SUPREME COURT RULES ON PARENT CORPORATION LIABILITY UNDER SUPERFUND
By:
Paulette S. Wolfson
Houston
On June 8, 1998, in United States v. Bestfoods, 1998 WL 292076, the Supreme Court vacated and remanded the Sixth Circuit's decision which held that a parent corporation may be responsible for its subsidiary's environmental liability under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA or Superfund) only when the corporate veil is pierced. Although the Supreme Court followed the traditional tests for piercing the corporate veil and held that, generally, the parent is not liable for the acts of its subsidiaries (absent grounds for piercing the veil), it also found that a corporate parent that actively participated in the operations of its subsidiary's contaminated facility may be directly liable as an operator of the facility, even though the corporate veil remains intact. Liability under CERCLA
Under CERCLA, owners and operators of contaminated industrial facilities may be held liable for the costs of cleaning up those facilities. The issue before the Court was whether a parent corporation that participated in the operations of the subsidiary could be held liable as an operator of the polluting facility. The Court proposed two tests, one for derivative liability and one for "direct" liability. The Court found that, following the traditional veil-piercing test for derivative liability, the parent was not liable in this case because the corporate formalities had been observed and there was no allegation of fraud. The Court also stated, however, that "a corporate parent that actively participated in, and exercised control over, the operations of the facility itself may be directly liable in its own right as an operator of the facility." Because the question of active participation in the operations of the facility by the parent had not been thoroughly addressed, the Court remanded the case for additional proceedings.
Confusing Decision
The decision does not provide clear guidance. In fact, major newspapers reporting the decision came to different conclusions regarding its meaning. The Wall Street Journal heralded the decision as granting "some relief to companies" while the New York Times concluded that the decision was a victory for environmental enforcement.
Cases addressing the scope of CERCLA liability often shed little light and the Court acknowledges that CERCLA itself gives little guidance. In particular, the Court points to the "uselessness" of CERCLA's circular definition of an operator as "any person . . . operating" the facility as not being helpful in determining who is an operator. Mr. Justice Souter, writing for the Court, attempts to flesh out the definition of operator so that companies may understand the standard for liability in the future. "To sharpen the definition [of operator] for purposes of CERCLA's concern with environmental contamination, [to be] an operator [and to be held liable for cleanup under CERCLA, an operator] must manage, direct, or conduct operations specifically related to pollution, that is, operations having to do with the leakage or disposal of hazardous waste, or decisions about compliance with environmental regulations."
The Court explains that the lower courts' analyses were faulty because of the confusion between the parent corporation's derivative liability, which would be based on the parent's relationship to the subsidiary and the parent's direct liability, which would be based on the parent's relationship to the operations at the facility. The Court agrees with the Sixth Circuit that the District Court erred because the District Court applied an "actual control" test to determine derivative liability, not the traditional veil-piercing standard. However, the Court found that the Sixth Circuit erred because it did not consider the possibility of the parent's direct liability because of the parent's direct control of the facility's environmental operations. The Supreme Court remanded the case so that the question of actual control of the facility could be addressed.
Conclusion
The Court upheld much of the Sixth Circuit's conclusion that CERCLA does not create a special standard of derivative corporate liability; traditional standards of veil piercing will be applied. As a result, the government should no longer be able to raise the "actual control" test as the veil-piercing standard. However, the Court blurred this clear standard by discussing a theory of direct liability, even though this theory was not developed in the lower courts. To determine direct parent corporation liability as the operator of its subsidiary's facility, Mr. Justice Souter, writing for a unanimous Court, leaves us with this less-than-clear test: "The critical question is whether, in degree and detail, actions directed to the facility by an agent of the parent alone are eccentric under accepted norms of parental oversight of a subsidiary's facility."
