On June 8, the Supreme Court issued a unanimous opinion limiting the liability of a corporation under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) arising out of the operations of that corporation's subsidiaries. United States v. Bestfoods, No. 97-454. The Court held that a company cannot be derivatively liable for the acts of its subsidiaries under CERCLA unless the corporate veil can be pierced. It also held that a parent may be held directly liable under CERCLA only if it operates its subsidiary's facility, not simply because it operates the subsidiary.

Mayer, Brown & Platt briefed and argued the case for Bestfoods.

Derivative liability: homage to long-standing common-law principles

The Court began its analysis by referring to the "deeply ingrained" general principle of corporate law that a parent corporation is not liable for the acts of its subsidiaries. A parent corporation's exercise of the control which stock ownership affords - the election of directors, making of by-laws, and such - will not create liability to the parent.

Against this common law backdrop, "the congressional silence is audible." CERCLA's failure "to speak to a matter as fundamental as the liability implications of corporate ownership demands application of the rule that in order to abrogate a common-law principle, the statute must speak directly to the question addressed by the common law." Thus, the Court concluded, a parent corporation may be charged with derivative CERCLA liability for its subsidiary's actions only when the corporate veil is pierced.

Direct liability: giving statutory terms their plain meaning

Liability of a parent corporation need not be derivative only; CERCLA imposes liability on any person who "operates" a "facility." The second issue for the Court, therefore, was to identify the acts of the corporate parent that would constitute operating its subsidiary's facility. The statute itself provides no guidance and its definition is circular: an "owner or operator" of a facility means "any person owning or operating such facility." 42 U.S.C.SECTION 9601(20)(A)(ii). With help from the dictionary, the Court interpreted operator under CERCLA as "simply someone who directs the workings of, manages, or conducts the affairs of a facility."

"To sharpen the definition for purposes of CERCLA's concern with environmental contamination, 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."

"The question is not whether the parent operates the subsidiary, but rather whether it operates the facility" as evidenced by "participation in the activities of the facility."

What constitutes participation in the activities of a facility will no doubt be the subject of litigation in the lower courts, but the Supreme Court's opinion in Bestfoods gives some guidance. The Court noted the "well established principle of corporate law that directors and officers holding positions with a parent and its subsidiary can and do 'change hats' to represent the two corporations separately." Thus, the presence of dual officers and directors who make policy decisions and supervise activities at a facility is not by itself enough to establish liability, unless they "were acting in their capacities as [the parent's] officers and directors, and not as [the subsidiary's] officers and directors, when they committed those acts." Liability might also attach to the parent upon a showing that an agent of the parent "with no hat to wear but the parent's hat . . . manage[d] or direct[ed] activities at the facility," but only if such agent's actions "are eccentric under accepted norms of parental oversight of a subsidiary's facility." Liability to the parent will not arise from "the interference that stems from the normal relationship between parent and subsidiary

The implications of Bestfoods for the defense of CERCLA lawsuits and due diligence in the merger and acquisition context are potentially far reaching. The Court's focus on traditional doctrines of corporate law and the language of CERCLA undercuts a line of lower court decisions that appeared since the mid-1980's to jettison traditional corporate law. Litigation of cases involving parent-subsidiary issues, and other corporate doctrines such as corporate dissolution, should now be more focused and predictable. In due diligence, the emphasis can shift to the parent's activities with respect to individual plants and other facilities, away from a dissection of the broader parent-subsidiary relationshipIn addition to environmental litigation, Mayer, Brown & Platt's Environmental Practice Area regularly advises clients in connection with corporate, financial, and real estate transactions

MAYER, BROWN & PLATT ENVIRONMENTAL PRACTICE AREA

John C. Berghoff, Jr., Practice Area Administrator

Percy L. Angelo

Russell R. Eggert

Michael P. Rissman

Todd E. Stark

Mark R. Ter Molen

Patricia F. Sharkey

Susan E. Brice

Richard F. Bulger

Lynn E. Delzell

Kevin G. Desharnais

Thomas W. Dimond

David S. Gualtieri

Karen L. Prena

Kyle F. Waldinger

Lyman C. Welch

Copyright © 1999 Mayer, Brown & Platt. This Mayer, Brown & Platt article provides information and comments on legal issues and developments of interest to our clients and friends. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.