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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.
©1998 Howrey LLP
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