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The liability of individual officers and directors for cleanup costs under CERCLA.

Traditional corporation law favors preserving the corporate entity, thereby insulating officers and directors from corporate liability. In certain situation, however, courts have disregarded corporate form and imposed liability under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) on individual officers and directors.

Congress enacted CERCLA to address the increasing health and environmental dangers posed by the release of hazardous substances. CERCLA departed dramatically from earlier environmental legislation by including a wide range of parties who could be subject to liability for the cleanup costs resulting from the release of hazardous substances. Section 107, 42 U.S. $S 9607, which is the basic liability section of CERCLA, provides that the following persons are liable for cleanup costs under CERCLA:

* The current owner or operator of a facility;

* Any person who owned or operated a facility at the time the hazardous substance was disposed of;

* Any person who arranged for the disposal or treatment of a hazardous substance; and

* Any person who accepts hazardous substances for transport to disposal or treatment facilities.

Section 101(20)(A) of CERCLA defines an "owner or operator" as a "person" who owns or operates a vessel or facility. Section 101(21) defines a "person" as "an individual, firm, corporation, association, partnership, consortium, joint venture, commercial entity, United States government, state, municipality, commission, political subdivision of a state, or any interstate body." Nowhere under section 101(21), however, does it expressly provide that an officer or director of a responsible corporation can be liable for cleanup costs under CERCLA.

Scope of liability

The basic rule of corporate law provides that officers, directors and shareholders of a corporation are protected from individual liability associated with the activities of the corporation as long as the corporation is not a sham and corporate formalities are observed--Joslyn Manufacturing Co. v. T.L. & Co. Inc. The personal assets of individuals connected with a corporation are generally not at risk unless the "corporate veil" is "pierced." Under CERCLA, however, courts have found individual officers and directors liable without "piercing the corporate veil" in cases where such individual "actually participated" in the wrongful conduct under CERCLA.

The leading early decision on the question of individual liability was United States v. Northeastern Pharmaceutical & Chemical Co. In Northeastern, the company's vice president and manufacturing plant supervisor, John Lee, was held personally liable for the state's cleanup costs under Section 107(a)(3) of CERCLA. The court found important in imposing liability that Lee, in his capacity as a plant supervisor, "actually knew about, and had immediate supervision over, and was directly responsible for arranging for the transportation and disposal of the [company's] hazardous substances at the Denny Farm site." The court specifically noted that Lee's liability was not "premised solely upon Lee's status as a corporate officer or employee" but rather based on the fact that he "personally arranged for the transportation and disposal of hazardous substances on behalf of [the company" and thus actually participated in [the company's] CERCLA violations.

In a similar case, United States v. Ward, the court held the president and principal shareholder (Robert Ward) of Ward Transformer Corp. liable for the state's cleanup costs under Section 107(a)(3). The facts in this case reveal that Ward had personally negotiated with a disposal company, owned and oeprated by Robert Burns, to dispose of certain transformer fluid. Much of Ward's surprise, however, Burns had disposed of the transformer fluid by dumping it onto Fort Bragg Military Base and along various North Carolina roadways. The court determined that Ward was personally liable for the cleanup costs of the fluid, even though he was not aware that Burns planned to dispose of the fluid in such a manner. The court specifically noted that any other conclusion would allow generators of hazardous wastes to escape liability under CERCLA by simply closing their eye to the method in which the hazardous waste was disposed of, this encouraging the type of incident that occurred in this case.

In another representative case, State of New York v. Shore Realty Corp., the principal officer and shareholder (Donald LeoGrande) of Shore Corp. was held liable as an "operator" for the state's cleanup costs under Section 107(a)(2) of CERCLA. The court determined that because there was no dispute that "LeoGrande specifically direct[ed], sanction[ed] and actively participate[ed] in Shore's maintenance of the nuisance," he was personally liable for the cleanup costs. As in Northeastern, LeoGrande was liable as an officer of Shore, the fact that LeoGrande actively participated in the wrongful conduct under CERCLA was sufficient to impose liability upon him.

In contrast, the court in Riverside Market Development v. International Building Products, found that personal liability was unwarranted and granted summary judgment in favor of an individual officer and former shareholder (Gene Prescott) of International Building Products (IBP). Prescott owned 85 percent of the shares of IBP and held the positions of secretary, consultant and chairman of the board. As officer of IBP, Prescott reviewed financial statements and consulted with the other officers during meetings. Furthermore, Prescott visited the facility where the operations at issue were conducted two to four times a year, but took no active role in the operations of the facility. As there was no evidence presented that established that Prescott personally participated in any conduct that violated CERCLA, the court declined to hold him personally liable.

Similarly, in Armotek Industries Inc. v. Freedman, the court found that personal liability was unwarranted under CERCLA and granted summary judgment in favor of an individual corporate officer (Seymour Freeman). The court refused to impose liability upon Freeman as there was no evidence that she had "participated in any pertinent way in or had any actual control of" the facility at issue. The court noted that "corporate liability was not based on whether the defendant was an officer, director or shareholder, but depended upon the specific activities of a party, including the level of involvement in day-to-day business operations and particpation in decisions regarding disposal of hazardous waste."

Although the majority of courts apply the "active participation" standard in determining personal liability, there are several courts that apply a slightly different standards. The most noted case is Kelly v. Thomas Solvent Co. In Kelly, the court explained

that in dealing with a closed corporation, personal liability should require more than "mere status as a corporate officer" and suggested a fact-specific test based on power and authority, rather than personal participation in the wrongful conduct. The factors to be weighed under this test included both the individual's degree of authority in general and the individual's specific responsibility for health and safety practices, including hazardous waste disposal. These factors would be applied to determine "whether the individual in the close corporation could have prevented or significantly abated the hazardous waste."

Along the same lines, a few courts impose liability only upon a showing that an individual had the authority to control the corporate operations that led to the wrongful conduct under CERCLA. In Nurad Inc. v. Hopper & Sons, the court refused to impose liability on certain vice presidents as they did not have control over the operations of the facility at issue. The court noted the test to determine personal liability under CERCLA turns on whether an individual had the authority to control the operations or decisions involving the disposal of the harzardous substance, rather than whether the individual "actively participated" in the operations or decisions. Applying this test to facts of the instant case, the court found that because the president retained all the decision-making authority over the company, including the daily operations of the facility, the vice-presidents were not liable under CERCLA.

Finally, several courts will only impose individual liability upon a finding that the individual both participated in the operations of an exercised control over the facility. In Levin Metals v. Parr-Richmond Terminal the court found that personal liability was unwarranted and granted a motion for summary judgment in favor of defendant, Fred Parr, an officer and minority shareholder. The court held that an individual could not be liable under Section 107(a)(2) as an "operator" unless that "individual actually participates in the operation of the facility at which the hazardous substances are disposed of, exercises control over the company immediately responsible for the operation of that facility, or is otherwise intimately involved in that company's operations." As the evidence in the instant case did not establish that Parr actively participated in the management of an exercised control over the operations of the facility, the court refused to impose liability upon him under CERCLA.

In contrast, in Vermont v. Staco Inc., the chairman of the board was held personally liable for cleanup costs under CERCLA. The court found that the chairman had directly participated in the management of the facility and had ultimate control over the proper handling of the hazardous substance at issue and thus was personally liable under CERCLA.

Defenses to liability

Section 107(b), 42 U.S.C. $S 9607(b), provides an exclusive list of affirmative defenses to CERCLA's strict liability to parties who can establish by a preponderance of the evidence that the release or threat of release of a hazardous substance and damages resulting therefrom were caused solely by an act of God, act of war, act or omission of a third party or any combination of the foregoing.

Courts are reluctant to find that a defendant has properly established an affirmative defense listed under Section 107(b). For instance, in United States v. Stringfellow, the court held that heavy rainfall was not sufficient to establish an "act of God" defense under Section 107(b)(1). The court determined that because the heavy rainfall was foreseeable based on normal climatic conditions and any harm caused by the rain could have been prevented through design of proper drainage channels, the defendant had not properly pled an affirmative defense listed under Section 107(b).

In another representative case, United States, v. Marisol Inc., defendants claimed that they were not liable for cleanup costs under CERCLA as the "third-party" defense under Section 107(b)(3) was applicable to their case. The court, however, held to the contrary. The court found that although the defense offered by the defendant was similar to the defense listed under Section 107(b)(3), it was deficient in two critical areas. First, the defendant claimed that the third party proximity caused the release. Under Section 107(b)(3), however, one must establish that the release was the "sole" cause of the third person. Second, the defendant claimed that it had "no control" over the actions of the third party. Section 107(b)(3), however, requires that a defendant must establish that the third party is not an employee or agent and that the act or omission did not occur in connection with a contractual relationship between the third party and defendant in order to properly plead a defense under Section 107(b)(3).

In contrast, in United States v. Pacific Hide & Fur Depot Inc., the court found that certain shareholders had properly pled the "innocent landowner" defense. The court determine that the defendant shareholders had met the strict requirements under CERCLA to invoke the defense.

In order to properly plead the "innocent landowner" defense, the court found that a defendant must satisfy the requirements set forth under sections 101(35)(A) and 107(b)(3) and (b) of CERCLA. First, sections 107(b)(3)(a) and (b) require that a defendant must establish by a preponderance of the evidence that the release of a hazardous substance was solely caused by an act or omission of a third party and that:

* He [or she] exercised due care with respect to the hazardous substance concerned...and

* He [or she] took precautions against foreseeable acts or omissions of any such third party and the consequences that could foreseeably result from such acts or omissons.

Next, section 101(35)(A) requires a defendant to prove that the facility in question was acquired by him/her after disposal of the hazardous substance and establish one or more of the circumstances described in clause (i), (ii), or (iii) by a preponderance of the evidence:

(i) At the time the defendant acquired the facility the defendant did not know and had no reason to know that any hazardous substance which is the subject of release of threatened release was disposed of on, in, or at the facility.

(ii) The defendant is a government entity...

(iii) The defendant acquired the facility by inheritance or bequest.

The "lack of knowledge" referred to under section 101(35)(A)(i) is further defined in section 101(35)(B) as follows:

[T]he defendant must have undertaken,

at the time of acquisition, all appropriate inquiry into the previous ownership with good commercial or customary practice in an effort to minimize liability. For the purposes of the preceding sentence, the court shall take into account any specialized knowledge or experience on the part of the defendant, the relationship of the purchase price to the value of the property if uncontaminated, commonly known or reasonably ascertainable information about the property, the obviousness of the presence or likely presence of contamination of the property and the ability to detect such contamination by appropriate inspection.

After reviewing the foregoing statutory requirements, the court determined that the "innocent landowner" defense was applicable, as the defendant shareholders had inherited their shares when they were teenagers and were not aware of the presence or likely presence of contamination at the facility at issue. Thus, the court held that the shareholders were not individually liable for cleanup costs under CERCLA.

Courts clearly construe the defenses listed under Section 107(b) narrowly. These defenses only appear to be reserved for extreme situations as found in Pacific Hide & Fur, supra. Therefore, it is not wise to assume that one could escape liability pursuant to Section 107(b), unless he/she is "truly" an innocent party.


Most courts will impose liability upon an individual corporate officer or director in situations where the individual was directly responsible for arranging for disposal or transport of the hazardous waste. Furthermore, the fact that the corporate officer was ignorant of the manner of disposal will not shield him/her from liability if the waste was improperly disposed of under CERCLA.

In addition, the majority of courts will hold officers or directors individually liable if they "actively participated" in the conduct which leads to contamination under CERCLA. Some courts, however, will only hold individuals liable if they had control over the corporation's operations and could have abated the release of the hazardous waste.

In order to avoid liability, a corporate officer who is substantially involved in the corporation's operations should educate himself as to the possible existence of hazardous substances on the corporation's property. In the event that hazardous substances are located on the property, the individual should make certain that there is no threat that such substane will be released. Further, if a corporate officer personally arranges for hazardous waste to be disposed of, he/she should make certain that such waste is properly disposed of.

Most importantly, before any property is purchased or leased, it should be properly tested for possible contamination. Furthermore, reasonable inquiry should be made as to who owned the property in the past and what the property was used for. Such practice would minimize the chance of later being hauled into court in an action for cleanup costs under CERCLA or a similar state statute.
COPYRIGHT 1993 Institute of Industrial Engineers, Inc. (IIE)
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

Article Details
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Title Annotation:comprehensive environmental response, compensation and liability act
Author:Garvin, Anthony O.; Loza, Norma
Publication:Industrial Management
Date:Sep 1, 1993
Previous Article:Strategy implementation: closing the management gap.
Next Article:Proactive government steps in improving U.S. industrial hazardous waste management.

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