Environmental Law - W. Scott Laseter and Julie v. Mayfield

• Jurisdiction: United States,Federal
• Publication year: 1999
• Citation: Vol. 50 No. 4

Environmental Lawby W. Scott Laseter*and

Julie V. Mayfield**

Departing somewhat from the format of earlier environmental law survey articles,¹ this Survey devotes substantial attention to a 1998 decision of the United States Supreme Court in a case that arose under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA").² Although that case, United States v. Bestfoods,³ emerged from the Sixth Circuit, it will almost certainly have important ramifications for Eleventh Circuit jurisprudence in the area of CERCLA operator liability. Further, the case may signal a new conservative leaning by the Supreme Court that may extend beyond the narrow issue of that case to other questions arising under CERCLA.

In addition to discussing Bestfoods, this Survey also discusses a recent case that arose under the National Environmental Policy Act ("NEPA")⁴ and the Clean Water Act ("CWA"),⁵ as well as a recent case involving the Endangered Species Act ("ESA").⁶ As with its more recent predecessors, this Survey will not provide a sketch of the broad statutory and regulatory schemes of these statutes; rather, it will refer to earlier survey editions for general overview as well as additional cases that address these laws.

I. Comprehensive Environmental Response, Compensation, and Liability Act

In Bestfoods the Court considered for the first time the scope of operator liability for parent corporations under CERCLA.⁷ In doing so, the Court potentially called into question the validity of hundreds of cases decided by federal circuit and district courts during the last fifteen years.

Prior to Bestfoods, federal courts had shown considerable disagreement concerning when a parent corporation should be held liable as an owner or operator of a facility at the time of disposal of hazardous substances.⁸ Under what was probably the most expansive view, the Fourth Circuit employed an "authority to control" test by which a parent corporation could be held liable if it had the mere authority to control the subsidiary's operations.⁹ At the other end of the spectrum, the Sixth Circuit held that, for the most part, a parent could be found liable only if its domination of the subsidiary was sufficient to pierce the corporate veil under traditional corporate law principles.¹⁰ In between, the Eleventh Circuit and several other circuits held that a plaintiff must show that the parent exerted "actual control" over the subsidiary and that such control could be inferred from evidence of involvement in managing the subsidiary even though the evidence might not be sufficient to pierce the corporate veil under traditional corporate law rules.¹¹

In Bestfoods, CPC International, Inc. ("CPC") owned substantially all the shares of Ott Chemical Corporation ("Ott") from 1965 to 1972, during which time large quantities of hazardous substances were released into the environment at the Ott facility.¹² During this time, CPC controlled the selection of Ott's officers and board members.¹³ Additionally, the chairperson of the board of Ott was always a high level CPC executive.¹⁴ Furthermore, at least some individuals working for CPC were involved at the Ott facility even though they did not have official responsibilities for Ott.¹⁵

Employing an "actual control" test, the district court found CPC liable because CPC selected Ott's board of directors and populated Ott's executive ranks with CPC officials and because one CPC official played a significant role in shaping Ott's environmental compliance policy.¹⁶ However, based on its precedents employing a very narrow view of operator liability, the Sixth Circuit reversed.¹⁷ Although the circuit court noted that it was at least theoretically possible to find a parent corporation directly liable as an operator, writing that "[a]t least conceivably, a parent might independently operate the facility in the stead of its subsidiary; or, as a sort of joint venturer, actually operate the facility alongside its subsidiary," it rejected the district court's use of the broader "actual control" approach.¹⁸ The circuit court held that where a parent corporation is sought to be held liable as an operator pursuant to 42 U.S.C. Sec. 9607(a)(2) based upon the extent of its control of its subsidiary which owns the facility, the parent will be liable only when the requirements necessary to pierce the corporate veil [under state law] are met. In other words . . . whether the parent will be liable as an operator depends upon whether the degree to which it controls its subsidiary and the extent and manner of its involvement • with the facility, amount to the abuse of the corporate form that will warrant piercing the corporate veil and disregarding the separate corporate entities of the parent and subsidiary.¹⁹

The Supreme Court granted certiorari.²⁰ As a preliminary step in its analysis, the Court framed the general standard for operator liability. The Court stated that "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."²¹

After summarily dispatching the "authority to control" test, the Court criticized the "actual control" test for direct liability for a parent corporation, stating:

The well-taken objection to the actual control test, however, is its fusion of direct and indirect liability; the test is administered by asking a question about the relationship between the two corporations (an issue going to indirect liability) instead of a question about the parent's interaction with the subsidiary's facility (the source of any direct liability). If, however, direct liability for the parent's operation of the facility is to be kept distinct from derivative liability for the subsidiary's own operation, the focus of the inquiry must necessarily be different under the two tests. "The question is not whether the parent operates the subsidiary, but rather whether it operates the facility, and that operation is evidenced by participation in the activities of the facility, not the subsidiary. Control of the subsidiary, if extensive enough, gives rise to indirect liability under piercing doctrine, not direct liability under the statutory language." The District Court was therefore mistaken to rest its analysis on CPC's relationship with [Ott], premising liability on little more than "CPC's 100-percent ownership of [Ott]" and "CPC's active participation in, and at times majority control over, [Ott]'s board of directors." The analysis should instead have rested on the relationship between CPC and the Muskegon facility itself²²

Thus, the Supreme Court agreed with the Sixth Circuit that indirect liability can only be predicated on factors that would justify piercing the corporate veil.²³ The Court based its decision on two well-founded principles of corporate law: (1) "that a parent corporation (so-called because of control through ownership of another corporation's stock) is not liable for the acts of its subsidiaries";²⁴ and (2) "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."²⁵ Finding that "[n]othing in CERCLA purports to rewrite [these rules]," the Court held that "when (but only when) the corporate veil may be pierced, may a parent corporation be charged with derivative CERCLA liability for its subsidiary's actions."²⁶

The Court further noted that "'it is entirely appropriate for directors of a parent corporation to serve as directors of its subsidiary, and that fact alone may not serve to expose the parent corporation to liability for its subsidiary's acts.'"²⁷ The Court then created a presumption in favor of finding that a person occupying positions for both the parent and subsidiary corporations acts in fact on behalf of the corporation on whose behalf he appears to act.²⁸ The Court declared:

This recognition that the corporate personalities remain distinct has its corollary in the "well established principle [of corporate law] that directors and officers holding positions with a parent and its subsidiary can and do 'change hats' to represent the two corporations separately, despite their common ownership." Since courts generally presume "that the directors are wearing their 'subsidiary hats' and not their 'parent hats' when acting for the subsidiary," it cannot be enough to establish liability here that dual officers and directors made policy decisions and supervised activities at the facility. The [Plaintiff] would have to show that, despite the general presumption to the contrary, the officers and directors were acting in their capacities as CPC officers and directors, and not as [Ott] officers and directors, when they committed those acts. The District Court made no such inquiry here, however, disregarding entirely this time-honored common law rule.²⁹

Finally, the Court addressed the situation of the individual who works for the parent but has some supervisory involvement with the subsidiary.³⁰ The Court stated that courts must distinguish

a parental officer's oversight of a subsidiary from such an officer's control over the operation of the subsidiary's facility. "[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 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...