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United Artists Theatre Circuit, Inc. v. Regional Water Quality Control Board

California Court of Appeals, First District, Fifth Division

November 27, 2019

REGIONAL WATER QUALITY CONTROL BOARD, San Francisco Region, Defendant and Appellant; Moonlite Associates LLC, Real Party in Interest.

          As Modified on Denial of Rehearing 12/18/2019

         [255 Cal.Rptr.3d 800] Superior Court of Alameda County, No. RG16811955, Hon. Jennifer Madden, Judge. (Alameda County Super. Ct. No. RG16811955)

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         Hogan Lovells US, Scott H. Reisch, Katherine B. Wellington, for Plaintiff and Appellant.

         Xavier Becerra, Attorney General, Gavin G. McCabe, Mark W. Poole and Marc N. Melnick, Deputy Attorneys General, for Defendant and Appellant.


         SIMONS, J.

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          Under Water Code section 133');">3304,[1] a prior owner of property may be required to participate in the cleanup of wastes discharged from its property that resulted in ground water contamination, if that person "caused or permitted" the discharge. The San Francisco Bay Regional Water Quality Control Board (Regional Board) named United Artists Theatre Circuit, Inc. (UATC) in a section 133');">3304 cleanup order addressing waste discharges from dry cleaning operations at a shopping center owned by UATC in the 1960s and 1970s. UATC filed a petition challenging its inclusion in the order, and the trial court concluded the Regional Board had erred.

          On appeal, both the Regional Board and UATC agree that the word "permitted" contains a knowledge component, but they [255 Cal.Rptr.3d 801] disagree on the degree of knowledge required to establish a prior owner’s liability for a cleanup resulting from a tenant’s activities. Furthermore, UATC argues that even if it would otherwise be subject to a cleanup order, its liability was discharged in a bankruptcy reorganization proceeding commenced in the year 2000. Each of these matters are issues of first impression in California.

         As to the knowledge component of "permitted," we adopt a standard that focuses on the landlord’s awareness of a risk of discharge: a prior owner may be named in a section 133');">3304 cleanup order upon a showing the owner knew or should have known that a lessee’s activity created a reasonable possibility of a discharge into waters of the state of wastes that could create or threaten to create a condition of pollution or nuisance.[2] This test is informed by the Legislature’s express intent to "exercise its full power and jurisdiction to protect the quality of waters in the state." (� 13000.) We further conclude that, even assuming the Regional Board’s entitlement to a cleanup order was

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a claim within the meaning of bankruptcy law, it was not discharged in UATC’s bankruptcy proceeding because it did not arise before confirmation of reorganization.


          Statutory Background

         In 1967, the Legislature created the State Water Resources Control Board (State Board) within the Resources Agency; the State Board now resides within the California Environmental Protection Agency. (� 175; Stats. 1967, ch. 284, � 2.4, p. 1442, eff. Dec. 1, 1967; Governor’s Reorganization Plan No. 1 of 1991, � 192, eff. July 17, 1991, 4 Stats.1991; see also Gov’t Code, � 12080 et seq.) In 1968, the Assembly Committee on Water suggested that the State Board "establish a task force to develop a comprehensive review of the Water Quality Control Act ...." (Assem. Daily J. (May 13, 1968) pp. 3003-3005.) The State Board responded by convening a Study Panel that produced in March 1969 a report entitled "Recommended Changes in Water Quality Control[:] Final Report of the Study Panel to the California State Water Resources Control Board" (Study Panel Report).[3] The report explained that the Study Panel was composed of leaders in relevant fields and representatives of statewide organizations and state agencies "with responsibility or interest in water quality or water quality control." (Study Panel Report, at pp. iv-v.)

         The Study Panel Report contained an "Appendix A" consisting of "recommended changes" to several California codes, including the Water Code. (Study Panel Report, March 1969, Appendix A.) Appendix A also included various explanatory notes with respect to particular proposed provisions. In 1969, the Legislature adopted the Study Panel’s recommendations in Assembly Bill 413 (1969 Reg Sess.). (See Stats. 1969, ch. 482, pp. 1045-1088.)[4] The changes [255 Cal.Rptr.3d 802] included replacing Division 7 of the Water Code with a new Division 7, to be known as the Porter-Cologne Water Quality Control Act (Porter-Cologne Act). (Stats. 1969, ch. 482, � � 17-18, pp. 1051-1052, see � 13020.) An entry in the Assembly Journal makes clear the Legislature’s reliance on the work of the Study Panel. In particular, the

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Assembly Committee on Water reported that, "Except for the comments set out below, the notes contained under the various sections of Assembly Bill No. 413 as set out in corresponding sections in Appendix A [of the Study Panel Report] reflect the intent of the Assembly Committee on Water in approving the various provisions of Assembly Bill No. 413." (Assembly Journal, May 5, 1969, pp. 2677-2678.)

         The Porter-Cologne Act finds and declares "that the people of the state have a primary interest in the conservation, control, and utilization of the water resources of the state, and that the quality of all the waters of the state shall be protected for use and enjoyment by the people of the state." (� 13000.) The Act further declares "that activities and factors which may affect the quality of the waters of the state shall be regulated to attain the highest water quality which is reasonable, considering all demands being made and to be made on those waters and the total values involved, beneficial and detrimental, economic and social, tangible and intangible." (Ibid. ) Moreover, the Act declares "that the health, safety and welfare of the people of the state requires that there be a statewide program for the control of the quality of all the waters of the state; that the state must be prepared to exercise its full power and jurisdiction to protect the quality of waters in the state from degradation originating inside or outside the boundaries of the state ... and that the statewide program for water quality control can be most effectively administered regionally, within a framework of statewide coordination and policy." (Ibid. ; see also City of Burbank v. State Water Res. Control Bd. (2005) 35 Cal.4th 613, 619, 26 Cal.Rptr.3d 304, 108 P.3d 862 (Burbank ); San Diego Gas & Electric Co. v. San Diego Regional Water Quality Control Bd. (2019) 36 Cal.App.5th 427, 434-435, 248 Cal.Rptr.3d 496');">248 Cal.Rptr.3d 496 (San Diego Gas & Electric ); Building Industry Assn. of San Diego County v. State Water Resources Control Bd. (2004) 124 Cal.App.4th 866, 875, 22 Cal.Rptr.3d 128 (Bldg. Indus. Assn. of San Diego ).)

         The Porter-Cologne Act directs the State Board to "formulate and adopt state policy for water quality control" and identifies and describes nine regional water quality control boards. (� � 13140, 13200, 13201.) "[T]ogether the State Board and the regional boards comprise ‘the principal state agencies with primary responsibility for the coordination and control of water quality.’ (� 13001.)" (Burbank, supra, 35 Cal.4th at p. 619, 26 Cal.Rptr.3d 304, 108 P.3d 862.) Among the various powers of the regional boards is the power to issue a waste "cleanup and abatement order." (� 133');">3304.) Section 133');">3304, subdivision (a) currently[5] provides in part, "A person who has discharged or discharges waste into the waters of this state in violation of any waste discharge requirement or other order or prohibition issued by a regional board or the state board, or who has

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caused or permitted, causes or permits, or threatens to cause or permit any waste to be discharged or deposited where it is, or [255 Cal.Rptr.3d 803] probably will be, discharged into the waters of the state and creates, or threatens to create, a condition of pollution or nuisance, shall, upon order of the regional board, clean up the waste or abate the effects of the waste, or, in the case of threatened pollution or nuisance, take other necessary remedial action, including, but not limited to, overseeing cleanup and abatement efforts." A "regional board may expend available moneys to perform any cleanup, abatement, or remedial work ... that, in its judgment, is required by the magnitude of the endeavor or the urgency for prompt action to prevent substantial pollution, nuisance, or injury to any waters of the state." (� 133');">3304, subd. (b)(1).) In that event, "the person or persons who discharged the waste, discharges the waste, or threatened to cause or permit the discharge of the waste ... are liable to that governmental agency to the extent of the reasonable costs actually incurred in cleaning up the waste, abating the effects of the waste, supervising cleanup or abatement activities, or taking other remedial action." (� 133');">3304, subd. (c)(1).)

         The Porter-Cologne Act authorizes persons aggrieved by actions of a regional board to "petition the state board to review such action." (� 133');">3320, subd. (a); see also Barry, supra, 194 Cal.App.3d at p. 171, 239 Cal.Rptr. 349.) The State Board’s decision may be reviewed in the superior court by way of a petition for writ of mandate. (� 133');">3330.)

          The Shopping Center and Dry Cleaner

          The Moonlite Shopping Center (the Center) is located on El Camino Real in Santa Clara, California. The Center has several large tenant spaces and twenty-five smaller tenant spaces. Saratoga Creek is located to the east of the Center.

          UATC (then United California Theaters, Inc.) began construction of the Center in 1960 and it opened in 1962. UATC owned the Center until 1975, and was the master lessor until 1978. Real party in interest Moonlite Associates, LLC (Moonlite) has owned the Center since 1977.

          For 35 years, from 1962 until 1997, a drycleaner (Moonlite Cleaners) continuously operated at the Center, under a number of different owners. The dry cleaner used "transfer" machines that used perchlorethylene (aka "tetrachloroethylene" and "PCE") as the cleaning solvent. The machines, which were effectively banned in 1998, required the manual transfer of clothes soaked with PCE from the washer to the dryer.

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         In City of Modesto v. Dow Chemical Co. (2018) 19 Cal.App.5th 130, 227 Cal.Rptr.3d 764 (Modesto II ),[6] Division Four of this District described PCE as follows: "PCE, also known as tetrachloroethylene, is a [255 Cal.Rptr.3d 804] molecule containing chlorine atoms and carbon atoms. It is also characterized as a ‘volatile halogenated organic compound,’ a ‘halogenated hydrocarbon’, a ‘chlorinated solvent’ or a ‘chlorinated hydrocarbon.’ As shorthand, it is referred to as ‘perc’ or PCE. All chlorinated hydrocarbons, like all solvents other than water, are ‘toxic.’ In 1978, the National Institute for Occupational Safety Hazards (NIOSH) recommended that PCE be handled as if it were a human carcinogen. In 1980 the State of California began regulating PCE as a hazardous waste. In 1984, when the Resource Conservation Recovery Administration (RCRA) was reauthorized, its regulations brought ‘small dry cleaners’ under the same requirements as major hazardous waste sources, with respect to PCE." (Modesto II, at p. 137, 227 Cal.Rptr.3d 764.)

         "PCE is a colorless liquid, and is therefore difficult to see once released into soil. [¶] ... PCE is particularly ‘persistent’ and ‘long lived’ compared to other contaminants, making it extremely difficult to accomplish complete remediation." (Modesto II, supra, 19 Cal.App.5th at p. 137, 227 Cal.Rptr.3d 764.)

         The record indicates that the dangers of dry-cleaning solvents in general, and PCE in particular, became gradually known during and after UATC’s ownership of the Center. For example, in 1953, the Supreme Court made reference to a statute addressing "Dry Cleaning Equipment Employing Volatile and Inflammable Solvents." (State Bd. of Dry Cleaners v. Thrift-D-Lux Cleaners (1953) 40 Cal.2d 436, 440, 254 P.2d 29.) A 1961 State Fire Marshal permit required the dry cleaner at the Center to take certain precautions against vapors from unidentified dry-cleaning solvents. In 1965 the Legislature set a specific maximum level for PCE vapor in former Health and Safety Code section 133');">3399.5, above which would be considered a " ‘dangerous toxic concentration.’ " (Stats. 1965, ch. 1781, � 13, p. 3974.) In 1975, the City of Santa

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Clara adopted an ordinance prohibiting the discharge of a variety of pollutants into the sewer system, including chlorinated hydrocarbons like PCE. In 1977, the Director of the National Institutes of Health published in the Federal Register a summary of a study regarding the "possible carcinogenicity" of PCE. (Report on Bioassay of Tetrachloroethylene for Possible Carcinogenicity, 42 Fed.Reg. 55270-55271 (Oct. 3, 1977).) In early 1978, the Environmental Protection Agency (EPA) published a list of toxic pollutants, including PCE. (Publication of Toxic Pollutant List, 43 Fed.Reg. 4108-4109 (Jan. 25, 1978).) In 1980, the EPA recognized PCE as a potential human carcinogen and adopted water quality standards for PCE. (Water Quality Criteria Documents, 45 Fed.Reg. 79318, 79340 (Nov. 28, 1980).) Other state and federal legislative and regulatory developments followed.

         It is also notable that the 1969 Study Panel Report that resulted in the enactment of the Porter-Cologne Act recognized the danger of chlorinated hydrocarbons. (Study Panel Report, at p. 41.) Specifically with reference to pesticides, the Report observed, "Extensive studies of the use of pesticides, and particularly of the chlorinated hydrocarbons, have shown alarming residual concentrations in fish and fowl across wide areas of the earth, as well as here in California. Present accumulations of these toxic, nondegradable chemicals are causing heavy mortality to some birds and perhaps in fish. These concentrations do not seem to be dangerous to people in the amounts now found in California, but there is legitimate concern for the future." (Ibid. )

          Underlying Proceedings

          In 2004, Moonlite discovered PCE contamination in groundwater at the Center, [255 Cal.Rptr.3d 805] and, in 2009, Moonlite reported the contamination to the Regional Board. Subsequent testing disclosed high PCE concentrations in soil gas, indoor air, and groundwater. Regional Board staff commented that the levels "are very significant and warrant aggressive oversight" and that the indoor air concentrations are "one of the worst we have seen."

         In June 2013, the Regional Board issued a tentative cleanup and abatement order naming both Moonlite and UATC. UATC had objected to being named in the order. In September, following a hearing, the Regional Board issued a section 133');">3304 cleanup and abatement order (the Cleanup Order) finding, "UATC is named as a discharger because it owned the Site during the time of the PCE discharges, had knowledge of the activities that caused the discharge, and had the legal ability to prevent the discharge."

         In February 2016, UATC filed a petition for writ of mandate (Petition) in Santa Clara County Superior Court, naming the Regional Board, the State

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Board, Moonlite, and the City of Santa Clara.[7] The case was moved to Alameda County and the parties agreed to dismiss the State Board from the case. The Petition alleged four claims. First, UATC alleged it should not have been named as a discharger for several reasons, including because the evidence did not show that the contamination occurred while UATC owned or leased the Center, that UATC had actual or constructive knowledge of any discharge, or that UATC had legal authority to prevent a discharge. Second, UATC alleged the Regional Board’s claim was discharged in a Chapter 11 bankruptcy proceeding initiated by UATC in 2000.[8] Third, UATC alleged the Regional Board should have named the City of Santa Clara as a discharger. And, fourth, UATC alleged it did not receive a fair hearing.

         The trial court sustained the demurrer of the City of Santa Clara to the third cause of action on the grounds that the Regional Board exercised discretion in deciding whom to name in the Cleanup Order and that UATC could bring an action against the city for contribution or indemnification. On September 29, 2017, after briefing on UATC’s remaining claims, the trial court entered an order granting the Petition. The court rejected the Regional Board’s definition of "permitted" under which a former landlord who knew or should have known of the nature of the tenant’s activities may be named in a cleanup order. The court concluded that, under section 133');">3304, a discharger "must have had contemporaneous actual or constructive knowledge of either a specific discharge or of a dangerous condition that poses a reasonable suggestion of a discharge at the site." The trial court also concluded that the Regional Board’s cleanup [255 Cal.Rptr.3d 806] order was not a claim that could be discharged in UATC’s bankruptcy. On October 25, the court entered judgement pursuant to the September order, directing the Regional Board to vacate the Cleanup Order and authorizing further proceedings consistent with the September order construing section 133');">3304.[9]

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          The Regional Board filed an appeal and UATC filed a cross-appeal.


         I. The Trial Court Erred in Interpreting Section 133');">3304

         The trial court’s grant of UATC’s Petition was based on its interpretation of section 133');">3304, subdivision (a)— in particular, whether UATC could be treated as a person who "permitted" the PCE discharges at the Center. The trial court concluded such a finding would require evidence that UATC had "actual or constructive knowledge of either a specific discharge or of a dangerous condition that poses a reasonable suggestion of a discharge at the site." We understand the trial court’s phrase "a dangerous condition that poses a reasonable suggestion of a discharge at the site" to mean a specific condition at a site that creates a risk of discharge, as contrasted to a risk of discharge generally associated with an activity. (See Part I.B., post .) As explained below, although the trial court properly construed the word "permitted" to require a showing of some knowledge on the part of UATC beyond a simple awareness that its lessee was a dry cleaner, the trial court erred in requiring knowledge or constructive knowledge of a specific discharge or specific dangerous condition. Among other things, the principal case relied upon by the trial court, Laube v. Stroh (1992) 2 Cal.App.4th 364, 3 Cal.Rptr.2d 779 (Laube ), involved a very different context with constitutional and policy considerations not present here.

         On the other hand, we also reject the Regional Board’s interpretation of section 133');">3304. The Regional Board’s position is that, in order to be responsible for "permitting" a discharge, a prior owner need only have knowledge of the general activity of the tenant that resulted in the discharge. That is, unless a tenant deceives an owner regarding its activities, if an owner leases to a tenant and a discharge occurs, the owner may be named in a cleanup order, regardless of what the owner knew or should have known about the possibility of discharges and the effects on water quality that might result from any discharges. In the present case, the Regional Board argues it properly found UATC permitted the discharges at the Center because it "developed property specifically to be used as a dry cleaner business, and knowingly leased that property for more than two decades to operators that caused those discharges." Elsewhere, the Regional Board states flatly that UATC was properly named in the Cleanup Order because it "leased property to a dry cleaner whose operations resulted in a discharge."

         Rather than the standard adopted by the trial court or that proposed by the Regional Board, we conclude a prior owner may be named in a cleanup order

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as someone [255 Cal.Rptr.3d 807] who has "permitted" a discharge if it knew or should have known that a lessee’s activity presented a reasonable possibility of discharge into waters of the state of wastes that could create or threaten to create a condition of pollution or nuisance. This standard gives meaning to the word "permitted" without requiring that a regional board show a degree of awareness of risk inconsistent with the Legislature’s purpose that the state "exercise its full power and jurisdiction to protect the quality of waters in the state." (� 13000.)[10]

          A. Standard of Review

         "A party aggrieved by a final decision of the [State Board] may obtain review of the decision by filing a timely petition for writ of mandate in the superior court." (Bldg. Indus. Assn. of San Diego, supra, 124 Cal.App.4th at p. 879, 22 Cal.Rptr.3d 128, citing � 133');">3330, subd. (a).) In the present case, the review is of the Regional Board’s decision because the State Board did not act on UATC’s petition seeking State Board review.

          Under Code of Civil Procedure section 1094.5, "an abuse of discretion" is established if the Regional Board did not proceed "in the manner required by law" in adopting the Cleanup Order, or if the Cleanup Order "is not supported by the findings, or the findings are not supported by the evidence." (Code Civ. Proc. � 1094.5, subd. (b); see also � 133');">3330, subd. (e); Fukuda v. City of Angels (1999) 20 Cal.4th 805, 810, 85 Cal.Rptr.2d 696, 977 P.2d 693 (Fukuda ).) The trial court exercises its "independent judgment" in determining whether the Regional Board’s findings are supported by the evidence. (� 133');">3330, subd. (e); Code Civ. Proc. � 1094.5, subd. (c).) Nevertheless, the trial court "must afford a strong presumption of correctness concerning the administrative findings, and the party challenging the administrative decision bears the burden of convincing the court that the administrative findings are contrary to the weight of the evidence." (Fukuda, at p. 817, 85 Cal.Rptr.2d 696, 977 P.2d 693.) "On appeal, this court ordinarily reviews the record to determine whether the trial court’s findings are supported by substantial evidence. [Citation.] But where, as here, the determinative question is one of statutory or regulatory interpretation, an issue of law, we may exercise our independent judgment." (Manriquez v. Gourley (2003) 105 Cal.App.4th 1227, 1233');">33, 130 Cal.Rptr.2d 209; see also Coastal ...

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