Barg Coffin Lewis & Trapp, LLP Articles

June 1998

United States v. Bestfoods: The Supreme Court Tackles Parent Liability Under CERCLA

By Richard C. Coffin

Introduction and Case History

In putting the lid on one can of CERCLA worms, the Supreme Court may have taken it off another. In United States v. Bestfoods, et al., 1998 WL 292076 (June 8, 1998) the Court held:

A parent corporation that actively participates in, and exercises control over the operations of a subsidiary may not, without more, be held liable as an owner or operator of a polluting facility owned or operated by the subsidiary. The only exception to this rule regarding "derivative liability" is when facts support piercing the corporate veil under state law standards.
A corporate parent that actively participates in, and exercises control over, the operations of the specific facility in controversy may be held directly liable in its own right as an operator of the facility.

While the decision appears to have cleared up the area of derivative liability under CERCLA, it has exposed fertile ground for fact-based disputes over what constitutes operation or control of the facility sufficient for direct liability to attach. Indeed, the implications of the holding are sufficiently unclear that both sides claimed victory after the Court released the decision.

Bestfoods arose out of contamination at a chemical plant in Michigan. In 1957, Ott Chemical Co. began manufacturing chemicals at the site near Muskegon. From 1965 to 1972, the site was owned and operated by a wholly-owned subsidiary of CPC International, Inc., called Ott II. (CPC is now owned by Respondent Bestfoods.) During this period, CPC selected the board of directors of Ott II, including members of the CPC board, and a CPC official, identified as G.R.D. Williams, "played a significant role in shaping Ott II's environmental compliance policy." Massive pollution of soil and groundwater occurred at the site from 1957 until at least 1977. In 1981, EPA initiated remedial activities at the site, and in 1989 filed this action under section 107 of CERCLA to recover its costs.

The District Court found CPC liable based on its general control over Ott II during the period that contamination occurred. The Sixth Circuit, applying Michigan state veil-piercing law, determined that, despite the lack of separateness between the parent and the subsidiary in environmental matters, the corporate form had not been used to "perpetrate fraud or subvert justice," and therefore reversed the District Court. The Supreme Court agreed with the Sixth Circuit's decision on veil-piercing generally, but the Court vacated the decision and remanded the case for further proceedings on the issue of whether CPC had exercised sufficient direct control over the facility so that liability should attach. The Court stated unequivocally that the mere incidence of control of the subsidiary, without more, was insufficient to per se establish liability, but that derivative liability was still possible under state law veil-piercing doctrine. Activities here, however, according to the Court, were not sufficiently eccentric for piercing to apply - "[t]he analysis should instead have rested on the relationship between [Bestfoods] and the Muskegon facility itself." (Emphasis added.)

Before: Direct Control of the Facility or Indirect Control without Fraudulent Intent

Prior to Bestfoods there were two basic ways a parent company could be held liable for the actions of a subsidiary under CERCLA:

directly, by showing that the parent company participated in or controlled the subsidiary's operations with respect to the facility from which the contamination originated; or
indirectly, by showing that the parent company controlled the subsidiary generally, for example through common boards of directors or appointment of officers and executives.

The second prong was similar to the common-law doctrine known as "piercing the corporate veil" under which a court is asked to disregard the corporate structure that would otherwise protect shareholders (here the parent company) from liability for the acts of the corporation. A CERCLA plaintiff did not, however, have to prove that the parent's control was for improper purposes such as fraudulently protecting assets from potential creditors, as it would under most states' veil-piercing laws. This was an important distinction that made it significantly easier for a CERCLA plaintiff to pursue "deep pocket" parent companies.

After: Direct Control of the Facility or Control of the Subsidiary Rising to the Level of Piercing

Bestfoods has essentially put the indirect method of parent company CERCLA liability on par with traditional common-law veil-piercing doctrine. Instead, the Court has shifted the focus to the parent's involvement in environmental decisions at the facility in controversy. The Court wrote that "CERCLA liability may turn on operation as well as ownership, and nothing in the statute's terms bars a parent company from direct liability for its own actions in operating a facility owned by its subsidiary. This much is easy to say; the difficulty comes in defining actions sufficient to constitute direct parental 'operation'" of the facility.

The opinion offers some useful guidance on what it means to be an operator under CERCLA, and thereby subject to direct, personal liability under section 107(a)(2) of CERCLA. The statute defines operator tautologically as "any person . . . operating the facility." The Court expanded on the definition stating that "in the organizational sense more obviously intended by CERCLA, the word [operator] ordinarily means 'to conduct the affairs of; manage; operate a business. So, under CERCLA, an operator is simply someone who directs the workings of, manages, or conducts the affairs of a facility. . . . An operator must manage, direct or conduct operations specifically related to pollution, that is, operations having to do with the leakage or disposal of hazardous waste, or decisions about compliance with environmental regulations." (Emphasis added.) This definition of operator will prove critical now that the Court has clearly limited the derivative liability of parent corporations.

Implications of the Holding for Corporate Policies and Practices

The Court's decision appears to mean that a parent company may actively participate in and even control the operations of its subsidiary without necessarily subjecting itself to CERCLA liability, so long as the parent company holds the separateness of the two corporate entities in due regard. Companies with subsidiaries should, however, examine the relationships between parent and subsidiary and clarify the parent's involvement in the affairs of the subsidiary's facilities where CERCLA liability might attach. For example, where possible, in the area of environmental safety and compliance, management of subsidiary facilities should be distinct from the parent company's management of its own facilities.

In this case, the Court found it significant that Mr. Williams, CPC's "governmental and environmental affairs director" was an agent only of the parent - and not of the subsidiary - during his involvement in environmental issues at the subsidiary's facility. In fact, the Court found this issue so fundamental that it remanded the case for a more detailed evaluation of Williams' role. If the court below finds that Williams wore only his "CPC parent company hat," to use the Court's phraseology, while actively participating and exerting control over Ott II environmental decisions at the facility in controversy, Williams' actions may be sufficiently "beyond accepted norms of parental oversight of a subsidiary facility" for CERCLA liability to attach to the parent company.

The clear lesson here appears to be that officers and environmental compliance activities must wear two distinct hats, and clearly change hats depending on the activity in question and upon whose behalf the activity is undertaken. "The critical question is whether, in degree and detail, actions directed to the facility by an agent of the parent alone" go beyond normal oversight to infringe upon or replace the actions of agents of the subsidiary. Conversely, "activities that involve the facility but which are consistent with the parent's investor status, such as monitoring of the subsidiary's performance, supervision of the subsidiary's finance and capital budget decisions, and articulation of general policies and procedures, should not give rise to direct liability." The Court noted that there is generally a presumption that directors and officers are wearing their subsidiary hats when acting on behalf of the subsidiary. As a result, parent corporations should be careful to explicitly assign environmental managers separate positions in subsidiaries if they are going to be involved in day-to-day environmental compliance decisions.

This article was authored with the assistance of Landels Ripley & Diamond, LLP attorneys Buzz Hines and David Levy.
These materials are provided for information purposes only and are not intended as and cannot be considered legal advice. Before taking action based upon this information, you should consult your legal counsel.

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