When Congress enacted the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA," commonly referred to as "Superfund"), it created a broad liability scheme intended to make polluters pay the costs of cleaning up waste disposal sites, but it left to the courts the development of a federal common law to define the specific liability parameters created by Section 9607 and the subsequently enacted Section 9613(f). Known for its poor drafting, inconsistent language and vague definitions, CERCLA's liability scheme has provided the federal courts with abundant opportunities to develop the detailed common law contemplated by the legislature.
Section 9607 imposes strict liability on past and present owners and operators of facilities where hazardous substances have been disposed, as well as on the generators (sometimes referred to as "arrangers") of the waste and transporters who participated in the selection of the disposal site. By defining "owner and operator," in Section 9601(20)(A), as "any person owning or operating" the site in question, Congress left it to the federal courts to determine who should be held liable as an owner or operator.
Should a parent corporation, shareholder, director, officer or facility manager be held liable as an owner or operator, and if so, under what circumstances should such liability be imposed? Are there circumstances where someone other than the actual generator of the waste or the actual transporter of the waste should be held liable under Sections 9607(a)(3) and (4)? In the event of an asset sale which does not include the site in question, under what circumstances should the successor asset owner be subject to the CERCLA liabilities of the predecessor asset owner? In this and the following five issues of our White Paper Series we will be discussing how the federal courts have responded to these and other questions relating to the ongoing development of CERCLA's federal common law. In this paper, we review the courts' attempts to define when someone other than the actual or de jure owner or operator of a site may be held liable as such under Sections 9607(a)(1) and (2).
CERCLA was enacted to provide for the remediation of contaminated properties where the release or threatened release of hazardous substances poses a threat to human health or the environment. Many of these properties have had checkered histories of industrial use by a number of unrelated companies, each of which may have contributed to the contamination. Under Section 9607(a)(2), past owners or operators of the facility may be strictly, jointly and severally liable for the cost of remediation along with the current owner and operator. However, because one or more of the companies that actually owned or operated the facility over time may no longer be viable, agencies as well as private parties have sought to impose liability on viable companies that may have had some relationship with the now defunct company that actually owned or operated the facility.
As you will see, much like variations in the development of state common law relating to torts or product liability, a consistent, uniform federal common law has not been developed in determining "indirect" owner or operator liability under CERCLA.
With the enactment of CERCLA, Congress established "an array of mechanisms to combat the increasingly serious problem of hazardous substance releases." Dedham Water Co. v. Cumberland Farms Dairy, Inc., 805 F.2d 1074, 1078 (1st Cir. 1986). CERCLA provides the federal government with "the tools necessary for a prompt and effective response to problems of national magnitude resulting from hazardous waste disposal," and it evinces congressional intent "that those responsible for problems caused by the disposal of chemical poisons bear the costs and responsibility for remedying the harmful conditions they created." United States v. Reilly Tar & Chemical Corp., 546 F.Supp. 1100, 1112 (D. Minn. 1982).
CERCLA imposes liability on "persons" (referred to as "potentially responsible parties" or "PRPs") for the cleanup of "facilities" where the release or threatened release of "hazardous substances" disposed at the facility results in the incurrence of response costs. §9607. Liability for the response costs is strict, subject to defenses for causation solely by an act of God, an act of war or acts or omissions of a third party other than an employee or agent of the defendant or one whose act or omission occurs in connection with a contractual relationship with the defendant. §9607(b); New York v. Shore Realty Corp., 759 F.2d 1032, 1042 (2d Cir. 1985).
Owner Liability Under CERCLA
CERCLA clearly imposes liability on the person or entity that actually owns the contaminated facility. Indeed, courts have imposed liability on the owner of the facility despite arguments that the owner had no responsibility or control over the disposal activity. See, e.g., United States v. Monsanto Co., 858 F.2d 160, 168 (4th Cir. 1988) ("The plain language of section 107(a)(2) extends liability to owners of waste facilities regardless of their degree of participation in the subsequent disposal of hazardous waste.") Courts have extended owner liability to include tenants that have control over the site. U.S. v. A & N Cleaners and Launderers, Inc., 788 F. Supp. 1317 (S.D.N.Y. 1992) (lessee bank that subleased property to dry cleaner operator was an "owner" subject to liability under §9607(a)(2) since bank had site control and responsibility for the use of the site, relying on United States v. South Carolina Recycling and Disposal, Inc., 653 F.Supp. 984 (D.S.C. 1985 ), aff'd sub nom. United States v. Monsanto Co., 858 F.2d 160, 168 (4th Cir. 1988)); cf. Lincoln Properties, Ltd. v. Higgins, 823 F. Supp. 1528 (E.D. Cal. 1992) (county which had an easement in sewer line but had no possessory interest or authority to determine how line would be used under California law was not an owner under CERCLA).
Courts also are in agreement that a parent corporation may be held liable as an owner of its subsidiary's facility in circumstances in which it is determined that piercing the corporate veil is warranted. Joslyn Manufacturing Co. v. T.L. James & Co., 893 F.2d 80 (5th Cir. 1990), cert. denied, 498 U.S. 1108 (1991); Lansford-Coaldale Joint Water Authority v. Tonolli Corp., 4 F.3d 1209 (3rd Cir. 1993).
Operator Liability Under CERCLA
Numerous courts have recognized that CERCLA is a poorly written statute and that its lack of clarity have made it difficult for courts to precisely determine the parameters of liability among and between related corporations and their officers. See, e.g., New York v. Shore Realty Corp., 759 F.2d 1032, 1040 (2nd Cir. 1985) (describing CERCLA as "an eleventh hour compromise" passed without the benefit of committee reports concerning the compromise); Lansford-Coaldale Joint Water Authority v. Tonolli Corp., 4 F.3d 1209, 1221 (3rd Cir. 1993) (noting that CERCLA is a "statute notorious for its lack of clarity and poor draftsmanship"). See also Developments in the Law - Toxic Waste Litigation, 99 Harv. L. Rev. 1458, 1465 & n.1 (1986). Left with this lack of legislative guidance, courts have fashioned differing standards for evaluating CERCLA liabilities of corporations and their affiliates and officers and other persons with some connection to the facility who arguably could be considered "operators" of the facility. The majority of courts which have addressed the issue of operator liability have analyzed whether a parent or sister corporation or other person exercised sufficient control over the related corporation or its facility to be considered an operator of the facility with the attendant liability under §9607(a)(1) or (a)(2). Two divergent standards which have emerged are the "authority to control" test and the "actual control" test. Still other courts have refused to impose CERCLA liability on a parent corporation or shareholder absent circumstances which would warrant "piercing the corporate veil" under the traditional common law standard.
Authority to Control
Under the most liberal standard adopted by any federal court, operator liability may be imposed where the party merely had the authority to control the facility. In Nurad, Inc. v. William E. Hooper & Sons Co., 966 F.2d 837 (4th Cir.), cert. denied sub nom. Mumaw v. Nurad, Inc., 506 U.S. 940 (1992), the owner of a contaminated site sought reimbursement of remedial costs against former owners and tenants of the site. The Fourth Circuit affirmed the district court's application of the "authority to control" standard, stating:
Although the court did note that the tenant defendants "never actively participated in the disposal of hazardous substances" at the site, the court's decision quite properly turned on the fact that they lacked "authority to control the operations or decisions involving the disposal of hazardous substances at the Site or the contents of the USTs" (emphasis added). Indeed, the district court's examination of the terms of the various leases in question indicated that it recognized that authority to control - not actual control - was the appropriate standard. This is the definition of the word "operator" that most courts have adopted . . . and it is one which properly declines to absolve from CERCLA liability a party who possessed the authority to abate the damage caused by the disposal of hazardous substances but who declined to actually exercise that authority by undertaking efforts at a cleanup. Id., 966 F.2d at 842 (citations omitted) (emphasis by the court).
In Kaiser Aluminum & Chemical Corp. v. Catellus Development Corp., 976 F.2d 1338 (9th Cir. 1992), the Ninth Circuit considered whether a site contractor could be held liable as an operator. The City of Richmond, California ("Richmond") purchased land from Catellus's predecessor to develop for housing. Richmond hired James L. Ferry & Son ("Ferry") as a site contractor to excavate and grade a portion of the property. Ferry excavated and graded contaminated soil, spreading it to previously uncontaminated areas of the property. Richmond sued Catellus for part of the costs incurred to remove contaminated soils. Catellus joined Ferry alleging that Ferry exacerbated the contamination. Ferry cited Edward Hines Lumber Co. v. Vulcan Materials, 861 F.2d 155 (7th Cir. 1988), to argue that he was not the operator of the property. In Hines, a contractor designed and built a wood treatment plant which became contaminated after wood processing operations began. The Seventh Circuit determined that the contractor should not be held liable as an operator of the facility. The Ninth Circuit distinguished Hines, stating:
Although the Seventh Circuit affirmed a grant of summary judgment in favor of the contractor, Hines does not stand for the proposition that a contractor can never be liable as an operator under section 9607(a)(2). On the contrary, it is clear from the court's analysis in Hines that the contractor was not liable as an "operator" because, although he designed and built the wood treatment plant, he had no authority to control the day-to-day operation of the plant after it was built; and it was during the operation of the plant that the hazardous materials were released.
We read Hines as reiterating the well-settled rule that "operator" liability under section 9607(a)(2) only attaches if the defendant had authority to control the cause of the contamination at the time the hazardous substances were released into the environment. Catellus, 976 F.2d at 1341 (citation omitted) (emphasis by the court).
Under case law which developed at the same time as the "authority to control" standard, a majority of courts have concluded that CERCLA liabilities may be imposed on a parent or sister corporation, shareholder, director, officer or other individual where the facts indicate that there was active, substantial control of the corporation or its facility by the affiliate or individual. In Lansford-Coaldale Joint Water Authority v. Tonolli Corp., 4 F.3d 1209 (3rd Cir. 1993), the Third Circuit addressed the issue in a CERCLA action brought by a water authority against an adjacent owner of a lead smelting facility and its parent and sister corporations. When the corporation which owned the smelter filed for bankruptcy, the plaintiff proceeded against only the parent and sister corporations. In its analysis of the statutory basis for operator liability, the court stated:
CERCLA's language supports the view that corporations may be held liable for the acts of subsidiary and sister corporations, notwithstanding the traditional rule of limited liability in the corporate context. CERCLA states that an "operator" is a potentially liable party, 42 U.S.C. §9607(a)(4). While "operator" is defined circularly as any person operating a facility, see 42 U.S.C. §9601(20)(A)(ii), "person" is defined broadly to include a firm, corporation, or commercial entity, among other things, see 42 U.S.C. §9601(21). CERCLA's language, therefore, indicates an intent to hold a corporation liable for the environmental violations of its subsidiaries and sister corporations, if it is otherwise determined to have operated the facility in question. Id. at 1221 n.11.
Having concluded that a related corporation may be an operator of an affiliate, the court then evaluated the two standards and traditional common law relating to the liability shield provided by the use of the corporate form and concluded that the "actual control" standard "appears to strike the appropriate middle ground, balancing the benefits of limited liability with CERCLA's remedial purposes." Id. at 1221. The court opted to follow the test articulated in United States v. Kayser-Roth Corp., 910 F.2d 24 (1st Cir. 1990), cert. denied, 498 U.S. 1084 (1991), and CPC International, Inc. v. Aerojet-General Corp., 777 F. Supp. 549 (W.D. Mich. 1991):
[To] be an operator requires more than merely complete ownership and the concomitant general authority or ability to control that comes with ownership. At a minimum, it requires active involvement in the activities of the subsidiary. Whereas a corporation's "mere oversight" of the subsidiary or sister corporation's business in a "manner appropriate and consistent with the investment relationship" does not ordinarily result in operator liability, a corporation's "actual participation and control" over the other corporation's decision-making does. Tonolli Corp., 4 F.3d at 1222 (citations omitted).
According to the court, whether to impose liability under the "actual control" standard:
requires an inherently fact-intensive inquiry, involving consideration of the totality of the circumstances presented. The factors courts should consider focus on the extent of the corporation's involvement in the day-to-day operations and its policy-making decisions. We understand the actual control standard to hold accountable for environmental violations those corporations which are not mere investors in other corporations, but instead have actively and substantially participated in the corporation's management. Id. at 1222 (citations and footnote omitted).
The court also agreed that:
evidence of control over a sister or subsidiary corporation's environmental decisions is "indicative of the type of control necessary to hold a corporation liable as an operator." However, operator liability may be established even without evidence that a corporation controlled the environmental decisions of an affiliated corporation as long as there exist other factors which sufficiently demonstrate pervasive control. Id. at 1222 n.13 (citing United States v. Kayser-Roth Corp.).
In addition to the Third Circuit, the "actual control" standard has been adopted by the First Circuit, Kayser-Roth; the Seventh Circuit, Sidney S. Arst v. Pipefitters Welfare Educ. Fund, 25 F.3d 417 (7th Cir. 1994) (corporation's president and vice president who exerted direct management control over the handling of PCB-filled transformer and directed and controlled the employee who cut the transformer open and spilled the hazardous contents onto ground had direct, personal liability as operators); the Eighth Circuit, United States v. TIC Inv. Corp., 68 F.3d 1082 (8th Cir. 1995) (parent corporation which has authority to control and exercises actual or substantial control over operations of subsidiary incurs direct operator liability for subsidiary's on-site disposal practices), cert. denied sub nom. Georgoulis v. U.S., 519 U.S. 808, 117 S. Ct. 50, 136 L.Ed. 2d 14 (1996); and the Eleventh Circuit, Jacksonville Elec. Authority v. Bernuth Corp., 996 F.2d 1107 (11th Cir. 1993) (parent corporation may be held liable as operator of its subsidiary's business when it exercises actual and pervasive control of subsidiary to the extent of actually involving itself in the daily operations of the subsidiary).
In Schiavone v. Pearce, 79 F.3d 248 (2d Cir. 1996), the Second Circuit held that a parent corporation could be liable as the operator of its subsidiary's facility even if the elements for veil-piercing are not established, joining the majority of the courts of appeal that have addressed the issue. However, the court declined to determine what degree of control by the parent corporation was necessary to establish operator liability, finding that "such a ruling lies beyond the scope of the present appeal." Id. at 255.
Shortly after deciding Schiavone, the Second Circuit revisited the issue in Certain Underwriters at Lloyd's, London v. St. Joe Minerals Corp., 90 F.3d 671 (2d Cir. 1996). Although determining again that it was unnecessary to decide the issue, the court suggested that it was not inclined to adopt the "authority to control" standard:
Although we decided [in Schiavone] that a parent can be held liable without veil-piercing, we have yet to decide what degree of control will be required. We need not decide that question today. Suffice it to say that more is required than simple ownership and the general authority to control that comes with it. At a minimum there must be "active involvement in the activities of the subsidiary." Although the Fourth Circuit has found mere authority to control sufficient [citing Nurad], it is debatable whether this Court is prepared to go that far. Id. at 674 (citing Kayser-Roth, citations omitted).
Whether a court applies the "actual control" rather than the "authority to control" standard would be outcome determinative where the related corporations have common officers. In Jacksonville Elec. Authority v. Eppinger & Russell Co., 776 F. Supp. 1542 (M.D. Fla. 1991), aff'd sub nom. Jacksonville Elec. Authority v. Bernuth Corp., 996 F.2d 1107 (11th Cir. 1993), the owner of a contaminated site sought recovery of cleanup costs against Tufts University, which owned a majority of shares in Eppinger & Russell Co., the former site operator. In discussing the "common officers factor," the court stated:
[T]he fact that Tufts and Eppinger had some common directors and officers, and that Tufts received regular financial status reports on Eppinger merely demonstrates the concomitant general authority and ability to control that comes with ownership. This case stands in stark contrast to Kayser-Roth, where the parent corporation exercised pervasive control over the subsidiary's financial operations and gave final approval of the installation of the system that used the hazardous substance at issue. Kayser-Roth's control over the subsidiary was so complete that the subsidiary was required to obtain Kayser-Roth's approval before making any expenditures over $5000 or before making any real estate deals. Id., 776 F. Supp. at 1548 (citation omitted) (emphasis by the court).
Piercing the Corporate Veil
The most conservative view has been adopted by the Fifth and Sixth Circuits, and it holds that a parent corporation or shareholder will be held liable under CERCLA for the actions of its subsidiary only when it is determined that piercing the corporate veil is warranted. In Joslyn Manufacturing Co. v. T.L. James & Co., 893 F.2d 80 (5th Cir. 1990), cert. denied, 498 U.S. 1108 (1991), the court declined to interpret "owner or operator" broadly to reach parent corporations whose subsidiaries are found liable under CERCLA, despite the apparent judicial trend to do so. The court reasoned:
Significantly, CERCLA does not define "owners" or "operators" as including the parent company of the offending wholly-owned subsidiaries. Nor does the legislative history indicate that Congress intended to alter so substantially a basic tenet of corporation law. "It is elementary that the meaning of a statute must, in the first instance, be sought in the language in which the act is framed, and if it is plain . . . the sole function of the courts is to enforce it according to its terms." Joslyn asked this court to rewrite the language of the Act significantly and hold parents directly liable for their subsidiaries' activities. To do so would dramatically alter traditional concepts of corporation law. The "normal rule of statutory construction is that if Congress intends for legislation to change the interpretation of a judicially created concept, it makes that intent specific." Any bold rewriting of corporation law in this area is best left to Congress. Id., 893 F.2d at 82-83 (citations omitted).
In United States v. Cordova Chemical Company of Michigan, 113 F.3d 572 (6th Cir. 1997), the Sixth Circuit joined the Fifth Circuit in adopting the conservative veil-piercing standard despite observing that several other circuits have imposed operator liability where the parent corporation exerts significant control over the operations of the subsidiary. The court specifically stated:
[W]e reject the district court's "new, middle ground" as the basis for fixing operator liability and hold that where a parent corporation is sought to be held liable as an operator pursuant to 42 U.S.C. §9607(a)(2) based on the extent of its control of its subsidiary which owns the facility, the parent will be liable only when the requirements necessary to pierce the corporate veil are met. In other words, under the circumstances of this case, whether the parent will be liable as an operator depends upon whether the degree to which it controls its subsidiary and the extent and manner of its involvement with the facility, amount to the abuse of the corporate form that will warrant piercing the corporate veil and disregarding the separate corporate entities of the parent and subsidiary. Id. at 580.
The court looked to Michigan law to determine whether the circumstances warranted piercing the corporate veil and observed:
There must be such a unity of interest and ownership that the separate personalities of the corporation and its owner cease to exist, and the circumstances must be such that adherence to the fiction of separate corporate existence would sanction a fraud or promote injustice. Organization of a corporation for the avowed purpose of avoiding personal liability does not in itself constitute fraud or reprehensible conduct justifying a disregard of the corporate form. Id. (citations omitted).
Lender Liability Under CERCLA
CERCLA's definition of "owner or operator" specifically excludes "a person, who, without participating in the management of a vessel or facility, holds indicia of ownership primarily to protect his security interest in the vessel or facility." §9601(20)(A). Just as courts have failed to agree on the contours of operator liability for corporations and their affiliates, judicial decisions examining the circumstances under which lenders could be held liable as owners or operators of contaminated properties failed to articulate clearly what lenders could do to protect their investments without incurring liability.
The Ninth Circuit held in In re: Bergsoe Metal Corporation, 910 F.2d 668 (9th Cir. 1990), that the "secured creditor" exemption will be void only in circumstances where the holder of a security interest actually participates in the management of the borrower's facility. In an earlier case, United States v. Fleet Factors, 901 F.2d 1550 (11th Cir. 1990), cert. denied, 498 U.S. 1046 (1991), the Eleventh Circuit had taken the contrary position in dicta that a nonforeclosing secured lender could be liable for the cleanup of a contaminated facility absent actual control if it had participated in the "financial management" of the facility to a degree sufficient to indicate the "capacity to control" waste handling operations. Furthermore, EPA's attempt to allay such concerns through a regulatory initiative was invalidated. As a result, federal legislation was needed to clarify the standard of "lender liability" in connection with CERCLA.
In response to such need, Congress enacted the Asset Conservation, Lender Liability and Deposit Insurance Act of 1996 (the "Act") as part of the 1997 Omnibus Appropriations Bill which was signed into law and became effective on September 30, 1996. The Act included certain amendments to CERCLA which affect secured creditors and fiduciaries. The amendments contained in the Act clarify the circumstances under which a secured creditor can be held responsible under CERCLA for its borrower's contamination. The Act also clarifies the extent of fiduciary responsibility under CERCLA.
For lenders and fiduciaries, clarification is achieved through amendments to CERCLA's definitions and liability provisions. Section 2502 of the Act contains amendments to CERCLA's definitions and creates a new provision on fiduciary liability. Section 2504 of the Act revives the provisions, previously invalidated, of the EPA-promulgated 1992 Lender Liability Rule that apply to the involuntary acquisition of property by the government.
The Act amends the CERCLA definition of "owner or operator" by adding, somewhat redundantly, at the end of the original definition an exclusion from liability for "a lender that, without participating in the management of a vessel or facility, holds indicia of ownership primarily to protect [its] security interest." See Section 2502(b) of the Act, codified at 42 U.S.C. §9601(20)(E)(i).
The Act defines "participation in management" as actual participation in the management or operational affairs of a vessel or facility, and does not include within the definition the mere capacity to influence, or the unexercised right to control, operations. See Section 2502(b) of the Act, codified at 42 U.S.C. §9601(20)(F). In so defining participation in management, Congress clearly rejected the analysis of Fleet Factors, where the court stated that mere capacity to influence operations could give rise to CERCLA liability on the part of secured parties. Under the Act, a secured party would be liable as participating in management if, while the borrower is still in possession, the secured party:
- makes environmental compliance decisions; or
- has responsibility for overall day-to-day decision-making with respect to environmental compliance; or
- has responsibility for overall operational functions other than environmental compliance.
The Act thus defines "participating in management" in much the same way as did EPA in its 1992 Lender Liability Rule and is consistent with the actual control standard of operator liability.
Under the Act, if the secured creditor has not previously participated in management, it may foreclose on the vessel or facility and maintain business activities, wind up operations, undertake cleanup activities consistent with the National Contingency Plan or preserve, protect or prepare the property for sale or other disposition; provided, however, that the secured creditor seeks to sell, re-lease or otherwise divest itself of the property "at the earliest practicable, commercially reasonable time, on commercially reasonable terms, taking into account market conditions and legal and regulatory requirements." See Section 2502(b) of the Act, codified at 42 U.S.C. §9601(20)(E)(ii).
The three distinct theories of indirect operator liability that, until otherwise determined by the United States Supreme Court, now constitute the federal common law on the subject cannot be harmonized or reconciled by any reading of the statute.
The strict "veil piercing only" approach adopted by the Fifth and Sixth Circuits is difficult to reconcile with the fundamental policies underlying CERCLA. As a result of the enactment of EPA's Lender Liability Rule as part of the 1997 Omnibus Appropriations Bill, it would seem inappropriate that a parent corporation or sole shareholder could escape CERCLA liability where a lender engaging in the very same conduct would be subject to liability. This result is particularly anomalous when one compares the equity owner's control and potential economics benefit to that of the lender.
On the other hand, the "authority to control" test adopted by the Fourth and Ninth Circuits strips any majority shareholder or group of shareholders constituting a majority of the traditional corporate liability shield even where all of the requisite formalities of corporate structure and governance are maintained and the subsidiary or corporation functions in a truly stand-alone, independent fashion. Even CERCLA's fundamental policy of making the responsible polluter pay is difficult to rationalize as the basis for the "authority to control" test.
The courts have frequently commented that, when given the choice between imposing indirect liability on a parent or shareholder or imposing the cost on taxpayers, the underlying policy of CERCLA supports a liberal reading of the statute favoring a liability determination in order to effectuate its remedial purposes. However, the fact remains that CERCLA created a trust fund to pay for the remedial costs at orphan sites, and the tax supporting that trust fund comes from a levy on the industries historically associated with many of the hazardous disposal sites.
Like the new Lender Liability Rule, the "actual control" standard provides some specific guidelines and requires a very fact-specific analysis that clearly will vary from case to case. Since it is nearly impossible to anticipate the variety of factual scenarios that could give rise to indirect operator liability under the "actual control" standard, precise legislative reform is almost impossible. However, recognizing CERCLA's remedial policies, as well as the related elements of the new Lender Liability Rule, Congress could assist in the creation of a uniform rule of law on indirect operator liability by amending the definition of "owner or operator" in Section 9601(20)(A) to identify a uniform standard to be applied by all federal courts. If it chooses to do so, we would not be surprised to see the "actual control" test enacted as the standard.