Liability Protection For Corporate Shareholders


In Donahey v. Bogle, the federal Court of Appeals for the 6th Circuit has just extended important protection to corporate shareholders facing environmental clean up liability under CERCLA (the federal Comprehensive Environmental Response, Compensation and Liability Act as amended), the federal Superfund law. We are particularly pleased because that protection is the direct result of our efforts on behalf of a client who was a defendant in that case.

Our client in the Donahey case was the sole shareholder of a Michigan company which caused contamination as part of its operations. We demonstrated at trial that our client, although a sole shareholder, chairman of the board, treasurer, and active in the financial aspects of the business, did not participate in the waste disposal practices or decisions made by the company. Plaintiff had argued that our client was liable as an "operator" of the company because, as sole shareholder, he had authority to control the company's waste disposal practices, even though he had not done so. In other words, plaintiffs argued that our client should be liable vicariously for the acts of the corporation whose shares he owned although he had not participated in such acts. This argument has previously been made in numerous cases against sole shareholders, whether the shareholder was a private individual like our client or a parent corporation.

This line of argument was rejected by the Court of Appeals because it runs directly counter to Michigan's corporate law which provides that shareholders are vicariously liable for the corporation only in circumstances which would justify "piercing the corporate veil." Those limited circumstances exist only where there is "such a unity of interest of ownership that the separate personalities of the corporation and its owner cease to exist" and adherence to the corporate form would amount to fraud or cause an injustice.

This CERCLA case should be a strong precedent for interpreting Part 201 of NREPA, the Michigan counterpart to CERCLA, for two reasons. First, in general, the 6th Circuit has been a good predictor of how the Michigan Supreme Court will rule on an issue. Second, as it relates to interpreting the scope of Part 201, state courts have tended to follow federal decisions under CERCLA.

This decision is consistent with another recent 6th Circuit CERCLA decision, U.S. v. Cordova Chemical Company of Michigan, where the Court of Appeals applied the same rule in the context of a parent/subsidiary relationship where the parent corporation was a sole shareholder of its subsidiary. The decision should also apply in any other circumstance where one shareholder by virtue of the size of its shareholder interest, has the ultimate authority over the corporation.

We must emphasize what the Donahey decision does not address or protect. An individual or company ("person") can be liable as an "operator" of the company if the person becomes actively involved in activities related to the waste disposal which took place. It may also be possible for liability to be imposed where there is active involvement in other parts of company operations, although that is a gray area and very fact dependent. In either of these cases, however, the person will be liable because of actions that person took and not because that person owned stock in the company.

The Donahey case has a long history in the appellate courts. The case was tried in 1992! The decision has been appealed to the U.S. Supreme Court. It is too soon to say whether this decision is the last word in this case.