State & Local News Vol. 22, No. 1, Fall 1998 Environmental Law Update By Stephanie P. Brown Courts Set Test for Corporate ParentCand Local GovernmentCSuperfund Liability In United States v. Bestfoods, __ U.S. __, 118 S. Ct. 1876, 1998 U.S. LEXIS 3733 (June 8, 1998), the U.S. Supreme Court established the standard for determining when a parent corporation has direct (as distinguished from derivative or indirect) liability as an "operator" under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA or Superfund), 42 U.S.C. §§ 9601B9675, for contamination caused by its subsidiary corporation. Thus, Bestfoods controls the factual showing a local government (or any other plaintiff) now must make to prevail against a parent corporation in a CERCLA cost recovery action. Furthermore, at least one federal appeals court has relied upon Bestfoods for determining when a local government is liable under CERCLA for its purported "operation" of a privately owned disposal site. Bestfoods' Path to "Deep-Pocket" Parents Imagine that your local government client faces potential multi-million dollar Superfund liability because it owned or operated a contaminated landfill. Imagine also that a significant share of the waste at the site came from a now insolvent or defunct company and that a financially viable corporate parent owns this now impecunious polluter. In such a scenario, the local government typically would seek recovery from the parent corporation for its subsidiary's pollution. Prior to Bestfoods, depending upon the federal jurisdiction hearing your case, you would need to satisfy one of three conflicting standards for parental liability, i.e., the "actual control" test, the "authority to control" test, or corporate law's traditional "veil piercing" test. With respect to direct CERCLA operator liability for corporate parents, Bestfoods has put to rest the question of which, if any, of these standard applies. In Bestfoods, a parent corporation placed its own officials on its subsidiary's board of directors and in key management positions. Those officials made major policy decisions and conducted day-to-day operations at the subsidiary's facility. Also, the parent corporation's director of environmental affairs actively participated in, and exerted control over, the subsidiary's environmental matters, including issuing directives regarding the subsidiary's response to regulatory inquiries. The trial court attributed the actions of the dual corporate officers and directors to the parent corporation and, therefore, found the parent liable. The Sixth Circuit Court of Appeals applied traditional state law veil piercing principles, and reversed. The Supreme Court accepted certiorari to resolve the conflict among the circuit courts over the extent to which parent corporations may be liable under CERCLA for their subsidiaries' polluting activities. The high court reasoned that, with respect to a parent corporation's direct liability, judicial inquiry must focus upon whether the parent participated in activities of the contaminating facility, rather than upon the parent-subsidiary corporate relationship. Second, relying on the ordinary meaning of the term "operate," the Court stated that to be an "operator" within the meaning of CERCLA, the responsible party 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." Third, as to a parent corporation's liability as a CERCLA operator, the Court stated - without reference to examples - that the "critical question is whether, in degree and detail, actions directed to the facility by an agent of the parent alone are eccentric under accepted norms of parental oversight of a subsidiary's facility." (Emphasis added.) Based upon this reasoning, the Supreme Court rejected the trial court's rationale for finding the parent corporation liable. The high court also agreed with the Sixth Circuit that direct parent liability cannot be based upon participation-and-control tests, but disagreed that direct parental liability is limited to parent-subsidiary exclusive or joint ventures. Accordingly, the Court vacated the Sixth Circuit's ruling and remanded the case for a determination of whether the conduct of the parent corporation's director of environmental affairs established parental liability. (Notably, the Court stated in dicta that indirect, or derivative, parent corporation liability may be obtained only under the traditional tenets of corporate veil piercing which, generally, is allowed only in cases of fraud or other misuse of the corporate form.) Bestfoods' "Operator" Standard Applies to Town In United States v. Township of Brighton, the U.S. Sixth Circuit Court of Appeals found that Bestfoods' plain-meaning standard for "operation" governs the determination of whether a local government is liable as a CERCLA operator for a privately owned and run disposal site. See No. 96B1802/96B1992, 1998 U.S. App. LEXIS 20771 (6th Cir. Aug. 25, 1998). The court refused to endorse specific factors for determining when governmental regulation constitutes CERCLA "operation," but indicated that a local government's funding and "hands-on" involvement with upkeep, closure, and other activities at a private disposal site may give rise to operator liability. In 1960, Brighton Township, Michigan, contracted with certain landowners to use a fifteen acre parcel for the disposal of noncommercial/non-industrial waste generated by the town's residents. Notably, the disposal agreement required the dump to "meet specifications of and be under the supervision of the [township's] Board of Appeals." The town paid rent and a maintenance fee for its residents' disposal, and allowed the landowner to contract separately to allow nonresidents to use the dump. In 1965, the town allowed residents to dispose of commercial, as well as residential, waste. By 1967, the town excluded nonresidents' waste and industrial waste from the site. The township closed the dump in 1973. Throughout this period, the township steadily increased the fees it paid to the landowner, made numerous special appropriations for site maintenance and repairs, approved and/or assisted with certain maintenance activities at the site, and appointed a committee to determine how to address the landowner's inability to properly maintain the site. Also, various town officials visited the site and communicated with state authorities regarding environmental conditions there. Around 1989, the U.S. Environmental Protection Agency (EPA) began site investigations. In 1994, EPA sued the township and the landowners under CERCLA to recover approximately $500,000 in response costs, plus interest. In 1996, the federal district court found the town and the landowners jointly and severally liable. The township appealed (and EPA appealed denial of prejudgment interest). On appeal the township argued, among other things, that it did not exercise sufficient control over the site to qualify as a CERCLA "operator." Both parties urged the court to apply the "actual control" test to adjudge the town's liability. Although the court agreed that this test was applicable, it reasoned that the primary question is whether the township's conduct satisfies the ordinary meaning of the term "operation." According to the court, the "plain meaning of the term 'operator' as expounded upon in Bestfoods . . . requires that . . . [the township] have performed some affirmative acts - that they 'operated' the site by 'directing the workings,' 'managing,' or 'conducting the affairs' . . . ." Furthermore, the court stated that "a government entity, by regulating the operation of a facility actively and extensively enough, can itself become an operator." In other words, a local government subjects itself to potential CERCLA liability when its regulation of a site exceeds the exercise of conventional police power to prevent threats to public health and safety and, instead, rises to the level of "macro-managing" a facility. The court remanded the case for a factual determination regarding whether the town's activities related to the site constituted a CERCLA operation. Although the court refused to provide a "mechanical checklist" of factors for determining when regulation constitutes "macromanaging," it emphasized that the township had failed to operate at "arm's-length" with its contractor and thus risked CERCLA liability. The court stressed that (1) the disposal agreement made the dump subject to the township's specifications and supervision, (2) the town had made repeated and substantial ad hoc appropriations and arrangements for maintenance, and (3) the town "took responsibility for ameliorating the unacceptable conditions" at the dump before and after state authorities scrutinized the site. Notably, the court stated: While we are sympathetic to the plight of the township, which could not have been happy when this dirty problem fell into its lap, there is no basis for us to conclude that the township was somehow forced to take such direct responsibility and action. Perhaps ironically, if . . . [the township] had been willing to spend more money in the 1960s and 1970s, it could have made other, arm's-length arrangements for the disposal of local refuse and the rehabilitation of . . . [the] property, and probably avoided operator liability. It remains to be seen how the trial court will assess the town's actions on remand. Nonetheless, the facts stressed by the appeals court are cautionary to any local government that contemplates providing hands-on assistance to the owner of a private disposal site. Stephanie P. Brown is an attorney-advisor in the U.S. Environmental Protection Agency's Office of Site Remediation Enforcement, in Washington, D.C. Ms. Brown may be reached at brown.stephanie@epamail.epa.gov. (The views are those of the author and do not represent those of the U.S. EPA.) State & Local Law News home page | Table of Contents