[The following is an excerpted from “Environmental Liability: Managing Environmental Risks in Corporate, Real Estate and Brownfield Transactions” written by Larry Schnapf and published by Lexis Law Publishing]

Liability of Parent Corporations

A basic tenet of traditional corporate law is that a corporation is a separate entity from its shareholders who are shrouded under a corporate veil from the liabilities of the corporate enterprise. Under this concept of limited shareholder's liability, the shareholder's responsibility for the debts or obligations of a corporation is limited to the amount of the investment in the corporation. However, a number of courts have held parents liable under CERCLA for the hazardous waste activities of their subsidiaries. While the courts have struggled over the exact contours of parent liability under CERCLA, the decisions imposing liability of parent corporations generally fall into two categories. One line of cases imposes "owner" liability on parent corporations. These cases are commonly referred to as the "indirect" liability approach because they focus on the relationship of the parent corporation to its subsidiary. The other line of cases, commonly referred to as the direct liability cases, holds that parents may be liable as CERCLA "operators" of a facility because of their involvement in the business affairs of their subsidiary. These so-called "direct" liability cases focus on the relationship of the parent corporation to the offending facility instead of the subsidiary.

Owner Liability of Parent Corporations
Under the indirect liability cases, courts will use a corporate veil piercing analysis to determine if CERCLA liability should be imposed on parent corporations. Since corporations are creatures of state law, corporate veil piercing is usually based on state law. During the past few years, the federal government has argued that a more liberal, federal common law test should be used in CERCLA cases to ensure that CERCLA liability is applied uniformly throughout the country. The courts are divided over which standard should be employed.

In the traditional state corporate veil piercing analysis, courts are extremely reluctant to disregard the corporate form but will use the equitable doctrine of "piercing this corporate veil" to hold either corporate shareholders or specific individuals liable for corporate actions. A court will pierce the corporate veil when (1) the court determines that the shareholder and the corporate entity are not distinct entities and (2) when upholding the corporate form will cause injustice. Some states, like New York, impose a more stringent test for the second element and require that a court make a finding of fraud before the corporate form may be disregarded.

The essence of the first part of the test is that the shareholder is using the corporation to further its own purposes This may be established by showing that the corporation was controlled by an alter ego who completely dominated the policy and business practices of the corporation so that it had no separate will, mind, or existence of its own. In considering whether to disregard the corporate form, a court will consider the following factors: inadequate capitalization, pervasive control by the shareholder, intermingling of corporate property with those of the shareholder, failure to observe corporate formalities, siphoning of corporate funds, absence of corporate records, and non-functioning officers or directors. When the stockholder is a parent corporation, a court may pierce the corporate veil if it finds that the subsidiary was a mere instrumentality of the parent corporation in which the parent so dominated the subsidiary that it had no separate existence and was merely a conduit of the parent.
The second element for piercing the corporate veil, which requires injustice or fraud to justify disregarding the corporate form, can be satisfied when there is inadequate capitalization for the debts normally associated with business or where the corporate form has been used to misrepresent or defraud creditors.

Federal courts have shown less hesitancy to lift the corporate veil and to hold corporate shareholders liable, especially when federal statutes are involved. In such cases, federal courts may look to the purpose of the underlying statute. In some cases, courts have discarded the traditional veil-piercing test and have used a more relaxed federal common law standard which disregards the corporate form when this would serve the interests of public convenience, fairness, and equity.

The recent trend seems towards relying on state corporate veil piercing analysis and away from the more liberal federal common law standard. Often, the kind of standard adopted by the court will determine the outcome of the case. For example, In Joslyn Corp. V. T. L James & Co,. the Fifth Circuit refused to impose liability on a parent corporation where the parent owned 100 percent of the stock of its subsidiary, advanced loans to the subsidiary, shared common directors, and certain executives worked in the corporate offices. The court said the concept of limited shareholders was so entrenched in American jurisprudence that liability could not be expanded in the absence of a specific mandate from Congress. The court was influenced by the fact that the subsidiary had faithfully adhered to basic corporate formalities by keeping its own books and records, holding frequent shareholder and director meetings, filing its own tax returns, paying its own bills, and making its own arrangements for employee benefits. Furthermore, the contaminated property was owned in the name of the subsidiary and the daily operations of the two companies were separate. Finally, the principal shareholders of the subsidiary were not employees of the parent.
Likewise, in Acushnet River V. New Bedford Harbor, a federal district court found that although the parent provided some services and exercised some power over the subsidiary, this was within the normal parent/subsidiary relationship and did not justify piercing the corporate veil. This case was also interesting because the parent had formed its subsidiary expressly for the purpose of isolating the environmental liabilities associated with a particular site in the subsidiary. The government argued that a parent corporation should be held liable whenever it forms a subsidiary to avoid environmental liability. However, the court rejected this notion, ruling that a parent corporation should be able to put a waste site to productive use by forming a well-capitalized, non-fraudulent subsidiary without exposing all of its corporate assets.

The factors often examined by courts using the traditional state veil piercing analysis include the following:

1.	Inadequate capitalization in light of the purpose of the subsidiary;

2.	Extensive or pervasive control by the parent shareholders;

3.	Intermingling of the subsidiary properties or accounts with the parent such as parent pays the salaries and expenses of the subsidiary or all business of the subsidiary is funneled through the parent;

4.	Subsidiary fails to observe corporate formalities and separateness such as keeping separate books and records, and holding shareholder or director meetings;

5.	Siphoning of subsidiary funds;

6.	The companies share common shareholders, directors, and officers;

7.	The companies have common business departments;

8.	The daily operations of the two companies are not kept separate;

9.	The companies file consolidated financial statements and tax returns; and

10.	Nonfunctioning officers or directors.

None of these factors are sufficient individually to pierce the corporate veil nor are all of these factors required before a court will disregard the corporate form. Piercing the corporate veil is an equitable remedy that is used only in the most exceptional circumstances and the parties seeking to disregard the corporate form have the burden of proving in each case that substantial grounds exist for using this unusual measure.
A number of courts have used the more relaxed federal common law standard and have focused on the kind of control exerted by the parent company over its subsidiary. While these courts tend to require a lesser degree of control than required under the traditional veil-piercing tests, these cases often blur the distinction between operator and owner liability. Indeed, in most of these cases, the parent has also been held liable as an operator and the courts often use the same factors.

Operator Liability of Parent Corporations

As explained earlier, a number of cases bypass the corporate veil piercing analysis and hold that a parent corporation may be liable as an operator if it is so pervasively involved in the operations of a particular facility owned by a subsidiary. With limited exceptions, these cases require active involvement by the parent corporation and not merely ownership or ability to control that is necessarily inherent with ownership. Thus, in most of the jurisdictions adopting the operator line of liability, unexercised power to control will not be sufficient to impose operator liability on a parent However, these cases have not yet articulated a clear standard for imposing operator liability on parents.

The leading case for imposing operator liability on parent corporations is US V. Kayser-Roth.  In that case, the United States Court of Appeals for the First Circuit specifically rejected the Fifth Circuit's holding in Joslyn and ruled that parent corporation could be liable as an operator without piecing the corporate. The appellate court agreed with the district court that Kayser-Roth had exhibited overwhelming pervasive control over the affairs of a defunct subsidiary, Stamina Mills. Among the actions influencing the court were that Kayser-Roth had (1) exerted total monetary control over the subsidiary's fiscal operations, including account supervision, payment of bills, collection of account receivables, borrowing money, preparing budgets, and determining executive compensation; (2) all leasing, buying, or selling real estate had to be approved by the parent; (3) required governmental contacts-including environmental matters-be funneled through the parent; (4) any capital transfer or expenditures over $5,000 also had to be approved; and (5) placement of personnel in nearly all of Stamina's director and officer positions. Kayser had control over environmental matters, including approving installation of the remediation equipment. However, the court said exercise of control over environmental matters was not necessary to establish operator liability if there was sufficient pervasive control over other operations.

In John S. Boyd Co. V. Boston Gas Co., the First Circuit once again held a parent corporation liable as an operator. The actions leading to liability included that the parent holding company, NEES: (1) continually maintained a presence among the officers and directors of the subsidiary, Lynn Gas; (2) the president of Lynn Gas was also the president of a division of NEES; (3) the president of Lynn Gas had been appointed by the chairman of NEES and reported directly to NEES officials; (4) NEES selected the directors of Lynn Gas; (5) a senior officer of NEES approved the budget of Lynn Gas; (6) NEES had to approve all Lynn Gas expenditures over $5,000; (7) NEES' service affiliate, NEPSCO, provided extensive financial services to Lynn Gas, including controlling its checking account, handling oil purchases, and maintaining Lynn Gas property; and (8) NEPSCO employees were among the officers and directors of Lynn Gas.

The most expansive reading of operator liability may be the handful of courts who have appeared to impose operator liability on parent corporations on the parent's ability to control its subsidiary. In Idaho V. Bunker Hill and U.S. V. Nicolet, federal district courts found the that while employees of the parent companies did not actually exercise control over hazardous waste activities, the parent corporations were familiar with the practices and had power to control both the disposal and resulting release of the hazardous substances as well as the ability to abate the contamination. Recently, though, the United States Court of Appeals for the Eleventh Circuit ruled that degree of control required to impose operator liability on a parent depended on whether the parent was involved in the same business as the subsidiary. In Jacksonville Electric Authority V. Bernuth Corp., the Jacksonville Electric Authority (JEA) filed a contribution action against Tufts University (Tufts) arguing that Tufts was a defacto operator of a wood treatment plant by virtue of its control over the current owner of the plant, Eppinger & Russell Co. (ERC). JEA maintained Tufts should be liable because, inter alia, it hired the senior executives of ERC, created a profit-sharing plan for ERC management, and received dividends in excess of net earnings which reduced the funds available for upgrading plant equipment. The court indicated that such evidence might indicate the requisite level of direct involvement and control if the parent had been engaged in the same business but could not be presumed here where parent company was composed of trustees of a university.

This decision might bode well for parent companies other than universities, such as investment companies, financial institutions, or even corporate conglomerates where the parent is involved in an industry that is totally unrelated to the subsidiary's operation. However, it could also mean that where the companies are in the same field and share common operations, such as marketing, sales, or accounting, courts might suspect that the parent will be more likely to exercise its power to control the subsidiary.

Generator Liability of Parent Corporations

The analysis for imposing generator liability upon parent corporations is similar to the operator cases because control remains the critical question. However, in these cases, the focus tends to be more on the hazardous waste practices since it is these actions that lead to the CERCLA liability. For example, in U.S. V. Arrowhead Refining Corp. the district court declined to impose generator liability on Chrysler for CERCLA liability of its subsidiary, Plaza Dodge, Inc. Plaza). The court found that Chrysler initially incorporated and financed Plaza and retained an ownership interest until its investment was recouped, installed employees as officers and directors of Plaza, and maintained a critical eye on the business, including suggesting changes in operation. However, Plaza observed corporate formalities, transacted daily business through its own employees, maintained its own books, paid its own taxes, salaries, and expenses, and also established its own pay and benefit packages. Furthermore, the two companies did not have common directors and officers, did not share a common business department, did not consolidate financial statements, did not file consolidated tax returns, or combine daily operations. Finally, Chrysler did not exert any control over hazardous waste practices. When viewed in its totality, the court characterized Chrysler's relationship to Plaza as more akin to a creditor. Whatever assistance Chrysler offered was designed to protect its investment in Plaza and to develop a profitable business that would sell more Chrysler cars. This involvement, the court ruled, fell far short of the day-to-day pervasive involvement required to impose CERCLA liability.

On the other hand, a parent was found liable as a generator m City of New York V. Exxon In that case, the parent of a waste hauling subsidiary was found liable because (1) there were common officers and directors; (2) the parent had final approval for all expenditures of the subsidiary; (3) the parent negotiated the purchase of 15 trucks; (4) the parent arranged financing and guaranteed the loan; (5) the parent contributed $3 million in 18 months to the subsidiary's operations; (6) the parent paid for the subsidiary's insurance policy; (7) had direct contact with many customers; the parent had the power to appoint or replace officers and directors; and (9) paid the salary of the subsidiary's president.
None of the cases holding parent corporations liable under either a direct or indirect liability theory have imposed liability simply on the basis of stock ownership. Thus, corporate investors with a minority interest m a corporation or with representation on a board proportionate to its shares, without engaging in the active management or otherwise exercising operational control over the corporation, should not incur CERCLA liability.

In the majority of jurisdictions adopting the operator or generator theories of liability for parent corporations, it would appear that a parent who monitors compliance, has knowledge about environmental conditions at a subsidiary's plant, or merely provides environmental or general business advice to a subsidiary or sister corporation should not incur liability in the absence of actual involvement in the operations of the plant. Furthermore, actions indicative of a prudent investor, such as monitoring of a subsidiary's fiscal operations, and consolidation of certain administrative functions, such as accounting and, perhaps, law, should not by themselves result in CERCLA liability so long as the actions do not cross the line into daily management of the business.
The prospect of potential environmental liability could cause corporate organizations to take a "hands-off" policy regarding environmental compliance. On the other hand, the criminal sentencing guidelines for businesses seem to encourage parent corporations to create strong environmental policies. It would appear that these polar concerns could be met by requiring subsidiaries to put into place environmental policies and for the parent to provide expert corporate assistance when requested. The subsidiaries should be required to develop their own in-house environmental expertise. In no event should the parent unilaterally initiate environmental compliance programs. On the budget approval levels, the thresholds required for approval by the parent should be higher than the trivial amounts ($5,000) that contributed to liability in the Kayser-Roth and John Boyd decisions.

(c) Copyright 1999 Lawrence Schnapf