So, you are managing a major construction site in downtown Chicago. It’s been raining and you have thousands of gallons of silty water which you need to get off site. You can: (a) store it in tanks and then truck it to a waste water treatment facility; (b) discharge it to the local sewer under proper sewer authority; or (c) pump it into the river in full view of thousands of commuters walking over the bridges from the local train stations.Read More
On June 26, 2018, in one of his final acts as Administrator of the U. S. Environmental Protection Agency (“EPA”), Scott Pruitt issued a memorandum  that has set in motion a process to amend the regulations that govern the agency’s exercise of its “veto” authority under Section 404(c) of the Clean Water Act.  The memo directs EPA staff to prepare a proposal, within six months, that would potentially curtail EPA’s authority to effectively bar development projects that require a Section 404 dredge-and-fill permit from the U.S. Army Corps of Engineers.
As background, Section 404 of the Clean Water Act authorizes the Corps (and state agencies with delegated permitting authority) to issue permits authorizing the discharge of dredged or fill material into regulated waters at “specified disposal sites.”  However, the statute provides EPA the authority to “prohibit” or “withdrawal” the specification of any area as a disposal site when it determines that a proposed discharge will have an unacceptable adverse effect on water supplies, fisheries, wildlife, or recreational areas.  This is commonly known as EPA’s “veto” authority because the EPA can effectively veto a project that would otherwise be authorized under Clean Water Act permits issued by the Corps by prohibiting construction in areas for which there is no reasonably available alternative disposal site. EPA currently administers its veto authority through regulations that were last amended nearly four decades ago, in 1979.  To date, EPA has used its final veto authority only 13 times. 
The new memo grows out of concerns surrounding EPA’s prior use of its veto authority before a Section 404 permit application had been filed—i.e., a “preemptive” veto—or after a permit had already been issued—i.e., a “retroactive” veto—rather than in the midst of the permitting process.  Recent examples include EPA’s proposed preemptive veto of a high-profile copper and gold mining project near Bristol Bay, Alaska in 2014 (which remains pending),  and its 2011 retroactive veto of a coal mining project in Logan County, West Virginia.  Both of these cases spawned substantial litigation  and caused many observers (including former Administrator Pruitt) to question whether in the future “the mere potential of the EPA’s use of its section 404(c) authority before or after the permitting process could influence investment decisions and chill economic growth by short-circuiting the permitting process.” 
In response to these concerns, former Administrator Pruitt’s Memo directs EPA staff to prepare and provide to the White House Office of Management and Budget a proposal within six months (before the end of 2018) that would consider and seek public comment on the following changes:
- Eliminating EPA’s authority to veto a project before a permit application has been filed.
- Eliminating EPA’s authority to veto a project after a Section 404 permit has been issued.
- Requiring EPA regional administrators to obtain approval from EPA headquarters before initiating the Section 404(c) veto process.
- Requiring the completion of environmental review under the National Environmental Policy Act before preparing and publishing a proposed veto determination.
- Requiring EPA to publish and seek public comment on final veto determinations before those determinations take effect.
While former Administrator Pruitt is no longer in office following his July 5 resignation, all indications are that the new Acting Administrator, Andrew Wheeler, will forge ahead with the rulemaking process initiated by his predecessor. Administrator Wheeler has publicly expressed his commitment to the regulatory agenda pursued by Pruitt prior to his departure and he has strong ties to the mining industries which, of all industries, were most negatively impacted by EPA’s application of the agency’s veto power under the Obama administration.
The coming weeks should serve as a valuable window into whether Administrator Wheeler will indeed move forward with a new 404(c) rulemaking. In a letter dated July 19, Senator Tom Carper (D-Del.) and Representative Peter DeFazio (D-Ore.) urged Wheeler to “immediately and publicly revoke” Pruitt’s memorandum.  The letter requests that by August 15, 2018, Administrator Wheeler respond to several 404(c)-related questions, including his “view on the proper exercise of EPA’s section 404(c) authority, and how this view is consistent with the Congressional history and judicious use of this authority by your agency in the past.” 
Assuming Administrator Wheeler stays the course set by his predecessor, the upcoming rulemaking process will provide a critical opportunity for EPA leadership and the regulated community to shape the Clean Water Act regulatory landscape for years to come. Persons and industries with interests tied to high-profile, capital intensive development projects—such as oil and gas, mining, and large scale water supply/impoundment projects—should give particular consideration to participation in the rulemaking process, as it is these types of ventures that are most likely to be negatively impacted by a surprise veto under EPA’s current regulatory regime.
The anticipated rulemaking limiting EPA’s Clean Water Act veto authority is already generating considerable controversy, so interested stakeholders should consider weighing in with EPA even before any proposed rule is released. K&L Gates has a team of lawyers and policy professionals in Washington, D.C. and beyond that is positioned to assist with such efforts.
The California Supreme Court issued an opinion on May 14, 2018 in United Riggers & Erectors, Inc. v. Coast Iron & Steel Co. that resolves a split in authority regarding whether Civil Code Section 8814 excuses prompt payment of retention by an owner or prime contractor if a good faith dispute of any kind exists between the parties or only when there is a dispute over the work for which the retention is due. The Court held that a contractor is only entitled to withhold retention when there is a dispute arising out of the work on which the retention is based.
In United Riggers, the prime contractor, Coast Iron & Steel Co. (Coast Iron), entered into a contract with the owner, Universal Studios, and in turn subcontracted a portion of the work to United Riggers & Erectors (United Riggers). United Riggers submitted its final bill that included additional costs for increased expenses due to Coast Iron’s alleged mismanagement and outstanding change order requests. Coast Iron accepted the work completed by United Riggers, but disputed the additional costs. Coast Iron then used this dispute as justification to withhold the entire final payment, including the retention payment for the accepted work.
United Riggers filed suit against Coast Iron for, among other things, its failure to make prompt payment of the retention monies it had received from Universal according to California Civil Code Section 8814. Notably, by the time the bench trial took place, Coast Iron had paid the outstanding retention to United Riggers. This action did not moot the statutory claim because violation of the prompt payment statute can result in a monetary penalty and payment of attorney’s fees under Civil Code Section 8818.
Coast Iron argued that the Court should adopt the broad view of the statute held in Martin Brothers Construction, Inc. v. Thompson Pacific Construction (2009) that held any bona fide dispute between the parties can justify the withholding of retention. In particular, Coast Iron pointed out the lack of any express limit on the nature of the dispute contained in the Section 8814 exception. On the other hand, United Riggers argued for the narrow interpretation of Section 8814 held in East West Bank v. Rio School District (2015) which restricts justification for withholding retention payments to disputes related to the security purpose of retention. East West Bank highlighted the underlying purpose of the prompt payment statutes was “to ensure timely payment of the retention as soon as its narrow justifications have been served.”
The Court considered the legislative history of Section 8814 and held that its narrow interpretation of the prompt payment statute aligns with the statute’s underlying purpose to ensure timely payment of undisputed amounts to contractors while still allowing the retention to fulfill its security purpose. Retention may be withheld when: (1) the subcontractor’s construction-related performance is the subject of a good faith dispute, (2) the liens or other demands from third parties expose the direct contractor to double payment, or (3) when payment would result in the subcontractor receiving more than the minimum amount both sides agree is due. Under United Riggers, withholding retention is not justified because of a dispute whether additional amounts beyond the retention might be owed such as pending requests for change orders.