Corporate Noncompliance with the Clean Water and Clean Air Acts: Theories to Hold a Director Personally Liable
By Maya K. Van Rossum
INTRODUCTION
Perhaps the most contemptible of actions which harm the Earth are those taken by individuals in positions of power to further their own economic, political and business goals. In 1908, President Theodore Roosevelt recognized the need to control individual greed for the good of the whole, stating:
We are coming to recognize as never before the right of the Nation to guard its own future in the essential matter of natural resources. In the past we have admitted the right of the individual to injure the future of the Republic for his own present profit. In fact there has been a good deal of a demand for unrestricted individualism, for the right of the individual to injure the future of all of us for his own temporary and immediate profit. The time has come for a change. As a people we have the right and the duty, second to none other but the right and duty of obeying the moral law, of requiring and doing justice, to protect natural resources....
Over the past two decades, both federal and state governments enacted laws to regulate Corporate America's pollution discharges in an effort to preserve and protect the environment. Such laws include the Clean Water Act (“CWA”) and the Clean Air Act (“CAA”), both of which were enacted in the early 1970s. Yet the attainment of the objectives of these environmental laws has proven elusive, primarily as the result of increases in industrial growth and continued actions and decisions made or acquiesced in by industry heads in contravention of these laws.
Irresponsible actions taken by directors of corporations which violate environmental laws can harm our environment and may also violate the duties owed to the corporation's shareholders. Both federal and state environmental laws require violators, including corporations, to pay civil penalties in order to recover any benefits the malefactors may have received from the violations and to deter the commission of future offenses. When a corporation violates an environmental law, the corporation itself must pay these penalties out of the corporate coffers. The environmental laws themselves do not require that either the individuals who engaged in the activity that led to the violation, or the individuals who ordered or acquiesced in the commission of the violative activity, be held personally responsible for the civil penalty. As a result, the corporate entity and its shareholders are injured because of the acts or negligence of a few individuals. This Article addresses whether there is a method pursuant to corporate law, namely the shareholder derivative suit, that can be used to hold the directors of a corporation liable to reimburse the corporation for civil penalties paid for corporate violations of environmental laws. Such a method would allow shareholders to protect their economic interests and exercise their “right and duty ... to protect natural resources” by deterring illegal conduct which harms the environment. This Article specifically focuses on the CWA and the CAA, as these laws carry permit requirements putting a director on notice that a violation is occurring or has occurred. Though no case or statutory law directly addresses this specific issue, general principles of corporate law strongly indicate that actions by a corporation which lead to violations of environmental laws, particularly the CWA or CAA, can result in a director being held liable to the corporation for the payment of a civil penalty.
A. The Clean Water Act and Clean Air Act
Section 301 of the CWA generally prohibits the discharge of any pollutant from a point source into a navigable water of the United States. The CWA allows such a discharge, however, if it is made pursuant to a National Pollutant Discharge Elimination System Permit (“NPDES permit”) issued by either the state or federal government pursuant to the Act. An NPDES permit specifies specific pollutants and corresponding quantities of those pollutants that the permit holder may lawfully discharge. One who violates a NPDES permit by discharging a pollutant in excess of the amount allowed by the NPDES permit violates the CWA and may be subject to the CWA's many enforcement options. The CWA and its attendant regulations require permit holders to monitor whether they are in compliance with the CWA and report the results of such monitoring to the appropriate state and federal environmental agencies (a practice called “self-monitoring”). The permit and monitoring reports required by the CWA, called Discharge Monitoring Reports (“DMRs”), specify when and by what method a permit holder must sample and test its effluent. The results of the sample tests must be recorded on DMRs and be submitted periodically to the appropriate federal and state environmental agencies.
In 1990, Congress amended the CAA and incorporated a monitoring and reporting system which parallels the permit system of the CWA. Various sections of the CAA require that certain types of facilities, wishing to discharge air pollutants, obtain a permit in order to legally do so. Violation of a CAA permit is a violation of the CAA and may subject the violator to the various enforcement provisions of the Act. The CAA allows the Administrator of the Environmental Protection Agency (“EPA”) to, via regulation, set forth monitoring and reporting requirements for specified types of facilities. As with the CWA, the results of the monitoring will be submitted to the appropriate environmental agencies for review. For the purposes of this Article, the reports to be submitted to the state and federal environmental agencies will be collectively referred to as “monitoring reports.”
Violations of either the CWA or CAA can lead to imposition of substantial penalties. The CWA subjects a violator to civil action and the imposition of civil penalties of up to $25,000 per day for each violation. Additionally, the CWA provides for administrative penalties of $10,000 per violation, with a cap of $25,000. Similarly, the CAA provides for imposition of civil penalties of up to $25,000 per day of violation24 and administrative penalties of up to $25,000 per day for each violation. Both the CWA and CAA provide for issuance of permits to a “person,” the definition of which includes corporations under the CWA.
B. Corporate Law and Directors as Fiduciaries of the Corporation
Delaware Corporation Law requires that “[t]he business and affairs of every corporation organized [under Delaware law] shall be managed by or under the direction of a board of directors.” “The existence and exercise of this power carries with it certain fundamental fiduciary obligations to the corporation and its shareholders.” As fiduciaries, the directors of a corporation owe common law duties of loyalty and care. The duty of loyalty requires that directors place the interests of the corporation and its shareholders before any individual interest the director may hold. The duty of care requires that a director “act carefully in fulfilling the important tasks of monitoring and directing the activities of corporate management.” If a director violates either or both of these fiduciary duties and thereby causes harm to the corporation, the director may be subject to a derivative suit by the shareholders of the corporation. Such a lawsuit for breach of fiduciary duty could result in the director being held personally liable to the corporation for damages.
Moreover, where a director participates in, or acquiesces in, illegal conduct by a corporation, it is a breach of the director's fiduciary duty to the corporation. Though the basis for this liability is not specifically predicated on either the duty of care or duty of loyalty, it has been held to constitute a breach of fiduciary duty and results in director liability to the corporation for resulting damages.
C. Focus of the Article
The question raised by this brief discussion of the CWA, the CAA and Delaware Corporation Law is whether violations of the CWA or CAA that lead to imposition of penalties upon a violating corporation could subject the corporate directors to a shareholder derivative suit seeking recovery of the penalty amounts paid. This Article will seek to answer this question in the context of Delaware Corporation Law.
In searching for the answer to the question posed, Part II of this Article will discuss and apply judicial decisions holding directors liable for damages to their corporation when the directors participated or acquiesced in either conduct prohibited by law or conduct violating public policy. Part II will determine whether the body of law discussed and developed could be used to support director liability for corporate violations of the CWA or CAA. Part III will discuss the duty of care owed by directors to their corporations; the focus of this section will be both the standard applied to determine when the duty of care has been violated and the type of director conduct that can result in a breach of the duty. This section of the Article will conclude with a discussion of how and when the duty of care argument can be used to require directors to reimburse their corporations for penalties paid as the result of corporate violations of the CWA or CAA. Part IV will then discuss shareholder derivative suits, their purpose and related policy issues; ultimately this section will discuss whether the policy reasons for allowing shareholder derivative suits also support imposition of director liability in cases of corporate violations of the CWA or CAA. Part V will then discuss director defenses, as well as substantive and procedural issues, all of which must be addressed when seeking to bring a derivative suit to hold a director liable to his corporation for corporate violations of the CWA or CAA. Finally, the Article will contain a brief discussion of issues of indemnification and how, if at all, a director, though found liable, can avoid having to personally pay any judgment imposed.
Perhaps the most contemptible of actions which harm the Earth are those taken by individuals in positions of power to further their own economic, political and business goals. In 1908, President Theodore Roosevelt recognized the need to control individual greed for the good of the whole, stating:
We are coming to recognize as never before the right of the Nation to guard its own future in the essential matter of natural resources. In the past we have admitted the right of the individual to injure the future of the Republic for his own present profit. In fact there has been a good deal of a demand for unrestricted individualism, for the right of the individual to injure the future of all of us for his own temporary and immediate profit. The time has come for a change. As a people we have the right and the duty, second to none other but the right and duty of obeying the moral law, of requiring and doing justice, to protect natural resources....
Over the past two decades, both federal and state governments enacted laws to regulate Corporate America's pollution discharges in an effort to preserve and protect the environment. Such laws include the Clean Water Act (“CWA”) and the Clean Air Act (“CAA”), both of which were enacted in the early 1970s. Yet the attainment of the objectives of these environmental laws has proven elusive, primarily as the result of increases in industrial growth and continued actions and decisions made or acquiesced in by industry heads in contravention of these laws.
Irresponsible actions taken by directors of corporations which violate environmental laws can harm our environment and may also violate the duties owed to the corporation's shareholders. Both federal and state environmental laws require violators, including corporations, to pay civil penalties in order to recover any benefits the malefactors may have received from the violations and to deter the commission of future offenses. When a corporation violates an environmental law, the corporation itself must pay these penalties out of the corporate coffers. The environmental laws themselves do not require that either the individuals who engaged in the activity that led to the violation, or the individuals who ordered or acquiesced in the commission of the violative activity, be held personally responsible for the civil penalty. As a result, the corporate entity and its shareholders are injured because of the acts or negligence of a few individuals. This Article addresses whether there is a method pursuant to corporate law, namely the shareholder derivative suit, that can be used to hold the directors of a corporation liable to reimburse the corporation for civil penalties paid for corporate violations of environmental laws. Such a method would allow shareholders to protect their economic interests and exercise their “right and duty ... to protect natural resources” by deterring illegal conduct which harms the environment. This Article specifically focuses on the CWA and the CAA, as these laws carry permit requirements putting a director on notice that a violation is occurring or has occurred. Though no case or statutory law directly addresses this specific issue, general principles of corporate law strongly indicate that actions by a corporation which lead to violations of environmental laws, particularly the CWA or CAA, can result in a director being held liable to the corporation for the payment of a civil penalty.
A. The Clean Water Act and Clean Air Act
Section 301 of the CWA generally prohibits the discharge of any pollutant from a point source into a navigable water of the United States. The CWA allows such a discharge, however, if it is made pursuant to a National Pollutant Discharge Elimination System Permit (“NPDES permit”) issued by either the state or federal government pursuant to the Act. An NPDES permit specifies specific pollutants and corresponding quantities of those pollutants that the permit holder may lawfully discharge. One who violates a NPDES permit by discharging a pollutant in excess of the amount allowed by the NPDES permit violates the CWA and may be subject to the CWA's many enforcement options. The CWA and its attendant regulations require permit holders to monitor whether they are in compliance with the CWA and report the results of such monitoring to the appropriate state and federal environmental agencies (a practice called “self-monitoring”). The permit and monitoring reports required by the CWA, called Discharge Monitoring Reports (“DMRs”), specify when and by what method a permit holder must sample and test its effluent. The results of the sample tests must be recorded on DMRs and be submitted periodically to the appropriate federal and state environmental agencies.
In 1990, Congress amended the CAA and incorporated a monitoring and reporting system which parallels the permit system of the CWA. Various sections of the CAA require that certain types of facilities, wishing to discharge air pollutants, obtain a permit in order to legally do so. Violation of a CAA permit is a violation of the CAA and may subject the violator to the various enforcement provisions of the Act. The CAA allows the Administrator of the Environmental Protection Agency (“EPA”) to, via regulation, set forth monitoring and reporting requirements for specified types of facilities. As with the CWA, the results of the monitoring will be submitted to the appropriate environmental agencies for review. For the purposes of this Article, the reports to be submitted to the state and federal environmental agencies will be collectively referred to as “monitoring reports.”
Violations of either the CWA or CAA can lead to imposition of substantial penalties. The CWA subjects a violator to civil action and the imposition of civil penalties of up to $25,000 per day for each violation. Additionally, the CWA provides for administrative penalties of $10,000 per violation, with a cap of $25,000. Similarly, the CAA provides for imposition of civil penalties of up to $25,000 per day of violation24 and administrative penalties of up to $25,000 per day for each violation. Both the CWA and CAA provide for issuance of permits to a “person,” the definition of which includes corporations under the CWA.
B. Corporate Law and Directors as Fiduciaries of the Corporation
Delaware Corporation Law requires that “[t]he business and affairs of every corporation organized [under Delaware law] shall be managed by or under the direction of a board of directors.” “The existence and exercise of this power carries with it certain fundamental fiduciary obligations to the corporation and its shareholders.” As fiduciaries, the directors of a corporation owe common law duties of loyalty and care. The duty of loyalty requires that directors place the interests of the corporation and its shareholders before any individual interest the director may hold. The duty of care requires that a director “act carefully in fulfilling the important tasks of monitoring and directing the activities of corporate management.” If a director violates either or both of these fiduciary duties and thereby causes harm to the corporation, the director may be subject to a derivative suit by the shareholders of the corporation. Such a lawsuit for breach of fiduciary duty could result in the director being held personally liable to the corporation for damages.
Moreover, where a director participates in, or acquiesces in, illegal conduct by a corporation, it is a breach of the director's fiduciary duty to the corporation. Though the basis for this liability is not specifically predicated on either the duty of care or duty of loyalty, it has been held to constitute a breach of fiduciary duty and results in director liability to the corporation for resulting damages.
C. Focus of the Article
The question raised by this brief discussion of the CWA, the CAA and Delaware Corporation Law is whether violations of the CWA or CAA that lead to imposition of penalties upon a violating corporation could subject the corporate directors to a shareholder derivative suit seeking recovery of the penalty amounts paid. This Article will seek to answer this question in the context of Delaware Corporation Law.
In searching for the answer to the question posed, Part II of this Article will discuss and apply judicial decisions holding directors liable for damages to their corporation when the directors participated or acquiesced in either conduct prohibited by law or conduct violating public policy. Part II will determine whether the body of law discussed and developed could be used to support director liability for corporate violations of the CWA or CAA. Part III will discuss the duty of care owed by directors to their corporations; the focus of this section will be both the standard applied to determine when the duty of care has been violated and the type of director conduct that can result in a breach of the duty. This section of the Article will conclude with a discussion of how and when the duty of care argument can be used to require directors to reimburse their corporations for penalties paid as the result of corporate violations of the CWA or CAA. Part IV will then discuss shareholder derivative suits, their purpose and related policy issues; ultimately this section will discuss whether the policy reasons for allowing shareholder derivative suits also support imposition of director liability in cases of corporate violations of the CWA or CAA. Part V will then discuss director defenses, as well as substantive and procedural issues, all of which must be addressed when seeking to bring a derivative suit to hold a director liable to his corporation for corporate violations of the CWA or CAA. Finally, the Article will contain a brief discussion of issues of indemnification and how, if at all, a director, though found liable, can avoid having to personally pay any judgment imposed.
