Opinion
C082487
01-27-2021
MICHAEL STEVEN GONZALES, JR., Plaintiff and Appellant, v. CALIFORNIA DEPARTMENT OF RESOURCES RECYCLING AND RECOVERY, Defendant and Respondent.
NOT TO BE PUBLISHED California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. 34201580002261CUWNGDS)
California law encourages the recycling of empty beverage containers through a program of financial incentives. Under the centerpiece of this program, consumers must pay a refundable deposit when they purchase a beverage (either 5 or 10 cents) and may recover this deposit only if they later return the empty beverage container to a recycling facility. This financial incentive has, as intended, led to rising rates of recycling for beverage containers purchased in California. But it has also, not as intended, led to rising levels of importation of out-of-state beverage containers into California. Although these out-of-state containers are ineligible for a deposit refund in California, individuals have long imported these containers into the state and then presented them, often successfully, to California recycling facilities for a refund. This case concerns the state's ongoing efforts to prevent this type of conduct.
In early 2010, the California Department of Resources Recycling and Recovery (CalRecycle) learned that trucks from Nevada were bringing large loads of empty beverage containers into Susanville, California—a city lying near California's border with Nevada. Shortly after, CalRecycle began an investigation that, in 2011, culminated in the seizure of tens of thousands of pounds of empty beverage containers and the felony convictions of seven individuals for the fraudulent redemption of out-of-state containers.
The investigation also resulted in the auditing of several recycling operators in and around Susanville, including, relevant here, Michael Steven Gonzales, Jr. Gonzales formerly operated a recycling facility in Susanville under the name of USA Recycling. CalRecycle audited Gonzales in 2011, brought an administrative action against him in 2013 based on the results of that audit, and, following a hearing, revoked his right to operate and ordered him to pay substantial penalties and restitution. The agency reasoned these penalties were warranted, not because Gonzales intentionally accepted out-of-state containers for recycling, but because his negligent operation of his facility bordered on incompetence, resulted in thousands of violations of laws intended to prevent recycling fraud, and potentially resulted in over $1,000,000 in damages to California's recycling fund.
Gonzales afterward unsuccessfully sought relief from the trial court, and he now asks that we reverse the trial court's decision. He contends CalRecycle's action is time-barred under the applicable statute of limitations and, even if it is not, CalRecycle's decision is not supported by substantial evidence and is impermissibly based on an "underground" regulation. Although we find most of Gonzales's arguments unpersuasive, we agree the agency must reconsider whether its action is time-barred. For that reason, we reverse.
BACKGROUND
I
Legal Background
"In 1986, the Legislature adopted the California Beverage Container Recycling and Litter Reduction Act (Pub. Resources Code, § 14500 et seq.) (the Act) to encourage large-scale recycling of used beverage containers through a program of financial incentives." (Californians Against Waste v. Department of Conservation (2002) 104 Cal.App.4th 317, 319.) CalRecycle administers the Act. (Pub. Resources Code, §§ 14510.5, 14530.)
Undesignated statutory references are to the Public Resources Code.
Under the Act's "central" program, distributors of beverage containers pay a refundable deposit (called a California Refund Value or CRV) for each beverage sold—a cost that is ultimately passed on to consumers. (Tomra Pacific, Inc. v. Chiang (2011) 199 Cal.App.4th 463, 471; see § 14560.) Consumers can later recover this deposit by returning their empty beverage containers to a certified recycler. (§ 14572, subd. (a)(1).) Recyclers, in turn, can then sell these empty containers to certified "[p]rocessor[s]," who reimburse recyclers for any CRV paid and also pay a processing payment, an administrative fee, and the scrap value of the containers. (§ 14573.5; see also § 14518.) Recyclers operating in what is known as a "convenience zone"—which is typically a "zone" near a supermarket—may also obtain an additional payment, called a "handling fee." (§§ 14509.4, 14513.4, 14585.) Processors, after paying recyclers, may later obtain reimbursement and an administrative fee from CalRecycle, which pays them through a fund consisting primarily of the deposits that distributors pay. (§ 14573; Tomra Pacific, Inc., at p. 471.)
This program "provides economic incentives to recycle throughout the chain from consumers to retailers, recycling centers, and ultimately processors." (Alamo Recycling, LLC v. Anheuser Busch InBev Worldwide, Inc. (2015) 239 Cal.App.4th 983, 989.) But not all beverage containers are treated equally under this program. Relevant here, only containers sold in California may be redeemed for a deposit refund, as only the sale of those containers requires a payment into California's recycling fund. Consumers who purchase containers out of state, in contrast, do not pay a California deposit, and so cannot recover any deposit when they present these containers at California recycling facilities. (See § 14595.)
Enforcing this prohibition against redeeming out-of-state containers, however, has often proved difficult. As CalRecycle noted in a 2013 rulemaking, "[s]ince the inception of the program there have been unscrupulous individuals and entities intent on defrauding [California's Recycling] Fund by redeeming non-qualifying beverage containers for CRV (e.g., imported from out-of-State, out-of-country, or previously redeemed empty beverage containers)." (CalRecycle, Notice of Proposed Action (May 3, 2013), p. 3 <https://www2.calrecycle.ca.gov/Docs/102881>, archived at: <https://perma.cc/H248-PDVJ>.) Considering this conduct, the Legislature has "declare[d] that the redemption of beverage container material imported from out of state . . . presents a significant threat to the integrity of the beverage container recycling program and fund." (§ 14595.) To address this "significant threat," CalRecycle has adopted various regulations to detect and prevent potential fraud. These regulations, among other things, require recyclers to prepare detailed receipts for any purchase of $100 or more of empty beverage containers (Cal. Code Regs., tit. 14, § 2525, subd. (a)) and to "inspect each load of containers, subject to the Act, delivered to the recycling center, for which refund value is claimed, to determine whether the load is eligible for any refund value" (id., § 2501, subd. (a)). These regulations also, at least during the period relevant to this case, required recyclers to prepare and provide to CalRecycle "a separate list of all purchases of more than 250 pounds of aluminum beverage containers." (Cal. Code Regs., tit. 14, former § 2530, subd. (i).)
CalRecycle eliminated this requirement concerning sales over 250 pounds in 2013. At that time, it reduced daily load limits for aluminum containers to 100 pounds (previously 500 pounds), making the requirement for sales over 250 pounds no longer applicable. (CalRecycle, Notice of Proposed Action, supra, at p. 4 <https://www2.calrecycle.ca.gov/Docs/102881>, archived at: <https://perma.cc/H248-PDVJ>; see Cal. Code Regs., tit. 14, § 2535, subd. (f).)
But these several efforts to counter fraudulent conduct have often fallen short. "To facilitate fraud" and evade regulatory requirements, CalRecycle has found, "unscrupulous" individuals "break large loads into smaller load sizes that are compliant with the current regulations, thus avoiding detection, and then illegally redeem[] them for California Refund Value (CRV) at certified recycling centers throughout California." (CalRecycle, Notice of Proposed Action, supra, at p. 3 <https://www2.calrecycle.ca.gov/Docs/102881>, archived at: <https://perma.cc/H248-PDVJ>.) This fraudulent redemption of out-of-state containers, according to one survey's estimates, "results in an estimated minimum fraud exposure of $7 million annually to the [California recycling fund] for [out-of-state beverage containers] transported in 'rental trucks' alone." (Id. at p. 5.)
CalRecycle, in the years both before and after the conduct relevant to this case, has modified its regulations several times to better detect potential fraud and prevent future losses to California's recycling fund. (CalRecycle, Notice of Proposed Action, supra, at pp. 3-4 <https://www2.calrecycle.ca.gov/Docs/102881>, archived at: <https://perma.cc/H248-PDVJ>.) But despite these efforts, CalRecycle believes that recycling fraud remains a significant issue today. (See CalRecycle, California Cracks Suspected Bottle and Can Recycling Fraud Ring (July 1, 2020) <https://www.calrecycle.ca.gov/NewsRoom/2020/07july/06>, archived at: <https://perma.cc/G8B7-MVYH>; CalRecycle, 11 Arrested in $2 Million Recycling Fraud Scheme (Jan. 27, 2020) <https://www.calrecycle.ca.gov/newsroom/2020/01jan/01>, archived at: <https://perma.cc/7APA-TGK9>; CalRecycle, State of Recycling in California (Feb. 2016), pp. 67-68 <https://www2.calrecycle.ca.gov/Publications/Download/1194>, archived at: <https://perma.cc/5FVJ-5HLN>.)
II
Factual and Procedural Background
On January 25, 2010, CalRecycle received a tip from a California Highway Patrol officer about "multiple vehicles coming from Nevada to Susanville with the bed of their pickups plum full of aluminum cans and plastic bottles."
Shortly after, in late February of 2010, CalRecycle began investigating the matter. It first reviewed records, prepared by another state agency, identifying vehicles with large loads of empty beverage containers that had recently entered California from Nevada through an inspection station near Susanville, California. It then, after identifying vehicles of interest, conducted surveillance near the border on multiple days in March and April of 2010. During the surveillance, CalRecycle "staff identified a total of 28 different vehicles coming from the Reno, NV area with loads of out-of-state and [plastic] used-beverage containers." Twenty-one of those vehicles sold materials to a recycler in Susanville named Bullseye Recycling, one sold materials to a recycler in a nearby city, and two, on one date in April of 2010, sold materials to Gonzales, who operated under the name USA Recycling.
CalRecycle's findings, along with those of other agencies, later led to a criminal investigation into those importing these containers that resulted in the seizure of over 70,000 pounds of empty beverage containers and the arrests of nine individuals, seven of whom ultimately pleaded "no contest" to felony fraudulent redemption of out-of-state containers. CalRecycle's findings also, relevant here, eventually led to an audit of USA Recycling that started on April 4, 2011. On that date, CalRecycle staff visited USA Recycling to monitor recycling transactions at the facility and, during the visit, requested over two years of the facility's records. The next day, April 5, 2011, USA Recycling provided most of the requested materials, and 10 days later, on April 15, 2011, CalRecycle sent a letter outlining violations it discovered during its initial review. CalRecycle then continued to monitor USA Recycling in the months ahead. In that time, CalRecycle found Gonzales and his staff failed to comply with several laws intended to prevent recycling fraud, including by, among other things, failing to inspect loads from customers to ensure they contained only eligible recycling material (see Cal. Code Regs., tit. 14, § 2501, subd. (a)) and failing to prepare proper receipts for transactions involving empty beverage containers with a refund value of $100 or more (see id., § 2525, subd. (a)).
Two years after it began its audit, on April 4, 2013, CalRecycle filed an administrative accusation against Gonzales. It later amended its accusation on April 15, 2014, to add Gonzales's wife, Rebekah Gonzales, as a respondent. In its accusation, CalRecycle raised four counts concerning the Gonzaleses' conduct between January 1 and March 31, 2011.
In count one, it alleged the Gonzaleses failed to prepare proper receipts for their transactions. With one exception irrelevant here, recycling centers must prepare and maintain a receipt "for any purchase or donation of empty beverage containers in the amount of one hundred dollars ($100.00) or more in refund value." These receipts must include, among other things, "[t]he basis for the refund value," the recycling center's certification number, certain identifying information about the person selling or donating the material, and "[t]he printed name and signature of the person selling or donating the material, or a statement explaining why such could not be obtained." (Cal. Code Regs., tit. 14, § 2525, subd. (a).) According to CalRecycle, the Gonzaleses prepared 2,055 receipts that failed to comply with these requirements.
In count two, CalRecycle alleged the Gonzaleses submitted false or fraudulent shipping reports. Recycling centers must prepare and submit a "shipping report" for each delivery of recyclable material to a processor. (Cal. Code Regs., tit. 14, § 2530, subd. (a)(2); see also § 14538, subd. (d)(7)(A).) These reports, like all reports "required pursuant to this division and submitted to [CalRecycle]," "shall be complete, legible, and accurate." (§ 14553, subd. (a); see also § 14597; Cal. Code Regs., tit. 14, § 2090, subd. (c).) According to the accusation, the Gonzaleses prepared 65 shipping reports that were based on their 2,055 improper receipts; and because these receipts were inaccurate and incomplete, the shipping reports were also inadequate and incomplete.
In count three, CalRecycle alleged the Gonzaleses submitted a false or fraudulent handling-fee application. Again, recycling centers located in a "convenience zone," like USA Recycling, may obtain a "handling fee" for eligible containers they redeem. (§§ 14509.4, 14513.4, 14585.) But they may not "claim[] or receive any . . . handling fee" for, among other things, "[b]everage container material that the person knew, or should have known, was imported from out of state." (§ 14595.5, subd. (a)(1)(A); see also §§ 14553, subd. (a), 14597; Cal. Code Regs., tit. 14, § 2090, subd. (c).) Per the accusation, the Gonzaleses obtained over $50,000 in handling fees in violation of this requirement.
Finally, in count four, CalRecycle alleged the Gonzaleses failed to properly prepare and maintain complete and accurate daily summaries of USA Recycling's transactions. Recycling centers must "prepare and retain daily summaries of all receipt and log transactions, including donations, for each shipping report." (Cal. Code Regs., tit. 14, § 2525, subd. (i).) These summaries "shall be complete, legible, and accurate." (§ 14553, subd. (a); see also Cal. Code Regs., tit. 14, § 2090, subd. (c).) According to CalRecycle's accusation, the Gonzaleses prepared at least some daily summaries that fell short of this requirement.
An administrative law judge (ALJ), after presiding over a hearing on the matter, issued a proposed decision in May 2015. At the start, the ALJ considered whether, as the Gonzaleses alleged, CalRecycle had filed its accusation too late. Under section 14552, as then written, CalRecycle needed to bring its enforcement action "within two years after [it] discover[ed], or with reasonable diligence, should have discovered," the Gonzaleses' violations. (Stats. 2008, ch. 696, § 9, p. 4710.) According to Gonzales, however, CalRecycle failed to file its accusation within this time period. The ALJ agreed in part. She found CalRecycle's date of discovery was April 15, 2011—the date the agency sent a letter to Gonzales describing certain violations it had discovered. Because CalRecycle filed its accusation against Gonzales within two years of that date, the ALJ found the action timely as to him. But because CalRecycle only added Rebekah Gonzales to the case on April 15, 2014, the ALJ found the action untimely as to her. The ALJ thus dismissed CalRecycle's claims against Rebekah Gonzales.
In 2014, the Legislature amended section 14552 to grant CalRecycle three extra years to bring enforcement actions. (Stats. 2014, ch. 35, § 142; see § 14552, subd. (b)(2).)
The ALJ next turned to the merits. She ultimately found Gonzales had committed the majority of the violations that CalRecycle alleged, including that Gonzales had submitted several inaccurate daily summaries of USA Recycling's transactions and prepared 2,055 inaccurate or incomplete receipts for transactions involving empty beverage containers with a refund value of $100 or more. But she found these violations only warranted penalties of $9,000, well below what CalRecycle sought, and rejected CalRecycle's remaining contentions concerning his shipping reports and handling-fee application.
CalRecycle's director, who had authority to accept or reject the ALJ's recommendations, declined to accept the ALJ's proposed decision. (See Gov. Code, § 11517, subd. (c)(2)(E).) He instead directed the parties to submit additional arguments on whether the ALJ's decision should be adopted or changed. After considering the parties' responsive submittals, he then issued his own decision. To begin, he agreed with the ALJ's decision concerning the statute of limitations and so, in reviewing the merits, focused only on Gonzales. He agreed too that Gonzales had prepared 2,055 inaccurate or incomplete receipts and submitted several inaccurate daily summaries of his facility's transactions. But, unlike the ALJ, he found Gonzales had also submitted an improper application for handling fees and 65 improper shipping reports. And he further found these violations were significant, as they facilitated recycling fraud and "result[ed] in up to $1,041,295.12 in actual damages to the California Beverage Container Recycling Fund."
Although the director appeared to find none of Gonzales's violations intentional, he found they reflected "negligence and incompetence in performance of [his] duties." He also found that negligence and incompetence particularly troubling as Gonzales had been operating USA Recycling for over 10 years. Finding greater penalties warranted than the ALJ had believed, he revoked Gonzales's right to operate USA Recycling and ordered him to pay $573,000 in penalties and $55,286.56 in restitution.
Gonzales afterward filed a complaint for declaratory relief and a petition for writ of mandate with the trial court. He alleged, as he had in the administrative proceedings, that CalRecycle filed its accusation after the statute of limitations had already run. But even if it had not, he added, CalRecycle's decision was not supported by substantial evidence and was impermissibly based on an "underground" regulation. To support his "underground" regulation claim, Gonzales sought judicial notice of two letters from CalRecycle that, he asserted, showed CalRecycle had imposed obligations not required by statute or regulation. But the trial court denied Gonzales's request for judicial notice and found none of his arguments persuasive. It thus denied his petition for writ of mandate and his request for declaratory relief. Gonzales timely appealed.
DISCUSSION
I
Statute of Limitations
We consider first Gonzales's contention that CalRecycle initiated its enforcement action too late.
Section 14552 supplies the relevant statute of limitations. At the time of the alleged conduct here, it provided: "Notwithstanding any other provision of law establishing a shorter statute of limitation, [CalRecycle] may take an enforcement action, including, but not limited to, an action for restitution or to impose penalties, at any time within two years after [CalRecycle] discovers, or with reasonable diligence, should have discovered, a violation of this [Act] or the regulations adopted pursuant to this [Act]." (Stats. 2008, ch. 696, § 9, p. 4710.)
A. The Date CalRecycle Discovered Gonzales's Violations
Starting with the date CalRecycle allegedly "discover[ed]" his misconduct, Gonzales, for several reasons, contends CalRecycle's director both misinterpreted section 14552 and misapplied the facts.
First, he asserts CalRecycle's director misinterpreted the term "discovers" in section 14552 to mean actual knowledge. In his view, CalRecycle "discovers" a violation when it suspects a violation, even if it lacks actual knowledge of the violation. He reasons that the common law discovery rule similarly starts the statute of limitations at the time a plaintiff discovers or should have discovered wrongdoing, and in that context, courts have found a plaintiff's suspicion is generally enough to start the clock. (See Norgart v. Upjohn Co. (1999) 21 Cal.4th 383, 397-398 [under the common law discovery rule, a "plaintiff discovers the cause of action when he at least suspects a factual basis . . . for its elements," and "[h]e has reason to discover the cause of action when he has reason at least to suspect a factual basis for its elements"].) Applying that same reasoning in this case, Gonzales contends CalRecycle's initial suspicion about USA Recycling—which, he asserts, began in 2010—was enough to trigger the statute of limitations here. And he contends CalRecycle's director wrongly found otherwise in part because he interpreted the term "discovers" to mean actual knowledge.
We reject the argument. Even supposing the term "discovers" in section 14552 means "suspects," something CalRecycle contests, we cannot say CalRecycle's director interpreted the term "discovers" differently. According to Gonzales, because CalRecycle's director found the agency first "discovered" his violations on April 15, 2011—the date it sent a letter documenting some of his violations—"[i]t is clear" the director believed the term "discovered" means actual knowledge. But it is not so clear in our view. CalRecycle's director very well may have concluded that the agency first suspected Gonzales on the same day it sent this letter. An agency, after all, certainly could first suspect and then find misconduct on the same day. Gonzales may believe that finding inappropriate based on the evidence in this case, something we address below; but we cannot, as he argues, say CalRecycle's director necessarily interpreted the term "discovers" to mean actual knowledge.
Second, Gonzales asserts that CalRecycle's director further misinterpreted the term "discovers" in section 14552 because he construed it to include only actual discovery and not also constructive discovery. We agree CalRecycle's director needed to consider constructive discovery, something we will get to in part I.B. of the Discussion below. But we find Gonzales mistaken in believing this requirement derives from the "discovers" language in section 14552. Whether CalRecycle "discover[ed]" a violation is a subjective consideration based on actual "discovery"; whether CalRecycle "should have discovered" a violation, on the other hand, is an objective consideration—and it is a topic we will address when we turn to Gonzales's argument concerning section 14552's "should have discovered" language. (See Kitzig v. Nordquist (2000) 81 Cal.App.4th 1384, 1391 [statute providing " 'the statute of limitations begins to run when the plaintiff suspects or should suspect' " wrongdoing "sets forth two alternate tests for triggering the limitations period: (1) a subjective test requiring actual suspicion by the plaintiff that the injury was caused by wrongdoing; and (2) an objective test requiring a showing that a reasonable person would have suspected the injury was caused by wrongdoing"].)
Third, Gonzales contends "substantial evidence does not support the lower court[']s decision as to the statute of limitations"—which we interpret to be a challenge to CalRecycle's director's decision on the statute of limitations. (See Vineyard Area Citizens for Responsible Growth, Inc. v. City of Rancho Cordova (2007) 40 Cal.4th 412, 427 [an appellate court's review of the administrative record for legal error in mandamus cases "is the same as the trial court's: The appellate court reviews the agency's action, not the trial court's decision"].) In Gonzales's view, because CalRecycle suspected wrongdoing more than two years before it initiated this action, and because the statute of limitations began running at that time, CalRecycle's director needed to find this action untimely. Even assuming the word "discovers" means "suspects," we disagree.
Courts, as Gonzales notes, have often said in cases concerning the common law discovery rule that a "plaintiff discovers the cause of action when he at least suspects a factual basis, as opposed to a legal theory, for its elements." (Norgart v. Upjohn Co., supra, 21 Cal.4th at p. 397.) But courts have also made clear that this is only the general rule. (Fox v. Ethicon Endo-Surgery, Inc. (2005) 35 Cal.4th 797, 807 [a plaintiff's "suspicion of one or more of the elements of a cause of action, coupled with knowledge of any remaining elements, will generally trigger the statute of limitations period" (italics added)].) And they have also clarified that not any suspicion will do; the "suspicion must be meaningful." (Kitzig v. Nordquist, supra, 81 Cal.App.4th at p. 1393.)
The question here, then, concerns when CalRecycle "meaningful[ly]" suspected the violations Gonzales allegedly committed between January and March of 2011. In particular, it concerns whether CalRecycle meaningfully suspected these violations before April 5, 2011 (in which case this action would be time-barred) or on or after April 5, 2011 (in which case this action would not be time-barred). CalRecycle's director believed the latter was true, and we find substantial evidence in the record supports that conclusion.
Before April 5, 2011, CalRecycle had only limited information about Gonzales's conduct, all of which appeared to concern Gonzales's conduct in early 2010. It had a January 2010 e-mail from a California Highway Patrol officer about "multiple vehicles coming from Nevada to Susanville with the bed of their pickups plum full of aluminum cans and plastic bottles." It had records showing recycling at USA Recycling had substantially increased over time. And it had noticed, following surveillance in April and March 2010, two vehicles coming from Nevada unload cans and bottles at USA Recycling. One of CalRecycle's staff, based on this information, said the agency suspected "[o]ut-of-state material was coming in to Susanville" and was "aware" that USA Recycling had received some of these materials.
Gonzales contends CalRecycle also, by April 5, 2011, had discovered certain violations at USA Recycling from the audit that began on April 4, 2011. But he offers no citation to support this claim. Nor has he shown that the purported violations discovered on April 4, 2011, have any relation to the violations relevant to this case.
But although, in 2010, CalRecycle suspected those who imported beverage containers into California were doing so unlawfully, it is not clear that it also, at this time, meaningfully suspected that those who received the materials were themselves acting unlawfully. After all, as CalRecycle staff testified, beverage containers sold out of state are often "marked California CRV" and are otherwise identical to those sold in state; and so California recycling facilities, in some instances at least, may have no reason to suspect that containers they receive are from out of state. (See Alamo Recycling, LLC v. Anheuser Busch InBev Worldwide, Inc., supra, 239 Cal.App.4th at p. 989 ["[n]either the Act nor its implementing regulations prohibit out-of-state beverage containers from being labeled with 'California Redemption Value' "].) Other considerations, to be sure, may nonetheless cause a recycling facility to suspect that containers labeled as having a "California Redemption Value" are actually from out of state—for example, when the person delivering the containers has an out-of-state license plate. But notably here, neither of the two out-of-state vehicles CalRecycle observed unloading containers at USA Recycling had Nevada plates; both, it appears, had California plates. And even supposing Gonzales nonetheless had reason to suspect the out-of-state nature of these containers, that still would not necessarily indicate unlawful conduct. As CalRecycle staff testified, even if a California recycling facility knows containers it receives are from out of state, it can still (or at least could in 2010) accept the containers and pay the scrap value of the containers; it just cannot pay a CRV for the containers. Considering this record, even though CalRecycle was "aware" that two vehicles (again, notably, vehicles with California plates) delivered out-of-state materials to USA Recycling in early 2010, it is not clear that the agency meaningfully suspected Gonzales of any wrongdoing at this time.
We find that true even though CalRecycle understood, at the time it began its surveillance in early 2010, that its investigation could lead to administrative actions against recycling entities. On that topic, Gonzales makes much of the fact that CalRecycle, at that time, said information it gathered "may be used as the basis for CalRecycle to initiate administrative action against certified program entities." But we decline to equate CalRecycle's general pronouncement that its investigation could potentially implicate certified program entities with the agency's meaningful suspicion of a specific program entity. We also decline to find CalRecycle's later decision to conduct an audit at USA Recycling, among other facilities, necessarily reflected a meaningful suspicion about Gonzales's conduct. CalRecycle, after all, may audit recycling facilities to confirm compliance even when it does not suspect any wrongdoing. (§ 14552, subd. (b).) And although CalRecycle in this case, after learning "[o]ut-of-state material was coming in to Susanville," may have thought it a good idea to confirm compliance at recycling facilities in and around Susanville, including Gonzales's own, we cannot necessarily equate this desire to confirm compliance at these facilities with meaningful suspicion of these facilities. (See Brovelli v. Superior Court (1961) 56 Cal.2d 524, 529 [an agency can investigate " 'because it wants assurance' " the law is not being violated, even if it lacks suspicion].)
CalRecycle's director perhaps could have found differently on the facts of this case. But what matters is not whether there is any evidence supporting a different conclusion. What matters is whether a "reasonable person could reach the conclusion reached by the administrative agency, based on the entire record before it." (Doe v. Regents of University of California (2016) 5 Cal.App.5th 1055, 1073 [" 'Only if no reasonable person could reach the conclusion reached by the administrative agency, based on the entire record before it, will a court conclude that the agency's findings are not supported by substantial evidence' "].) And because we find a reasonable person could have reached the conclusion CalRecycle's director reached, even if others might have found differently, we will not disturb that conclusion.
B. The Date CalRecycle Should Have Discovered Gonzales's Violations
Branching beyond whether CalRecycle "discover[ed]" his violations before April 5, 2011, Gonzales further contends CalRecycle's director neglected to consider whether the agency "should have discovered" his violations before April 5, 2011. On this point, we agree.
The director, at the start of his analysis, correctly described the relevant statute of limitations. He noted that, under section 14552, the statute of limitations began to run once CalRecycle "discover[ed], or with reasonable diligence, should have discovered" the relevant violations. And applying the first part of this statute, like the ALJ, he found CalRecycle "had 'discovered' specific operating and record-keeping violations" as of April 15, 2011. But he never considered whether the agency "should have discovered" the alleged violations before that date—even though Gonzales specifically raised that issue in his briefing. That was improper. (See Topanga Assn. for a Scenic Community v. County of Los Angeles (1974) 11 Cal.3d 506, 514 [an agency, in its adjudicative decisions, "must render findings sufficient both to enable the parties to determine whether and on what basis they should seek review and, in the event of review, to apprise a reviewing court of the basis for the [agency's] action"].)
CalRecycle, in its briefing, never directly addresses this shortcoming in the director's decision. It instead appears to presume the director found that CalRecycle "should have discovered" Gonzales's violations no earlier than April 5, 2011, and then asserts that substantial evidence supports this conclusion. But the director needed to at least make some finding on this topic before we could resort to review for substantial evidence. "The substantial evidence test," after all, "compels courts only to sustain existing findings supported by such evidence, not to hypothesize new findings." (Sierra Club v. City of Hayward (1981) 28 Cal.3d 840, 859, superseded by statute on other grounds in Friends of East Willits Valley v. County of Mendocino (2002) 101 Cal.App.4th 191, 204-205.)
Taking the director's findings as they are, we cannot say the director ever considered whether CalRecycle "should have discovered" Gonzales's violations before April 5, 2011. This shortcoming, which left Gonzales unaware of the basis for the director's ruling and undermined our ability to conduct effective review, rendered the director's decision inadequate. (See Sierra Club v. City of Hayward, supra, 28 Cal.3d at pp. 858-859 [finding improper a city's adjudicative decision that lacked "explicit" findings showing it applied the relevant statutory requirements]; Topanga Assn. for a Scenic Community v. County of Los Angeles, supra, 11 Cal.3d at pp. 511-515, 519-521 [same]; Madain v. City of Stanton (2010) 185 Cal.App.4th 1277, 1289 [finding improper a city's adjudicative decision that failed to address an "important" issue raised by the party before it].)
II
Underground Regulation
The director's failure to fully address Gonzales's statute-of-limitations argument is reason enough to warrant reversal without considering Gonzales's remaining contentions. But because these remaining contentions will arise again if the director finds the action timely, we address them here in the interest of judicial economy.
We start with Gonzales's argument that CalRecycle's enforcement action is based on an "underground regulation."
State agencies, with few exceptions irrelevant here, must adopt regulations following the procedures established in the Administrative Procedure Act (Gov. Code, § 11340 et seq.). When an agency attempts to enforce a rule without following these procedures, the rule is often called an "underground" regulation and found invalid. (People v. Medina (2009) 171 Cal.App.4th 805, 813-814.)
According to Gonzales, CalRecycle's action here is premised on one such underground regulation—a May 2011 letter that CalRecycle sent to recycling facilities about out-of-state beverage containers and that CalRecycle later said was neither intended nor would be used to impose additional obligations on recycling facilities. In that letter, CalRecycle noted that existing law prohibits recycling facilities from paying for beverage container material that they know or should know is ineligible for redemption. (See § 14595.5, subd. (a).) It then noted certain "indicators" tending to show a beverage container "is not from a legitimate source," including, for example, "[l]arge quantities of used beverage containers delivered in rental trucks." In Gonzales's view, although CalRecycle said the May 2011 letter did not impose new obligations, the agency's decision here was nonetheless based in part on obligations imposed in this letter.
But Gonzales's argument suffers from a significant flaw: The May 2011 letter is not properly part of the record before us. At the trial level, Gonzales moved the court to take judicial notice of CalRecycle's May 2011 letter and another CalRecycle letter. But the trial court denied Gonzales's request. And now, without even acknowledging the court's denial of his request, Gonzales presents his argument as if CalRecycle's letter is already appropriately part of the record. It is not. Gonzales never argues the trial court erred in denying his request for judicial notice, nor does he seek judicial notice in this court. Because, as a result, the May 2011 letter is not properly part of the record on appeal, we reject his argument premised on that letter. (See Tenet Healthsystem Desert, Inc. v. Blue Cross of California (2016) 245 Cal.App.4th 821, 834 [letters found not properly part of the appellate record when the trial court declined to judicially notice the letters and no party appealed that decision or sought judicial notice on appeal].)
III
Substantial Evidence
We consider next Gonzales's claim that the imposed restitution and civil penalty amounts were not supported by substantial evidence.
A. Restitution Award
We begin with Gonzales's challenge to the restitution award, which concerned the over $50,000 in handling fees that Gonzales received in January 2011.
Gonzales received these fees, again, because he operated in what is known as a "convenience zone"—which, in general, is statutorily defined to mean the area within a one-half mile of a supermarket. (§ 14509.4.) Recyclers who operate in these zones may receive a "handling fee" for eligible containers they redeem (§§ 14509.4, 14513.4, 14585), and, according to one of Gonzales's fee requests, he was entitled to over $50,000 in these fees in January 2011.
But CalRecycle, in its accusation, challenged Gonzales's receipt of these fees and the agency's director later agreed. Because Gonzales supported his January 2011 request for handling fees using receipts and logs that were, in the director's view, either inadequate or incomplete, the director ordered Gonzales to repay the fees he received. The director reasoned these receipts and logs were inadequate because "(1) one purchase exceeded the daily load limit" of 250 pounds (Cal. Code Regs., tit. 14, former § 2530, subd. (i)), "(2) three transactions over $100.00 were not receipted" (Cal. Code Regs., tit. 14, § 2525, subd. (a)), "(3) 2,055 receipts did not have the basis for refund value" (id., subd. (a)(3)), "(4) 617 receipts did not have [USA Recycling's] correct certification number" (id., subd. (a)(4)), "(5) 1,622 of the receipts did not have both the printed name and signature of the customer" (id., subd. (a)(6)), and "(6) 1,292 of the receipts did not have valid identifying information" for the customer (id., subd. (a)(7)).
According to Gonzales, the director's decision to require the repayment of the January 2011 handling fees "lacked foundation and was speculative" for several reasons. But we find none of his arguments persuasive. First, he asserts the director's decision wrongly relied on one witness's speculative handwriting analysis. This witness, as Gonzales notes, testified about potential indicators of fraud in Gonzales's paperwork, including frequent erasures. But according to Gonzales, all this witness's testimony "was an exercise in guesswork and speculation." Even supposing that were true, however, we fail to see how that supports his argument here. Although the director referenced matters relating to this witness's handwriting analysis, his restitution award was ultimately not premised on that testimony; it was instead premised on the 2,055 inadequate or incomplete receipts.
Second, Gonzales suggests the director arbitrarily disqualified transactions involving 250 pounds of materials, redemptions just under $100, and customers who dropped off beverage containers more than four times. But the director did not order restitution because some transactions exhibited these characteristics. Instead, he ordered restitution because Gonzales's January 2011 request for handling fees was based on receipts that were either inadequate or incomplete.
Third, Gonzales claims the director's decision wrongly disregarded the ALJ's finding that neither he nor his wife intentionally falsified records. The director, however, acknowledged the ALJ's finding that the Gonzaleses did not intentionally falsify records and, agreeing with that finding, ultimately found the Gonzaleses submitted falsified records, not intentionally, but "due to [their] negligent and improper record keeping."
Lastly, as to restitution, Gonzales contends CalRecycle never satisfied the statutory criteria for restitution under section 14538—which allows CalRecycle to recover certain payments made to a recycler that are based on consumer transaction receipts and logs "that are not prepared or maintained in compliance with [CalRecycle's] regulations, and that do not allow [CalRecycle] to verify claims for program payments." (§ 14538, subd. (e).) In particular, although he acknowledges his receipts were inadequate, Gonzales contends CalRecycle failed to show his receipts were so inadequate that they prevented the agency from verifying his claims for handling fees, and, "as such, restitution cannot be ordered." He reasons CalRecycle "only attempted to contact a few of the individuals who recycled at USA [Recycling] and the result of those attempts failed to prove that the claims were fraudulent." But because he offers no record citations to support this claim, we find this argument forfeited. (Cal. Rules of Court, rule 8.204(a)(1)(C) [each brief must "[s]upport any reference to a matter in the record by a citation to the volume and page number of the record where the matter appears"]; Jumaane v. City of Los Angeles (2015) 241 Cal.App.4th 1390, 1406 [courts "may disregard any claims when no reference [to the record] is furnished"].)
B. Civil Penalties
We turn next to Gonzales's challenge to the imposed civil penalties.
The Act authorizes CalRecycle to impose up to $5,000 in penalties for each intentional or negligent violation of the Act. (§ 14591.1, subd. (b).) Based on this authority, CalRecycle's director imposed penalties in the total amount of $573,000. This included $405,500 in penalties for 1,622 of the receipts found in violation of receipt requirements ($250 per violation; Cal. Code Regs., tit. 14, § 2525, subd. (a)), $162,500 in penalties for the 65 shipping reports found to include inaccurate information ($2,500 per violation; § 14597, subd. (b)), and $5,000 in penalties for the daily summary reports found to be inaccurate (Cal. Code Regs., tit. 14, § 2525, subd. (i)).
Gonzales challenges these penalties for various reasons, none of which we find persuasive. He first argues the penalties concerning the shipping reports are inappropriate for the same reasons as the restitution award. But for the reasons discussed in part III.A. of the Discussion, ante, we find none of those arguments persuasive. He also contends the penalty amount was improper because it was based in part on an underground regulation. But that contention too is premised on an argument we have already rejected. (See Part II of the Discussion, ante.)
Gonzales further asserts the penalty amount was improper because the director based it in part on the finding that he intentionally falsified documents, which it rejected in other parts of its decision. But because Gonzales never cites anything in the record to show this claimed inconsistency, we reject the claim. (Cal. Rules of Court, rule 8.204(a)(1)(C) [parties must "[s]upport any reference to a matter in the record by a citation . . . where the matter appears"].)
Gonzales next contends the penalty should have been lower because (1) his violations were minor and covered only a short period and (2) CalRecycle "failed to present any evidence that [it] could make a determination as to [his] ability to pay the excessive civil penalties." We reject these contentions. Although Gonzales argues his violations were minor and short-lasting, CalRecycle's director found differently. According to the director, the Gonzaleses committed thousands of violations that "result[ed] in up to $1,041,295.12 in actual damages to the California Beverage Container Recycling Fund"—a conclusion Gonzales never effectively rebuts. We are thus not persuaded that his violations were only minor and short-lasting. Nor are we persuaded by Gonzales's claim concerning his ability to pay. Although CalRecycle's director needed to consider Gonzales's ability to pay (§ 14591.1, subd. (e)), CalRecycle's enforcement unit did not have the burden to show Gonzales was in fact able to pay the penalty it sought. Courts, for good reason, have long found defendants in these types of circumstances have the burden to show their inability to pay civil penalties. (See People v. First Federal Credit Corp. (2002) 104 Cal.App.4th 721, 729 [discussing civil cases "making the defendant's financial inability to pay the penalty a matter for the defendant to raise in mitigation"].) A defendant, after all, is clearly the best source of information about his or her own ability to pay a penalty, and nothing in the statutory scheme here suggests we should depart from the general rule that defendants have the burden to raise their inability to pay a civil penalty.
Finally, Gonzales suggests the penalty amount is improper because CalRecycle's director, at one point in his decision, said Gonzales's failure to follow record-keeping requirements prevented CalRecycle from pursuing those who were delivering containers ineligible for redemption—a statement Gonzales calls "outrageous." But we fail to understand how this statement shows the penalty amount was improper. Nor do we find the statement to be altogether "outrageous." It is not, in our view, outrageous to conclude that CalRecycle would have been better able to find those who delivered ineligible containers had Gonzales properly identified those persons in the receipts he was required to prepare.
DISPOSITION
The trial court's order denying Gonzales's petition for writ of mandate is reversed, and the case is remanded to the trial court. The trial court is directed to issue a writ of mandamus requiring CalRecycle's director to vacate his decision and reconsider whether, as Gonzales alleges, CalRecycle "should have discovered" Gonzales's violations before April 5, 2011. Gonzales is entitled to recover his costs on appeal. (Cal. Rules of Court, rule 8.278(a).)
/s/_________
BLEASE, Acting P. J. We concur: /s/_________
ROBIE, J. /s/_________
RENNER, J.