Parent Corporation Liability Under Cercla After United States v. Bestfoods

• Jurisdiction: United States,Federal
• Citation: Vol. 28 No. 3 Pg. 85
• Pages: 85
• Publication year: 1999

28 Colo.Law. 85 Colorado Lawyer 1999.

1999, March, Pg. 85. Parent Corporation Liability Under CERCLA After United States v. Bestfoods

---

85

Vol. 28, No. 3, Pg. 85

The Colorado Lawyer
March 1999
Vol. 28, No. 3 [Page 85]

Specialty Law Columns
Natural Resource and Environmental Notes
Parent Corporation Liability Under CERCLA After United States v. Bestfoods
by Dean C. Miller, Nancy A. Mangone

Companies have long wondered if they would be held liable as owners or operators in the Superfund1 context for the actions of their subsidiaries. Their confusion was compounded by disparate precedents in the U.S. circuit courts - the circuits were all over the board on whether to "pierce the corporate veil" to hold parent companies liable under CERCLA § 107(a), and, if so, what factual circumstances and legal standards they would apply under that analysis

That confusion was somewhat stemmed with the U.S. Supreme Court's recent decision in United States v. Bestfoods.2 Nevertheless, the decision was not a panacea. Questions remain regarding whether state or federal common law will be applied to "pierce the corporate veil," whether such standards will continue to vary by circuit, and what conduct will be considered sufficiently "eccentric" or "outside the norm" so as to hold parent corporations liable for the activities of their subsidiaries

The Decision in Bestfoods

In Bestfoods, the Supreme Court applied fundamental principles of statutory construction to determine when a parent corporation can be held liable under CERCLA § 107(a)(2)3 as an "operator" of a polluting "facility" that is owned or operated by a subsidiary. The Court held that the parent may be subject to liability on two different theories: (1) "derivative" liability, when circumstances warrant piercing the corporate veil of the subsidiary; or (2) "direct" liability, for the parent corporation's own action, when it operates the facility

For the direct liability scenario, the Court emphasized that, for purposes of operator liability under CERCLA, the proper focus of the analysis is on the relationship between the parent and the facility, not that between the parent and the subsidiary.4 In addition, the Court emphasized that well-established principles of limited liability offered by the corporate form will not be abrogated without express direction from Congress.5

With respect to derivative liability, the Court reasoned that nothing in CERCLA purports to reject the "bedrock principle" that a parent corporation is not liable for the acts of its subsidiaries.6 Thus, although control of a subsidiary by a parent through stock ownership or duplication of some or all of the directors or executive officers are factors to consider in any piercing analysis, these two factors alone will not result in liability beyond the assets of the subsidiary.7

The Court noted that nothing in CERCLA purports to rewrite the "fundamental principle of corporate law . . . that the corporate veil may be pierced and the shareholder held liable for the corporation's conduct when, inter alia, the corporate form would otherwise be misused to accomplish certain wrongful purposes, most notably fraud, on the shareholder's behalf."8 However, the Court declined to resolve the significant question of whether derivative liability - that is, piercing the corporate veil - should be assessed by applying individual state law or a uniform federal common law.9

For purposes of direct liability under CERCLA, the Court defined an "operator" as one who

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.10

In reaching its unanimous conclusion regarding the appropriate circumstances under which to hold a parent directly liable as an operator under CERCLA, the Court rejected the use of an "actual control" or "participation and control" test - which fused direct and indirect liability - as previously applied by the District Court and the First and Eleventh Circuits.11 Under this "actual control" test, a parent would be found liable as an operator only if it "actually operated the business of the subsidiary."12 However, the Court reasoned that the more relevant inquiry for establishing direct liability was the parent's interaction with the subsidiary's facility, not its interaction with the subsidiary's business.13 Inquiry into the business relationship between the two corporate entities should be reserved for the "derivative" liability theory, which requires the application of the traditional tests for "piercing the corporate veil."14

In emphasizing a theme that runs throughout the Bestfoods opinion - whether the conduct of the parent or its officers is consistent with the norms of the parent-subsidiary relationship - the Court observed that when looking at the activities of the parent corporation and its officers, "[t]he critical question is whether, in degree and detail, actions directed to the facility by an agent of the parent alone are eccentric under accepted norms of parental oversight of a subsidiary's facility."15 The Court observed that directors and officers holding positions with both the parent and the subsidiary can and do "'change hats' to represent the two corporations separately, despite their common ownership."16 Therefore, there is a presumption that the directors are wearing their "subsidiary hats" and not their "parent hats" when acting for the subsidiary.17

Examples of situations in which a parent may be held directly liable for the operation of a subsidiary's facility include: (1) operation of the facility by the parent "in the stead of its subsidiary or alongside the subsidiary in some sort of joint venture"; (2) "a dual officer or director might depart so far from the norms of parental influence exercised through dual office holding as to serve the parent, even when ostensibly acting on behalf of the subsidiary in operating the...