Volume 18, Number 3
April/May 2001

Underground Storage Tanks

Walter G. Wright, Jr.

Several environmental issues arise with sufficient frequency that a practitioner is likely to encounter them whether or not specializing in that area of law. Examples include lead-based paint, asbestos, and petroleum underground storage tanks (USTs). USTs are arguably the most significant issue, because of challenges both to identify them and/or to quantify associated liabilities. Further, the presence of USTs at a facility requires consideration of the feasibility or desirability of employing various risk management mechanisms to address potential liabilities.

The private practitioner is most likely to encounter UST issues in one of two scenarios. Their presence on facilities or properties being purchased, sold, or financed may necessitate that potential liabilities associated with them be quantified. Or, a practitioner may be asked to prosecute or defend a claim that a spill or leak from a UST caused property damage and/or bodily injury. Advising clients requires an understanding of environmental issues associated with USTs and government programs developed to address them.

An additional issue in the past two years has been the concern expressed by government agencies and private groups that a gasoline additive/oxygenate known as methyl tertiary butyl ether (MTBE) heightens risks associated with leaks or spills from USTs. Therefore, the real or perceived impact of MTBE must now also be addressed.

USTs are a common presence in our communities because they are or were used by a wide variety of facilities to store and dispense motor fuels or other petroleum products. Businesses or government agencies such as service stations, bus terminals, police and fire departments, airports, utilities, construction companies, car and implement dealerships, food/beverage distributors, freight forwarders, and schools commonly depend on USTs to fuel fleets of vehicles or dispense petroleum products to the public. The number of petroleum USTs in the United States is estimated to be from 750,000 to 1.2 million.1 Further, hundreds of thousands of USTs have been removed from various properties and facilities during the past 15 years.2 Federal and most state environmental statutes define USTs as:

Any one or combination of tanks (including underground pipes connected thereto) which is [sic] used to contain an accumulation of regulated substances, and the volume of which (including the volume of the underground pipes connected thereto) is 10 per centrum or more beneath the surface of the ground.

The traditional motivation for placing tanks underground has been (and continues to be) the belief that explosions or fires associated with storage of flammable liquids is reduced. Consequently, many state and local fire codes restrict to some extent the storage of petroleum products and other substances in aboveground storage tanks.

In the mid-1980s, the United States discovered that safety benefits derived from the use of USTs had been offset by potential environmental problems. A substantial number of USTs were found to have suffered leaks or spills (generically known as "releases"). These releases sometimes contaminated soil and groundwater, requiring significant expenditures for investigation and remediation. Causes of UST leaks are usually corrosion, system rupture, punctures, external stress, and/or faulty construction or installation. Also, a spill may occur when filling a tank or vehicle from the aboveground portion of the tank.

Not all petroleum leaks or spills threaten public health and the environment. For example, whether or not a given leak or spill will adversely impact groundwater can depend on the time it takes to check the release, soil conditions, proximity of groundwater, and characteristics of the aquifer. Nevertheless, congressional concern about the number of UST releases resulted in a statutory mandate that the federal Environmental Protection Agency (EPA) promulgate a set of regulations addressing various aspects of tank operation and deactivation.

Regulatory Requirements

A detailed set of federal regulations now dictates minimum requirements for UST design and maintenance, along with required responses (reporting, investigation, corrective action) in the event of a leak or spill. Identical or more stringent requirements are found in most states. Regulations include a requirement that the tank be initially designed or upgraded to prevent corrosion. Operation and maintenance requirements include various approved methods to determine whether the USTs have suffered a release and retaining records sufficient to document surveillance. These regulatory mandates have generated a variety of issues relevant to a practitioner addressing USTs in the transactional or litigation contexts.

Facility cost/investment. Installa-tion and/or prospective operation of USTs can entail capital and operation and maintenance costs. These costs must be considered when determining the profitability and/or value of the facility. Regulations required that operating USTs meet corrosion protection and other requirements by 1998. Facilities that failed to meet these requirements pose an obvious concern and are potential targets for government enforcement. They are more likely to leak and represent a future expenditure of monies to meet upgrade requirements. A number of states now prohibit by statute the delivery of petroleum products to USTs that have been identified as having failed to meet the standards.

Generation of information. Federal and state UST regulations require the generation and retention of information that can be helpful in assessing past or current operation of the equipment. For example, UST owners or operators must submit notification forms to the relevant agency providing information concerning tank design, leak detection capabilities, and so forth. Further, leak detection monitoring results must be maintained by the facility.

Other important documents include closure records. The area around a UST must be sampled at the time it is removed or taken out of service, and these sampling results must be submitted to the relevant agency. If further investigation and/or remediation is required, other reports also must be prepared for agency approval.

The regulations require that the UST owner/operator notify the agency in the event a release is discovered. Such notifications should be available for inspection at the relevant agency when assessing a facility, and the resolution (i.e., false alarm, remediation, etc.) of all reported releases must be determined.

UST State Trust Funds

Most states have created a trust fund that provides owners and/or operators of eligible USTs that suffer a petroleum release reimbursement of up to $1 million for both corrective action (i.e., remediation of leaks and spills) and third-party claims for property damage and/or bodily injuries. A UST's eligibility for trust fund reimbursement is typically predicated on a determination that certain statutory prerequisites have been met. Eligibility criteria include a demonstration that the UST was in substantial compliance with the relevant regulations, the agency was notified of the release in a timely manner, and the tanks were registered and certain fees paid. Payment of such investigative/remediation costs and/or third-party damages is usually required to meet certain criteria. For example, a determination is typically undertaken to determine whether the claim for costs and damages is reasonable and fits within the scope of the reimbursement scheme.

Transactional Issues

The potential for contamination originating from USTs at a specific facility usually must be addressed in an acquisition, lease, or loan agreement. Aggregate risks related to overall UST population numbers presumably are declining as new tanks are installed that meet required minimum design standards and existing tanks are upgraded. Regardless, tens of thousands of new releases are discovered every year. A transaction that involves one or more properties that currently or formerly held USTs, therefore, will often require quantification of such risks. An analysis initially attempts to determine the likelihood and/or magnitude of associated contamination. If contamination is deemed likely, the estimated cost of investigation/remediation and potential liability associated with third-party bodily injury/property damage claims will be considered. These issues involve various parties in a commercial transaction, such as buyer, seller, lender, lessor, and lessee. Different risk-management mechanisms may be utilized to address to varying degrees the liabilities associated with USTs.

Risk Management Mechanisms

UST trust funds. A state trust fund can potentially play a role in addressing the potential corrective action and/or third-party bodily injury/property damage liabilities that may be associated with a preexisting leak or spill. If a given UST is trust fund eligible, significant possibility exists that a reimbursement can be made for remediation and/or third-party expenditures. A critical issue in such a transaction is whether the UST meets the statutory prerequisites for reimbursement (if needed) or, if not, whether eligibility can be regained. Various issues may arise when parties contemplate the potential use of trust funds in the transactional context. An example is the potential impact of a state trust fund on a lease transaction. Federal and state regulations typically impose responsibility for compliance with these programs on both the owner and operator of the USTs. Therefore, a lessor will have an interest in drafting and enforcing lease language that requires the lessee to comply strictly with UST regulations. The lessor/UST owner must recognize, however, that it will also be held liable regardless of whether the lessee/UST operator was contractually responsible for compliance with the regulations. Interestingly, the potential availability of a state trust fund might encourage the lessor to incorporate incentives in the lease for the lessee to maintain strict UST regulatory compliance. For example, the lessor may agree to assume responsibility for various costs associated with UST leaks or spills if the lessee does what is necessary to maintain trust fund eligibility. This benefits both the lessor and lessee. State trust funds also play a significant role in addressing lenders' qualms about financing acquisition or leasing of properties with USTs. Nevertheless, the trust fund's usefulness is again dependent upon the eligibility of the relevant USTs. The lender must determine that the prerequisites for trust fund eligibility are in place at the inception of the loan and maintained thereafter. Lenders may require a periodic "compliance check" to ensure that the relevant USTs meet relevant requirements during the life of the loan. If trust eligibility is maintained, the lender may be able to recover the value of the property even if the defaulted collateral is subsequently determined to have suffered a UST release.

A trust fund can also have consequences for plaintiffs and defendants involved in third-party bodily injury/property damage claims related to UST releases. A plaintiff pursuing common law environmental damage claims will often attempt to prove that the defendant violated federal and/or state environmental regulatory provisions. In some UST scenarios, such allegations may pose a problem. If the defendant UST owner or operator is thinly capitalized and/or does not have insurance (which often occurs), a state trust fund may be the only source of funds for the plaintiff. A key question is whether proof of UST violations jeopardizes trust fund eligibility. Likewise, UST owners/operators settling government enforcement actions for alleged regulatory violations must do so without admission of violations for trust fund eligibility purposes. Trust funds typically have specific procedures for settlement of third-party claims and will specify an approval process along with the type of damages that are covered. It is critical that both the defendant UST owner/operator and plaintiffs' counsel understand this process.

Due diligence. Various parties as a matter of course undertake environmental audits or assessments of the properties or facilities that are involved in a commercial transaction. Due diligence associated with the assessment of facilities with USTs must include the preceding information, pursuant to applicable regulations. However, an assessment may also be used to establish a baseline at the time of the transfer (such as information on environmental conditions existing at the time of closing, against which future changes can be judged). This may be particularly important if a buyer and/or lessee will be operating the same USTs.

Closure/cleanup standards. An audit or assessment of a property with USTs will often determine that constituents of a petroleum product are present. An important question is whether the results constitute a regulatory violation and/or may trigger investigation/remediation activities. A decade ago, neither the federal government nor most states provided guidance as to appropriate cleanup criteria or action levels for various types of properties. However, in the case of USTs, states often set action levels that could be used to determine the level of environmental and health protection that could be achieved by a corrective or remedial action.5 The status of the facility in relation to applicable action or cleanup levels is relevant to determine the likelihood and extent of prospective investigation/remediation obligation or third-party claims.

Action levels can also play an important role in warranties, covenants, indemnities, and other provisions usually placed in commercial documents to address environmental issues.6 They are sometimes used as triggers or benchmarks delineating whether a warranty/covenant was violated or an indemnity is applicable. The environmental condition of a property is frequently a key issue in the negotiation of an acquisition or lease. For example, the seller and purchaser will negotiate the acceptable level or amount of substance(s) that might be present in soil and/or groundwater. Sellers or lessors are rarely willing to warrant the complete absence of non-natural substances, even in the case of unimproved properties. Instead, a warranty will often be tied to compliance with relevant laws or regulations or an action level promulgated by a governmental agency. Parties to an agreement attempting to use such contractual clauses to encompass certain environmental conditions must therefore draft with clarity.

Tax Considerations

The IRS's treatment of certain environmental costs is relevant to some UST activities. The classification of expenses for federal tax purposes can be an important financial issue. Tax treatment of various costs involved with USTs and associated contamination was the subject of an IRS guidance, Coordinated Issue: Petroleum Industry Replacement of Underground Storage Tanks at Retail Gasoline Stations.7 The document establishes that when a UST is removed and replaced:

  • Removal and replacement of the USTs are capital expenditures.
  • Soil and remediation expenses are deductible if incurred by the tax payer at a contaminated facility.

Monitoring systems, wells, or other equipment associated with remediation of contamination must be capitalized to the basis of the equipment. If the UST is removed but not replaced:

  • Removal of the UST and associated soil remediation are deductible unless the costs are incurred to adapt the property to a different use.
  • Installation of monitoring systems, wells, or other capital assets associated with remediation of contaminated areas must be capitalized.

MTBE: A New Development

Issues concerning the additive or fuel oxygenate MTBE continue to develop. MTBE is one of two oxygenates utilized in various areas of the country to attempt to meet air pollution emission requirements mandated by 1990 amendments to the Clean Air Act. The recent focus on MTBE stems from reports that it is frequently found in groundwater in various areas of the country. There is nothing novel about the presence of constituents derived from petroleum products in soil and/or groundwater. However, MTBE is alleged to be different from other gasoline components in that it is highly soluble in water and, therefore, likely to spread more rapidly and widely than other petroleum components. There is also concern about its biodegradability. Regardless of the validity of the various concerns, it is clear that MTBE can affect a number of the UST-related issues.

Revised action levels. An extraordinary amount of research is underway to determine potential risks associated with MTBE in groundwater. The EPA and various states are considering banning or reducing MTBE use, despite its role in reducing certain air emissions. A number of states are establishing or revising MTBE action or cleanup levels.

A key issue will be the validity of prior agency decisions regarding appropriate action or cleanup levels for a UST release that affected soil and/or groundwater. If a UST release includes MTBE, will prospective changes affect prior agency decisions? Regardless of the effect on prior agency cleanup decisions, concern exists that MTBE may render a UST release more costly to remediate. It is critical that facilities with USTs and/or parties to a transaction understand the ramifications (if any) to the cost of investigation/remediation and that the potential presence of MTBE be taken into account in quantifying risks associated with the property.

A related consideration is whether the presence of MTBE will affect the choice of methods or technologies utilized to address the UST release. The past two decades have seen the rapid development of methods to remediate soil and/or groundwater petroleum contamination. This wealth of experience provides better estimates for the cost of such cleanups. But it is possible that findings of MTBE will increase the time and/or cost to remediate soil and/or groundwater media.

Litigation risks. Various class actions have been filed against major oil companies and others over the presence of MTBE in motor fuels and its alleged damages. This litigation is at a relatively early stage. Further, the EPA and government entities such as individual municipalities have filed actions or issued orders against owners or operators of USTs alleging that MTBE has contaminated drinking water sources. The attention focused on MTBE will clearly heighten concern about many UST releases, and these risks, real or perceived, must be considered.

An important consideration in assessing the quantification of potential third-party actions is resolution of various claims regarding health risks associated with exposure to MTBE.10 The point at which MTBE in groundwater poses a threat will continue to be a matter subject to debate, driven by the fact that MTBE is found in a significant percentage of petroleum-contaminated areas associated with UST releases.

Another wrinkle associated with MTBE is its possible use as a "marker" compound. Because this additive did not appear in motor fuels until the late 1970s (or later), its absence may indicate the age of a particular release.11 This can be a useful tool, because a number of facilities in the area of a release may have a history of USTs and determining which UST is the source of the release can be difficult.

Notes

  • See Wayne Geyer, Where is Our Petroleum Storage Capacity Gone?, 33 L.U.S.T.L.I.N.E. bulletin, at 17 (Oct. 1999); Mark D. Oshinskie, Tanks for Nothing: Oil Company Liability for Discharges of Gasoline from Underground Storage Tanks Divested to Station Owners, 18 VA. ENVTL. L.J. 1, 2 (1999).
  • Lund, Changes in UST and LUST: The Federal Perspective, 10 Tank Talk, No. 2 (March 1995).
  • 42 U.S.C. § 6991(1).
  • 42 U.S.C. §§ 6901-6991(i).
  • Note that these actions or cleanup levels may be found in either regulation or guidance.
  • The EPA and a number of states use risk-based guidelines for determining cleanup or corrective action levels for soil, groundwater, or both. This risk-based corrective action process is also known as the "Rebekkah" standards. They provide a decision-making framework that takes into account substances in USTs as well as cites specific factors such as proximity to drinking water.
  • 7 DAILY TAX REP. 21 (BNA Jan. 12, 1998).
  • Rev. Rul. 98-25, 1994-1 C.B. 35.
  • For example, the presence of MTBE might eliminate natural attenuation as a potential method to address contamination. With natural attenuation, processes such as biodegradation, dispersion, and volatilization reduce the mass, toxicity, mobility, and so forth of the petroleum constituents.
  • A related concern involving costs is the argument that the problems associated with MTBE should be addressed by expanding or enhancing the controls required for USTs. For example, should the federal and state subtitle I regulations be revised to mandate double-walled containment. If so, this would increase the cost of installing and/or upgrading USTs.
  • Mark D. Oshinskie, Tanks for Nothing: Oil Company Liability for Discharges of Gasoline from Underground Storage Tanks Divested to Station Owners, 18 VA. ENVTL. L.J. 1 (1999).

Walter G. Wright, Jr,. is a member of the Little Rock, Arkansas, law firm of Mitchell, Williams, Selig, Gates & Woodyard, P.L.L.C., practicing in the areas of environmental, energy, and water law. He also serves as an adjunct professor at the University of Arkansas at Little Rock School of Law. He can be reached via e-mail at wwright@mwsgw.com.

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