Environmental Litigation: Piercing the Corporate Veil, Alter Ego, and Successor Liability Today’s faculty features: 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 1. WEDNESDAY, MARCH 4, 2020 Presenting a live 90-minute webinar with interactive Q&A Daniel Riesel, Prinicpal, Sive Paget & Riesel, New York Thomas R. Smith, Member, Bond Schoeneck & King, Syracuse, N.Y.
Transcript
Environmental Litigation: Piercing the
Corporate Veil, Alter Ego, and Successor Liability
2001) - lessees with typical leases are not liable as owners under CERCLA.
E.g., City of Los Angeles v. San Pedro Boat Works, 635 F.3d 440 (9th Cir. 2011) -
holder of a revocable permit to operate a harbor berth was not an owner
under CERCLA.
(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
E.g., Litgo New Jersey Inc. v. N.J. Dep’t of Envtl. Prot., 725 F.3d 369 (3d Cir.
2013) - current operators are held strictly liable for all releases that occur at a
facility, despite whether they have actually engaged in polluting activities
8
CERCLA § 107(A)
Who is Liable Under
CERCLA? (3) any person who . . . arranged for disposal or treatment . . . of
hazardous substances owned or possessed by such person . . . at any facility or incineration vessel owned or operated by another party or entity and containing such hazardous substances
No arranger liability where defendant sells useful product
Burlington Northern & Santa Fe Ry. Co. v. United States, 556 U.S. 599 (2009) - interpreting the application of CERCLA “arranger” liability
Factors to consider include foreseeability of harm, intent to dispose: "[K]nowledge alone is insufficient to prove that an entity “planned for” the disposal . . . to qualify as an arranger, Shell must have [had] . . . the intention that at least a portion of the product be disposed of during the transfer process by one or more of the methods described in [Section 107(a)(3)]."
(4) any person who accepts or accepted any hazardous substance for transport to disposal or treatment facilities, incineration vessels or sites selected by such person, from which there is a release or a threatened release
9
CERCLA § 107(A)
Two Claims for Private
Relief CERCLA Section 107
Allows the government, or private parties not confined to §113 claims, to seek cost recovery for response costs against any other person who is liable or potentially liable under Section 107(a), with the US District Courts having exclusive original jurisdiction over all such controversies.
E.g., PCS Nitrogen Inc. v. Ashley II of Charleston LLC, 714 F.3d 161 (4th Cir. 2013) – discussing the bona fide prospective purchaser exception to owner liability under CERCLA
Joint and several liability
CERCLA Section 113(f)
Section 113(f)(1) allows any person to seek contribution from any other person who is liable or potentially liable under Section 107(a), with the US District Courts having exclusive original jurisdiction over all such controversies.
Section 113(f)(3)B) allows any person whose own liability has been resolved by virtue of an administrative or judicial settlement or civil action to seek contribution from any other liable or potentially liable person who has not otherwise entered into a settlement with respect to CERCLA liability.
No joint and several liability
10
42 U.S.C. s 107(a)(4)(B) 42 U.S.C. s 113(f)(1), 113(f)(3)(B)
Mounting Tension: Section
107 vs. Section 113
CERCLA Section 113(f) requires contribution plaintiff to have a judgement or order against them.
107 actions are not available to those who previously participated in 113 actions because contribution is not considered a “response cost”
United States v. Atlantic Research Corp., 551 U.S. 128 (2007) - discussing the distinction between cost recovery under Section 107 and contribution under Section 113
In particular, footnote 6 raises the possibility that there IS overlap between the two claims (e.g., where a PRP sustains expenses involuntarily pursuant to a consent decree, it is unclear whether its costs are recoverable under Section 107, Section 113, or even both).
Agere Systems, Inc. v. Advanced Envtl. Tech. Corp., 602 F.3d 204 (3d Cir. 2010)
Parties who enter settlement agreements under 113(f)(2) are shielded from contribution claims against them, therefore they should not be allowed to bring a 107 claim because that would preclude the possibility of the defendant PRPs bringing a 113 contribution counterclaim
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Liability for Parent Corporations and Stockholders –U.S. v. Bestfoods, 524 U.S. 51 (1998)
The United States sued CPC International, Inc. (Bestfoods) under CERCLA Section 107(a)(2) for the cost of cleaning up industrial waste generated by CPC’s subsidiary, Ott Chemical Co.
The District Court conflated derivative with direct operator liability for parent corporations when it held Bestfoods liable. On appeal, the Sixth Circuit limited its analysis to whether Bestfoods was indirectly liable via veil-piercing, but noted that direct liability could attach if the parent actively operated the facility (e.g., as a joint venture with the subsidiary). The Supreme Court took the case to resolve a Circuit conflict as to whether a parent corporation could be held liable under CERCLA for operating a facility ostensibly belonging to its subsidiary.
The Supreme Court held that a parent corporation may be held liable as an operator under CERCLA in two situations:
Indirect, or derivative liability, which requires the court to pierce the corporate veil
Direct liability, where the parent corporation is directly involved in the operations of the "polluting facility" - this is broader than the Sixth Circuit's characterization.
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Indirect or Derivative
Liability“When (but only when) the corporate veil may be pierced, a parent corporation may be charged with derivative CERCLA liability for its subsidiary’s actions in operating a polluting facility.” U.S. v. Bestfoods, at 51-52.
Piercing the corporate veil requires fulfillment of a two-prong test:
Prong 1: Improper or illicit corporate dominance by the parent
Prong 2: An injustice, fraud, or wrong with a nexus to the corporate parent's dominance
Bestfoods indicates that this fraud/wrong is contamination in the context of CERCLA. In practice, the nexus between the parent and the contamination is key.
Presumptions against veil-piercing include:
That a corporate relationship exists between two corporations does not make the one liable for the torts of its affiliate.
The exercise of ordinary "control" by stockholders (including election of directors, creation of bylaws, and other actions incident to a stockholder's legal status) do not extend liability of a subsidiary past its assets to the stockholder.
Choice of Law question left open in Bestfoods
Circuit split between state law and federal common law
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Choice of Law
“There is significant disagreement among courts and commentators over whether, in
enforcing CERCLA’s indirect liability, courts should borrow state law, or instead apply a federal common law of veil piercing. Compare, e.g., … Lansford-Coaldale Joint Water
Auth. v. Tonolli Corp., 4 F.3d, at 1225 (“given the federal interest in uniformity in the application of CERCLA, it is federal common law, and not state law, which governs
when corporate veil-piercing is justified under CERCLA”), … with, e.g., 113 F.3d, at 580 (“Whether the circumstances in this case warrant a piercing of the corporate veil will be
determined by state law”)... Cf. In re Acushnet River & New Bedford Harbor Proceedings, 675 F. Supp. 22, 33 (Mass. 1987) (noting that, since “federal common law
draws upon state law for guidance, … the choice between state and federal [veil-piercing law] may in many cases present questions of academic interest, but little
practical significance”). … Since none of the parties challenges the Sixth Circuit’s holding that CPC and Aerojet incurred no derivative liability, the question is not
presented in this case, and we do not address it further.”
14
US v. Bestfoods at note 9.
Choice of Law Cases
since Bestfoods Price Trucking Corp. v. Norampac Indus.., Inc., 2014 WL
1012835 (2d. Cir. 2014)
“Where federal statutory regulation is comprehensive and detailed, as CERCLA is, we presume that matters left unaddressed are left subject to . . . state law.” New York v. National Service Industries, Inc., 460 F.3d 201 (2d Cir. 2006)
U.S. v. Gen. Battery, 423 F.3d 294 (3d Cir. 2005)
Carter Jones Lumber Co. v. LTV Steel Co., 237 F.3d 745 (6th Cir. 2001)
K.C.1986 Ltd. P'ship v. Reade Mfg., 472 F.3d 1009, 1025 n. 4 (8th Cir. 2007)
Duke Energy Florida, LLC v. FirstEnergy Corp., 731 Fed. Appx. 385 (6th Cir. 2018)
Applying choice of law rules in the forum state (OH) and using the ”most significant relationship” test to apply FL law because the release of toxic waste occurred in FL
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Prong 1 Dominance
Factors Absence of corporate formalities e.g. issuance of stock, election of directors, keeping
corporate records separate, etc.
Inadequate capitalization
Whether funds are put in and taken out of the corporation for personal rather than corporate
purposes
Overlap in ownership, officers, directors, and personnel, common office space, address and
telephone numbers of corporate entities
Amount of business discretion displayed by the allegedly dominated corporation
Whether the related corporations deal with the dominated corporation at arm's length
Whether the corporations are treated as independent profit centers
The payment of guarantee of debts of the dominated corporation by other corporations in the
group
Whether the corporation in question had property that was used by other of the corporations
as if it were its own
Passalacqua Builders, Inc. v. Resnick Developers South, Inc., et al., 933 F.2d 131 (2d Cir. 1991)
Other Circuits look to similar dominance factors: E.g., Pearson v. Component Tech. Corp., 247 F.3d 471, 484-85 (3d Cir. 2001); Van Dorn Co. V. Future Chemical & Oil Corp., 753 F.2d 565, 570 (7th Cir. 1985); Broussard v.Meineke Discount Muffler Shops, Inc., 155 F.3d 331, 349 (4th Cir. 1998); Ranza v. Nike, Inc., 793 F.3d 1059, 1074 (9th Cir. 2015); Carter Jones Lumber Co. V. LTV Steel Co., 237 F.3d 745, 749 (6th Cir. 2001).
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Passalacqua Facts
Plaintiff Passalacqua entered into a contract with Defendant Resnick Developers South to construct a project in Florida
Disputes arose during construction, and Passalacqua sought arbitration and obtained a final judgment of over $1.7MM
Plaintiffs brought suit in NY for equitable relief seeking, inter alia, to pierce the corporate veil
Alleging that Resnick Developers was dominated by other corporations and that the Resnick family members used it to pursue their own ends
Resnick family real estate businesses were various partnerships & corporations, all controlled either directly or indirectly by family members
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Passalacqua Dominance
Analysis Developers did not observe corporate formalities by: not issuing timely shares, having no
employees, not holding regular meetings, not electing officers and directors per the terms of its certificate of incorporation, not having a separate office.
But, Developers did keep separate books and maintain separate bank accounts and filed separate tax returns, except when consolidated legally with other Resnick-controlled companies
Developers were severely undercapitalized by: having only $10 in capital paid by another Resnick-controlled entity; all other capital came from loans from other Resnick-controlled entities, and a bank loan of $9MM which was secured by a mortgage on the property and personally guaranteed by Jack and Burton Resnick, whose guarantees did not cover payment of amounts owed to contractors working on the project
Funds were intermingled among corporate entities without regard for business purpose, and used to pay personal expenses of officers and employees
Developers had overlapping officers with other Resnick family businesses
There were also blurred-lines between officer roles at different Resnick-controlled entities (e.g. Irving Katz, Treasurer of Resnick & Sons, Inc., signed letters as Controller of Developers, but was not an employee or officer of Developers)
Corporations did not deal at arm's length with each other - when Developers was purchased by another Resnick family company for $10, the anticipated profit of the development was $3MM
Corporations were not treated as individual profit centers – profit calculations were compiled
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Key Dominance Factors, with examples in cases
Looting and/or intermingling funds
Wachovia Securities LLC v. Banco Panamericano, Inc., 674 F.3d 743, 753 (7th Cir. 2012) - decision to pierce the veil supported by shareholders having raided the dominated company of its assets.
Rochester Gas & Elec. Corp. V. GPU, Inc., No. 00-CV-6369, 2008 WL 8912083, at *6 (W.D.N.Y. Aug. 8, 2008), aff'd, 355 Fed. App'x 547 (2d Cir. 2009) - parent company used a pyramid structure to siphon revenues from subsidiary and give them to other related entities within the structure.
Absence of corporate formalities
Except for small-closely held companies (E.g., Crane v. Green & Freedman Baking Co., 134 F.3d 17, 25 (1st Cir. 1998))
Rice v. First Energy Corp., 339 F.Supp.3d 523 (W.D. Pa. 2018) – SEC filings stating that subsidiary was a division of parent for state and federal income tax purposes, that parent loaned subsidiary money at below market rates, and that parent had some involvement in the decision to deactivate power stations were not sufficient to pierce the corporate veil.
Failure to Perform Arm's Length Transactions
FirstEnergy Corp., 766 F.3d at 226 – subsidiary did not have legal representation in negotiations between parent & subsidiary
Passalacqua – deals between related entities were imbalanced (e.g., $10 paid for subsidiary with expected return of $3 million to related entity)
Undercapitalization
Passalacqua, 933 F.2d at 139 - dominated entity was undercapitalized because related entity only paid $10 for 100% of its shares and all other funds available were in the form of loans made or secured by other related entities.
However, Plaintiff's knowledge of undercapitalization precludes this factor from consideration (Brunswick Corp. v. Waxman, 459 F. Supp. 1222, 1232 (E.D.N.Y. 1978), aff'd, 599 F.2d 34 (2d Cir. 1979))
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Prong 2: Fraud/Wrong
A plaintiff asserting corporate veil-piercing must prove that adhering to the fiction of the defendant subsidiary's separate corporate existence would result in a fraud, promote injustice, or allow some other inequitable result
In practice, the egregiousness of the corporate parent's dominance tends to overlap with the court's analysis of this second prong
In CERCLA cases, courts have held that there must be some nexusbetween the corporate parent's dominance and the release of contamination:
New York State Elec. & Gas Corp. v. FirstEnergy Corp. - given the extent of domination, the court found it impossible to distinguish the parent from the subsidiary, thus "establishing a 'direct nexus' between [the parent's] domination and the operation of the … facilities, which resulted in the contamination at issue." 808 F. Supp. 2d at 499.
Next Millennium Realty, L.L.C. v. Adchem Corp. - holding that "[b]ecausePlaintiffs present no evidence connecting corporate domination to the Site contamination, the Court finds that there is no genuine dispute of material fact and Plaintiffs' veil-piercing claims must be dismissed." 2015 WL 11090419 at *22.
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Piercing the Corporate Veil A Comparison in the Second Circuit
New York State Elec. & Gas Corp. v. FirstEnergy Corp. (2014)
AGECO, a public utility holding company, was the parent of NYSEG (the product of a merger of certain AGECO subsidiaries). NYSEG acquired the MGPs at issue in this case from AGECO. Between 1922 and 1940, AGECO was controlled by Howard C. Hopson and John I. Mange. FirstEnergy Corp. is the successor of AGECO.
Domination
whether corporate formalities were observed:not expressly addressed by the court.
inadequate capitalization: NYSEG was notundercapitalized.
whether funds are put in and taken out of the corporation for personal rather than corporate purposes: Hopson freely transferred funds in and out of AGECO and its subsidiaries, including NYSEG
Next Millennium Realty, L.L.C. v. Adchem Corp. (2017)
Plaintiffs claimed that NSR Co., a lessee of the contaminated property, was liable for the operations of another company, Lincoln, on the property under a “single enterprise” theory (a single set of brothers were involved in both companies)
Domination (note: facts below were taken from the court below, 2015 WL 11090419 (E.D.N.Y. March 31, 2015), aff’d in case above)
whether corporate formalities were observed: the corporations maintained separate incorporations, organization, bylaws, corporate seals, tax filings, stock and stock redemptions, retirement plans, and officer election/resignation proceedings. Further, the corporations held separate meetings and separate votes.
inadequate capitalization: Each of the corporations was separately and sufficiently capitalized. Where they had consolidated financial statements, they were prepared in accordance with generally accepted accounting principles.
whether funds are put in and taken out of the corporation for personal rather than corporate purposes: Though the Pufahlbrothers borrowed money from Lincoln, it was through an arrangement available to all Lincoln employees that required repayment (with interest if not within a certain time period).
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New York State Elec.
& Gas Corp. v.
FirstEnergy Corp. overlap in ownership, officers, directors, and
personnel: e.g., Mange was the president of AGECO and a director of NYSEG from 1922-1940; Hopson was on the NYSEG board from 1927-1934.
common office space, address, and telephone numbers: board meetings for NYSEG were held at or near AGECO’s office, which was also the primary location of Hopson’s accounting and financial organization that rendered assistance to AGECO as well as NYSEG and other subsidiaries.
the amount of business discretion displayed by the allegedly dominated corporation: terms of service contract left the subsidiaries with “no vestige of independent authority or control.”
whether the related corporations deal with the dominated corporation at arms length: no one represented NYSEG or the other subsidiaries in service contract negotiations with AGECO.
Next Millennium
Realty, L.L.C.
v. Adchem Corp. overlap in ownership, officers, directors, and personnel:
Though both corporations had common ownership and management, that alone is insufficient to pierce the veil. However, NSR Co. did not have any employees of its own, and Lincoln employees did perform administrative functions on NSR Co.’s behalf.
common office space, address, and telephone numbers:The corporations all had separate phone numbers and where they shared buildings, the rent was shared proportionally amongst them according to use, as determined by third party accountants. Note that having the same office or phone number weighs less in favor of veil piercing for closely held corporations.
the amount of business discretion displayed by the allegedly dominated corporation: there was no evidence showing that either corporation’s business decisions were impaired or influenced by the other.
whether the related corporations deal with the dominated corporation at arms length: the corporations conducted separate businesses with distinct products, processes, customers, and machinery.
22Piercing the Corporate Veil
A Comparison in the Second Circuit
New York State Elec.
& Gas Corp. v.
FirstEnergy Corp. whether the corporations are treated as
independent profit centers: not expressly addressed in opinion; however, free transfer of funds between parent and subsidiaries cuts against AGECO.
the payment or guarantee of debts of the dominated corporation by other
corporations in the group: AGECO loaned money to NYSEG and guaranteed debts by others to NYSEG.
whether the corporation in question had property that was used by other of the corporations as if it were its own: not expressly addressed in opinion
Next Millennium
Realty, L.L.C.
v. Adchem Corp. whether the corporations are treated as independent
profit centers: the corporations had separate bank accounts, had separate tax ID numbers, and made separate tax filings with separately recorded profits.
the payment or guarantee of debts of the dominated corporation by other corporations in the group: While certain life insurance policy beneficiaries were changed
from Lincoln to NSR Co., NSR Co. assumed payment upon the enactment of this change and the policies lapsed prior to the holders’ deaths. However, several employees were paid in cash by the same person for both corporations.
whether the corporation in question had property that was used by other of the corporations as if it were its own:Though there was shared office space, each corporation paid rent in proportion to its share of space/use.
23Piercing the Corporate Veil A Comparison in the Second Circuit
Piercing the Corporate
Veil in the Sixth CircuitDuke Energy Florida, LLC v. FirstEnergy Corp.,
731 Fed.Appx. 385 (2018)
Contamination at issue was released by two
manufactured gas plants in Florida from 1929 to 1943.
FirstEnergy is the successor to the owner/operator of those manufactured gas plants.
The parties stipulated that direct liability was not at issue,
so the Court focused its analysis on veil piercing.
The Sixth Circuit acknowledged that NY Courts had twice
decided CERCLA cases based on contamination from
FirstEnergy’s predecessor’s manufactured gas plants, but
noted that state law governs veil-piercing standards.
24
Piercing the Corporate
Veil Under FL State Law
Florida courts are reluctant to pierce the corporate veil and
take such action only in severely limited circumstances,
and only with three elements are met:
the shareholder dominated and controlled the corporation to such an extent that the corporation’s independent existence, was in fact non-existent and the shareholders were in fact alter egos of the corporation;
the corporate form must have been used fraudulently or for an improper purpose; and
the fraudulent or improper use of the corporate form caused injury to the claimant.
25
Duke Energy Florida, LLC v. FirstEnergy Corp.,
731 Fed.Appx. 385 (2018)
Piercing the Corporate
Veil in the Sixth CircuitDuke Energy Florida, LLC v. FirstEnergy
Corp., 731 Fed.Appx. 385 (2018)
The Court considered factors similar to those identified in
Passalacqua:
Parent owned the majority of the subsidiary’s stock, but this factor alone is not dispositive
Parent and subsidiary shared common officers and directors, but again, this factor alone is not dispositive
District court found that parent and subsidiary were incapable of acting independently
The Court concluded that Duke Energy had shown by a
preponderance of the evidence that the first prong of
the corporate veil-piercing analysis was met.
26
Piercing the Corporate
Veil in the Sixth CircuitDuke Energy Florida, LLC v. FirstEnergy
Corp., 731 Fed.Appx. 385 (2018)
Prong 2 – Fraud/Improper Use of Corporate Form
No evidence that parent had extracted exorbitant funds from or otherwise abused subsidiary
No evidence of undercapitalization
Plaintiff’s theory follows NY precedent – that the very act of producing coal tar involved releasing hazardous substances, and that in itself should be sufficient to meet the second prong
Held: “The facts … do not show that [the parent] was purposefully avoiding environmental liability or cutting costs at the expense of the environment. This waste was released decades before most major environmental legislation, including CERCLA, was passed. The record does not contain evidence tending to show that AGECO officials were even aware of the environmental costs of their business model.”
The Court noted that the parent may be liable under a direct liability theory, but such argument was not before the court.
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Direct Liability
“[A] corporate parent that actively participated in, and exercised control over, the operations of its subsidiary’s facility may be held directly liable in its own right under § 107(a)(2) as an operator of the facility.” U.S. v. Bestfoods, at 55. "If, however, direct liability for the parent's operation of the facility is to be kept distinct from derivative liability for
the subsidiary's own operation, the focus of the enquiry must necessarily be different under the two tests. The question is not whether the parent operates the subsidiary, but rather whether it operates the facility, and that operation is evidenced by participation in the activities of the facility, not the subsidiary." Id. at 68 (internal citations omitted).
With respect to G.R.D. Williams, a CPC official who the District Court found had a "significant role in shaping Ott II's environmental compliance policy," Id. at 59: "[W]e observed that a dual officer or director might depart so far from the norms of parental influence exercised through dual officeholding as to serve the parent, even when ostensibly acting on behalf of the subsidiary in operating the facility. See n. 13, supra.
Yet another possibility, suggested by the facts of this case, is that an agent of the parent with no hat to wear butthe parent's hat might manage or direct activities at the facility. . . .The critical question is whether, in degree and detail, actions directed to the facility by an agent of the parent alone are eccentric under accepted norms of parental oversight of a subsidiary's facility."
"There is, in fact, some evidence that CPC engaged in just this type and degree of activity at the Muskegon plant. The District Court's opinion speaks of an agent of CPC alone who played a conspicuous part in dealing with the toxic risks emanating from the operation of the plant. G.R.D. Williams worked only for CPC; he was not an employee, officer, or director of Ott II . . . and thus, his actions were of necessity taken only on behalf of CPC. The District Court found that CPC became directly involved in environmental and regulatory matters through the work of . . . Williams, CPC's governmental and environmental affairs director. Williams . . . became heavily involved in environmental issues. He actively participated in and exerted control over a variety of Ott II environmental matters, and he issued directives regarding Ott II's responses to regulatory inquiries." Id. At 72.
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Direct Liability
The Second Circuit summarized Bestfoods' three circumstances under which a parent can be held liable as a direct operator of a subsidiary's facilities:
(1) “when the parent operates the facility in the stead of its subsidiary or alongside the subsidiary in some sort of a joint venture”;
(2) when “a dual officer or director ... depart[s] so far from the norms of parental influence exercised through dual officeholding as to serve the parent, even when ostensibly acting on behalf of the subsidiary”; and
(3) when “an agent of the parent with no hat to wear but the parent's hat ... manage[s] or direct[s] activities at the facility.” FirstEnergy Corp., 766 F.3d at 222.
Other Subsequent Cases
U.S. v. Kayser-Roth Corp., 272 F.3d 89 (1st Cir. 2001) – Parent corporation liable where parent participated in subsidiary’s environmental decision-making; required all of its subsidiaries to notify parent’s legal department of agency/court contact regarding environmental matters
Atlanta Gas Light Co. v. UGI Utilities, Inc., 463 F.3d 1201 (11th Cir. 2006) –Parent corporation not liable where parent was not actively managing the subsidiary’s facility itself.
29
Third Circuit Parent
Corporation Liability Analysis
Facts Defendant Greenlease operated a plant to build and repair railcars
Use resulted in heavy metals, paint waste, and VOC contamination
Greenlease became subsidiary of defendant Ampco in 1983
Plaintiff Trinity purchased the property in 1986 and sold it in 2004
In 2006, PA charged Trinity with felonies and misdemeanors for environmental violations at the site
Trinity entered into a consent decree requiring ~$9M remediation
30
Trinity Industries, Inc. v. Greenlease Holding Co., et al.
2018 WL 4324261 (2018)
Trinity Industries Parent
Corporation Liability Analysis
Direct Liability
Ampco not liable as an operator because Ampco’s involvement at the Greenlease plant did not exceed the normal relationship between parent and subsidiary
Greenlease employees were responsible for all day-to-day operations at the plant
Greenlease employees coordinated disposal with outside contractors
Greenlease employees communicated with PA DEP on environmental matters
Ampco did not employ any engineers or persons with technical experience in manufacturing that could make decisions for Greenlease with respect to environmental compliance or waste management
Ampco employed only a professional staff, e.g. accountants, actuaries, lawyers
The Third Circuit found that even if Ampco advised Greenlease on legal compliance with environmental laws, such articulation of policies and procedures is consistent with a normal parent subsidiary relationship and did not give rise to parent corporation liability.
31
Trinity Industries Parent
Corporation Liability Analysis
Indirect Liability
Greenlease was not undercapitalized and Ampco did not siphon funds from Greenlease
Greenlease issued $50M in dividends to Ampco in the years following the plant’s closure, but the Court found no basis in the record that Greenlease was undercapitalized while operating the plant, and no evidence that the dividends were issued with awareness of the liability to Trinity
Greenlease and Ampco’s relationship was a typical parent-subsidiary relationship
Greenlease & Ampco had 3 overlapping board members and 1 overlapping officer, but Greenlease ran the plant and hired all of the employees.
Ampco’s role in approving large decisions consistent with normal parent-subsidiary relationship.
Greenlease operated with autonomy on decisions relating to manufacturing, environmental compliance and disposal of waste.
Third Circuit cited to Bestfoods in finding that “‘duplication of some or all of the directors or executive officers’ is not fatal to maintaining legally distinct corporate forms.” at *22.
32
Trinity Industries Parent
Corporation Liability Analysis
State Law & Public Policy
Trinity argued that PA law requires veil-piercing “whenever justice or public policy demands” (citing Ashley v. Ashley, 393 A.2d 637, 641 (1978))
Third Circuit disagreed, finding that PA veil-piercing law requires a showing that the subsidiary is operated as a robot or puppet by the controlling shareholders.
“The record is devoid of evidence that Ampco misused separate corporate entities for some nefarious purpose. To pierce the corporate veil would thus fly in the face of Pennsylvania’s strong presumption…against piercing the corporate veil.” at *22 (internal citations omitted).
Trinity’s “polluter pays” public policy argument failed.
“Because evidence does not suggest that there was fraud or an attempt to use a corporate façade as an alter ego, public policy first favors upholding the integrity of the corporate form. Trinity has not presented any public policy consideration sufficiently compelling to overcome the strong presumption against veil-piercing.” at *23.
33
Conclusion
These are not ordinary CERCLA cases; they involve significant economic analysis and corporate forensic work.
Key factors for determining corporate dominance include:
Whether the subsidiary was subject to looting and/or intermingling of funds with other related corporations
Whether corporate formalities were observed
Whether the subsidiary and related corporations dealt with each other at arm's length
Whether the subsidiary is undercapitalized
CERCLA-specific takeaway:
Beware the level of involvement in the operation of the subsidiary's facility by an environmental coordinator who wears the parent's hat (in Bestfoods parlance); too much vertical integration could lead to direct liability.
34
Successor Liability
for
Environmental
Claims
Strafford CLE
March 4, 2020
Thomas R. Smith, Esq.
Thomas R. Smith, Esq.Mr. Smith has more than 40 years of experience in civil
litigation, dispute resolution and risk management
counseling, representing large and small businesses,
universities and colleges and individuals. He has
represented clients in federal and state courts, before
administrative agencies and in arbitrations and mediations.
He has handled litigation over remediation costs, damages
and penalties related to releases of hazardous substances
and petroleum and concerning the proper management of
hazardous or toxic materials. He has litigated
environmental cases involving federal statutes such as
CERCLA, RCRA and the Clean Water Act and the Clean Air
Act, and New York statutes such as Environmental
Conservation Law, Navigation Law (petroleum spills) and
Labor Law (asbestos handling), as well as claims arising
under common law. He also has defended toxic tort claims,
including claims for personal injury or illness, fear of future
harm and medical monitoring, and claims for property
damage or diminution in property value arising from
contamination. He has been recognized by Super Lawyers
and Best Lawyers for environmental litigation, including Best
Lawyers-Syracuse Litigation- Environmental Lawyer of the
Year (2013, 2017, 2019).
36
Types of Successor Liability
A corporation may be liable as a
“successor” in two different contexts:
1. a corporate merger or consolidation
2. a sale of assets
37
Merger or Consolidation• In a merger or consolidation under state law applicable to corporations, the
surviving corporation takes on all assets and liabilities of the constituent
corporations
15 Fletcher Cyclopedia of the Law of Corporations §7041
Ladjevardian v. Laidlaw- Coggeshall, Inc., 431 F.Supp. 834, 838
(S.D.N.Y. 1977)
U.S. v. Pioneer Natural Resources Co., 309 F.Supp.3d 923, 930 (D.
Col. 2018)
• Shareholders of the constituent corporations become shareholders of the
merged corporation
38
Merger or Consolidation
• Simple in concept, often more complicated in
practice
• Because environmental liabilities, particularly
under CERCLA, might derive from activities
decades in the past, successor liability may
need to be traced through multiple mergers
39
Example: NYS Electric & Gas Corp. v. FirstEnergy Corp.,
766 F.3d 212 (2d Cir. 2014); Rochester Gas & Electric
State Law Apply?• Many courts have held that where the potential liability is
based on federal law (e.g., CERCLA), federal common
law should determine successor liability issues.
• Some courts have reasoned that state law should apply,
as corporations are creatures of state law, and state law
generally applies to their organization, operation, and
obligations
• U.S. v. Bestfoods – left question open, but appeared to
apply general corporate law rules (“fundamental
principles of corporate law”); Congress did not indicate
any need to create CERCLA-specific rules
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State of New York v. National Service Industries, Inc.
460 F.3d 201 (2d Cir. 2006)
• “Strictly speaking,” federal common law applies
• But, in determining the content of federal law, court could
incorporate state law or create a nationwide federal rule
• Court decided there would be no difference between New
York law and traditional common law, so left the question
open
• See Atchison Topeka & Santa Fe v. Brown & Bryant, 159 F.3d
358 (9th Cir. 1997) (finding no need to choose between state
law and federal common law).
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Liability Assumed by Buyer• Determined by reference to the language and context of the parties’
contract, applying state contract law. E.g., Columbia Falls Aluminum Co. LLC v. Atl. Richfield Co., 2019 U.S. Dist. LEXIS 62702 (D. Mont. 2019)
• Be aware of the state rules of construction, burden of proof, and application of parol evidence rule
• Is language broad enough to encompass environmental liability based on laws enacted after the date of the contract? Compare Commander Oil Corp. v. Advance Food Service Equip., 991 F.2d 49 (2d Cir. 1993) with Olin Corp. v. Consolidated Aluminum Corp., 5 F.3d 10 (2d Cir. 1993)
• “As is, where is” language may not be sufficient to transfer liability to purchaser; this language has been held only to disclaim warranties, e.g., Int’l Clinical Labs v. Stevens, 710 F. Supp. 466 (E.D.N.Y. 1989)
• An assumption of liabilities may be implied from the facts without an express agreement. E.g. Shaoxing Daqin Imp. & Exp. Co. v. Notations, Inc., 2019 U.S. Dist. LEXIS 208593 (S.D.N.Y. 2019).
46
De Facto MergerFactors considered by courts:
1. continuity of ownership, typically accomplished by paying
for assets with stock
2. cessation of ordinary business and dissolution of selling
corporation
3. assumption by the buyer of the liabilities ordinarily
necessary for the uninterrupted continuation of business
4. continuity of management, personnel, physical location,
assets and general business operations
Arnold Graphics Indus., Inc. v. Independent Agent Ctr., Inc.,
775 F.2d 38, 42 (2d Cir. 1985)
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De Facto Merger, cont’d.Continuity of ownership is an essential element of a de facto
merger.
State of N.Y. v. Nat’l. Serv. Indus. Inc., 460 F.3d 201, 212 (2d Cir. 2006); 105
Mt. Kisco Assoc., LLC v. Carozza, 2017 U.S. Dist. LEXIS 47855 (S.D.N.Y.
2017)
Easter v. Contech Const. Prods., 2019 U.S. LEXIS 170181 (W.D. Va. 2019)
Typical Scenario:
Corp. B acquires substantially all of the assets of Corp. A and pays
with stock of Corp. B.
Corp. A dissolves and distributes the shares of Corp. B to its
shareholders
Former shareholders of Corp. A are now shareholders of Corp. B,
which continues the business of Corp. A
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Mere ContinuationFactors considered:
• whether and to what extent there is an identity of ownership
• how the nature and scope of the business of the successor corporation
compares to the predecessor (such as products, customers)
• whether the asset transfer was for less than adequate consideration
• whether the two separate entities still remain after the transaction
• whether the new corporation continues attributes of the old business, such
as name, same address, same facilities, same phone number, same
