Eastern Shore homebuilder investigated for storm water runoff

Introduction

The New Jersey-based homebuilder K. Hovnanian Enterprises is under investigation by the Department of Justice for possible violations of the Clean Water Act.

Hovnanian, which has been fighting for almost a decade to construct the Four Seasons development on Kent Island on Maryland’s Eastern Shore, is being investigated for storm water discharge practices at several of its mid-Atlantic development sites, according to a Securities and Exchange report the company filed in June.

The inquiry into Hovnanian, one of the nation’s 10 largest builders, is for storm water runoff from construction activities, which can have a significant impact on water quality. As rain water flows over a construction site, it can pick up pollutants including chemicals, debris, and sediment. Without controls and barriers, the runoff often washes into the nearest waterway where it can harm or kill fish and other wildlife, in addition to causing erosion.

According to the report, the Department of Justice began looking into the company’s storm water discharge practices after a series of inquiries by the Environmental Protection Agency in connection with homebuilding in the agency’s Region 3, which includes Delaware, Maryland, Pennsylvania, Virginia, West Virginia, and the District of Columbia. Hovnanian has developments in each of those states, but its filing mentioned only two EPA notices of violations, both related to projects in Pennsylvania.

“We have no further comment beside what is in the SEC filing,” said Doug Fenichel, a K. Hovnanian spokesman.

While officials from both the EPA and the Justice Department said they do not release information or comment on ongoing investigations, Mark Pollins, director of the EPA’s Water Enforcement Division, said the Justice Department generally becomes involved in the more egregious and complex cases, which are likely to result in larger penalties.

Hamilton Hackney, a Boston environmental attorney who has represented developers for the law firm Greenberg Traurig, said the EPA has renewed its focus on storm water runoff compliance after years of lax enforcement because of pressure from environmental groups. The policy change left builders open to investigation and large fines, and they are scrambling to comply with the rules, he said.

“The funny thing about it is the EPA let this area go for a very long time and for the last five years has really changed course,” Hackney said.

Hackney said the EPA does not always target the worst offenders, but most often focuses on large developers. “My understanding of EPA targeting is that it’s not ‘so-and-so is a bad outfit’; it’s more, ‘so-and-so is a large entity so they are a good target to go after,’” he said. “You get a lot of compliance bang for your buck.”

Hackney added that fines from violations dating back to the early part of the decade are now hitting developers who are particularly vulnerable to financial loss from the downturn in the housing market.

Chad Harsh, an EPA Region 3 environmental scientist and investigator, said the agency searches for violators by reviewing builders’ permits and other records and also by inspecting construction sites. Harsh says he has seen violations as small as improper documentation of storm water runoff plans and as large as development with no storm water runoff plan in place.

“It really goes across the board, as far as the type of violations we have seen,” Harsh said.

In June, four other of the nation’s largest homebuilders agreed to pay $4.3 million to resolve alleged violations of the Clean Water Act at construction sites in the District of Columbia and 34 states, including Maryland, Pennsylvania, and Virginia. The builders are Centex Homes, based in Dallas; KB Homes, based in Los Angeles; Pulte Homes, based in Bloomfield Hills, Michigan; and Richmond American Homes, based in Denver.

K. Hovnanian has long pursued a contentious plan to build Four Seasons, a 1,350-home age-restricted development, on environmentally sensitive land just east of the Chesapeake Bay Bridge on Kent Island. After strong local and state protest against the project, the Maryland Board of Public Works in 2007 denied the developer’s license to build on the wetlands, citing concerns that storm water runoff from the construction site would pollute the Chesapeake Bay. The company is appealing the decision and still includes the development on the website it maintains for prospective buyers.

The federal Department of Justice is checking into the practices of at least one other large developer in addition to K. Hovnanian. According to its quarterly report to the SEC filed in June, Pennsylvania homebuilder Toll Brothers received an EPA request in 2006 for information on its storm water discharge practices in Region 3. Toll Brothers spokeswoman Allison Nugent said the company’s policy is to not comment on ongoing legal matters.

The EPA’s Pollins said the agency’s investigations will continue. “We expect to maintain a significant presence in the homebuilder industry,” he noted. “We would be hopeful to see increased compliance as the message gets out.”

For their part, developers seem to expect stiffer requirements from the EPA. “It can be anticipated that increasingly stringent requirements will be imposed on developers and homebuilders in the future,” wrote K. Hovnanian in its quarterly report. “Although we cannot predict the effect of these requirements, they could result in time-consuming and expensive compliance programs and in substantial expenditures, which could cause delays and increase our cost of operations.”