Just yesterday after trying to start my car(bad starter) I accidentally put my foot on the brake pedal right at the same time the car started. the brake pedal went all the way down and the BRAKE FAILURE light came on. Now the when I brake it feels mushy and my whole leg extends just to brake. I noticed there is a leak coming from the brake lines. the fluid reads in between the min/max. Is there just AIR in the brake system? DO I just need to bleed brakes?
Bad master cylinder? Prior to this happening, the brakes worked fine. No issues whatsover. see pics

 

First thing, find and replace or fix the leak. You probably have air in the lines and your braking ability is now marginal. It could turn into a very dangerous situation to you, any passengers, and those people around you if you loose the rest of you brake pressure.

Brakes are serious business.

 

^^^This! Fluid comes out...air and moisture go in. It is not ok for ANY fluid to exit AT ANY TIME. Find the leak, fix the leak.

 

Is that whole unit(see picture) where the leakage is coming from-is that the PRESSURE DIFFERENTIAL WARNING UNIT/VALVE? According to the Bentley Book this is not repairable and must be replaced if any sign of leaking. Could this be the reason why the brakes are failing? if so where could I buy this?

 

Also referred to as a brake junction. There are repair kits available but they DO NOT WORK!
There is no safe solution except replacement...don't know where you are but here ya go...
Volvo 240 Brake Line Junction 1985-1991 | 240 Parts

 

Hey Swifjustice, IS THE REMOVAL AND INSTALLATION OF THE BRAKE LINE JUNCTION TO BE LEFT TO A PRO? I've changed the brakes and done the bleeding on a Honda Accord I use to have but that was years ago. What do you think

 

As long as you use line wrenches rather than open end wrenches you will be fine. The secret is to get each line started into the new block before you begin tightening them up. Also, the one bolt that mounts the block to the frame should be installed last. You need as much wiggle room as possible to get all the lines to seat in and tighten down without cross threading.

 

Swifjustice, a co-worker suggested just using teflon tape to stop the leak(s). I have a feeling this is a no no. What do you think? sorry for the stupid question

 

Teflon tape will be useless. The threads do not seal these pipe joints, the pipe has a flare on the end, the nut on the pipe merely compresses the flare into the union and creates a tight seal.
Degrease and clean the whole are before you even consider opening the brake system too, even one tiny piece of grit will ruin system components.