October 1998

Environmental Crimes Bulletin - Supreme Court Clarifies CERCLA's Reach: Parent Corporations Breathe Easier, October 1998

4 min

Few federal statutes have caused as much conflict and confusion among federal courts as the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA or Superfund). Thus, it comes as no surprise that federal courts have been all over the map when deciding whether parent corporations may be held liable under CERCLA for the hazardous waste disposal practices of their subsidiaries. This past summer, the United States Supreme Court issued a unanimous decision which should curb CERCLA actions against parent corporations and help parents better predict their potential liability for cleanup costs attributed to their subsidiaries as well as related enforcement actions. Traditionally, under state law, parent corporations have been liable for activities of a subsidiary only in extraordinary cases - where the subsidiary was a mere shell corporation or was used by the parent to accomplish wrongful or fraudulent goals. In these instances, courts "pierce the corporate veil" to assess liability against the parent, but only upon a convincing showing that the parent pervasively controlled the subsidiary for the benefit of the parent. The traditional corporate "veil-piercing" test is sufficiently rigorous that cases successfully establishing parent liability for subsidiary activities are few and far between. However, when CERCLA was enacted in 1980, it defined the parties responsible for cleaning up hazardous waste sites to include "operators" of facilities that generate such wastes. Because the statute and its legislative history offer little guidance on the definition of "operator," federal courts have reached radically different conclusions about the conditions prerequisite to finding parent companies liable as "operators" of their subsidiaries' hazardous waste handling activities. Some courts have continued to apply a very strict "veil piercing" test. Other courts have found that the CERCLA term "operator" simply waters down the rigorous "veil piercing" test. Still other courts have established a separate test for "operator" status, focusing more on the parent's relationship to the specific facility in question, rather than the subsidiary that owns the facility. Recently, in United States v. Bestfoods, the Supreme Court finally resolved the issue, clarifying that parent corporations may be liable for their subsidiaries' hazardous wastes in one of two ways. First, under the common law, a parent may be subject to derivative liability for the subsidiary itself through a traditional corporate "veil piercing" analysis. Second, under CERCLA, a parent may be directly liable as an "operator" of the subsidiary's facility if the parent corporation (or an agent acting on the parent corporation's behalf) manages, directs, or conducts (1) activities related to leakage or disposal of hazardous wastes, or (2) decisions relating to compliance with environmental regulations. In other words, under CERCLA's definition of "operator," the question is not whether the parent "operates" the subsidiary, but whether the parent "operates" the facility (more specifically, the aspects of the facility that gave rise to liability for cleanup). Thus, CERCLA does not attempt to replace or dilute the traditional corporate "veil piercing" test, but rather complements it as a separate basis for establishing parent liability. In Bestfoods, the Court found insufficient basis to "pierce the corporate veil" where the parent merely (1) selected the subsidiary's board of directors; (2) populated its executive ranks with officials from the parent company; and (3) played a significant role in shaping the subsidiary's environmental compliance policy. However, the Court did find evidence in the record that the parent may be directly liable as an "operator" of the subsidiary's facility. An agent who served solely as a representative of the parent company (and did not hold a position in the subsidiary) played a conspicuous part in dealing with the hazardous waste handling activities at the subsidiary's facility - i.e., he actively participated in a wide variety of environmental matters and even issued directives regarding the subsidiary's response to regulatory inquiries. Therefore, the Court remanded for further consideration of whether the parent corporation was directly liable as an "operator" of the subsidiary's facility. As a result of the Bestfoods decision, aggressive enforcement officials should no longer be able to use the ambiguous definition of "operator" under CERCLA to dilute long-established principles of corporate law.