Case: 11-31117 Document: 00512311654 Page: 1 Date Filed: 07/17/2013
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
July 17, 2013
No. 11-31117 Lyle W. Cayce
Clerk
UNITED STATES OF AMERICA, on behalf of Administrator of
Environmental Protection Agency,
Plaintiff-Appellant/Cross-Appellee
v.
CITGO PETROLEUM CORPORATION,
Defendant-Appellee/Cross-Appellant
Appeals from the United States District Court
for the Western District of Louisiana
Before JONES, BARKSDALE, and SOUTHWICK, Circuit Judges.
LESLIE H. SOUTHWICK, Circuit Judge:
The United States brought suit against CITGO Petroleum Corporation,
seeking civil penalties and injunctive relief under the Clean Water Act (“CWA”).
After a bench trial, the district court imposed a $6 million penalty against
CITGO and ordered injunctive relief. The United States appeals, arguing the
amount of the penalty is inadequate. CITGO cross-appeals, arguing the district
court lacked jurisdiction. There is jurisdiction, but we conclude the district court
erred in failing to provide a reasonable approximation of economic benefit as
required under the CWA and our caselaw. We VACATE the civil penalty award
and REMAND for further proceedings.
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FACTS AND PROCEDURAL HISTORY
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 used
its authority under state law to issue 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.
Settlement discussions began, then were suspended due to an investigation
being conducted by the federal Environmental Protection Agency.
In June 2008, the United States and Louisiana filed the present action in
federal district court as co-plaintiffs. The United States sought civil penalties
and injunctive relief under the CWA, and Louisiana sought penalties and costs
as provided by the Louisiana Environmental Quality Act.1 Louisiana amended
its compliance order in July 2008, explaining that it now would pursue penalties
against CITGO in federal court.
CITGO conceded liability. The district court held a two-week bench 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
1
The district court awarded Louisiana $3 million in damages for CITGO’s violation of
state law. Louisiana is not a party in this appeal, and CITGO does not challenge the award.
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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 then considered the penalty factors of the CWA. See 33 U.S.C.
§ 1321(b)(8). It determined that CITGO should be penalized on a per-barrel
basis under 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. It accepted
CITGO’s estimate that approximately 54,000 barrels of oil had spilled into the
waterways and 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.
DISCUSSION
I. Diligent Prosecution Bar
CITGO argues the district court erred by denying its motion to dismiss for
lack of jurisdiction, and urges this court to vacate the judgment and order the
suit dismissed. What CITGO relies upon is a provision in the CWA precluding
federal prosecution where “a State has commenced and is diligently prosecuting”
an action under comparable state law. 33 U.S.C. § 1319(g)(6)(A)(ii). The United
States argues Louisiana was not displaying diligence. If the bar is factually
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inapplicable, it would not matter whether it is a jurisdictional bar. The district
court made no fact findings on this question and, indeed, gave no explanation as
to why the motion was denied.
As we noted already, in April 2007 the Louisiana Department of
Environmental Quality issued a compliance order to CITGO for violations
resulting from the oil spill and gave notice of potential penalties. The State and
CITGO engaged in some settlement negotiations. According to a June 2008
internal Department memorandum, those negotiations were put on hold because
of an EPA criminal investigation. When the complaint in the current suit was
filed in June 2008, the state administrative action was pending but the attention
being given to it was, at best, desultory. In July 2008, the State amended its
compliance order, explaining that it intended to pursue monetary penalties for
CITGO’s violation of state law in federal court.
We cannot see diligence in these procedural steps. Little had occurred
prior to the current suit being brought under the CWA. Nearly simultaneously
with the filing of this suit, the State indicated it would no longer pursue with
diligence or otherwise the comparable relief being sought administratively.
There was no diligent prosecution by the State and no jurisdictional issue
to resolve. The motion to dismiss was properly denied.
II. Civil Penalty
The district court imposed a $6 million civil penalty on CITGO for its
violation of the CWA. The United States had recommended a penalty of $247
million. On appeal, the United States argues the penalty is unreasonably low
and inconsistent with the court’s findings on the penalty factors. The United
States also argues the district court failed to make necessary fact-findings on the
amount of economic benefit to CITGO and erred in some of its other findings.
Finally, it argues the district court should have found CITGO’s inactions and
delays in managing its wastewater system to be gross negligence.
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The factors to be considered in awarding a civil penalty are identified in
the CWA. A district court’s analysis of those factors is highly discretionary.
Despite this discretion, we conclude that the district court’s failure to quantify
the economic benefit to CITGO of deferring for nearly a decade its response to
the known deficiencies at its Lake Charles plant requires reversal. As we will
explain, because economic benefit serves as the starting point for calculating the
civil penalty and is adjusted based on the remaining statutory factors, on
remand the district court should consider its analysis of the factors afresh after
making a reasonable approximation of economic benefit.
A. Penalty Factors
The assessment of civil penalties under the CWA is left to the district
court’s discretion. The exercise of that discretion is guided by consideration of
the following factors:
the seriousness of the violation or violations, the economic benefit
to the violator, if any, resulting from the violation, the degree of
culpability involved, any other penalty for the same incident, any
history of prior violations, the nature, extent, and degree of success
of any efforts of the violator to minimize or mitigate the effects of
the discharge, the economic impact of the penalty on the violator,
and any other matters as justice may require.
33 U.S.C. § 1321(b)(8). The Supreme Court has described the process of
weighing the penalty factors as “highly discretionary.” Tull v. United States, 481
U.S. 412, 427 (1987). We review factual findings in support of a district court’s
penalty calculation for clear error. Sierra Club, Lone Star Chapter v. Cedar
Point Oil Co., 73 F.3d 546, 573 (5th Cir. 1996). A court’s determination of the
amount of a penalty to be assessed is reviewed under the highly deferential
abuse-of-discretion standard. Id.
We find particularly instructive one of our precedents in which we
reversed a district court’s “highly discretionary” award of a civil penalty under
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the CWA. See United States v. Marine Shale Processors, 81 F.3d 1329 (5th Cir.
1996). We started with the observation that “calculation of discretionary
penalties is not an exact science, and few courts could comply with [the
defendant’s] request that the importance of each factor be precisely delineated.”
Id. at 1338. We found an error in fact finding, then held that because the
district court had failed to articulate with some precision how it had relied on
different facts to compute the penalty, we needed to vacate and remand for the
district court to calculate the fine again. Id. at 1339. We will explain why we
find ourselves in an analogous position.
The economic benefit to CITGO that resulted “from the violation” is the
critical factor in this appeal, critical in part because the district court made no
finding on it. Though the “violation” in its most limited sense was the oil spill
from which CITGO obtained no economic benefit, such a narrow reading of this
statutory factor is inconsistent with the manner in which other courts have
interpreted the requirement. Generally, courts consider the financial benefit to
the offender of delaying capital expenditures and maintenance costs on
pollution-control equipment. See United States v. Smithfield Foods, Inc., 191
F.3d 516, 530 (4th Cir. 1999); Atl. States Legal Found., Inc. v. Tyson Foods, Inc.,
897 F.2d 1128, 1141 (11th Cir. 1990).
One court concluded that 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.” United
States v. Allegheny Ludlum Corp., 366 F.3d 164, 169 (3d Cir. 2004); see also
United States v. Mun. Auth. of Union Twp. (Dean Dairy), 150 F.3d 259, 266 (3d
Cir. 1998) (noting that “methods other than the delayed or avoided capital
expenditure for ascertaining economic benefit” have been used).
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Besides the choices to make in calculating economic benefit, courts must
also choose how to set the amount of the penalty:
The CWA does not prescribe a specific method for determining
appropriate civil penalties for violations. In Dean Dairy, we noted
that some courts use the “top down” approach in which the
maximum penalty is set ($25,000 per day of violation at the times
relevant here), and reduced as appropriate considering the six
enumerated elements of § 1319(d) as mitigating factors, while other
courts employ the “bottom up” approach, in which economic benefit
is established, and the remaining five elements of § 1319(d) are used
to adjust the figure upward or downward. Dean Dairy, 150 F.3d at
265.
Allegheny Ludlum, 366 F.3d at 178 n.6. This circuit has never held that a
particular approach must be followed, and we do not decide otherwise today.
Regardless of the mathematics, we conclude that a district court generally must
“make a ‘reasonable approximation’ of economic benefit when calculating a
penalty under the CWA.” Cedar Point Oil, 73 F.3d at 576.
We now examine what the district court decided here. It stated that the
purpose of this penalty factor is to recoup any benefit gained by the polluter in
failing to comply with the law, which indicates the court was defining the factor
as do we. The 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,
instead of quantifying the economic benefit, the court provided a range and
found “the amount of [economic] gain to CITGO was less than the $83 million
argued by the government, but more than the $719.00 asserted by CITGO.”
We interpret these findings to have left economic benefit as a non-factor.
Overall, the district court’s failure to quantify economic benefit has made our
review more difficult. Proper consideration of economic benefit is integral to
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arriving at an appropriate damage award. Whether the economic benefit is a
floor, adjusted by a court’s analysis of the other factors, or helps determine how
much to lower the ceiling established in other ways, it should not be ignored. In
this case, based on CITGO’s history of avoiding corrective actions for years, we
find it particularly inappropriate not to have made an estimate, though
admittedly difficult, of the economic benefit.
The remaining factors include the “seriousness of the violation.” The
district court found the spill was “massive,” “excessive,” and a “tragedy.” Both
parties agree with this assessment, as do we. The district court considered
CITGO’s “degree of culpability” and found that it was “fully at fault” for the spill
and was negligent. The government points out that 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 (adjusting civil penalties under CWA for inflation).
Because CITGO was found to be negligent – a higher degree of culpability than
strict liability – the United States argues that the district court’s penalty of
$111/barrel is unreasonable given that up to $1,100/barrel was authorized.
With respect to the fifth factor, “history of prior violations,” the court found
that CITGO had made unauthorized discharges of oily wastewater on at least
six occasions prior to the spill and had been in violation of its permits for over
950 days. CITGO’s history of violations, the district court found, reflected a lack
of environmental responsibility and a general disregard of its duty to operate its
business safely. According to the government, the district court’s penalty of
$111/barrel is clearly contrary to these findings. In light of our discussion of
gross negligence below, the findings regarding this factor need to be re-evaluated
on remand.
The United States claims the district court erred in relying on CITGO’s
efforts to minimize or mitigate the spill’s effects – factor six – as a basis for
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imposing a lower penalty. CITGO estimated that it spent approximately $65
million in clean-up and response costs. At the height of its response, CITGO had
deployed 1,500 people; 60 miles of boom; vacuum trucks; skimmers; portable
barges; and other clean-up equipment. The district court acknowledged these
efforts, but still found CITGO’s first response to the spill “lacking.” There was
evidence that CITGO, at least initially, failed to contain the spill and did not
fully inform the Coast Guard of the severity of the spill. Though there are
different findings that could have been made, we do not discern any clear error
in the facts found here or abuse of discretion in weighing this factor as the
district court did.
The government also argues that the court placed too much emphasis on
the eighth factor, which permits consideration of “any other matters as justice
may require.” In analyzing this factor, the court noted that CITGO was a major
employer in the Lake Charles community. Additionally, as one of the largest
refineries in the nation, the Lake Charles facility had a positive impact on the
state’s economy. The court recognized the obvious negative impact the spill had
on the community but concluded that it was only fair to view CITGO’s role in the
community as a whole, rather than limit its view to a single, extremely negative
event. According to the government, the fact that a polluter operates a large
facility that benefits the local and state economies is not a basis for assessing a
low penalty and contravenes the purpose of civil penalties under the CWA –
punishment and deterrence. We conclude that the district court’s analysis of
this factor was not clear error.
Finally, the government takes issue with the court’s consideration of the
injunctive relief ordered in assessing the penalty. While not addressed under its
analysis of the factors, the court explained in the penalty section of its order that
it had taken into account the injunctive relief ordered in determining that
$111/barrel was an appropriate penalty. As stated, the district court ordered
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CITGO to construct a fourth wastewater storage tank. The court also ordered
CITGO to perform sediment sampling, to conduct a stormwater drainage
calibration study, to repair and properly use the tanks’ oil-skimming equipment,
and to install other equipment designed to prevent future spills. Evidently, the
court reduced the civil penalty an unspecified amount based on the award of
injunctive relief. The district court’s consideration of the cost of the injunctive
relief does not strike us as clear error.
The district court needed to have made a finding on the amount of
economic benefit. We conclude 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. We therefore vacate the civil penalty award and remand for re-
evaluation. Regardless of how the district court then exercises its discretion,
within a top-down, a bottom-up, or some other analytical framework, the
economic benefit factor creates a nearly indispensable reference point. We have
upheld some of the findings on various factors, and found error in others. On
remand, the district court may take a renewed look at all factors in light of the
new findings on some.
B. Gross Negligence
Under the CWA, a court may impose a higher per-barrel civil penalty if the
violation was “the result of gross negligence or willful misconduct.” 33 U.S.C. §
1321(b)(7)(D). According to the government, there was ample evidence
presented at trial in support of CITGO’s gross negligence. Further, the
government argues that the district court erroneously applied the state-law
definition of gross negligence rather than the definition supplied by the CWA.
The district court began its analysis of gross negligence by stating “[u]nder
Louisiana law, gross negligence is willful, wanton, and reckless conduct that
falls between intent to do wrong and ordinary negligence.” This statement, the
government argues, creates uncertainty as to whether the district court applied
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the proper legal standard. The government points out that the state-law
definition equates gross negligence with willful misconduct, whereas the CWA
uses those terms in the disjunctive.
“Gross negligence” is a label that straddles the divide between intentional
and accidental actions. The Louisiana Supreme Court has said that “often
[there is] no clear distinction between such willful, wanton, or reckless conduct
and ‘gross’ negligence, and the two have tended to merge and take on the same
meaning.” Brown v. ANA Ins. Grp., 994 So. 2d 1265, 1269 n.7 (La. 2008)
(quotations omitted). We see no error in the district court’s articulation of its
understanding of this term that is neither fish nor fowl. It does not appear that
the district court relied on the state-law definition anyway. After it offered the
state-law definition of gross negligence, the district court stated that “it does not
find that CITGO’s actions or inactions rise to the level of gross negligence or
willful misconduct” and “the Court finds no gross negligence or willful
misconduct on the part of CITGO.” Given these subsequent statements, we
conclude the district court applied the correct legal standard.
The government also contends that the district court’s failure to find gross
negligence is contrary to the overwhelming evidence of such negligence. CITGO
completed construction on a multi-million dollar wastewater treatment facility
at its Lake Charles refinery in 1994. According to CITGO, the facility was
designed to withstand a “25-year/24-hour” storm (a storm of a strength seen only
once in 25 years, lasting 24 hours). By 1996, just two years after the facility’s
completion, a supervisor requested the construction of an additional storage
tank, citing the inadequacy of the two existing storage tanks to accommodate
stormwater. The following year, a CITGO engineer warned: “Since the system
is already marginal for stormwater capacity, it is imperative that excess oil and
solids be removed so that this capacity can be used to store stormwater.”
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Despite this warning, CITGO failed to repair the oil-skimming system
designed to remove floating waste oil. While CITGO employed other methods
to remove waste oil from the tanks, such as using portable pumps, it had
abandoned those methods by 2000. As a result, sludge and waste oil continued
to accumulate in the tanks for years, causing the tank levels to rise and
lessening their ability to accommodate stormwater.2
In 2002, CITGO employed an environmental consulting firm to evaluate
the facility’s stormwater capacity. The results of that study again called for the
addition of a third storage tank. CITGO points out that it acted on this
recommendation and constructed a third tank. It did not begin construction
until 2005 – three years after receiving the recommendation – and it did not
complete construction until 2007, which unfortunately was after the spill.
CITGO’s own investigation of the spill revealed it had several “root
causes.” First, CITGO’s wastewater treatment facility was inadequate to handle
stormwater, a fact identified by the 2002 study. Second, CITGO did not have a
procedure in place to monitor the amount of waste oil accumulating in the tanks.
Third, CITGO failed to remove waste oil and sludge from the tanks on a regular
basis.
Despite the above facts, all of which were put before the district court
during a two-week bench trial through testimony from numerous witnesses and
the introduction of hundreds of exhibits, the district court concluded in less than
one page of analysis that CITGO was not grossly negligent. Not illogically, the
district court credited CITGO for having undertaken, prior to the storm, the
construction of the third storage tank. That tank, though, was not completed
until more than a year after the storm. The district court found that prior to the
2
CITGO’s standard operating procedures required the contents of the tanks to be
brought down to a level of 5.5 feet prior to a storm event. CITGO’s corporate representative
testified that at the time of the storm, the tanks’ contents measured at 17 feet.
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completion of the third storage tank, CITGO had made other improvements to
the plant’s functionality and capacity, including paving a dike around the
storage tanks to contain overflows. The court also referred to evidence that
CITGO was working on a plan to remove the excess sludge from the tanks
shortly before the spill; though it is unclear from the record what steps if any
had been taken to implement the plan. Finally, the court reasoned that even
though the tanks were overburdened, it was unlikely that they would have
overflowed had it not been for the excessive amount of rain that fell on the day
of the spill.
A district court’s “finding that a party is negligent or grossly negligent is
a finding of fact and must stand unless clearly erroneous.” Houston Exploration
Co. v. Halliburton Energy Servs., Inc., 269 F.3d 528, 531 (5th Cir. 2001). “A
finding of fact is ‘clearly erroneous’ when although there is evidence to support
it, the reviewing court on the entire evidence is left with the definite and firm
conviction that a mistake has been committed.” Id. In this case there is some
evidence of CITGO’s efforts to address the inadequacies of its wastewater
storage tanks. By finding nothing more than simple negligence, the district
court discounted the seriousness of CITGO’s multi-year wait before it began
taking the corrective measures required at this plant. In our view, though,
almost winning a highly risky gamble with the environment does not much
affect the egregiousness of having been gambling in the first place.
We have acknowledged the need to uphold the district court’s findings
unless clearly erroneous. We make no ruling on this question now. The
category of negligence into which CITGO’s conduct is placed is part of the
overall analysis underlying the setting of the appropriate penalty. Because of
the conclusions we have already set out, the district court will have the
obligation on remand to re-analyze the civil penalty award. At that time, the
district court should reconsider all its findings with respect to CITGO’s conduct,
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giving special attention to what CITGO knew prior to the oil spill and its delays
in addressing recognized deficiencies.
C. Penalty Calculation
The government raises two issues with respect to the district court’s
calculation of the civil penalty. First, it argues that the court erred in refusing
to apply the “top-down” method of calculating the penalty. We have already
answered that question. Second, it contests the court’s use of CITGO’s estimate
of the amount of oil spilled in calculating the penalty.
On the question of how much oil was spilled, the district court accepted
CITGO’s estimation. After evaluating the methods of calculation used by the
parties’ experts, the court found CITGO’s estimate of 54,000 barrels “more
reasonable and credible” than the government’s higher estimate of 76,800
barrels. The government’s argument on this issue is essentially that the court
credited the wrong expert. “Where there are two permissible views of the
evidence, the factfinder’s choice between them cannot be clearly erroneous.”
Bertucci Contracting Corp. v. M/V ANTWERPEN, 465 F.3d 254, 258 (5th Cir.
2006). Consequently, we reject the government’s argument that the district
court erred with respect to its findings on the amount of oil spilled.
The district court’s civil penalty is VACATED and this case is
REMANDED for further consideration of the statutory penalty factors and its
finding of negligence consistent with this opinion.
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