Transcending Common Law Principles of Limited Liability of Parent Corporations for the Environment
By Aron M. Bookman
INTRODUCTION
Commentators universally recognize limited liability as “one of the first principles of American law” and as one of the most fundamental principles in American corporate law. Recently, in United States v. Bestfoods, the Supreme Court addressed the question of whether common law principles of limited liability protect parent corporations from liability for violations of the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) at facilities “owned or operated” by their subsidiaries. By determining that a parent corporation can be held directly liable under Section 107(a)(2) as an “operator” for its involvement in the management of its subsidiary's facility, the corporations of America claim that the Court appears to be “sweeping aside” the concept of limited liability in the CERCLA context.
CERCLA was enacted in 1980 to address public concern regarding the serious environmental and health risks caused by years of unregulated dumping of industrial pollutants. Operators are included in one of the four classes of parties who are potentially liable for the clean-up of hazardous waste sites. The goal of CERCLA was that, “those actually ‘responsible for any damage, environmental harm, or injury from chemical poisons [should bear] the cost of their actions.” ’ Thus, pursuant to the express goals of CERCLA, this comment contends that a parent corporation should be liable as an “operator” of a facility under Section 107(a)(2) both for “turning a blind eye” and for instituting policies that lead to releases or threatened releases. Further, liability under CERCLA should encourage parent corporations to be aware of and to mandate environmental compliance for their subsidiaries. Therefore, the standard for parental liability under Section 107(a)(2) should focus on the responsibility of the parent corporation for the creation of a CERCLA site.
The Supreme Court was faced with a difficult balancing task in Bestfoods. On one side are the traditional concepts of limited liability and corporate law on which corporations and shareholders rely when making investments. On the other side are the goals and policies of CERCLA that are frustrated by adherence to traditional corporate law principles. These principles allow parent corporations to reap the benefits of investment in risky hazardous waste disposal practices, while also protecting the often substantial assets of the corporation from strict or joint and several liability under CERCLA.
The Supreme Court's decision to apply the actual control of the facility standard for operator liability may frustrate the goals of CERCLA by encouraging parent corporations to be uninvolved in the environmental policies of their subsidiaries. Furthermore, the Court's narrow decision may not be the victory that it appears to be for environmentalists who preferred the actual control test to the protections of limited liability. By applying the corporate law theory that directors and officers of both parent and subsidiary corporations “change hats” and represent the interests of subsidiaries independently from those of the parent corporation,11 the Court is only encouraging parent corporations to tighten up their transactions with subsidiaries to take advantage of the loophole created by the opinion. The Court's decision did not go far enough in protecting the goals of CERCLA and may have actually undermined the goals of CERCLA by creating a presumption that the actions of dual officers and directors are not attributable to parent corporations for direct operator liability.
However, environmentally protective courts can find solace in the fact that while the Court offered a definition of “operator” liability, it did not take the opportunity to rule on it in Bestfoods. This gives the lower courts the discretion to apply the rules and definitions supplied by the Supreme Court liberally by analogizing to past cases and to the Court's vague definition of an “operator” as “someone who directs the workings of, manages, or conducts the affairs of the facility.” Further, by directing lower courts to focus on the parent corporation's knowledge of, involvement in, and control over the environmental practices of its subsidiaries, the Court is allowing lower courts to use Section 107(a)(2) as a way to make parent corporations liable where the parent corporation is directly responsible for the creation of or the failure to mitigate a release or potential release of hazardous wastes. However, it is unclear whether lower courts will use this opportunity to take an environmentally protective stance.
Commentators universally recognize limited liability as “one of the first principles of American law” and as one of the most fundamental principles in American corporate law. Recently, in United States v. Bestfoods, the Supreme Court addressed the question of whether common law principles of limited liability protect parent corporations from liability for violations of the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) at facilities “owned or operated” by their subsidiaries. By determining that a parent corporation can be held directly liable under Section 107(a)(2) as an “operator” for its involvement in the management of its subsidiary's facility, the corporations of America claim that the Court appears to be “sweeping aside” the concept of limited liability in the CERCLA context.
CERCLA was enacted in 1980 to address public concern regarding the serious environmental and health risks caused by years of unregulated dumping of industrial pollutants. Operators are included in one of the four classes of parties who are potentially liable for the clean-up of hazardous waste sites. The goal of CERCLA was that, “those actually ‘responsible for any damage, environmental harm, or injury from chemical poisons [should bear] the cost of their actions.” ’ Thus, pursuant to the express goals of CERCLA, this comment contends that a parent corporation should be liable as an “operator” of a facility under Section 107(a)(2) both for “turning a blind eye” and for instituting policies that lead to releases or threatened releases. Further, liability under CERCLA should encourage parent corporations to be aware of and to mandate environmental compliance for their subsidiaries. Therefore, the standard for parental liability under Section 107(a)(2) should focus on the responsibility of the parent corporation for the creation of a CERCLA site.
The Supreme Court was faced with a difficult balancing task in Bestfoods. On one side are the traditional concepts of limited liability and corporate law on which corporations and shareholders rely when making investments. On the other side are the goals and policies of CERCLA that are frustrated by adherence to traditional corporate law principles. These principles allow parent corporations to reap the benefits of investment in risky hazardous waste disposal practices, while also protecting the often substantial assets of the corporation from strict or joint and several liability under CERCLA.
The Supreme Court's decision to apply the actual control of the facility standard for operator liability may frustrate the goals of CERCLA by encouraging parent corporations to be uninvolved in the environmental policies of their subsidiaries. Furthermore, the Court's narrow decision may not be the victory that it appears to be for environmentalists who preferred the actual control test to the protections of limited liability. By applying the corporate law theory that directors and officers of both parent and subsidiary corporations “change hats” and represent the interests of subsidiaries independently from those of the parent corporation,11 the Court is only encouraging parent corporations to tighten up their transactions with subsidiaries to take advantage of the loophole created by the opinion. The Court's decision did not go far enough in protecting the goals of CERCLA and may have actually undermined the goals of CERCLA by creating a presumption that the actions of dual officers and directors are not attributable to parent corporations for direct operator liability.
However, environmentally protective courts can find solace in the fact that while the Court offered a definition of “operator” liability, it did not take the opportunity to rule on it in Bestfoods. This gives the lower courts the discretion to apply the rules and definitions supplied by the Supreme Court liberally by analogizing to past cases and to the Court's vague definition of an “operator” as “someone who directs the workings of, manages, or conducts the affairs of the facility.” Further, by directing lower courts to focus on the parent corporation's knowledge of, involvement in, and control over the environmental practices of its subsidiaries, the Court is allowing lower courts to use Section 107(a)(2) as a way to make parent corporations liable where the parent corporation is directly responsible for the creation of or the failure to mitigate a release or potential release of hazardous wastes. However, it is unclear whether lower courts will use this opportunity to take an environmentally protective stance.
