Supreme Court Clarifies Test for Parent Corporation Liability under Superfund

Date: Jul 10, 1998

On June 8, 1998, the Supreme Court delivered a unanimous decision in U.S. v. Bestfoods, No. 97-454, clarifying the requirements for finding parent corporations liable for hazardous waste clean-up costs incurred by their subsidiaries under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA, or "Superfund"). Parent corporations, the Court ruled, can be held liable only if (1) the corporate veil may be pierced under the applicable state law, or (2) the parent actively participated in and exercised direct control over the operations of the subsidiary's facility. The ruling has broad implications for many Superfund cost-recovery cases, where parent corporations are sued because the subsidiary owner or user of the Superfund sites either have insufficient assets to pay for clean-up costs or have gone out of business.

In U.S. v. Bestfoods, the United States brought suit against CPC International, Inc., the parent corporation of the defunct Ott Chemical Co., to recover the cost of cleaning up industrial wastes at an Ott chemical plant. (Due to changes in ownership, Bestfoods was later substituted as respondent.) The suit was brought under CERCLA §107(a)(2), 42 U.S.C. 9607(a)(2), which provides that any corporation that "owned or operated" a facility at which hazardous wastes were disposed will be liable for the government's response costs at the site. The district court held CPC liable as an "operator" of the Ott plant, based on the fact that CPC had selected Ott's board of directors and appointed certain CPC officials as executives of Ott. The Sixth Circuit reversed, applying instead the Michigan veil-piercing law, and finding that CPC's ownership of Ott did not amount to abuse of the corporate form necessary to pierce the corporate veil and hold CPC liable.

Justice Souter, writing for a unanimous Court, rejected elements of both lower court decisions and set out the proper test for parent corporation liability under CERCLA. A parent may be held derivatively liable only when the corporate veil can be pierced under the applicable state law. CERCLA, therefore, does not change the common law rule that owners may be held liable for the corporation's debts when the corporate form is being misused for wrongful or fraudulent purposes. Alternatively, a parent may be held directly liable in its own right under CERCLA §107(a)(2) if it actively participated in and exercised control over the operations at the subsidiary's facility. Notably, the Supreme Court rejected the district court's interpretation of operator liability as too broad, stating that majority control over a subsidiary's board is not sufficient grounds for CERCLA liability. Rather, direct parent liability must be based on active parent involvement, such as when an agent of the parent manages or directs activities at the plant level. The court stated that norms of corporate behavior should serve as reference points in distinguishing normal oversight functions from active control over operations.

For further information, please contact Douglas J. Behr at 202-434-4213 or by e-mail at behr@khlaw.com.