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Maritime Update: United States v. CITGO Petroleum Corp.


5th Circuit Remands Case for Determination of Economic Benefit Damages Under Clean Water Act

United States v. CITGO Petroleum Corp., No. 11-31117, (5th Cir. July 17, 2013) http://www.ca5.uscourts.gov/opinions/pub/11/11-31117-CV0.wpd.pdf

In 2006, a severe rainstorm caused two wastewater storage tanks at CITGO’s Lake Charles, Louisiana refinery to fail. Over two million gallons of oil flooded into the surrounding waterways. The spill forced the closure of a nearby navigation channel for ten days, disrupting local businesses. Recreational activities on the impacted waterways were restricted for weeks following the spill. The spill also damaged over 100 acres of marsh habitat. Fish and other aquatic life were adversely impacted, and several birds were killed.  In April 2007, the Louisiana Department of Environmental Quality issued a compliance order, citing CITGO for violations of water quality laws as a result of the 2006 spill. The Department required corrective action and notified CITGO of the potential penalties it faced.

In June 2008, the United States and Louisiana filed suit seeking civil penalties and injunctive relief under the Clean Water Act (“CWA”), and Louisiana sought penalties and costs as provided by the Louisiana Environmental Quality Act.  CITGO conceded liability and the court held a trial solely on the issue of damages.

The court found that CITGO had failed to maintain its wastewater storage tanks properly and had allowed sludge and waste oil to  accumulate in the tanks, lessening their capacity to accommodate stormwater. The court noted that CITGO violated its own standard operating procedures by allowing the tanks to become overburdened. Additionally, CITGO.  was forced to make several unauthorized discharges of oily wastewater, totaling over 30 million gallons, into a surge pond to prevent the wastewater storage tanks from overflowing.  The district court concluded that CITGO’s numerous failures amounted to ordinary negligence, rejecting the government’s argument for a finding of gross negligence. The court noted that at the time of the spill, CITGO had designed a plan to address its overloaded storage tanks. Additionally, CITGO had taken steps to improve the plant, including the addition of a third wastewater storage tank, which was under construction at the time of the spill. Finally, the court recognized that an “exceptional amount of rain”– approximately 11 inches – had fallen on the day of the spill. The court reasoned that had the rainstorm not been so massive, the tanks likely would not have overflowed.

The Court determined that CITGO should be penalized under the CWA on a per-barrel basis.  33 U.S.C. § 1321(b)(7)(A). The court found that under “the totality of the circumstances,” a per-barrel penalty of $111 was reasonable.  Approximately 54,000 barrels of oil had spilled into the waterways.  The district court therefore assessed a civil penalty of $6 million. The court also ordered extensive injunctive relief, which included the requirement that CITGO build a fourth storage tank.

The government appealed, arguing that the penalty assessed by the district court was inadequate.  The 5th Circuit reversed and remanded.  The Court found that the district court failed to consider the economic benefit to CITGO by delaying capital expenditures and maintenance costs on pollution control equipment.

A district court generally must “make a ‘reasonable approximation’ of economic benefit when calculating a penalty under the CWA.  ”There are two general approaches to calculate economic benefit: “(1) the cost of capital, i.e., what it would cost the polluter to obtain the funds necessary to install the equipment necessary to correct the violation; and (2) the actual return on capital, i.e., what the polluter earned on the capital that it declined to divert for installation of the equipment.”   The remaining factors include the seriousness of the violation, history of prior violations, efforts to minimize or mitigate the spill’s effects, and consideration of any other matters as justice may require.

The district court found that CITGO had decided to forgo certain maintenance projects that would have prevented the spill in an effort to minimize costs and increase profits. The court found, though, that the exact amount of cost savings was “almost impossible to determine” given the numerous and conflicting estimations of economic benefit presented by the parties at trial. Therefore, the district court did not quantify the economic benefit to CITGO.  The 5th Circuit interpreted the district court’s analysis to have left economic benefit as a non-factor, and that proper consideration of economic benefit is integral to arriving at an appropriate damage award.  The 5th  Circuit concluded that the district court needed to have made a finding on the amount of economic benefit, and that such a finding is central to the ability of a district court to assess the statutory factors and for an appellate court to review that assessment. The Court therefore vacated the civil penalty award and remanded for reevaluation.  The 5th Circuit concluded that regardless of how the district court exercises its discretion on determining damages, the economic benefit factor creates “a nearly indispensable reference point.”

The government also argued on appeal that the district court erred by not finding that CITGO’s violation was the result of gross conduct or willful misconduct, which may have subjected it to a higher per-barrel civil penalty under the CWA.  23 U.S.C. § 1321(b)(7)(D).  The 5th Circuit declined to rule on that issue.  The Court stated that the category of negligence into which CITGO’s conduct is placed is part of the overall analysis underlying the setting of the appropriate penalty. The Court noted that the district court will have the obligation on remand to re-analyze the civil penalty award. The 5th Circuit stated that “at that time, the district court should reconsider all its findings with respect to CITGO’s conduct, giving special attention to what CITGO knew prior to the oil spill and its delays in addressing recognized deficiencies.”

Learning point:  The CWA’s penalty provision is a strict-liability provision and allows for the imposition of penalties up to $1,100/barrel even in the absence of negligence. See 33 U.S.C. § 1321(b)(7)(A) and 40 C.F.R. § 19.4.  The district court’s process of weighing the penalty factors is “highly discretionary” and its determination of the amount of a penalty to be assessed is reviewed under the highly deferential abuse-of-discretion standard.  Nevertheless, the district court is required to conduct an economic benefit analysis when assessing civil penalties under the CWA.


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