CHAPTER 4 REDUCING THE LEGAL EXPOSURE OF OFFICERS, DIRECTORS, AND EMPLOYEES

• Jurisdiction: United States

Corporate Environmental Management II
(Feb 1994)
CHAPTER 4
REDUCING THE LEGAL EXPOSURE OF OFFICERS, DIRECTORS, AND EMPLOYEES
Paul J. Hemschoot, Jr.
Amax Gold Inc.
Englewood, Colorado
Douglas T. Hamilton
Osler, Hoskin & Harcourt
Toronto, Ontario

Introduction

With increasing frequency, courts are finding individual officers, directors and employees of a corporation liable in conjunction with the corporation for violation of various environmental laws. In the United States, this liability has arisen under the Clean Water Act¹ , the Resource Conservation and Recovery Act² ("RCRA") and the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended³ ("CERCLA"). Moreover, liability has been assessed not only in civil proceedings but through criminal prosecutions as well⁴ . A number of commentators applaud this result⁵ , arguing that only by imposing direct liability on corporate officers and directors can one be assured that they will be vigilant with respect to the environmental laws in their conduct of the corporation's business.

Liability for environmental offenses⁶ is premised on several theories. It is, of course, easy to find a corporate officer, director or employee liable civilly or criminally if he or she is an active participant in the corporate acts which violated the law⁷ . In cases where such active participation is not evident, some courts have nevertheless found liability premised on the doctrine of the "responsible corporate official", first evidenced in 1943 in the United States Supreme Court decision in U.S. v. Dotterweich⁸ , and subsequently confirmed in the 1975 United States Supreme Court decision of U.S. v. Park⁹ . Both of these cases arose under the federal Food, Drug and Cosmetic Act¹⁰ and a major factor in imposing liability was the court's concern that the nature of the statute required strict liability to protect public health. Some courts and commentators believe that the nature of the various environmental laws are of similar nature to justify the imposition of individual liability on corporate officers and directors irrespective of proof that they knowingly participated in the corporation's violation of the law¹¹ . This standard of the "responsible corporate officer" is specifically incorporated into the definition of "person" in the Clean Air Act¹² and the Clean Water Act¹³ . It has also been adopted by court decision in at least the Third Circuit to find criminal liability for corporate employees for violations of RCRA¹⁴ . In cases arising under CERCLA the analysis is focused on whether the individual corporate officer or employee is an "owner or operator" as defined under CERCLA, but the process of finding liability follows a similar analysis in many instances¹⁵ .

Clean Water Act¹⁶

The doctrine of the responsible corporate officer is expressly incorporated in the definition of the term "person" for purposes of criminal enforcement of this statute¹⁷ . It applies both to negligent violations and knowing violations, except that individual liability for knowing endangerment requires proof of actual awareness or belief by the individual defendant that his or her conduct placed another person in imminent danger of death or serious bodily injury and prohibits attribution of knowledge to the individual by a person other than the individual defendant¹⁸ . In proving the defendant's possession of actual knowledge, however, the statute specifically allows use of circumstantial evidence "including evidence that the defendant took affirmative steps to shield himself from relevant information."¹⁹

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The leading case is United States v. Frezzo Brothers, Inc.²⁰ in which the President and the Secretary of the corporate defendant²¹ , as well as the corporation, were convicted of willfully or negligently discharging pollutants into navigable water of the United States without a permit. The corporation was fined $50,000 and the two individual defendants were sentenced to thirty days in jail and fines aggregating $50,000. Frezzo Brothers, Inc. was engaged in mushroom farming. As part of the business, it produced compost to provide a growing base for the mushrooms. The compost is comprised mainly of hay and horse manure mixed with water and allowed to ferment outside on wharves. The corporation had a 114,000 gallon concrete holding tank designed to contain water runoff from the compost wharves and recycle the water back to them. There was a separate storm water runoff system that carried rain water through a pipe to a channel box on an adjoining property and ultimately into an unnamed tributary of the east branch of the White Clay Creek. The defendants were charged with willfully discharging manure into the storm water runoff system and also negligently discharging pollutants into a stream by having a holding tank that was too small to contain the compost wastes after a rain storm. The jury returned guilty verdicts on all counts. The corporation had no permit to discharge pollutants, but argued on appeal that the EPA had not promulgated any effluent standards applicable to the compost manufacturing business and had not instituted civil action prior to commencing criminal enforcement. The individual defendants also contended that there was insufficient evidence to convict them.

The Third Circuit Court of Appeals upheld all convictions holding that EPA promulgation of effluent limitation standards is not a prerequisite to the maintenance of a criminal proceeding based on violation of §1311a of the Act and, in the absence of a permit, there was a flat prohibition on discharges from the property. The court also held that the Administrator of the EPA is not required to pursue administrative or civil remedies, or give notice, before invoking criminal sanctions. Finally, the court found sufficient evidence to support the convictions of the individual defendants and dismissed their contention that the trial judge improperly instructed the jury that they could be found guilty as individuals when the indictment charged them with acting as corporate officers. The court specifically noted that the government argued its case on the "responsible corporate officer doctrine" recognized by the United States Supreme Court in United States v. Park²² and United States v. Dotterweich²³ and found no error in the jury instruction submitting the case on this theory²⁴ .

Clean Air Act²⁵

The federal Clean Air Act has a similar statutory scheme with respect to criminal enforcement as the Clean Water Act²⁶ , including the incorporation of "responsible corporate officer" in the definition of "person" for the purpose of such enforcement²⁷ and a similar prohibition against attribution of knowledge to an individual defendant in proving knowing endangerment²⁸ . It also allows circumstantial evidence to be used to prove a defendant's possession of the requisite knowledge²⁹ . No cases of individual liability of corporate officers, directors or employees for acts involving the corporation have been found, however.

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RCRA³⁰

This presents a somewhat different statutory scheme of enforcement. Criminal liability attaches only to knowing acts or omissions in violation of the Act³¹ and there is no statutory inclusion of responsible corporate officers in the definition of persons subject to enforcement under the Act. Nevertheless, in 1984 the Third Circuit Court of Appeals in the case of United States v. Johnson & Towers Inc.³² used the rationale of the Park and Dotterweich cases as a basis for assessing criminal liability against two employees, a foreman and a service manager in the trucking department, for knowing violations of RCRA. The criminal prosecution in this case arose from the disposal of chemicals at the corporate defendant's plant in New Jersey. In its business of repairing or overhauling large motor vehicles, the defendants used degreasers and other industrial chemicals that contained chemicals such as methylene chloride and trichloroethylene, both of which are classified as hazardous waste under RCRA and pollutants under the Clean Water Act. During the relevant period, the waste chemicals from these cleaning operations were drained into a holding tank and, when the tank was full, were pumped into a trench. The trench flowed from the plant property into a nearby creek, which was a tributary of the Delaware River. The corporate defendant had no permit for disposal of hazardous waste.

All three defendants (the corporation and its two employees) were charged with conspiracy under 18 U.S.C. § 371 (1982) as well as violations under RCRA and the criminal provisions of the Clean Water Act³³ . The individual defendants were also charged with being aiders and abettors under 18 U.S.C. § 2 (1982). The corporation pled guilty to the RCRA counts. The individual defendants pled not guilty and moved to dismiss. The lower court stated that the RCRA criminal provisions apply only to "owners and operators, i.e., those obligated under the statute to obtain a permit."³⁴ Since the court concluded that neither of the individuals was an owner or operator, it granted the individual defendants' motion as to the RCRA charges, but held that they could be liable for aiding and abetting. The government appealed and the Third Circuit Court of Appeals held that RCRA §6928(d)(2)(A) covers employees as well as owners and operators of a facility who knowingly treat, store or dispose of any hazardous waste, but that employees can be subject to criminal prosecution only if they know, or should have known, that there had been no compliance with the permit requirements of §6925 of RCRA³⁵ . The court then looked to the Park and Dotterweich line of cases as justifying the application of the criminal provisions of the statute to the individual defendants who, the court opined, were in a position to secure a permit. It purported to look at congressional intent in the passage of RCRA and...