State Clears Stockholder in Cleanup Suit

The sole shareholder of a corporation whose shoddy waste disposal practices contaminated a site is not personally liable for the property owner's cleanup costs under the federal Superfund law, according to a ruling by a federal appeals court (Donahey v. Bogle, Nos. 92-1128, 92-1151, 6th Cir., Nov. 17, 1997).

St. Clair Rubber Co. leased an industrial site in Marysville, Mich., in the 1960s and 1970s from Helen Bogle. Bogle's brother, Seabourne Living-stone, owned 100 percent of St. Clair's stock. He also served as chairman of the board and treasurer.

St. Clair produced rubber products and adhesives by a process that blended resins, solvents and other organic compounds. The blending left a waste product that was combined with additional solvent to form a "sludge," which was drained into 55-gallon drums.

Typically, company employees transported the sludge from the adhesive plant to the site for disposal. They simply allowed the sludge to drain from the barrels and returned after several days to burn the sludge. Eventually the city of Marysville convinced St. Clair to stop its dumping and burning on the property.

In 1982, Richard Donahey purchased the property for $115,000 under a contract calling for monthly installment payments. Before signing the contract, however, Donahey negotiated an agreement with St. Clair under which the company agreed to clean up the site and indemnify Donahey for costs attributable to the company's dumping practices. Unfortunately for Donahey, St. Clair ceased to exist as a corporation shortly after the sale was consummated.

By 1984, Donahey realized he had a serious problem. Former St. Clair employees told state environmental officials about the company's disposal practices. In the meantime, newspaper articles described the condition of the property, highlighting its potential harm to nearby drinking water sources.

Finally, the State ordered Donahey to do an environmental assessment of the site. Donahey hired a consultant who proposed a clean-up plan in 1987 with a then-estimated price tag of $500,000. (The current cost of the plan is $1 million.)

After Bogle refused to take back the property, Donahey stopped making payments on the land contract and filed suit in federal district court against Bogle and Living-stone. He wanted a judgment invalidating the contract and holding Living-stone personally liable for the contamination. However, the court ruled that Don-ahey was stuck with his contract and that Living-stone had no such obligation.

The district judge found no evidence that Living-stone personally participated in the company's waste disposal practices. No witness testified that he ordered or personally arranged for the disposal of wastes in any particular manner.

Indeed, the testimony at trial showed that Living-stone handled only financial dealings for St. Clair and that day-to-day affairs, including waste disposal practices, were handled by managers and supervisors who did not need Living-stone's approval to perform their duties. In short, though he had authority to control waste disposal practices, he never did so. Donahey appealed.

Citing its recent decision in a case involving liability of a parent corporation for the acts of a subsidiary (U.S. v. Cordova Chem. Co., 113 F.3d 572), the U.S. Court of Appeals for the Sixth Circuit, among other things, affirmed the lower court's ruling that Living-stone was not liable as an operator for the clean-up of the site.

In Cordova, the Sixth Circuit held that attempts to saddle a parent corporation with "operator" liability under the Superfund law based upon the extent of its control of its subsidiary would be judged by state law standards.

Since both the Donahey and Cordova cases arose in Michigan, the appeals court applied its earlier reading of Michigan law. Under Michigan law, stockholders, like parent corporations, are shielded from liability unless circumstances exist to "pierce the corporate veil," the appellate panel said.

Courts will protect the corporate form even if "a single stockholder ... is entitled to dominate the company ...," the opinion continued. Thus, parent corporations and stockholders being accorded similar treatment with respect to vicarious liability, "it is clear to us that the [pre-conditions for operator liability] articulated in Cordova ... should be extended to stockholders," the court concluded.

Finding no facts to justify disregarding the corporate entity, the appeals court refused to hold Living-stone liable as an operator for clean-up of the property.

[Note: The U.S. Supreme Court will hear arguments this term in a case involving the effect of the Superfund law on a company that had "significant control" over a subsidiary when the latter disposed of hazardous waste at a site.]