24 ELR 10479 -- Trustee Liability Under CERCLA

Trustee Liability Under CERCLA

F. James Handley

The author is an attorney in the U.S. Environmental Protection Agency's (EPA's) Office of Enforcement and Compliance Assurance. The views expressed are solely those of the author and do not necessarily reflect those of EPA or the U.S. government. Mr. Handley holds an LL.M. in environmental law from George Washington University, a J.D. from the University of Houston, and a Bachelor of Chemical Engineering from the University of Delaware.

[24 ELR 10479]

Trustees face possible liability under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA)¹ because, as holders of legal title to property, they may be "owners" or "operators"² of CERCLA facilities.³ Although CERCLA does not expressly address trustee liability and the U.S. Environmental Protection Agency, except for a brief mention in the preamble to its lender liability rule,⁴ has not formally addressed the subject, common-law trust principles support finding trustees liable for CERCLA damages in certain situations. This Dialogue examines the scope of trustee liability and the extent to which a trustee's personal assets may be exposed in cases where the trust is liable.

Common-Law Principles of Trustee Liability

A trust is a common-law device for ownership of property in which the legal and beneficial interests in the property are separated: The trustee holds legal title to the property for the benefit of the beneficiary, who holds beneficial (or equitable) interest in the trust property. Thus, a trust divides the attributes of property ownership between the trustee, who bears the "responsibility" for administration of the property, and the beneficiary, who obtains the benefits, often in the form of income.⁵ The characteristics of the particular property and the trust instrument determine what these respective responsibilities and benefits are.

A trustor (or settlor) creates a trust by expressing unequivocal intent to create a trust, indicating the identity of the beneficiary, defining the trust property, and providing for a trustee.⁶ The trust property may be any real or personal property actually in existence, in which the trustor has a transferable title or interest, including undivided, future, or contingent interests.⁷

Trustees are liable for obligations incurred in the administration of a trust to the same extent as if the property were held free of trust.⁸ Consistent with this, trustees may be held personally liable for torts committed in the administration of a trust.⁹ The rationale for holding trustees liable is essentially that because the trustee is acting as the representative of the trust, the trustee is responsible for his or her conduct with respect to the administration of the trust. The trustee's liability attaches regardless of the fault or lack [24 ELR 10480] of fault of the trustee,¹⁰ although ordinarily the trustee may obtain indemnification from trust assets for acts within his or her official capacity of trust.¹¹ Acts of the trustee beyond his or her authority expose the trustee to personal liability without the potential for such reimbursement.¹²

Because the trust "res" or property may be any type of real or personal property that an owner can voluntarily transfer,¹³ the type of property held will affect the scope of a trustee's potential liability. Where the trust "res" includes corporate shares, the trustee holds the shares for the benefit of the trust beneficiary, who generally receives the earnings. A trustee is treated the same as other shareholders under principles of corporate law, and is ordinarily not liable for the torts of the corporation.¹⁴ Thus, a trustee who holds shares of a corporation that owns or operates a hazardous waste facility will not generally face liability on the basis of ownership of shares.¹⁵ Liability will be limited to the value of the shares.¹⁶

Common-Law Trust Principles Applied to CERCLA Liability

Although there is no general federal common law, common-law principles are appropriate in interpreting and applying CERCLA, because the need exists for a uniform federal rule of decision and because courts have interpreted CERCLA's legislative history to support congressional intent that courts develop a federal common law to supplement the statute.¹⁷ Also, Congress intended CERCLA § 107(a)(2), (3), and (4)¹⁸ to codify the common-law doctrine of strict liability in tort as it applies to those who undertake any of the ultrahazardous activities of hazardous substance generation, transportation, management, or disposal, or who permit these activities on their land.¹⁹ CERCLA § 107(a)(1)²⁰ goes further by holding liable "passive" owners of previously contaminated property who had no involvement or activity beyond such ownership.²¹ But this distinction parallels that made by common-law trust principles between trustees who are actively involved in potentially tortious activity and those who are mere titleholders.

Trustee Liability Limited to Trust Assets

CERCLA § 107(a)(1) holds liable current owners and operators of facilities²² where hazardous substances were released or there is a threat of a release. Liability is based solely on ownership; no other involvement, acts, or mental state need be shown. In other words, CERCLA § 107(a)(1) imposes strict liability in tort on owners of land where the ultrahazardous activities of hazardous substance disposal occurred. Although the liability is strict, under common-law principles if the trustee's sole involvement with contaminated property is as titleholder, the trustee's liability under § 107(a)(1) should be limited to the amount of trust assets. Section 265 of the Restatement (Second) of Trusts provides:

Where a liability to a third person is imposed upon a person, not as a result of a contract made by him or a tort committed by him but because he is the holder of title to property, a trustee as holder of the title to the trust property is subject to personal liability, but only to the extent to which the trust estate is sufficient to indemnify him.²³

[24 ELR 10481]

A trustee whose sole involvement is as titleholder is, thus, not a guarantor or insurer of the property; he or she is merely the holder of the trust assets.²⁴

A more complicated situation arises where a trustee holds title to an entity that now operates, but does not own,²⁵ a facility where hazardous substances were previously disposed of by another operator.²⁶ In that situation, would the trustee be held liable based on his or her status as titleholder of the operator entity or based on a contract made or a tort committed by the trustee? Because any operator involved in the actual disposal of hazardous substances would also be liable under § 107(1)(2), liability under § 107(a)(1) must be based solely on holding title to the operator entity. Therefore, any trustee who is liable solely as a holder of title to an entity that now operates a facility where past disposal of hazardous substances occurred, should be liable only to the extent of the trust assets.

Trustee Liability Extending to the Trustee's Personal Assets

Unlike the liability of owners and operators under § 107(a)(1), which is based on current status, the liability of owners and operators under § 107(a)(2) is based on past status -- status as owners or operators at the time the property was used for disposal, when they presumably could exercise control.²⁷ If the trustee has power under the particular trust instrument to control the uses of the trust property, and the trustee allowed disposal of hazardous substances, he or she is more than a mere titleholder and the rationale of Restatement § 265 for limiting the trustee's liability to the amount of trust assets is absent. Thus, recovery should not be limited to the available trust assets and the trustee's personal assets should be reached.

On the other hand, if the trust instrument precludes the trustee from controlling use of the property and another person directs the trustee's actions concerning the property held in trust, the trustee's liability should be limited to the amount of the trust assets. (Naturally, it follows that the party who directed the trustee's actions would face potential CERCLA § 107(a)(2) "operator" liability.)²⁸ In other words, where the trustee at the time of disposal did not have the authority to control the property, and did not exercise control over the property, but was effectively limited to the role of titleholder in his or her capacity as trustee, the liability limiting principle of § 265 is more appropriate.

This result is supported by policy considerations: Where a trustee is (or has authority to be) in a decisionmaking position, the imposition of personal liability beyond the available trust assets is an appropriate deterrent, which treats trustees similarly to others who control and manage property that may be used for hazardous substance disposal. An exception to CERCLA liability would create the anomalous situation of providing trustees greater protection from potential liability for permitting the ultrahazardous activity of hazardous substance disposal than for permitting other ultrahazardous activities on trust land.²⁹

Trustees' Liability as Generators or Transporters

Under the terms of a trust, a trustee may hold legal title to an entity that is or was an "arranger" (generator) or transporter of hazardous substances.³⁰ As the holder of legal title to such an entity, a trustee may be subject to CERCLA liability.³¹ If the trustee's only involvement were the holding of title to an entity that is or was a generator or transporter, and no activity giving rise to generator or transporter liability occurred during the time the trustee held such title, the Restatement's liability limiting principle³² would limit liability to the amount of trust assets.

If, however, the trustee were holding legal title to an entity while it generated or transported hazardous substances and the terms of the trust allowed the trustee to exercise control³³ over these activities, the trustee would be more than a "passive" titleholder and the principle limiting a trustee's liability would not apply, rendering the trustee's personal assets potentially available to satisfy the CERCLA obligation.

[24 ELR 10482]

Conclusion

The crucial question for trustees is: Do they have the authority to control the use of the trust property, or do they merely hold title? If courts apply common-law principles to determine trustee liability under CERCLA, the difference in the answers to this question could represent a significant difference in potential liability. Thus, for trustees and potential trustees, it is essential to examine the nature of the trust and the extent -- or potential extent -- of the trustee's involvement in activities at the facility.³⁴

1. 42 U.S.C. §§ 9601-9675, ELR STAT. CERCLA §§ 101-405.

2. See id. § 9607(a)(1), (2), ELR STAT. CERCLA § 107(a)(1), (2) (defining owner and operator liability).

3. The situation is probably less common, but trustees may also be liable as "arrangers" (generators) or "transporters" by virtue of ownership of trust property. See infra notes 30-33 and accompanying text.

4. 57 Fed. Reg. 18344, 18349 (Apr. 29, 1991). In Kelley v. U.S. Environmental Protection Agency, 15 F.3d 1100, 24 ELR 20511 (D.C. Cir. 1994), the U.S. Court of Appeals for the D.C. Circuit vacated EPA's lender liability rule on the grounds that EPA has not been delegated authority to promulgate rules limiting CERCLA liability.

5. RESTATEMENT (SECOND) OF TRUSTS § 2 (1959) [hereinafter RESTATEMENT]; see also 1 AUSTIN SCOTT, SCOTT ON TRUSTS § 2.3 (4th ed. 1988); GEORGE BOGERT, TRUSTS & TRUSTEES §§ 41-46 (2d ed. 1984). This definition applies to express trusts, as distinct from trusts created by operation of law, or constructive and resulting trusts, whose formalities differ. The RESTATEMENT defines a "trust" as a "fiduciary relationship with respect to property, subjecting the person by whom title is held to equitable duties to deal with the property for the benefit of another person, which arises as a result of a manifestation of an intention to create it." RESTATEMENT, supra, § 2.

There seems to be general agreement that the RESTATEMENT is a fair representation of the common law of trusts in U.S. jurisdictions. BOGERT, supra, §§ 6-7; 1 SCOTT, supra, §§ 1.8-1.11; City of Phoenix v. Garbage Servs. Co., 827 F. Supp. 600, 603, 23 ELR 21314, 21315 (D. Ariz. 1993). Because U.S. trust law is derived from a well-developed body of English common law, the principles are quite consistent among jurisdictions.

6. RESTATEMENT, supra note 5, § 17; seealso 1 SCOTT, supra note 5, §§ 17-73. RESTATEMENT § 3 defines other key terms associated with a trust. A "settlor" is the person who creates a trust, a "trustee" is the person holding trust property for the benefit of another, a "trust property" or "res" is the property held in trust, and a "beneficiary" is the person for whose benefit the trust property is held. RESTATEMENT, supra note 5, § 3.

7. "Any property which can be voluntarily transferred by the owner can be held in trust." RESTATEMENT, supra note 5, § 78.

8. See RESTATEMENT, supra note 5, § 261 ("The trustee is subject to personal liability to third persons on obligations incurred in the administration of the trust to the same extent the he would be liable if he held the property free of trust.").

9. See RESTATEMENT, supra note 5, § 264 ("The trustee is subject to personal liability to third persons for torts committed in the administration of the trust to the same extent that he would be liable if he held the property free of trust.").

10. See 3A SCOTT ON TRUSTS § 265.1 (4th ed. 1988); AM. JUR. 2D Trusts § 632 (1992) ("[A] trustee who incurs personal liability for a tort committed in the administration of the trust, where he is without personal fault or negligence, and has acted in good faith for the benefit of the estate in the line of his duties, is entitled to exoneration therefor from the trust property if has not discharged the claim, or, if he has paid the claim, to be reimbursed therefor out of the trust funds.").

11. See RESTATEMENT, supra note 5, § 244 ("The Trustee is entitled to indemnity out of the trust estate for expenses properly incurred by him in the administration of the trust.").

12. Id.

13. See infra note 21.

14. In the absence of some showing that the corporation was a sham and thus that a court should disregard corporate form, i.e., "pierce the corporate veil," shareholders would face no personal liability for the torts of the corporation in which they had invested. See, e.g., In re Acushnet River & New Bedford Harbor Proceedings, 675 F. Supp. 22, 31-33, 18 ELR 20543, 20547-48 (D. Mass. 1987) (listing the factors to be considered in determining whether to "pierce").

15. Of course, this would not protect the trustee from other liability, if other bases for it existed. For instance, if the trustee had been involved in decisionmaking by the corporation, the trustee could face "operator" liability independent of its status as shareholder. See, e.g., New York v. Shore Realty Corp., 759 F.2d 1032, 1052, 15 ELR 20358, 20368 (2d. Cir 1985).

16. The analysis in this Dialogue is limited to common-law trusts, as distinguished from business trusts, land trusts, and "Massachusetts" trusts. These last three are essentially alternatives to the corporate form and therefore principles of corporate liability are more applicable.

17. See City of Phoenix v. Garbage Servs. Co., 827 F. Supp. 600, 23 ELR 21314 (D. Ariz. 1993) (the court invoked common-law principles to interpret the scope of trustee liability under CERCLA). Generally, the courts develop and apply federal common law in two limited situations: Where a uniform federal rule is necessary to protect federal interests and where Congress has given the courts the power to develop substantive law. Texas Indus., Inc. v. Radcliff Materials, Inc. 451 U.S. 630, 640 (1981). In City of Phoenix, the court observed that CERCLA's meager legislative history indicates that Congress expected the courts to develop a federal common law to supplement the statute. City of Phoenix, 827 F. Supp. at 602, 23 ELR at 21315. Moreover, the court concluded that "the important federal policies behind CERCLA require the court to fashion a uniform federal rule of decision .. . from existing common law on trustee liability." Id. at 603, 23 ELR at 21315.

Federal common law has also been invoked to determine the scope of CERCLA liability in other contexts. See, e.g., United States v. Kayser-Roth Corp., 724 F. Supp. 15, 21, 20 ELR 20349, 20352 (D.R.I. 1989); In re Acushnet River & New Bedford Harbor Proceedings, 675 F. Supp. at 30, 18 ELR at 20546 (relying on federal common-law analysis to determine when it is appropriate to "pierce the corporate veil" to impose CERCLA liability).

18. 42 U.S.C. § 9607(a)(2), (3), (4), ELR STAT. CERCLA § 107(a)(2), (3), (4).

19. See, e.g., 126 CONG. REC. H9462 (daily ed. Sept. 23, 1980) (remarks of Rep. Gore); 126 CONG. REC. S14972 (daily ed. Nov. 24, 1980) (remarks of Sen. Tsongas) ("For the purposes of [CERCLA] Congress declares that manufacture, use, transportation, treatment, storage, disposal and release of hazardous substances are ultra-hazardous activities.").

20. 42 U.S.C. § 9607(a)(1), ELR STAT. CERCLA § 107(a)(1).

21. CERCLA § 107(a) holds past and present owners, operators, those who arrange for disposal, and transporters liable for any release or threat of release of a hazardous substance that causes the incurrence of response costs. 42 U.S.C. § 9607(a), ELR STAT. CERCLA § 107(a). The release or threat of release of hazardous substances is presumably what makes the activity ultrahazardous. Thus, even mere ownership of land where there is a release or threat of release could constitute an ultrahazardous activity.

22. CERCLA § 101(9) defines "facility" as any of a variety of places where "hazardous substances have been deposited, stored, disposed of, or placed, or otherwise come to be located." 42 U.S.C. § 9601(9), ELR STAT. CERCLA § 101(9).

23. RESTATEMENT, supra note 5, § 265.

24. In City of Phoenix v. Garbage Servs. Co., 827 F. Supp. 600, 23 ELR 21314(D. Ariz. 1993), the court held that CERCLA § 107(a)(1) liability may be imposed on any person holding current title to property, based on "the mere fact of property ownership," and it, therefore, applied RESTATEMENT § 265 as a principle of federal common law to limit the trustee's liability to the amount of assets held in trust. City of Phoenix, 827 F. Supp. at 605, 23 ELR at 21316.

25. Although § 107(a)(1) uses the conjunction "and" in the phrase "owner and operator," courts have not construed this as a requirement that owners of previously contaminated facilities also be operators. Instead, the provision is construed as parallel to § 107(a)(2), which uses the phrase "owner or operator." United States v. Fleet Factors Corp., 901 F.2d 1550, 1554 n.3, 20 ELR 20832, 20834 n.3 (11th Cir. 1990).

26. CERCLA § 107(a)(2) refers to ownership and operations "at the time of disposal of any hazardous substance," i.e., owners and operators who may not currently own or operate but who owned or operated when past disposal occurred. By inference, § 107(a)(1) applies to present owners and operators of property where hazardous substances were released or are in danger of being released. See Fleet Factors Corp., 901 F.2d at 1553-54, 20 ELR at 20833-34. Thus, § 107(a)(1) imposes liability on current "operators" and "owners" of facilities where hazardous substances were released or are in danger of being released. This may occur where disposal operations have ceased, or where past disposal involved hazardous substances, and current disposal only involves nonhazardous substances.

27. City of Phoenix, 827 F. Supp. at 604-05, 23 ELR at 21316-17. The court noted that its focus on the "control" element was consistent with language in the preamble to EPA's lender liability rule, suggesting that liability of "innocent" trustees, those who cannot exercise control over disposal, be limited to trust assets. Id. at 606, 23 ELR at 21317.

28. See New York v. Shore Realty Corp., 759 F.2d 1032, 1052-53, 15 ELR 20358, 20368 (2d Cir. 1985).

29. See United States v. Burns, No. C-88-94-L, 1988 U.S. Dist. LEXIS 17340, 17344 (D.N.H. Sept. 12, 1988) ("Congress did not intend for a responsible party to … avoid liability through the use of a trust or other forms of ownership.").

30. See 42 U.S.C. § 9607(a)(3), (4), ELR STAT. CERCLA § 107(a)(3), (4).

31. If the trustee held an equity interest, such as shares of corporate stock, liability would generally be limited to the value of shares. See supra notes 14-16 and accompanying text.

32. "Where … liability is imposed … not as a result of a contract made … or a tort committed … [by a trustee] … but because he is the holder of title to property … a trustee is subject to personal liability but only to the extent to which the trust estate is sufficient to indemnify him." RESTATEMENT, supra note 5, § 265.

33. In City of Phoenix v. Garbage Servs. Co., 827 F. Supp. 600, 23 ELR 21314 (D. Ariz. 1993), the court emphasized the issue of control, beyond mere ownership, as a basis for the trustee's personal liability. 827 F. Supp. at 607, 23 ELR at 21317. Although the court's holding is ostensibly limited to the situation where the trustee is the owner of the facility, the same logic should apply to other forms of CERCLA liability. If a trustee has power under the particular trust instrument to control the activities of the business, and the trustee allows for operation, generation, or transportation of hazardous waste, the limitation of § 265 should not apply.

34. The Clinton Administration has developed a proposal to reform CERCLA, which includes provisions addressing the liability of fiduciaries. H.R. 3800, 103d Cong., 2d Sess. § 605, para. 3 (Comm. Print May 16, 1994) (definition of owner/operator). The proposed legislation appears to be consistent with the analysis in this Dialogue, because it would exempt trustees from liability in their personal capacities where they did not participate in the management of operations resulting in a release or threat of release of hazardous substances. Id.