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U.S. Supreme Court Rules on Environmental Law Liability of Corporate Parent for Acts of Subsidiary


July 24, 1998


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Howrey LLP

On June 8, 1998, the United States Supreme Court handed down an important decision establishing the test for determining whether a corporate parent is liable for its subsidiary's operations that are subject to liability under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. ¤ 9601 et seq.  The Court held the test to be whether the parent operated and/or controlled the specific facility responsible for the actionable pollution.

CERCLA, in a statutory scheme to clean up industrial pollution sites, allows the government to clean these sites and then recoup the costs from, among others, any party who owned or operated the facility at the time of disposal of various regulated pollutants.  The issue visited in the Bestfoods case relates to "owner/operator" liability and was framed as "whether a parent corporation that actively participated in, and exercised control over, the operations of a subsidiary may, without more, be held liable as an operator of a polluting facility owned or operated by the subsidiary."

In Bestfoods, the government had named several past and current parent and subsidiary corporations as defendants in a CERCLA action to pay clean-up costs for a Michigan chemical production facility.  On the issue of whether parent corporations CPC and Aerojet could be held liable, the Court staked out middle ground between the expansive parent liability interpretation of the district court and the limited parent liability interpretation of the Circuit Court of Appeals.  It sent the case back to the district court with new direction for determining whether a parent is liable, the critical question being "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."  Though the court did not reach a final determination as to either parent corporation, it indicated that the district court's findings regarding CPC showed the kind of "eccentric" action necessary to find parent liability.  To reach this determination, the district court had found that a CPC employee had "played a conspicuous part in dealing with the toxic risks emanating from the operation of the plant [and had] issued directives regarding [the company's] responses to regulatory inquiries."

What does this case mean for corporate parents?  As a general rule, it is possible that a parent may exercise extensive control over its subsidiaries, including dual officeholding by corporate officers and directors.  In fact, in the case of dual officeholding, a general legal presumption exists that any oversight or supervision of the subsidiary by a dual officeholder is done solely in that person's role as a subsidiary employee.  Only when corporate norms are not followed Š such as where a parent officeholder who does not hold a position with the subsidiary nonetheless operates the subsidiary's facility or where the government can show that a dual officeholder, despite the presumption, was operating the polluting facility strictly as a parent officeholder Š will the parent corporation be found liable under CERCLA.  Thus, parent corporations must be careful to maintain corporate formalities and to permit only dual officeholders to play active roles in supervising subsidiaries in order to avoid indirect subsidiary liability under CERCLA.
 

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For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-848-4996 or at paulberning@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.



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