI successfully argued for a methodology that applied a
different interest rate to the past values and the future values.
It reasoned that past costs should be governed by an risk-free,
after-tax rate. On the other hand, since future costs involved
uncertainty, it argued for a discount rate reflecting this risk.
Specifically, future values should be computed by using an
after-tax corporate borrowing rate based upon the current yield
of WCI bonds. Based upon the then-current yield of WCI bonds,
the rate suggested was 9.6%. Where the past benefits issue was
the major source of contention, WCI argued that any return above
the risk-free rate does not reflect delay, but instead reflects
risk and uncertainty. The court agreed:
Any return above the risk-free rate is earned not from delay
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but by assuming risk,and therefore is not properly considered
economic benefit from noncompliance. Because this amount is
known and the existence and solvency of the party is^also
known, it is inappropriate to increase the rate to reflect
risk. As to this issue, the Court finds Defendant WCI's
argument to be more persuasive. Id. at 831.
V. ECONOMIC BENEFIT AS A PENALTY FLOOR
There are two commonly used methods of calculating civil
penalties. The first method determines the statutory maximum
penalty, and then reduces that number in an amount that
corresponds to all applicable mitigating factors to arrive at a
final penalty assessment. The alternative method determines the
economic benefit of noncompliance and adds to that a gravity
component that reflects the seriousness of the harm, frequency of
the violation, and other mandated considerations. The gravity
component is then adjusted for relevant mitigating factors.
The EPA penalty policy supports the use of the latter
method when calculating a preliminary penalty figure. Framework
guidance at 2. The policy restricts mitigating adjustments to
the gravity component of the penalty assessment. The policy was
modified by the EPA's ability to pay policy which permits
mitigation of the economic benefit portion in appropriate cases.
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This method guarantees that the penalty recoups all economic
benefit except in cases where there is a clear inability to pay
the full penalty. Having the economic benefit of noncompliance
as a penalty floor ensures that the penalty assessment will serve
as a deterrent.
Courts, however, have demonstrated a preference for
assessing the maximum penalty first, and then applying all
mitigating factors to this figure.17 In Tyson Foods, Inc., 897
F.2d 1128, at 1142, the court advised that the maximum fine
should first be determined. If the court chooses not to impose
the maximum, "it must reduce the fine in accordance with the
factors spelled out in [33 U.S.C.] section 1319(d), clearly
indicating the weight it gives to each of the factors in the
statute and the factual findings that support its conclusions".
Id. at 1142. Likewise, the court in Roll Coater, Cause No. IP
89-828 C, at 6 (S.D. Ind. March 22, 1991) stated that "first, the
statutory maximum penalty must be determined. Second, the Court
reduces the penalty in accordance with factors indicated by
Congress. "18
In other cases, courts have applied economic benefit as a
penalty floor under which no penalty may fall except when
statutorily required.19 In supporting the use of economic benefit
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as a penalty floor, the Gwaltnev court states that one of the
purposes behind including an economic benefit component in a
penalty assessment is "to ensure that the violator disgorges at
least its economic benefit". 611 F.Supp. at 1558. Likewise, in
dicta, the Hercules. 1989 U.S. Dist. LEXIS 16901, at *7 court
stated: "the penalty should include, up to the . . . daily
maximum, the court's assessment of what the company has saved by
not purchasing, installing and maintaining the appropriate
equipment to abate its discharge of pollutants". Civil Action
No. 83-3262 at 6. Furthermore, in Ekco Housewares, 853 F. Supp.
at 991, the court maintained that the total economic benefit
"accrued by Ekco in this case should serve as a floor below which
the civil penalty will not be mitigated." Similarly, CAA §
120(d)(2) specifies that the amount of the penalty assessed
cannot be less than the economic value of noncompliance. More
recently, the court in PIRG v. Magnesium Electron. Inc., 40 ERC
1917 (D.N.J. 1995), rev'd on other grounds 123 F.3d 111 (3rd Cir.
1997) held, "The penalty must at least reflect the proven
economic benefit. (Citations omitted) That is the starting point.
Then the other § 309(d) factors are used to increase the amount
which reflects the economic benefit . . ."
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This case is really benefit recapture being the floor. That is a
bit different than the intro to this section. Either modify
mtro, or move out of the section.
Furthermore in In re: Newell Recycling Company, Inc.. 1999 EPA
App. LEXIS, at *85, the court stated, "[T]he role that economic
benefit plays in penalty assessment under the Policy is to
establish the penalty floor--the penalty assessment must at least
capture the economic benefit of noncompliance, even if other
penalty adjustment factors would eliminate a gravity based
penalty computation".
VI. OFFSETS FOR COMPLIANCE COSTS
Economic benefit includes any delayed or avoided expenditures
that would have been necessary to bring a violator into
compliance. Whether and to what extent an offset against
economic benefit is appropriate for expenditures made in
unsuccessful or only partially successful compliance efforts is
an issue with which courts have struggled recently.20 There are
three basic ways that the EPA and the courts can approach such
costs: (1) the calculation of benefit includes the expenditure;
(2) the government disregards the expenditure in the calculation;
or (3) the expenditure is offset against the benefit. The EPA's
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policy, set forth in the BEN User's Manual21, is to only allow
credits or offsets when a company in good faith relies on
competent advice and purchases equipment which ultimately proves
unsuccessful at achieving compliance.22 Absent such good faith
reliance on competent consultants, EPA excludes the expenditure
from the benefit calculation if it was not made in good faith
(e.g. trying a cheap fix instead of investing in appropriate
reliable solutions). If the delayed attempt at compliance is at
least partially successful, and the violator uses it in the final
compliance scenario, the Agency includes it in a separate benefit
calculation based on the equipment that was only partially
successful. The date that equipment was up and running is the
compliance date for the benefit calculation. This number is then
added to a second benefit analysis based on the equipment that is
still needed for compliance. The compliance date for the second
analysis is the date the violator was finally in compliance.
START HERE
Relatively few cases have directly addressed the issue of
compliance cost offsets in the calculation of economic benefit.
In one recent case, the Environmental Appeals Board ruled that
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the presiding officer erred in concluding that the EPA should
have considered the defendant's expenditures to reduce its
discharges in calculating economic benefit. In re: B.J. Carney
Industries, Inc., 1997 EPA App. LEXIS 7; CWA Appeal No. 96-2,
(June 9, 1997). In B.J. Carney, the defendant discharged
untreated wastewater into a POTW, in violation of pretreatment
requirements under the Clean Water Act.23 A consultant's report
indicated the least expensive method of compliance was to
purchase a $62,000 evaporator at an annual operating cost of
$1,550. Instead, B.J. Carney spent $240,000 on such things as
soil removal, general repairs, maintenance, and improvements to
reduce its discharges of produced water into a POTW. The EPA did
not credit B.J. Carney with these expenses in calculating an
economic benefit of $167,000, primarily because compliance would
have involved zero discharge, not simply a reduction. The EPA
also argued that the expenditures were to reduce or eliminate
costs associated with RCRA and thus should not be offset against
the economic benefit of noncompliance with the Clean Water Act.
The presiding officer held that the EPA should have considered
the expenditures because, "It is equitable to offset any costs
for attempting to eliminate the discharge against the costs saved
by non-compliance". On appeal, however, the E.A.B. reversed the
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presiding officer's decision, concluding that "the offsets
against the economic benefit were not appropriate here". The
board did not, however, go so far as to say that pre-compliance
expenditures could never be offset against economic benefit. It
merely concluded that B.J. Carney "did not meet its burden of
quantifying the specific costs that, in its view, should 'offset'
the economic benefit calculation". Id. at 115 n. 59. In
reaching this conclusion, the E.A.B. noted that the record was
inconclusive as to what sums were spent and for what purposes.24
Perhaps more importantly from a future enforcement standpoint,
the board noted in dicta25 that even if B.J. Carney had proved
that it spent the $240,000 in an attempt to comply with its
permit, this figure should increase the amount of economic
benefit from non-compliance, not decrease or negate the benefit
as the presiding officer had previously ruled. The board stated:
Even if such a showing had been made, there has been no
showing that the expenditure of these sums would have
negated the need to purchase and operate an evaporator.
Thus, we can only conclude that if the expenditure of
$240,000 was necessary to achieve compliance, it was in
addition to the purchase and operation of an evaporator. It
follows, then, that if compliance required both the purchase
and operation of an evaporator and $240,000 worth of other
measures, any benefit B.J. Carney enjoyed from delaying the
expenditure of $240,000 was in addition to the benefit
enjoyed from avoiding the purchase and operation of an
evaporator. Therefore, it does not appear to us that had
the $240,000 been considered in the Region's economic
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benefit calculation, it would have negated the Region's
$167,000 calculation; instead, it appears that it would have
increased that amount. B.J. Carney. 1997 EPA App. LEXIS 7,
at 140 n.79.
A second case also addressed the issue of whether
expenditures made in attempts at compliance should be offset
against economic benefit. The district court in Friends of the
Earth v. Laidlaw Environmental Services (TOC). Inc.. 956 F. Supp.
588 (D.S.C. 1997), vacated. 149 F.3d 303 (4th Cir. 1998), rev'd.
528 U.S. 167 (2000), allowed credits for certain expenditures
made by Laidlaw in an unsuccessful attempt to comply with its
NPDES permit. Experts for both the EPA and Laidlaw calculated
economic benefit using two types of expenditures: penalty items
and credit items. Penalty items involved delayed expenditures
which were necessary to bring the facility into compliance.
Credit items involved expenditures that were either not necessary
for compliance or were made because the penalty item equipment
was not in place. Jd. at 597. The citizen group's expert did not
credit Laidlaw with expenditures which ultimately proved
unnecessary for compliance. The court, however, held that
Laidlaw should have received an offset stating:
It must be remembered that Laidlaw is being penalized
through the calculation of economic benefit for delayed
expenditures that were necessary for permit compliance.26 It
is undisputed that if these penalty item expenditures had
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been timely made, Laidlaw would have been in compliance and
it would have been unnecessary to spend money on the three
credit items at issue. It would be unfair to impose a
penalty upon Laidlaw for equipment that it purchased too
late while at the same time not extending a credit for
expenditures that clearly would not have been made if those
purchases had been timely. Id. at 598.
VI. CONCLUSION
Both the courts and the legislature realize that recouping
the economic benefit of noncompliance when assessing civil
penalties is essential if these penalties are to provide an
effective deterrent to future violations. It is obvious that if
violators can profit from delaying compliance with environmental
regulation, they will delay compliance. The conflicts
surrounding this issue involve how the economic benefit of
noncompliance is calculated.
The inputs that go into the economic benefit calculation are
not always straight - forward, and in almost every case, there is
more than one set of inputs proffered. The court's most
difficult task is to choose between input values. Most judges
are not experts in corporate finance, and they do not always
understand the calculations that are involved in the cases before
them. They are forced to rely on expert testimony that explains
where the penalty numbers come from. It is the conflicting
expert testimony that makes this choice so difficult.
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It is obviously difficult to predict how a judge will rule
on economic benefit. In many cases, the outcome can turn on how
convincing or confusing an expert witness is. The case law
suggests that an effective presentation of the economic benefit
issue shows the court that each input value is rationally
determined and easily understandable. Precedent also clearly
demonstrates that a plaintiff who presents an economic benefit
figure that seems arbitrarily determined is likely to face severe
difficulties convincing a trier of fact regarding benefit. It
also appears that triers of fact are influenced by the kind of
harm presented. If the harm is potential in nature (e.g. failure
to file notices or permit applications) then a judge will tend to
be less sympathetic to the Agency's benefit presentation. In
contrast, if there are actual human health effects or significant
environmental damage, then the judge may be looking for a tool to
justify a significant civil penalty. Benefit recapture furnishes
the trier of fact with such a tool.
2The only exception is the Section 120 program of the Clean
Air Act. That section actually requires the recapture of a
violator's economic benefit from violating the law. The Section
12 0 program has its own set of regulations and its own computer
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model that has gone through rulemaking.
2The key point is that although EPA designed the model as a
settlement tool, an expert witness can choose to employ it in a
hearing or trial as long as he or she can thoroughly explain how
the model does the calculation. There are some who have
attempted to short cut this process by having an nonexpert (e.g.
case development officer) run the model and then introduce this
"BEN run" in court. Any astute defense counsel will quickly
figure out that the witness does not understand how the model
made the calculation and have the testimony stricken from the
record. For very small, simple benefit analyses, the
practitioner may want to use the rule of thumb which is so simple
that even nonexperts can explain it to a trier of fact.
3 See In re: B.J. Carney Industries. CWA Appeal No. 96-2 1997
EPA App. LEXIS 7, at *145-46 (June 9, 1997) where the
administrative law judge rejected the EPA's uncontroverted expert
witness testimony. On appeal the Environmental Appeals Board
(EAB)reversed this decision on the basis that the ALJ had abused
his discretion in rejecting the uncontroverted expert testimony.
Id. at 147.
4For a discussion focusing solely on Clean Water Act cases,
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see. Civil Penalty Assessment for Clean Water Act Wastewater
Discharge Violations: A Review of the Law (U.S. EPA, March,
1992) .
5The North Adams case opens the door to suits against
municipalities. Proffitt v. Lower Bucks County Joint Municipal
Authority. No. 86-7220, 12 (E.D. Pa. 1988), rev'd and remanded
877 F.2d 57 (3rd Cir. 1989), aff'd mem. 908 F.2d 963 (3d Cir.
1990), like North Adams. also involved a municipality. Though
Proffitt was reversed and remanded on a standing issue, it is
interesting to note the key difference between the two cases.
The fact the North Adams involved a successful suit by the
federal government, and Proffitt involved an unsuccessful one by
a private citizen is relevant. This outcome suggests that courts
may be reluctant to award a judgment against a municipality to a
private citizen. However, in Pinev Run a municipality was
assessed a $400,000 penalty in a citizen suit - although the
court underestimated the economic benefit.
xIn reality, there is no difference between the calculation
of economic benefit in water cases and such calculations in
nonenvironmental cases.
2The assumption made by the court that a WACC rate is more
company-specific than an equity rate is not true. Not only could
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a WACC rate could easily be based on an industry wide rate
(investments in general), but the current Agency model utilizes
just such a rate.
30f course the model EPA wanted to use here had gone through
rulemaking. And because it did so, even though BEN is similar to
the Section 120 model, the court was probably much more
deferential to the Section 120 model than it would have been to
BEN.
4This assumes that retained earnings have no time value which
simply is not true. Violators often come up with some very
creative explanations why their company did not actually obtain a
benefit. Unfortunately, judges sometimes get taken in. While a
detailed critique of them is beyond the scope of this document,
the practitioner is urged to consult with Headquarters or the
Helpline at(888) 326-6778 for advice on how to handle such
arguments.
5S.Rep. No. 50, 99th Cong., 1st Sess. 25 (1985). This is
discussed on page 4, above.
6 According to the presiding officer, "Carney came into
compliance in July 1990 and this should have been the ending date
for the benefit". Initial decision at 28.
7 The E.A.B. distinguished cases such as Gwaltnev that have
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used a violator's compliance date as an ending date for
calculating the economic benefit. In those cases, the specific
issue of whether the economic benefit calculation should end on
the date of compliance or on the date the benefit was disgorged
was neither raised nor addressed.
8 The burden of proof issue is fully discussed in section IV
A, infra.
9It is worth noting that the respondent's expert witness
applied a risk free rate forward approach in calculating the
economic benefit. EPA's expert applied a WACC based calculation.
While the ALJ accepted defendant's expert's view of economic
benefit, it is clear that the ALJ focused on the cost of
compliance issue, not the methodology which made only an
insignificant difference.
10See also. Louisiana-Pacific Corporation. 682 F. Supp. at
1156 (judge indicated that § 113 of the Clean Air Act should be
construed as creating incentives for the violator to permanently
correct the problem and not to simply perform short-term
remedies); U.S. v. Bethelehem Steel Corporation. 829 F.Supp.
1023, 1056 (N.D. Ind. 1993) (refusing to credit violator with the
amount spent for corrective action while it was not complying
with permits). But see Friends of the Earth. Inc. V. Laidlaw
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Environmental Services (TOC) Inc.. 956 F. Supp. 588 (D.S.C. 1997)
(subtracting the costs of purchasing equipment used in compliance
efforts from its economic benefit calculation).
1]-For example, in one of the major enforcement actions
against the Louisiana Pacific Corporation, the Agency obtained a
civil penalty of about $10 million based on delayed and avoided
costs. But subsequent analysis suggested that the defendant
undercut the prices of its competitors by not complying and
captured market share of over $400 million. See also. Charles
Garlow & and Jay Ryan, A Brief Argument for the Inclusion of an
Assessment of Increased Market Share in the Determination of
Civil Penalty Liability for Environmental Violations: Letting
Corporations Share the Regulatory Burden of Policing Their
Markets. 22 B.C. Envtl. L. Rev. 2 7 (1994).
12 See Calculation of the Economic Benefit of Noncompliance
in EPA's Civil Penalty Enforcement Cases. 61 FR 53026, Oct. 9,
1996 (Requesting comments on methodologies to measure economic
benefit gained from illegal competitive advantage).
13In Duauesne Light Co. V. EPA. 698 F.2d at 483, 484, several
utility companies challenged EPA regulations mandating full
recovery of economic benefit under § 120 of the Clean Air Act.
Here, an EPA model similar to BEN was brought into question, and
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became part of the focus of the litigation. The industry
petitioners did not disagree with the use of the model or the
parameters used in constructing the model. However, petitioners
argued that (1) the industry-wide equity discount rate, (2) the
long run inflation rate, and (3) the long-term Debt-Equity ratio
for calculating cost of investment to the company, assumed by the
model, overestimated economic benefit. The court upheld the
EPA's model's data inputs, stating that the model was not
arbitrary or capricious. Further, the court held that
petitioners had failed to show excessive penalties resulting from
the model's use, and had not presented a more reasonable
alternative methodology. Id. at 483, 486.
15In this case, the Agency took an unusually hard line in
refusing to disclose the BEN formula, and did so without
providing adequate justification. Universal Circuits. No. CWA-
IV-88-001, at 34. If relying on BEN at trial, litigation teams
should be prepared to justify, using current financial theory,
each data input, not simply the use of the model itself. To
accomplish this, the Agency generally supplies an expert witness
who may refer to the BEN model, but only to support his/her own
assessment of the violator's derived economic benefit. With
regard to filing an administrative complaint, use of the BEN
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model to derive the economic benefit amount is probably-
reasonable .
"Actually, retained earnings do have a time-value: the rate
of return or discount rate anticipated by the stockholders of the
company. Retained earnings are the accumulation of net income of
the company not distributed to its owners--the shareholders. To
convince the shareholders that re-investing the profits in the
company is a better decision than declaring dividends and
distributing the profits, and to ensure that the
company's stock prices do not plummet, a sufficient anticipated
rate of return on the reinvested money must be projected. Thus,
this money does have a time-value. A conservative investment
might be to place the money in a bank account. A more likely
investment would involve more risk and, therefore, a higher
prospective rate of return. Shall & Haley, Introduction to
Financial Management 320 (4th ed. 1986).
17See. e.g.. Sierra Club v. Cedar Point Oil Co.. Inc.. 73
F.3d 546 (5th Cir. 1996); U.S. v. Marine Shale Processors. 81
F.3d 1329 (5th Cir. 1996) . EPA is not, necessarily, opposed to
this method because it usually results in higher penalties. This
fact could be useful in negotiating settlements as well as future
litigation.
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18Use of this method could adversely affect the goal of
recovering at least the economic benefit derived from
noncompliance. Where economic benefit exceeds the statutory
maximum, any reduction of the penalty as mitigation will directly
reduce the economic benefit portion of the penalty, and provide
the violator with a windfall for its noncompliance. Even when
economic benefit lies below the statutory maximum penalty, any
reduction which lowers the penalty below the economic benefit
assessment would have the same effect. However, the statutory
maximum is usually so high that this is rarely a problem.
19See. e.g.. U.S. v. Municipal Authority of Union Township.
929 F. Supp. 800, 806 (D. Pa. 1996) where the court explicitly
rejected the Tyson Foods approach of starting with the statutory
maximum and mitigating as warranted. Instead, the court preferred
to "begin with economic gain and add a sum to that figure guided
by the other [Clean Water Act § 309(d)] factors and the need for
punishment and deterrence".
"Courts are also split on the related issue of interim
compliance cost offsets (See Section III(B)(3)(c), supra, Interim
Compliance Costs).
21See discussion of pre-compliance expenditures at pages 4-3
of the BEN User's Manual (Sept. 1999)
91
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chttp://es.epa.gov/oeca/models/ben.pdf>.
"See Friends of the Earth v. Laidlaw Environmental Services
(TOC). Inc.. 956 F. Supp. 588 (D.S.C. 1997).
"Section 307(b), 33 U.S.C. 1317(b), 40 C.F.R. 429.75
24The E.A.B. also noted that B.J. Carney's expenditures had
already been factored into the penalty as part of the gravity
factor. B.J. Carney.1997 EPA App. LEXIS 7, at *142 ("To the
extent some of the [pre-compliance costs] reduced the PCP
discharge and thus the harm to the environment, those costs were
indirectly reflected in the penalty calculation by the presiding
officer's conclusion that B.J. Carney's violations resulted in
only minor harm to the environment".
26This is consistent with the court's holding in U.S. v.
Environmental Waste Control. Inc.. 710 F. Supp. 1172, 1244 (N.D.
Ind. 1989) in which the court stated, "The cost of compliance
with the law ... is not a proper set-off to apply to penalties
for non-compliance."
92
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1. This section is further discussed in Section HI B (l)(c), Use of a Discount Rate Established by
Regulation.
93
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APPENDIX C
Draft Brief on Statue of Limitation Issue
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
REGION 10
1200 Sixth Avenue
Seattle, Washington 98101
IN THE MATTER OF:
B. J. Carney Industries, Inc.
Sandpoint, Idaho
Docket No. 1090-09-13-309(g)
EPA'S BRIEF REGARDING
APPLICABILITY OF 28 U.S.C.
§ 2462 TO CALCULATION OF
ECONOMIC BENEFIT
EPA'S BRIEF RE STATUTE
OF LIMITATIONS - PAGE 1
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INTRODUCTION
Pursuant to 40 CFR § 22.16 and the Presiding Officer's Order dated June 26, 1997, Complainant
EPA hereby submits the following brief regarding the applicability of 28 U.S.C. § 2462 to the
calculation of the penalty factors under Section 309(g)(3) of the Clean Water Act ("CWA" or "Act"), 33
U.S.C. § 1319(g)(3), including economic benefit.1 For the reasons set out below, EPA believes that the
Presiding Officer may consider evidence of matters occurring outside the period described by 28 U.S.C.
§ 2462 in calculating the appropriate penalty for the violations found within the limitations period. EPA
therefore requests that the Presiding Officer hold that the entire economic benefit enjoyed by Respondent
may be considered in assessing a penalty, subject only to (1) the maximum penalty allowed within the
statutory limitation period and (2) the further CWA administrative penalty assessment limitation of
$125,000. Section 309(g)(2)(B) of the Act, 33 U.S. C. § 1319(g)(2)(B).
This issue was not briefed to the Environmental Appeals Board, and not subsequently decided t
the Board in its Remand Order of June 9, 1997, which stated: "we will not address the merits" of
whether "[t]he Presiding Officer miscalculated the correct time for the statute of limitations in limiting
the calculation of the economic benefit." Remand Order, In re B.J. Carney Industries, Inc., CWA
1 The Agency recognizes that in this case, regardless of whether the Presiding Officer applies the statute of
limitations directly to preclude evidence relevant to the economic benefit penalty factor, the ultimate penalty
imposed upon B.J. Carney probably will be unaffected. The Agency demonstrated to the presiding officer in the
initial hearing that the respondent, from 1984 until 1993, enjoyed an unlawful economic benefit of $167,000.
Transcript at 447. But since the EAB held in this case that economic benefit continues to accrue until it is disgorged,
Remand Order, In re B.J. Carney Industries, Inc., CWA Appeal No. 96-2 (EAB June 9, 1997), slip op. at 81-82,
EPA is prepared to show that the appropriately revised figure, as of July 1997, exceeds $266,000.
Even if the statute of limitations were directly applied to restrict the consideration of economic benefit, the
resulting calculation would still be greater than the statutory cap. EPA is prepared to show on rehearing that the
economic benefit that accrued to the respondent from 1985 (the earliest date within the five year statute of limitations
period) through the 1993 hearing date would have been approximately $153,000. But updating even this partial
benefit forward to July 1997 (at the discount rate of 16.01%) yields a benefit figure of over $250,000. In either case,
B.J. Carney's total economic benefit exceeds the administrative penalty cap of $125,000 set forth at Section
309(g)(2)(B) of the Clean Water Act, 33 U.S.C. § 1319(g)(2)(B).
EPA'S BRIEF RE STATUTE
.OF LIMITATIONS - PAGE 2
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Appeal No. 96-2 (EAB June 9, 1997), slip op. at 77 n.67. The Board's consequent discussion of the
economic benefit issue, then, should be considered dicta.2
The Presiding Officer has directed Complainant to "determine and identify what evidence they
will submit on the issue of economic benefit within the limitations period and whether an oral hearing is
necessary to receive that evidence." Order Setting Procedures Following Remand (June 26,1997).
Given the scope of the EAB's Remand Order (June 9, 1997), Complainant believes that the evidence
responsive to this request is the mathematical recalculation of the economic benefit that occurred
between 1985 and the present. In light of the Presiding Officer's Order of June 26, 1997, Complainant
argues below that the statue of limitations does not bar consideration of evidence of economic benefit
that occurred outside the statute of limitations. Whether the Presiding Officer rules in EPA's favor or
not on the statute of limitations argument, the only additional evidence that EPA would proffer is a
detailed written explanation of the economic benefit to which Ms. Zanier testified at the hearing in 1993.
Complainant expects that Ms. Zanier's report on economic benefit, whether it addresses a five or six-
year period, is expected to be less than 10 type-written pages in length.
Complainant does not believe that a rehearing is necessary in light of the limited scope of the
EAB's Remand Order, which states in relevant part:.
Accordingly, on remand, the presiding officer shall, in conformance with this opinion and
after any new evidence is received during the reopened hearing, determine the economic
benefit that B.J. Carney enjoyed within the limitations period. Then, also in accordance
with this opinion, the presiding officer shall determine an appropriate penalty based on all
2 The Board itself noted that the issue had not been briefed. Id. Complainant did not brief or argue this
issue further in the EAB appeal because it believes, as noted above, that respondent will be liable for the entire
$125,000 allowed under Section 309(g) of the Act, no matter what theory is adopted by the Presiding Officer.
Nonetheless, because the EAB itself raised a number of issues on this subject, Complainant submits its arguments on
the effect of 28 U.S.C. § 2462 in order to assist the Presiding Officer in his subsequent ruling on this matter.
EPA'S BRIEF RE STATUTE
OF LIMITATIONS - PAGE 3
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of the factors he is required to consider under Clean Water Act § 309(g)(3), including the
statutory directive to recover a violator's economic benefit of noncompliance.
Slip Op. at 93-94. The EAB left intact Complainant's showing on initial cost of compliance and the
discount rate. Slip Op. at 71 n.58, 87. The EAB also ruled that the benefit continues to accrue through
the present. Slip Op. at 81-82.
The EAB has remanded for the sole purpose of recalculating economic benefit to cover the
period from October, 1985 to the present. Complainant does not interpret the EAB's Remand Order to
direct the parties to proffer new evidence regarding any other issues in the matter. Consequently, no new
evidence will be required from either Respondent or Complainant regarding any of the inputs to the
economic benefit calculation other than the period of time over which it could be calculated. The
Presiding Officer can provide a fair and reasoned ruling in the instant matter without taking additional
oral testimony from Ms. Zanier.3 If a hearing is ordered, however, Complainant will have Ms. Zanier
testify regarding her new calculations and her report will be offered into evidence at that time. A copy .
the report will be provided to the Presiding Officer and Respondent no later than August 5, 1997.
ARGUMENT
I. THE EAB'S HARMON DECISION DOES NOT APPLY TO THIS CASE
The Presiding Officer has invited the parties to brief whether the statute of limitations period
"itself should be further considered in light of the EAB's decision in In re Harmon Electronics. Inc..
RCRA (3008) Appeal No. 94-4 (EAB, Mar. 24, 1997), 7 E.A.D. , 1997 RCRA Lexis 2, or whether
3 Respondent offered no economic benefit witness at hearing, so Ms. Zanier would be the only witness on
remand regarding economic benefit.
EPA'S BRIEF RE STATUTE
OF LIMITATIONS - PAGE 4
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they believe that question . . . has been decided by the EAB." Although the Environmental Appeals
Board considered the applicability of the federal statute of limitations in Harmon, the ruling is not
applicable to this case. In the case at bar, B.J. Carney has not asserted that the violations alleged in the
administrative complaint occurred outside the statutory limitations period. In Harmon, the Board faced a
defense against liability, and rejected it.4 The issue here is whether the five year statute of limitations
should be applied to individual penalty assessment factors or instead to the entirety of the Agency's
penalty liability claim. Here, the Presiding Officer is being asked to rule not on how the statute of
limitations may apply to determine liability — respondent's liability has already been determined -- but
on whether the statute applies to an individual penalty assessment factor. Because this issue was not
reached by the EAB in Harmon, that decision is not on point.
II. THE STATUTE OF LIMITATIONS DOES NOT BAR INTRODUCTION OF
RELEVANT EVIDENCE
The general federal statute of limitations, codified at 28 U.S.C. § 2462, applies to EPA's
administrative penalty cases. 3M Company v. Browner, 17 F.3d 1453, 1455-59 (D.C. Cir. 1994). The
statute states in relevant part:
Except as otherwise provided by Act of Congress, an action, suit or proceeding for the
enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be
entertained unless commenced within five years from the date when the claim first
accrued ....
4 The Board noted, in denying the defense, that "when a violation 'first accrues' is not to be confused with
when a violation 'first occurs.'" In re. Harmon Electronics, Inc., RCRA (3008) Appeal No. 94-4 (EAB, March 24,
1997), slip op. at 26.
EPA'S BRIEF RE STATUTE
OF LIMITATIONS - PAGE 5
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A. Section 309 Penalty Factors Require Consideration of Conduct Occurring
Outside the Statute of Limitations
Like most federal environmental statutes, the Clean Water Act dictates how penalties are to be
assessed. The Administrator
shall take into account the nature, circumstances, extent and gravity of the violation, or
violations, and, with respect to the violator, ability to pay, any prior history of such
violations, the degree of culpability, economic benefit or savings (if any) resulting from
the violation, and such other matters as justice may require. . . .
Section 309(g)(3) of the Act, 33 U.S.C. § 1319(g)(3). While the statute of limitations may limit which
violations give rise to a penalty, it does not suppress evidence necessary to assess an appropriate penalty.
See generally Brinkley-Obu v. Hughes Training, Inc., 36 F.3d 336, 346 (4th Cir. 1994)("Statutes of
limitation do not operate as an evidentiary bar controlling the evidence admissible at trial of a timely-
filed cause of action.")(Employment discrimination claim under Equal Pay Act of 1963); United States
v. Musacchio, 968 F.2d 782, 790 (9th Cir. 1991) ("[Defendant] is attempting to convert the statute of
limitations from a procedural rule that requires bringing the complaint within a certain time after the
completion of a crime to a rule that restricts the introduction of evidence. We find no support for this
use of the statute of limitations. . . . The statute of limitations does not bar the introduction of evidence
of acts that occurred outside the limitations period.")(Criminal case alleging misapplication of funds in
violation of 18 U.S.C. § 657). After liability is established, appropriate penalties are determined by
reference to the facts of the case and the penalty assessment factors of the Clean Water Act.
As the Supreme Court has noted, Congress instructed the judiciary to "take into account multiple
factors ... in order to set civil penalties under the Clean Water Act." Tull v. United States, 481 U.S.
412, 427 (1987); see also, Atlantic States Legal Foundation v. Tyson Foods, Inc., 897 F.2d 1128, 1140-
EPA'S BRIEF RE STATUTE
OF LIMITATIONS - PAGE 6
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41 (11th Cir. 1990)(holding that the legislative history of the Act requires courts to consider all the
statutory penalty assessment factors) and PIRG v. Powell Duffryn Terminal, Inc., 720 F. Supp. 1158,
1160 (D.N.J. 1989), aff'd, 913 F.2d 64 (3d. Cir. 1990), cert, denied, 498 U.S. 1109 (1991)(same); see
also, In re Employers Insurance ofWausau and Group Eight Technology, Inc., TSCA Appeal No. 95-6
(EAB February 11, 1997), slip op. at 32 ("the Presiding Officer must also ensure that the penalty he or
she ultimately assesses reflects a reasonable application of the statutory penalty criteria to the facts of the
particular violation."). Indeed, the EAB in its June 9 Remand Order examined economic benefit issues
arising earlier than five years before the filing of the administrative complaint and observed that the
Presiding Officer in the initial decision erred by excluding a discount rate from outside the limitations
period. Remand Order, slip op. at 79-80.5
Several statutory penalty factors — prior history, culpability, economic benefit and other
justiciable matters — invite judicial inquiry into conduct that may have occurred earlier than five years
before the filing of a complaint.
5 Although the EAB did not expressly rule on the economic benefit issue, the Board noted that it was
appropriate to apply a discount rate from 1984 to the entire calculation despite the fact that the five year limitations
period began in October 1985. Remand Order at 79-80. The EAB observed:
Despite the statute of limitations, the point at time at which compliance was initially required may
nonetheless be an appropriate time for setting the discount rate, which . . . represents the cost of
financing pollution control equipment. . . . We think it was wrong for the presiding officer to
conclude that the statute of limitations automatically precludes the use of such a discount rate in
economic benefit calculations.
B J Carney, slip op. at 79-80. The Board then added, "The statute of limitations does not preclude a company from
obtaining a benefit, it only precludes the Agency from recovering that portion of the benefit that was realized more
than five years before the complaint was filed, outside the limitations period." [Footnote omitted.] Id. at 80. In light
of the Board's earlier declaration that it was not deciding the statute of limitations issue, and its subsequent
statement, cited in the text below, that the respondent "should not be allowed to benefit economically . .. and be
placed in a better position" than law-abiding competitors, this last passage must be considered dicta. The Board may
also have intended this statement to apply to a different category of case in which EPA seeks to recover more than
the statutory maximum penalty by using an economic benefit argument to reach beyond the statute of limitations
period.
EPA'S BRIEF RE STATUTE
OF LIMITATIONS - PAGE 7
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1. Section 309(g)(3) Requires the Presiding Officer to Consider the Entire
History of Violation
This factor inherently requires the trier of fact to look into past conduct that may predate a
statutory limitations period. One court held
"any history of such violations" in § 309(d) of the Act to refer to previous violations not
related to the instant litigation, and not a continuing violation.... A "recidivist" offender
is one who has been caught and punished. [The defendant] does not have a history of
violations because it has not been found guilty of a violation previous to the one at bar.
United States v. Roll Coater, 21 ELR 21073, 21076 (S.D.Ind. 1991) (emphasis added). See also, ASLF
v. Universal Tool & Stamping Co., 786 F. Supp. 743, 751 (N.D. Ind. 1992)(taking notice of penalty
violations occurring as early as 1975, approximately thirteen years before the filing of the complaint);
SPIRGNJv. Monsanto, 29 Env't Rep. Case (BNA) 1078, 1091 (D.N.J. 1988)("I do agree . . . that, in
determining what is an appropriate penalty . . . that the whole history of the past violation or violations
may be taken into consideration."); In re Spang & Co., EPCRA Appeal Nos. 94-3 & 94-4 (EAB Octobr
20, 1995), 6 E.A.D., slip op. at 28 ("the past acts of violators have historically been appropriate for
consideration when assessing a penalty.").
Complainant is not aware of any decisions that would allow the statute of limitations to veil the
full history of a recidivist violator. Such an approach would require a tribunal to turn a blind eye to
egregious conduct, even criminal conduct resulting in injuries or death, that may have occurred just
outside the five period described by 28 U.S.C. § 2462. The clear intent of Congress expressed in Section
309 is that the Presiding Officer consider all relevant misconduct by violators without regard to a five
year rule.
EPA'S BRIEF RE STATUTE
OF LIMITATIONS - PAGE 8
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2. The Presiding Officer is Required to Consider Culpability
This factor dictates an examination by a presiding officer of the circumstances of a respondent's
noncompliance. Relevant evidence as to culpability may lie more than five years in the past, and cutting
off its availability could frustrate the decisionmaker's efforts to implement the Act. This concern was
recognized by the Eighth Circuit in United States v. City of Green Forest Arkansas, 921 F.2d 1394 (8th
Cir. 1990), cert, denied sub nom. Work v. Tysons Food, Inc., 502 U.S. 956 (1991):
[Citizen-appellant] Work points out that the evidence of prior violations was relevant to
such issues as Tyson's knowledge and culpability, even if Tyson could not be held liable
for violations pre-dating the statute of limitations period... .
Work is right that there is no rule that automatically excludes evidence pre-dating a
statute of limitations period. In this case, it may have been error for the court
automatically to exclude considerable evidence that was relevant to Tyson's culpability
921 F.2d at 1409.
3. The Presiding Officer May Consider Such Other Matters as Justice May Require
The EAB's Remand Order in this case noted that "the underlying principle of the "justice" factor
... is "to operate as a safety mechanism when necessary to prevent an injustice." Remand Order, at 91-
92 n.82 (quoting In re Spang & Company, EPCRA Appeal Nos. 93-4 and 94-4 (EAB, Oct. 20, 1995), 6
E.A.D., slip op. at 28). Under Spang, the Board explained, what a respondent needed to show in order to
have this factor applied "in the context of past expenditures on 'environmental good deeds.'" Id. Under
the Spang holding, a Presiding Officer might under certain circumstances find it useful to accept relevant
evidence relating to this purely equitable factor even though it occurred beyond the statute of limitations.
In such circumstances, 28 U.S.C § 2462 would not preclude a Presiding Officer from acting "to prevent
an injustice."
EPA'S BRIEF RE STATUTE
OF LIMITATIONS - PAGE 9
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4. The Presiding Officer is Required to Consider Economic Benefit or Savings
The legislative history of the Clean Water Act discloses that Congress included "economic
benefit" in part to promote a fair market among the regulated community. The relevant Senate Report
states:
The amendment would also expressly require the courts to consider a number of factors,
including, in particular, the economic benefit gained as a result of the violation. Violators
should not be able to obtain an economic benefit vis-a-vis their competitors due to their
noncompliance with environmental laws.
S. Rep. No. 50, 99th Cong., 1st Sess. 25 (1985), reprinted in, 2 A Legislative History of the Water
Quality Act of 1987 at 1446 (Comm. Print 1988)("CWA 1987 Legis. Hist."). Applying the statute of
limitations to preclude the evidence of a violator's benefit would thwart Congressional intent to equalize
the playing field between competitors, and deny the Presiding Officer relevant evidence in evaluating the
extent of the violations and thereby determining the appropriate civil penalty.
The Presiding Officer should certainly be able to consider whether a violator with ten years of
violation (and resultant economic benefit) will receive an advantage against a competitor with five years
of violation (and a significantly lesser benefit) for penalty purposes.6 The EAB seems to have reached
an analogous conclusion in its Remand Order, when it stated that "Having been found in violation, B.J.
Carney should not be allowed to benefit economically from that violation, and thus be placed in a better
position that [sic] those who followed the law and complied on time." Remand Order at 81-82 (relating
6 If a violator were allowed to keep the economic benefit it unlawfully appropriated before the statute of
limitations date, it would profit at the expense of any competitor who made required pollution control investments in
that same period of time. That would hardly be fair. It would reward lawbreakmg at the expense of the law-abiding,
and provide incentives to dischargers to avoid investing in continuing pollution control obligations in the hope of
taking refuge behind a false argument. It would mean that this tribunal, in contradiction of Congressional intent and
in violation of the spirit of EAB rulings, would not recognize the obvious, equitable difference between a violator
with five years of violations and one with considerably more.
EPA'S BRIEF RE STATUTE
OF LIMITATIONS - PAGE 10
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to date of disgorgement of economic benefit). The recapture of economic benefit is central to the
effective enforcement of the Clean Water Act and necessary to avoid unjust enrichment of the violator.
Friends of the Earth v. Laidlaw Environmental Services (TOC), Inc., 890 F. Supp. 470, 492 (D.S.C.
1995)
The Board's contemplated methodology requires consideration of evidence predating any statute
of limitations in this case. The EAB's approach - reaching back to 1984 ~ implicitly rejects an
argument that this case falls within that class of case in which "evidence has been lost, memories have
faded, and witnesses have disappeared." Order of R.R. Telegraphers v. Railway Express Agency, Inc.,
321 U.S. at 349. Even if not considered under the economic benefit statutory factor, evidence relating to
the respondent's economic benefit prior to the limitations period of 28 U.S.C. § 2462 is relevant
information the Presiding Officer must consider under "such other matters as justice may require,"
culpability, history of such violations.
If the federal statute of limitations were held to restrict the application of each statutory penalty
assessment factor, and in particular restrict the recapture of improperly accrued economic benefit, it
would conflict with and frustrate the deterrence and fair treatment purposes of the Clean Water Act's
enforcement provisions. See, e.g., Tull v. United States, 481 U.S. at 422-23 (purpose of Act's
enforcement provisions are retribution and deterrence) and SPIRGNJ. v. AT&T Bell Laboratories, 617 F.
Supp. 1190, 1201 (D.N.J. 1985) ("There is little doubt that Congress intended deterrence as a purpose of
sanctions under the FWPCA.") and 2 CWA 1987 Legis. Hist. 1446 ("Violators should not be able to
obtain an economic benefit vis-a-vis their competitors due to their noncompliance with environmental
laws.").
EPA'S BRIEF RE STATUTE
OF LIMITATIONS - PAGE 11
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B. Public Policy Considerations
Statutes of limitations exist for several reasons, among them to foreclose stale claims, and
prevent the prosecution of forlorn cases in which "evidence has been lost, memories have faded, and
witnesses have disappeared" and in which "the right to be free of stale claims in time comes to prevail
over the right to prosecute them." Order ofR.R. Telegraphers v. Railway Express Agency, Inc., 321 U.S.
342, 349(1944).
The federal statute of limitations that applies these policy concerns effectively, and appropriately,
weeds out claims for penalties in which the violative conduct has ended more than five years before the
filing of a complaint. Those are the very cases in which "a potential defendant 'ought to be secure in his
reasonable expectation that the slate has been wiped clean of ancient obligations.'" 3M, 17 F.3d at 1457
(quoting Note, Developments in the Law - Statutes of Limitations, 63 Harv. L. Rev. 1177, 1185
(1950)).7 The statute of limitations is not designed to limit the evidence that a party may introduce that
is relevant to an issue in the case. See Green Forest, 921 F.2d at 1409; Brinkley-Obu, 36 F. 3d at 346;
and, Musacchio, 968 F.2d at 790.
The issue here is whether this case, in which the respondent's misconduct continued unabated
and essentially unchanged for a period extending from before the five year period until a date shortly
7 On the other hand, 28 U.S.C. § 2462 limits itself to penalty claims only, since claims for injunctive relief
describe either ongoing violative conduct or ongoing effects of violative conduct that are neither "ancient," nor
"stale," nor subject to fading memories or missing witnesses. United States v. Banks, 1997 U.S. App. LEXIS, *8
(11th Cir., June 24, 1997)("Because Congress did not expressly indicate otherwise m the statutory language of
section 2462, its provisions apply only to civil penalties; the government's equitable claims against Banks are not
barred."); United States v. Hobbs, 736 F. Supp. 1406, 1410 (E.D.Va. 1990), affd, 947 F. 2d 941 (4th Cir. 1991),
cert, denied, 504 U.S. 940 (1992)("The limitations period set forth in 28 U.S.C. § 2462 applies only to suits for civil
penalties. This section, by its own terms, has no bearing on suits in equity." )(CWA § 404). The law also states that
"Statutes of limitation sought to be applied to bar rights of the government, must receive a strict construction in favor
of the government." Badaracco v. Commissioner, 464 U.S. 386, 391 (1984).
EPA'S BRIEF RE STATUTE
OF LIMITATIONS - PAGE 12
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before the filing of the complaint, falls within that class of cases in which a violator can take shelter in a
forgiving and pragmatic public policy, codified by the statute of limitations. In other words, is the
respondent being hounded over an "ancient obligation"? Does the government's case rely upon
circumstances so stale, or so changed, as to prevent reliable proofs? Is EPA incorporating in its penalty
demand an amount greater than the maximum it is entitled to in the statutory five year period? To all
questions, the answer is "No."
In this case, the respondent complied by shutting down. It never purchased the necessary
pollution control equipment to operate lawfully. The proof needed to support a calculation of economic
benefit in this situation is the same whether the first day of violation was five years prior to the filing of
the complaint or six years prior. The essential facts are identical. There is no risk of the government
bringing a stale claim here. Nor is there any risk that the respondent's witnesses will be unable to
remember what occurred prior to October 1985, five years before the administrative complaint was filed
in this matter. The equipment was not in place in 1985, in 1984, or at any other time. Finally,
Complainant is requesting no more than it may demand ~ the maximum $125,000 allowed under
Section 309(g) of the Act - even though respondent's full economic benefit exceeds that amount.
CONCLUSION
The statute of limitations only limits the number of years in which violations can be considered.
It cannot subsequently be applied a second time to limit the independent consideration of evidence
EPA'S BRIEF RE STATUTE
OF LIMITATIONS - PAGE 13
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supporting aggravating or mitigating statutory penalty factors.8 This rule is consistent with the approach
taken by the court in United States v. Sheyenne Tooling and Manufacturing Co.. 952 F. Supp. 1420,
1426 (D.N.D. 1996)(CWA), in which the defendant's economic benefit was measured over a ten year
history of noncompliance. By making this distinction, this tribunal can give effect to both the statute of
limitations and the statutory penalty assessment factors provided by the Clean Water Act.
Consequently, for the reasons provided above, Complainant requests that the Presiding Officer
hold that 28 U.S.C. § 2462 is inapplicable to the statutory penalty assessment factors of Section 309(g)
of the Clean Water Act.
DATED this 14th day of July, 1997.
Mark A. Ryan
Assistant Regional Counsel
Region 10
Of Counsel:
David Drelich, OECA
Jonathan Libber, OECA
8 Plainly, the Presiding Officer's threshold determination of CWA liability (to which the statute of
limitations may apply) is based on completely different findings than a penalty determination (to which it does not
apply). Compare Sections 301(a) and 502 ofthe Act, 33 U.S.C. §§ 1311(a) and 1362, to Section 309(g)(3) of the
Act, 33 U.S.C. § 1319(g)(3).
EPA'S BRIEF RE STATUTE
OF LIMITATIONS - PAGE 14
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APPENDIX D
Case Law Update
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Case Law Update - Economic Benefit
6/24/2002
Use of Nonexpert Witnesses to Present Economic Benefit Testimony
In re: Industrial Chemicals Corp.. Docket No. CWA-02-99-3402 June 16, 2000 2000 WL
793949 (EPA ALJ) [Round I] - EPA used an engineer as its "financial expert" on both the
benefit and ability to pay issues before Judge Nissen, and it worked. It is not clear from the
decision how the engineer derived the benefit component, but from the PO's references to the
BEN model, and my contact with this attorney on a similar case, there must have been some use
of the BEN model. Although Judge Nissen stated that the engineer failed to explain the
rationale behind the BEN model. He did find that there was SI,096 in Economic Benefit from
failing to monitor storm water discharges. But the costs were very low, the benefit was avoided
and Respondent admitted that he had saved almost the same amount that the engineer
calculated. It is important not to read too much into this decision.
In the Matter of Industrial Chemicals Corporation - 2000 EPA ALJ LEXIS 84 (Docket No.
CWA-02-99-3803 )(September 22, 2000) [Round II] - The respondent was issued a civil penalty
for failing to properly prepare, implement, and amend its Spill Prevention Control and
Countermeasure Plan (SPCC) for its chemical manufacturing facility in Puerto Rico. ICC used
about 10,000 gallons of diesel oil annually to operate a boiler and sulfur burner during start-up of
sulfur processing operations and to fuel five maintenance vehicles. Smaller quantities of
lubricating and hydraulic oils were also used for maintaining equipment and vehicles. The
facility had a total oil storage capacity of 24,620 gallons and was located immediately adjacent to
the shoreline of the Carribean Sea and the Tallaboa River. In late 1997, when the Region
received reports of a sticky and discolored substance along the shoreline adjacent to the ICC
facility, it undertook an inspection of the ICC facility. During the December 20, 1997 inspection
a number of SPCC violations were revealed. A notice of noncompliance was sent to the
respondent on February 13, 1998.
Pursuant to the CWA the Region assessed a civil penalty of $11,475, which included an
economic benefit amount of S3,375 due to its delayed compliance with the SPCC regulations.
That amount included interest, and annualized construction and maintenance costs for the period
of noncompliance - from December 1997 until April 1999. The EPA witness was not an expert.
He applied the "rule of thumb" formula from the 1984 penalty policy. The Region's witness
testified that, in arriving at this amount, conservative estimates regarding respondent's costs were
used for the benefit calculation. Since ICC did not challenge the testimony or the methodology
used, the ALJ accepted the witness' testimony as the only substantial evidence on the issue.
Analysis
Enforcement Sensitive and Confidential
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Even though the judge seems to think the government witness used the BEN model to
derive the penalty figure, the witness used the rule of thumb approach. The problem is: the ALJ
may have actually thought he that was hearing was a BEN analysis. Either way, it
demonstrates that ALJ's are willing to accept nonexpert testimony on economic benefit.
Nevertheless, we strongly advise against having a nonexpert introduce BEN analyses in
hearing or trial as the more normal response is for the judge to reject them unless the
witness can explain what the model did with the inputs.
> In re: City of Salisbury. 2000 WL 190658 (E.P.A., Feb 08, 2000) (NO. CWA-IH-219) - The EPA
-successfully used its penalty witness, a nonfinance person, to calculate benefit and ability to pay.
The Agency first voluntarily reduced its penalty demand from the initially proposed amount of
$69,000 to a penalty of SI6,000 on the basis of Respondent's ability to pay. In the process of
developing the penalty figure before the ability to pay adjustment, the Chief Judge Susan Biro
determined that the economic benefit component was $7,125. She accepted the analysis of
EPA's penalty witness, an environmental scientist and enforcement officer. The penalty
witness just listed the items that were avoided and summed them together. She made no
attempt to adjust them for taxes, determine their net-present value, etc. There was one
minor error, which only became apparent at trial. Judge Biro made the appropriate subtraction
and moved forward. Decision at pages 29-30. The interesting part of this case, for a
municipality violating the CWA after showing municipal budgetary data that they could afford tc
pay that fine, equal to about $2 per household.
Analysis
At least for Judge Biro, one can see a willingness to rely on very simple economic
analyses as long as they are not opposed by Respondents. In fact I see in this opinion a little
frustration on her part that the Agency did not seek a larger penalty.
> Pinev Run Preservation Ass'n v. County Com'rs of Carroll County. Md.. 82 F.Supp 2d 464
(D. Md., Feb 10, 2000) rev'd on other grounds 268 F.3d 255 (4lh Cir. 2001); U.S. v. Hill.- In this
citizen suit for substantial injunctive relief and civil penalties, neither side hired an expert
witness to present the economic benefit or ability to pay issues. The court did a "seat of the
pants" type of calculation without any attempt to look at the time value of money issue and the
fact that some of the costs were delayed and not avoided. He imposed a civil penalty of
$400,000.
But the judge went against logic and the established case law in starting his calculation
two years after the benefits began accruing. He recognized that the violations began in June of
1996, but when he calculated the economic benefit of noncompliance, he started the calculation
from November 1998, the date he felt that the defendants knew of the problem. By doing so, the
judge has essentially added knowledge as a requirement for the calculation economic benefit.
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This case was reversed on the liability issue.
Analysis: The Good, the Bad and the Surprising
The good news is that was the first time to my knowledge that a citizen plaintiff prevailed
against a municipality on the civil penalty issue. This is a particularly significant development
because Carroll County is a relatively small defendant.
The bad news is that this cases suggests that knowledge is a requirement to establish
economic savings. This approach, although not precedential because of the reversal, is
inconsistent with the case law in this area, but it might undermine the deterrent effect of citizen
suits and EPA enforcement actions. By making knowledge a requirement, the judge is
encouraging violators to be ignorant of what it takes to remedy their noncompliance. Had the
court of appeals affirmed, the County would still have walked away from this private citizen
enforcement action with substantial economic savings even after paying a $400,000 civil penalty.
The surprising is that the judge was willing to impose a large penalty based upon
economic benefit with so little information in the record.
Illegal Competitive Advantage
y In Re: Chempace Corporation FLFRA Appeal Nos. 99-2 & 99-3 Docket No.
5-IFFRA-96-017 May 18, 2000 2000 WL 696821 (EPA EAB) - While this decision is known
better for its controversial ability to pay holding (upheld on appeal to the EAB) the ALJ
determined the economic benefit component based on mostly on an ICA type analysis - the sales
of the product. ALJ Perlstein found Chempace liable of 99 counts of manufacturing and
distributing unregistered, misbranded and canceled pesticides. The ALJ found that Chempace
realized $35,000 from its unlawful sales, and that figure was considered a minimum
starting point in considering an appropriate penalty. Chempace also saved $6.500 in
annual pesticide registration fees by not registering the three pesticides it produced and
sold. While he did not add the benefit component to the gravity component, he did state
that penalty sufficiently exceeded the total of gravity amounts to fully recover the
Chempace's economic benefit.
Analysis
Judge Perlstein had no trouble using the illegal sales ICA approach to come up with most
of his benefit figure. The $6,500 was a standard avoided expense. Not only is this an important
ICA case, but it is the first time to my knowledge that a judge has calculated benefit from both a
BEN type analysis and ICA type benefit analysis in the same case. Practitioners should proceed
with caution here as many BEN type benefit scenarios overlap with ICA type scenarios leading to
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potential double counting of benefits.
>>In re: Lawrence John Crescio IP - 2001 WL 537494 (Docket No. 5-CWA-98-004) May 17, 2001
The respondent was a "muck-farmer" charged with violating the CWA by discharging pollutants
into navigable waters without a permit. The respondent hired a company to install drainage tiles
on his land using a trenching machine which discharged approximately 2,810 cubic yards of
dredged material - soils and organic material - into wetlands located on the site. The ALJ
imposed a civil administrative penalty in the amount of $31,500 for the violation.
Since the ALJ believed it was possible to calculate at least a partial or reasonable
approximation of economic benefit of noncompliance, he began the penalty calculation with that
factor. The EPA calculated an economic benefit of $5,000 representing the savings the
respondent realized by not monitoring and restoring the site for seven years, from October 1991,
when he installed the tiles, until August 1998, when he plugged the ditch system and disabled the
tiling system. This was a standard BEN type analysis, and the ALJ accepted this figure.
However, after the hearing, EPA included an additional economic benefit of
approximately $27,000 to $29.700 minus costs for the years 1993 through 1998 from income
gained through the sale of mint oil which was grown on the nine productive acres of the
thirteen acres tiled in 1991. The ALJ ruled that the economic benefit consisted of at least
$2.400 in "wrongful profits." in addition to the initial amount of $5.000 in savings from
delayed restoration of the site, or a total of $7.400.
Analysis
This a clear application of an ICA type analysis, and it is the second time to my
knowledge that a judge has calculated benefit from both a BEN type analysis and ICA type
benefit analysis in the same case. As mentioned with Chempace. above, practitioners should
proceed with caution here as many BEN type benefit scenarios overlap with ICA type scenarios
leading to potential' double counting of benefits.
^ In re: Iowa Turkey Growers Cooperative (Docket Nos. CWA-07-2001-0052; CERCLA-07-2002-
0009; EPCRA-07-2002-0009) May 14, 2002. This case revolves around the Regions attempts to
use the limited administrative discovery we have to determine if the violator obtained an ICA
from its violations. Judge Moran refused to compel discovery when the Respondent failed to
cooperate with the Region's discovery request. Judge Moran reasoned that in order to conduct an
ICA type analysis, you need to compare what a company did before and after the violation
occurred citing Dean Dairy. The information requested by the EPA did not allow that
comparison to be made. The information requested should have covered a longer period of time
than it did to enable the government to calculate the ICA. Thus the information requested
lacked probative value. Then he held that ALJ's are not compelled to admit or consider
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"wrongful profits"citing the B.J. Carney EAB decision.
Region VII filed a motion for reconsideration and an interlocutory appeal. The nub of
each motion was that 1) such comparison was not needed to perform an ICA, particularly since
the court in Dean Dairy made no such comparison and 2) it is not up the ALJ to decide whether
the ICA approach is appropriate in a particular case. The EAB's reasoning in B.J. Carney was
directed at the Agency, not the ALJ's. Judge Moran denied both motions, and the Region
decided to push the issue further. The case later settled before hearing.
Analysis
Judge Moran's holding is very disturbing. While EPA could not tell at the discovery
phase if there was an ICA, it seems entirely inappropriate for a judge to cut off EPA's inquiry at
that phase of the hearing.
Burden of Proof in Administrative Cases on the Economic Benefit Part of the Case
In re: Titan Wheel Corporation of Iowa - 2001 WL 499328 (Docket No.
RCRA-Vn-98-H-0003) May 4, 2001; aff'd RCRA (3008) Appeal No. 01-3. This case was filed
under Resource Conservation and Recovery Act (RCRA). The respondent manufactured steel
wheels for agricultural equipment and generated solid and hazardous waste in the process. Since
it generated hazardous waste in quantities greater than 1000 kilograms per month at the facility,
it's defined as a Large Quantity Generator and was subject to the requirements under RCRA §
3005. After conducting a screening of the violator's facility an EPA representative decided to
conduct a full RCRA compliance inspection of the facility. The violations observed by the
representative were described in three separate counts. Count I: storage of hazardous waste
without a permit at the facility for periods greater than the 90 days allowed by RCRA on eight
separate occasions. Count II: failure to develop or use a personnel training program aimed at -
compliance with the requirements of 40 C.F.R. Part 265, and that teaches employees how to
respond to emergency situations. Count HI: contingency plans failure to meet statutory
requirements. An argument for economic benefit was presented for all three counts.
Mr. Jonathan Shefftz, who testified by affidavit by agreement of both parties, was used
as the EPA's expert for all three counts. He calculated the economic savings realized by the
violator by delaying the removal of the excess solvent by compounding the respondent's cash
flows using an estimated WACC to determine the present value of economic benefit. The
respondent rejected his calculations as arbitrary and flawed and argued that the benefit
amount should be decreased to small percentages of the government's calculations without
explaining how it arrived at that number. The EPA countered that the respondent failed to
offer its own testimony or evidence and did not attempt to cross-examine Mr. Shefftz. The
ALJ agreed with these arguments and affirmed the economic benefit amounts.
Enforcement Sensitive and Confidential
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Analysis
This confirms the clearly established burden of proof in administrative litigation. The
Agency had the burden of going forward on the benefit question, and satisfied that burden with
Mr. Shefftz's testimony. Respondent failed to undermine his testimony, present its own evidence
on the issue or attack the reasoning behind the benefit analysis. Thus it failed to meet its burden
of going forward, and the government consequently won the issue. Just for the record, I would
point out that the ALJ imposed a substantial BEN component even though RCRA is silent about
considering benefit. (Of course the RCRA civil penalty policy addresses benefit.)
U.S. Supreme Court Looks at Benefit Recapture
^ Friends of the Earth. Inc. v. Laidlaw Environmental Services (TOO. Inc.. 120 S.Ct. 693
(U.S.S.C. Jan 12, 2000) - While the real issues in this Supreme Court were not directly related to
economic benefit, Justice Ginsburg's majority opinion did discuss the issue in footnote 2. She
attacks Justice Scalia's dissenting opinion which claims that the penalty would not have had
much deterrent effect because the lawsuit by the State of South Carolina had already pushed the
level of deterrence "near the top of the graph." She then points out that Laidlaw asked the DHEC
to sue it, drafted the complaint, and paid the filing fee. She also noted the district court
judge's finding that South Carolina's penalty "was far too low to remove Laidlaw's
economic benefit from noncompliance." It is clear from that footnote that she endorses the
considering the violator's economic benefit of noncompliance. While this is not part of the
holding of the case, it certainly suggests strongly that at least Justice Ginsburg supports the
recapture of economic benefit. It gives us hope that if the recapture issue makes it to the
Supreme Court, it has a good chance of getting a favorable hearing.
Statutory Maximum Imposed in Major UST Case
^ U.S. v. Hill. 2000 WL 725709 (N.D.N.Y. May 30, 2000) - The judge assigned the maximum
penalty of $4,756,000 under the Solid Waste Disposal Act to a gas station owner who spilled
more than 10,000 gallons of gasoline on a Native American Reservation, poisoning the drinking
water. The judge found it appropriate since he saved more than $1,000,000 by failing to clean
up, made no effort to clean it up or otherwise mitigate the damage, and did not refute the
government's evidence that he was a wealthy man and capable of paying the full penalty. There
was no factor-by-factor presentation of how the judge calculated the penalty since he imposed the
statutory maximum.
Analysis
This is another good example of egregious facts producing a very favorable decision. I
Enforcement Sensitive and Confidential
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suspect that the benefit factor may have helped convince the judge to impose the maximum. The
fact that this individual made monev while he poisoned people's drinking water is an
invitation to a severe penalty. It is also possible that he would have imposed the maximum
no matter what. But one should always be ready to make a concrete presentation of
benefit.
Egregious Facts in Safe Drinking Water Act Case
In re: Sunbeam Water Company. Inc.. Garden Grove Public Water System,
the Estate of Rodney Parrish. and R. Michael Parrish. 1999 WL 1013077 (E.P.A., Oct 28, 1999)
(NO. 10-97-0066-SDWA) - Sunbeam Water Company is a small drinking water provider and
was prosecuted for violating a 1996 order directed at serious deficiencies in their delivery of
water. It was alleged during the hearing that some of the families using the water were getting ill
from it. The Agency requested and received a $9,000 civil penalty.
The economic benefit evidence was sketchy at best in this decision. Judge Pearlstein
does not state how the figure was derived, only that the benefit was in the $3,500 to $4,000
range, and that $3,500 was a minimum number. It did "not include the savings from failing to
submit the site sampling plan; failing to publish notice of the violations; delaying compliance;
and from interest earned on the savings."
Analysis
Of significant importance is that the facts were egregious. The Respondents' conduct
was outrageous both in blowing off their responsibilities and in their jeopardizing the health of
the families using the water. I sensed some real judicial anger in this decision. I would note the
two of the strongest judicial reactions were to cases where the respondent/defendant poisoned
someone's drinking water: this case and U.S. v. Oliver R. Hill.
Ringing Endorsement of Agency Discounting/Compounding Approach
^.United States v. Allegheny Ludlum Corporation 187 F.Supp. 426 (W.D. Pa. 2002). This case is a
ringing endorsement of benefit recapture and the Agency's WACC discount/compound
methodology in calculating that benefit. The judge stated:
Indeed, were we to adopt ALC's [Allegheny Ludlum Corporation] approach, we might
very well create an economic incentive to violate the law p.441.
Analysis
While this one of four opinions on the subject, it contains the most reasoning on the
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subject. This case should prove particularly helpful for the government.
Confirmation that Benefit Recapture Applies to Federal Facilities
~^In re: U.S. Army. Fort Wainwright Central Heating & Power Plant. Docket No. CAA-1-99-0121
(April 30, 2002). Army power plant in Alaska out of compliance for over 10 years. Ignored
State of Alaska notices of violation. EPA got involved five years ago, and they ignored the EPA
as well. Very massive violations in a pristine environment. EPA suing the Army for
$16,000,000 based largely on benefit. Judge Susan Biro had already found the Army liable of 8 x
of the 9 counts in the complaint on a motion for accelerated decision.
The Army then challenged the Agency's application of the size of business factors and
economic benefit of noncompliance to its facility. Judge Biro concluded as a matter of law that
both factors were applicable. The actual calculation of the penalty is reserved for later
proceedings. In the meantime, the Army filed an interlocutory appeal which Judge Biro and the
EAB accepted.
Analysis
Judge Biro crafted a very well reasoned, thoroughly researched opinion that should do
well on appeal. There was a factual error in her opinion when she described the BEN computer
model, but this is not part of the holding. She clearly states in footnote 22 on page 36 of her
opinion that she is not making any final decision on the appropriate methodology for benefit
calculation. That will be left for the penalty phase of the hearing.
Enforcement Sensitive and Confidential
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APPENDIX E
Sample Expert Report
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EXPERT OPINION
on
Economic Benefit
in
U.S.
v.
The New Portland Meadows, Inc.
No. CV 00-507-AS
prepared for
U.S. Environmental Protection Agency
U.S. Department of Justice
April 18.2002
Jonathan S. Shefftz, Senior Associate
Industrial Economics, Incorporated 2067 Massachusetts Avenue; Cambridge MA 02140
Mr. Sheffitz's resume — providing his qualifications, publications, and testimony history—follows
at the end of this report. His company receives compensation of $95 per hour for the time he has
spent preparing this report, and for testimony would receive $125 per hour.
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Expert Opinion of Jonathan S. Shefftz
Economic Benefit of Noncompliance
April 18, 2002
1. Summary of Opinion
The United States Department of Justice and Environmental Protection Agency have asked
me to provide an expert opinion regarding the economic benefit that The New Portland Meadows,
Inc. ("TNPM") may have gained as a result of environmental noncompliance at its horse-racing
facility in Portland, Oregon.
I estimate that TNPM's economic benefit is approximately $1.7 million. Alternatively, had
TNPM chosen initially less-expensive compliance measures that would have then resulted in
foregone income, its economic benefit is $2.3 million and perhaps even higher. I may revise my
opinion as additional information becomes available to me.
2. Basis for Opinion
My opinion is based on my expertise in economic and financial analysis, experience with
economic benefit calculation in environmental noncompliance cases, independent research into
certain publicly available data, compliance-related data received from counsel, and telephone
conversations with U.S. DOJ and EPA staff. My resume follows the main body of this report.
3. Economic Benefit: Context, Theory, and Methodology
In this section, I explain economic benefit's context, theory, and methodology. In the section
after this one, I summarize my economic benefit calculations. The detailed worksheets for these
calculations follow at the end of my report.
a. Context
TNPM should have come into compliance with Clean Water Act requirements by 1995, but
exactly which measures TNPM would have chosen then is now uncertain. I therefore perform two
separate sets of economic benefit calculations, based upon two different sets of requirements. Under
either scenario, TNPM — by failing to comply by 1995 — benefitted from avoiding and/or delaying
investment in capital equipment, as well as from avoiding annual fees and operation and
1
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maintenance costs over the period of noncompliance.1 TNPM could have invested funds not used
for compliance expenditures in other profit-making ventures, purchased assets, or returned funds to
its owner in the form of dividends.
b. Theory
When a company such as TNPM delays or avoids compliance with environmental
requirements, the company and its owners gain an economic benefit from the delay. By postponing
compliance, TNPM benefitted from being able to avoid investing in capital equipment and paying
certain necessary operating and maintenance costs and fees.
Economic benefit represents the financial gains that a defendant accrues through such delayed
and/or avoided expenditures. Funds not spent on legal requirements are available for other
profit-making activities or, alternatively, a defendant avoids the costs associated with obtaining
additional funding for legal requirements.2 Economic benefit estimates the amount by which a
defendant is financially better off from not having complied with legal requirements in a timely
manner. Economic benefit is "no fault" in nature: a defendant need not have deliberately chosen
to delay compliance (for financial or any other reasons), or in fact even have been aware of its
noncompliance, for it to have accrued the economic benefit of noncompliance.
The appropriate economic benefit estimate should represent the amount of money that would
make the company financially indifferent between compliance and noncompliance.3 If the United
States fails to recover through a civil penalty at least this economic benefit, then TNPM will retain
a gain from its noncompliance. Because of the precedent of this retained gain, TNPM or other
regulated entities may see an economic advantage in additional or similar noncompliance, and the
1 TNPM actually was in noncompliance with legal requirements before 1995, but as noted for reasons
explained later in the report, my economic benefit calculations treat January 1995 as the date by when
compliance should have occurred.
2 The concept that the true cost of any action can be measured by the value of the alternative that must
be foregone is known in economics as "opportunity cost."
3 This implicitly assumes a 100-percent probability of the company paying that sum of money in the
form of a civil penalty. For purposes of this report, I assume a 100-percent probability, and do not address
alternative probabilities.
In the alternative, however, as the probability declines, then the amount of money increases that would
make an economically rational company financially indifferent between compliance and noncompliance.
For example, if a violator gained an economic benefit of $1 million, but faced only a 1/3 chance of
detection/prosecution/penalization, then a $3 million penalty would be necessary to achieve financial
indifference, with additional penalty amounts (based on "gravity" and related concepts) necessary to
accomplish financial deterrence.
2
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penalty will fail to deter potential violations. Economic benefit does not represent compensation to
the United States as in a typical "damages" calculation for a tort case, but instead is the minimum
amount by which TNPM must be penalized so as to return it to the position the company would have
been in had it complied on time.
c. Methodology
The economic benefit calculation incorporates the concept of the "time value of money." For
example, in simple terms, a dollar yesterday is worth more than a dollar today since one had
investment opportunities for yesterday's dollar. Thus, the further in the past the dollar is, the more
it is worth in "present-value" terms. The greater the time value of money (i.e., the greater the
"discount" or "compounding" rate), the more value past costs have in present-value terms.
To calculate TNPM's economic benefit, I use standard financial cash flow and net present
value analysis techniques, based on modern and generally accepted financial principles. First, I
calculate the costs of full on-time compliance that TNPM should have incurred in 1995 and the costs
of delayed partial compliance that TNPM actually incurred, adjusted for inflation and tax
deductibility. To compare the full on-time and delayed partial compliance costs in a common
measure, I calculate the 1995 present value of both streams of costs, or "cash flows," as of the initial
1995 noncompliance date. I derive these values by discounting the annual cash flows at an estimate
of TNPM's cost of capital. I next subtract the present value of the delayed partial compliance from
the present value of the on-time full compliance to determine TNPM's initial economic benefit as
of the noncompliance date in 1995. Then I compound this initial economic benefit forward to 2002.
The graphs on the following page illustrate a hypothetical economic benefit calculation. A
company should have incurred $500 in compliance costs in 1995, but instead incurred only $400 in
partial compliance costs in 2001. As the first graph illustrates, the $400 is worth even less in present
value terms as of 1995 — a mere $216 — because of the time value of money. The economic
benefit that the company gained from its noncompliance is equal to the difference in the present
values of the avoided on-time full compliance costs and the actually incurred (in a delayed manner)
partial compliance costs: $500 minus $216. The resulting $284 represents the initial economic
benefit as of the noncompliance date, looking forward in time. But the penalty will be paid in 2002,
not in 1995. Therefore, this initial figure must be compounded forward to 2002, growing to $582,
as the graph at the bottom of the page illustrates.
A civil penalty insufficient to disgorge the entire $582 economic benefit would fail to make
the company financially indifferent between compliance and noncompliance. Such indifference is
the first step in achieving financial deterrence, which would additionally require an even higher
penalty over and above the disgorgement of the economic benefit. For example, if the economic
benefit were $582 and the civil penalty only $300, the company would have a $282 incentive to
violate the law. By contrast, if the civil penalty were $582, the company would come out even, and
have no incentive either to comply or not comply (assuming a 100% chance of penalization).
Alternatively, if the penalty were $882, the company would have a $300 incentive to comply.
3
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Initial Discounting to Noncompliance Date
1995 1996 1997 1998 1999 2000 2001 2002
(Noncompliance Date) (Date of Delayed Partial Compliance)
Final Compounding to Penalty Payment Date
(Noncompliance Date) (Penalty Payment Date)
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4.
Economic Benefit Calculations and Results
Below I explain how I calculate TNPM's economic benefit of noncompliance. First I
describe the general inputs to my calculations, then I present the scenario-specific inputs, and finally
I summarize my results.
a. General Inputs
My economic benefit calculations use the following inputs for both scenarios (i.e., less- and
more-expensive compliance requirements):
• Noncompliance Dates: I use January 28, 1995 as the date that TNPM should have
achieved compliance with the Clean Water Act. As I understand from information
provided by counsel, this is the earliest date for which the United States may assess
penalties consistent with the statute of limitations, even though violations may have
started earlier than this date.
• Capital Investment Depreciation and Replacement Cycles: I use the modified
Accelerated Cost Recovery System for the capital investment, which entails a seven-
year double declining balance schedule with conversion to straight line, and full
deduction of any remaining depreciation in the final year of operations. This is the
most rapid depreciation schedule TNPM would likely use for tax purposes, and thus
produces the most conservative economic benefit calculation.4 Although in most of
my casework I also include a replacement cycle at the end of a standard 15-year
useful life, given the many uncertainties surrounding the future of horse racing at the
site, I do not model such a replacement cycle in this case. Excluding the replacement
cycles as I have done here results in a lower economic benefit estimate.
• Tax Rate: I use the year-specific combined U.S. federal and Oregon state marginal
individual tax rates, as TNPM is an S-Corporation whose income is reported on the
individual tax returns of its owner. I use the highest marginal rates, even though if
anything the actual tax rates of TNPM's owner might be lower. The highest marginal
rates produce the lowest after-tax value of compliance costs, and therefore the lowest
economic benefit estimate.
• Penalty Payment Date: I use a penalty payment date of April 18, 2002, which is the
date of this report. Since any settlement or court judgment would occur after this
date, I also provide information on how this economic benefit should be adjusted
forward with the passage of time.
4 Depreciation generates positive after-tax cash flows; the nearer these are to the current date, the lower
the net present value of the pollution control expenditures.
5
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• Discount/Compound Rate Methodology: I use an estimate of TNPM's weighted
average cost of capital ("WACC") to compound and discount the company's cash
flows. The WACC represents the cost of a company's debt and equity weighted by
the value of each source of financing. On average, a company must earn a rate of
return that enables it to repay its debt holders (e.g. banks, bondholders) and satisfy
its equity owners (e.g., partners, stockholders). Although companies can earn rates
in excess of their WACC, companies that do not on average earn returns equivalent
to their WACC will not survive (i.e., their lenders will not receive their principal
and/or interest payments, and their owners will be dissatisfied with their returns). As
a result, standard business practices dictate that a company should make its business
decisions by discounting cash flows at its WACC. Therefore, the WACC represents
the return TNPM would have expected to earn on monies not invested in pollution
control, or, viewed alternatively, represents the avoided costs of financing pollution
control investments. Text boxes on the following page provide additional support
for the use of a company's WACC in economic benefit calculations.5
• Discount/Compound Rate Value: I estimate TNPM's cost of capital for each year
from 1995 through 2001, and then use an average of these years' estimates as the rate
to discount and compound all cash flows throughout my economic calculations. The
debt cost of capital is based upon the eight-percent interest rate on the bank note used
to acquire TNPM in 1998. The equity cost of capital is based upon the widely used
Capital Asset Pricing Model, which states that investors will demand a return from
a risk investment that is equal to the return on a risk-free investment plus an
additional return to compensate for the additional risk taken on by the investor. To
determine the level of risk for investing in the equity of a business like TNPM, I rely
upon data from the Ibbotson Associates Cost of Capital 2001 Yearbook.6 A detailed
spreadsheet (which follows the main text of this report) explains in detail the
derivation for my average value of 7.8 percent.
5 As with any issue in any field of economics, alternative methodologies do exist. In particular, some
practitioners have advocated using not the violator's cost of capital, but instead the U.S. federal government's
cost of capital, i.e., the yield on 30-day Treasury bills, adjusted from a violator's viewpoint to an after-tax
basis. This is often known as the "risk-free rate" methodology. The underlying rationale is that this yield
approximates the risk-free rate of return (since the U.S. Treasury's default risk is essentially negligible), as
any higher return is earned not from noncompliance but by taking on additional business risk. Such
noncompliance, however, does in fact allow the company to deploy its capital to take on additional business
risk (and return), instead of committing funds to economically nonproductive legal requirements.
Furthermore, performing an economic benefit calculation with the risk-free rate would effectively provide
a violator with retroactive financing at a rate available only to the U.S. Treasury on a short-term basis, a rate
unavailable to any entity other than the U.S. Treasury and unavailable for financing periods longer than 30
days. Implementing such a risk-free rate methodology would therefore provide an incentive to delay meeting
legal requirements and paying penalty demands.
6 Although Ibbotson advocates an additional size premium for small companies like TNPM, I omit this
to formulate a more conservative cost of capital, and hence lower economic benefit estimate.
6
-------
WHY USE THE COST OF CAPITAL TO CALCULATE ECONOMIC BENEFIT?
Court Opinions:
"Roll Coater used a discount factor of 10.84 percent. This discount factor was calculated by the
weighted average costs of capital method. This method concentrates on the return for a given industry
and does not look at investments in general. Because Roll Coater should not be punished for not
investing its capital in other industries, the Court holds that Roll Coater's discount factor of 10.84
percent is applicable in this situation."
— U.S. v. Roll Coater, Inc., 21 Envtl. L. Rep. 21073, 21075 (S.D. Ind. 1991).
"The court acknowledges there are various methods for calculating defendants' economic benefit
gained from noncompliance. However, based on credible testimony,17 the court finds the avoided
and/or delayed cost of compliance, and the weighted average cost of capital (WACC)18 as a
discount/interest rate in the economic benefit calculation, to be both the best and the appropriate
method to determine how much money defendants made on the funds they did not spend for
compliance."
Footnote 17: "... The court rejects in most part the testimony of defendants' experts Robert H. Fuhrman and
A. Lawrence Kolbe, and particularly the risk-free rate analysis."
Footnote 18: "The WACC is the average return a company expects to make for its investors, in order to
maintain its current level of investors and its current level of business operations."
— U.S. v. Smithfield Foods, Inc. etal., 972 F. Supp. 338,348 (E.D. Va. 1997); rev'don other grounds,
191 F.3d 516 (4th Cir. Va. 1999), cert, denied, 531 U.S. 813 (2000).
"We are persuaded that the appropriate discount rate to use is the weighted average cost of capital
('WACC'). .. . the WACC 'represents the rate of return a company must earn annually to continue to
attract its investors and maintain its current level of operations. It is a rate which is commonly used
by companies in making capital budgeting decisions.'...
"It is significant to note that ALC's expert, Dr. Howard Pifer, also used the WACC to discount
the money backward for purposes of calculating the benefit of non-compliance as of the date of non-
compliance. ... However, Dr. Pifer contends that rather than using the WACC to determine the value
of the money going forward to the penalty payment date, we should use the 30-day treasury bill rate.
We reject Dr. Pifer's reasoning as unpersuasive because it fails to take into account the economic
reality that ALC had the use of the money for as much as ten years, and there is no evidence that it
invested the money in 30 day treasury bills. The key concept ignored by Dr. Pifer is that money is
fungible and that once ALC had an economic benefit as of, for example, 1990, we cannot know what
happened to those particular dollars. As Harris points out, the funds might have been used for very
profitable investment or less profitable investments. But the WACC offers a reasonable approach for
averaging what ALC did with the money."AJLC also contends through Dr. Pifer that if the company
knew for certain it would have to pay a penalty, the only way it would be certain to have the money
available would be to invest the money in treasury bills. But here, ALC enjoyed economic benefit and
did not segregate the money into treasury bills. . ..
"Dr. Pifer's argument is not supported by facts. Indeed, were we to adopt ALC's approach we
might very well create an economic incentive to violate the law: a company could profit from the
spread between its investments, which are inevitably designed to exceed the 30-day treasury rate, and
the 30-day treasury rate."
— U.S. v. Allegheny Ludlum Corp., 2002 U.S. Dist. LEXIS 3351 (W.D. Pa. Feb. 19, 2002).
7
-------
WHY USE THE COST OF CAPITAL TO CALCULATE ECONOMIC BENEFIT?
Academic Opinions:
"Environmental cash flows have about the same risk as projects overall in a division or in a company; they are necessary to stay in
business. Given this assumption, the overall required rate of return is based on both debt and equity costs, the same mix as used to
finance investment projects in general."
^ James C. Van Home; A. P. Giannini Professor of Finance, Graduate School of Business, Stanford University; 1991 U.S.
EPA-Commissioned Peer Review of BEN economic benefit computer model.
"Another factor favoring the use of the WACC [weighted-average cost of capital] as the discount rate is the fact that most firms do
in fact use a mix of debt and equity to raise capital, so the most reasonable assumption to make regarding the financing of any capital
expenditure is that it will be financed with a combination of debt and equity. Even if the company states that funds raised in a
particular financing will be used for a particular project, those funds are fungible, and they are commingled with the firm's other
funds. Further, the securities issued during a given financing will have an influence on future financings and capital costs."
Eugene F. Brigham, Graduate Research Professor, College of Business Administration; University of Florida, 1991 U.S.
EPA-Commissioned Peer Review of the BEN economic benefit computer model.
"To get an accurate estimate of this economic benefit, avoided or delayed costs should be discounted back to the date of
noncompliance at the WACC, or the average project return the firm expected to earn on their investments during the period of
^compliance."
Wendy Morrison; Assistant Professor of Economics, Middlebury College; 1996 U.S. EPA-Commissioned Public Comment
Process on the BEN computer model and economic benefit recapture policy.
8
-------
b. Scenario-Specific Inputs
As mentioned earlier, I provide economic benefit estimates for two compliance scenarios.
The "Otak" scenario7 assumes that TNPM avoided:
• constructing a sewer connection with a detention pipe system;
• a one-time sewer connection fee;
• annually recurring sewer discharge fees; and,
• annually recurring sewer system operation and maintenance costs.
Instead of incurring these costs, TNPM incurred costs associated with a waste-handling
building, eight bunker covers, environmental testing, and employees whose responsibilities included
animal waste management. I understand that these costs would not have been incurred had the
company complied in 1995 by incurring the costs that it in fact avoided, as outlined above.
By contrast, the "MEC" scenario8 assumes that TNPM starting in 1995 would have incurred
costs associated with the following less-costly compliance measures:
• constructing a sewer connection with a tank detention system;
• a one-time sewer connection fee;
• annually recurring sewer discharge fees;
• annually recurring sewer system operation and maintenance costs;
• constructing a waste-handling building;
• annually recurring best-management practice ("BMP") implementation costs (whose
magnitude is currently unknown); and,
• costs associated with clean closing the facility entirely in 1999 (whose magnitude is
also unknown).
7 The "Otak" scenario refers to the engineering firm that TNPM retained to design a system to comply
with EPA's 1999 administrative order. In May 2000, Otak provided cost estimates to TNPM for a sewer
connection system that would have involved guttering the horse stalls and retaining storm water in
underground detention pipes. This system was the least expensive of several alternative sewer connection
plans that Otak had proposed. TNPM never constructed any of the alternatives; the "Otak" scenario assumes
that in January 1995 TNPM would have constructed the system described in the May 2000 cost estimate.
8 The "MEC" scenario refers to MEC Oregon Racing, Inc., the company that succeeded TNPM in
operating the Portland Meadows race track. In a recently filed consent decree in Federal District Court for
the District of Oregon, the United States resolved certain Clean Water Act claims against MEC in exchange
for MEC's agreement to: 1) cease horse racing and clean close the race track within three years; and, 2) for
the three-year period during which racing continues, implement a series of interim measures, designed to
reduce discharges by more than 95 percent as compared to current conditions. The "MEC" economic benefit
scenario assumes that TNPM would have agreed to such a compliance schedule in January 1995.
9
-------
As in the OTAK scenario, instead of incurring these costs, TNPM incurred costs associated
with eight bunker covers, environmental testing, and employees whose responsibilities included
animal waste management. TNPM did eventually construct the waste-handling building as called
for under the MEC scenario, but in 2001, not in 1995 as it should have.
In addition, by failing to perform clean closure at the facility in 1998, TNPM gained cash
flow that it would not have earned had it come into compliance through this scenario. Specifically,
by continuing to operate the facility, TNPM gained an additional economic benefit equal to the
present value of the company's after-tax operating cash flows from operating activities from 1998
through May 2001 (net of purchases of furniture, fixtures, and equipment, which would appear to
be necessary for ongoing activities). TNPM cash flow statements are available only through 2000,
and therefore my estimate of this economic benefit component is unable to include excess cash flow
for January through May of 2001.
c. Results
Based on the inputs described in the previous section, my opinion is that TNPM has gained
an economic benefit of $1,730,000 if one assumes that TNPM would have chosen back in 1995 to
comply via the OTAK measures, or $2,297,000 if one assumes TNPM would have chosen the MEC
measures. The detailed worksheets for my calculations following the main text of the report.
Note that the MEC scenario excludes the unknown costs for the BMP implementation and
clean closure, as well as cash flow from January through May of 2001 that should have been
foregone. Furthermore, had TNPM chosen the MEC set of compliance measures, TNPM not only
would have foregone the cash flow from its final three-and-a-half seasons of racing (with three
reflected in the economic benefit calculations), but also most likely would have foregone the $3.5
million payment it received for lease termination in 2001. I understand this payment would not have
been received had TNPM ceased operations by then, and therefore my result for the MEC scenario
probably severely underestimates its actual economic benefit.
This economic benefit is calculated as of the date of this report, i.e., April 18, 2002. If the
penalty payment is further delayed, the economic benefit would continue to be compounded at the
rate of 7.8 percent (i.e., my estimate of TNPM's cost of capital, as described on page 6 and derived
in detail on the spreadsheet that follows the main text). This translates into an increase of about
$11,000 for the OTAK scenario and $15,000 for the MEC scenario, for each month of delay in
paying the penalty past April 2002.
10
-------
A through D calculated as of: 28-Jan-95
A) Present Value of Avoided On-Time Full Compliance
B) Present Value of Actual Delayed Partial Compliance
C) Present Value of Cash Flow from Excess Operations
D) Initial Economic Benefit as of Jan 1995 [A-B+CJ
E) Economic Benefit as of: 18-Apr-02
OTAK
$1,148,845
$143,135
$1,005,710
$1,730,343
MEC
$647,331
$143,135
$831,259
$1,335,455
$2,297,675
Formula for monthly increase in economic benefit
So for six months
For a factor of
And a restated economic benefit of
Hence an increase of
With an approximate per-month increase of
((1 +Rate)A( 1 /12)) AMonths
((1+0.078)A(1/12))A6
1.038
$1,796,096 $2,384,987
$65,753 $87,312
$11,000 $15,000
5. Conclusion
By failing to meet legal requirements in 1995, TNPM has enjoyed at the very least an
economic benefit in excess of $1.7 million. A civil penalty that fails to recapture this gain would
create a financial incentive for TNPM and similarly regulated companies to delay and/or avoid
compliance with legal requirements.
11
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CAPITAL anti _ .HER ONE-TIME COSTS: Data Sources (document Bates Stamp #s in bra^ .>1
OTAK Scenario Sewer Connection Fee of $170,111 based on $239,594 in letter from City of Portland to TNPM [30200026], reduced by 29% for guttering [20005262].
OTAK Scenario Sewer Connection Construction cost of $1,621,533 based on OTAK estimate [20005662]
OTAK Scenario Fire Line Relocation cost of $10,779 based on Portland Bureau of Water Works estimate [20005292]
MEC Sewer Connection Fee of $239,594 based on letter from City of Portland to TNPM [30200026],
MEC Sewer Connection Construction cost of $363,000 based on EPA staff telephone conversation with MEC counsel
MEC Scenario and Delayed Compliance Waste Handling Building cost of $290,888 based on TNPM table |20006822].
Delayed Compliance Bunker Covers cost of $15,994 based on TNPM-reported $2,051 for tarps and $13,943 for scaffolding [20006819]
OTAK Sewer Connection
Initial Cost Estimates and Inflation Adjustments
Initial cost estimate
Estimate date
Cost index
Cost index value as of estimate date
Cost index as of incurred date (28-Jan-1995)
Inflation-adjusted cost as of incurred date:
Fee
$170,111
01-Jul-95
CPI
152.5
150 3
$167,657
Construction
$1,621,533
31-May-00
CCI
6233.0
5443.0
$1,416,012
Fire Line
Relocation
$10,779
23-May-00
CCI
6233 0
5443 0
$9,413
MEC Sewer Connection Waste Handling
Fee
$239,594
01-Jul-95
CPI
152.5
150.3
$236,138
Construction
$363,000
15-Jan-02
CCI
6404 2
5443.0
$308,518
Building
$290,888
28-Feb-01
CCI
6273.0
5443.0
$252,400
Economic Benefit Calculations
OTAK Scenario On-Time (1995) Full Compliance
28-Jan-1995
28-Jul-1995
28-Jul-1996
28-Jul-1997
28-Jul-1998
28-Jul-1999
28-Jul-2000
15-Mav-2001
Sewer Connection Fee
(167,657)
Sewer Connection Construction & Fire Line Relocation
(1,425,425)
Depreciation Factor (MACRS), through closure/sale
14.29%
24 49%
17.49%
12.49%
8.93%
8 92%
13.39%
Depreciation Deduction
(203,693)
(349,087)
(249,307)
(178,036)
(127,290)
(127,148)
(190,864)
Marginal Tax Rate
45.0%
45.0%
45 0%
45.0%
45.0%
45.0%
45.0%
44.6%
Net After-Tax Cash Flow
(1,517,637)
91,662
157,089
112,188
80,116
57,281
57,217
85,126
Present Value Factor to 28-Jan-1995
1.0000
0.9634
0 8935
0.8289
0.7689
0.7133
0.6615
0.6231
Cash Flow Present Value at 28-Jan-1995
(1,517,637)
88,311
140,366
92,992
61,603
40,857
37,851
53,040
Net Present Value at 28%Jan-95: ($1,002,617)
MEC Scenario On-Time (1995) Full Compliance
28-Jan-1995
28-Jul-1995
28-Jul-1996
28-Jul-1997
28-Jan-1998
Sewer Connection Fee
(236,138)
Sewer Connection Construction & Waste Handling Buildi
(560,917)
Depreciation Factor (MACRS), through closure/sale
14.29%
24.49%
17.49%
43.73%
Depreciation Deduction
(80,155)
(137,369)
(98,104)
(245,289)
Marginal Tax Rate
45.0%
45.0%
45.0%-
45.0%
45.0%
Net After-Tax Cash Flow
(690,793)
36,070
61,816
44,147
110,380
Present Value Factor to 28-Jan-1995
1.0000
0.9634
0.8935
0.8289
0 7981
Cash Flow Present Value at 28-Jan-1995
(690,793)
34,751
55,235
36,593
88,094
Net Present Value at 28^Jan-95:
($476,120)
Delayed Partial Compliance
01-Jan-2001
28-Feb-2001
15-Mav-2001
Bunker Covers (Jan) & Waste Handling Building (Feb)
(15,994)
(290,888)
Depreciation Deduction
0
0
(306,882)
Marginal Tax Rate
44.6%
44.6%
44.6%
Net After-Tax Cash Flow
(15,994)
(290,888)
136,869
Present Value Factor to 28-Jan-1995
0.6405
0.6329
0.6231
Cash Flow Present Value at 28-Jan-1995
(10,244)
(184,104)
85,281
Net Present Value at 28^Jan-95:
($109,068)
-------
ANNUALLY RECURRING ITEMS:
Estimates,
Inflation Adjustments, and
Economic Benefit Results
OTAK Compliance
MEC Compliance
Partial Compliance
MEC Excess Cash Flow
Sewer
Discharge
Fee
O&M
Costs
Sewer
Discharge
Fee
O&M
Costs
Baker
Tank
Rental
Employee
Costs
Mandated
Environmental
Testing
1998
Fiscal
Year
1999
Fiscal
Year
2000
Fiscal
Year
Noncompliance period start date
28-Jan-95
28-Jan-95
28-Jan-95
28-Jan-95
28-Jan-95
01-0ct-00
01-Aug-99
01-Jan-98
01-Jan-99
01-Jan-00
Noncompliance period end date
15-May-01
15-May-01
28-Jan-98
28-Jan-98
28-Jan-98
31-Mar-01
15-May-01
31-Dec-98
31-Dec-99
31-Dec-00
Noncompliance period midpoint date
22-Mar-98
22-Mar-98
29-Jul-96
29-Jul-96
29-Jul-96
30-Dec-00
22-Jun-00
02-Jul-98
02-Jul-99
01-Jul-00
Noncompliance period length (in years)
6.3
63
3.0
3.0
30
Total cost
1 8
1.0
1 0
1.0
Annualized estimate
Uses average of
$36,712 in 1995
and $54,367 in
1999
$8,000
$51,707
$12,000
$43,000
$36,639
$32,381
From operating activities'
Estimate date
08-Feb-00
01 -Jul-95
08-Feb-00
15-Jan-00
% of total cost
attributable to
animal waste.
31-Dec-00
$863,095
$1,103,921
$1,110,771
Cost index for inflation adjustments
PCI
CPI
PCI
CPI
PCI
From investing activities.
Index value as of estimate date
391.1
152 5
391.1
168 8
396.0
($177,864)
($158,573)
($655,352)
Index value as of noncompliance period midpoint
386 8
157 0
381.8
157.0
100%
393.1
Net excess cash flow
Estimate adjusted to noncompliance period midpoint
$45,540
$7,912
$64,230
$11,715
$39,994
Relevant cost¦
$32,144
$685,231
$945,348
$455,419
Total inflation-adjusted estimate for period
$286,961
$49,857
$193,042
$35,208
$120,201
$36,639
$57,595
$685,231
$945,348
$456,667
Marginal tax rate
45.0%
45.0%
45.0%
45.0%
45.0%
44.8%
45.0%
45.0%
45.0%
45.0%
After-tax cash flow •
($157,829)
($27,421)
($106,173)
($19,364)
($66,111)
($20,225)
($31,677)
$376,877
$519,941
$251,167
Present value factor for period midpoint
0.7894
0 7894
0 8934
0.8934
0 8934
0.6407
0 6664
0.7730
0.7171
0 6652
Present value of after-tax cash flow
($124,583)
($21,645)
($94,851)
($17,299)
($59,061)
($12,958)
($21,109)
$291,341
$372,853
$167,064
Data Sources (document Bates StamD #s in brackets):
OTAK Scenario Sewer Discharge Fee of $36,712 in 1995 based on $51,707 in letter from City of Portland to TNPM [30200026], reduced by 29% for guttering [20005262]
OTAK Scenario Sewer Discharge Fee of $54,367 in 1999 based on $76,753 in letter from City of Portland to TNPM [no Bates Stamp], reduced by 29% for guttering [20005262],
OTAK Scenario O&M Costs of $8,000 based on OTAK cost estimate [20005262].
MEC Scenario Sewer Discharge Fee of $51,707 in 1995 based on letter from City of Portland to TNPM [30200026],
MEC Scenario O&M Costs of $12,000 based on OTAK cost estimate [20005262],
MEC Scenario Baker Tank Rental of $43,000 based on EPA staff telephone conversation with MEC counsel.
Delayed Compliance Employee Costs based on TNPM-reported $36,639, adjustated for neither additional payroll taxes nor time unrelated to animal waste management [20006819]
Delayed Compliance Testinq Costs based on TNPM-reported $16,190.70 for 01-0ct-00 through 31-March-01 [200068191.
MEC Excess Cash Flow based upon TNPM financial statements [21000026]
-------
Discount/Compound Rate Calculation
(1) Interest rate on note from First Independent Bank to finance purchase of TNPM in 1998
(2) Combined OR (9%) & U.S. (39.1% for 2001; 39.6% prior years) individual marginal tax rates: U.S.+(OR*(1-U.S.)); Federation of Tax Administrators.
2001 rate' 44.6% prior years.. 45 0%
(3) Calculated as: CostOfDebt x (1 - TaxRate), to adjust for tax-deductibility of interest payments
(4) Ratio of TNPM total liabilities to total assets from annual financial statements (2001 ratio set equal to 2000), see columns (a) and (b) for data.
(5) Federal Reserve Bulletin Table 1.35; used as a proxy for the risk-free rate in the Capital Asset Pricing Model (CAPM),
where return on risky investment is equal to return on risk-free investment plus compensation for risk
(6) Measures risk relative to overall stock market; derived from 0.46 unlevered asset beta for business code 7948 ("racing, including track operation") composite, as reported by
Ibbotson Associates Cost of Capital 2001 Yearbook, relevered to form equity beta for TNPM capital structure via formula: 0.46*[1+(1-TaxRate)xDebtWeight/EquityWeight]
(7) Differences of average returns between stock market and 5-yr T-notes, 1926 - prior year; Ibbotson Associates Stocks, Bonds, Bills, and Inflation Yearbook.
(8) Calculated as Beta x IntermedHorizonRiskPrem, to adjust risk on overall stock market for risk specific to TNPM equity.
(9) Calculated as 5YearTreasuryNotes + CompanyRiskPremium, to reflect risk-free rate of return plus the risk premium on TNPM equity, as per CAPM (see note 5 above).
(10) Calculated as 1 - DebtWeight, to reflect equity financing as the difference of total assets minus debt financing.
(11) Calculated as AfterTaxDebtCost x DebtWeight + EquityCost x EquityWeight, to reflect a weighted average of debt and equity costs.
average from:
1995
to:
2001
=
7.8%
(1)
(2)
(3)
(4)
(5)
5-Year
(6)
(7)
Intermed.
(8)
Company
(9)
(10)
(11)
Cost of
After-Tax
Debt
Treasury
Horizon
Risk
Equity
Equity
Cost
(a)
(b)
YEAR
Debt
Tax Rate
Debt Cost
Weight
Notes
Beta
Risk Prem
Premium
Cost\
Weight
of Capital
Assets
Liabilities
1995
8.0%
45.0%
4.4%
65.0%
6.38%
0.93
7.4%
6 9%
13.3%
35.0%
7.5%
$2,389,310
$1,551,905
1996
8 0%
45.0%
4 4%
36.2%
6.18%
0 60
7.8%
4.7%
10.9%
63.8%
8.5%
$1,885,218
$682,320
1997
8 0%
45.0%
4.4%
31 3%
6 22%
0 58
7.9%
4.5%
10 7%
68.7%
8.7%
$2,100,029
$657,613
1998
8 0%
45 0%
4.4%
71 8%
5.15%
1.11
8.2%
9 1%
14.3%
28.2%
7.2%
$2,305,404
$1,655,942
1999
8 0%
45.0%
4.4%
49.6%
5.55%
0.71
8.4%
6.0%
11.6%
50.4%
8.0%
$2,466,309
$1,222,428
2000
8.0%
45 0%
4.4%
68.0%
6.16%
1.00
8.5%
8.5%
14.7%
32 0%
7.7%
$2,759,069
$1,874,827
2001
8.0%
44 6%
4.4%
68.0%
4.57%
1 00
8.2%
8.2%
12.8%
32.0%
7.1%
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JONATHAN S. SHEFFTZ
Industrial Economics, Incorporated
2067 Massachusetts Avenue
Cambridge MA 02140
617-354-0074
Mr. Shefftz is a Senior Associate with Industrial Economics, Incorporated (IEc), where he
specializes in the application of economics to public policy decisions, regulatory issues, and
litigation disputes, especially in the environmental context. Since joining IEc, Mr. Shefftz has
acquired extensive experience in settlement and litigation support, and has been qualified as an
expert witness in administrative court.
Mr. Shefftz's recent experience includes work in the following areas.
• Applying financial economics to issues that arise in federal, state, and not-
for-profit litigators' enforcement of environmental regulations, including
economic benefit calculation and ability to pay assessment.
• Providing litigation, technical, and case management support to federal, state,
territorial, and private trustees on lawsuits involving damages to natural
resources.
• Analyzing the impacts of regulations and proposed legislation for both
federal agencies and private clients.
Mr. Shefftz has performed this work in a variety of contexts, including expert witness testimony,
computer model development, user manual preparation, training course delivery, and helpline
management, as well as reports and memoranda. He has supervised project teams comprising
economists, accountants, paralegals, and software developers, as well as worked in parallel with
engineers, scientists, lawyers, and lobbyists.
Mr. Shefftz holds a B.A. magna cum laude and Phi Beta Kappa in Economics and Political
Economy from Amherst College, and an M.P.P. degree, with concentrations in Government &
Business and Energy & Environmental Policy, from the John F. Kennedy School of Government at
Harvard University. His professional experience prior to EEc includes summer internships during
graduate school with Resources for the Future, the Investor Responsibility Research Center, and the
Foundation on Economic Trends (all in Washington, D.C.). Mr. Shefftz's professional memberships
include the National Association of Forensic Economics, the Government Finance Officers
Association, and the Boston chapter of the National Federation of Municipal Analysts.
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JONATHAN S. SHEFFTZ
Applied Financial Economics
Mr. Shefftz has extensive experience in applying financial.economics to issues that arise in enforcing
environmental regulations, including economic benefit calculation and ability to pay assessment.
Economic Benefit Casework
Mr. Shefftz has analyzed environmental regulatory costs to calculate the economic benefit of
noncompliance on lawsuits that the U.S. Environmental Protection Agency (EPA), U.S. Department
of Justice (DOJ), the National Environmental Law Center, and the Connecticut, New Hampshire,
New Mexico, and Wisconsin Attorneys General have filed in administrative, federal, and state
courts, under the Clean Water Act, Clean Air Act, Resource Conservation and Recovery Act, and
state statutes. Mr. Shefftz has analyzed companies in industries including steel, chemicals, meat
processing, acquaculture, animal feed, forest products, charcoal, cement, aerosol packaging, oil and
gas exploration/refining/retailing, asbestos removal, industrial pan reglazing, waste disposal,
automotive, telecommunications, and housing development, as well as municipalities. He has
presented his analyses in contexts including memoranda, settlement negotiations, expert witness
reports, depositions, and courtroom testimony.
Ability to Pay Assessment
For EPA Regional Counsels and DOJ, Mr. Shefftz has examined the finances of individuals,
businesses, municipalities, and other not-for-profits to assess their ability to pay for compliance
costs, Superfund'cleanup contributions, and penalties. He has presented his analyses in contexts
including memoranda, settlement negotiations, expert witness reports, and depositions.
Economic Benefit Public Comment Process
Mr. Shefftz has managed IEc's support to EPA's Office of Enforcement and Compliance Assurance
(OECA) in the public comment process on its economic benefit program (including the BEN
computer model for calculating economic benefit). He has served on public hearings panels with
EPA officials, participated in stakeholder focus groups, assessed public comments, managed the
development of the current BEN model, and drafted suggested text for Federal Register notices.
Computer Model Development, 1 raining, and Support
Also for EPA's OECA, Mr. Shefftz has managed the development of the computer models
PROJECT (which calculates supplemental environmental projects' after-tax net present values) and
MUNIPA Y (which assesses municipalities' ability to,pay for.environmental expenditures), and has
prepared the accompanying user's manuals and training materials. He has conducted training
courses for EPA and state enforcement staff on PROJECT and MUNIPAY, as well as on BEN, and
also on ABEL and INDIPAY (which assess corporations' and individuals' ability to afford
environmental expenditures). Mr. Shefftz manages OECA's toll-free helpline to provide assistance
to state and federal staff on these models and other financial economic issues.
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JONATHAN S. SHEFFTZ
Natural Resource Damage Assessment
Montrose DDT Contamination
For federal and state Trustees (including NOAA), Mr. Shefftz provided case management support
in the natural resource damage assessment of chronic chemical contamination in the Southern
California Bight. He also analyzed corporate control issues and evidence to assess two parent
companies' liability for their joint venture's actions.
Apex Houston Oil Spill
For DOJ and the National Oceanic and Atmospheric Administration (NOAA), Damage Assessment
Center, Mr. Shefftz provided litigation and technical support on a lawsuit seeking to recover the
restoration costs associated with natural resource damages resulting from the Apex Houston oil spill.
Groundwater Contamination
On a lawsuit seeking to recover damages from groundwater contamination in a U.S. territory, Mr.
Shefftz estimated the present value of the future expenses associated with a proposed water treatment
plant. At the Massachusetts Military Reservation site, for the Massachusetts Department of
Environmental Protection he assessed communities' willingness to pay to remediate groundwater
contamination. At a Superfund site, for a private landowner Mr. Shefftz analyzed the diminution
in potential real estate development value from public perception of groundwater contamination.
Regulatory Impact Assessment
Legislative Review
For an industry association, Mr. Shefftz designed and implemented a survey and analyzed its results
to predict the impacts of a proposed national lead tax upon lead consumption and dependent
industrial sectors. For a national waste management firm, he analyzed the economic impacts of a
proposed state tax on hazardous waste land disposal.
Superfund Economic Impacts
For DOJ's Environmental Enforcement Section, Mr. Shefftz examined the Department of Energy's
SURE model's predictions of economic impacts from Superfund liability and cost allocation reform.
Also for DOJ, he reviewed a small city's claims that the proposed contaminated soil cleanup remedy
would result in economic disruptions.
To'ngass Timber Reform Act Litigation
For'DOJ's Civil Division (CD) and the U.S. Department of Agriculture, Mr. Shefftz assessed the
nistorical and projected impact of the Forest Service's implementation of Congressional legislation
upun a national forest's timber sales and the resultant viability of the region's timber companies.
Computer Model Development
For DOJ CD, Mr. Shefftz managed the development of a computer model to calculate interest
accruing on claims filed under the Contract Disputes Act.
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JONATHAN S. SHEFFTZ
Regulatory Impact Assessment (continued)
Public Policy Review
For an EPA study of the environmental impacts from Bureau of Reclamation rate setting for
California's Central Valley Project, Mr. Shefftz reviewed economically efficient methods for
allocating water project costs to user classes. For EPA's Office of Air and Radiation, he investigated
the 1990 Clean Air Act amendments' potential to lead to plant closures in the petroleum refining
industry, reviewing and responding to industry tomments on EPA's draft report. For an EPA Region
1 review of Boston's relative regulatory burdens, Mr. Shefftz developed a national profile of present
and projected residential water and sewer rates relative to income.
Cost of Capital for Safe Drinking Water Act
For EPA's Office of Water, Mr. Shefftz assessed peer reviewer comments and then revised a draft
report on the cost of capital for public water systetns." The conclusions from the report will be used
for regulatory impact analyses under the Safe Drinking Water Act Amendments of 1996.
Publications
Mr. Shefftz has prepared a number of manuals and other documents under contract to the U.S.
Environmental Protection Agency. These documents reflect the policies, guidance, and editorial
comments that the sponsoring agency desires.
Testimony History
United States Public Interest Research Group, Stephen E. Crawford, and Charles Fitzgerald v.
Heritage Salmon. Inc.; U.S. PIRGet at v. Stolt Sea Farm, Inc.; U.S. PIRG etal. v. Atlantic
Salmon of Maine LLC (USDC, Maine), deposition 6/5/01.
U.S. v. Murphy Oil USA, Inc. (USDC. WD Wis.), deposition 4/24/01.
U.S. v. Royal Oak.Enterprises, Inc. (USDC, ED Va.), depositions 3/22/00 and 5/19/00.
U.S. v. Gulf States Steel, Inc. (USDC, ND Ala.), affidavit 12/30/98, deposition 10/22/99.
U.S. v. Koch Industries, Inc. (USDC, ND Okla. and SD Tex.), depositions 5/24/99 and 6/1/99.
¦State of Wisconsin v. I-K-I Manufacturing Company, Inc., deposition 4/13/99.
U.S. v. Borden,Chemicals & Plasties^t^DQ deposition 2/5/98-.
State of New Hampshire v. Johnson Products, Incorporated, deposition 2/3/98.
In the matter of Ekco/Glaco, Ltd. & EK Management Corporation (U.S. EPA Administrative
Hearing), courtroom testimony 8/14/97.
U.S. v; SmithfieldFoods, Inc., et at (USDC, ED Va.), deposition 7/9/97.
U.S. v. Nucor Corporation (USDC, ND Ala.), deposition 6/12/97.
U.S. v. U.S. Metallics, Inc., and Town of Onalaska, Wis. (USDC, WD Wis.), affidavit 10/21/96.
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June 2002
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