United States v. Bestfoods: The U.S. Supreme Court Sets New Limits on the Direct Liability of Parent Corporations for Polluting Acts of Subsidiaries

George C. Hopkins

Editors' Summary: Defining the scope of parent corporation liability under CERCLA has been a source of disagreement between appellate courts for years. This Article examines this disagreement and how it led to the U.S. Supreme Court decision in United States v. Bestfoods. First, the Article examines the two contradictory lines of cases that spawned the disagreement. Courts using the remedial purpose doctrine have held parent corporations directly liable under CERCLA based on general involvement with the business and not due to specific involvement in the polluting activities. In contrast, courts employing a corporate law approach have rejected direct liability and have only found indirect CERCLA liability where the corporate veil has been pierced. The Article then describes how the Court's attempt to resolve the disagreement in United States v. Bestfoods drew from both lines of cases but effectively curtailed direct liability. According to the Court, a parent corporation may only be held indirectly liable for its subsidiaries' acts when the corporate veil is pierced. Direct liability, however, can be imposed only if a parent corporation operates a subsidiary facility through the parent's agents on the parent's behalf. The Article then claims that the Court failed to define what activities will constitute a parent's "operation" of a subsidiary, did not address the liability of managing shareholders, and did not specify whether state or federal law will control veil-piercing standards. To highlight these unresolved issues, the Article examines recent decisions in which several appellate courts struggled with application of United States v. Bestfoods. The Article concludes that considering the remaining unresolved issues, the significance of the Court's effort to scale back direct liability in United States v. Bestfoods remains uncertain.

George C. Hopkins is a partner in the Washington, D.C. office of Vinson & Elkins L.L.P. where he represents clients in a variety of litigation matters arising under environmental laws. Among other cases that he has played a lead role in include Pneumo Abex Corp. v. High Point, Thomasville & Denton R.R., 142 F.3d 769, 28 ELR 21261 (4th Cir. 1998), cert. denied, 119 S. Ct. 407 (1998). He also routinely advises clients on environmental issues in various commercial contexts. Mr. Hopkins is a 1981 graduate of Tufts University and a 1985 graduate of Boston College Law School. The author wants to acknowledge the assistance of Benjamin R. Lippard in preparing this Article.

[29 ELR 10545]

Defining the proper scope of parent corporation liability under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA)¹ has been a persistent source of disagreement among appellate courts for the last 12 years. The focal point of this disagreement has been balancing the competing priorities of advancing speedy cleanups through broadly imposed liability and protecting the limited liability concepts of the corporate form in the absence of a specific directive from Congress to supersede it. This disagreement is best described by examining two distinct, contradictory lines of cases. The first line of cases focuses on the broad remedial purposes of CERCLA and finds that CERCLA imposes broad parent liability in order to further Congress' goal of speedy environmental cleanup. The second line of cases focuses on the baseline of traditional principles of corporate law, and finds that Congress could not have meant to displace such fundamental principles without explicitly stating its intention to effect a dramatic change in widely recognized legal tenets. These courts have thus refused to find the parent corporation liable as an operator of a subsidiary's facility unless state-law veil-piercing standards have been met.

The Broad Understanding of Parent Corporation Liability and the Remedial Purpose Doctrine

Courts using the remedial purpose doctrine line of reasoning have held parent corporations and individual stockholders liable under CERCLA based on their involvement with the business generally and not due to specific involvement in the polluting activities themselves. Several Courts of Appeal have read CERCLA to effect a radical shift in existing law that displaces the common law of parent liability. Cases endorsing this position tend to identify the Second Circuit's [29 ELR 10546] opinion in New York v. Shore Realty Corp.² as a significant early example of this doctrine. Shore Realty involved Donald LeoGrande, the sole shareholder of a corporation created solely for the purpose of purchasing an environmentally contaminated property in New York. LeoGrande, as sole shareholder, made all of the corporate decisions. In addition to resolving a number of other CERCLA issues, the Second Circuit found that despite Leogrande's status as a shareholder, he was personally liable for response costs assessed under CERCLA.³

The Second Circuit rested its conclusion on two alternative findings. First, it held that "an owning stockholder who manages the corporation" is liable as an operator under CERCLA.⁴ Second, the court also held that "in any event, LeoGrande is in charge of the operation of the facility in question, and as such is an 'operator' within the meaning of CERCLA."⁵ These alternative formulations of liability are somewhat inconsistent. The first imposes liability solely due to the shareholder's management of the corporation, the second due to the shareholder's management of the facility in question. This distinction is not critical to Shore Realty, since it appears that the corporation's sole function was to manage the facility at issue. However, this distinction becomes very important in analyzing later cases up to and including the Supreme Court's opinion in United States v. Bestfoods.⁶

Later cases relying on Shore Realty blur this distinction. In perhaps the most influential broadening of CERCLA parent liability, the First Circuit considered the scope of operator liability under CERCLA in United States v. Kayser-Roth Corp.⁷ and found that Congress:

Implied that a person who is an operator of a facility is not protected from liability by the legal structure of ownership…. corporate status, while relevant to determine ownership, cannot shield a person from operator liability. In addition, the legislative history provides no indication that Congress intended "all persons" who are "operators" to exclude parent corporations.⁸

The Kayser-Roth court assumed without analysis that managing a subsidiary corporation was equivalent to operating a facility for purposes of CERCLA liability.⁹ This understanding of Kayser-Roth can be illustrated by the First Circuit's citation of Shore Realty for the proposition that "the majority shareholder of a corporation has been held individually liable as an operator under CERCLA"¹⁰ without considering the fact that the majority shareholder in Shore Realty was also the direct manager of the facility at issue. The shareholder was not merely the manager of a subsidiary corporation who was not directly involved in running the facility itself.¹¹ It appears that this distinction simply did not occur to the Kayser-Roth court.

The remainder of the Kayser-Roth court's analysis is less helpful. The court stated that "it is obviously not the usual case that the parent of a wholly owned subsidiary is an operator of the subsidiary," but also asserted that "active involvement in the activities of the subsidiary" justifies liability.¹² Such an amorphous test provides no clear limits to parent corporation liability whatsoever.¹³ Although the First Circuit rejected the idea that "merely complete ownership and the concomitant general authority or ability to control that comes with ownership"¹⁴ is not sufficient to establish a parent corporation's operator liability, it failed to provide any sort of standard regarding the requisite showing of control. The detailed list of factors reflecting the significant control that the Kayser-Roth corporation exercised over its subsidiary fails to identify whether all or just some of these factors go beyond general authority or ability to control in the parent-subsidiary context. Without such a clarification, courts have been free to identify these factors as a basis to hold a parent corporation liable for its subsidiary's CERCLA liabilities.

Perhaps the best indicator of the Kayser-Roth court's underlying assumptions comes from its invocation of the remedial purpose of CERCLA:

CERCLA was enacted in response to the increasing concern about the vast problems of the disposal of and contamination from hazardous waste throughout the country. It is a remedial statute designed to protect and preserve public health and the environment. Because CERCLA is a remedial statute, "we … construe its provisions liberally to avoid frustration of the beneficial legislative purpose."¹⁵

Equating management of the subsidiary with operation of the facility reflects the court's broad reading of the term "operate." While this reading extends CERCLA liability broadly, it fails to connect the acts to the facility, which, after all, is the focus of the "operator" definition in the first place.

Despite these evident flaws, the Kayser-Roth court's understanding of CERCLA parent corporation liability has been accepted in many other circuits, including the First,¹⁶ Second,¹⁷ Third,¹⁸ Fourth,¹⁹ Seventh,²⁰ Eighth,²¹ and Eleventh.²² Achieving the remedial purpose of CERCLA has led courts to gloss over the question of whether the operation of a facility is established by proof of active management of the subsidiary owning the facility. The Second Circuit's decision [29 ELR 10547] in Schiavone v. Pearce²³ exemplifies this approach. Recognizing that there is a tension between holding a corporation directly liable as an operator and holding it indirectly liable as the shareholder of the subsidiary, the court relied on the same remedial purpose canon of construction to find that direct liability may be imposed on the parent corporation.²⁴ While the Schiavone court recognizes the difference between owner and operator liability under CERCLA, it implicitly identifies management of the subsidiary with operation of the facility. As a result, although the court purports to hold the parent corporation liable for its own actions, liability still passes through the subsidiary: "Any operator liability that [the parent corporation] may have, then, even though related to the activities of its subsidiary—the legal owner of the offending plant—is specific to [the parent corporation] alone."²⁵

The Narrow Understanding of Parent Corporation Liability Under CERCLA

The Fifth and Sixth Circuits have rejected the broad reading of CERCLA parent liability and have instead opted for an approach that proceeds from the common-law backdrop of corporate law. The leading case advocating this point of view is Joslyn Manufacturing Co. v. T.L. James & Co.²⁶

In Joslyn, the Fifth Circuit considered a situation where a subsidiary corporation was liable for releases of hazardous substances under CERCLA. A subsequent parent corporation, Joslyn, sought to hold a prior parent corporation, James Company, liable as an owner or operator under CERCLA. The court held that the prior parent corporation was not liable under CERCLA.²⁷ In so ruling, the court emphasized the importance of interpreting a statute according to its plain language and reasoned that CERCLA does not specifically name parent corporations as "owners or operators" under CERCLA.²⁸ This congressional silence led the court to conclude that CERCLA did not displace background commonlaw rules:

Joslyn asks this court to rewrite the language of [CERCLA] significantly and hold parents directly liable for their subsidiaries' activities. To do so would dramatically alter traditional concepts of corporation law. The "normal rule of statutory construction is that if Congress intends for legislation to change the interpretation of a judicially created concept, it makes that intent specific."²⁹

The Joslyn court also firmly rejected the remedial purpose canon as a legitimate basis to extend CERCLA beyond the plain meaning of its terms by citing language from a Seventh Circuit decision: "To the point that courts could achieve 'more' of the legislative objectives by adding to the lists of those responsible, it is enough to respond that statutes have not only ends but also limits."³⁰ Interestingly, the Ninth Circuit recently echoed this observation in ruling that successor-liability questions need to be resolved by state law, not federal common law.³¹

If the great failing of cases adopting the broad understanding of CERCLA parent liability is an unexamined conflation of operating a facility and managing a subsidiary, the great failing of the cases adopting the narrow interpretation of CERCLA parent liability is the failure to distinguish between direct and indirect operator liability under CERCLA. While CERCLA does not indicate any intention to overturn existing common-law corporate principles, neither does it foreclose a claim of direct operator liability against a parent corporation. Yet, the Joslyn court explicitly held that CERCLA imposed no direct liability on parent corporations for the actions of their subsidiaries, because no "'control' test appears in … the subsection at issue in this case…."³² As a result, the Joslyn court only examined the relationship between the parent and subsidiary corporations in terms of common-law veil piercing.³³ The Joslyn court, however, never looked at the relationship between the parent corporation and the facility itself, and thus never considered the parent corporation's potential direct liability for its own acts.

In defense of the Joslyn court, the facts at issue in that case may not have implicated direct operator liability. However, later cases applying the narrow understanding of CERCLA parent corporation liability use the corporate law principles of veil piercing to limit a parent corporation's liability. For example, in its opinion in United States. v. Cordova Chemical Co. of Michigan³⁴—the case that became United States v. Bestfoods on certiorari review in the Supreme Court—the Sixth Circuit reasoned: "When a parent corporation actively participates in the affairs of its subsidiary consistent with the restrictions imposed by traditional corporations law, nothing in the definition just cited or in the rest of [CERCLA] indicates that the parent has assumed the role of operator."³⁵ This language appears to exclude CERCLA operator liability except where the common-law test for veil piercing is met or in the limited cases where the parent corporation acts in the stead of the subsidiary or as a joint venturer.³⁶

Missing from the Cordova court's opinion is an attempt to evaluate the parent's relationship to the facility under CERCLA's plain language without the intervening limitation of veil-piercing rules: "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…."³⁷ Thus, existing cases that apply either the broad or narrow understanding of CERCLA liability share the common failing of overlooking the relationship between the parent and the facility itself. They substitute either the remedial purpose canon or common-law veil-piercing rules in place of the inquiry demanded by the plain language of [29 ELR 10548] CERCLA: whether the parent's direct involvement with the facility rises to the level of "operating" the facility. It was this confusion that the Supreme Court attempted to resolve in Bestfoods.

United States v. Bestfoods

In its unanimous decision, the Supreme Court addressed two discrete types of operator liability under CERCLA. The first type of liability addressed by the Court is indirect liability, where a plaintiff seeks to impose liability on the parent corporation due to the acts of the subsidiary. The second type of liability considered by the Court is direct liability, where a plaintiff seeks to impose liability on the parent corporation due to its own actions. In the first context, the Court held that arranger liability can only be imposed if the parent corporation abuses the corporate form in a way sufficient to justify piercing the corporate veil. In the second context, the Court held that liability can be imposed if a parent corporation's agents operate the facility of a subsidiary on the parent's behalf. The most significant development resulting from this case is that a parent corporation's control over a subsidiary, absent more, will not result in indirect operator liability under CERCLA.³⁸

To put it another way, the Court appears to have said that one may hold the parent directly liable if it operated the subsidiary's facility, or one may hold the parent indirectly liable by ignoring the subsidiary corporation if the parent corporation abuses the corporate form. Absent such a showing, the Court appears to have held that however pervasive the parent's control of the subsidiary, CERCLA operator liability will not be imposed as long as the facility itself was operated only by the subsidiary.

Indirect Liability

As noted above, the Bestfoods court was careful to distinguish between indirect and direct liability under CERCLA. "Indirect liability" attempts to impose liability on the parent because of the acts of the subsidiary, not the acts of the parent. The rationale for such liability is the parent corporation's ability to control the subsidiary. As the Court notes, this is not the general rule of corporate law, which does not impose liability for a subsidiary corporation's actions on the parent corporation. It is crucial to distinguish between this sort of liability and "direct liability," considered in the next section, that is imposed on the parent because of its own actions. Part of the reason the Supreme Court criticizes the decision of the circuit court is because the circuit court fuses these two types of liability, creating confusion.³⁹

The Court began its discussion of indirect liability under CERCLA with an invocation of the importance of the principle of limited liability: "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 subsidiaries."⁴⁰ The Court noted a broad array of cases and scholarly writing supporting this principle. Given this weight of authority, the Court found that "nothing in CERCLA purports to reject this bedrock principle, and against this venerable common-law backdrop, the congressional silence is audible."⁴¹

In keeping with this consideration, the Court next considers the traditional exceptions to the principle of limited corporate liability. "But there is an equally fundamental principle of corporate law … that the corporate veil may be pierced and the shareholder held liable for the corporation's conduct…."⁴² The Court indicated the types of conduct that are generally required before the corporate veil will be pierced, including fraud or use of the subsidiary as the mere instrumentality of the parent.⁴³ Because CERCLA "giv[es] no indication 'that the entire corpus of state corporation law is to be replaced simply because a plaintiff's cause of action is based upon a federal statute,'"⁴⁴ the Court held that indirect liability is available only when the corporate veil may be pierced under the general standards of corporate law.⁴⁵ The Court was unwilling to find that Congress had set aside this traditional principle of corporate law through silence.

As a result, the Court has developed a clear rule on indirect liability in the parent-subsidiary context. A parent corporation may only be held liable for the acts of its subsidiary through indirect liability when the general corporate law requirements for veil piercing are met. Absent this showing, parent corporations may only be held liable for their own acts. As the next part of the Court's ruling indicates, the relationship between the parent and subsidiary is not itself enough to establish direct operator liability running to the parent.

Direct Liability

The Supreme Court's ruling on direct liability appears to be the most significant part of the Bestfoods decision. As noted above, the direct liability inquiry examines the parent corporation's own acts as a potential source of CERCLA liability. Nothing in CERCLA purports to excuse a parent corporation from liability due to the mere existence of the parent-subsidiary relationship. As the Court notes: "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.'"⁴⁶ The Court found that the plain language of CERCLA imposes liability on any entity that operates a facility. If the subsidiary's facility is operated by the parent's agents on the parent's behalf, the parent-subsidiary relationship is simply irrelevant.⁴⁷

As the Court notes, the difficulty in this analysis lies in CERCLA's unfortunately circular definition of an "operator" as any person "operating" a facility.⁴⁸ Faced with this circularity, the Court attempted to give the term "operator" [29 ELR 10549] its ordinary, natural meaning and found that an "operator" under CERCLA is someone "who directs the workings of, manages, or conducts the affairs of a facility."⁴⁹ The Court also held that CERCLA's environmental focus limits an "operator" to one who controls operations "specifically related to pollution, that is, operations having to do with the leakage or disposal of hazardous waste,or decisions about compliance with environmental regulations."⁵⁰

More significant, however, was the Court's rejection of the district court's use of the actual control test for CERCLA operator liability. As applied in other circuits, this test considers whether the parent corporation actually operated or exercised control over the business of the subsidiary, without specifically considering the role of the parent in operation of the facility. The Court rejected this test, largely because it examines the relationship between the parent and the subsidiary, instead of the relationship between the parent and the facility.⁵¹ Control of the subsidiary, however pervasive, may result in indirect liability only in circumstances where the veil-piercing test is met. Direct liability can be established only from the actions of the parent corporation through its agents.

This reasoning poses some complexity in a business environment where agents of the parent corporation also serve as agents of the subsidiary. In such situations, it can be difficult to determine on whose behalf, either parent or subsidiary, the agent is working. This reality was central to the district court's imposition of operator liability on the parent corporation.⁵² However, the Supreme Court was unwilling to presume that a dual agent inevitably acts on behalf of the parent. Recognizing 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,"⁵³ the Court refused to impose liability on the parent corporation simply because the parent's agents also had a role in the management of the subsidiary. Instead the Court applied a presumption that when corporate officers or directors wear two hats as dual agents, the agents are acting on the behalf of the subsidiary. As long as the parent-subsidiary relationship remains within acceptable norms of corporate behavior, the parent is not exposed to operator liability. The Court also noted that when an agent of the parent corporation with no role in the subsidiary operates the facility, operator liability may be imposed on the parent.

Unresolved Issues After Bestfoods

The Supreme Court's decision appears clear on its face, but it leaves many crucial issues unresolved. The Court invokes undefined "norms of parental influence" and corporate governance as setting the boundaries of direct operator liability in the parent-subsidiary context:

Identifying such an occurrence calls for line drawing yet again, since the acts of direct operation that give rise to parental liability must necessarily be distinguished from the interference that stems from the normal relationship between parent and subsidiary. Again norms of corporate behavior (undisturbed by any CERCLA provision) are crucial reference points.⁵⁴

The Court goes on to explain that certain activities consistent with the parent's investor role in the subsidiary corporation should not give rise to operator liability. These activities include "monitoring of the subsidiary's performance, supervision of the subsidiary's finance and capital budget decisions, and articulation of general policies…."⁵⁵

Unfortunately, the Supreme Court did not identify the source of these norms of corporate behavior. Given its strong emphasis that CERCLA should not disturb these norms, state corporate law seems to be the only potential source. Such an understanding is also consistent with the Court's recent holdings that the development of federal common-law rules to supplement statutory causes of action is strongly disfavored.

More significantly, the ambiguity surrounding these norms leaves unclear the practical difference between the actual control test rejected by the Court and the new "eccentric under accepted norms of parental oversight"⁵⁶ test the Court appears to have adopted. Despite this ambiguity, the Court has laid out several principles governing the determination of a parent corporation's liability as an operator under CERCLA. First, the parent's relationship to the facility, not to the subsidiary, is the focal point of the operator analysis.⁵⁷ Second, individuals who serve as agents of both the parent and the subsidiary are presumed to be acting on behalf of the subsidiary when operating or managing facilities belonging to the subsidiary.⁵⁸ There must be proof that the officers were acting on the parent's behalf.⁵⁹

Given the ambiguity present in both the concept of "operations" as defined by CERCLA's circular language, as well as that present in the Court's invocation of unspecified norms of corporate law, it is unclear what specific factual situations will give rise to direct parent liability. The Bestfoods decision certainly suggests that parent corporations may minimize, if not eliminate, their potential exposure to operator liability by scrupulously adhering to corporate formalities and ensuring that any agents of the parent corporation involved in the operations of the subsidiary corporation are also agents of the subsidiary. The parent corporation must also carefully avoid the appearance of subordinating the subsidiary's interests to those of the parent corporation.⁶⁰

In a practical sense, however, it is difficult to tell what the impact of the Bestfoods decision is likely to be when viewed against the backdrop of existing case law. For example, in one of the leading cases applying the actual control test, the First Circuit imposed operator liability in a factual context where:

[29 ELR 10550]

Kayser-Roth [the parent corporation] exercised pervasive control over Stamina Mills [the subsidiary] through, among other things: 1) its total monetary control including collection of accounts payable; 2) its restriction on Stamina Mills' financial budget; 3) its directive that subsidiary—governmental contact, including environmental matters, be funneled directly through Kayser-Roth; … and finally, its placement of Kayser-Roth personnel in almost all Stamina Mills' director and officer positions, as a means of totally ensuring that Kayser-Roth corporate policy was exactly implemented and precisely carried out.

Kayser's control included environmental matters….⁶¹

It is not clear whether these facts would justify direct liability under the actual control test established by the Court in Bestfoods. Moreover, whether these facts rise to the level of a breach of norms of corporate behavior may require some opinion testimony on this point. These norms are unspecified and unexplained. As a result, although the Bestfoods decision appears to narrow the scope of parent liability in theory, its practical impact may merely be to change how these cases are pled and presented. Only time will tell whether this new standard really narrows the scope of operator liability for parent corporations.

Another complex issue arises under the facts of Shore Realty, which is another leading case applying the actual control test.⁶² In this case, the court held that operator liability under CERCLA may be applied to an "owning stockholder who manages the corporation."⁶³ Under the Bestfoods test, such a shareholder could not be derivatively liable under CERCLA unless the standards for veil-piercing are met. As for direct operator liability, it is clear that management of the corporation would not be enough to impose direct liability on the parent corporation unless the corporation and the facility were one and the same. Here, however, the manager is not a parent corporation but an individual shareholder. Presumably under Bestfoods the relationship would not be enough for direct liability as a shareholder no matter how extensively he manages the corporation unless the corporation and the facility were one and the same.

Finally, it is important to note that the Supreme Court has left the question of the source of the veil-piercing rules for another day: "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 … the question is not presented in this case, and we do not address it further."⁶⁴ The Court's discussion of this issue notes cases citing rationales of uniformity and consistency with federal statutory policy for adopting a federal common-law rule.⁶⁵ Other Supreme Court decisions appear to indicate a reluctance to use federal common-law rules unless absolutely necessary.⁶⁶

A very recent decision by the Sixth Circuit reflects the difficulties that litigants can expect to encounter as courts struggle to apply the Bestfoods test. In United States v. Township of Brighton,⁶⁷ the Sixth Circuit reviewed a district court decision prior to Bestfoods holding a township liable as an operator of the local town dump. Although the township presented many points on appeal, it is the arguments regarding the standard for operator liability that will be examined.

The opinion presents two related disagreements on the subject of operator liability. The first disagreement is what the standard for operator liability should be in the wake of Bestfoods, and the second disagreement is whether there is an adequate factual record from the district court to determine operator liability under the Bestfoods standard. On this latter point, the opinion is fairly interesting as Judge Moore's concurrence and Judge Dowd's dissent formulate very different concepts for operator liability.

The first issue confronted by the panel was whether the Bestfoods test should be applied to a case involving the relationship between a municipal entity and a contractor. Although Bestfoods sets forth the plain meaning of the term "operator," the opinion clearly seeks to resolve questions of liability relating to corporate form and control. Thus, the question was whether the operator formulation in Bestfoods was appropriate in the noncorporate context. The court correctly reasoned that the plain-meaning standard articulated in Bestfoods should apply in any context "whether the defendant is acting in a corporate, governmental, or any other capacity."⁶⁸

Having made that decision, the question became whether it was necessary to remand the case for a new decision on this basis since the district had also applied the actual control test. In fact, one might expect that the appeals court could simply apply the new Bestfoods test to the factual record developed by the district court. That is not what ultimately transpired, however, as the majority decided to vacate the district court decision and remand for further proceedings.⁶⁹ Judges Boggs and Moore concurred that the district court needed to consider whether the facts met the Bestfoods test.

Judge Boggs' opinion states that "we cannot conclude that Brighton Township was or was not an operator of the facility." In his view, the Court lacked adequate facts to determine "whether the [Township] was running the facility or merely regulating it."⁷⁰ Responding to Judge Dowd's dissent, which argued for a ruling that the township was not an operator, Judge Boggs was concerned that: (1) the agreement between the township and the dump owner specified that the dump must "meet the specifications of and be under the supervision of the Board of Appeals"⁷¹; (2) the township "made repeated and substantial ad hoc appropriations" for various measures, including dump repair, bulldozing, plowing, fire protection, trenching and snow removal, dozers and crane work⁷²; (3) the township made arrangements for various measures, including maintenance when the dump owner "proved unequal to the task"⁷³; and (4) the township appeared [29 ELR 10551] to have taken responsibility for addressing state government concerns regarding the unacceptable condition of the dump.⁷⁴ Given these facts, Judge Boggs believed that he could not rule that the township was not an operator as a matter of law.

Judge Dowd, on the other hand, was prepared to rule that the township was not an operator under the actual control standard articulated by the Supreme Court in Bestfoods. In his view, the district court's factual findings simply did not "support a finding of actual control."⁷⁵ Most significantly, the district court found that the dump owners "did maintain the daily operations of the dump" and that the "township did not exercise its control over the facility on a daily basis."⁷⁶ In the absence of facts indicating that the township "hired the employees of the dump, had the authority to supervise or fire them, or manage the finances of the dump," Judge Dowd determined that the township "could not be found liable under the actual control standard."⁷⁷

In a larger sense, the disagreement between Judges Boggs and Dowd turns on whether one can manage, direct, or conduct the affairs of a facility within the meaning of Bestfoods without being involved in the day-to-day affairs of that facility. Judge Dowd's point has some intuitive appeal, as it is hard to conceive of an entity as an operator unless it makes decisions about hiring, firing, supervising employees, or managing the dump's finances. However, a party could make other managerial and financial decisions regarding a facility that would have just as great an impact on facility operations as day-to-day management decisions.

For instance, if the township used its supervisory and financing powers to set limits on the nature and manner of the dump's operations, those decisions could have controlled the daily operations of the dump just as much as the hiring, firing, and supervising of employees. Likewise, if the township itself performed maintenance activities at the dump, as Judge Boggs has suggested, it could have "conducted these affairs of the dump" within the meaning of Bestfoods. In such circumstances, it would be hard to argue that the Bestfoods criteria had not been met.

Of course, Bestfoodsclarifies that mere involvement in a facility's operation is not sufficient for operator liability. Rather, the alleged operator "must manage, direct, or conduct operations specifically related to pollution…."⁷⁸ The decision is not clear as to the level of specificity that is required for operator liability. Under a narrow reading of Bestfoods, the district court must determine not only that the township actually exercised control over the dump's operation, but also that the control related to the hazardous substances and leaking drums that gave rise to the response costs incurred by the U.S. Environmental Protection Agency in the first place. Were only a higher level of generality sufficient for Bestfoods, however, the mere involvement in pollution-related activities at the site could be sufficient for operator liability.

Judge Moore's concurrence, by contrast, would simply read this requirement right out of Bestfoods. Judge Moore's concurrence acknowledges Bestfoods, but then proceeds to almost ignore the Supreme Court's instructions by urging a "broad conceptualization" of day-to-day control "in order to strike the appropriate balance between CERCLA's remedial purpose and concerns over chilling regulatory efforts in the hazardous waste arena."⁷⁹ To Judge Moore, however, it is not necessary to show "the micromanaging of a facility's pollution activities" by a defendant. Rather, merely "macromanaging a facility's operations" should be sufficient for actual control under Bestfoods.⁸⁰ Judge Moore would thus approve the operator liability even in situations where the defendant may have had nothing to do with specific operations constituting the leakage or disposal of hazardous waste, or the decisions about compliance with environmental regulations.

Township of Brighton is an interesting case for several reasons. First, the case demonstrates the confusion that remains on the critical point of what constitutes control sufficient for arrangement liability. In its narrowest conception, operator liability requires "hiring and supervising the employees, and the control of the financial decisions of the facility"⁸¹ particularly as it relates to pollution-control activities. At its broadest formulation, operator liability does not require "hands-on" involvement in a facility's activities or even "micromanaging of a facility's pollution activities…."⁸² If one panel of an appellate court cannot agree on what constitutes control after Bestfoods, we can anticipate perhaps substantial variations among district court judges.

Second, this fact pattern is quite relevant to several important trends in today's marketplace. Many municipalities have begun to seek privatization of their sewage and water services. Likewise, many private companies are examining the benefits and risks of outsourcing various ancillary operations such as wastewater treatment and energy generation. Township of Brighton makes it very clear that how such agreements are structured is very important for purposes of operator liability.

For instance, had the agreement allowed the dump operator to pass such costs directly through to the consumer (i.e., the township), approval of these expenditures by the township would not have been necessary. Since spending power is one of the traditional control indicia, it is likely to be an important factor in any operator-liability analysis. Indeed, this fact seemed very important to the Township of Brighton court. Despite the risks for the township from approving these expenditures, there may have been benefits from structuring appropriations in this manner. For instance, the township would know the real costs of the equipment or modification needed and would not be charged a disproportionately higher cost by the dump owner. In addition, the township's preferential borrowing power may have also lowered the costs of the equipment or modifications needed.

In essence, the question should really be whether the relationship between the township and the dump owner stopped being one of customer and supplier based on the facts identified by Judge Boggs. Since parties can contract for services and products in any number of ways, the focus should be on the purpose underlying their dealings, particularly regarding payment and other financial issues. If the parties' goal is [29 ELR 10552] to transfer control over the supplier's operations, then operator liability would be appropriate. If, on the other hand, the goal is merely to minimize costs to the customer while producing a satisfactory product or service, imposing operator liability on this basis alone would be problematic.

These considerations suggest that Judge Boggs' concern about basing operator liability on a "mechanical checklist of narrow and rigid factors"⁸³ is well-taken. It remains conceivable that a party could lack day-to-day control over employees at a facility, yet still have control of the facility through financial restrictions or other powers. Bestfoods does not foreclose these avenues of operator liability, but seems to require that the controls—financial or otherwise—meet a high threshold of managing or directing a facility and relate to specific environmental issues at a particular facility. Thus, if a party has the power to review and approve specific financial decisions at a particular facility that effectively allow it to manage or direct operations, and those financial issues relate to the waste disposal or compliance matters, that involvement could indeed satisfy the Bestfoods test.

Other Developments

The Third Circuit's decision in United States v. Dell'Aquilla⁸⁴ reflects the acceptance of the Bestfoods test for operator liability claims under other federal statutes. In Dell'Aquilla, the court examined the definition of operator under the Clean Air Act (CAA)⁸⁵ in connection with violations of the national emission standards for hazardous air pollutants.⁸⁶ The Third Circuit found the Bestfoods decision relevant to its inquiry because of the common purpose of the statute and the close similarity with language in the two provisions.⁸⁷

An Illinois district court's decision in Browning-Ferris Industries of Illinois, Inc. v. Ter Maat⁸⁸ found the Bestfoods test to be appropriate for resolving operator claims against affiliates and shareholders.⁸⁹ In Ter Maat, Browning Ferris Industries sued the main shareholder and tracking affiliate of a defunct landfill operator for response costs on both direct and derivative theories of liability.⁹⁰ Although recognizing that the claims before it did not involve parentcorporation liability, the court noted the "shared officers and directors" in finding "the language of Bestfoods equally applicable here."⁹¹

A recent Michigan district court decision in Datron, Inc. v. CRA Holdings⁹² applies the Bestfoods test to a direct liability claim. In this case, a purchaser of the stock of two former wholly owned subsidiaries of another company sued the former parent to recover response costs being incurred in connection with the subsidiaries' facilities. The defendant moved to dismiss the CERCLA claims on the grounds that it was not the operator of the facilities in question because its subsidiaries were operated as independent businesses that made all decisions regarding compliance and waste decisions were made at the plant level.

Datron countered that the parent's conduct in the operations of the subsidiaries' facilities exceeded the accepted norms of corporate behavior because: (1) the parent's corporate policies referred to the subsidiaries, (2) the parent's corporate safety director conducted semiannual Occupational Safety and Health Administration inspections of the plants, (3) the parent's corporate policies required all employees to comply with the Resource Conservation and Recovery Act,⁹³ (4) there were dual officers, and (5) the parent required the subsidiaries to obtain credit approval for any credit arrangements outside of the normal accounts. For one of the facilities in question, Datron argued that operator liability was appropriate because the parent assisted in obtaining insurance for the facility, hired a lawyer to defend the facility against an environmental claim and assisted in obtaining an easement for a drainage ditch.

The court found these activities were within the normal oversight by a parent of its subsidiaries.⁹⁴ Although there was some direct involvement by the parent in hiring an attorney for the environmental matter, that aid came at the subsidiary's request and related to a problem caused by decisions that the plant-level employees had made. The circumstances were largely the same in the obtaining of the drainage easement, which the court noted was not involved in transporting wastes but only water from the roof. The remaining patchwork of allegations were handled in summary fashion as the court found them all to be common activities for a parent corporation.

This decision demonstrates the real impact of Bestfoods on the scope of direct parent liability under CERCLA. The court's focus was facility-specific and the allegations had to be brought down to the plant level. There were no allegations regarding the parent's control of the subsidiary's boardroom at all. Second, the Bestfoods presumption that dual status employees are working for the subsidiary will defeat the mere allegation of that fact as warranting direct liability. Merely saying that the parent had dual status officers will simply not pass muster under the new Bestfoods test.

The only unusual aspect of the Datron decision is the lack of an explicit point of reference for the "normal oversight" by a parent over a subsidiary. While it seems evident that Datron's allegations were insufficient for operator liability the court did not clarify the standard against which they deficient. Thus, this case affords no real guidance on all-important question of what are reference points for "accepted norms of corporate behavior."

There is some indication that courts are willing to a Bestfoods outside of the CERCLA context. For instance, in Dell'Aquilla, the Third Circuit considered Bestfoods when determining whether the defendant was an operator for purposes of the CAA.⁹⁵ Despite the fact that Bestfoods dressed what it means to be an operator under CERCLA Third Circuit found the discussion to be meaningful because "the purposes of the two statutes is the same, and the [29 ELR 10553] language in question is nearly identical."⁹⁶ Indeed, under the CAA, an "owner or operator" is "any person who owns, leases, operates, controls, or supervises a statutory source."⁹⁷ Whether courts will apply Bestfoods to yet other federal environmental statutes remains to be seen.

Conclusion

Virtually any decision by the Supreme Court under CERCLA presents an important development. Bestfoods does not disappoint in this regard as it has scaled back the criteria for direct liability of parent corporations under CERCLA from the overly broad test endorsed by several courts and strongly advocated by the U.S. Department of Justice. Thus, it remains to be seen how significant the curtailing of the concept of direct liability under Bestfoods proves to be. Nevertheless, the fact-intensive test that the Supreme Court has left for the lower courts to apply incorporates some elusive concepts such as the "accepted norms of corporate behavior." Historically, courts looking to validate expansive interpretations of liability under CERCLA have relied on just such amorphous concepts to reach results that are at odds with accepted principles of corporate liability and common law. Indeed, the questionable outcome of the Township of Brighton decision demonstrates that Bestfoods has not sapped the vitality of the broad remedial purpose construction that has driven the expansion of CERCLA liability for the last 18 years.

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

2. 759 F.2d 1032, 15 ELR 20358 (2d Cir. 1985).

3. Id. at 1052, 15 ELR at 20368.

4. Id.

5. Id.

6. 118 S. Ct. 1876, 28 ELR 21225 (1998).

7. 910 F.2d 24, 20 ELR 21462 (1st Cir. 1990).

8. Id. at 26, 20 ELR at 21463 (citing New York v. Shore Realty Corp., 759 F.2d 1032, 1044, 15 ELR 20358, 20363 (2d Cir. 1985)).

9. Id.

10. Id. at 27, 20 ELR at 21463.

11. Id.

12. Id.

13. See, e.g., id. (specifically not "deciding the exact standard necessary for a parent to be an operator").

14. Id.

15. Id. at 26, 20 ELR at 21463 (omission in original).

16. John S. Boyd Co. v. Boston Gas Co., 992 F.2d 401, 23 ELR 21122 (1st Cir. 1993).

17. Schiavone v. Pearce, 79 F.3d 248, 26 ELR 20824 (2d Cir. 1996).

18. United States v. USX Corp., 68 F.3d 811, 26 ELR 20030 (3d Cir. 1995); FMC Corp. v. Department of Commerce, 29 F.3d 833, 24 ELR 21097 (3d Cir. 1994); Lansford-Coaldale Joint Water Auth. v. Tonolli Corp., 4 F.3d 1209, 23 ELR 21534 (3d Cir. 1993).

19. United States v. Carolina Transformer Co., 978 F.2d 832, 23 ELR 20365 (4th Cir. 1992).

20. Sidney S. Arst Co. v. Pipefitters Welfare Educ. Fund, 25 F.3d 417. 24 ELR 20976 (7th Cir. 1994).

21. United States v. TIC Inv. Corp., 68 F.3d 1082, 26 ELR 20208 (8th Cir. 1995).

22. Jacksonville Elec. Auth. v. Bernuth Corp., 996 F.2d 1107, 23 ELR 21442 (11th Cir. 1993).

23. 79 F.3d 248, 26 ELR 20824 (2d Cir. 1996).

24. Id. at 253, 26 ELR at 20827.

25. Id. at 255, 26 ELR at 20828.

26. 893 F.2d 80, 20 ELR 20382 (5th Cir. 1990).

27. Id. at 82, 20 ELR at 20383.

28. Id.

29. Id. at 82-83, 20 ELR at 20383.

30. Id. at 83, 20 ELR at 20383 (citing Edward Hines Lumber Co. v. Vulcan Materials Co., 861 F.2d 155, 19 ELR 20187 (7th Cir. 1988)).

31. See, e.g., Atchison, Topeka & Santa Fe Ry. Co. v. Brown & Bryant, Inc., 132 F.3d 1295, 28 ELR 20463 (9th Cir. 1997).

32. Joslyn, 893 F.2d at 83, 20 ELR at 20383.

33. Id.

34. 113 F.3d 572, 27 ELR 20949 (6th Cir. 1997).

35. Id. at 579, 27 ELR at 20952.

36. Id.

37. Id. at 580, 27 ELR at 20952 (emphasis added).

38. See United States v. Bestfoods, 118 S. Ct. 1876, 1884-85, 28 ELR 21225, 21227 (1998) (affirming general applicability of limited liability in the CERCLA context).

39. Id. at 1887, 28 ELR at 21228.

40. Id. at 1884, 28 ELR at 21227 (citations omitted).

41. Id. at 1885, 28 ELR at 21227.

42. Id.

43. Id.

44. Id.

45. Id.

46. Id. at 1886, 28 ELR at 21228 (alteration in original).

47. Id.

48. 42 U.S.C. § 9601(20)(A)(ii), ELR STAT. CERCLA § 101(20)(A)(ii). See also Bestfoods, 118 S. Ct. at 1887, 28 ELR at 21228.

49. Bestfoods, 118 S. Ct. at 1887, 28 ELR at 21228.

50. Id.

51. Id.

52. "The District Court wrongly assumed that the actions of the joint officers and directors are necessarily attributable to [the parent corporation]." Id. at 1888, 28 ELR at 21228.

53. Id.

54. Id. at 1889, 28 ELR at 21229. The Supreme Court foreclosed any CERCLA provision as a reference point for norms of corporate behavior apparently to insure that the lender-liability legislation, recently enacted by Congress, would not be considered. However, the Court did not explicitly limit these norms to just state-law principles.

55. Id.

56. Id.

57. Id. at 1887, 28 ELR at 21228.

58. Id. at 1888, 28 ELR at 21229.

59. Id.

60. Id. at 1888 n.13, 28 ELR at 21229 n.13.

61. United States v. Kayser-Roth Corp., 910 F.2d 24, 27, 20 ELR 21462, 21463 (1st Cir. 1990).

62. New York v. Shore Realty Corp., 759 F.2d 1032, 15 ELR 20358 (2d Cir. 1985).

63. Id. at 1052, 15 ELR at 20368.

64. Bestfoods, 118 S. Ct. at 1886 n.9. 28 ELR at 21227 n.9.

65. Id.

66. O'Melveny & Myers v. Federal Deposit Ins. Corp., 512 U.S. 79 (1994).