Legal Watch: Volume 12

Prepared by William H. Bode
Bode & Grenier, LLP
1150 Connecticut Ave., NW
Washington, D.C. 20036
Telephone: 202-862-4300 | Email: wbode@bode.com

FINES TOTALING $2,508,900 LEVIED AGAINST UST OWNERS FOR FAILURE TO FILE A TIMELY "FINAL ASSESSMENT REPORT" UPHELD BY MICHIGAN APPEALS COURT

Case Summary: From 1986 until 1999, a retail gas station in Hartland Michigan with five underground tanks owned by Bulk Petroleum Corporation and Darshan’s Michigan Stations One, Inc. leaked gasoline. Michigan’s Department of Environmental Quality (“DEQ”) issued a Unilateral Administrative Order to clean-up the site in 1993, but the site was not completely remediated until 2001. The UST owners filed an incomplete Final Assessment Order in October 2002. A new environmental consultant was hired, and a final FAR was submitted to the DEQ on October 30, 2003. The DEQ then filed a complaint against defendants for violation of the UAO and sought penalties of $3,364,400. At a hearing on August 5, 2003, the trial court imposed a $1,090,000 penalty on defendants for failure to submit a statutorily complete FAR. Defendants paid the penalty on December 9, 2003. On January 21, 2005, the DEQ moved for additional penalties, seeking the remainder of the $3,364,400. At a March 2005 hearing, the trial court granted DEQ’s motion for additional penalties in the amount of $1,418,900, based on the seriousness of the violation and the UST owners’ non-compliance. The trial court also ruled that defendants waived the statute of limitations defense to the penalties by stipulating to summary disposition on the untimely filing of the FAR at the earlier proceeding. Defendant UST owners appealed and the Michigan Court of Appeals affirmed the penalties. The Appeals Court held that Michigan law provides for a penalty for failure to file a FAR under this schedule: $100 per day for the first 7 days; $500 per day for the next 7 days; and not more than $1000 per day beyond 14 days. Further, the Court held that Michigan law permits the DEQ to recover, based on the “seriousness of the violation and any good faith efforts by the violator,” a fine of not more than “$10,000 for each underground tank system for each day of noncompliance with a (regulatory) requirement…” The Court held that the trial court had adequately assessed the evidence and the fine was justified. The Court rejected the defendants’ claim that the two-year statute of limitations precluded any fines, noting that the defendants had failed to properly assert this defense in their Answer to the Complaint or to preserve it at trial.

LESSON: A cavalier attitude to state or federal environmental orders can result in huge fines for what may appear to be minor violations. In this case, the original environmental consultants apparently dragged their feet in completing a satisfactory FAR and the result was harsh. Terminal Operators are advised to hire environmental consultants with a reputation for timely and competent work. The environmental consultant should be given tight deadlines for completion of assigned tasks. Attorney General and Department of Environmental Quality v. Bulk Petroleum Corporation, Darshan’s Michigan Station One, Inc. and Darshan Dhaliwa

MOTIVA SUCCESSFULLY CHALLENGES TAX ASSESSMENT OF TERMINAL BY CITY OF STRATFORD -- VALUATION REDUCED TO $6,510,400 FROM $13,750,700

Case Summary: The City of Stratford, Connecticut assessed the Motiva Enterprises, LLC’s petroleum terminal on Long Island Sound at $13,750,700 for the tax reevaluation date of October 1, 2004. The Stratford Board of Assessment upheld the valuation in a decision issued April 5, 2005. Motiva appealed the decision to the local Superior Court on the grounds that the tax assessment was “grossly excessive and unlawful.” The Court found that the Motiva operated the property as a “Tank Farm” for petroleum and ethanol, and as a distribution center. The total site covered 48 acres, but only 25.6 acres were located in Stratford; the remaining acreage was in the City of Bridgeport. The tanks ranged in size from 81,000 barrels to 120,000 barrels and were served by two forty foot high vapor recovery tanks. The Stratford portion of the petroleum terminal did not have water access. The Court further found that its function in a tax appeal “is to first determine whether the subject property was overvalued, and if it was overvalued, what was the fair market value of the property.” After reviewing the various methods of valuing property, including the “cost to build,” the Court determined to use the “comparable sales” or “sales comparison” approach. The Court then analyzed five transaction involving terminals presented by Gregory Manzione of the Nationwide Consulting Company, who the Court found, had extensive experience in appraising petroleum storage facilities. The first facility sale used for the sales comparison was a July 1993 and then a later May 2000 sale of a terminal in New Haven, Connecticut with a tank capacity of 1,737,793 barrels for $15,400,000 and $13,535,000, respectively, or $8.86 and $7.95 per barrel. The third sale was a facility located in New Haven that could handle only barges sold in June 1997 for $3,100,000 or $6.70 per barrel. The fourth sale was a Portland, Maine facility capable of handling deep water vessels, barges, and rail traffic sold in May 2001 for $3,100,000, or $6.75 per barrel. The fifth sale was a facility in Bayonne, New Jersey, capable of handling deep water vessels and barges, that sold in May 2004 for $13,700,000, or $6.41 per barrel. The appraiser then adjusted these sale prices for variable such as location, capacity, supply sources, product spectrum, tank conditions, and improvements such as tank loading racks, vapor recover systems, offices, and warehouses. Based on these adjustments, the appraiser computed a price of $7.50 per barrel, compared to Stratford’s assessed value of $16.90 per barrel. The Court, after finding Motiva’s appraiser more qualified than Stratford’s, valued the property at $8.00 per barrel. Finding further that the property had a safe fill capacity 813,000 barrels, the Court held that “the true actual proper fair market value for the subject property is $6,510,400.”

LESSON: Terminal Operators can successfully challenge tax assessments by local municipalities that overvalue their facility. A key factor in overturning an overvalued assessment is the retention of an appraiser with more experience that the appraiser(s) hired by the municipality. Here the Court was very impressed with the Credentials of Motiva’s appraiser. This case also has this implication: As the value of terminals has skyrocketed in the last few years, and the costs of building new terminals has also soared, terminal operators may anticipate similarly higher valuations of their facilities by astute Municipal tax assessors in the future. (Motiva Enterprises, LLC v. Town of Stratford)

Please address any comments or questions to Mr. Bode at 202-862-4300 or wbode@bode.com.

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