“When Parents Act Like Children: CERCLA Liability of a Parent Corporation for its Subsidiary Corporation”

This comment was written by former staff member Griffin Farris and appeared in JNREL Vol. 22 No. 1. The abstract was written by staff member Brandon Wells.

The modern corporation form often allows business owners to maintain limited liability for actions of the corporation by setting up subsidiaries. This insulation came under review in the context of pollution and the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) in the Supreme Court case, United States v. Bestfoods, 524 U.S. 51 (1998). In Bestfoods, the Supreme Court was concerned with the liability of two different parent corporations that had at one time owned a polluting Michigan chemical manufacturing plant. The district court had found the parent companies liable as operators, and the Sixth Circuit had overturned that decision, finding that parent liability could only be established by showing a piercing of the corporate veil.

The Supreme Court's analysis began by noting two competing principles of corporate law. These are 1) that parent companies may protect themselves from liability by establishing subsidiaries, and 2) that there are instances that warrant "piercing the corporate veil" and holding the parent company liable for the actions of the subsidiary. The Court noted that these issues seem to be wholly irrelevant when discussing liability under CERCLA, as the statute is only concerned with whether the parent corporation is acting as an "operator" of a subsidiary polluting facility. The Court devised a definition for the term "operator" as "someone who directs the workings of, manages, or conducts the affairs of a facility." Bestfoods, 524 U.S.
at 66.

In the context of pollution, the court said that "an operator must manage, direct, or conduct operations having to do with the leakage or disposal of hazardous waste, or decisions about compliance with environmental regulations." Id. at 66-67. The Supreme Court then remanded the case to the district court, where the court found that the parent companies were not liable, even when focusing on the Supreme Court's definition of an "operator".

In cases that followed the Supreme Court's decision in Bestfoods, courts were more willing to find liability on the part of the parent company. Findings of liability were often based on evidence that the parent company was an "operator" of the subsidiary. Notable facts included a coordinator of the parent company taking part in the subsidiary plant's waste management designs; a requirement that the subsidiary notify the parent of any environmental communications; and active involvement by officers in disposal arrangements.

Based on subsequent consistent findings of liability for parent companies, the district court in Bestfoods was erroneous in its findings. In Bestfoods, many of the officers of the parent company held board positions in the subsidiary, and meetings often took place at both the parent and the subsidiary. Also, the parent company made many recommendations to the subsidiary as to how they should handle specific environmental matters. Although the district court rejected this argument because the subsidiary didn't follow the recommendations, it ignored the fact that the parent was still trying to control the subsidiary through management, albeit rather ineffective management. The factual scenario in Bestfoods was similar to cases finding liability, the only real distinction being that control from the parent was followed to a lesser extent. Although the district court found for no liability, based on the actions of the parent, it should have followed later cases that found liability on the part of the parent corporation.

In Bestfoods, the Supreme Court struck a balance between the two competing corporate law principles. Bestfoods recognized that while the corporate form is in place to allow for limited liability in many circumstances, it is not an absolute limitation on liability and there are situations where liability will still be found. Balancing these principles only makes sense when the entire factual account is taken into consideration. When only focusing on a single act, it may not establish liability on the parent as an "operator". But in order to best effectuate the ruling of Bestfoods, continuous acts of the parent as an "operator" of the subsidiary may give rise to parent liability.