Court Opinion

ID: 6935327
Source: CourtListenerOpinion
Date Created: 2022-07-24 00:29:10.232899+00
Date Added: 2024-06-11T09:09:56.357678
License: Public Domain

RYAN, Circuit Judge,
dissenting.
The court’s opinion today rests primarily on three grounds:
• That a parent corporation cannot, as a matter of law, be held directly liable under 42 U.S.C. § 9607(a)(2) as an “operator” of a facility owned and ostensibly operated by its subsidiary corporation, but may face only vicarious liability under state law corporation veil piercing principles;
• That piercing the corporate veil under Michigan law requires circumstances showing that the corporate form was used for a “fraudulent purpose.”
• That the district court erred in finding that the defendants failed to prove their entitlement to the so-called third-party defense under 42 U.S.C. § 9607(b)(3).
In my judgment, the court is mistaken on all three grounds, and I therefore respectfully dissent.
I.
Direct Liability of a Parent Corporation under § 9607(a)(2)
Nothing in CERCLA, 42 U.S.C. § 9601 et seq., excludes a parent corporation, as a matter of law, from liability for operating a contaminating facility if, in fact, it is operating it. CERCLA identifies the individuals and entities that may be held directly liable as responsible parties, and they include, as relevant here:
(1) the owner and operator of a ... facility, [and]
(2) any person who at the time of disposal of any hazardous substance owned or operated any facility at which such hazardous substances were disposed of.
42 U.S.C. § 9607(a)(1), (2).
CERCLA defines “owner or operator” as “any person owning or operating such facility,” § 9601(20)(A) (emphasis added), and excludes from the definition “a person, who, without participating in the management of a ... facility, holds indicia of ownership primarily to protect his security interest in the ... facility,” id. The next subsection defines “person” to include a corporation. § 9601(21).
The district court came to the conclusion, as I do, that a parent corporation may face potential liability as an operator of a contaminating facility because the plain language of § 9607(a)(2) indicates that Congress intended to impose liability on any entity actually *594operating a facility, regardless of the nature of the entity’s ostensible interest in the facility. Nothing in the language of § 9607 or elsewhere in CERCLA suggests that Congress’s definitions of “operator” or “person” include any corporation except a parent corporation.
The majority opinion holds, however, that Congress indeed intended to exclude parent corporations from potential direct liability as facility operators because Congress did not “contemplat[e] the abandonment of traditional concepts of limited liability associated with the corporate form.” Maj. op. at 589. But that conclusion seems to me to beg the question. The question under subsection (a)(2) is not whether a parent corporation may be held vicariously liable for abuse of its subsidiary’s corporate form — clearly it may — but whether Congress has created direct liability if the facts show that the parent corporation was the actor actually operating a contaminating facility. Stated differently, the issue is whether Congress has excused a parent corporation who is in fact operating a contaminating facility from direct liability, if it is doing so in the name of a corporate subsidiary. The district court thinks not, and I agree.
The district court held that a parent corporation may be held directly liable under § 9607(a)(2) as an operator if its level of control over the subsidiary is so complete and pervasive as to exceed mere oversight:
In this court’s view, then, a parent corporation is directly liable under section 107(a)(2) as an operator only when it has exerted power or influence over its subsidiary by actively participating in and exercising control over the subsidiary’s business during a period of disposal of hazardous waste. A parent’s actual participation in and control over a subsidiary’s functions and decision-making creates “operator” liability under CERCLA; a parent’s mere oversight of a subsidiary’s business in a manner appropriate and consistent with the investment relationship between a parent and its wholly owned subsidiary does not.
CPC Int’l, Inc. v. Aerojet-General Corp., 777 F.Supp. 549, 573 (W.D.Mich.1991).
The question is simply one of fact. The parent corporation is liable if it is shown to have been the operator-in-faet of the facility as indicated by the extent of its domination and control of its subsidiary — the ostensible operator. In such circumstances, there is no issue of veil piercing at all; it is a matter of applying the language of § 9607(a)(2). As the district court pointed out, some of the factors relevant to deciding whether the parent is the operator-in-fact include considerations such as the parent corporation’s involvement in the subsidiary’s board of directors and daily operations, and the parent corporation’s control over the subsidiary’s policy making in areas such as personnel, finance, and waste disposal. Also relevant are the facts leading up to the subsidiary’s origin and the reasons for its existence, and the parent’s level of financial monitoring and its cooperation or consolidation with the subsidiary’s accounting, legal, and research functions.
At least three other circuits have held that a parent corporation may be held directly liable as an operator under § 9607(a)(2) without any consideration of corporate veil piercing. In United States v. Kayser-Roth Corp., 910 F.2d 24 (1st Cir.1990), cert. denied, 498 U.S. 1084, 111 S.Ct. 957, 112 L.Ed.2d 1045 (1991), the court declared that the plain language of CERCLA compelled the conclusion that parent corporations may be held directly liable under § 9607(a)(2):
Congress, by including a liability category in addition to owner (“operators”) connected by the conjunction “or,” implied that a person who is an operator of a facility is not protected from liability by the legal structure of ownership. Given this grammatical construction and the broad definition of “person,” corporate status, while relevant to determine ownership, cannot shield a person from operator liability. In addition, the legislative history provides no indication that Congress intended “all persons” who are “operators” to exclude parent corporations____ Thus, our analysis of the statute and its legislative purpose and history reveals no reason why a parent *595corporation cannot be held liable as an operator under CERCLA.
Id. at 26 (citation omitted).
And, “[t]o be an operator requires more than merely complete ownership and the concomitant general authority or ability to control that comes with ownership. At a minimum it requires active involvement in the activities of the subsidiary.” Id. at 27.
In Lansford-Coaldale Joint Water Authority v. Tonolli Corp., 4 F.3d 1209 (3d Cir.1993), the court embraced the KayserRoth standard, emphasizing that “operator liability may be established even without evidence that a [parent] corporation controlled the environmental decisions of an affiliated corporation as long as there exist other factors which sufficiently demonstrate pervasive control.” Id. at 1222 n. 13.
Similarly, in Jacksonville Electric Authority v. Bernuth Corp., 996 F.2d 1107 (11th Cir.1993), the court agreed that the test for parent corporation liability as an operator was whether the parent “ ‘exercises actual and pervasive control of the subsidiary to the extent of actually involving itself in the daily operations of the subsidiary. Actual involvement in decisions regarding the disposal of hazardous substances is a sufficient, but not a necessary, condition to the imposition of operator liability.’ ” Id. at 1110 (quoting Jacksonville Elec. Auth. v. Eppinger and Russell Co., 776 F.Supp. 1542, 1547-48 (M.D.Fla.1991)).
Two other circuits apparently would hold a parent corporation directly hable as an operator not because the parent corporation actually controlled the subsidiary, but rather because it had the authority to do so. In Nurad, Inc. v. William E. Hooper & Sons, 966 F.2d 837 (4th Cir.), cert. denied, — U.S. —, 113 S.Ct. 377, 121 L.Ed.2d 288 (1992), the Fourth Circuit held that the key inquiry is not whether the parent corporation actually controlled the subsidiary, but rather whether it had the “ ‘authority to control the operations or decisions involving the disposal of hazardous substances at the [s]ite.’ ” Id. at 842 (emphasis in original). In dicta, the Ninth Circuit also has identified “authority to control the cause of the contamination” as the standard. Kaiser Aluminum & Chem. Corp. v. Catellus Dev. Corp., 976 F.2d 1338, 1341 (9th Cir.1992).
In addition, the Tenth Circuit, in FMC Corp. v. Aero Industries, Inc., 998 F.2d 842 (10th Cir.1993), applied the Kayser-Roth standard to impose operator liability on a company director directly, and not under state corporation law veil piercing standards.
Although I would not go so far as to hold, as the Fourth and the Ninth Circuits would, that mere “authority to control” is sufficient, it is clear that all the circuits that have addressed the point, save one, have found that a parent corporation is exposed to direct liability under § 9607(a)(2) without regard to common law veil piercing.
Only the Fifth Circuit has adopted a narrower view of operator liability for parent corporations: “CERCLA does not define ‘owners’ or ‘operators’ as including the parent company of offending wholly-owned subsidiaries. Nor does the legislative history indicate that Congress intended to alter so substantially a basic tenet of corporation law.” Joslyn Mfg. Co. v. T.L. James & Co., 893 F.2d 80, 82 (5th Cir.1990), cert. denied, 498 U.S. 1108, 111 S.Ct. 1017, 112 L.Ed.2d 1098 (1991). However, another panel of the same court recently observed, in dicta,' that an individual shareholder or officer could be held directly liable as an operator:
Under traditional concepts of corporate law, the principle of limited liability would protect officers or employees like [the shareholder here] from being held responsible for the acts of a valid corporation. However, CERCLA prevents individuals from hiding behind the corporate shield when, as “operators,” they themselves actually participate in the wrongful conduct prohibited by the Act____ In such cases, a defendant can be held individually hable for his wrongful conduct. “[T]his personal liability is distinct from the derivative liability that results from ‘piercing the corporate veil’ ” where we would hold the owners of a less than bona fide corporation responsible for corporate acts.
Riverside Mkt. Dev. Corp. v. International Bldg. Prods., Inc., 931 F.2d 327, 330 (5th *596Cir.), cert. denied, 502 U.S. 1004, 112 S.Ct. 636, 116 L.Ed.2d 654 (1991).
I conclude, as the district court did, and as the First, Third, Tenth, and Eleventh Circuits have, that a parent corporation may be held directly liable as an operator of a contaminating facility under § 9607(a)(2) if the facts of the case show that its domination and control of the subsidiary corporation ostensibly operating the facility is so pervasive that the parent is the operator in fact.
II.
CPC’s Liability under § 9607(a)(2)
The district court found that CPC, Ott II’s parent corporation, so totally and completely controlled Ott II that CPC was the actual operator of the contaminating facility in Dalton Township, Michigan, and is therefore directly liable under § 9607(a)(2) as the operator of the site. I agree.
The facts, as found by the district court, are these:
From CPC’s acquisition of Ott II in October 1965 through April 1966, all four directors on Ott II’s board were CPC officers. Over the next three and one-half years, at least three of the eight board members were officers of CPC, and for the following two and one-half years, until CPC sold Ott II, CPC officials comprised the majority of the eleven-director board. At all times during Ott II’s existence, the chairman of its board was a high-level CPC executive, appointed by CPC’s president.
In addition, the managers of Ott II who exerted active control over the subsidiary’s day-to-day activities also were officers of CPC. Arnold Ott, who had been chief executive officer of Ott I, continued as Ott IPs chief executive officer until 1969, during which time he also was CPC’s vice president for scientific research and president of CPC’s development company, a subsidiary with oversight responsibility for several CPC subsidiaries including Ott II. In addition, James Eiszner, who had been Ott I’s vice president of marketing, served as Ott IPs president from 1967 to 1970. During Eiszner’s tenure with Ott II, he also served as vice president of CPC’s development company, and eventually became CPC’s chief executive officer. Moreover, Eiszner, in particular, was criticized during his tenure as an Ott II official for paying too much attention to his CPC responsibilities and not enough attention to Ott II. Beverly Warner served as Ott IPs chief executive officer from 1970 until it was sold in 1972, at the same time serving as president of CPC’s development company.
In addition to CPC’s participation through Ott II’s board in Ott II’s environmental matters, CPC’s environmental affairs director, G.R.D. Williams, was influential in setting Ott IPs environmental policies. For example, because Williams did not believe Ott II needed a biological waste treatment facility, Ott II officers abandoned presenting plans for such a facility at a meeting with the state of Michigan. In addition, Williams repeatedly controlled the interface between Ott II officials and state and federal regulators, and instructed Ott IPs officers “to consult with CPC before responding to regulatory questionnaires or other inquiries.” 777 F.Supp. at 561.
Finally, as the district court found, CPC’s involvement in Ott IPs financial affairs involved more than mere review and oversight. For example, CPC made loans to Ott II in excess of $5 million, while assuming many of Ott IPs existing loans. In addition, CPC commingled its funds with Ott II’s funds. CPC also limited the amount of capital expenditures that Ott II could approve without further approval by CPC’s board of directors. As to personnel matters, CPC repeatedly participated in Ott II’s labor negotiations with local unions.
Based on these and many other findings, the district court concluded that, “[t]he evidence shows a level of participation and control by CPC that exceeds the bounds of an interested investor and enters the realm of an active operator.” Id. at 575. These findings are amply supported in the record. Accordingly, the district court’s conclusion that CPC was directly liable under § 9607(a)(2) as an operator should be affirmed.
III.
Aerojet’s Liability under § 9607(a)(1)
The district court found Aerojet liable as a present “owner” of a contaminated facility *597under § 9607(a)(1). It did so after finding that the facts justified piercing the corporate veil that thinly shielded Cordova/Michigan from Aerojet.
The majority opinion holds that the district court erred because it misapplied Michigan law: “[The district court’s findings do] not suggest that Aerojet operated with a fraudulent purpose; such a fraudulent purpose is, as we read Michigan corporate law, a prerequisite to disregard of the corporate form.” Maj. op. at 592 (citing Bodenhamer Bldg. Corp. v. Architectural Research Corp., 873 F.2d 109, 113 (6th Cir.1989)).
While there is no question that fraud justifies piercing the corporate veil, there is ample authority under Michigan law for finding parent corporation liability through veil piercing for less egregious unjustified use of the corporate form.
The Michigan Supreme Court repeatedly has held that veil piercing is not limited to instances of fraud or illegality. In Potter v. Michigan Bell Telephone Co., 246 Mich. 198, 224 N.W. 438 (1929), the court disregarded the corporate form despite recognizing that “[fjraud [wa]s expressly disclaimed.” Id., 224 N.W. at 439. In Herman v. Mobile Homes Corp., 317 Mich. 233, 26 N.W.2d 757 (1947), the court held that when a parent corporation’s control of its limited purpose subsidiary is so complete as to result in the subsidiary being a “mere instrumentalit[y],” piercing is appropriate to avoid an injustice, even in the absence of fraud. Id., 26 N.W.2d at 762-63.
More recently, the Michigan court affirmed that equity alone may require setting aside the corporate form. In Wells v. Firestone Tire and Rubber Co., 421 Mich. 641, 364 N.W.2d 670 (1984), a plaintiff attempted to avoid the workers compensation exclusivity provision in Michigan law by bringing a tort action against the employer’s parent corporation. The court rejected the attempt, invoking the piercing doctrine to find that the parent and employing subsidiary were a single corporate entity. As the court noted, the injustice to be avoided was abrogation of an overriding public policy interest.
Our disregard of the separate corporate entities of Firestone and its wholly owned subsidiary is premised upon our recognition of the important public policies underlying the Michigan Worker’s Disability Compensation Act and our belief that a contrary determination would be inequitable under the facts of this case....
If the statute is to be construed liberally when an employee seeks benefits, it should not be construed differently when the employer asserts it as a defense to a tort action brought by the employee who claimed and accepted benefits arising from that employment relationship____ Indeed, under the facts and circumstances of this case, we would not have permitted Firestone to shield itself behind its wholly owned subsidiary in order to avoid payment of workers’ compensation benefits to plaintiff.
Id., 364 N.W.2d at 675. The Wells court did not require proof of a “fraudulent purpose.”
Indeed, this court has observed, in dicta to be sure, that Michigan law permits veil piercing upon a showing of any of the following:
(a) a corporation and shareholders have complete identity of interests; (b) the corporation is a mere instrumentality of the shareholders; (c) the corporation is a devise to avoid a legal obligation; or (d) the corporation is used to defeat public convenience, justify a wrong, protect fraud or defend a crime.
Bodenhamer Bldg. Corp., 873 F.2d at 112 (emphasis added).
Thus, while there is authority in Michigan for denying veil piercing where fraud is absent, see Klager v. Robert Meyer Co., 415 Mich. 402, 329 N.W.2d 721 (1982), the weight of authority allows piercing when the shielding corporation is a mere instrumentality and justice requires that it be disregarded.
Here, the district court found that Aerojet was the 100 percent shareholder of Cordova/California who, in turn, was the sole shareholder of Cordova/Michigan. In addition, as the district court found, the boards of directors of Cordova/California and Cordova/Michigan were titular only, not even convening for meetings. At least twenty Aerojet officers simultaneously held the same or nearly identical positions in Cordova/Califor*598nia and Cordova/Miehigan. Aerojet so completely controlled the finances of all companies, that neither Cordova/California nor Cordova/Miehigan were permitted to maintain separate bank accounts. In addition, there was evidence that Aerojet used Cordova/Michigan by transferring to Cordova/California millions in worthless debt owed to Aerojet by Cordova/Miehigan, effectively canceling debt owed by Aerojet to Cordova/California. These findings are supported by the record and are not clearly erroneous. The evidence established that Cordova/Michigan operated as a mere instrumentality of Aerojet.
Even more compelling are the findings of the district court regarding Cordova/Michigan’s corporate purpose. When Aerojet began negotiations with MDNR for the Dalton Township property, Aerojet negotiated side-by-side with its then unincorporated division, Cordova. After Aerojet entered two short-term stipulations with MDNR, and merely eleven days before the sale was concluded, Aerojet incorporated Cordova as a wholly-owned subsidiary. Although Aerojet had initially drafted the stipulation and consent order with MDNR, it was “Cordova Chemical Company” that actually signed the agreement. Then, in November 1978, with the remodeling of the facility complete and manufacturing about to begin, Cordova/California incorporated Cordova/Miehigan, transferring to it Cordova/California’s ownership of the facility. Despite the supposed separate corporate form of Cordova/Miehigan, throughout operations, Aerojet actively participated in negotiations with prospective buyers for the possible sale of the facility. Once Cordova/Michigan ceased operations at the site, it was Aerojet that took responsibility for leasing portions of the site to third parties. Accordingly, it is clear that Aerojet took pains to insulate itself from environmental liability for the situation they knew existed at the site. Aerojet admits as much in their brief:
By using well-capitalized, non-fraudulent, separate corporate subsidiaries, such as Cordova/California and then Cordova/Michigan, Aerojet could justify an attempt to reclaim and make the waste Site productive without risking all of its corporate assets. A rule of law imposing enormous environmental liability on parent corporations whose subsidiary neither perpetrated a fraud nor contributed to actual contamination would result in contaminated waste sites being permanently abandoned as unproductive, orphan properties, because no rational corporate officer could support a decision to rehabilitate a contaminated site if such liability were unavoidable.
Thus, Aerojet admits that Cordova/Miehigan was established solely as a facade, to avoid any legal obligation to pay for further environmental cleanup at the site. Under Michigan law, their admission is sufficient to justify piercing the corporate veil. See Potter, 224 N.W. at 440.
As Aerojet points out, it is possible that a refusal to allow a prospective purchaser of a contaminated site to avoid liability will result in a scarcity of willing buyers. Certainly, both EPA and MDNR have a substantial interest in locating conscientious purchasers, who are willing to reclaim environmentally corrupt facilities. However, there is no evidence that the Michigan courts would view this interest as an exception to the state’s veil piercing standard, especially in light of the competing interest in imposing environmental cleanup costs on private industry rather than on taxpayers. Congress certainly was not deterred by this argument, given its balancing of interests in favor of imposing liability on new owners. Moreover, Aerojet and the Cordovas are not blameless, as they would have the court believe. The district court found that the entities actively contributed to the contamination and then failed to take remedial action, despite knowledge that contamination was continuing to migrate.
Accordingly, the district court’s conclusion that, by piercing the corporate veil, Aerojet may be held liable as an “owner” under 42 U.S.C. § 9607(a)(1) should be affirmed.
I further agree with the district court that Aerojet was directly liable as an operator under § 9607(a)(2):
In light of the same facts that were probative in concluding Aerojet is liable under section 107(a)(1), the court concludes that Aerojet operated the site through ac*599tive participation and pervasive control over the businesses of both Cordova/California and Cordova/Michigan.
As with CPC’s involvement with Ott II, Aerojet’s participation and control over the board, management and decision-making at Cordova/California and Cordova/Michigan shows that the parent operated the facility. Aerojet’s conduct toward its subsidiaries extended well beyond the activities that are merely indicative of a parent’s general oversight of a wholly owned subsidiary.
Accordingly, the court concludes the [sic] Aerojet is directly liable as an operator under section 107(a)(2).
CPC Int'l Inc., 777 F.Supp. at 580.
IV.
Third Party Defense under § 9607(b)(3)
I do not agree that the district court should be required, upon remand, to “revisit its treatment of the [third-party] defense raised by Aerojet, Cordova/California and Cordova/Michigan” under § 9607(b)(3).
To succeed under § 9607(b)(3), the defendants are required to prove all four elements of a third party defense which are:
1. That they did not contribute to the contamination.
2. That they were not in a direct or indirect contractual relationship with any person who, in connection with the contractual relationship, caused the contamination.
3. That they exercised due care throughout their ownership or operation of the contaminating facility.
4. That they protected against those acts and omissions of the polluting persons, and the consequences of those acts and omissions, that were foreseeable.
See 42 U.S.C. § 9607(b)(3); see also Kerr-McGee Chem. Corp. v. Lefton Iron & Metal Co., 14 F.3d 321, 325 (7th Cir.1994). The district court found that the defendants failed to carry their burden on all four elements of the § (b)(3) defense.
The majority opinion, in ordering that the district court “revisit its treatment of the defense” raised by the defendants, addresses only the “contractual relationship” ground. Even if the district court erred in its treatment of that element of the defense, its findings that the defendants have not carried their burden of proving the remaining three elements of the § 9607(b)(3) defense, which the majority opinion does not question, is amply supported in the record.
The district court committed no clear error in finding that the defendants demonstrated neither the exercise of due care nor the use of appropriate precautions. For example, in a May 1980 environmental risk report covering Aerojet and several subsidiaries including Cordova/Michigan, the defendants repeatedly stated their intent to take an ostrich approach with respect to the contamination problem:
The most significant environmental problems associated with the facility are those relating to the residues of past industrial occupants of the site. Management has adopted the position that any injury to others arising out of contamination from these residues is the responsibility of the State of Michigan Department of Natural Resources and that, accordingly, Cordova should insulate itself from any knowledge of, or involvement in monitoring these wastes.
The report went on to acknowledge that waste drums remained buried, despite completion of MDNR’s removal efforts. Moreover, the report acknowledged that the stipulation and consent order entered by Cordova and MDNR was never intended to resolve the contamination- problem. In describing the responsibilities assumed by the parties under the stipulation and order, the report admitted that MDNR’s duties were limited to removing 8700 drums and a portion of the contaminated soil and sludge, and that the consent order’s hold harmless clause relieved the defendants only of liability arising out of these specified removal efforts. In addition, as the report acknowledged, the MDNR absolved the defendants of liability relating to procurement of an alternative community water source.
As the district court pointed out, and as the report confirms, the stipulation and order *600did not resolve responsibility for remaining drums and contaminated soil and sludge, as well as responsibility for groundwater contamination. In this regard, the report specifically opined:
Between 65 and 100 monitoring wells for testing groundwater were either installed by Story or have been installed more recently under a. State/Federal study of groundwater contamination at the site. The study is being carried out by several consulting organizations under contract to the state. Cordova management believes the studies show little or no contamination but has avoided any participation or liaison with the study teams____ Because of the possibility that Cordova’s potential liability for groundwater contamination may have survived the Consent Order, it would appear desirable for Cordova management to keep abreast of current monitoring results. In addition, although a high chloride content would show continuation of problems from the old Story wastes, a high sulphate concentration would indicate seepage problems arising out of Cordova’s current operations.
Accordingly, fully aware that waste drums remained buried beneath the site and that the majority of the contaminated soil had not been removed, and cognizant of groundwater contamination to which they may have been contributing, the defendants believed the solution to these problems was to wear blinders. Their head-in-the-sand approach can hardly be characterized as the exercise of due care.
For the same reasons, it cannot be said that the defendants took adequate precautions to protect against the consequences of Ott II’s and Story’s omissions and acts. While the parties, in their briefs, debate whether reimplementation of the purge wells would have been an adequate precaution, they overlook the big picture. The defendants, fully aware that contamination problems on their property were not being addressed, chose to take no precautions to protect against the foreseeable consequences of these problems — namely, further migration. Accordingly, because the defendants have failed to prove at least two of the requisite elements of the third-party defense, the district court properly held that they were not entitled to invoke it.
Since the defendants were required to prove all four elements of the defense, it is unnecessary to consider whether they sustained their burden regarding the remaining two elements, including whether any of the pollution was the act of a third party “in connection with” the contractual relationship with the defendants.
y.
I would affirm the judgment of the district court.