Scope of Relations that May Create Liability for Pollution Cleanup Costs

Introduction

The Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) 42 USC § 9601, et seq. provides the federal statutory framework for civil liability for the costs of cleaning up hazardous substances.  CERCLA creates a form of strict liability for a broad class of potentially responsible parties.  These parties include all who fall within the meaning of "owners" and "operators" of facilities where hazardous substances are handled or disposed, and persons who transport or arrange for the transport of hazardous substances.  This article provides a summary of the potential CERCLA liability of corporations, their shareholders, employees, officers and directors,  corporate parents and subsidiaries, successors by merger, stock purchase or asset purchase, as well as lenders, trustees and other fiduciaries.

Parent Corporations And Other Shareholders

For most businesses, the touchstone for CERCLA liability is whether the company is the "owner" or "operator" of a "facility" from which hazardous substances were disposed.   Most directly, the company may own the facility.  Alternatively, the company may operate the facility.  In United States v. Bestfoods, 524 US 51, 118 S Ct 1876 (1998), the United States Supreme Court issued a much anticipated decision defining "operator" in the corporate context.  This decision disposed of a confusing welter of lower court standards for shareholder and parent liability as operators. 

In Bestfoods, the court ruled that a parent corporation could be responsible for the CERCLA liability of its subsidiary either as an "operator" under CERCLA or under the common law theory of "alter ego," also known as "piercing the corporate veil."   The same rules would appear to apply to any controlling shareholder.  As to "operator" liability, Bestfoods and subsequent decisions generally hold:

1. In order to impose liability on the parent corporation, it must be directly involved in management or operations specifically related to the pollution at the facility or the facility's compliance with environmental regulations.
2. The operative standard is actual control, not a theoretical or unexercised right to control.
3. On the other hand, activities that are consistent with the parent's investor status (monitoring performance, supervising finances, making capital budget decisions, setting corporate policy, etc.) do not make a parent an "operator."
4. Control over the subsidiary's board of directors, or even if the parent and subsidiary have identical boards of directors, does not create a presumption of "operator" status for the parent.
5. Control over the general functioning of the subsidiary is to be distinguished from control of the facility operations that have caused the pollution. 

With these rules, Bestfoods has eliminated the multiplicity of conflicting standards for a parent corporation's CERLCA liability.  There remain considerable gray areas. between the clear examples of hands-off investor status and actual supervision of illegal dumping.   Significant issues remain in defining the line between the parent's policy oversight, staffing  and budget making decisions that may inevitably impact the subsidiary's compliance with CERCLA

Liability as an "alter ego" of a corporation has been a long established common law principle in other contexts.  Under the "alter ego" or "piercing the corporate veil" theory, a parent corporation or other controlling shareholder may be liable for the company's CERCLA liability based upon the following factors:

1. The amount of respect given to the separate identity of the corporation by its shareholders (i.e., milking or commingling);
2. The fraudulent intent of the shareholders (possibly including under-capitalization);
3. The existence of any misrepresentation, violation of laws or holding out to be the operator;
4. The degree of injustice created by acceptance of the corporate shield.

 Alter ego cases tend to be highly fact specific.  These cases involve a balancing of the many facts developed to address the four criteria described above.  There is also a need to balance the corporate law goal of insulating legitimate shareholders from personal liability against CERCLA's goal of expansive liability in order to fund the cleanup of pollution.

Employees, Officers And Directors

Bestfoods has been interpreted to indirectly set the standard for individual liability of employees, officers and directors.  Again, the touchstone is to return to the definition of "operator" in CERCLA and as interpreted in the case law.  Liability as an "operator" attaches to any person who operates a polluting facility, and courts have held this to include individual employees, officers and directors. 

This scope of liability is consistent with general common law principals for tort liability.  Employees, officers and directors have never been immune from tort liability simply because the tort was committed within the course and scope of their work.  However, the scope and magnitude of potential CERCLA liability, and the complexity of compliance with the applicable law far exceeds that usually involved in common law negligence and other tort actions.

Fortunately, Bestfoods appears to have clarified that actual control; not simply authority to control is the proper standard for CERCLA liability.  This overrules prior Ninth Circuit decisions.  For liability to be imposed under the actual control standard, the person must have actually exerted direct control over the conduct that violated CERCLA.

Corporate Successors

Corporate successors may be created by either stock purchases (including mergers) or by asset purchases.   For stock purchasers and surviving merger parties, the usual doctrine of successor liability applies to CERCLA liability.  A corporation who merges with or acquires the stock of another corporation generally assumes all of the liabilities of the merged or acquired corporation.  Thus, the acquiring company is liable for the full extent of the acquired company's CERCLA liability.

With respect to asset purchases, the courts have typically applied common law and general corporate law to the buyer's CERCLA liability.  Pursuant to these principals, the asset buyer does not assume the liabilities of the seller except in four situations:

1. The purchaser agrees to assume liabilities:
   This situation arises in the CERCLA context several ways.  First, there may be agreements to assume liability that pre-date CERCLA, or at least predate widespread appreciation of successor liability under CERCLA.  Secondly, it arises more recently in situations where the buyer is unsophisticated and/or has not had counsel in the transaction.  It is important to note that even in the absence of any agreement to assume liabilities,  if the assets acquired by the buyer include contaminated property, the buyer will be directly liable as an owner.  Similarly, the buyer could promptly become an operator if it operates the acquired assets in a way that causes pollution.
2. There is deemed to be a de facto merger or consolidation of the seller and buyer:
   This situation arises where the asset purchase is so complete and the circumstances of the business operations so unchanged that the transaction is deemed to be the equivalent of a merger.  The necessary elements of a de facto merger or consolidation include (a) there is a continuity of management, personnel, locations, assets and operations; (b) there is a carry over of shareholders; (c) the seller promptly ceases operations; and (d) the buyer assumes all obligations of the seller that are necessary for uninterrupted continuation of the business.
3. The purchaser is found to be a "mere continuation" of the seller:
   This theory is closely related to the de facto merger theory.  In practice the term is applied to more clear-cut examples of near total asset purchases and continuity of business operations, ownership and control.
4. The transaction is a fraudulent attempt to avoid liability.
   The mechanics of this exception often approximate the scenarios discussed above as de facto mergers or mere continuations.  However, this exception is predicated upon a fraudulent attempt to avoid liability.   An example is provided by Schmoll v. AcandS, Inc. 703 F Sup 868 (D Or 1988) aff'd 977 F2d 499 (1992).  In that case, the buyer purchased the predecessor's assets, retained the valuable assets and disposed of the asbestos-containing products.  The court imposed liability on the buyer, finding the transaction to be a blatant attempt to "escape asbestos related liabilities."

With careful planning and thoughtful due diligence, stock purchasers or asset purchasers can identify and limit the risks of acquiring CERCLA liabilities.  Asset purchases can be legitimately structured to avoid the predecessor's CERCLA liability.  Even stock purchases or mergers can be structured to quantify and allocate the risks of CERCLA liability.

Dissolved Corporations

In the event that a corporation having CERCLA liability has been dissolved, what is the potentially liability of its former owners?  As noted above, they may be liable as operators or as alter egos.  In addition, former owners of a dissolved corporation are liable under CERCLA to the same extent they are liable under state law for other corporate liabilities.

Under Oregon law, the liability of a former shareholder of a dissolved corporation is limited by: (1) the shareholder's pro-rata share of the former corporation's liability based on stock holdings, and (2) not more than the value of assets actually distributed to the shareholder upon dissolution.  Unless there is another independent basis for liability, these general Oregon rules of former shareholder liability for a dissolved corporation's liability will apply to CERCLA liability.

Lenders

CERCLA expressly excludes from the definition of "owner or operator" any person who "without participating in management of a ... facility, holds indicia of ownership primarily to protect his security interest."   The scope of protection afforded by this provision varied greatly in court decisions and was interpreted quite narrowly in an influential Eleventh Circuit decision, United States v. Fleet Factors Corp., 901 F2d 1550 (11th Cir 1990).  In 1996, Congress passed the Asset Conservation, Lender Liability and Deposit Insurance Protection Act, which amended CERCLA to limit and clarify lenders' potential CERCLA liability.  The key provisions of the Act are:

1. A lender is not an owner or operator if (a) it holds indicia of ownership only to protect its security interest and (b) it does not participate in actual management of the facility (as opposed to the capacity or unexcercised authority to control facility operations).
2. Indicia of ownership include mortgages, trust deeds, surety bonds, certain lease finance transactions, and legal or equitable title obtained through foreclosure.
3. A lender is deemed to participate in management while the borrower is in possession of the facility if it exercises decision making control over environmental compliance or assumes responsibility for day-to-day decision making regarding operational functions of the facility, as distinguished from financial or administrative functions.
4. Participation in management does not include:
   a.   Holding, abandoning or releasing a security interest;
   b.   Making environmental compliance terms part of the credit agreement;
   c.   Enforcing environmental compliance contract terms;
   d.   Inspecting the facility;
   e.   Requiring the borrower to undertake environmental response actions;
   f.   Providing financial or other advise in an effort to mitigate, prevent or cure a default or a diminution in the value of the facility that serves as security;
   g.   Restructuring the terms of the security interest.

The Act also provides that a lender who forecloses contaminated property that serves as security will not be deemed to be an owner if it "seeks to sell, re-lease (in the case of a lease transaction) or otherwise divest [itself] of the … facility at the earliest practicable, commercially reasonable time, on commercially reasonable terms, taking into account market conditions and legal and regulatory requirements."  Given the number of subjective terms in this provision, it is a dubious safe harbor.  Moreover, under some circumstances a lender who forecloses upon contaminated property runs the risk of being deemed to be an operator between the time it takes control of the property and divests itself of the property.

Trustees And Other Fiduciaries

A "fiduciary" is defined by CERCLA as a person who acts for the benefit of another as a bona-fide trustee, executor, administrator, custodian, guardian of estates or guardian ad litem, receiver, conservator, committee for  incapacitated persons, personal representative, trustee under a financing agreement or "representative in any other capacity that the Administrator [of the EPA] determines to be similar to the capacities [described above]."   CERCLA provides several safe harbors for activities a fiduciary may engage in without being exposed to personal liability.  These include:

1. Undertaking or directing another person to undertake environmental investigations or cleanup actions;
2. Terminating the fiduciary relationship;
3. Requiring contractual terms related to environmental compliance;
4. Inspecting facilities;
5. Providing financial or other advice;
6. Restructuring the terms of the fiduciary relationship; and
7. Administering a facility that was contaminated prior to the commencement of the fiduciary relationship.

The liability of a fiduciary cannot exceed the value of the assets held as a fiduciary.  This limitation may be of little comfort, as it applies solely in the context of one's status as a fiduciary.   While acting as a fiduciary, a person may nonetheless be exposed to unlimited CERCLA liability as an operator, arranger or transporter of hazardous substances.

The foregoing applies to the trustee's personal liability.  This is to be distinguished from the trust's liability under CERCLA.  The trust itself is potentially liable as an owner or operator to the same extent as any other entity.

Conclusion

CERCLA provides that owners and operators of facilities that are the source of pollution, as well as persons who transport or arrange for the transportation of hazardous substances that become sources of pollution, are strictly liable for the costs of investigating and cleaning up the pollution.  CERCLA liability is not limited to the value of the offending property.  Where current, direct owners and operators cannot be found, or lack the financial resources to complete the necessary cleanup, the government (or other responsible parties) will seek to cast a wider net to implicate solvent defendants.

That net can include parent corporations and shareholders, as either operators under CERCLA or as alter egos under common law.   Potentially liable parties can also include a company's employees, officers and directors to the extent their actions make them personally "operators."  It also can include predecessor and successor business organizations, by merger, stock purchase or asset purchase.  Shareholders of dissolved corporations may also be liable up the amount they received in liquidation of the corporation.

Special rules apply to lenders, trustees and other fiduciaries.  These rules create safe harbors and generally serve to limit the liability of persons in their capacity as lenders, trustees and other fiduciaries.  However, lenders, trustees and other fiduciaries must exercise caution to not take actions that would render them liable as owners or operators.