Applying to the California UST Cleanup Fund -- Some Questions and Answers - Law Firm Bay Area Lawyers Network Attorneys San Francisco, California

1. Transferring Rights to Fund Reimbursement

2. The “Pre-Approval” Process

3. Regulatory Technical Assistance Costs

In 1989, the California legislature established the California Underground Storage Tank Cleanup Fund (“UST Fund”), the Barry Keene Underground Storage Tank Cleanup Trust Fund Act of 1989, §25299.10 et seq., Health & Safety Code. The UST Fund has its office in Sacramento, headed by a senior career civil service appointee. See http://www.swrcb.ca.gov/cwphome/ustcf/index.html. The UST Fund has paid out over $1 billion in costs of cleaning up leaks and releases from underground fuel tanks. However, recent amendments, new regulations, and interpretations by the State Water Resources Control Board have resulted in several pitfalls unwary applicants.

The Fund has two purposes: (1) Establish a system ensuring the financial responsibility of owners and operators of petroleum USTs for cleanups of leaks and releases, and (2) Fund the reimbursement of costs of cleaning up leaks and releases. The Fund and its staff have been busy; it has approved over 12,000 applications, and has paid 35,000 requests for reimbursement, totaling over $1.5 billion.

Owners or operators with a leak or release may recover as much as $1.5 million in cleanup costs for each such "occurrence." In addition, California's UST Fund will pay up to $3,000 for “regulatory technical assistance” (RTA) to prepare applications for eligibility. And, after some uncertainty in earlier years about financing the UST Fund, it is now clear that the Fund enjoys broad support for continuing support by a "throughput" fee on operating fuel storage tanks.

The California legislature made significant amendments to the Underground Storage Tank Cleanup Trust Fund Act at the beginning of 2000. The State Water Resources Control Board issued regulations, 23 CCR §§2803-2814.8. http://www.swrcb.ca.gov/cwphome/ustcf/docs/regulations/ustcfregs1100.pdf

The statute and the regulations are pretty clear, and for the ordinary situation where a gasoline service station is continuing in operation, one might reasonably rely on environmental consultants or experienced construction contractors. However, California’s UST Fund law and regulations may not provide clear answers for property owners, trustees (and beneficiaries) of trusts, banks administering properties with historic USTs, real estate attorneys, environmental consultants, individuals inheriting property, and contractors ---- unless they are assisted by experienced legal counsel.

Some questions and answers highlight the pitfalls attorneys and their clients would be wise to avoid in cleaning up property and seeking reimbursement from the UST Fund.

What are the steps? The owner or operator of a leaking petroleum UST applies for "admission" to the UST Fund program. The applicant claims a "priority ranking," - A, B, C, or D, based on business size. The Fund staff reviews the records of the local "lead" agency, either a county or a Regional Water Quality Control Board (or, sometimes a city). If the applicant has operating and closure permits, and has followed agency directives, the Fund issues a "Letter of Commitment" (LOC), establishing the applicant's priority ranking. The smaller the entity, the higher it's ranking, and the more claims in the class that have been paid.

It must be remembered that the Fund will only reimburse “cleanup costs” – and not costs of pulling out old USTs with their piping and dispensers, etc. Cleanup costs include soil and groundwater investigations, reports, remediation, and monitoring - and directly related expenses of repairs to the property. These costs must be reasonable, and the Fund has guidelines for many types of costs. See http://www.swrcb.ca.gov/cwphome/ustcf/docs/costguidelines/costguidelines.pdf.

After receiving the LOC, the applicant obtains three bids, or, alternatively, "pre-approval," for the initial work of the investigation and cleanup. As the work progresses, the applicant applies for reimbursements in increments of a minimum of $10,000 of incurred costs.

The "facts" as to methods and costs of cleanups are usually pretty easy. But, there are also pitfalls for the unwary to fall into and which can result in complete rejection of a claim for cleanup costs. Most of these pitfalls involve issues of law that could have been cured with the proverbial “ounce of prevention.”

QUESTION: Can the UST Fund "rights" to reimbursement be transferred to a third party (i.e., through settlement agreements, assignments, or "on behalf of agreements")?

Yes. "Rights" to UST Fund reimbursement can be transferred to a third party, through a settlement agreement, or a "on behalf of" agreement, or by an assignment. Lake Publishing Company, No. WQ 2000–06–UST. Also see the State Board’s explanation of these important rights of assignment at http://www.swrcb.ca.gov/cwphome/ustcf/docs/assignmentofclaims/assignment2.pdf

An agreement settling a lawsuit or claims does not have to be the result of litigation actually being filed, but a settlement agreement today should include recitals of settlement of claims for liability or contribution as among the parties. However, it may not be enough that the agreement refers to "all claims, past or future," or similar language. Recitals about USTs and appropriate "on behalf of" or "assignment" language will be helpful. Decisions issued by the State Water Resources Control Board require that such agreements be "express," and indicate that oral agreements are disfavored.

Transfers to and from estates and trusts require special care, in order that rights to reimbursement from the Fund are not lost. Also, more specialized transfers, such as §1031 “like kind” exchanges should be done with attention to preserving and transferring reimbursement rights.

QUESTION: When do parties involved with contaminated property need an assignment agreement?

The Fund's purpose is to provide cleanup funding for owners and operators of petroleum USTs. Anyone who acquires property with a leaking UST can't recover from the UST Fund if it should have known of the existence of the UST, nor can it recover if the predecessor was not eligible to recover from the UST Fund. 22 CCR §2810.1 However, "rights" of an eligible applicant to reimbursement can be transferred to or shared with an otherwise ineligible party, by means of a settlement agreement, an "on behalf of" agreement, or an assignment. See, In the Matter of Quaker State Corporation, No. WQ 97-06-UST, 1997 WL 369232 (June 19, 1997). Such agreements must be express and entered before cleanup costs are incurred.

Therefore, property polluted with petroleum leaks from USTs may be acquired by trust beneficiaries or heirs in a will, without an assignment or an "on behalf of" agreement from an estate or a seller. If such an agreement does not exist, the current owner may not be able to recover cleanup costs.

The writers of the Fund's regulations originally contemplated participation in cleanups by insurance carriers, who would advance cleanup funds to their policyholders. Beginning in the early 1990s, oil companies began entering agreements with individuals (who have higher priorities for reimbursement) whereby the company would advance the money to a joint fund or escrow account, and the individual would draw upon it to hire consultants and contractors. Requests for reimbursement of these expenses would then be filed, and the UST Fund would issue checks for allowed costs, made payable to both entities, or to their joint escrow or private funds account. Recently, the Fund has recognized such agreements among other parties, such as successive owners and trusts and beneficiaries.

QUESTION: If three bids were not obtained for some phases of work or for some components within a phase of work, how can a party obtain reimbursement?

The "3-bid" requirement used to be imposed in most situations. However, practical difficulties in obtaining 3 bids for small jobs, or at a time (e.g., late 1998) when many petroleum USTs are being replaced, has resulted in the Fund staff recognizing a "pre-approval" process in lieu of submitting "3 bids." Today, there is some risk in not applying for "pre-approval," particularly where the oversight agency is uncertain or is seeking impracticable remedies.

The “pre-approval” process is also fairly simple. An applicant seeking pre-approval submits a detailed costs estimate for proposed work that is being required by the overseeing regulatory agency. The Fund staff, using "best professional judgment," determines whether the estimated costs are reasonable (i.e., likely to be reimbursed). The Fund staff notifies the applicant that the estimated costs appear reasonable, and the applicant initials a request for a formal waiver of the 3 bid requirement. However, even if the costs are authorized for reimbursement through the "pre-approval" process, requests for reimbursement cannot be submitted until incurring at least $10,000 in costs, and then Fund review and payment typically takes 2 to 3 months. It is important to remember that the UST Fund does not have an "emergency funds" account, so planning and applying as soon as possible is important.

QUESTION: What are "regulatory technical assistance" ("RTA") costs and how are they reimbursed?

"Regulatory technical assistance" ("RTA") is "assistance from a person, other than the claimant, in the preparation and submission of a claim to the Fund." It does not include legal representation in court, and it does not include third party assistance in closing stalled cleanups (i.e., where regulatory closure is long delayed), nor assistance in petitioning for review of disallowed claims. RTA costs are currently limited to $3,000.

The issue of allowable RTA costs is vitally important to applicants, particularly those with non-routine claims. Law firms and environmental consulting firms have found that non-routine claims may cost almost as much to prepare and submit, as the sums that are ultimately reimbursed by the Fund. Examples have included costs of applications exceeding $30,000, where the eventual reimbursement was $40,000.

After a history of the Fund staff attempting to use their discretion to impose a cap on some costs claimed as RTAs, the legislature settled the matter with SB 665, effective January 1, 2000, which amended §25299.57(j), and caps RTAs at $3,000. As a result, today the Fund staff takes the position that RTAs include only the costs of actually dealing with the UST Fund, such as preparing documents, preparing the claim application, etc. In particular, RTAs do not include the costs of dealing with the pre-approval process, negotiating with the Fund staff, or "taking an appeal" to the State Water Resources Control Board.

The writers of SB 665 reviewed with several environmental consultants the proposed $3,000 cap on RTAs. Most of the consultants believed $3,000 should be sufficient to assemble and submit requests for assembling claims packages and the like. However, it also appeared to them that the practice among various consultants was that a clear distinction was not being made (and it didn't need to be made before SB 665) between corrective action costs and RTA. For instance, some engineers were including every call to an agency as a charge to RTA. Also, as to whether the Fund will reimburse fees charged by law firms, as opposed to those charged by environmental consulting firms, not many requests for reimbursement include attorneys' fees as RTA costs. The Fund staffers evaluate RTAs not on the basis of attorneys’ fees vs. engineers’ fees, but, instead on "who typically does this work and what are they paid." (Note: California is the only state in which such "claims assistance costs" are reimbursable by a UST Fund.)

Understanding the issues for UST Fund reimbursements is important for any property owner or trustee or administrator faced with potential cleanup costs.

Originally published as "Payment Pitfalls: Obtaining Reimbursement From the Underground Storage Tank Fund," Los Angeles Daily Journal, March 12, 2001; San Francisco Daily Journal, March 14, 2001.

James R. Arnold is with the Arnold Law Practice in San Francisco and Lafayette, California. A comprehensive resume can be found at http://www.baln.org/atty_arnold_j.htm.