Enforcement Action: Civil Penalties and Ability-to-Pay Claims
Businesses and other entities may seek to reduce civil penalties in EPA administrative enforcement actions by making an ability-to-pay (ATP) claim. EPA recently issued new guidance for assessing these claims in penalty cases under a host of federal environmental statutes.
When is ATP Relevant?
- EPA Assessment of a Civil Penalty
EPA seeks civil penalties in an administrative enforcement action against a business or other respondent by filing an administrative complaint. EPA must show that it has considered statutorily relevant factors, which often include ATP. This requires EPA to make limited findings about an entity’s financial circumstances. These findings may be supported by readily available public information. Unless the respondent asserts otherwise, ATP is presumed.
- Challenge to a Civil Penalty
In an administrative proceeding, a business may challenge EPA’s conclusion that the business can pay the penalty without suffering an “undue financial hardship.” The business must produce evidence supporting its ATP claim. This information will be shared with EPA through a discovery-like process before a hearing with an administrative officer. The administrative officer may rely on the ATP guidance to manage the discovery process and to determine when the business has met its evidentiary burden for showing that the penalty would deprive it of funds for “ordinary and necessary business expenses.”
- Settlement Negotiations
ATP claims also play a role in settlement negotiations before and during an enforcement action, including requests to extend penalty payment periods. The guidance is particularly helpful in understanding what and how financial information may be used as a basis for settlement.
What Financial Information Does EPA Want?
The information requested by EPA depends on the type of entity making an ATP claim, the size of the penalty, and the stage at which the claim is asserted. Typically, businesses will be expected to provide tax returns for previous years. In the settlement context, EPA will use this data for inputs to computer models that provide rough conclusions about a business’ ATP. Additional information, like financial statements, budgets and year-to-date results, asset ledgers, loan and mortgage agreements, tax returns of related entities, and SEC filings, may be requested to augment the modeling or to prove an undue hardship in an administrative proceeding. For individuals, public entities, and non-profit organizations, the pertinent financial information will be different.
Throughout, EPA will adhere to its regulations governing confidential business information.
- The business bears the burden of showing that it cannot pay the full penalty without suffering an undue hardship. The business must produce evidence to support its ATP claim and persuade the agency that the evidence demonstrates limited financial means.
- ATP claims may be used to reduce the penalty or extend payment beyond the default 30-day payment period. The guidance instructs EPA to make earlier payments more attractive in settlements by delaying the accumulation of interest or aligning interest rates with financial markets.
- For smaller cases, EPA may be more likely to rely on its computer models for assessing ATP claims. These models are available online, and may help a business evaluate the viability of its claim.
- ATP is a mitigating factor, not a complete defense. Even if a business can demonstrate an inability to pay, the penalty may not necessarily be reduced.
- The ATP guidance, by definition, is not binding. But it provides a roadmap of what EPA is likely to consider relevant in the ATP setting – both in litigation and in settlement negotiations.
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