ADW Draft 2/13/12
AP edits 2/19/12
Chapter 13 Corporate Environmental Liability
Primary Sources Used in This Chapter:
CERCLA § 107 (42 U.S.C. § 9607)
United States v. Bestfoods
Concepts for this Chapter:



Corporation as polluter
o
Respondeat superior liability
o
But pollution pays!
CERCLA liability
o
Parent corporation liability

Owner: only under PCV (derivative liability)

Operator: manage polluting facilities (direct liability)
o
Factors in direct liability: parent personnel – polluting facility

Dual officers/directors not enough

Beyond “norms” of parental oversight
Corporate Officers’ liability
o
Criminal (environmental statutes): no convictions!
o
Civil: beyond normal PCV
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A.
Corporation as “Polluter”
Environmental liability is the third chapter of the discussion of corporate externalities. This
chapter combines the themes of PCV and corporate criminality from Chapters 11 and 12. It
continues the discussion of civil and criminal corporate liability, as well as discussing the
imposition of liability of corporate parents for the environmentally harmful practices of their
subsidiaries under the Superfund statute.
B.
Environmental Liability of Corporate Actors
Question: Do environmental laws apply to corporations?
Answer: Yes. Federal environmental statutes include corporations in their definitions of
regulated “persons.”
Question: When is a corporation liable as a polluter?
Answer: In most cases, it is not necessary to show that there is a corporate policy that
acquiesces or supports pollution. It is only necessary to show that people charged with
the responsibility (as agents) to live up to environmental standards have failed to do so.
A corporation may be either civilly or criminally liable:

Civil liability: in government and private suits from failure to supervise, failure to
take adequate remedial measures, some employee conduct

Criminal liability: for acts committed by employees acting within the scope of
their employment for the benefit of the corporation
Question: What about the employees who take the criminal actions?
Answer: Prosecutors also indict corporate officers for criminal violations. The risk of
going to jail may motivate an individual more effectively than the imposition of fines or
other liability on the corporation.
Question: Why do companies violate environmental laws? Does pollution pay?
Answer: Yes. The Breakout Box on p. 350 discusses the fact that when a corporation is
charged with pollution, the fines and compliance costs that result exceed the stock price
drop (market reputation).
Corporations may use the environment without paying for it (they externalize many
environmental costs). The fines for environmental law violations do not make up for the
income gained by the corporation.
1.
Parent Corporation Liability
Question: What law governs corporate environmental practices?
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Answer: Although state law governs corporations, federal environmental laws such as
CERCLA can trump state law.
Question: What is CERCLA?
Answer: CERCLA is the Comprehensive Environmental Response, Compensation and
Liability Act, often known as the Superfund Statute, was passed in 1980 to remedy toxic
waste sites around the country and to create a liability scheme in which responsible
parties would pay for the costs of remediation.
Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA) § 107 (42 U.S.C. § 9607)
(a)
…
(2)
Covered persons; scope; recoverable costs and damages; interest
rate; "comparable maturity" date
Any person who at the time of disposal of any hazardous substance
owned or operated any facility at which such hazardous substances
were disposed of
…
shall be liable for
(A)
(B)
(C)
(D)
all costs of removal or remedial action incurred by the United
States Government or a State or an Indian tribe not inconsistent
with the national contingency plan;
any other necessary costs of response incurred by any other person
consistent with the national contingency plan;
damages for injury to, destruction of, or loss of natural resources,
including the reasonable costs of assessing such injury, destruction,
or loss resulting from such a release; and
the costs of any health assessment or health effects study carried
out under section 9604(i) of this title.
http://uscode.house.gov/download/pls/42C103.txt
CORRECTION: The statutory text at the bottom of page 350 is from CERCLA §107(a)(2), not
(a)(1).
United States v. Bestfoods 524 U.S. 51 (1998)
Facts: The United States commenced an action against CPC International, Inc. (CPC) for
the costs of cleaning up industrial waste generated by a chemical plant in Muskegon,
Michigan. The property was used as a dumping site from 1957 to 1972. The company
that began the practice was sold in 1965 to CPC International, Inc. (CPC), and operated
as a wholly-owned subsidiary. CPC sold the subsidiary in 1972 to a company that then
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went bankrupt. In 1981 the Environmental Protection Agency (EPA) began to clean up
the site, with a remedial plan costing tens of millions of dollars.
Under CERCLA, the United States is allowed to use this fund to finance cleanup efforts,
which it can then replenish by suits brought under § 107. To recover some of the money
spent on cleanup, the United States filed an action under § 107 against CPC (among
others).
Note: As discussed in the Breakout Box on p. 352, CPC was sold to Bestfoods during
the litigation. Under the “mere continuation” doctrine, an acquiring corporation assumes
the liability of its predecessor after a transfer of assets if

It is the only survivor

There is a general continuity in the business operations, and

There is overlap of shareholders and directors between the two
corporations.
Issue: Under CERCLA, can a parent corporation that actively participated in, and
exercised control over, the operations of a subsidiary, without more, be held liable as an
operator of a polluting facility owned or operated by the subsidiary?
Holding: No. The parent has no derivative (owner) liability unless the veil is pierced.
However, the parent may be held liable directly in its own right as an operator of the
facility if the corporate parent actively participated in and exercised control over the
operations of the facility itself. Court remands to determine if CPC operated the facility.
Reasoning: A parent corporation that actively participated in, and exercised control over,
the operations of a subsidiary may not, without more, be held liable as an operator of a
polluting facility owned and operated by the subsidiary unless the corporate veil can be
pierced. However, a corporate parent that actively participated in, and exercised control
over, the operations of the facility itself may be held directly liable in its own right as an
operator of the facility.
Justice Souter noted the general principle that a parent corporation is not liable for the
acts of its subsidiaries and emphasized that nothing in CERCLA rejected that “bedrock”
principle. However, Justice Souter also noted another fundamental principle: that the
corporate veil may be pierced and the shareholder held liable for the corporation’s
conduct “when the corporate form would otherwise be misused to accomplish certain
wrongful purposes”
Justice Souter therefore agreed with the Sixth Circuit was correct – it was necessary to
pierce the corporate veil in order to hold a parent corporation derivatively liable for a
subsidiary’s actions. However, nothing in CERCLA barred a parent from being held
directly liable (as an operator) for its own actions in operating a facility owned by its
subsidiary.
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What is an "operato"? Under CERCLA, an operator must “manage, direct or conduct
operations specifically related to pollution.” Operation means exercise of discretion over
the facility’s activities.
Using this standard, Justice Souter found that the Sixth Circuit erred in limiting direct
liability under the statute to a parent’s sole operation, which eliminated a possible finding
that CPC was liable as an operator.
Justice Souter also took issue with the District Court’s mistaken focus on the relationship
between parent and subsidiary, rather than parent and facility, in deciding whether CPC
might be liable as an operator of the facility.
Because there was some evidence that indicated that CPC engaged in this sort of operator
behavior at the Muskegon plant (an agent, Williams, worked only for CPC and played an
obvious role in dealing with the toxic risks from the plants operation), the judgment of
the Court of Appeals was vacated and the case was remanded to the District Court.
Points for Discussion
1. “Owner or operator” liability
Question: Can parent corporations be liable for clean-up costs of a subsidiary?
Answer: No, according to the normal rule of limited liability. Limited liability allows
the separation of assets and risks within corporate groups. Corporate parents can place
risk in separately incorporated subsidiaries without incurring liability (except when the
veil can be pierced).
Question: What is the impact of Superfund’s “owner and operator” language?’
Answer: Superfund’s owner and operator language has been interpreted expansively to
impose liability on parent corporations for the dumping of their subsidiaries.
2. Derivative vs. direct liability
Question: How can parents be held liable for the dumping of their subsidiaries under CERCLA?
Answer: This has been accomplished two ways:

Derivative piercing liability
Even if the parent avoids being “owner” or “operator” liability, it can incur
derivative liability when the subsidiary incurs CERCLA liability if the veil can be
pierced.
Result: the parent corporation is better off if it is completely detached from the
actions of the subsidiaries – allowing them to pollute more
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
Direct “operator” liability
The parent corporation may be deemed an “operator” if it directs, manages or
conducts the affairs of a facility (e.g. if the parent controls a subsidiary’s
environmental programs, the parent may be liable as an operator).
This must be an abnormal parental influence – not the regular parent/subsidiary
relationship.
3. Deference to corporate norms
Question: Why does the Supreme Court adopt “state” PCV standards and call state-base
corporate limited liability a “bedrock principle”? CERCLA is federal law.
Answer: It is not clear. Perhaps this is some kind of internal affairs doctrine. Or perhaps
the fact that federal law assumes that state law has a preeminent position in corporate
law. A more skeptical interpretation may be that capitalism pays taxes, and the Supreme
Court is not going to fool around.
Question: Which state law is Justice Souter talking about?
Answer: If federal “derivative liability” depends on state law, which state? Do you look
to the law of the state where the corporation is incorporated? Or the law where the
pollution happened? We do not know.
4. Rewarding laxity
Question: Which parent company is better off – one that oversees its subsidiary’s potentially
polluting activities or the one that does not?
Answer: Although it is tempting to answer that ignoring a subsidiary’s activities is more
sensible, there is also the study cited in the Breakout Box on p. 358 that found that at
least some kinds of proactive, positive environmental action results in higher share value.
2.
Director and Officer Liability
Although heavy fines may be extracted from corporations which violate environmental laws,
deterrence and punishment may be more effective when corporate officers are held individually
liable for violations. Although environmental law has easily allowed the imposition of criminal
liability on low-level employees directly involved in the polluting behavior, a more interesting
question is the liability of directors and officers of a polluting firm.
The Resource Conservation and Recovery Act, the Clean Water Act and the Clean Air Act
include an exception to corporate limited liability and the possibility of imposing personal
liability on corporate executives who are “responsible corporate officer[s]” in supervisory roles
when pollution occurs. Courts have been less willing to impose such liability unless the officers
have committed some independent wrong.
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Nevertheless, the data on PCV in environmental cases suggest that lower courts may have
relatively high rates of piercing in environmental cases.
Question: Should there be a different standard for PCV in environmental cases?
Answer: Maybe. The evidence that share prices are not being affected as much as the
cost for the environmental harm being done suggests that some additional pressure on the
corporate decisionmaking process may be appropriate. On the other hand, if
parent/officer liability is needed, then perhaps the better course would be a specific
provision in the statute itself.
Bonus Hypothetical:
You are the general counsel of GlobalPetroleum. There has been a terrible accident. An oil rig
leased to GP has gone down in flames with loss of life, and the uncapped underwater well is
spewing oil into the Gulf of Mexico. It may become the biggest man-made oil spill in history.
It turns out the rig was actually operated not by GP, but its wholly owned subsidiary, GP
Exploration. Liability of GP Exploration (as “holder” of the offshore mineral rights) is capped
under the Oil Pollution Act of 1990 at $75 million, unless there was “gross negligence.”
The BP board has met in emergency session. You have been asked to address GP liability. What
do you advise the board?
The Oil Pollution Act of 1990 is available here:
http://epw.senate.gov/opa90.pdf
Answer: This hypothetical is obviously based on the BP oil spill. In that case, there were
numerous subsidiaries between BP plc and BP Exploration:

BP plc

BP North America Inc.

BP Corp North America

BP Co North America

BP America Production

BP Exploration, Inc.
Nevertheless, it was BP plc which funded the BP Oil Spill Victim Compensation Fund
Is this accurate? Yep
As General Counsel of GlobalPetroleum, your analysis may go like this:
GP (parent) liability
•
Oil Pollution Act no exception to LL, parent not “holder,” unless PCV
•
Derivative liability
–
Courts protect LL (see Bestfoods), more $$ and oil
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–
•
Depends on parent $$, involvement, environmental supervision – more
facts
–
Depends on incorporating state of GP, GP Exploration, or spill
–
Unlikely that court will PCV
Direct liability
–
CERCLA superseded by OPA, no “operator” liability
–
Might be liable as “operator” – need more facts
–
Liability of GP Exploration
•
Relevant to parent exposure
–
Depends on whether “gross negligence” - need more facts, likely
–
Subsidiary’s “gross negligence” might affect PCV
Advice
•
GP should liquidate, dissolve, pay shareholders / D&Os seek asylum
•
GP should accept responsibility for disaster, avoid public outcry
•
GP should set up relief/compensation fund, avoid court surprise
In the slides, there were numbers (1-4) at the end of these lines. What were they? places for me
to fill based on students' emailed comments
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Summary
The main points in this chapter are:



Environmental liability is another area in which a corporation may externalize its
costs
Federal environmental laws may shift liability back to corporations and to corporate
officials
o Civil
o Criminal
A parent corporation may be liable for the environmental liability of its subsidiary
o Derivatively– as owner – only if the corporate veil is pierced
o Directly – as operator- if it actively participates in and exercises control over the
operations of the facility itself
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