Reed Smith Client Alerts

A recent decision by a California court of appeal clarified the breadth of the California Water Resources Control Board’s (Board) subpoena power, which could have implications for other state agencies in California and elsewhere. Moreover, private entities which are the subject of an administrative investigation may have a difficult time withholding financial records even if those records are not related to the alleged violations, and even if the subpoenaed entity is not directly responsible for any of the alleged violations.

Autores: Phillip H. Babich Kerry E. Roberson

Pertinent case facts and procedural history

In State Water Resources Control Board v. Baldwin & Sons, Inc., the Fourth District Court of Appeal, relying on state and federal supreme court precedent, decided that the Board’s administrative investigation was similar to “a grand jury proceeding” and it could “investigate merely on suspicion that the law is violated, or even just because it wants assurance that it is not.” (45 Cal. App. 5th 40.) The court affirmed the trial court’s decision that Baldwin & Sons, Inc. (Baldwin) had to comply with the Board’s subpoena and turn over, among other things, income tax filings, loan agreements, bank and financial statements, and economic reports and sales projections. Baldwin was not the developer of the project under investigation for alleged violations of state and federal water regulations. Rather, it was suspected of paying for project-related expenses.

The case concerns construction of a large-scale development project in the Portola Hills Community in Lake Forest, California. During construction, the Board began investigating whether the developer had violated the federal Clean Water Act (33 U.S.C. § 1251 et seq.) and California’s Porter-Cologne Water Quality Control Act (Wat. Code, § 13000 et seq.) The Board issued notices of violation to four entities, including Baldwin. The notices alleged that federal and state water quality laws had been violated because discharges from the project adversely affected neighboring creeks and their tributaries. These discharges, according to the Board, violated the developer’s permit coverage under the state’s Construction General Permit, which is California’s National Pollutant Discharge Elimination System (NPDES) Permit. Importantly, Baldwin was not an owner, contractor, or permittee in relation to the project.

The purpose of the Board’s investigation was to determine if an administrative civil liability (ACL) complaint was warranted against responsible entities.

The Board’s first round of subpoenas did not target Baldwin. Instead, it sought documents from the permittees under the Construction General Permit. After discovering that there was a relationship between the permittees and “other entities who appeared to be paying for project related expenses,” the Board issued a subpoena to Baldwin. That subpoena sought: financial documents detailing the entities’ interrelationship, financial documents related to the entities’ corporate management, documents related to the development project including lease agreements and project operations, and documents related to the financial ability of responsible entities to pay any administrative civil liability imposed during enforcement proceedings. It also sought income tax filings, loan agreements, bank and financial statements, and economic reports and sales projections related to the development of the project (Financial Documents).

In response, Baldwin refused to comply with the subpoena on grounds that the Financial Documents were protected from disclosure under common law and a constitutional right to privacy. Baldwin also claimed that the documents were not reasonably relevant to the investigation and, thus, constituted an illegal search and seizure.

The Board filed a court action to seek an order compelling compliance with the subpoena. The trial court largely granted the Board’s petition and ordered Baldwin and the other appellants to turn over their records. It also directed entry of a protective order to limit disclosure of the Financial Documents. The appeal followed.