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Environmental Consultants Beware: Substantial Judgment Entered Against Environmental Consultants for Alleged Fraudulent Claims Submitted to the Underground Storage Tank Fund June 15, 2010 by Michael E. Vergara mvergara@somachlaw.com |
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The State Water Resources Control Board (SWRCB) through its Office of Enforcement (OE) recently announced that a substantial judgment was entered on its behalf against an environmental engineering and consulting firm for the alleged submission of fraudulent reimbursement requests to the Underground Storage Tank Fund (UST Fund). (See March 16, 2010 Press Release by SWRCB.) This action was the first of its kind, and is likely the precursor for similar actions against other environmental consultants and/or engineers who have allegedly submitted fraudulent claims to the UST Fund. Background Under the Barry Keene Underground Storage Tank Act of 1989 (Act), Health and Safety Code section 25299.10 et seq., a qualified claimant may be eligible for reimbursement of the costs of investigating and remediating contamination (i.e., “corrective action”) released from an underground storage tank (UST). (Health & Saf. Code, §§ 25299.14 and 25299.54.) The Act establishes the UST Fund that is managed by the SWRCB. (Health & Saf. Code, § 25299.50; http://www.waterboards.ca.gov/water_issues/programs/ustcf/.) Under the Act, an eligible claimant is entitled to a maximum aggregate reimbursement of $1.5 million incurred while conducting a corrective action. (Health & Saf. Code, §§ 25299.51, subd. (c), 25299.57, subd. (a), and 25299.59, subd. (b).) Thus, an eligible claimant who hires an environmental consultant to conduct a corrective action can submit the consultant’s invoices to the SWRCB for reimbursement from the UST Fund. (Health & Saf. Code, §§ 25299.54 and 25299.56.) While this system incentivizes the claimant to promptly hire an environmental consultant to conduct corrective action, like insurance, it also removes the claimant from concern for the cost of such activity, at least until the $1.5 million cap is reached. Under the Act, claimants are required to verify the veracity of reimbursement requests submitted to the UST Fund (Health & Saf. Code, § 25299.55, subd. (a); Cal. Admin. Code, tit. 23, § 2812.6), but in practice, claimants (who are typically layman) rely on the veracity of their expert consultant. The UST Fund not only serves as the funding source, it also serves as the arbiter or adjuster for submitted claims. (Cal. Admin. Code, tit. 23, § 2812.2.) Unfortunately, the regulators overseeing and approving the corrective action are distinct and separate from the UST Fund staff who review and approve reimbursement requests. (Underground Storage Tank Cleanup Fund Audit, February 22, 2010, Chapter II; see February 22, 2010 UST Fund Performance Audit.) This arrangement allows for little communication and coordination between those regulating the corrective action and those managing the UST Fund which, in turn, creates the potential for environmental consultants to submit fraudulent claims to the UST Fund. In mid-2006, the SWRCB created the OE “to ensure that violations of orders and permits result in firm, fair, and consistent enforcement through direct actions, the development of policies and guidance, and the identification of metrics for decision-making on enforcement issues.” (http://www.swrcb.ca.gov/water_issues/programs/enforcement/.) The OE is compromised of several units, one of which is the UST Enforcement Unit. (See OE Flow Chart.) Among the responsibilities delegated to the UST Enforcement Unit is the investigation of “allegations of fraud against the UST Cleanup Fund.” (http://www.swrcb.ca.gov/water_issues/programs/enforcement/.) In the first overt exercise of this directive, the OE and the SWRCB, acting through the State Attorney General’s Office, commenced a civil action against E2C Remediation, Inc. (E2C) and other related defendants for allegedly submitting fraudulent reimbursement claims to the UST Fund. The E2C Complaint and Judgment The SWRCB filed its first amended complaint (Complaint) against E2C and the other related defendants on November 20, 2007. (See SWRCB Complaint.) The filing of this action followed the apparent serendipitous discovery in February 2005 by a UST Fund technician of a duplicate invoice submitted for reimbursement by E2C. (Complaint at ¶¶ 27 and 45.) The investigation that followed this discovery led to the alleged discovery of multiple other acts of fraud and misrepresentation by the defendants. (Ibid.) The complaint alleges nine causes of action (some of the claims are styled as “counts”) against E2C and other related defendants. The causes of action are all premised on the defendants’ allegedly making “multiple material misrepresentations of fact regarding materials, services, and work [defendants] claimed were eligible for Fund payments in order to obtain payments of money from the Fund that [defendants] were not entitled to receive.” (Id. at ¶ 30.) Other than the alleged duplicative invoice, however, the Complaint fails to specify the facts supporting the causes of action. The wrongful conduct allegedly occurred over several years, and involves multiple UST Fund claims. The Complaint seeks both injunctive relief and civil penalties. On February 26, 2010, the Sacramento County Superior Court entered a stipulated judgment (Judgment) in the case. (See Stipulated Judgment.) In this Judgment, defendants “expressly deny fault or liability for any and all claims in the Complaint.” (Judgment at ¶ 2.) The Judgment covers forty-three specified UST Fund reimbursement requests, and these requests were submitted between May 2004 and January 2008. (Id. at ¶ 3(b).) While the press release issued by the SWRCB regarding the Judgment touts that the Judgment is for “$1.2 Million,” this is an overstatement. [Note: defendants’ counsel claims that her clients are merely paying “$537,261” under the Judgment. This is incorrect. (http://www.bakersfield.com/news/local/x1664565285/Environmental-company-settles-fraud-claims-case).] Under the terms of the Judgment, the UST Fund retains “$465,173.98” of the $546,150.73 in reimbursement requests submitted by the defendants. (Id. at ¶ 3(a).) The balance of these pending reimbursement requests is to be paid to specified claimants. (Ibid.) The Judgment further provides that the defendants will reimburse the UST Fund $24,000 for mediation costs incurred in the matter (id. at ¶ 3(b)); and $50,000 in civil penalties under the Business and Professions Code. (Id. at ¶ 3(d).) The Judgment also requires that defendants discount by twenty (20) percent all pending and future reimbursement requests submitted to the UST Fund up to the aggregate total of $450,000. (Id. at ¶ 3(c).) Finally, the Judgment obligates the defendants to pay an additional $250,000, but only in the event that over a three-year period they violate the injunction contained in the Judgment. (Id. at ¶ 3(e).) Thus, under the terms of the Judgment, the defendants are obligated to pay not less than $989,173.98. Conclusion In the press release issued by SWRCB for this matter, the Director for the OE, Reed Sato, states: “This case should serve as a message to other claimants and consultants that the Water Board is actively identifying, investigating, and prosecuting those who commit fraud against the Cleanup Fund. Rooting out those who submit improper claims for reimbursement from the Fund not only protects fee payers who pay into the Fund, but also ensures that money is available for groundwater cleanups at a critical time when Fund balance is low.” The UST Fund continues to struggle to pay eligible claims (see February 22, 2010 UST Fund Performance Audit). Mr. Sato states that the SWRCB is “actively identifying” other environmental consultants for investigation and possible prosecution. Unfortunately, because the E2C case resolved through a stipulated judgment in which the defendants expressly deny fault or liability, the Judgment provides little guidance regarding what constitutes “improper claims for reimbursement.” Based on the Complaint, the intentional submission of a duplicative invoice for the alleged purpose of defrauding the UST Fund supports prosecution. Whether the submission of invoices containing allegedly inflated hours, rates or other falsified information supports prosecution is yet to be answered. Claimants, or other interested parties, who suspect that an environmental consultant or engineer has submitted an improper claim for reimbursement can file a complaint online. (http://www.dtsc.ca.gov/database/CalEPA_Complaint/index.cfm.) For additional information please contact Michael Vergara at mvergara@somachlaw.com. Somach Simmons & Dunn provides the information in its Environmental Law & Policy Alerts and on its website for informational purposes only. This general information is not a substitute for legal advice, and users should consult with legal counsel for specific advice. In addition, using this information or sending electronic mail to Somach Simmons & Dunn or its attorneys does not create an attorney-client relationship with Somach Simmons & Dunn. |
