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In a case shocking for the size of the individual penalties, the New Jersey Appellate Division of the Superior Court decided that the New Jersey Department of Environmental Protection did not abuse its discretion when it imposed multi-million-dollar penalties on a responsible corporate officer whose company flouted the state’s environmental laws. In doing so, the court affirmed a decision of the DEP that imposed $7.873 million in fines on the Diamond Hill Estates Sewer Company and $7.855 million in fines on its president, Jerry Petraccoro Sr. Many corporate officers are aware, generally speaking, that statutes and regulations with which their companies must comply provide for penalties against a corporation which does not comply. Few are aware that “responsible corporate officers” in non-complying corporations can also be held personally liable for fines and penalties under certain of the statutes and regulations. In the Petraccoro case, the DEP has sent a message that those running corporations will be held accountable if their companies ignore their environmental responsibilities under the law. The case arose under the state’s Water Pollution Control Act, N.J.S.A. 58:10A-1 et seq. The WPCA authorizes the issuance of New Jersey Pollutant Discharge Elimination Permits to entities that discharge enumerated pollutants into the state’s waterways. Pursuant to the permits, the discharges are strictly regulated, and any violation of the permits or the effluent limitations are subject to civil penalties of up to $50,000 for each violation, as well as for each day the violation continues. The statute states that any “person” is prohibited from discharging a pollutant in violation of a NJPDES permit. “Person” is defined as “any individual, corporation, company, partnership, firm, association, owner or operator of a treatment works, political subdivision of this State and any state or interstate agency.” It also defines “person” as “any responsible corporate official for the purpose of enforcement action” under the statute. The statute does not define “responsible corporate official.” Accordingly, in determining who is, in fact, a responsible corporate official, the DEP looks to case law for guidance. In the instant case, the DEP and the administrative law judge who made the original finding against Petraccoro relied on a decision of the New Jersey Appellate Division of the Superior Court, State Department of Environmental Protection v. Standard Tank Cleaning Corp., 284 N.J. Super 381 (App. Div. 1995), in determining the definition of a responsible corporate official. In the Standard Tank case, the Appellate Division looked to the developing case law under the Federal Clean Water Act for help in construing the term, reasoning that because the WPCA was designed to establish a system for enforcing the Federal Clean Water Act in New Jersey, it was reasonable to construe the term the way the federal courts construed it in Clean Water Act cases. “Under this view,” said the Standard Tank court, “an individual may not be held liable for a corporation’s violation of the WPCA simply because he or she occupies the position of corporate officer or director. Instead, there must be a showing that a corporate officer had actual responsibility for the condition resulting in the violation or was in a position to prevent the occurrence of the violation but failed to do so. Stated another way, we construe the WPCA to impose liability only upon corporate officers who are in control of the events that result in the violation.” The administrative law judge held that Petraccoro’s liability would therefore turn on whether or not he was an “actual participant in the operations of [the company] that resulted in the violations or would have been in a position to prevent those violations.” Petraccoro was the president, controlling shareholder and one of two directors of Diamond Hill Estates Sewage Company, a sewage treatment facility in Mansfield Township, N.J. The treatment plant served approximately 246 customers in local residential developments. His name was on every application and document submitted to satisfy NJPDES requirements. Testimony showed that he was the “dominant” person making day-to-day decisions for the company. The defendant argued that although he was the corporate official with the responsibility and authority to take the necessary measures to prevent violations of the company’s NJPDES permit, a lack of money made it impossible for him to correct the problems at the company. The facility needed approximately $750,000 to upgrade the plant in order the meet the effluent limitations of its permit, but he could not raise the funds necessary. As a result of the “impossibility,” he claimed he could not and should not be held personally liable for the violations. Petraccoro’s defenses were rejected at all levels of the case, from the ALJ to the Appellate Division. According to the fact-finders, while it was true that the business was in the red for most of its existence, Petraccoro had the ability to raise the rates his treatment plant charged its customers, through application to the Board of Public Utilities, but his attempts to apply for rate increases were inept at best. As the ALJ explained in his opinion, “[A] public utility has the constitutional and statutory right to a reasonable rate of return. N.J.S.A. 48:2-21(b) … While the term ‘reasonable’ is hardly precise, to pass constitutional muster the rate of return must be sufficient to provide for the company’s financial security, attract necessary capital, and yield a reasonable return on the owner’s investment … Thus, Diamond Hill had an undeniable right to have a reasonable rate of return, which included a rate large enough to make the necessary capital improvements to allow the company to come into compliance with the environmental laws.” But Petraccoro’s efforts were half-hearted and paltry. “The history of Diamond Hill’s efforts to realize a reasonable rate of return is abysmal,” said the ALJ. “Petraccoro admits that in 1985 the company, fully realizing the need to obtain funds to prevent deterioration of the plant, applied for a rate increase. Yet because the company’s accountants would not adequately prepare the papers without additional payment, the company withdrew the rate increase application. While the respondents blame the accountants, the company, through its decision-maker, Petraccoro, made an economic decision not to spend the funds to adequately present a petition for a reasonable rate of return, expenditures that would be recovered by a reasonable rate.” Several years later, Petraccoro again applied for a rate increase but submitted incorrect forms and was not ready to put on a case when his rate hearing came up. Three years after that, Petraccoro again came unprepared to yet another rate-increase hearing, prompting the BPU’s Rate Counsel to offer its staff to help Diamond Hill properly prepare a rate-increase petition. Petraccoro decided not to pursue this new petition but rather to try to sell his company. Looking at the facts, the ALJ found that the company’s failure to raise the capital necessary to make improvements at the company that would have prevented the violations was a direct result of Petraccoro’s poor decision-making, not “impossibility.” As the Standard Tank court said, responsible corporate officials have not only a “positive duty to seek out and remedy violations when they occur but also, and primarily, a duty to implement measures that will insure that violations will not occur.” Said the ALJ: “[T]he undisputed facts demonstrate that the company made only sporadic, half-hearted attempts to get the funds to address the problems that were resulting in violations of the law.” Finally, the ALJ pointed out that Diamond Hill’s permit required the operator to cease operations if it could not prevent permit violations. This Petraccoro did not do. If Diamond Hill had properly ceased operating (which, the commissioner of the Department of Environmental Protection said in his affirmance, included seeking permission to do so from the BPU and properly closing the plant so that no more raw sewage was accepted and no raw sewage was discharged), there is no doubt that the violations would have therefore ceased. The commissioner affirmed the ALJ’s decision, rejecting Petraccoro’s impossibility defense on the ground that he had not demonstrated “objective impossibility.” “[T]he evidence here would not support a finding of objective ‘impossibility.’… His affidavit demonstrates that he made efforts from time to time to correct the problems at the plant and that he experienced difficulties and setbacks in doing so. But, even when viewed in the light most favorable to him, the affidavit does not allege sufficient facts to permit a rational fact finder to conclude that prevention of the violations was objectively ‘impossible.’ The problems described in the affidavit were not physical or legal impossibilities, but rather the chronic insufficiency of funds and the long standing failure to obtain rate increases necessary to obtain sufficient funds.” While not finding as a matter of law that the defense of objective impossibility even exists under the WPCA, the commissioner set forth a standard for establishing such a defense where lack of funding is the issue. The defendant must allege facts that would show continuous, timely efforts to obtain the needed rate increases, pursued with attention, diligence and competence, and that despite such attention, the rate increases were denied. The Appellate Division panel affirmed the penalties against Petraccoro based on the reasoning of the decisions of the ALJ and the commissioner. Through the sheer size of the penalty against Petraccoro, the case should serve as a warning to corporate officials who do not do everything in their power to prevent violations by their companies of the Clean Water Act. Janet S. Kole is the president of the Law Offices of Janet S. Kole P.C. (Collingswood and Philadelphia, Pa.). Its lawyers concentrate their practice in environmental law. Kole is the co-chair of the American Bar Association’s section of litigation environmental litigation committee.

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