The United States Court of Appeals for the Sixth Circuit issued a divided en banc decision on May 13, 1997, that establishes a narrow scope of liability for parent corporations under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). (An en banc decision is a decision issued after consideration by all Sixth Circuit judges, on review of a previous decision by a panel of three Sixth Circuit judges.) The decision also held that a deed that transfers title to contaminated property is not, in itself, a sufficient "contractual relationship" to prevent the current owner of property from invoking the third party defense under CERCLA Section 107(b)(3).
The site in which the controversy arose, known as the Ott/Story/Cordova Chemical Site, located in Dalton, Michigan, has a history of chemical manufacturer owners that contributed to the contamination of the property since 1957. Ott Chemical Company (Ott), a wholly owned subsidiary of CPC International, Inc. (CPC), owned and operated the site from 1965 until 1972, when Ott sold it to Story Chemical Company. In 1977, the Michigan Department of Natural Resources (MDNR) inspected the property because Story Chemical had commenced bankruptcy proceedings, and found extensive contamination. The MDNR assisted in attracting a purchaser for the property to provide financial assistance for remediation because of a lack of state resources to restore the property. In October 1977, Cordova Chemical Company (Cordova/California), a wholly owned subsidiary of Aerojet-General Corporation (Aerojet), entered into an agreement with MDNR to assist in a partial cleanup and subsequent purchase of the property, in exchange for a cap on its liability for future environmental cleanup. Cordova/California and MDNR both met their obligations under the agreement.
In 1978, Cordova Chemical Company of Michigan (Cordova/Michigan), a wholly owned subsidiary of Cordova/California, acquired ownership of the property. Cordova/Michigan operated the property for approximately eight years, and then ceased manufacturing operations in 1986. In 1981, the Environmental Protection Agency (EPA) participated in a long term response effort to clean up the property that is anticipated to cost millions of dollars. EPA sued Cordova/Michigan, Cordova/California, Aerojet, CPC, and the former owner of Ott to recover EPA's past and future response costs. CPC commenced a separate action against Aerojet, its subsidiaries, and MDNR. The district court consolidated the two cases.
The district court held that a parent corporation is liable as an "operator" under CERCLA Section 107(a)(2) when it has exerted power or influence over its subsidiary by actively participating in and exercising control over the subsidiary during the time the subsidiary disposed of hazardous waste on the subsidiary's property. The district court described this theory as a "new, middle ground" approach to the issue of CERCLA liability of parent corporations. On this basis, the district court held that two parent corporations (CPC and Aerojet), were both liable as "operators" for the disposal of hazardous substances that had occurred while their respective subsidiaries had operated the site.
Upon review, the Court of Appeals rejected the district court's "new, middle ground," stating that a parent corporation may be liable only if it meets all of the necessary requirements of corporate veil piercing as established in traditional state corporate law. The requirements for piercing the corporate veil depend on the degree to which the parent corporation involved itself in the affairs of the subsidiary, the control that the parent exercised over its subsidiary, and whether the way the parent involved itself in the subsidiary resulted in an abuse of the corporate form. According to the Sixth Circuit, Michigan's rule for piercing the corporate veil requires "patent abuse" of the corporate form. In other words, the corporate veil would be pierced only if: (1) there is such a unity of interest and ownership that the subsidiary and parent have no separate personalities; and (2) recognizing the separate corporate existence would support fraud or promote injustice. The Sixth Circuit held that neither CPC nor Aerojet could be held liable under this standard, and reversed the district court's judgment against them.
Concerning the "third party defense" under CERCLA Section 107(b)(3), which absolves the defendant of liability for contamination which resulted from an act or omission of a third party who has no "contractual relation" with the defendant, the district court had held that a deed transferring title to contaminated property is considered a "contractual relationship" under CERCLA, and that any defendant who acquired property by deed from a party responsible for the contamination of the property is not entitled to assert the "third party defense."
The Court of Appeals held that the district court also erred in this ruling because it did not apply the requirement that the release of hazardous substances must have been caused in connection with the contractual relationship between the defendant and the third party. In this case, the release of the hazardous substance was caused solely by the previous owners and had nothing to do with the transfer of the property by deed. The Sixth Circuit sent this issue back to the district court to reconsider.
United States v. Cordova Chemical Company, 1997 W.L. 242128 (6th Cir. May 13, 1997)
This article was written by Christopher J. Dunsky, a partner in our Environmental Law Department, and previously appeared in the June 1997 edition of Michigan Environmental Compliance Update, our monthly newsletter published by M. Lee Smith Publishers.