Based on Court Case United States v. Bestfoods 113F.3d 572(1998)
United States v. Bestfoods
113 F.3d 572 (1998)
SOUTER, JUSTICE
The United States brought this action under §107(a)(2) of theComprehensive Environmental Response, Compensation, and LiabilityAct of 1980 (CERCLA) against, among others, respondent CPCInternational, Inc., the parent corporation of the defunct OttChemical Co. (Ott II), for the costs of cleaning up industrialwaste generated by Ott II’s chemical plant. Section 107(a)(2)authorizes suits against, among others, “any person who at the timeof disposal of any hazardous substance owned or operated anyfacility.” The trial focused on whether CPC, as a parentcorporation, had “owned or operated” Ott II’s plant within themeaning of §107(a)(2). The District Court said that operatorliability may attach to a parent corporation both indirectly, whenthe corporate veil can be pierced under state law, and directly,when the parent has exerted power or influence over its subsidiaryby actively participating in, and exercising control over, thesubsidiary’s business during a period of hazardous waste disposal.Applying that test, the court held CPC liable because CPC hadselected Ott II’s board of directors and populated its executiveranks with CPC officials, and another CPC official had played asignificant role in shaping Ott II’s environmental compliancepolicy.
The Sixth Circuit reversed. Although recognizing that a parentcompany might be held directly liable under §107(a)(2) if itactually operated its subsidiary’s facility in the stead of thesubsidiary, or alongside of it as a joint venturer, that courtrefused to go further. Rejecting the District Court’s analysis, theSixth Circuit explained that a parent corporation’s liability foroperating a facility ostensibly operated by its subsidiary dependson whether the degree to which the parent controls the subsidiaryand the extent and manner of its involvement with the facilityamount to the abuse of the corporate form that will warrantpiercing the corporate veil and disregarding the separate corporateentities of the parent and subsidiary. Applying Michiganveil-piercing law, the court decided that CPC was not liable forcontrolling Ott II’s actions, since the two corporations maintainedseparate personalities and CPC did not utilize the subsidiary formto perpetrate fraud or subvert justice.
Held:
1. When (but only when) the corporate veil may be pierced, aparent corporation may be charged with derivative CERCLA liabilityfor its subsidiary’s actions in operating a polluting facility. Itis a general principle of corporate law that a parent corporation(so-called because of control through ownership of anothercorporation’s stock) is not liable for the acts of itssubsidiaries. CERCLA does not purport to reject this bedrockprinciple, and the Government has indeed made no claim that acorporate parent is liable as an owner or an operator under§107(a)(2) simply because its subsidiary owns or operates apolluting facility. But there is an equally fundamental principleof corporate law, applicable to the parent-subsidiary relationshipas well as generally, that the corporate veil may be pierced andthe shareholder held liable for the corporation’s conduct when,inter alia, the corporate form would otherwise be misusedto accomplish certain wrongful purposes, most notably fraud, on theshareholder’s behalf. CERCLA does not purport to rewrite thiswell-settled rule, either, and against this venerable common-lawbackdrop, the congressional silence is audible. Cf.Edmonds v. Compagnie Generale Transatlantique,443 U.S. 256, 266-267. CERCLA’s failure to speak to a matter asfundamental as the liability implications of corporate ownershipdemands application of the rule that, to abrogate a common-lawprinciple, a statute must speak directly to the question addressedby the common law. United States v. Texas, 507U.S. 529, 534.
2. A corporate parent that actively participated in, andexercised control over, the operations of its subsidiary’s facilitymay be held directly liable in its own right under §107(a)(2) as anoperator of the facility.
(a) Derivative liability aside, CERCLA does not bar a parentcorporation from direct liability for its own actions. Under theplain language of §107(a)(2), any person who operates a pollutingfacility is directly liable for the costs of cleaning up thepollution, and this is so even if that person is the parentcorporation of the facility’s owner. Because the statute does notdefine the term “operate,” however, it is difficult to defineactions sufficient to constitute direct parental “operation.” Inthe organizational sense obviously intended by CERCLA, to “operate”a facility ordinarily means to direct the workings of, manage, orconduct the affairs of the facility. To sharpen the definition forpurposes of CERCLA’s concern with environmental contamination, anoperator must manage, direct, or conduct operations specificallyrelated to the leakage or disposal of hazardous waste, or decisionsabout compliance with environmental regulations.
(b) The Sixth Circuit correctly rejected the direct liabilityanalysis of the District Court, which mistakenly focused on therelationship between parent and subsidiary, and premised liabilityon little more than CPC’s ownership of Ott II and its majoritycontrol over Ott II’s board of directors. Because direct liabilityfor the parent’s operation of the facility must be kept distinctfrom derivative liability for the subsidiary’s operation of thefacility, the analysis should instead have focused on therelationship between CPC and the facility itself, i.e., onwhether CPC “operated” the facility, as evidenced by its directparticipation in the facility’s activities. That error wascompounded by the District Court’s erroneous assumption thatactions of the joint officers and directors were necessarilyattributable to CPC, rather than Ott II, contrary to time-honoredcommon-law principles. The District Court’s focus on therelationship between parent and subsidiary (rather than parent andfacility), combined with its automatic attribution of the actionsof dual officers and directors to CPC, erroneously, even ifunintentionally, treated CERCLA as though it displaced orfundamentally altered common-law standards of limited liability.The District Court’s analysis created what is in essence a relaxed,CERCLA-specific rule of derivative liability that would banishtraditional standards and expectations from the law of CERCLAliability. Such a rule does not arise from congressional silence,and CERCLA’s silence is dispositive.
(c) Nonetheless, the Sixth Circuit erred in limiting directliability under CERCLA to a parent’s sole or joint ventureoperation, so as to eliminate any possible finding that CPC isliable as an operator on the facts of this case. The ordinarymeaning of the word “operate” in the organizational sense is notlimited to those two parental actions, but extends also tosituations in which, e.g., joint officers or directorsconduct the affairs of the facility on behalf of the parent, oragents of the parent with no position in the subsidiary manage ordirect activities at the subsidiary’s facility. Norms of corporatebehavior (undisturbed by any CERCLA provision) are crucialreference points, both for determining whether a dual officer ordirector has served the parent in conducting operations at thefacility, and for distinguishing a parental officer’s oversight ofa subsidiary from his control over the operation of thesubsidiary’s facility. There is, in fact, some evidence that anagent of CPC alone engaged in activities at Ott II’s plant thatwere eccentric under accepted norms of parental oversight of asubsidiary’s facility: The District Court’s opinion speaks of suchan agent who played a conspicuous part in dealing with the toxicrisks emanating from the plant’s operation. The findings in thisregard are enough to raise an issue of CPC’s operation of thefacility, though this Court draws no ultimate conclusion, leavingthe issue for the lower courts to reevaluate and resolve in thefirst instance.
113 F.3d 572, vacated and remanded.
What norms of corporate behavior does the court look to indetermining whether an officer or a director is involved in theoperation of a facility?
