Chapter 13 Corporate Environmental Liability

ADW Draft 2/13/12

AP edits 2/19/12

Chapter 13 Corporate Environmental Liability

Primary Sources Used in This Chapter:

CERCLA § 107 (42 U.S.C. § 9607)

United States v. Bestfoods

Concepts for this Chapter:

·  Corporation as polluter

o  Respondeat superior liability

o  But pollution pays!

·  CERCLA liability

o  Parent corporation liability

§  Owner: only under PCV (derivative liability)

§  Operator: manage polluting facilities (direct liability)

o  Factors in direct liability: parent personnel – polluting facility

§  Dual officers/directors not enough

§  Beyond “norms” of parental oversight

·  Corporate Officers’ liability

o  Criminal (environmental statutes): no convictions!

o  Civil: beyond normal PCV

A. Corporation as “Polluter”

Environmental liability is the third chapter of the discussion of corporate externalities. This chapter combines the themes of PCV and corporate criminality from Chapters 11 and 12. It continues the discussion of civil and criminal corporate liability, as well as discussing the imposition of liability of corporate parents for the environmentally harmful practices of their subsidiaries under the Superfund statute.

B. Environmental Liability of Corporate Actors

Question: Do environmental laws apply to corporations?

Answer: Yes. Federal environmental statutes include corporations in their definitions of regulated “persons.”

Question: When is a corporation liable as a polluter?

Answer: In most cases, it is not necessary to show that there is a corporate policy that acquiesces or supports pollution. It is only necessary to show that people charged with the responsibility (as agents) to live up to environmental standards have failed to do so.

A corporation may be either civilly or criminally liable:

·  Civil liability: in government and private suits from failure to supervise, failure to take adequate remedial measures, some employee conduct

·  Criminal liability: for acts committed by employees acting within the scope of their employment for the benefit of the corporation

Question: What about the employees who take the criminal actions?

Answer: Prosecutors also indict corporate officers for criminal violations. The risk of going to jail may motivate an individual more effectively than the imposition of fines or other liability on the corporation.

Question: Why do companies violate environmental laws? Does pollution pay?

Answer: Yes. The Breakout Box on p. 350 discusses the fact that when a corporation is charged with pollution, the fines and compliance costs that result exceed the stock price drop (market reputation).

Corporations may use the environment without paying for it (they externalize many environmental costs). The fines for environmental law violations do not make up for the income gained by the corporation.

1. Parent Corporation Liability

Question: What law governs corporate environmental practices?

Answer: Although state law governs corporations, federal environmental laws such as CERCLA can trump state law.

Question: What is CERCLA?

Answer: CERCLA is the Comprehensive Environmental Response, Compensation and Liability Act, often known as the Superfund Statute, was passed in 1980 to remedy toxic waste sites around the country and to create a liability scheme in which responsible parties would pay for the costs of remediation.

Comprehensive Environmental Response, Compensation and Liability Act

(CERCLA) § 107 (42 U.S.C. § 9607)

(a) Covered persons; scope; recoverable costs and damages; interest rate; "comparable maturity" date

…

(2) Any person who at the time of disposal of any hazardous substance owned or operated any facility at which such hazardous substances were disposed of

…

shall be liable for

(A) all costs of removal or remedial action incurred by the United States Government or a State or an Indian tribe not inconsistent with the national contingency plan;

(B) any other necessary costs of response incurred by any other person consistent with the national contingency plan;

(C) damages for injury to, destruction of, or loss of natural resources, including the reasonable costs of assessing such injury, destruction, or loss resulting from such a release; and

(D) the costs of any health assessment or health effects study carried out under section 9604(i) of this title.

http://uscode.house.gov/download/pls/42C103.txt

Is this the correct excerpt? The CERCLA section is unclear but I am not sure how you got the text in the book.CORRECTION: The statutory text at the bottom of page 350 is from CERCLA §107(a)(2), not (a)(1).

United States v. Bestfoods 524 U.S. 51 (1998)

Facts: The United States commenced an action against CPC International, Inc. (CPC) for the costs of cleaning up industrial waste generated by a chemical plant in Muskegon, Michigan. The property was used as a dumping site from 1957 to 1972. The company that began the practice was sold in 1965 to CPC International, Inc. (CPC), and operated as a wholly-owned subsidiary. CPC sold the subsidiary in 1972 to a company that then went bankrupt. In 1981 the Environmental Protection Agency (EPA) began to clean up the site, with a remedial plan costing tens of millions of dollars.

Under CERCLA, the United States is allowed to use this fund to finance cleanup efforts, which it can then replenish by suits brought under § 107. To recover some of the money spent on cleanup, the United States filed an action under § 107 against CPC (among others).

Note: As discussed in the Breakout Box on p. 352, CPC was sold to Bestfoods during the litigation. Under the “mere continuation” doctrine, an acquiring corporation assumes the liability of its predecessor after a transfer of assets if

·  It is the only survivor

·  There is a general continuity in the business operations, and

·  There is overlap of shareholders and directors between the two corporations.

Issue: Under CERCLA, can a parent corporation that actively participated in, and exercised control over, the operations of a subsidiary, without more, be held liable as an operator of a polluting facility owned or operated by the subsidiary?

Holding: No. The parent has no derivative (owner) liability unless the veil is pierced. However, the parent may be held liable directly in its own right as an operator of the facility if the corporate parent actively participated in and exercised control over the operations of the facility itself. Court remands to determine if CPC operated the facility.

Reasoning: A parent corporation that actively participated in, and exercised control over, the operations of a subsidiary may not, without more, be held liable as an operator of a polluting facility owned and operated by the subsidiary unless the corporate veil can be pierced. However, a corporate parent that actively participated in, and exercised control over, the operations of the facility itself may be held directly liable in its own right as an operator of the facility.

Justice Souter noted the general principle that a parent corporation is not liable for the acts of its subsidiaries and emphasized that nothing in CERCLA rejected that “bedrock” principle. However, Justice Souter also noted another fundamental principle: that the corporate veil may be pierced and the shareholder held liable for the corporation’s conduct “when the corporate form would otherwise be misused to accomplish certain wrongful purposes”

Justice Souter therefore agreed with the Sixth Circuit was correct – it was necessary to pierce the corporate veil in order to hold a parent corporation derivatively liable for a subsidiary’s actions. However, nothing in CERCLA barred a parent from being held directly liable (as an operator) for its own actions in operating a facility owned by its subsidiary.

What is operationan "operato"? Under CERCLA, an operator must “manage, direct or conduct operations specifically related to pollution.” Operation means exercise of discretion over the facility’s activities.

Using this standard, Justice Souter found that the Sixth Circuit erred in limiting direct liability under the statute to a parent’s sole operation, which eliminated a possible finding that CPC was liable as an operator.

Justice Souter also took issue with the District Court’s mistaken focus on the relationship between parent and subsidiary, rather than parent and facility, in deciding whether CPC might be liable as an operator of the facility.

Because there was some evidence that indicated that CPC engaged in this sort of operator behavior at the Muskegon plant (an agent, Williams, worked only for CPC and played an obvious role in dealing with the toxic risks from the plants operation), the judgment of the Court of Appeals was vacated and the case was remanded to the District Court.

Points for Discussion

1. “Owner or operator” liability

Question: Can parent corporations be liable for clean-up costs of a subsidiary?

Answer: No, according to the normal rule of limited liability. Limited liability allows the separation of assets and risks within corporate groups. Corporate parents can place risk in separately incorporated subsidiaries without incurring liability (except when the veil can be pierced).

Question: What is the impact of Superfund’s “owner and operator” language?’

Answer: Superfund’s owner and operator language has been interpreted expansively to impose liability on parent corporations for the dumping of their subsidiaries.

2. Derivative vs. direct liability

Question: How can parents be held liable for the dumping of their subsidiaries under CERCLA?

Answer: This has been accomplished two ways:

·  Derivative piercing liability

Even if the parent avoids being “owner” or “operator” liability, it can incur derivative liability when the subsidiary incurs CERCLA liability if the veil can be pierced.

Result: the parent corporation is better off if it is completely detached from the actions of the subsidiaries – allowing them to pollute more

·  Direct “operator” liability

The parent corporation may be deemed an “operator” if it directs, manages or conducts the affairs of a facility (e.g. if the parent controls a subsidiary’s environmental programs, the parent may be liable as an operator).

This must be an abnormal parental influence – not the regular parent/subsidiary relationship.

3. Deference to corporate norms

Question: Why does the Supreme Court adopt “state” PCV standards and call state-base corporate limited liability a “bedrock principle”? CERCLA is federal law.

Answer: It is not clear. Perhaps this is some kind of internal affairs doctrine. Or perhaps the fact that federal law assumes that state law has a preeminent position in corporate law. A more skeptical interpretation may be that capitalism pays taxes, and the Supreme Court is not going to fool around.

Question: Which state law is Justice Souter talking about?

Answer: If federal “derivative liability” depends on state law, which state? Do you look to the law of the state where the corporation is incorporated? Or the law where the pollution happened? We do not know.

4. Rewarding laxity

Question: Which parent company is better off – one that oversees its subsidiary’s potentially polluting activities or the one that does not?

Answer: Although it is tempting to answer that ignoring a subsidiary’s activities is more sensible, there is also the study cited in the Breakout Box on p. 358 that found that at least some kinds of proactive, positive environmental action results in higher share value.

2. Director and Officer Liability

Although heavy fines may be extracted from corporations which violate environmental laws, deterrence and punishment may be more effective when corporate officers are held individually liable for violations. Although environmental law has easily allowed the imposition of criminal liability on low-level employees directly involved in the polluting behavior, a more interesting question is the liability of directors and officers of a polluting firm.

The Resource Conservation and Recovery Act, the Clean Water Act and the Clean Air Act include an exception to corporate limited liability and the possibility of imposing personal liability on corporate executives who are “responsible corporate officer[s]” in supervisory roles when pollution occurs. Courts have been less willing to impose such liability unless the officers have committed some independent wrong.

Nevertheless, the data on PCV in environmental cases suggest that lower courts may have relatively high rates of piercing in environmental cases.

Question: Should there be a different standard for PCV in environmental cases?

Answer: Maybe. The evidence that share prices are not being affected as much as the cost for the environmental harm being done suggests that some additional pressure on the corporate decisionmaking process may be appropriate. On the other hand, if parent/officer liability is needed, then perhaps the better course would be a specific provision in the statute itself.

Bonus Hypothetical:

You are the general counsel of GlobalPetroleum. There has been a terrible accident. An oil rig leased to GP has gone down in flames with loss of life, and the uncapped underwater well is spewing oil into the Gulf of Mexico. It may become the biggest man-made oil spill in history.

It turns out the rig was actually operated not by GP, but its wholly owned subsidiary, GP Exploration. Liability of GP Exploration (as “holder” of the offshore mineral rights) is capped under the Oil Pollution Act of 1990 at $75 million, unless there was “gross negligence.”

The BP board has met in emergency session. You have been asked to address GP liability. What do you advise the board?

The Oil Pollution Act of 1990 is available here:

http://epw.senate.gov/opa90.pdf

Answer: This hypothetical is obviously based on the BP oil spill. In that case, there were numerous subsidiaries between BP plc and BP explorationExploration:

·  BP plc

·  BP North America Inc.

·  BP Corp North America

·  BP Co North America

·  BP America Production

·  BP Exploration, Inc.

Nevertheless, it was BP plc which funded the BP Oil Spill Victim Compensation Fund

Is this accurate? Yep

As General Counsel of GlobalPetroleum, your analysis may go like this:

GP (parent) liability

•  Oil Pollution Act no exception to LL, parent not “holder,” unless PCV

•  Derivative liability

–  Courts protect LL (see Bestfoods), more $$ and oil

–  Depends on parent $$, involvement, environmental supervision – more facts

–  Depends on incorporating state of GP, GP Exploration, or spill

–  Unlikely that court will PCV

•  Direct liability

–  CERCLA superseded by OPA, no “operator” liability

–  Might be liable as “operator” – need more facts

– 

Liability of GP Exploration

•  Relevant to parent exposure

–  Depends on whether “gross negligence” - need more facts, likely