Court Opinion

ID: 6568
Source: CourtListenerOpinion
Date Created: 2010-04-25 05:18:49+00
Date Added: 2024-06-11T09:38:02.279115
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UNITED STATES COURT OF APPEALS
                          FOR THE FIFTH CIRCUIT

                           _____________________

                                No. 93-2634
                           _____________________

                       UNITED STATES OF AMERICA,

                                                                       Plaintiff,

                                     VERSUS

                           RALPH L. LOWE, ET AL.,

                                                                       Defendants,

                                      and

                                 RALPH L. LOWE,

                                                             Cross-Plaintiff/
                                                                   Appellant,

                                     VERSUS

                  JOC OIL EXPLORATION COMPANY, INC.,

                                                             Cross-Defendant/
                                                                    Appellee.

      ____________________________________________________

           Appeal from the United States District Court
                for the Southern District of Texas
      _____________________________________________________

                               (August 15, 1994)

Before POLITZ, Chief Judge, and DUHÉ and BARKSDALE, Circuit Judges.

RHESA HAWKINS BARKSDALE, Circuit Judge:

     This review of a summary judgment concerns the determinative

factors    for   whether   a    corporation   is    required      by    its   bylaw

(indemnity, under certain conditions, for officers and directors

sued "by    reason   of"    their   corporate      status)   to   indemnify      an

officer/director, Ralph L. Lowe, for his individual liability
incurred     under     the    Comprehensive          Environmental         Response

Compensation and Liability Act, 42 U.S.C. § 9601 et seq. (CERCLA).

Apparently because CERCLA permits personal liability to be imposed

against an officer or director, the district court held that Lowe

was not entitled to indemnity.          We REVERSE.

                                       I.

     This case arises out of the disposal of wastes at the Brio

Superfund Site in Texas; the following facts are not in dispute.

From the late 1950s until 1969, the site was owned by Hard-Lowe

Company, and its successor Lowe Chemical Company (Lowe I).                   Lowe,

an investor in Hard-Lowe, became the sole stockholder of Lowe I;

and in 1969, he sold Lowe I to Chemical Pollution Control, Inc.

(CPC).   The transaction was financed by Lowe, who took a security

interest in the Brio property.           When CPC went bankrupt in 1972,

Lowe foreclosed on the site.1

     In anticipation of the foreclosure, Lowe incorporated Lowe

Chemical Company (Lowe II).        According to Lowe, he exchanged the

Brio Site for stock in Lowe II in May 1972, but the attorneys

handling the transaction "neglected to file and record a deed

reflecting   the     conveyance   of   the    property,      and   title    to   the

property   remained     in   [Lowe's]       name."     Due    to   this    claimed

oversight, Lowe was shown as the record owner of the site until

1977. Lowe claims that JOC discovered the error, and a "corrective

1
     Although JOC does not dispute the preceding facts, some of the
following facts regarding the chain of title are described by JOC
as "disputed". It states that "[i]f summary judgment had not been
granted on JOC's motion ..., these facts would have been fully
developed at the district court level."

                                    - 2 -
deed" was recorded; it "recited that it was given by [Lowe] and

accepted by JOC Oil Aromatics to `evidence the sale and intended

conveyance made on May 2, 1972, and it shall be effective as of and

retroactive to, such date.'"

     According to Lowe, the purpose of the corrective deed related

to the 1975 purchase of all of Lowe II's stock by JOC at a price

that assumed Lowe II's ownership of the Brio Site.             JOC defaulted

on amounts owed Lowe, and conveyed the Brio Site back to him in

1978 in lieu of foreclosure.         Later that year, Lowe conveyed the

property to another entity.

     After     the   Brio   Site   was   declared   a   superfund    site,   the

government spent $1.31 million taking remedial action at it, and

then filed an action against both JOC and Lowe to recover those

costs.    In turn, Lowe cross-claimed against JOC for indemnifi-

cation under the corporate bylaw in issue.                Without admitting

liability, Lowe settled with the government for $400,000.2                   JOC

settled later for $20,000.

     On Lowe's cross-claim for indemnification, JOC and Lowe both

moved    for   summary   judgment.       A   magistrate   judge     recommended

granting JOC's motion and denying Lowe's.           After overruling Lowe's

objections to that recommendation, the district court entered

judgment for JOC on Lowe's cross-claim.

2
     The settlement occurred shortly after denial of the United
States' motion for summary judgment against Lowe.

                                     - 3 -
                                       II.

     Pursuant    to   Lowe    II's    bylaws,    each   of    its    officers   and

directors was indemnified for liability and expenses incurred "in

connection with any claim made against him, or any action ... to

which he may be a party by reason of ... being" an officer or

director.3      JOC   and    Lowe    agree    that   this    bylaw   governs    the

indemnity claim; both assert here that they are entitled to summary

judgment.4

3
     The indemnity clause provided:

                  Each director and each officer or former
             director or officer of this corporation ... shall
             be   indemnified   by   the   corporation   against
             liabilities   imposed   upon   him   and   expenses
             reasonably incurred by him in connection with any
             claim made against him, or any action, suit or
             proceeding to which he may be a party by reason of
             his being or having been such director or officer,
             and against such sums as independent counsel
             selected by the board of directors shall deem
             reasonable payment made in settlement of any such
             claim, action, suit or proceeding primarily with a
             view of avoiding expenses of litigation; provided,
             however, that no director or officer shall be
             indemnified with respect to matters as to which he
             shall be adjudged in such action, suit or
             proceeding   to  be   liable   for  negligence   or
             misconduct in performance of duty, or with respect
             to any matters which shall be settled by the
             payment of sums which counsel selected by the board
             of directors shall not deem reasonable payment made
             primarily with a view to avoiding expenses of
             litigation, or with respect to matters for which
             such indemnification would be against public
             policy.
4
     It goes without saying that we review a summary judgment de
novo; it is appropriate only when, viewing the evidence in a light
most favorable to the non-movant, there are no genuine issues of
material fact and the movant is entitled to judgment as a matter of
law. E.g., Raju v. Rhodes, 7 F.3d 1210, 1212 (5th Cir. 1993),
cert. denied, ___ U.S. ___, 114 S. Ct. 1543 (1994); Fed. R. Civ. P.
56.

                                      - 4 -
      The district court held that Lowe was not sued "by reason of"

his corporate status.       The magistrate judge found "it to be of

significance" that the United States brought this action against

Lowe personally, and held a hearing to ascertain whether the United

States sued Lowe "in his capacity as an officer and director".

After examining the United States' summary judgment submissions in

the   underlying    litigation,     and     having     discussions   with    a

representative of the United States at the hearing, the magistrate

judge concluded that Lowe was sued "because of actions he may have

taken in his personal capacity and not because of actions he may

have taken in his capacity as a director or officer."                     This

conclusion was driven by Lowe's personal involvement at the Brio

Site and the fact that CERCLA permitted personal liability for such

actions.

                                     A.

      Based upon the complaint in the underlying litigation, and,

alternatively,     upon   CERCLA,    JOC    presents    several   bases     for

upholding its summary judgment.

                                     1.

      JOC seizes on the wording of the United States' complaint,

contending that the indemnity clause requires that Lowe be made a

party to an action in his capacity as an officer or director.

Thus, JOC urges that we focus on that complaint, and avoid asking

"why or for whom Lowe was involved with hazardous substances at the

Brio Site."   We disagree.

                                    - 5 -
      The parties agree that our interpretation of the indemnity

clause is governed by Texas law; and under it, because the bylaw is

not claimed to be ambiguous, its construction is a question of law.

University Savings Ass'n. v. Burnap, 786 S.W.2d 423, 425-26 (Tex.

Ct. App. 1990).     Burnap addressed an issue very similar to that

here:   whether a corporate bylaw obligated University Savings to

indemnify Burnap.    Id. at 425.    Burnap was an officer and director

of University Savings' predecessor, and he was sued by its former

shareholders for "tipping inside information". Id. at 424. Burnap

requested indemnification for his legal fees incurred in defending

the suit,   pursuant   to   a   bylaw   that   indemnified    officers   and

directors for expenses incurred defending a suit "to which such

person is made a party solely by reason of his being or having been

a director [or] officer".       Id. (emphasis added).    The Texas Court

of Appeals held that he was entitled to reimbursement.          Id. at 426-

27.

      Interestingly, both parties rely on Burnap.            Lowe maintains

that it stands for the proposition that the pleadings are not the

sole determinant for whether one is sued by reason of having been

an officer or director; rather, the facts giving rise to the

complaint must be considered. See id. at 426 (interpreting factual

allegations made in complaint against Burnap and assessing trial

testimony, among other things, in ascertaining whether indemnity

clause applied).     On the other hand, JOC contends that Burnap

relied solely on what was apparent on the face of the complaint,

and that the citation to trial testimony was "unnecessary" to the

                                   - 6 -
decision.     See id.   In fact, the decision did note that its holding

"is consistent with the law concerning an insurance company's duty

to defend under an insurance contract. Under those provisions, the

duty to defend is determined solely from the face of the pleadings

in light of the policy provisions."           Id. (citation omitted).

      We do not read Burnap to hold that indemnity is triggered

solely by the underlying pleadings reciting that the individual is

being sued as an officer or director.           Obviously, this would give

considerable power to artful pleading in the underlying complaint

as to the application of the indemnity provision. Needless to say,

this could, among other things, lead to considerable mischief. The

examination of trial testimony and factual interpretation of the

complaint's allegations in Burnap do not appear to have been

surplusage.

      In any event, we need not rely solely on Burnap; we are guided

by a recent decision by the same court that decided Burnap, Grove

v.   Daniel   Valve     Co.,   874 S.W.2d 150   (Tex.   Ct.   App.   1994),

application for writ of error filed (May 11, 1994).5                The court

interpreted a Delaware statute that permitted indemnification when

an individual is sued "by reason of the fact that he is or was a"

director or officer, id. at 153 (quoting Del. Code Ann. tit. 8, §

145(a) (1991); emphasis deleted).         As here, relying on Burnap, the

appellee urged that the language of the complaint in the underlying

litigation determined indemnification vel non.              Id. at 152.    The

5
     Two of the justices in Grove participated in Burnap; the same
justice authored both opinions.

                                      - 7 -
court found that reliance misplaced, ruling that "in Burnap we did

not hold so sacred the alignment and naming of parties as to

preclude any other analysis", id. at 156:

          Appellee's argument proposes a static view of the
          litigation process, locking in indemnification
          rights at one stage of the process, namely at the
          preliminary stage of the proceedings. The pleading
          must   be  a   primary   part  of   any   follow-up
          indemnification suit because it informs a court not
          involved in the original lawsuit of the substance
          of the suit, but it cannot be the end-all.

Id. at 158.   Accordingly, we agree with the district court that the

absence of a recitation in the United States' complaint that Lowe

was being sued because he was an officer and director of Lowe II is

not fatal to his indemnification claim.    But, as discussed infra,

we part company with the district court as a result of the

determinative effect it apparently gave to CERCLA providing for

personal liability for actions taken by Lowe.     While CERCLA does

permit such liability, this is not the end of the inquiry; a more

detailed factual inquiry was required as to Lowe's status during

the relevant period.

                                 2.

     JOC asserts that Lowe was personally involved in the operation

at the Brio Site, and thus liable under CERCLA.6    See 42 U.S.C. §

9607(a)(2) (imposing liability on "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"); Riverside

Mkt. Dev. Corp. v. International Bldg. Prods., Inc., 931 F.2d 327,

6
     As noted, without admitting liability, Lowe settled with the
United States on its claim against him.

                                - 8 -
330 (5th Cir.) (per curiam) ("CERCLA prevents individuals from

hiding behind the corporate shield when, as `operators,' they

themselves actually participate in the wrongful conduct prohibited

by the Act."), cert. denied, ___ U.S. ___, 112 S. Ct. 636 (1991);

United States v. Northeastern Pharmaceutical & Chem. Co., 810 F.2d
726,   743-44   (8th    Cir.    1986)    (government   can    impose      personal

liability on an officer or employee of a corporation as a "person"

within the meaning of CERCLA), cert. denied, 484 U.S. 848 (1987).

JOC contends that Lowe's liability under CERCLA precludes his

liability arising "by reason of" being an officer and director.

       We disagree.     Although Lowe's liability "was not derivative

but personal", see Northeastern Pharmaceutical, 810 F.2d at 744,

this does not preclude, per se, his being indemnified.                 A similar

argument was attempted in one of the few reported federal decisions

addressing whether an indemnity clause covered personal CERCLA

liability, Bowen Engineering v. Estate of Reeve, 799 F. Supp. 467

(D.N.J. 1992).         There, the estate of a former officer sought

indemnification     from   the    corporation,    which      had   joined   other

corporations in suing the estate for contribution for CERCLA

damages.   In that case, the corporate plaintiffs "contend[ed] that

they   [were]   suing    [the    former    officer],   through      his   estate,

personally for the violation of CERCLA."           Id. at 485 (emphasis in

original).      Nevertheless, the court concluded that although the

officer (and therefore his estate) was liable personally under

CERCLA as an "operator" of the site, id. at 474, he was entitled to

                                        - 9 -
indemnification under a clause nearly identical to that in issue

here.    See id. at 483-89.7

     We agree with Bowen.         Lowe's CERCLA personal liability does

not, without more, void the indemnity clause.                 In other words,

although    Lowe    is     personally    liable,   he   may   be   entitled   to

indemnity.       Cf. Grove, 874 S.W.2d at 154 ("It is true that ...

Grove could be individually liable for any negligent design ....

The indemnification statute, however, expressly provides that if an

employee's job exposes him to liability, then the corporation must

indemnify him if the employee is successful on the merits ....")

Indeed, if Lowe II's officers or directors were not subject to

personal liability for acts or omissions arising out of their

corporate positions, there would be little reason for the indemnity

clause.    Cf. Riverside, 931 F.2d at 330 ("`Corporate officers are

liable     for     their     torts,     although   committed       when   acting

officially.'") (quoting 3A S. Flanagan & C. Keating, Fletcher

Cyclopedia of the Law of Private Corporations § 1135 (1986)).                 As

stated, Lowe's CERCLA personal liability does not preclude per se

indemnification.8

7
     New Jersey law controlled in Bowen. "In New Jersey a party
may receive indemnification `only if he or she is without fault and
his or her liability is purely constructive, secondary or
vicarious.'" Bowen, 799 F. Supp. at 484 (emphasis in original;
citation omitted). The court noted that strict liability statutes,
such as CERCLA, establish "secondary" liability under New Jersey
law. Id. at 484-85.
8
     Of course, indemnity may be circumscribed by defenses that can
be raised under the indemnity clause, such as exclusion of
indemnification where the officer "shall be adjudged ... liable for
negligence or misconduct in performance of duty".

                                      - 10 -
                                          3.

     Alternatively, JOC contends that the bylaw's prohibition of

indemnification     where    such    "would    be    against   public   policy"

prohibits it in this instance, asserting that "[a]llowing Lowe to

shirk his responsibility for the contamination he caused violates

CERCLA's policy."

     But, assuming arguendo that this issue was raised properly in

district   court,   JOC     does    not    contend   that   CERCLA   prohibits

indemnification; to the contrary, it notes "that 42 U.S.C. §

9607(e)(1) freely allows parties to agree to indemnify one another

for liability under CERCLA."         That being so, we cannot understand

why Lowe's personal liability under CERCLA would be contrary to

CERCLA's allowing indemnity.         Obviously, indemnification does not

relieve Lowe of his liability vis-a-vis the government; it only

provides a possible source of payment for damages resulting from

that liability.9

9
     JOC   contends   also   that   CERCLA's    policies  prohibit
indemnification, even apart from the indemnity clause.        JOC's
proposed distinction -- that indemnity is only permissible for
officers or directors "who are expressly sued as such or who are
not named individually because their involvement with the
contamination is limited to general corporate matters removed from
actual participation in the handling and disposal of the hazardous
substances" -- finds no support in the statute.        In fact, an
officer or director's individual liability under CERCLA depends
upon "actual[] participation", i.e., "personal participation in the
alleged wrongful conduct".    Riverside, 931 F.2d at 330.     Thus,
indemnity would be meaningless if it only covered officers or
directors who were "removed from actual participation", because
they would not be subject to underlying liability.

                                     - 11 -
                                    B.

      As noted, Lowe does more than merely challenge the adverse

summary judgment; he asserts that he is entitled to judgment.10

But, as noted earlier, more factual inquiry into the relationship

between Lowe's CERCLA liability and his status as an officer and

director is required.

      The focus of that factual inquiry should be on the "connection

between the complaint and [Lowe's] corporate status".          See Grove,

874 S.W.2d 156.       In assessing this connection, we recognize the

breadth with which many courts have interpreted language such as

"by   reason   of".     For   example,   the   Seventh   Circuit   recently

interpreted the Delaware indemnification statute, and concluded

that the "`by reason of the fact that' phrase is broad enough to

encompass suits against a director in his official capacity as well

as suits against a director that arise more tangentially from his

role, position or status as a director."           Heffernan v. Pacific

Dunlop GNB Corp., 965 F.2d 369, 375 (7th Cir. 1992).11

      Keeping the breadth of the bylaw's "by reason of" language in

mind, Lowe's liability may be connected to his status as an officer

10
     JOC responds that this issue is not before us, stating that
Lowe did not properly raise the issue of the denial of his cross-
motion for summary judgment. In the light of our disposition of
this issue, we need not reach this contention.       In any event,
Lowe's notice of appeal concerned the district court granting
summary judgment to JOC and denying Lowe's summary judgment motion.
And, the issue Lowe presented for review includes whether the
district court erred in denying his summary judgment motion.
Moreover, he concludes his summary of argument by urging that he
"is entitled as a matter of law" to indemnity.
11
     In Grove, the Texas Court of Appeals cited Heffernan with
approval. See Grove, 874 S.W.2d at 153-56.

                                  - 12 -
and director; much of his liability may have arisen "by reason of"

that status.    Even JOC offers support for this position.             For

example, it states that "Lowe personally oversaw the day-to-day

site activities, was actively involved in Lowe Chemical Company's

environmental   compliance   problems,   supervised    the   initial   pit

closure activities, and was involved in and had the authority to

control the disposal of waste generated by Lowe Chemical Company."

(Footnote   omitted.)    Similarly,      JOC    recognizes   that    "Lowe

personally participated in the disposal of styrene tar at the Brio

Site and maintained daily, on-site involvement in decisionmaking

regarding hazardous substances at Lowe Chemical Company -- a

company whose fundamental operations involved the use of hazardous

substances it placed in earthen pits."         (Footnote omitted.)

     Obviously, a number of other issues require exploration by the

district court.    First, as discussed, Lowe was sued as both an

"operator" and an "owner" of the Brio Site.       Lowe suggests that, to

the extent his liability arose as an "owner" rather than an

"operator", "this theory [of liability] does not entitle [him] to

indemnification." Therefore, there may be a need for apportionment

of Lowe's liability between that occasioned as an "owner" and that

as an "operator".12

     Moreover, Lowe contends that he was not liable at all as an

"owner" of the Brio Site.       If this is true, apportioning the

12
     Lowe's settlement with the United States also involved another
superfund site, the "Hardage Site". The district court may also
need to apportion the settlement amount between that resulting from
the Brio Site and that from the Hardage Site if the latter is not
subject to the indemnity clause.

                                - 13 -
liability      may    be      pretermitted           (assuming      apportionment       is

appropriate).         Lowe advances two reasons for escaping "owner"

liability.      First, he asserts that he is exempt from CERCLA

liability as a foreclosing lienholder.                      See 40 C.F.R. § 300.1100

(1993).      Second,       he    contends       that    JOC's    acceptance       of   the

"corrective" deed for the Brio Site estops it from asserting that

Lowe owned the Brio Site during the years preceding that deed.

These issues are appropriately first addressed by the district

court.

     Last, assuming apportionment is required, the question of

attorneys' fees arises.             Lowe notes that the indemnity clause

covers "expenses ... incurred ... in connection" with claims

subject   to    the    clause.           He    contends      that     expenses    include

attorneys'     fees,       and    that        they   should     not    be   subject     to

apportionment.         More      specifically,         he   analogizes      the   expense

provision to an insurer's duty to defend.                      Under Texas law, "the

insurer is obligated to defend, as long as the complaint alleges at

least one cause of action within the coverage of the policy."

Rhodes v. Chicago Ins. Co., 719 F.2d 116, 119 (5th Cir. 1983)

(citations omitted); see also Burnap, 786 S.W.2d at 426 (inviting

comparison between indemnity clause and insurer's duty to defend).

On the other hand, Grove directed that, on remand, "the parties ...

apportion in some reasonable manner the monies spent by [Grove]

defending his status as general partner [for which indemnification

was not allowed] and as corporate personnel [for which it was]."

Grove, 874 S.W.2d at 158.            We need not clarify Texas law on this

                                          - 14 -
issue; until the district court determines whether apportionment of

the liability is necessary, and, if so, how it should be made,

there is no issue before us regarding apportionment of attorneys'

fees.    In short, this is another possible issue for the district

court.

                                III.

     For the foregoing reasons, the judgment is REVERSED, and the

case REMANDED for further proceedings consistent with this opinion.

                       REVERSED and REMANDED

                               - 15 -