United States v. Bestfoods

Brief Fact Summary.

The United States, brings an action against two parent corporations for the polluting activities of its subsidiary company. The United States Supreme Court must determine whether the parent companies can be liable under section 107(a)(2) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA).

Synopsis of Rule of Law.

Under CERCLA, a parent corporation may be liable if the corporate veil can be pierced. Alternatively, a parent corporation may be directly liable as an operator of the polluting facility if it exerted power and control over the operations of its subsidiary that lead to the pollution.

Facts.

Since 1957, the numerous owners of the site where Cordova Michigan (Cordova MI) now sits have polluted. In 1965, CPC International Incorporated’s (CPC) wholly owned subsidiary bought Ott Chemical Company (Ott). The new company kept Ott’s name, managers and former founder, president and principal shareholder, Arnold Ott, as officers of Ott.
In 1972, CPC sold Ott to Story Chemical Company (Story). Story then sold the plant to Aeroject General Corporation (Aeroject), which created a wholly owned California subsidiary, Cardova Chemical Company (Cardova CA), to purchase the property, who in turn created a wholly owned Michigan subsidiary, Cardova Chemical Company of Michigan (Cardova MI), which manufactured chemicals at the site until 1986.
In 1981, the federal Environmental Protection Agency (EPA) undertook to clean up the site. Subsequently, the United States filed a claim against CPC, Aeroject, Cordova CA, Cordova MI, and Arnold Ott. The parties launched claims against one another. Consequently, the District Court consolidated the cases for trial in three phases: liability, remedy, and insurance coverage.
After completion of the liability phase in favor of the United States, the District Court determined that CPC and Aeroject were liable as the parent corporations of Ott and the Cordova companies because they had “owned or operated” the facility within the meaning of Section:107(a)(2). The District Court held that CPC and Aeroject were directly liable as operators under Section:107(a)(2) because they actively participated in and controlled the subsidiary’s functions and decision-making.
The Court of Appeals for the Sixth Circuit reversed in part. Later, that court granted a rehearing en banc and vacated the panel decision. This time, the court again reversed the District Court in part. The court held that a parent company might be held directly liable as an operator of a facility owned by its subsidiary, but only “when the requirements necessary to pierce the corporate veil [under state law] are met.” Finding that the corporate veil could not be pierced because the subsidiary corporations “maintained separate personalities “and “did not utilize the corporate form to perpetrate fraud or subvert justice,” the court did not extend direct liability to CPC or Aeroject.
The United States Supreme Court granted certiorari “to resolve a conflict among the Circuits over the extent to which parent corporations may be held liable under CERCLA for operating facilities ostensibly under the control of their subsidiaries.”

Issue.

Whether a parent corporation could be liable for its subsidiary’s pollution under CERCLA?

Held.

No, unless the corporate veil can be pierced. However, a parent corporation may be directly liable if it actively participated in and exercised control over the operations of that facility. The Court of Appeals’ decision is vacated and remanded.

Discussion.

Liability under CERCLA is based on the corporation’s “ownership” and “operation” of the polluting facility.
A parent corporation is not liable for the acts of its subsidiaries. However, the corporate veil may be pierced and the shareholder may be held derivatively liable for the subsidiary corporation’s conduct if the corporate form would be “misused to accomplish certain wrongful purposes, notably fraud, on the shareholder’s behalf.”

Aside from derivative liability, CERCLA contemplates that any person who operates a polluting facility may be directly liable for her own actions regardless of whether that person is the facility’s owner, the owner’s parent corporation or business partner. Thus, if any act is done on behalf of the parent corporation, the relationship between parent-subsidiary is irrelevant in determining liability as an operator.

Under CERCLA, an operator is “someone who directs the workings of, manages, or conducts the affairs of a facility . . . . related to pollution” such as “operations having to do with the leakage or disposal of hazardous waste, or decisions about compliance with environmental regulations.”

To determine direct liability, the test 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.”

Here, there is some evidence to suggest that CPC acted as an operator that participated in the facility’s pollution. Thus, the District Court must reevaluate the extent of CPC’s involvement on the theory of direct operation.