Business 8th Edition by Marianne Jennings

Exercise 9

S. v Bestfoods, Inc.
524 U.S. 51 (1998)
Lifting the Veil Is Best for Cleanup, but Not for Shareholders
FACTS
In 1957, Ott Chemical Co. manufactured chemicals at its plant near Muskegon, Michigan, and both intentionally and unintentionally dumped hazardous substances in the soil and groundwater near the plant. Ott sold the plant to CPC International, Inc.
In 1965, CPC incorporated a wholly owned subsidiary (Ott II) to buy Ott's assets. Ott II then continued both the chemical production and dumping. Ott II's officers and directors had positions and duties at both CPC and Ott.
In 1972, CPC (now Bestfoods) sold Ott II to Story Chemical, which operated the plant until its bankruptcy in 1977. Aerojet-General Corp. bought the plant from the bankruptcy trustee and manufactured chemicals there until 1986.
In 1989, the EPA filed suit to recover the costs of cleanup on the plant site and named CPC, Aerojet, and the officers of the now defunct Ott and Ott II.
The District Court held both CPC and Aerojet liable. After a divided panel of the Court of Appeals for the Sixth Circuit reversed in part, the court granted rehearing en banc and vacated the panel decision. This time, seven judges to six, the court again reversed the District Court in part. Bestfoods appealed (Ott settled prior to the appeal).
JUDICIAL OPINION
SOUTER, Justice
The issue before us, under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), is whether a parent corporation that actively participated in, and exercised control over, the operations of a subsidiary may, without more, be held liable as an operator of a polluting facility owned or operated by the subsidiary. We answer no, unless the corporate veil may be pierced. But a corporate parent that actively participated in, and exercised control over, the operations of the facility itself may be held directly liable in its own right as an operator of the facility.
The District Court said that operator liability may attach to a parent corporation both directly, when the parent itself operates the facility, and indirectly, when the corporate veil can be pierced under state law. The court explained that, while CERCLA imposes direct liability in situations in which the corporate veil cannot be pierced under traditional concepts of corporate law, "the statute and its legislative history do not suggest that CERCLA rejects entirely the crucial limits to liability that are inherent to corporate law."
Applying that test to the facts of this case, the court found it particularly telling that CPC selected Ott II's board of directors and populated its executive ranks with CPC officials, and that a CPC official, G.R.D. Williams, played a significant role in shaping Ott II's environmental compliance policy.
[W]here a parent corporation is sought to be held liable as an operator pursuant to 42 U.S.C. § 9607(a)(2) based upon the extent of its control of its subsidiary which owns the facility, the parent will be liable only when the requirements necessary to pierce the corporate veil [under state law] are met. In other words… whether the parent will be liable as an operator depends upon whether the degree to which it controls its subsidiary and the extent and manner of its involvement with the facility, amount to the abuse of the corporate form that will warrant piercing the corporate veil and disregarding the separate corporate entities of the parent and subsidiary.
It is a general principle of corporate law deeply "ingrained in our economic and legal systems" that a parent corporation (so-called because of control through ownership of another corporation's stock) is not liable for the acts of its subsidiary.…
But there is an equally fundamental principle of corporate law, applicable to the parent-subsidiary relationship as well as generally, that the corporate veil may be pierced and the shareholder held liable for the corporation's conduct when, inter alia, the corporate form would otherwise be misused to accomplish certain wrongful purposes, most notably fraud, on the shareholder's behalf.
Nothing in CERCLA purports to rewrite this wellsettled rule, either. If a subsidiary that operates, but does not own, a facility is so pervasively controlled by its parent for a sufficiently improper purpose to warrant veil piercing, the parent may be held derivatively liable for the subsidiary's acts as an operator.
The fact that a corporate subsidiary happens to own a polluting facility operated by its parent does nothing, then, to displace the rule that the parent "corporation is [itself] responsible for the wrongs committed by its agents in the course of its business." It is this direct liability that is properly seen as being at issue here.
We are satisfied that the Court of Appeals correctly rejected the District Court's analysis of direct liability. But we also think that the appeals court erred in limiting direct liability under the statute to a parent's sole or joint venture operation, so as to eliminate any possible finding that CPC is liable as an operator on the facts of this case.
In imposing direct liability on these grounds, the District Court failed to recognize that "it is entirely appropriate for directors of a parent corporation to serve as directors of its subsidiary, and that fact alone may not serve to expose the parent corporation to liability for its subsidiary's acts."
The Government would have to show that, despite the general presumption to the contrary, the officers and directors were acting in their capacities as CPC officers and directors, and not as Ott II officers and directors, when they committed those acts. The District Court made no such enquiry here, however, disregarding entirely this time-honored common-law rule.…
In sum, the District Court's focus on the relationship between parent and subsidiary (rather than parent and facility), combined with its automatic attribution of the actions of dual officers and directors to the corporate parent, erroneously, even if unintentionally, treated CERCLA as though it displaced or fundamentally altered common-law standards of limited liability.…
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, 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 at Ott II." 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."
We think that these findings are enough to raise an issue of CPC's operation of the facility through Williams's actions, though we would draw no ultimate conclusion from these findings at this point. Prudence thus counsels us to remand, on the theory of direct operation set out here, for reevaluation of Williams's role, and of the role of any other CPC agent who might be said to have had a part in operating the Muskegon facility.
The judgment of the Court of Appeals for the Sixth Circuit is vacated, and the case is remanded.
Describe the corporate ownership history that surrounds the Muskegon facility.