Are Parents Liable for Subsidiary Sin?

A parent company must actively participate in or control the operations of a polluting facility owned or operated by a subsidiary before it may be held directly liable in its own right under the federal Superfund law for environmental cleanup costs, under a U.S. Supreme Court ruling [U.S. v. Bestfoods, No. 97-454, June 8, 1998].

Parent liability has been a hotly contested issue throughout the Superfund program's 18-year history. Under the law, the government may pay for cleanup efforts by suing "any person who at the time of disposal of any hazardous substance owned or operated any facility." The term "person" includes corporations and other business organizations. However, "owned or operated" is not clearly defined. Moreover, considerable disagreement has existed among the federal courts about when a parent company can be deemed an "owner or operator."

The controversy before the high court started about 40 years ago when Ott Chemical Co. began manufacturing chemicals at a Michigan plant and dumping hazardous substances at the site. In 1965, CPC International Inc. bought the facility via a subsidiary and continued to produce chemicals and contaminate the area. Cordova Chemical Co., an Aerojet-General Corp. subsidiary, took over the facility in the '70s, maintaining operations until 1986.

By 1981, the U.S. Environmental Protection Agency had begun site cleanup efforts with a remedial plan budgeted at tens of millions of dollars. To recover some of the money, the United States filed suit in 1989 under Section 107 of the Superfund law naming CPC (recently renamed Bestfoods), Aerojet and Cordova as responsible parties.

The U.S. District Court for the Western District of Michigan divided the case into three phases: liability, remedy and insurance coverage. Only the first phase has been completed. In 1991, the court conducted a 15-day trial that focused on whether CPC and Aerojet, as parent corporations, had "owned or operated" the facility. Both CPC and Aerojet were held liable as operators. The court found it significant that CPC selected the subsidiary's board of directors and named CPC officials as subsidiary officers, and that a CPC official took charge of shaping the subsidiary's environmental compliance policy.

On appeal, the U.S. Court of Appeals for the Sixth Circuit reversed the district court, finding that both CPC and Aerojet maintained corporate personalities separate from their subsidiaries and that neither parent used the subsidiary corporate form for any wrongful purpose.

Delivering the unanimous high court opinion, Justice David Souter noted the firmly recognized corporate law principle that a parent corporation generally is not liable for its subsidiaries' acts except where the corporate form is being misused. "Nothing in [the Superfund law] purports to reject this bedrock principle, and ... the Congressional silence is audible," he wrote.

Nevertheless, the opinion said, Superfund liability "may turn on operation as well as ownership." Thus, a parent corporation may face direct liability for its own actions in operating a subsidiary-owned facility.

Characterizing as "useless" the law's definition of "operator," the opinion attempts to define actions that amount to "direct parental operation," and concludes: "an operator must manage, direct, or conduct operations specifically related to pollution, that is, operations having to do with the leakage or disposal of hazardous waste, or decisions about compliance with environmental regulations."

To saddle a parent corporation with direct liability under Superfund, the government must show the nature and extent of the parent's interaction with the subsidiary's facility, the ruling said. Moreover, the opinion continued, "it cannot be enough to establish liability here that dual officers and directors made policy decisions and supervised activities at the facility." Thus, the government must prove that, "despite the general presumption to the contrary, the officers and directors were acting in their capacities as CPC officers and directors, and not as [subsidiary] officers and directors, when they committed those acts."

Justice Souter expressed the court's suspicion that if this case were re-tried in district court, the government might be able to prove that a CPC employee named Williams, acting for CPC and not for the subsidiary, "played a conspicuous part in dealing with the toxic risks from ... the plant."

Concluding his opinion, Justice Souter said, "Prudence ... counsels us to remand ... for re-evaluation of Williams' role and the role of any other CPC agent who might be said to have had a part in operating the ... facility."

Assistant Attorney General Lois Schiffer announced at a press conference that the Justice Department was "pleased with the decision." This reaction surprised many environmental defense lawyers who see the ruling as an outright rejection of the government's theories of parent liability. The Bestfoods decision has sharply limited situations where plaintiffs can win judgments against parent corporations in "operator" cases.