Appendix — United States v. Bestfoods

Supreme Court, U.S.

FILED

97.45 4 SEP 1 0 1997

2

No.

In the Supreme Court of the United States

OCTOBER TERM, 1996

UNITED STATES OF AMERICA, PETITIONER

U.

CPC INTERNATIONAL, INC., ET AL.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

APPENDIX TO

PETITION FOR A WRIT OF CERTIORARI

SETH P. WAXMAN

Acting Solicitor General

Lois J. SCHIFFER

Assistant Attorney General

LAWRENCE G. WALLACE

Deputy Solicitor General

JEFFREY P. MINEAR

Assistant to the Solicitor

General

MARTIN W. MATZEN

MICHAEL J. MC NULTY

EVELYN S. YING

Attorneys

Department of Justice

Washington, D.C. 20530-0001

(202) 514-2217

60

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TABLE OF CONTENTS

Appendix A (court of appeals’ opinion dated

May 13, 1997)

Appendix B (district court’s opinion dated

Aug. 27, 1991)

Appendix C (court of appeals’ opinion dated

July 14, 1995)

Appendix D (court of appeals’ order dated

Oct. 19, 1995)

Og te

APPENDIX A

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

Nos. 92-2288, 92-2326

UNITED STATES OF AMERICA, PLAINTIFF-APPELLEE

v.

CORDOVA CHEMICAL COMPANY OF MICHIGAN;

CORDOVA CHEMICAL COMPANY; AEROJET-GENERAL

CORPORATION (92-2288), DEFENDANTS-APPELLANTS

CPC INTERNATIONAL INC. (92-2326),

DEFENDANT-APPELLANT

MICHIGAN DEPARTMENT OF NATURAL RESOURCES,

DEFENDANT-APPELLEE

[Decided: May 13, 1997

OPINION

Before: MARTIN, Chief Judge; MERRITT, KENNEDY,

MILBURN, NELSON, RYAN, Boas, Norris, SILER,

BATCHELDER, DAUGHTREY, and Moore, Circuit

Judges.

Norris, J., delivered the opinion of the court, in

which KENNEDY, MILBURN, NELSON, Boaes, SILER,

and BATCHELDER, JJ., joined and in which MERRITT, J.,

joined as to Part III.C.3. Merritt, J. (pp. (24a-32a)),

delivered a separate opinion concurring in part and

dissenting in part. RYAN, J. (pp. [82a-54a)), delivered a

separate dissenting opinion in which MARTIN, C.J.,

DAUGHTREY, and Moore, JJ., joined and in which

MERRITT, J., joined as to Part I.

(la)

2a

ALAN E. Norris, Circuit Judge.

This appeal highlights the difficulty that often

attends the apportionment of liability for the clean-up

costs of sites that have been subjected to long-

term environmental degradation. In the present case,

brought pursuant to the Comprehensive Environ-

mental Response, Compensation, and Liability Act

(“CERCLA”), 42 U.S.C. $§ 9601-9675 (1988 & Supp. V

1993), the environmental damage occurred over a

period of decades and during the watch of several

owners.

A central concern on appeal is the criteria required

under CERCLA before a parent corporation can be

held financially liable for pollution that occurred on a

site owned by a subsidiary. Because we adopt a

stricter standard than did the district court for

imposition of such liability, we reverse certain of its

determinations and remand for further proceedings.

I. PROCEEDINGS BELOW

In May and June 1991, the district court conducted

a fifteen-day bench trial to determine which parties

were responsible for clean-up costs related to pollu-

tion of a site located in Dalton Township, Michigan.

In addition to the live testimony of twenty-nine wit-

nesses, the court received more than 2,300 exhibits

and reviewed dozens of deposition transcripts. Given

the complexity of the proceedings below, the

factual findings contained in the district court’s

published opinion are extensive. CPC Int'l, Inc. v.

Aerojet-General Corp., 777 F.Supp. 549, 555-70 (W. D.

3a

Mich. 1991). We summarize them here by way of

background.

Beginning in 1957, a series of owners used the

Dalton Township site to manufacture chemicals. The

initial owner, the Ott Chemical Company (“Ott I”),

controlled the site from 1957 until 1965. During

this time, the groundwater flowing underneath the

site became contaminated, a development confirmed

by tests conducted in 1964.

Pollution of soil, surface water, and groundwater

continued after the Ott Chemical Company (“Ott II”),

a wholly owned subsidiary of CPC International, Inc.

(“CPC”), took over ownership of the site in 1965. The

use of unlined lagoons as a means of chemical waste

disposal was the principal cause of the contamination.

According to the district court, this practice spanned

the period from 1959 until at least 1968.

See page from these lagoons did not, however, con-

stitute the sole source of pollution that occurred

during the ownership of Ott I and Ott II. Further

contamination emanated from chemical spills from

train cars, from chemical drums, from overflows of

chemicals contained in a cement-lined equalization

basin, and from other sources. Groundwater pollution

did not go completely untreated during this time;

from 1965 until 1974, purge wells were operated

intermittently in an attempt to alleviate the problem.

In 1972, the Story Chemical Company (“Story”)

acquired the site from Ott II and continued to operate

it until 1977, when bankruptcy ended operations. At

that point, the trustee in bankruptcy assumed title to

the site and attempted to find a buyer.

4a

Active governmental response to the pollution prob-

lems at the site began in 1977, after Story’s bank-

ruptcy, when the Michigan Department of Natural

Resources (“MDNR”) visited the site to assess the

situation. In view of the severity of the environ-

mental problems and the lack of resources to pay for a

cleanup, the MDNR became active in an effort to

attract a purchaser who would participate financially

in clean-up efforts. This search led to the signing

of a document on October 13, 1977, by the Cordova

Chemical Company (“Cordova/California”). a wholly

owned subsidiary of Aerojet-General Corporation

(“Aerojet”), and the MDNR. The district court de-

scribed the agreement and its aftermath:

It addressed the problem of environmental con-

tamination at the property and set forth obliga-

tions with respect to cleanup activities

. . « MDNR agreed to remedy the waste

container and sludge problems, and Cordova/

California agreed to eliminate the phosgene gas

and give MDNR $600,000 to defray the costs of the

agency’s cleanup of the waste containers, sludge

and residential wells.

With respect to Cordova/California’s $600,000

payment and the company’s responsibility or

liability for the contamination at the site it was

acquiring, the [agreement] stated:

5a

Cordova Chemical Company shall not have

any responsibility or liability in connection

with any other corrective actions which the

Department of Natural Resources or any other

governmental agency may hereafter deem

However, the agreement did not provide for a

total cleanup of the site’s severe environmental

problems.

In particular, MDNR and Cordova/ California

did not reach an agreement regarding a remedy

for the groundwater contamination problem.

Instead, the fate of the groundwater problems was

not resolved, with MDNR left to tackle the

problem as part of its overall regulatory

responsibility for the site.

Cordova/ California and MDNR fulfilled

their cleanup obligations under the [agreement].

CPC Int'l v. Aerojet-General, 777 F.Supp. at 564-67.

Having executed this document, Cordova/California

purchased the site the following day from the Story

bankruptcy trustee. Cordova Chemical Company of

Michigan (“Cordova/Michigan”), a wholly owned sub-

sidiary of Cordova/California, acquired ownership of

the site in 1978. Cordova/Michigan retains owner-

ship, although manufacturing operations at the site

ceased in 1986.

6a

The district court made the following observations

regarding conditions at the site during the ownership

of the Cordova companies:

During their period of operations, [the com-

panies} neither buried waste nor dumped it onto

the ground. No chemical waste was disposed into

the unlined lagoons that had been used during the

Ott I and Ott II eras. Before beginning chemical

manufacturing, Cordova/Michigan repaired the

equalization basin and chemical sewer system.

When operating, Cordova/Michigan discharged

chemical waste through o/f-site disposal or to a

sewer that flowed to the Muskegon County

treatment facility.

Id. at 556. In short, although the preexisting ground-

water contamination problem was not remedied dur-

ing their ownership, the trial court concluded that

neither Cordova/California nor Cordova/Michigan

exacerbated the condition.

The federal Environmental Protection Agency

became involved in cleanup of the site in 1981. Since

then, the EPA has formulated a long-term response to

the environmental damage that has occurred at the

site; the cost of this effort will run into the millions of

dollars.

The district court noted that two hazardous chemicals—

benzene and 1,2 dichloroethane—were found at the site and

used during the Cordova period of ownership. Id. at 556, 579

n. 11. Although Cordova/Michigan, in an April 5, 1984 letter to

the federal EPA, acknowledges generating small quantities of

these materials for disposal, we find nothing in the record to

support a finding that any additional release of hazardous sub-

stances occurred at the site during the Cordova period.

7a

II. CERCLA LIABILITY

Section 107(a) of CERCLA lists the parties who are

potentially liable for the clean-up costs of a polluted

site.“ 42 U.S.C. § 9607(a). For the purposes of this

action, those parties include the present owner and

operator of a facility from which there is a release of

a hazardous substance, any prior owner or operator of

a facility whose involvement coincided with disposal

of a hazardous substance, and any person who

arranged for the disposal or transport of hazardous

waste from a facility. 42 U.S.C. § 9607(a)(1)-(3). The

parties stipulated that the site is a “facility” as de-

fined by CERCLA, that it contains “hazardous sub-

® 42 U.S.C. § 9607(a) states, in part:

Notwithstanding any other provision or rule of law, and

subject only to the defenses set forth in subsection (b) of

this section—

(J) the owner and operator of a . . facility,

(2) any person who at the time of disposal of any

hazardous substance owned or operated any facility at

which such hazardous substances were disposed of,

(3) any person who by contract, agreement, or

otherwise arranged for disposal or treatment, or

arranged with a transporter for transport for disposal

or treatment, of hazardous substances

(4) any person who accepts or accepted any hazard-

ous substances for transport to disposal or treatment

facilities, . from which there is a release, or a

threatened release which causes the incurrence of

Te costs, of a hazardous substance, shall be liable

or—

(A) all costs of removal or remedial action.

8a

stances,” that “releases” of hazardous substances

have occurred and threaten to continue, and that

CPC, the MDNR, Aerojet, Cordova/California, and

Cordova/Michigan are “persons” as defined by the

statute. Jd. at 556.

Because courts that have been asked to render

liability decisions in CERCLA actions frequently

invoke the remedial purpose of the act, e.g., United

States v. Kayser-Roth Corp., Inc., 910 F.2d 24, 26 (Ist

Cir. 1990), cert. denied, 498 U.S. 1084, 111 S. Ct. 957,

112 L.Ed.2d 1045 (1991), we will review that subject

before considering the liability of those parties now

before us.

Congress enacted CERCLA as a “remedial statute

designed to protect and preserve public health and the

environment.” Kayser-Roth, 910 F.2d at 26; accord

Schiavone v. Pearce, 79 F.3d 248, 253-54 (2d Cir.

1996); Lansford-Coaldale Joint Water Auth. v.

Tonolli Corp., 4 F.3d 1209, 1221 (8d Cir. 1993); Anspec

Co., Inc. v. Johnson Controls, Inc., 922 F.2d 1240,

1241-42 (6th Cir. 1991) (reviewing this circuit’s ap-

proach to CERCLA liability). Accordingly, courts

generally will not interpret § 9607(a) in a way that

apparently frustrates the statute's goals in the

absence of specific congressional intent to the

contrary. Anspec, 922 F.2d at 1247 (citing New York

v. Shore Realty Corp., 759 F.2d 1032, 1045 (2d Cir.

1985)).

It must be recognized, however, that it is difficult

to divine the specific, as opposed to the general, goals

of Congress with respect to CERCLA liability since

the statute represents an eleventh hour compromise.

See generally Shore Realty Corp., 759 F. 2d at 1039-42

(discussing legislative history). As the district court

9a

recognized, “some of CERCLA’s provisions are

vague and its legislative history sparse.“ CPC Int'l

v. Aerojet-General, 777 F.Supp. at 571; accord

Anspec, 922 F.2d at 1247 (characterizing the legisla-

tive history as “scant”); Lansford-Coaldale Joint

Water Auth., 4 F.3d at 1221 (Clongressional intent

may be particularly difficult to discern with precision

in CERCLA, a statute notorious for its lack of clarity

and poor draftsmanship.”).

Courts would not be warranted, therefore, in point-

ing to the “remedial legislation” litany, see generally

Norman J. Singer, 3 Southerland Statutory Con-

struction § 60.01 (5th ed.1992) (the rule that remedial

statutes should be liberally construed is “firmly

established”); Dennis v. Higgins, 498 U.S. 439, 443,

111 S.Ct. 865, 868, 112 L.Ed.2d 969 (1991) (noting

that 42 U.S.C. § 1983, as a remedial statute, should be

liberally construed), as a reason for filling in the

blanks left by this sketchy legislative history to

impose liability under nearly every conceivable

scenario. Thus, while the liability provisions con-

cerning facility operators should be construed so

that financial responsibility for clean-up operations

falls upon those entities that contributed to the

environmental problem, the widest net possible ought

not be cast in order to snare those who are either

innocently or tangentially tied to the facility at issue.

In fact, this court has pointed out that, “Congress

intended that those responsible for disposal of

chemical poisons bear the cost and responsibility for

remedying the harmful conditions they created.”

Anspec, 922 F.2d at 1247 (emphasis added).

In turning to the specific facts now before us, we

adhere to the tenet that liability attaches only to

10a

those parties who are culpable in the sense that they,

by some realistic measure, helped to create the

harmful conditions.

In its effort to discern the sweep of CERCLA

liability, the district court concluded that:

CERCLA broadens the potential for liability of

parent corporations without discarding entirely

the traditional concept of limited liability that is

central to corporate law

Accordingly, it seems that CERCLA’s “owned

or operated” language forges a new, middle

ground. It is a ground that at once accommodates

the general principle of limited liability and the

broader principle of liability attaching for opera-

tive activity. To permit these principles to

coexist under CERCLA, the liability of a parent

corporation cannot attach simply because a parent

has had involvement with its subsidiary in a

manner merely consistent with their investment

relationship. Rather, a parent must have actually

operated the business of its subsidiary.

In this court’s view, then, a parent corporation

is directly liable under section 107(a)(2) as an

operator only when it has exerted power or

influence over its subsidiary by actively partici-

pating in and exercising control over the sub-

sidiary’s business during a period of disposal of

hazardous waste. A parent’s actual participation

in and control over a subsidiary’s functions

and decision-making creates “operator” liability

under CERCLA; a parent’s mere oversight of a

subsidiary’s business in a manner appropriate and

consistent with the investment relationship

lla

between a parent and its wholly owned subsidiary

does not.

CPC Intl v. Aerojet-General, 777 F.Supp. at 573

(emphasis added).

On the basis of this “new, middle ground,” the

district court found both CPC and Aerojet liable as

operators for the disposal of hazardous substances

oo occurred while their subsidiaries operated the

site.

III. DISCUSSION

A. CPC

The district court reasoned that liability poten-

tially could attach to CPC as a parent corporation

in two ways: direct liability under CERCLA’s

“operator” language or by common law veil-piercing.

Clearly, since the facility was titled in the sub-

sidiary’s name, CPC could be found liable as an owner

only through veil piercing. The court determined

that CPC was liable as an operator of the site for

environmental damage that occurred during the

ownership of Ott II; this liability was grounded in

section 107(a)(2) of CERCLA, which renders “any

person [liable] who at the time of disposal of any

hazardous substance owned or operated any facility at

which such hazardous substances were disposed of.”

42 U.S.C. § 9607(a)(2). To reach this conclusion, the

court necessarily had to hold CPC, as a parent cor-

poration, accountable for the environmental conduct

of its wholly owned subsidiary corporation, Ott II.

And, because the court held CPC directly liable as

an operator, it did not reach the question of whether

12a

CPC was liable as an owner pursuant to the tradi-

tional common law doctrine of veil-piercing.

{t is not at all clear from the district court’s

opinion whether the basis for finding parental liabil-

ity as an operator under its “new, middle ground” is

the actual operation of the subsidiary’s business or,

on the other hand, the exertion of power or influence

through active participation in the subsidiary’s

business. Although they are used interchangeably in

the district court’s opinion, the two concepts are not

interchangeable. If anything, the facts recited by the

district court support liability under the latter

standard but not under the former. This confusion

underscores the inevitable difficulty that arises when

courts attempt to erect new concepts of corporate

liability within the framework of CERCLA in the

absence of direction from Congress. We are not per-

suaded that, in enacting CERCLA, Congress con-

templated the abandonment of traditional corcepts of

limited liability associated with the corporate form in

favor of an undefined “new, middle ground.”

Actually, another scenario occurs to us under

which one could argue that a parent corporation

should be deemed to have directly operated a facility

owned by its subsidiary. At least conceivably, a

parent might independently operate the facility in the

stead of its subsidiary; or, as a sort of joint venturer,

actually operate the facility alongside its subsidiary.

However, this is not a theory of operator liability

relied upon by the district court, or alluded to in its

opinion.

13a

CERCLA defines the “owner or operator” of an

onshore facility as “any person owning or operating

such facility.“ 42 U.S.C. § 9601(20)(A)(ii). When the

facility has been conveyed to a unit of state or local

government, the definition differs. It then includes

“any person who owned, operated or otherwise con-

trolled activities at such facility immediately [before

the transfer to the governmental authority].” 42

U.S.C. § 9601(20)(A)(iii). It thus appears that the

drafters of the statute distinguished an operator from

a person who “otherwise controlled” a facility. When

the owner of a facility contracts out the daily running

of the operation to a third party, that party pre-

sumably attains operator status (and its attendant

liability). However, when a parent corporation ac-

tively participates in the affairs of its subsidiary

consistent wich the restrictions imposed by tradi-

tional corporations law, nothing in the definition just

cited or in the rest of the statute indicates that the

parent has assumed the role of operator.

Despite the definition of “owner or operator,”

several circuits, like the district court below, have

determined that parent corporations can attain

operator status by exerting significant control over

the operations of their subsidiaries. See, e.g.,

Kayser-Roth, 910 F.2d at 26-27; Schiavone, 79 F.3d at

255; Lansford-Coaldale Joint Water Auth., 4 F.3d at

1221; Nurad, Inc. v. William E. Hooper & Sons Co.,

966 F. 2d 837, 842 (4th Cir.), cert. denied, 506 U.S. 940,

113 S.Ct. 377, 121 L.Ed.2d 288 (1992); CPC Intl v.

Aerojet-General, 777 F.Supp. at 572-73.

While some may wish to extend the reach of

CERCLA to maximize the impact of its remedies,

nothing in the statute or its legislative history

14a

warrants the invocation by courts of vague, expansive

concepts, such as the district court’s “new, middle

ground,” which threaten the efficacy of time-honored

limited liability protections afforded by the corporate

form. As the Court of Appeals for the Fifth Circuit

has noted in this context, if Congress wanted to

extend liability to parent corporations it could have

done so, and it remains free to do so.” Joslyn Mfg. Co.

v. T. L. James & Co., Inc., 893 F.2d 80, 83 (5th Cir.

1990).

The district court’s approach presents a number of

problems. First, it replaces the relatively bright line

provided by the traditional doctrine of piercing the

corporate veil with a nebulous “control” test. When,

precisely, is a parent acting in a manner consistent

with its investment relationship as opposed to a

manner that triggers operator liability? The indicia

enumerated by the district court, such as participa-

tion in the subsidiary’s board of directors and in-

volvement in specific policy decisions, offer little

guidance. Certainly, these activities are not grounds

traditionally relied upon as warranting the disregard

of separate corporate existences.

Second, the threat of unlimited liability will likely

deter private sector participation in the cleanup of

existing sites. The case before us illustrates this

point. There is no dispute that the MDNR actively

sought a private sector partner to take over and

assist in the remediation of the site. Aerojet indi-

cated an interest on the condition that it could cap its

potential liability for environmental cleanup, which it

sought to accomplish through the negotiation of

the agreement with the MDNR and the use of sub-

l5a

sidiaries.“ To scuttle such sensible and legitimate

precautions in favor of an unpredictable “control” test

would actually contravene the public interest by

discouraging businesses from being involved in such

projects.

Accordingly, we reject the district court’s “new,

middle ground” as the basis for fixing operator

liability and hold that where a parent corporation is

sought to be held liable as an operator pursuant to 42

U.S.C. § 9607(a)(2) based upon the extent of its control

of its subsidiary which owns the facility, the parent

will be liable only when the requirements necessary

to pierce the corporate veil are met. In other words,

under the circumstances of this case, whether the

parent will be liable as an operator depends upon

whether the degree to which it controls its subsidiary

and the extent and manner of its involvement with the

facility, amount to the abuse of the corporate form

that will warrant piercing the corporate veil and

disregarding the separate corporate entities of the

parent and subsidiary.

Whether the circumstances in this case warrant a

piercing of the corporate veil will be determined

by state law. See Anspec, 922 F. 2d at 1248. Michigan

appears to follow the general rule that requires

demonstration of patent abuse of the corporate form

in order to pierce the corporate veil. There must be

such a unity of interest and ownership that the

separate personalities of the corporation and its

owner cease to exist, and the circumstances must

Although it does not affect our resolution of the liability

issue, we note that these negotiations occurred before the

enactment of CERCLA.

l6a

be such that adherence to the fiction of separate

corporate existence would sanction a fraud or

promote injustice. 1 William M. Fletcher, Fletcher

Cyclopedia of the Law of Private Corporations § 41.30

(perm. ed. rev. vol. 1990); Stephen H. Schulman et al.,

Michigan Corporation Law & Practice § 3.9%c) (1991

Supp.); Seasword v. Hilti, Inc., 449 Mich. 542, 548, 537

N.W.2d 221, 224 (1995) (corporate veil may be pierced

where the subsidiary is a “mere instrumentality” of

the parent and the separate corporate existence is

used to subvert justice or cause result contrary to

clearly overriding public policy); see also Boden-

hamer Bldg. Corp. v. Architectural Research Corp.,

873 F.2d 109, 111-12 (6th Cir. 1989) (surveying

Michigan corporate veil-piercing decisions). Organi-

zation of a corporation for the avowed purpose of

avoiding personal responsibility does not in itself

constitute fraud or reprehensible conduct justifying a

disregard of the corporate form. Gledhill v. Fisher &

Co., 272 Mich. 353, 359, 262 N.W. 371, 373 (Mich.

1935).*

The district court relied upon a number of factors

in determining that CPC “actively participated in and

exerted significant control over Ott II's business

and decision-making” and was therefore directly

liable under 42 U.S.C. § 9607(a)(2) as an operator:

4 We do not conclude, as suggested by the dissent, It hat

piercing the corporate veil under Michigan law requires show-

ing that the corporate form was used to ‘subvert justice.

Rather, it requires that the subsidiary be a “mere instrumental-

ity” of the parent which is used either to subvert justice or

to circumvent overriding public policy. In our view, none of

these factors fairly characterize the relationship between CPC

and Ott II.

17a

100% ownership of Ott II; participation on Ott II's

board of directors; a cross-pollination of officers

who were involved in decision-making and daily opera-

tions; active participation by CPC officials in en-

vironmental matters; and financial control of Ott II

through approval of budgets and capital expenditures.

CPC Int'l v. Aerojet-General, 777 F.Supp. at 575.

While these factors reveal a parent that took an active

interest in the affairs of its subsidiary, they do not

indicate such a degree of control that the separate

personalities of the two corporations ceased to exist

and that CPC utilized the corporate form to per-

petrate the kind of fraud or other culpable conduct

required before a court can pierce the veil. While

CERCLA contemplates allocating financial respon-

sibility to those corporations that cause environ-

mental degradation, it does not authorize assignment

of liability to parent corporations that abide by the

proper use of the corporate form.

In summary, then, it seems to us that under

the “owned or operated” language of 42 U.S.C.

§ 9607(a)(2), there are three scenarios under which a

parent corporation could be held liable for the disposal

of hazardous substances at a facility whose owner of

record was the parent’s subsidiary corporation.

First, as an owner, by piercing the corporate veil.

Second, as an operator, where the parent directly

operates the facility itself, either independently of its

subsidiary, or as an actual co-operator alongside the

subsidiary.’ Although a parent conceivably could be

® Thus, the dissent’s characterization of our opinion as

holding “that a parent cannot, as a matter of law, be held

directly liabie under 42 U.S.C. § 9607(a)(2) as an ‘operator’ of a

facility owned by its subsidiary corporation” is mistaken.

18a

held liable under this theory, it is not the one relied

upon by the district court, and, in any event, is not

supported by the facts in the record before us.

Finally, operator liability may be based upon the

conduct of the parent in the course of its affiliation

with its subsidiary, including the degree of control

exerted by the parent over its subsidiary. This is the

scenario utilized by the district court, relying upon

its “new, middle ground” standard to define the cir-

cumstances under which the parent will be liable. As

pointed out above, we conclude that this “new, middle

ground” is unworkable, and that traditional veil pierc-

ing is the only standard under which this scenario for

liability can be assessed reliably.

Accordingly, the district court’s finding of operator

liability with respect to CPC must be reversed.

B. MDNR Liability

The district court rejected liability claims that

were advanced against the MDNR on two fronts: as

an operator and as an “arranger.” Only the district

court’s decision regarding arranger liability is

appealed.

CERCLA imposes liability on

any person who by contract, agreement, or

otherwise arranged for disposal or treatment, or

arranged with a transporter for transport for

disposal or treatment of hazardous substances

owned or possessed by such person, by any other

party or entity, at any facility . owned or operated

by another party or entity and containing such

hazardous subs tances.

19a

42 U.S.C. § 9607(a)(3).

It is contended that the MDNR incurred arranger

liability when it negotiated with Cordova/California

for the acquisition of the site and agreed with

Cordova/California on a plan to clean up the ground-

water contamination.

We agree with the district court’s conclusion that

the MDNR escapes liability because its actions

were taken in response to the Act’s environmental

emergency provision:

No state or local government shall be liable

under this subchapter for costs or damages as

a result of actions taken in response to an

emergency created by the release or threatened

release of a hazardous substance generated by or

from a facility owned by another person. This

paragraph shall not preclude liability for costs

or damages as a result of gross negligence or

intentional misconduct by the State or local

government. For the purpose of the preceding

sentence, reckless, willful, or wanton misconduct

shall constitute gross negligence.

42 U.S.C. § 9607(d)(2). Our reading of the record

indicates that the MDNR acted in good faith when

attempting to address the groundwater contamination

of the site. That its efforts proved to be less than

entirely successful is unfortunate, but does not

subject the agency to liability.“

We note that, since this case was briefed and argued, the

Supreme Court decided Seminole Tribe of Fla. v. Florida, —

U.S. ——, 116 S.Ct. 1114, 134 L.Ed.2d 252 (1996), which poten-

tially provides the MDNR with an Eleventh Amendment de-

fense. Because this issue has not been raised by the parties

20a

C. Liability of Aerojet and its Subsidiaries

I. Owner Liability

The district court held both Aerojet and Cordova/

Michigan liable as present owners of the site under

CERCLA’S section 107(a)(1) which assigns liability

to “the owner and operator of a. .. facility.” 42 U.S.C.

§ 9607(a)(1). Cordova/Michigan does not challenge

this decision on appeal and we therefore express no

opinion with respect to its liability.

As for the parent corporation, Aerojet could be

found liable as an owner only through veil piercing,

since Cordova/Michigan was the owner of record.

The district court appropriately looked to Michigan

law to determine whether to pierce the corporate veil

and, in its view, the evidence supported a conclusion

that Aerojet had “totally dominated Cordova/

Michigan, creating a complete identity of interests

between the parent and its wholly owned subsidiary.”

CPC Intl v. Aerojet-General, 777 F.Supp. at 578.

Accordingly, the court determined that it was appro-

priate to pierce the corporate veil. Among the

grounds cited for its decision, the court highlighted

the total ownership by the parent, Aerojet’s active

participation in the acquisition of the site, the timing

of the incorporation of the subsidiaries, cross- pollina-

tion of corporate officers, financial control, and the

integration of the businesses. Id. at 577.

through supplemental briefs and the resolution of the case with

respect to the MDNR is not affected, we choose not to consider

the impact of Seminole Tribe at this point in the proceedings.

21a

These facts, however, fall somewhat short of

what is required to pierce the corporate veil under

Michigan law. They do not establish that Cordova/

Michigan was a mere instrumentality of Aerojet in

the sense that the separate corporate personalities

of the parent and subsidiary ceased to exist. More

tellingly, they do not reveal activity by Aerojet that

approaches the level of culpable conduct contemplated

by Michigan law as a predicate to disregarding the

separate corporate form. Bodenhamer Bldg. Corp.,

873 F.2d at 112. While Aerojet obviously sought to

limit its liability for existing environmental problems

through good faith negotiation with the MDNR and

prudent use of the corporate form, there is nothing to

suggest that the company acted to subvert justice

or with fraudulent intent or otherwise sought to

distort the legitimate purposes of the corporate form.

Although Aerojet took an active interest in its sub-

sidiaries, the record does not support a conclusion

that Cordova/Michigan was not a viable corporate

entity. Accordingly, the district court erred when it

pierced the corporate veil to assign liability to

Aerojet as an owner.

The district court also noted that Cordova/

California actually owned the site from October 1977

until November 1978. Although the company began

clean-up operations as required by its agreement

with the MDNR, the district court found that

additional releases of hazardous substances occurred

during this period. CPC Int'l v. Aerojet-General, 777

F. Supp. at 579. It thus imposed liability on Cordova/

California as a former owner pursuant to section

107(a)(2).

22a

This conclusion, however, conflicts with the

district court’s summary of activity at the site during

the ownership of the Cordova companies. Id. at 556.

On remand, therefore, we ask the district court to

indicate with greater specificity precisely which por-

tions of the record it relies upon to support a finding

that additional releases of hazardous substances

occurred during Cordova/California’s brief owner-

ship. Absent such evidence, liability cannot attach to

Cordova/California as a former owner of the site.

2. Operator Liability

Finally, we turn to the district court’s alternative

imposition of liability on Aerojet pursuant to section

107(a)(2), precisely the same basis for liability that we

have already discussed, and rejected, with respect to

CPC. Since we decline to adopt the “new, middle

ground” control test utilized by the district court, no

liability attaches unless the corporate veil can be

pierced. And because the record does not support veil

piercing, Aerojet cannot be held liable as an operator

pursuant to section 107(a)(2).

3. Defenses

Upon remand, the district court should also revisit

its treatment of the defense raised by Aerojet,

Cordova/California, and Cordova/Michigan under sec-

tion 107(b)(3.. The pertinent part of the statute

follows:

[A] person otherwise liable who can establish by a

preponderance of the evidence that the release or

threat of release of a hazardous substance and the

damages resulting therefrom were caused solely

in :

(3) an act or omission of a third party other

than . . one whose act or omission occurs in

connection with a contractual relationship,

existing directly or indirectly, with the defendant

... if the defendant establishes by a preponderance

of the evidence that (a) he exercised due care with

respect to the hazardous substance concerned.

and (b) he took precautions against foreseeable

acts or omissions of any such third party and the

consequences that could foreseeably result from

such acts or omissions. . . .

42 U.S.C. § 9607(b) (emphasis added).

In parsing the exceptions to the defense, the

district court noted that under 42 U.S.C. § 9601(35)

(A), the term “contractual relationship” includes

deeds transferring title. Thus, the district court

concluded that a defense would be unavailable to a

defendant who had a direct or indirect contractual

relationship with the parties responsible for contami-

nating the site. CPC Int'l v. Aerojet-General, 777

F.Supp. at 581. Under this view, the defense could not

be invoked by any defendant who was a party to a deed

with a polluter. The district court, however, ignored

the requirement that, in order to render the defense

inapplicable, the hazardous substance release must

have resulted from the act of a third party “in

connection with” the contractual relationship with

the defendant. The “in connection with” language of

the defense appears to have been designed to preclude

24a

a person from escaping liability by contracting for a

third party to do his dirty work for him.

As we pointed out above, from what we glean from

the district court’s recitation of facts, the release of

hazardous substances appears to have been caused

solely by the predecessors of these three defendants.

IV. CONCLUSION

For the foregoing reasons, the district court is

reversed in part and affirmed in part and this cause

is remanded to the district court for further pro-

ceedings consistent with this opinion.

MERRITT, Circuit Judge, concurring in part and

dissenting in part.

I concur in part I of Judge Ryan’s opinion, which

would hold CPC International directly liable as

an operator. I also concur in part III.C.3. of Judge

Norris’ opinion for the Court and support remanding

the case for further findings regarding the Aerojet

defendants’ assertion of the “third-party” defense,

CERCLA S 107(b)(3), 42 U.S.C. § 9607(b)(3), and for

further findings regarding whether or not disposal of

hazardous substances occurred while the Aerojet

defendants owned the site. Unlike Judges Ryan and

Norris, however, I believe that federal common law

governs the question of whether Cordova/California

and Aerojet are liable as current owners pursuant

te CERCLA S 107(a)(1), 42 U.S.C. § 9607(a)(1), rather

than Michigan’s doctrine of piercing the corporate

veil. Since the district court improperly analyzed

this question using Michigan state law, I would

remand the case for further findings.

25a

I. State Law v. Federal Common Law

Several of the parties argue that Cordova/

Michigan, the nominal owner of the site, is an alter

ego of Cordova/California and Aerojet and that

Cordova/California and Aerojet should thus be held

liable as owners under the doctrine of piercing the

corporate veil. Resolution of this issue first requires

deciding whether the question is governed by state

law or federal common law.

It is well-established that actions arising under

nationwide federal programs are governed by federal

law. United States v. Kimbell Foods, Inc., 440 U.S.

715, 726, 99 S.Ct. 1448, 1457, 59 L.Ed.2d 711 (1979). But

federal law can incorporate applicable state law doc-

trines in appropriate circumstances. Id. at 727-28,

99 S. Ct. at 1457-59. In Kimbell Foods, the Supreme

Court enumerated the factors a court must consider

in deciding whether to apply state law or federal

common law. “[FJederal programs that ‘by their

nature are and must be uniform in character through;

out the Nation’ necessitate formulation of controlling

federal rules,” id. at 728, 99 S.Ct. at 1458 (quoting

United States v. Yazell, 382 U.S. 341, 354, 86 S. Ct.

500, 507, 15 L.Ed.2d 404 (1966)), but courts must also

consider “whether application of state law would

frustrate specific objectives of the federal programs”

and “the extent to which application of a federal rule

would disrupt commercial relationships predicated on

state law.” Id.

Under the Kimbell Foods test, federal common

law standards for piercing the corporate veil should

be applied in CERCLA actions against parent cor-

26a

porations. All three of the Kimbell Foods factors

support using a uniform federal standard.

In attempting to eliminate the dangers of hazard-

ous wastes, CERCLA presents a national solution

to a nationwide problem. One can hardly imagine

a federal program more demanding of national

uniformity than environmental protection. Con-

gress did not intend that the ability of the

executive to fund the clean up of hazardous waste

sites should depend on the attitudes of the several

states toward parent-subsidiary liability in

general, or CERCLA in particular. The need for a

uniform federal rule is especially great for ques-

tions of piereing the corporate veil, since liability

under the statute must not depend on the partieu-

lar state in which a defendant happens to reside.

In re Acushnet River & New Bedford Harbor

Proceedings re Alleged PCB Pollution, 675 F.Supp.

22, 31 (D. Mass. 1987).

Congress intended for CERCLA to cast a wide net

of responsibility for the costs of environmental

cleanup. Uniform national standards of liability are

necessary to effectuate this goal. Following state law

in this area would allow corrore‘ions to easily evade

their environmental respons ilities under CERCLA

by incorporating subsidiaries in states with stringent

standards for piercing the corporate veil. See 126

Cong. Rec. H11787 (daily ed. Dec. 3, 1980) (statement

of Rep. Florio, CERCLA House sponsor) (Atlo insure

the development of a uniform rule of law, and to dis-

courage business dealings in hazardous substances

from locating primarily in Stafes with more lenient

laws, the bill will encourage the further development

of a Federal common law in this area”). In addition,

27a

states’ interests in regulating corporations are

strongest with respect to internal affairs of the cor-

poration, and are less compelling with respect to

external affairs such as shareholder liability to out-

side parties. See Henry Hansmann & Reinier

Kraakman, A Procedural Focus on Unlimited

Shareholder Liability, 106 Harv. L.Rev. 446, 450-53

(1992) (arguing that choice of law concerns do not bar

unlimited shareholder liability in tort actions); Note,

Piercing the Corporate Veil: The Alter Ego Doctrine

Under Federal Common Law, 95 Harv. L.Rev. 853,

862-63 (1982) (arguing that piercing the corporate veil

relates to external affairs and should be governed by

the law of the forum); cf. First Nat'l City Bank v.

Banco Para El Comercio Exterior De Cuba, 462

U.S. 611, 621, 103 S.Ct. 2591, 2597, 77 L.Ed.2d 46 (1983)

(“As a general matter, the law of the [country] of

incorporation normally determines issues relating to

the internal affairs of a corporation. . Different

conflicts principles apply, however, where the rights

of third parties external to the corporation are at

issue.” (citations omitted)).

Federal precedents support using a federal common

law standard for piercing the corporate veil to deter-

mine parent corporation CERCLA liability. Al-

though few circuit courts have considered the issue,

compare Lansford-Coaldale Joint Water Authority

v. Tonolli Corp., 4 F.3d 1209, 1225 (3d Cir. 1993)

(applying federal common law) with Joslyn Manu-

facturing Co. v. T.L. James & Co., 893 F.2d 80 (5th

Cir. 1990) (affirming a district court opinion that

declined to address the choice of law question on the

grounds that the standard for piercing the corporate

veil are the same under state and federal law), district

28a

courts have overwhelmingly applied federal common

law in this context. IJdylwoods Assocs. v. Mader

Capital, Inc., 915 F.Supp. 1290, 1805 (W.D.N.Y. 1996);

Atlantic Richfield Company v. Blosenski, 847

F.Supp. 1261, 1278 (E. D. Pa. 1994); City of New York

v. Exxon Corp., 112 B. R. 540, 552 (S. D. N. V. 1990),

aff'd on other grounds, 932 F.2d 1020 (2d Cir. 1991);

United States v. Kayser-Roth Corp., 724 F.Supp. 15,

20 (D.R.1.1989), aff'd on other grounds, 910 F.2d 24

(Ist Cir. 1990); United States v. Nicolet, Inc., 712

F.Supp. 1193, 1201 (E.D. Pa.1989); In re Acushnet

River & New Bedford Harbor Proceedings re

Alleged PCB Pollution, 675 F.Supp. 22, 30-31 (D.

Mass. 1987); cf. Jacksonville Elec. Auth. v. Eppinger

and Russell Co., 776 F.Supp. 1542, 1545-46 (M.D. Fla.

1991) (applying Fifth Circuit standard without

discussing the choice of law question), aff'd on other

grounds sub nom Jacksonville Elec. Auth. „.

Bernuth Corp., 996 F.2d 1107 (11th Cir. 1998); United

States v. Mottolo, 695 F.Supp. 615, 624 (D.N.H. 1988)

(holding parent corporation liable without piercing

the corporate veil because “CERCLA places no

importance on the corporate form”).

Additional support for using a federal common law

standard comes from cases involving successor cor-

poration liability under CERCLA. Although this

Court has previously relied on state law in that

context, see Anspec Co. v. Johnson Controls, Inc., 922

F. 2d 1240 (6th Cir. 1991), other circuits that have con-

sidered this issue have applied federal common law.

See B.F. Goodrich v. Betkoski, 99 F.3d 505, 519 (2d

Cir. 1996); United States v. Carolina Transformer

Co., 978 F.2d 832 (4th Cir. 1992); Louisiana · Pacific

Corp. v. Asarco, Inc., 909 F.2d 1260 (9th Cir. 1990);

29a

Smith Land & Improvement Corp. v. Celotex Corp.,

851 F.2d 86 (3d Cir. 1988); see also United States v.

Mexico Feed and Seed Co., 980 F.2d 478, 487 n. 9 (8th

Cir. 1992) (stating in dicta that federal common law

should probably be applied).

Il. The Proper Federal Standard

Piercing the corporate veil is an equitable doctrine.

“The federal common law in this area emerges from

the general principle that ‘a corporate entity may be

disregarded in the interests of public convenience,

fairness and equity.“ In re Acushnet River & New

Bedford Harbor Proceedings re Alleged PCB

Pollution, 675 F.Supp. 22, 33 (D. Mass. 1987) (quoting

Town of Brookline v. Gorsuch, 667 F.2d 215, 221 (Ist

Cir.1981)); see also American Bell Inc. v. Federation

of Tel. Workers, 736 F. 2d 879, 886 (3d Cir. 1984) (“the

appropriate occasion for disregarding the corporate

existence occurs when the court must prevent fraud,

illegality or injustice, or when recognition of the

corporate entity would defeat public policy or shield

someone from liability for a crime”). Two elements

are generally regarded to be essential to pierce the

corporate veil: “First, the dominant corporation

must have controlled the subservient corporation, and

second, the dominant corporation must have proxi-

The Eleventh Circuit recently applied state law to deter-

mine the CERCLA liability of limited partners, see Redwing

Carriers, Inc. v. Saraland Apartments, 94 F.3d 1489 (11th Cir.

1996). That is not necessarily inconsistent with applying

federal law in claims involving subsidiary corporations, how-

ever, since the danger of corporations creating subsidiary part-

nerships, as compared to subsidiary corporations, in order to

evade CERCLA liability is fairly attenuated.

30a

mately caused plaintiff harm through misuse of this

control.” Krivo Indus. Supply Co. v. National

Distillers & Chem. Corp.,.483 F.2d 1098, 1103 (5th

Cir. 1973).

Although some cases require a showing of fraud,

see, e. g., Edwards Co. v. Monogram Indus., 730 F.2d

977, 980-81 (5th Cir.1984), even jurisdictions that re-

quire such a showing in some circumstances often

recognize that fraud is not always required. See, e.g.,

United States v. Jon-T Chems., Inc., 768 F.2d 686,

692-93 (5th Cir. 1985) (finding that fraud is not re-

quired to pierce the veil in tort cases even though

fraud is required in contract cases). Courts applying

federal common law have found that fraud is not

required to pierce the corporate veil. See, e.g., Valley

Fin., Inc. v. United States, 629 F.2d 162, 172 (D.C.

Cir. 1980). Requiring a showing of fraud would be

particularly inappropriate in CERCLA cases. The

fraud requirement appears to arise from the equitable

nature of the piercing doctrine. The public policy

considerations underlying CERCLA, however, pro-

vide a sufficient equitable basis for piercing the

corporate veil whether or not fraud has been shown.

This conclusion is further supported by CERCLA’s

limited deference to corporate form. See United

States v. Mottolo, 695 F.Supp. 615, 624 (D.N.H. 1988);

United States v. Kayser-Roth Corp., 724 F.Supp. 15,

23-24 (D. R. I. 1989), af d on other grounds, 910 F.2d 24

(Ist Cir. 1990).

Similarly, the proximate cause element should not

be required in CERCLA cases, because Congress has

provided statutory liability criteria. If a CERCLA

defendant is a potentially responsible party under

3la

CERCLA § 107, 42 U.S.C. § 9607, then no further

finding of proximate causation should be required.

The test for piercing the corporate veil under

federal common law in CERCLA cases thus should be

simply whether the parent corporation “controls or

at the relevant time controlled the management and

operations of the subsidiary.” United States v.

Nicolet, Inc., 712 F.Supp. 1193, 1202 (E.D. Pa. 1989).

Federal courts applying this standard in CERCLA

cases have relied on one of two tests: a twelve-factor

test set out in United States v. Jon-T Chems., Inc.,

768 F.2d 686, 691-92 (5th Cir. 1985); see Jacksonville

Elec. Auth. v. Eppinger and Russell Co., 776 F.Supp.

1542, 1545 (M. D. Fla. 1991), af d on other grounds sub

nom Jacksonville Elec. Auth. v. Bernuth Corp., 996

F. 2d 1107 (11th Cir. 1993); Joslyn Corp. v. T. L. James

& Co., 696 F.Supp. 222, 227 (W. D. La. 1988), aff’d, 893

F. 2d 80 (5th Cir. 1990); or a seven- factor test set out

in In re Acushnet River & New Bedford Harbor Pro-

ceedings re Alleged PCB Pollution, 675 F.Supp. 22,

33 (D. Mass. 1987); see Idylwoods Assocs. v. Mader

Capital, Inc., 915 F.Supp. 1290, 1305 (W.D.N.Y. 1996);

City of New York v. Exxon Corp., 112 B.R. 540, 553

(S. D. N. V. 1990), aff d on other grounds, 932 F.2d 1020

(2d Cir. 1991); United States v. Kayser-Roth Corp.,

724 F.Supp. 15, 20 (D.R.I. 1989), aff d on other

grounds, 910 F.2d 24 (Ist Cir. 1990). These tests over-

lap, and neither list of factors is exhaustive. Piercing

the corporate veil requires a fact-specific inquiry

taking into account all of these factors and any other

pertinent circumstances. The trier of fact must con-

sider the totality of the circumstances to determine

whether the parent controls or controlled the man-

agement and operations of the subsidiary.

32a

Because the district court applied Michigan law

rather than the proper federal common law standard

for piercing the corporate veil, I would remand the

case for further review under the proper standard.

RYAN, Circuit Judge, dissenting.

My colleagues’ opinion today reaches three impor-

tant and dispositive conclusions:

That a parent corporation cannot, as a matter

of law, be held directly liable under 42 U.S.C.

§ 9607(a)(2) as an “operator” of a facility owned

by its subsidiary corporation, but may face only

vicarious liability under state-law corporation-

veil-piercing principles;

That piercing the corporate veil under Michigan

law requires circumstances showing that the

corporate form was used to “subvert justice”; and

That the district court erred in finding that the

defendants failed to prove their entitlement to

the so-called third-party defense under 42 U.S.C.

§ 9607(b)(3).

In my judgment, the court is mistaken on all three

grounds, and I therefore respectfully dissent.

I.

Direct Liability of a CPC Under Section 107(4)(2)

A.

Parent Corporations as “Operators”

CERCLA identifies two distinct categories of

individuals or entities that may be held directly liable,

33a

as responsible parties, for the costs of cleanup of an

environmentally contaminated facility:

(1) the owner and operator of a vessel or a

facility, [or]

(2) any person who at the time of disposal of any

hazardous substance owned or operated any

facility at which such hazardous substances were

disposed of].]

42 U.S.C. § 9607(a) (emphasis added). The parties

have stipulated that the site is a “facility” as defined

by CERCLA, and that the site contains “hazardous

substances.”

The terms “owner” and “operator,” as used in sec-

tion 107(a)(2), are defined in the statute as “any

person owning or operating such facility,” 42 U.S.C.

§ 9601(20)(A)(ii), a definition that is, at best, circular

and unhelpful. At least one court has observed that

“(tlhe circularity strongly implies ... that the

statutory terms have their ordinary meanings rather

than unusual or technical meanings.” Edward Hines

Lumber Co. v. Vulcan Materials Co., 861 F.2d 155,

156 (7th Cir. 1988). Further, it is noteworthy that the

definition of “owner” explicitly excludes one whose

ownership interest is merely that of a stockholder

and who does not participate in management of the

facility, 42 U.S.C. § 9601(20)(A)(iii), suggesting that

ene who does participate in management is accord-

ingly susceptible to liability, see United States v.

Kayser-Roth Corp., 910 F.2d 24, 26 n. 6 (Ist Cir. 1990).

Finally, “person” is defined expansively as “an indi-

vidual, firm, corporation, association, partnership,

consortium, joint venture, commercial entity, United

States Government, State, municipality, commission,

34a

political subdivision of a State, or any interstate

body.” 42 U.S.C. § 9601(21). The breadth of this de-

finition plainly leaves room for a parent corporation.

See Kayser-Roth, 910 F.2d at 25 n. 5.

The first question presented by this appeal is

whether a parent corporation may be considered an

“operator” under section 107(a)(2) when its subsidiary

is the “owner.” The district court determined that a

parent corporation may face potential liability as an

operator of a contaminating facility because the plain

language of section 107(a)(2) indicates that Congress

intended to impose liability on any entity actually

operating a facility, regardless of the nature of the

entity’s ostensible interest in the facility. It is a con-

clusion with which I agree; indeed, it is a conclusion

that the vast majority of circuits—eight out of nine

considering the question—have reached as well.

Certain Underwriters at Lloyd’s, London v. St. Joe

Minerals Corp., 90 F.3d 671, 673-74 (2d Cir. 1996),

Schiavone v. Pearce, 79 F.3d 248, 253-55 (2d Cir.

1996); FMC Corp. v. United States Dep’t of Cori-

merce, 29 F.3d 833, 842 (8d Cir. 1994) (en banc);

Lansford-Coaldale Joint Water Authority v. Tonoiii

Corp., 4 F.3d 1209, 1221-22 (3d Cir. 1993); Jacksonville

Elec. Auth. v. Bernuth Corp., 996 F.2d 1107, 1110

(11th Cir. 1993); John S. Boyd Co. v. Boston Gas Co.,

992 F.2d 401, 408 (Ist Cir. 1993); see Kaiser Alumi-

nim and Chem. Corp. v. Catellus Dev. Corp., 976

F. 2d 1338, 1341-42 (9th Cir. 1992); Kayser-Roth Corp.,

910 F.2d at 27; see also United States v. TIC

Investment Corp., 68 F.3d 1082, 1091-92 (8th Cir.

1995), cert. denied, — U.S. ——, 117 S.Ct. 50, 136

L.Ed.2d 14 (1996); Nurad, Inc. v. William E. Hooper

& Sons Co., 966 F.2d 837, 842 (4th Cir. 1992); of.

35a

Sidney S. Arst Co. v. Pipefitters Welfare Educ.

Fund, 25 F.3d 417, 420 (7th Cir. 1994). But see Joslyn

Mfg. Co. v. T. L. James & Co., 893 F.2d 80 (5th Cir.

1990).

My colleagues offer several reasons for parting

company with this impressive wealth of authority.

First, they argue that courts have relied on the

so-called remedial purpose of CERCLA to justify

their conclusion that CERCLA should be given an

expansive meaning, including a meaning that admits

of liability for parent corporations as operators.

Certainly, the shibboleth “remedial purpose” is a

weak basis for legal analysis and I do not find it

necessary to resort to it. But what the majority sees

as the logical secend step to a rejection of the

remedial-purpose litany, namely, its “adhere[nce] to

the tenet that liability attaches only to those parties

who are culpable in the sense that they, by some

realistic measure, helped to create the harmful

conditions,“ is, to put it mildly, a non sequitur. (Maj.

op. at 578.) Implicit in the majority’s chosen “tenet”

is rejection of the universally accepted principle that

liability under CERCLA is both strict, as well as

joint and several. See, e.g., Kayser-Roth, 910 F.2d at

26; FMC Corp., 29 F.3d at 835. Whether CERCLA’s

purpose is “remedial” or not, the sounder proposition,

I think, is that liability attaches only to those entities

whom Congress has singled out for liability. For the

reasons set forth below, the statutory language

leaves no room to doubt that Congress has singled out

operators for liability, irrespective of their corporate

form.

The majority is also critical of the district court’s

language that liability should be predicated on a “new,

36a

middle ground,” and contends that this choice of

language makes it unclear “whether the [district

court's] basis for finding parental liability as an

operator. is the actual operation of the

subsidiary’s business or . . . the exertion of power

or influence through active participation in the sub-

sidiary’s business.” (Maj. op. at 579.) It may be that

trial courts’ inventive “new, middle ground” expres-

sion is more conferring than clarifying, but my

colleagues’ conclusion that the district court’s

holding “threaten[s] the efficacy of time-honored

liability protections afforded by the corporate form,”

simply does not follow. And my colleagues’ ultimate

conclusion, that a parent can only be found liable

“when the requirements necessary to pierce the

corporate veil are met,” contradicts the plain lan-

guage of section 107(a)(2). Moreover, it is a conclu-

sion that begs the question this case presents, which,

under subsection (a)(2), is not whether a parent

corporation may be held vicariously liable for abuse of

its subsidiary’s corporate form—clearly it may—but

whether Congress has created direct liability if the

facts show that the parent corporation was the actor

actually operating a contaminating facility. Stated

differently, the issue is whether Congress has ex-

cused a parent corporation that is in fact operating a

contaminating facility from direct liability, simply

because it is doing so in the name of a corporate

subsidiary. The majority’s belief that such an excuse

may be found in the statute does not, for me,

withstand close scrutiny.

The structure of the statute, on its face, requires

a recognition that “ ‘owner’ liability and ‘operator’

liability denote two separate concepts and hence re-

37a

quire two separate standards for determining

whether they apply.“ Lansford-Coaldale, 4 F.3d at

1220. “‘CERCLA’s language.. indicates an intent

to hold a corporation liable for the environmental

violations of its subsidiaries and sister corporations,

if it is otherwise determined to have operated the

facility in question.“ Schiavone, 79 F.3d at 255

(quoting Lansford-Coaldale, 4 F.3d at 1221 n. 11). As

the Kayser-Roth court observed,

Congress, by including a liability category in

addition to owner (“operators”) connected by the

conjunction “or,” implied that a person who is an

operator of a facility is not protected from liability

by the legal structure of ownership. Given this

grammatical construction and the broad definition

of “person,” corporate status, while relevant to

determine ownership, cannot shield a person from

operator liability.

Kayser-Roth, 910 F.2d at 26; see Schiavone, 79 F.3d at

254. In short, direct CERCLA liability under sub-

section (a)(2) may be predicated on one’s status as an

owner or on one’s status as an operator.

Alternatively, of course, a parent corporation may

also be derivatively liable if circumstances warrant

piercing the corporate veil in order to treat that

parent corporation as an owner, when its subsidiary

is in fact the owner. The majority opinion conflates

and confounds the two types of liability, which are

analytically distinct, and erroneously concludes that

the latter is the exclusive basis for liability. See

Sidney S. Arst Co., 25 F.3d at 420; cf. Schiavone, 79

F.3d at 253. As a result, the majority’s analysis

founders on a perceived tension between the standard

38a

of a derivative liability arising out of common-law

principles of corporate law and the standard of direct

liability arising out of an application of the statutory

language of CERCLA. The tension is chimerical.

The statute explicitly provides for distinct, direct

operator liability, and “the basis for such operator

liability is wholly independent of any liability on the

part of” the subsidiary, Schiavone, 79 F.3d at 254; it

is a direct liability that “stem[s] directly from [the

parent's] control over the plant,” that is, its own

actions as an operator, id. The mere fact that

derivative owner liability requires a veil-piercing

analysis simply does not speak to the appropriate

analysis of direct operator liability.

As previously alluded to, many courts have ana-

lyzed the issue of direct operator liability of a parent

corporation. Most have followed the approach of

Kayser-Roth, in which the court declared that At lo be

an operator requires more than merely complete

ownership and the concomitant general authority or

ability to control that comes with ownership. At a

minimum it requires active involvement in the activi-

ties of the subsidiary.” 910 F.2d at 27. “This standard

requires an investigation into the relationship

between the parent and subsidiary, in order to reveal

the requisite level of corporate involvement.” John S.

Boyd, 992 F.2d at 408. Thus, the degree of control

required is more.. than simple ownership and the

general authority or control that comes with it.”

Certain Underwriters, 90 F.3d at 674. In Lansford-

Coaldale, 4 F.3d 1209, the court embraced the Kayser-

Roth standard, emphasizing that “operator liability

may be established even without evidence that a

[parent] corporation controlled the environmental

39a

decisions of an affiliated corporation as long as there

exist other factors which sufficiently demonstrate

pervasive control.” Id. at 1222 n. 13. Similarly, in

Jacksonville Electric, 996 F.2d 1107, the court agreed

that the test for direct parent corporation liability as

an operator was whether the parent “ ‘exercises

actual and pervasive control of the subsidiary to the

extent of actually involving itself in the daily

operations of the subsidiary. Actual involvement in

decisions regarding the disposal of hazardous sub-

stances is a sufficient, but not a necessary, condition

to the imposition of operator liability.’ “Jd. at 1110

(citation omitted). As is clear from the language

of these cases, and as the Kayser-Roth court empha-

sized, it would “obviously not [be] the usual case that

the parent of a wholly owned subsidiary is an operator

of the subsidiary.” Kayser-Roth, 910 F.2d at 27; see

John S. Boyd, 992 F.2d at 408.

Among the many courts that have recognized that a

parent corporation may be directly liable as an

operator under section 107(a)(2), there has been a

difference of opinion “as to whether operator liability

should be predicated on the actual control one cor-

poration has over the other, or whether the cor-

poration’s capacity or authority to control is suffi-

cient.” Lansford-Coaldale, 4 F.3d at 1220. The

minority view has been adopted by the Fourth and

Ninth Circuits, which would hold a parent cor-

poration directly liable as an operator not because the

parent corporation actually controlled the subsidiary,

but rather because it had the authority to do so. See,

e.g., Nurad, 966 F.2d at 842; Kaiser Aluminum, 976

F.2d at 1341. Those courts have justified their test

as “one which properly declines to absolve from

40a

CERCLA liability a party who possessed the author-

ity to abate the damage caused by the disposal of

hazardous substances but who declined to actually

exercise that authority by undertaking efforts at a

cleanup.” Nwrad, 966 F. 2d at 842.

This view, I think, goes too far, because it assigns

liability to the parent corporations beyond that

intended by Congress. But in holding, as the majority

of circuits have, that a parent corporation may be

liable when it actually operates the facility in ques-

tion, a court simply faithfully interprets plain statu-

tory language.

Only the Fifth Circuit has adopted the limited view

of operator liability described in the majority opinion

here, in which the corporate form of the alleged

operator is dispositive. The Joslyn court framed its

inquiry as being whether to “impose direct liability

on parent corporation for the violations of their

wholly owned subsidiaries.” Joslyn, 893 F.2d at 81.

This somewhat disingenuous framing of the question

ignores the direct link contemplated by the majority

of other courts that have discussed operator liability,

and suggests that operator liability for parent

corporations, like owner liability, would simply be

another type of derivative liability, albeit of a less

demanding nature than corporate-veil-piercing. The

Joslyn court reasoned that because “CERCLA does

not [explicitly] define ‘owners’ or ‘operators’ as in-

cluding the parent company of offending wholly-owned

subsidiaries,” id. at 82, there can be no operator

liability for parents in the absence of veil-piercing.

This analysis completely misses the point, which is

that since a parent corporation is certainly within

the statutory definition of “person,” the relevant

41a

question is simply whether the particular corporation

was, in fact, an operator of the facility in question.

Thus, the Joslyn court’s invitation to Congress to

“extend liability to parent corporations” if it wishes

to do so, id. at 83, is simply meaningless. It is obvious

that CERCLA does extend liability to all cor-

porations, including parent corporations, so long as

they satisfy the statutory prerequisite that they be

operators. I note, too, that another panel of the Fifth

Circuit, in a case decided after Joslyn, observed in

dicta that individual shareholders or officers could

be held directly liable as an operator, when “they

themselves actually participate in the wrongful

conduct prohibited by the Act,” and recognized that

“this personal liability is distinct from the derivative

liability that results from ‘piercing the corporate

veil.’” Riverside Mkt. Dev. Corp. v. International

Bldg. Prods., Inc., 931 F.2d 327, 330 (5th Cir. 1991).

The Riverside holding indicates, at a minimum, a

reluctance within the Fifth Circuit to broadly apply

Joslyn.

In sum, I conclude, as the district court did, that a

parent corporation may be held directly liable as an

operator of a contaminating facility under section

107(a)(2) if the facts of the case show that its domina-

tion and control of the subsidiary corporation ostensi-

bly operating the facility is so pervasive that the

parent is the operator in fact.

CPC’s Liability Under Section 107(a)(2)

In addition to generally repudiating the possibility

of direct operator liability for parent corporations,

which has been adopted in a majority of circuits con-

42a

sidering the question, my colleagues have a factual

dispute with the district court. That is, given my

conclusion that CERCLA plainly contemplates the

possibility of direct operator liability for parent cor-

porations, the analysis necessarily turns to whether

such liability is appropriately imposed here: whether

CPC, as a factual matter, operated the facility. My

colleagues acknowledge that, arguendo, “where the

parent directly operates the facility itself, either in-

dependently of its subsidiary, or as an actual co-

operator alongside the subsidiary,” liability would be

appropriate, but they assert that this theory “is not

the one relied upon by the district court and, in any

event, is not supported by the facts in the record

before us.” (Maj. op. at 581.) This assertion simply

belies the record and te district court’s opinion,

and further, it fails to recognize that our review on

this point is limited to review for clear error.

Lansford-Coaldale, 4 F.3d at 1219; John S. Boyd, 992

F. 2d at 408; Kayser-Roth, 910 F.2d at 27.

The district court found that CPC, Ott II’s parent

corporation, so totally and completely controlled

Ott II that CPC was the actual operator of the con-

taminating facility in Dalton Township, Michigan.

There is an abundance of evidence in the record to

support this factual finding, and in all events, not

even my colleagues claim it is clearly erroneous. It

follows, therefore, as the district court found, that

CPC is directly liable under section 107(a)(2) as the

operator of the site. I agree.

Section 107(a)(2) provides that a parent corporation

is liable if it is the operator-in-fact of the facility as

indicated by the extent of its domination and control

of the subsidiary, the ostensible operator. The

43a

district court pointed out that some of the factors

relevant to deciding whether the parent is the

operator-in-fact include considerations such as the

parent corporation’s involvement in the subsidiary’s

board of directors and daily operations, and the parent

corporation’s control over the subsidiary’s policy

making in areas such as personnel, finance, and waste

disposal. Also relevant are the facts leading up to the

subsidiary’s origin and the reasons for its existence,

and the parent’s level of financial monitoring and its

cooperation or consolidation with the subsidiary's

accounting, legal, and research fur.ctions.

The specific facts with regard to CPC, as found by

the district court, are these:

From CPC’s acquisition of Ott II in October 1965

through April 1966, all four directors on Ott II's board

were CPC officers. Over the next three and one-half

years, at least three of the eight board members were

officers of CPC, and for the following two and one-half

years, until CPC sold Ott II, CPC officials comprised

the majority of the then eleven-director board. At all

times during Ott II's existence, the chairman of its

board was a high-level CPC executive, appointed by

CPC’s president. In addition, the managers of Ott II

who exerted active control over the subsidiary’s day-

to-day activities also were officers of CPC. Arnold

Ott, who had been chief executive officer of Ott I,

continued as Ott II’s chief executive officer until

1969, during which time he also was CPC’s vice

president for scientific research and president of

CPC’s development company, a subsidiary with over-

sight responsibility for several CPC subsidiaries

including Ott II. In addition, James Eiszner, who had

been Ott I’s vice president of marketing, served as Ott

doa

II's president from 1967 to 1970. During Eiszner's

tenure with Ott II. he also served as vice president of

CPC's development company, and eventually became

CPC’s chief executive officer. Moreover, Eiszner, in

particular, was criticized during his tenure as an Ott

II official for paying too much attention to his CPC

responsibilities and not enough attention to Ott II.

Beverly Warner served as Ott II's chief executive

officer from 1970 until it was sold in 1972, at the same

time serving as president of CPC’s development com-

pany.

Not only did CPC participate in Ott Il's environ-

mental matters via the CPC’s environmental affairs

director, G.R.D. Williams, but it was instrumental in

setting Ott II's environmental policies. For example,

because Williams did not believe Ott II needed a

biological waste treatment facility, Ott II officers

abandoned presenting plans for such a facility at a

meeting with the state of Michigan. Moreover,

Williams repeatedly controlled the interaction be-

tween Ott II officials and state and federal regulators,

and instructed Ott II’s officers “to consult with CPC

before responding to regulatory questionnaires or

other inquiries.” CPC Int'l, Inc. v. Aerojet-General

Co, 777 F.Supp. 549, 561 (W. D. Mich. 1991). Finally,

as the district court found, CPC's involvement in Ott

II’s financial affairs involved more than mere review

and oversight. For example, CPC made loans to Ott

II in excess of $5 million, while assuming many of Ott

II's existing loans. In addition, CPC commingled

its funds with Ott II's funds. CPC also limited

the amount of capital expenditures that Ott II could

approve without further approval by CPC’s board of

directors. As to personnel matters, CPC repeatedly

45a

participated in Ott II's labor negotiations with local

unions.

Based on these and many other findings, the dis-

trict court concluded that At he evidence shows a

level of participation and control by CPC that exceeds

the bounds of an interested investor and enters the

realm of an active operator.” Id. at 575. These find-

ings are amply supported in the record. As I have

said, my colleagues do not claim they are clearly

erroneous. Accordingly, the district court’s con-

clusion that CPC was directly liable under section

107(a)(2) as an operator should be affirmed.

II.

Aerojet’s Liability Under Section 197(a)(1)

The district court found Aerojet liable as a present

“owner” of a contaminated facility under section

107(a)(1). It did so after finding that the facts justified

piercing the corporate veil that thinly shielded

Cordova/Michigan from Aerojet. My colleagues hold

that the district court erred because it misapplied

Michigan law: “(The district court’s findings do] not

suggest that the company acted to subvert justice or

with fraudulent intent or otherwise sought to distort

the legitimate purposes of the corporate form.” (Maj.

op. at 582.)

While there is no question that fraudulent intent or

a subversion of justice justifies piercing the

corporate veil, there is ample authority under

Michigan law for finding parent corporation liability

through veil piercing for a less egregious reason,

such as unjustified use of the corporate form. Indeed,

16a

the Michigan Supreme Court has onl

restated the applicable rule: diaper’

Michigan law presumes that, absent some abuse of

corporate form, parent and subsidiary cor-

porations are separate and distinct entities. This

presumption, often referred to as a “corporate

veil,” may be pierced only where an otherwise

separate corporate existence has been used to

— justice ot cause a result that [is] con-

rary some r clearly overriding public

policy.” More specifically, Michigan —4—

generaliy required that a subsidiary must

become ‘a mere instrumentality’ of the parent”

before its separate corporate existence will be

disregarded.

Seasword v. Hilti, Inc., 449 Mich. 542, 537 N.W.2d 221

224 (1995) (emphasis added) (citations omitted); see

Wells v. Firestone Tire and Rubber Co., 421 Mich.

641, 364 N.W.2d 670, 675 (1984); Herman v. Mobile

Homes Corp., 317 Mich. 233, 26 N.W2d 757, 762-63

(1947); Potter v. Michigan Bell Tel. Co., 246 Mich. 198,

224 N.W. 438, 439 (1929). But the most instructive

language of Seasword, for purposes of this case, is in

the court’s illustrative listing of “relevant factors

showing that a subsidiary is a ‘mere instrumentality’

of its parent”:

[The parent and subsidiary shared principal

offices, or had interlocking boards of directors or

frequent interchanges of employees, that the

subsidiary is the parent’s exclusive distributing

arm, or the parent’s revenues are entirely derived

from sales by the subsidiary.

Seasword, 537 N.W.2d at 224 n. 10.

47a

The coincidence between these hypothetical factors

and the reality of Aerojet’s relationship with its

subsidiaries is, to put it mildly, striking. The district

court found that Aerojet was the 100% shareholder

of Cordova/California; that Cordova/California, in

turn, was the sole shareholder of Cordova/Michigan;

and that the boards of directors of Cordova/California

and Cordova/Michigan were titular only, not even

convening for meetings. At least twenty Aerojet of-

ficers simultaneously held the same or nearly

identical positions in Cordova/California and Cordova/

Michigan. Aerojet so completely controlled the

finances of all companies that neither Cordova/

California nor Cordova/Michigan were permitted to

maintain separate bank accounts. In addition, there

was evidence that Aerojet used Cordova/Michigan

by transferring to Cordova/California millions in

worthless debt owed to Aerojet by Cordova/Michigan,

effectively canceling debt owed by Aerojet to Cordova/

California. These findings are supported by the

record and are not clearly erroneous. The evidence

established that Cordova/Michigan operated as a

“mere instrumentality” of Aerojet.

Even more compelling are the findings of the

district court regarding Cordova/Michigan’s corpo-

rate purpose. When Aerojet began negotiations with

MDNR for the Dalton Township property, Aerojet

negotiated side-by-side with its then-unincorporated

division, Cordova. After Aerojet entered two short-

term stipulations with MDNR, and merely eleven

days before the sale was concluded, Aerojet incorpo-

rated Cordova as a wholly-owned subsidiary. Al-

though Aerojet had initially drafted the stipulation

and consent order with MDNR, it was “Cordova

48a

Chemical Company” that actually signed the agree-

ment. Then, in November 1978, with the remodeling

of the facility complete and manufacturing about

to begin, Cordova/California incorporated Cordova/

Michigan, transferring to it Cordova/California’s

ownership of the facility. Despite the separate

corporate form of Cordova/Michigan, throughout

operations, Aerojet actively participated in negotia-

tions with prospective buyers for the possible sale of

the facility. Once Cordova/Michigan ceased opera-

tions at the site, it was Aerojet that took responsibil-

ity for leasing portions of the site to third parties. It

is clear that Aerojet took pains to insulate itself from

environmenta! liability for the situation they knew

new 45 at the site. Aerojet admits as much in its

rief:

By using well-capitalized, non-fraudulent, sepa-

rate corporate subsidiaries, such as Cordova/

California and then Cordova/Michigan, Aerojet

could justify an attempt to reclaim and make

the waste Site productive without risking all of

its corporate assets. A rule of law imposing

enormous environmental liability on parent cor-

porations whose subsidiary neither perpetrated a

fraud nor contributed to actual contamination

would result in contaminated waste sites being

permanently abandoned as unproductive, orphan

properties, because no rational corporate officer

could support a decision to rehabilitate a contami-

nated site if such liability were unavoidable.

Thus, Aerojet admits that Cordova/Michigan was

established solely as a facade, to avoid any legal

obligation to pay for further environmental cleanup at

49a

the site. Under Michigan law, its admission is

sufficient to justify piercing the corporate veil. See

Potter, 224 N.W. at 440. As Aerojet points out, it is

possible that a refusal to allow a prospective pur-

chaser of a contaminated site to avoid liability will

result in a scarcity of willing buyers. Certainly, both

EPA and MDNR have a substantial interest in locat-

ing conscientious purchasers, who are willing to

reclaim environmentally corrupt facilities. However,

there is no evidence that the Michigan courts would

view this interest as an exception to the state's

veil-piercing standard, especially in light of the com-

peting interest in imposing environmental cleanup

costs on private industry rather than on taxpayers.

Congress certainly was not deterred by this argu-

ment, given its balancing of interests in favor of

imposing liability on new owners. Moreover, Aerojet

and the Cordovas are not blameless, as they would

have the court believe. The district court found that

the entities actively contributed to the contamination

and then failed to take remedial action, despite knowl-

edge that contamination was continuing to migrate.

Accordingly, the district court’s conclusion that,

by piercing the corporate veil, Aerojet may be held

liable as an owner under 42 U.S.C. § 9607(a)(1) should

be affirmed.

I further agree with the district court that Aerojet

was directly liable as an operator under section

107(a)(2):

In light of the same facts that were probative in

concluding Aerojet is liable under section

107(a)(1), the court concludes that Aerojet operat-

ed the site through active participation and

50a

pervasive control over the businesses of both

Cordova/California and Cordova/Michigan.

As with CPC’s involvement with Ott II, Aerojet’s

participation and control over the board, manage-

ment and decision-making at Cordova/California

and Cordova/Michigan shows that the parent

operated the facility. Aerojet’s conduct toward its

subsidiaries extended well beyond the activities

that are merely indicative of a parent’s general

oversight of a wholly owned subsidiary.

Accordingly, the court concludes the [sic]

Aerojet is directly liable as an operator under

section 107(a)(2).

CPC Int'l, Inc., 777 F.Supp. at 580.

III.

Third-Party Defense Under Section 107 (b) (3)

Finally, I do not agree that the district court

should be required, upon remand, to “revisit its

treatment of the [third-party] defense raised by

Aerojet, Cordova/California, and Cordova/Michigan”

under section 107(b)(3). (Maj. op. at 582-83.) To

succeed under section 107(b)(3), the defendants are

required to_prove all four elements of a third-party

defense, which are:

1. That they did not contribute to the con-

tamination;

2. That they were not in a direct or indirect

contractual relationship with any person

5la

who, in connection with the contractual re-

lationship, caused the contamination;

3. That they exercised due care throughout

their ownership or operation of the con-

taminating facility; and

4. That they protected against those acts and

omissions of the polluting persons, and the

consequences of those acts and omissions,

that were foreseeable.

See 42 U.S.C. § 9607(b)(3); see also Kerr-McGee

Chem. Corp. v. Lefton Iron & Metal Co., 14 F.3d 321,

325 (7th Cir. 1994).

The district court found that the defendants failed

to carry their burden on all four elements of the

section (b)(3) defense. My colleagues, in desiring that

the district court “revisit its treatment of the

defense” raised by the defendants, address only the

“contractual relationship” ground. Even if the

district court erred in its treatment of that element

of the defense, its findings that the defendants have

not carried their burden of proving the remaining

three elements of the section 107(b)(3) defense, which

my colleagues do not question, is amply supported in

the record.

The district court committed no clear error in

finding that the defendants demonstrated neither the

exercise of due care nor the use of appropriate

precautions. For example, in a May 1980 environ-

mental risk report covering Aerojet and several

subsidiaries including Cordova/Michigan, the defen-

dants repeatedly stated their intent to take a

52a

head-in-the-sand approach with respect to the con-

tamination problem:

The most significant environmental problems

associated with the facility are those relating to

the residues of past industrial occupants of the

site. Management has adopted the position that

any injury to others arising out of contamination

from these residues is the responsibility of

the State of Michigan Department of Natural

Resources and that, accordingly, Cordova should

insulate itself from any knowledge of, or in-

volvement in monitoring these wastes.

The report went on to acknowledge that waste drums

remained buried, despite completion of MDNR's

removal efforts. Moreover, the report acknowledged

that the stipulation entered into by Cordova and

MDNR was never intended to resolve the contamina-

tion problem. In describing the responsibilities

assumed by the parties under the stipulation, the

report admitted that MDNR’s duties were limited

to removing 8700 drums and a portion of the con-

taminated soil and sludge, and that the stipulation’s

hold-harmless clause relieved the defendants only of

liability arising out of these specified removal efforts.

In addition, as the report acknowledged, the MDNR

absolved the defendants of liability relating to

procurement of an alternative community water

source.

As the district court pointed out, and as the report

confirms, the stipulation did not resolve responsibil-

ity for the remaining drums and contaminated soil

and sludge, as well as responsibility for groundwater

contamination. In this regard, the report specifically

opined:

53a

Between 65 and 100 monitoring wells for testing

groundwater were either installed by Story or

have been installed more recently under a State /

Federal study of groundwater contamination at

the site. The study is being carried out by several

consulting organizations under contract to the

state. Cordova management believes the studies

show little or no contamination but has avoided

any participation or liaison with the study teams.

.. . Because of the possibility that Cordova 8

potential liability for groundwater contamination

may have survived the Consent Order, it would

appear desirable for Cordova management to keep

abreast of current monitoring results. In addition,

although a high chloride content would show con-

tinuation of problems from the old Story wastes, a

high sulphate concentration would indicate see

page problems arising out of Cordova’s current

operations.

Fully aware that waste drums remained buried

beneath the site and that the majority of the con-

taminated soil had not been removed, and cognizant of

groundwater contamination to which they may have

been contributing, the defendants believed the solu-

tion to these problems was to don blinders. Their

willful blindness can hardly be characterized as the

exercise of due care.

For the same reasons, it cannot be said that the

defendants took adequate precautions to protect

against the consequences of Ott II's and Story 8

omissions and acts. While the parties, in their briefs,

debate whether reimplementation of the purge wells

would have been an adequate precaution, they over-

look the big picture. The defendants, fully aware that

54a

contamination problems on their property were not

being addressed, chose to take no precautions to

protect against the foreseeable consequences of these

problems—namely, further migration.

Accordingly, because the defendants have failed to

prove at least two of the requisite elements of the

third-party defense, the district court properly held

that they were not entitled to invoke it. It is simply

unnecessary to consider whether they sustained

their burden regarding the remaining two elements,

including whether any of the pollution was the act of a

third party “in connection with” the contractual re-

lationship with the defendants.

IV.

The judgment of the district court sh

NA. should be

55a

APPENDIX B

UNITED STATES DISTRICT COURT

WESTERN DISTRICT OF MICHIGAN

SOUTHERN DIVISION

Nos. G&9-10503 CA, G89-961 CA

CPC INTERNATIONAL, INC., PLAINTIFF

U.

AEROJET-GENERAL CORPORATION

CorDOVA CHEMICAL COMPANY, CORDOVA CHEMICAL

COMPANY OF MICHIGAN, AND

MICHIGAN DEPARTMENT OF NATURAL RESOURCES,

DEFENDANTS

UNITED STATES OF AMERICA, PLAINTIFF

.

CoRDOVA CHEMICAL COMPANY OF MICHIGAN,

CoRDOVA CHEMICAL COMPANY OF CALIFORNIA,

AEROJET-GENERAL CORPORATION,

CPC INTERNATIONAL, INC.,

AND Dr. ARNOLD C. OTT, DEFENDANTS

CPC INTERNATIONAL, INC., THIRD-PARTY PLAINTIFF

V.

COMMERCIAL UNION INSURANCE COMPANY, ET AL.,

THIRD-PARTY DEFENDANTS

(Filed: Aug. 27, 1991]

HILLMAN, Senior District Judge.

TABLE OF CONTENTS

e cetcihenetacernsnemnenssensennnneseasece [56a]

Be , „ 58a

e [58a]

1 58a

2 — [60a]

27. IIOD Weeccieectenstncncscstscncocescesessece [62a]

ES [63a]

B. Ownership by Ott I: 1957 te 1965 [68a]

C. Ownership by Ott II: 1965 to 1972 (65a)

1. Acquisition of Ott ! 6a

ee [67a]

——— [69a }

4. CPC's development company [72a]

5. Environmental matters . . [74a]

D csessenbomnemnes {76a}

. [77a]

8. Other business matters {77a}

9. Sale of Ott II to Stor [78a]

D. Ownership by Story: 1972 to 1977 [78a]

E. Agreement between MDNR and Cordova/

California: 1977 ..... ü —— [79a]

1. MDNR's environmental emergency .... [79a]

2. Negotiations between MDNR and

Aerojet’s Cordova Chemical CO. [Sia]

3. The stipulation and consent order [83a]

0 d

TABLE OF CONTENTS—Continued: TABLE OF CONTENTS—Continued:

F. Ownership by Cordova/California and Conclusions of law regarding liability of

Cordova/Michigan: Since 1977 . . [92a] ” Aerojet, Cordova/California,

1. Acquisition of the site (92a) Cordova/Michigan liga

2. Incorporation of Cordova/ California, 1. Claims against Aerojet and its sub-

Cordova/Michigan Na sidiaries [IIgga]

3. Aerojet’s direct involvement with the 2. Section 107(a)(1) “present owner”

site 0 = [94a] liability {119a}

4. Integration of business [95a] 3. Section 107(a)(2) “operator”

5. Board of directors [96a] liability [123a]

2— — 4. Section 107(a)(3) “arranger”

7. Financial matters 994 liability 1125 a

III. CONCLUSIONS OF LAW .... — 100a 5. Section 107(b)(3) innocent landowner

A. CERCLA overview [100a] defense (126)

B. Conclusions of law regarding CPC IV. Conclusion [128a}

liability — 10 2a

1. Claims against CPC [102a]

2. Section 107(a)(2) “operator” liability [108a]

a. Parent corporation liability under

section 107(a)(2) [108a]

b. Liability of CPC under section

107(a(2) . [110a}

C. Conclusions of law regarding MDNR

liability ; {1l4a]}

I. Claims against MDNR [1l4a]}

2. Section 107(a)(3) “arranger”

0 — ee cS [114a]

3. Section 107(a)(2) “operator”

liability .. — [118a]

56a

I. INTRODUCTION

This consolidated action involves a series of clai

brought under the Comprehensive se adheye re

Response, Compensation, and Liability Act

(“CERCLA”), 42 U.S.C. § 9601 et seq. (1988). The par-

ties are litigating who must pay past and future costs

incurred in the environmental cleanup of the soil

surface water and groundwater surrounding a dor-

mant chemical manufacturing plant that has become

one of the nation’s most severely contaminated areas.

Following denial of summary j iabili

judgment on liabilit

issues, the CERCLA liability phase of this case —

tried before the court over 15 days in May and June

ro gle 8 sets forth the court’s findings of

a conclusions of la i

— w regarding CERCLA

The parties participating in the liability phase

the United States; CPC — A oor oy

(“CPC „ the Michigan Department of Natural Re-

sources (“MDN R”); and Aerojet-General Corporation

(“Aerojet ), along with its two wholly owned sub-

sidiaries, Cordova Chemical Company and Cordova

Chemical Company of Michi i *

Cordova defendants”). ere

: .

By prior order of the court, this case has been separated

into three phases: liability, remedy and insurance rage

See Order, November 14, 1990. The court denied mAh disposi.

— motions filed with respect to liability. See Bench Opinion

ebruary 4, 1991 & CPC Int'l, Inc. v. Aerojet-General Corp.

759 F.Supp. 1269 (W.D. Mich. 1991). .

The parties announced on the i i

morn of trial t

claims had been settled against another — Arnold Ott. The

court is currently awaiting presentation of a consent decree in

57a

CPC, MDNR and the Cordova defendants each

defended theories of liability advanced by the United

States or other defendants under CERCLA’s liability

provisions in section 107(a) of the statute.’ 42 U.S.C.

§ 9607(a). The court heard live testimony from

29 witnesses, received all or part of dozens of de-

positions, and admitted more than 2,300 trial exhibits.

Following the trial, each party submitted proposed

findings of fact and conclusions of law. On June 28,

1991, the parties delivered closing arguments.

After careful consideration of all the evidence and

arguments set forth, the court makes the following

findings of fact and conclusions of law on the issues of

CERCLA liability, in accordance with Fed. R. Civ. P.

52(a).*

accordance with CERCLCA's settlement provisions, 42 U.S.C.

§ 9622 et seq.

On April 30, 1991, the state filed a motion to dismiss based

on eleventh amendment immunity all state-law claims brought

against it by Aerojet, Cordova/California and Cordova/

Michigan. On May 24, 1991, the court granted the motion in an

opinion and order dismissing without prejudice claims for

breach of contract, promissory estoppel, negligent misrepre-

sentation and specific performance. CPC, International, Inc.

v. Aerojet-General Corp., 764 F.Supp. 479. 482 (W.D. Mich.

1991).

4 CERCLA liability, when it attaches is joint and several

unless a defendant proves that the harm is divisible. United

States v. Northeastern Pharmaceutical & Chem. Co., 579

F.Supp. 823 (W.D. Mo. 1984), 4d in part and rev'd in part on

other grounds, 810 F.2d 726 (8th Cir. 1986); United States v.

Ottati & Goss, Inc., 630 F.Supp. 1361 (D.N.H. 1985). How-

ever, under a provision of CERCLA added by Congress in 1986,

a potentially liable party may seek contribution from any other

potentially liable party for a share of the response costs. 42

U.S.C. § 9613(f (1). In allocating response costs in a contribu-

58a

II. FINDINGS OF FACT

A. Background

1. Ownership

The site of contamination that is the subject of this

litigation is located at 500 Agard Road in Dalton

Township, Michigan, (“the site”), near Muskegon in a

primarily rural area in the western part of the state.

Groundwater underneath the site flows through

tion action, a court has broad discretion to use equitable factors

as it deems appropriate. United States v. R.W. Meyer, Inc.,

932 F. 2d 568 (6th Cir. 1991).

In this case, the parties have advanced contribution claims

against each other, seeking to reduce the amount of any liabil-

ity that may attach. As previously indicated to the parties, the

court is electing to defer until after the remedy phase findings

of fact and conclusions of law with respect to allocation of

liability. After the remedy phase, the court will have heard

evidence regarding the extent of the harm caused by hazard-

ous waste disposal as well as the cost of the remedy. At that

time, the court will be able to reach an equitable decision re-

garding how cleanup costs should be allocated among liable

parties.

Deferring allocation decisions until after the remedy phase is

consistent with the legislative history of section 113(f)(1). The

House Committee that drafted the provision stated, “/A/fter

all questions of liability and remedy have been resolved, courts

may consider any criteria relevant to determining whether

there should be apportionment.” H.R. 253(III), 99th Cong., 2d

Sess. 19, (1985), reprinted in 1986 U.S.Code Cong. & Admin.

News 3038, 3041-42 (emphasis added). See also Amoco Oil Co.

v. Borden, Inc., 889 F.2d 664, 667-68 (5th Cir. 1989) (favoring

resolution of liability issues “ before deciding the more compli-

cated and technical questions of appropriate cleanup measures

and the proportionate fault of liable parties”).

59a

an aquifer in a southeasterly direction toward two

waterways, Little Bear Creek and the Unnamed

Tributary.

From approximately 1959 to 1986, the site was used

by a series of owners as a chemical manufacturing

facility for the production of a variety of synthetic

organic intermediate chemicals used for pharmaceuti-

cal, veterinary and agricultural purposes.

From 1957 to 1965, the site was owned and operated

by the Ott Chemical Company, a Michigan corpora-

tion (“Ott I”).

From 1965 to 1972, the site was owned and operated

by a wholly owned subsidiary of CPC International,

Inc. (“CPC”), known as Ott Chemical Company (“Ott

II”).

In 1972, Ott II sold the site to Story Chemical

Company (“Story”), a Georgia corporation. Story

owned and operated the site until it was adjudicated

bankrupt in 1977.

In 1977, the Michigan Department of Natural Re-

sources (“MDNR”) initiated a regulatory investiga-

tion at the site aimed at determining the extent of

environmental problems and possible remedies. As

part of its efforts, MDNR tried to attract a new

purchaser for the site who would participate in a

cleanup of the site. As a result of these efforts

MDNR entered into negotiations with Aerojet-

General Corporation and its subsidiary, Cordova

5 After the events at issue in this case, Corn Products Com-

pany changed its name to CPC International, Inc. For simplic-

ity, “CPC” will be used in all of the court’s references to the

company.

60a

Chemical Company. These negotiations were fruitful

and on October 13, 1977, Cordova Chemical Company

(“Cordova/California”) signed a “stipulation and

consent order” with MDNR that set forth obligations

with respect to efforts to remedy environmental

contamination problems at the site. One day later,

Cordova/California, a wholly. owned subsidiary of

Aerojet-General Corporation (“Aerojet”), purchased

the site from the Story bankruptcy trustee.

In 1978, Cordova Chemical Co. of Michigan

(“Cordova/Michigan”), a wholly owned subsidiary of

Cordova/California, became the owner of the site.

Cordova/Michigan continues to own the site, but the

facility has not been in operation since 1986.

2. Contamination

Prior to the commencement of chemical manu—

facturing at the site in 1957, the quality of the

groundwater underneath the site was excellent.

By 1959, as a result of chemical waste disposal, the

water pumped for use in the manufacturing process

at the site had become contaminated. By 1964, test

results showed that the groundwater flowing under-

neath the site had become contaminated.

As a result of chemical manufacturing and waste

disposal practices at the chemical facility, the soil,

surface water and groundwater at the site contain a

large number of toxic chemicals.

The principal source of contamination at the site

was the use of engineered, unlined lagoons at the

northwestern edge of the site for chemical waste

disposal. From 1959 to at least 1968, during the

6la

Ott I and Ott II periods of ownership, wastewaters

and other chemical waste used in the manufacturing

process were discharged into the lagoons, where

much of the contaminants seeped into the ground and

water. No disposal into the lagoons occurred during

the Story and Cordova periods.

During the Ott I and Ott II era, chemical waste also

entered the ground through the burial and slitting of

hundreds of drums in a sandy pit; numerous spills of

hundreds of gallons of chemicals from train cars onto

railroad tracks; frequent overflows of chemical waste

at a cement-lined equalization basin; and the dumping

into the woods of buckets of hazardous chemicals that

had spilled during the manufacturing process. Some

spills of hazardous waste also occurred during the

Story and Cordova periods of ownership.

Contamination entering the ground from disposal

in the lagoons or through spills then seeped into the

ground and migrated away from the site via the

aquifer to the southeast, ultimately reaching two

waterways, Little Bear Creek and the Unnamed

Tributary.

Beginning in 1965 during the Ott I period of

ownership and continuing during the Ott II period.

purge wells were used internuttently at the site in an

attempt to treat the groundwater contamination and

retard the spread of contamination away from the

site.

However, after 1974 during the Story era of

ownership and continuing through periods of owner-

ship by Cordova/California and Cordova/Michigan, the

purge wells were not operated for any significant

time period, resulting in the continued, unchecked

62a

spread of contamination away from the site through

groundwater.

During their period of operations, Cordova/

Michigan and Cordova/California neither buried

waste nor dumped it onto the ground. No chemical

waste was disposed into the unlined lagoons that

had been used during the Ott I and Ott II eras. Before

beginning chemical manufacturing, Cordova/ Michi-

gan repaired the equalization basin and chemical

sewer system. When operating, Cordova/Michigan

discharged chemical waste through off-site disposal

or_to a sewer that flowed to the Muskegon County

treatment facility.

However, two hazardous chemicals used in small

amounts by Cordova/Michigan—benzene and 1, 2

dichloroethane—are in the soil and groundwater at

the site.

3. EPA’s response

In 1981, the federal Environmental Protection

Agency (EPA) began investigating how to remedy

severe contamination problems in the ground and

water at the site and surrounding area resulting from

hazardous waste disposal practices at the site.

In 1982, the EPA placed the site and surrounding

area on the federal government’s National Priorities

List of locations in need of a long-term remedial

response. It is ranked 137th among this country’s

environmentally hazardous sites most in need of

federal remedial action.

63a

The EPA is presently continuing development of

a three-phase, multi-million dollar remedial plan for

the soil, surface water and groundwater at and sur-

rounding the site.

This litigation consists of a series of consolidated

claims regarding who should be liable for cleanup

costs under CERCLA, 42 U.S.C. §§ 9607, 9613 et seq.

4. Stipulations

The parties have stipulated that the site is a

“facility”; that the site contains hazardous sub-

stances”; that “releases” have occurred and threaten

to continue, as defined under CERCLA’s relevant

provisions; and that CPC, MDNR, Aerojet, Cordova/

California and Cordova/Michigan are “persons”, as

defined under CERCLA’s relevant provisions, 42

U.S.C. § 9601.

B. Ownership by Ott I: 1957 to 1965

From 1957 to 1965, Ott I, a publicly traded Michigan

corporation, owned and operated the site as a chemical

manufacturing plant.

The company was steered by an active board of

directors that was significantly involved in the man-

agement of the company. Ott I’s board of directors

made company decisions regarding policies, goals and

directions in regular meetings which were commemo-

rated in detailed minutes. During these meetings,

the board conducted working sessions in which com-

pany officers presented comprehensive reports on the

performance and activities of the various divisions.

64a

Arnold Ott was the leading officer and director of

Ott I. From the inception of Ott I in 1956 through its

sale in 1965 to CPC, he served as president and chief

executive officer of Ott I, and at various times served

in other positions, including treasurer. He also

served on the company’s board of directors, which he

chaired for a period of time. In addition, he was the

company’s largest shareholder, owning nearly 30

percent of its stock in July 1965, a time when the next

largest shareholder owned only about 5 percent.

Another leading Ott I official was James Eiszner, a

vice-president of marketing.

In 1963, Alexander McFarlane, CPC’s chairman of

the board, joined the Ott-I board. He soon became

impressed by members of Ott I’s management group,

whom he admired for their dynamic, entrepreneurial

spirit. McFarlane became interested in the possibility

of tapping the scientific talent he had encountered to

help CPC expand its primary business areas of corn

wet-milling and consumer food products.

In the spring of 1965, McFarlane and Arnold Ott

began to discuss the possibility of CPC acquiring Ott

I. McFarlane was interested in bringing Ott I

officials, particularly Ott and Eiszner, into the CPC

management structure.

As a result of the discussions, McFarlane stepped

down from the board of Ott I, and negotiations

between top officials of Ott I and CPC followed in

April and May 1965.

65a

C. Ownership by Ott II. 1965 to 1972

1. Acquisition of Ott I

In June 1965, the Ott I board approved in principle

an agreement and plan of reorganization for the

purchase of the company by CPC.

The same month, Arnold Ott moved to New York

and assumed responsibilities within CPC manage-

ment. Ott initially worked with Harold Hellman,

CPC’s assistant to the chairman. Ott also continued

to function as president, chief executive officer, and

director of Ott I. Ott’s move took place three months

before the formal purchase of Ott I.

In September 1965, in preparation for closing on

the sale, CPC created the Four Lakes Chemical

Company, a wholly owned subsidiary incorporated in

Delaware and capitalized with $1,000, for purposes of

acquiring Ott I. The initial directors of Four Lakes

were Arnold Ott and three CPC employees.

On September 22, 1965, the Four Lakes board of

directs elected as its officers five people, including

Ott and Eiszner, who had held identical positions with

Ott I. The board also voted to change its name,

effective October 1, 1965, from Four Lakes to the Ott

Chemical Company (“Ott II“)

Then on September 29, 1965, Ott I’s assets and

certain liabilities were sold to CPC’s subsidiary Four

Lakes, in exchange for 75,300 shares of CPC common

stock.

Under the agreemert, Four Lakes agreed to

assume some specific liabilities of Ott J. with Ott I

continuing to be responsible for those not designated.

66a

Ott I expressly remained liable for “injury or dam-

ages to persons or property arising out of the sale of

any goods, the provision of any services, or the

conduct of” Ott I prior to closing. In addition, the

agreement set forth that Ott I “expressly represents

that it will pay, or make provision for the payment of,

all liabilities and obligations of, or claims against

Seller [Ott I] not expressly assumed” by CPC or

Four Lakes.

The acquisition by CPC was publicized to custom-

ers, creditors, suppliers and the public.

After the sale, Ott I maintained public liability

insurance for three years, but it ceased to operate as

a functioning corporation. The company’s name was

changed to Muskegon Chemical Company.

On October 1, 1965, two days after the formal sale of

Ott I, Four Lakes officially became the Ott Chemical

Company (“Ott II“).

Following the acquisition, Ott II functioned in a

number of ways as Ott I had prior to the sale. The

officers of Ott II remained identical to the officers of

Ott I until March 1966. Ott II continued to use the

name, “Ott Chemical Company.” Ott II continued to

manufacture substantially the same products. Ott II

continued to sell products to nearly all of Ott I’s

customers. Ott II continued to employ most of the

same personnel as Ott J. And Ott II continued the

same chemical manufacturing operation at the same

facility.

CPC nevertheless planned rapid growth for Ott II.

Prior to the sale, Arnold Ott reported to the Ott I

board that McFarlane and CPC president Howard C.

Harder “envisage the chemical operation to reach

67a

at least $100,000,000 in five years.” Following the

acquisition, Ott II’s production capacity significantly

increased as CPC contributed millions of dollars to

expansion efforts. This increase in production, in

turn, created substantially greater amounts of waste-

water and chemical waste in need of disposal in the

unlined lagoons, which were expanded to accommo-

date the additional waste.

2. Board of directors

Following its acquisition of Ott II, CPC actively

participated in, and at times controlled, the policy-

making decisions of its subsidiary through its repre-

sentation on the Ott II board of directors.

The Ott II board of directors was an active board

during CPC’s period of ownership, continuing the

tradition established in the Ott I era of functioning

in an engaged, participatory manner. The board

established policies and goals for the company. It also

regularly received reports and presentations from

Ott II officers, including accounts of mounting prob-

lems with waste disposal. These sessions sometimes

lasted three to five hours. Far more than a rubber

stamp for management, the Ott II board functioned as

a major source of power and decision-making at the

company.

CPC had majority control of the board for nearly

three years. In the first six months following the

acquisition, all four directors on the then four-

member board were CPC officials, including Ott.

Then, from March 1970 until the sale of the company

to Story in June 1972, six of the eleven board members

of Ott II were individuals with CPC positions. No

68a

fewer than three CPC-affiliated directors served on

the Ott II board at all times, and CPC, as 100- percent

shareholder, controlled the selection of board

members.

CPC directors serving on the O;, board reported

back to CPC about Ott programs and gave approval on

behalf of CPC for appropriation requests.

During CPC’s entire period of ownership of Ott II,

the chairman of the Ott II board was always a

top-ranking CPC executive. The president of CPC

had the authority to determine who served as Ott II’s

chairman. Arnold Ott served as chairman from 1966

to 1969 at the same time that he was a CPC vice-

president and the president of CPC’s development

company. From 1969-1970, Eiszner was the Ott II

chairman in addition to serving as a CPC vice-

president. Finally, Beverly Warner served as

chairman from 1970 to 1972 while also serving as

president of CPC’s development company.

Other CPC officials served as particularly

influential members of the Ott II board. Within six

months of the acquisition, CPC placed Harold

Hellman, a CPC vice-president and assistant to

CPC’s president, on the board. James W. McKee,

CPC’s financial officer, served on the board from 1968

to 1969.

When the Ott II board expanded from eight to

eleven members in 1970, the three additional directors

were senior CPC employees, including Warner who

was elected chairman and chief executive officer.

CPC executives who were not Ott II board

members also occasionally attended Ott II board

69a

meetings, including CPC’s president and its chair-

man of the board.

CPC matters were discussed at board meetings,

and Ott II board members recognized the need to

consider CPC’s interest and seek strong guidance

from the parent company during these sessions.

The site of the Ott II board meetings regularly

alternated between Ott II's headquarters in

Muskegon and CPC’s headquarters in New York and

later Englewood Cliffs, New Jersey.

3. Management

CPC also actively participated in and exerted

control over day-to-day decision-making at Ott II

through representation in the highest levels of the

subsidiary’s management.

Although Ott II corporate officers set the day-to-

day operating policies for the company without any

need to obtain formal approval from CPC, CPC

actively participated in this decision-making because

high-ranking CPC officers served in Ott II man-

agement positions. In addition, the president of Ott II

reported directly to CPC’s president.

The Ott II management formulated and imple-

mented the company’s day-to-day operating policies,

including sales, marketing, advertising, the purchase

of raw materials, research and development, hiring

and personnel policies, capital expenditures, manu-

facturing, and environmental matters.

Several individuals served simultaneously as

top-ranking Ott II and CPC officials. In some

70a

instances, the officials with dual roles at Ott II and

CPC worked out of CPC’s headquarters in New York.

Arnold Ott was one of the principal CPC officials

who exerted control within Ott II management.

Following his move to CPC headquarters to assume

new corporate responsibilities at CPC even prior

to the formal acquisition of Ott I, Ott served as

president and chief executive officer of Ott II through

December 1966. During this period, Ott worked from

CPC’s headquarters where he served concurrently

as a CPC vice-president responsible for scientific

research. In 1968, Ott became the first president of

CPC’s development company, a division with over-

sight responsibility for Ott II and other wholly owned

subsidiaries involved in scientific development.

During his tenure as president of CPC’s development

company, Ott also served as Ott II's chief executive

officer.

James Eiszner similarly held a major position at

CPC at the same time that he was an active and

influential member of Ott II’s management. Eiszner

served as Ott II’s president from 1967 to 1970, and

in 1968, he became a vice president of CPC’s develop-

ment company, reporting directly to its president,

Arnold Ott. Eiszner subsequently ascended through

the ranks of CPC, where he eventually became chief

executive officer.

In another instance, a high-ranking CPC official

became an Ott II senior officer. Beverly Warner, who

became president of the development company in 1969,

assumed the position of Ott II’s chief executive officer

in 1970, a position he retained until the sale of Ott II

to Story in 1972.

71a

CPC officials thus played decisive roles in Ott II's

policy-making structure. As top officers at Ott II,

these CPC officials exerted significant control and

bore ultimate responsibility over decision-making at

the subsidiary in areas including waste disposal,

sales, marketing, manufacturing, purchasing and per-

sonnel.

The direct involvement and influence of CPC

officials in Ott II decision-making at times created

controversy and strains within the subsidiary.

While serving as CPC’s development company

president and Ott II’s chief executive officer, Beverly

Warner controlled decisions including production,

pricing and plant operations at Ott II actually

undermined a number of Ott II programs. According

to Eiszner, who eventually became CPC’s chief ex-

ecutive officer, Warner “made some terrible, terrible

management decisions which were probably what led”

to the sale of Ott II in 1972.

Eiszner himself was the subject of criticism for

improperly giving too much attention to CPC matters

while serving in dual management roles at Ott II and

CPC. At an Ott II board meeting, board members

admonished Eiszner for improperly allocating too

much management time to CPC.

The Ott II company airpiane also was frequently

unavailable for use by Ott II executives because CPC

officials were occupying it for travel between their

headquarters and the subsidiary.

Arnold Ott’s control over Ott II matters continued

even after he relinquished the Ott II presidency and

served as CPC’s development company president and

Ott II chairman. For example, Ott singlehandedly

72a

made the decision to move Gerald Roberts, Ott II's

controller and treasurer since 1967, to a similar

position with the CPC’s development company in

1968. Ott also personally selected Roberts’ successor

at Ott II, David Hackney.

4. CPC’s development company

CPC’s development company also actively partici-

pated in and exerted control over policy-making at Ott

II in efforts to enhance performance, shape decisions

and affect personnel changes.

The development company, which had oversight

responsibility for a number of CPC subsidiaries with

scientific or technical specialties, served as another

source of policy-making for Ott II. Prior to the

closing of sale of Ott II to Story in 1972, Ott II pre-

sident William T. White described to Story Chemical

official Harry Forman: “Ott has been operating as

part of the CPC Development Company, and, in

addition, Ott has had its own Board of Directors.

Thus ... overall policy has come from two sources

Arnold Ott and Beverly Warner served

successively as president of the development company

during the Ott II era, and each held positions as chief

executive officer and chairman of Ott II during their

respective tenures with the development company.

James Eiszner served as vice-president of the

development company.

The development company regularly reviewed Ott

II and recommended changes on matters ranging from

finances to personnel, exerting pressure to generate

more profits and enhance performance. The company

73a

sought to ensure that Ott II met profit plans and

policy goals. It also decided, among other things, who

would represent CPC on Ott II’s board of directors.

Ott II submitted monthly financial reports to the

development company and an annual financial pro-

spectus known as the “green book” for review and

approval. Top Ott II officers reported to development

company officials as well as the Ott II board.

In addition, the development company conducted re-

views of the subsidiary’s performance that would be

followed by calls for change within the subsidiary.

For example, in December 1970, Arnold Ott and James

Eiszner, who no longer held posts with Ott II, visited

the subsidiary at Warner’s request. In a December

21, 1970, memo to Warner summarizing the visit, Ott

wrote, “No intent was made to be demeaning or

critical, but rather to evoke constructive discussion

on policy interpretation, goal definition, organization

for achieving and means for directing and controlling

the profit-generating process.” The memo also stated

that Ott and Eiszner had “admonished” the Ott II

officers “to be more incisive and decisive, more frugal

on authorizations of expenditures and to let all the

personnel know—now—that the Company is off

course and the team must win.” After another review

of Ott II, Arnold Ott took the unusual step of re-

porting the results to Warner in the form of a

telegram sent to his home. It read, in part: “Am

absolutely convinced that total financial capability [at

Ott II] is grossly lacking. Sound fiscal management

impossible. At present don’t see plan to make

profitable operations for first quarter of 71. Suggest

replacing Hackney immediately as one element of

remedy.” David Hackney was subsequently replaced.

74a

Other CPC officials engaged in similar missions to

Ott II in which Ott II officials received instructions

and directives on how to improve and change.

Development company vice-president Kenneth W.

Knief visited Ott II to discuss with Ott officials the

accuracy of the subsidiary’s profit plans shortly

before CPC’s sale of Ott II to Story. In a March 27,

1972, memo, following the visit, Knief wrote to

Warner that Ott II management “had been advised not

to implement any changes in activity without dis-

cussion with Englewood Cliffs,” CPC’s headquarters.

In sum, CPC engaged in active participation in and

significant control over Ott II policy matters and

decision-making both internally through representa-

tion within Ott II's management and board and

externally through the supervision of CPC’s develop-

ment company.

5. Environmental matters

Along with its overall participation in Ott II

policies through extensive involvement in Ott II’s

board and management and through active oversight

by the development company, CPC actively partici-

pated in Ott II environmental matters.

Discussions of waste disposal problems and po-

tential solutions was a major topic of discussion

within the Ott II management structure and board

that CPC at times dominated and controlled.

In addition, CPC became directly involved in en-

vironmental and regulatory matters through the

work of G.R.D. Williams, CPC’s governmental and

environmental affairs director. Williams coordinated

all pollution activities for CPC and its divisions and

75a

subsidiaries and became heavily involved in environ-

mental issues at Ott II.

At the suggestion of Ott board member and CPC

executive Harold Hellman, Williams became involved

with Ott II in 1966 when Ott II was considering waste

disposal alternatives to be discussed at an upcoming

meeting with the state Water Resources Commis-

sion. Hellman recommended involving Williams

because he handled all CPC pollution problems and

had dealt with similar waste disposal issues at

another CPC subsidiary.

CPC’s Williams then actively participated in and

exerted control over a variety of Ott II environmental

matters

In the meeting with the Water Resources Commis-

sion, Williams participated in discussions, which, as a

result of his influence, did not include presentation by

Ott II of plans for a biological waste treatment

facility. Williams did not feel that Ott II should

mention the option because he did not think it would

be needed as a waste disposal alternative.

CPC’s Williams also instructed Ott II officials to

limit cooperation with state and federal regulators

regarding waste disposal and to consult with CPC

before responding to regulatory questionnaires or

other inquiries. In a memo to a new Ott II vice-

president for manufacturing in 1967, Ott II president

Eiszner wrote that Williams “feels that delaying

tactics are almost always advisable.” In a 1968 memo

to top-ranking Ott II officials, Williams instructed

that any unannounced visit by regulators “should

be stalled for advice from N.Y.” and that “(aJjny

questionnaires should be filled in promptly in pencil

76a

and forwarded to Air & Water Programs for review

and decision on reply.“ In a 1969 memo to an Ott II

project engineer regarding an upcoming visit by a

state regulator, Williams wrote, As you know, it is

our posture to be cooperative on the occasion of such

inspections. We answer questions that are not

self-incriminating, but we do not volunteer informa-

tion, particularly about planned capital expenditures,

production rates, sales volume and the like.“ In a 1971

memo regarding an upcoming federal survey to be

completed by Ott II plant chemists, Williams in-

structed that if test results “meet acceptable levels,

then the survey should be completed and forwarded by

the plant manager. If they do not for any reason meet

such levels, then this office should be queried with

the details before the survey request is answered.”

Other CPC officials also actively participated in

Ott II waste disposal matters. For example, in 1970,

Hanes Heller, a CPC attorney, negotiated with the

state regarding Ott II’s use of a county wastewater

treatment system. Heller provided detailed instruc-

tions to Ott II regarding the objectives in these

negotiations and indicated that CPC approval of any

agreement was necessary.

6. Financial matters

CPC also exerted significant control over Ott II's

finances.

Ott II prepared monthly financial reports for CPC’s

development company, and each year the subsidiary

submitted a detailed financial plan known as the

“green book” for review and approval by the parent

company.

77a

CPC functioned as Ott II's banker, advancing the

subsidiary more than $5 million from 1965 to 1971.

CPC also assumed a number of loans for Ott II. Ott

II's funds were commingled with CPC’s in a joint

account.

In addition, Ott II had a limit on capital expendi-

tures that were permitted without approval from

CPC’s board of directors or development company.

The ceiling on capital spending that did not require

parent approval was initially $5,000 in 1965 and

became $200,000 in 1968.

7. Labor matters

CPC officials also actively participated in some Ott

II labor matters.

In 1967, CPC officials became involved in the nego-

tiations between Ott II and a union that had pre-

viously attempted to organize at other CPC facilities.

CPC also participated in subsequent labor negotia-

tions in 1968 and 1970.

8. Other business matters

CPC also participated in other aspects of Ott II's

business. CPC provided staff services and employee

benefit programs to Ott II; filed patents; developed, in

a cooperative effort between Ott II and another CPC

research facility, chemicals for use by CPC; and

coordinated outside and accounting services. CPC

provided these services without charge to Ott II.

78a —

9. Sale of Ott II to Story

On June 9, 1972, CPC sold Ott II to Story for

approximately $6.6 million in cash and a $4 million

note. The transaction was made without the knowl-

edge of the Ott II board. For six months prior to the

closing, CPC operated the Ott II business for Story.

Following the sale to Story, Ott II changed its name

back to Four Lakes Chemical Company.

D. Ownership by Story: 1972 to 1977

On June 9, 1972, Story began its chemical manu-

facturing operations at the site.

By 1974, beset by financial problems, Story

abandoned regular use of the purge well system

installed during the Ott II era to eliminate

contaminants from the groundwater. This

abandonment increased the spread of contamination

migrating away from the site.

In July 1976, Story filed for bankruptcy

organization, and in August 1977, the company was

adjudicated bankrupt.

The bankruptcy trustee responsible for the

disposition of Story’s assets, Maurice Edelman,

assumed title on the site and attempted to find a

buyer.

79a

E. Agreement between MDNR and Cordova/

California: 1977

1. MDNR’s environmental emergency

Following Story’s bankruptcy in 1977, officials with

the State of Michigan began to assess the severe

environmental problems presented by the abandon-

ment of the site.

Acting in their regulatory capacity, MDNR offi-

cials, together with members of the Governor’s office,

Public Health Department, and State Police, visited

the site and discovered the extreme severity of its

environmental problems.

The site’s environmental problems were legion.

The toll exacted by decades of hazardous waste con-

tamination was abundantly clear. Groundwater

pumped to the surface contained foam and a brownish

color like root beer. The stench of chemicals per-

meated the air. Soil excavation revealed the taint of

toxic pollution, showing purplish colors. Hundreds of

chemical drums, many piled atop each other, lay

around the site, randomly strewn among trees, across

pavement and into sandy pits. Many of the drums and

barrels were crushed, corroded and leaking, with

their contents seeping into the ground. Chemical

waste by-products, including thousands of broken

bottles, littered the land.

Among the chemicals found at the site were

potentially deadly toxics. Tanks of explosive phosgene

gas, potentially deadly if released into the air,

presented a serious risk to neighboring residents in

the event of vandalism or an accident. Other

chemicals known as probable human carcinogens

80a

were found scattered around the site, including

benzene, phenol, methylene chloride, and methyl

isocyanate.

Based on these discoveries, MDNR identified five

severe environmental problems at the site. The five

problems were prioritized in their order of immediate

danger to public health: 1) the potentially explosive

phosgene gas contained in large tanks at the site;

2) a contaminated water supply in the community

surrounding the site; 3) contaminated sludges at the

site; 4) contaminated waste containers at the site,

particularly barrels and laboratory bottles; and 5)

contaminated groundwater flowing underneath the

site.

Although the environmental problems at the site

did not qualify as a public health emergency under

state fire or public health department standards,

these dire environmental conditions presented an

environmental emergency for MDNR. All of these

severe environmental problems were going unattend-

ed and threatened to worsen, including the spread of

some of the worst groundwater contamination state

regulators have encountered to date. As a result, the

site posed an environmental emergency in need of

prompt regulatory attention from MDNR as the state

agency responsible for the protection and conserva-

tion of Michigan’s natural resources.

MDNR’s ability to initiate an immediate cleanup

of the environmental emergency at the site was

severely limited, however. In 1977, Michigan and the

United States had not yet established laws creating

revolving funds to provide resources to pay for agency

cleanups and liability provisions to seek reimburse-

ment from polluters, such as CERCLA and its

Sla

Michigan counterpart, Act 307“, M. C. L.A. § 299.601

et seq. Instead, in order to initiate cleanup of an

environmentally contaminated site, MDNR needed to

obtain a specific legislative appropriation for that

purpose. The tools for government cleanups in

Michigan were few, and the process for obtaining

them was laborious.

In light of the severity of the environmental

problems at the site and the unavailability of immedi-

ate resources to pay for a cleanup, MDNR, together

with other state officials, initiated in early 1977 an

effort to expedite legislation appropriating funds for

cleanup of the site.

At the same time, MDNR became actively involved

in efforts to attract a buyer for the site. The agency

was interested in involving a new purchaser in the

cleanup as a way of reducing the amount of state

money that would be allocated by the legislature for

its regulatory response.

2. Negotiations between MDNR and Aerojet’s

Cordova Chemical Co.

In March 1977, officials from Aerojet and its

unincorporated division known as Cordova Chemical

Company met with MDNR officials in Michigan to

discuss possible purchase of the site. After the

meeting, Aerojet elected not to acquire the property,

due, in part, to its contamination problems.

Several months later, however, Aerojet had

renewed interest in the site. Aerojet was looking for

a facility to make ethelenimine (“EI”), a chemica!

used by its Cordova division in the manufacturing

process. Aerojet had recently learned that EI would

82a

soon not be available from its previous supplier. As a

result, talks between officials from MDNR and

Aerojet resumed.

Discussion of the existence and spread of con-

tamination at the site was central to the negotiations

between MDNR and Aerojet. MDNR had initially

aimed to have its regulatory cleanup of the five

environmental problems funded entirely by the site’s

new purchaser. In contrast, Aerojet was initially

reluctant to pay for the cleanup of any contamination

created by prior owners of the site.

The negotiations over the contamination focused on

identifying aspects of MDNR’s regulatory cleanup

efforts at the site that the company would agree to

finance. MDNR decided that receiving private fund-

ing for some of its cleanup efforts would be acceptable,

and Aerojet determined that it would be willing to pay

for some cleanup of the preexisting contamination at

the site in exchange for promises with respect to

future cleanup obligations.

With negotiations progressing, Aerojet signed a

stipulation with Story’s bankruptcy trustee on

September 12, 1977, in which Aerojet agreed to pay for

security and safety measures at the site for the

succeeding two weeks in exchange for the right to

match any offers to purchase the site during the time

period. On September 29, 1977, Aerojet signed a

similar agreement for two additional weeks.

On October 3, 1977, in anticipation of an imminent

agreement to purchase the site, Aerojet incorporated

its Cordova division. Cordova Chemical Company

(“Cordova/California”) became a wholly owned sub-

sidiary of Aerojet, incorporated in California.

After Cordova/California’s incorporation, negotia-

tions over the purchase of the site between MDNR

and Cordova/California culminated.

3. The stipulation and consent order

On October 13, 1977, a document entitled “stipula-

tion and consent order” was signed by MDNR,

Michigan’s attorney general’s office and Cordova/

California. It addressed the problem of environmental

contamination at the property and set forth obliga-

tions with respect to cleanup activities. The docu-

ment was not a formal stipulation and consent order

that received court approval or settled pending

litigation.

One day later, Cordova/California formally pur-

chased Story’s assets, including the site, from the

bankruptcy trustee for $50,000 and the assumption of

certain debts, subject “to all liens, claims and

encumbrances” on an “as is,” “where is” basis. In

total, Cordova/California paid about $2.5 million for

the site, which had been appraised by the State of

Michigan as being worth approximately $7.5 million.

The four-page stipulation and consent order set

forth the entire agreement between MDNR and

Cordova/California with respect to the contamination

at the site and obligations between the parties for

cleanup. It contained eight stipulated facts and nine

terms and conditions.

The stipulated facts in the document recited the

five pollution problems identified by MDNR in its

initial assessment of the environmental emergency

left after the Story bankruptcy, although they were

not enumerated as such: groundwater contamination;

84a

buried waste sludge; toxic waste drums and con-

tainers; water supply problems caused by contami-

nated residential wells; and phosgene gas.

With respect to the groundwater problem, the

stipulated facts stated that:

... Groundwater beneath and surrounding

Story Chemical Corporation for an unknown

distance has been and is continuing to be

contaminated with toxic chemical wastes which

originated at the Story Chemical Corporation

facility ....

... Toxic chemical wastes in the groundwater

from Story Chemical Corporation are moving

away from the property of the Corporation and

may thereby also contaminate nearby surface

waters of the State of Michigan.

.. There is continued leaching of toxic

chemical wastes to the groundwaters of the State

of Michigan as a result of the improperly disposed

waste sludges buried on the site of Story

Chemical Corporation.

Stipulation 7 1, 3 5.

The stipulated facts also set forth “the most

reasonable methods of abating the present pollution

problems” at the site:

a) Disposal of the approximately 8,700 fifty-

five gallon drums of solid and liquid chemi-

cal waste by the Department of Natural Re-

sources by means of recovery, incineration

or landfilling,

85a

b) Excavation, removal ar lisposal of approxi-

mately 8,000 cubic yarus of solid chemical

waste, sludges and contaminated soils by

the Department of Natural Resources, and

e) Neutralization, or sale, removal and dis-

posal of the phosgene by Cordova Chemical

Company.

Stipulation, J 8. The “most reasonable methods of

abating the present pollution problems” did not

mention or address the groundwater or water supply

problems.

The latter half of the document. was entitled

“consent order”, and it set forth terms and conditions

agreed to by MDNR and Cordova/California. Under

the consent order, MDNR agreed to remedy the

waste container and sludge problems, and Cordova/

California agreed to eliminate the phosgene gas and

ge MDNR $600,000 to defray the costs of the

agency’s cleanup of the waste containers, sludge and

residential wells.

MDNR expressly agreed, at its sole cost and

expense, to “completely remove the approximately

8700 fifty-five gallon drums from the Story Chemical

Corporation facility and dispose of such drums and

their contents. Consent order, J 2. MDNR also

expressly agreed, at its sole cost and expense, to

“completely excavate and remove the approximately

8000 cubic yards of solid chemical wastes, sludges and

contaminated soils. . [and] replace the excavated

materials with clean fill.” Consent order, J 3.

Cordova/California expressly agreed, at its sole

cost and expense, to “neutralize and dispose and/or

86a

sell and remove all phosgene presently stored on the

Story Chemical Corporation property. ...” Consent

order, J 4.

Cordova/California also agreed to pay $600,000 to

MDNR “to abate the pollution problems at the Story

Chemical property... Consent order, J 5. The

order set forth a schedule for the payments and made

them contingent upon MDNR obtaining legislative

and gubernatorial approval.

With respect to Cordova/California’s $600,000 pay-

ment and the company’s responsibility or liability for

the contamination at the site it was acquiring, the

consent order stated:

6. It is anticipated that said $600,000 will

be sufficient to reimburse the Department of

Natural Resources fully for all costs and ex-

penses incurred by it in connection with its

obligations hereunder and, in addition, to

provide at least $100,000 towards the provision

of an alternative water supply system to serve

residents and commercial establishments whose

water supply wells are or may become affected

by the groundwater contaminants emanating

from the Story Chemical Corporation property.

The Cordova Chemical Company shall not have

any liability in the event that said $600,000 is

not in fact sufficient for the intended purposes

nor shall it have any responsibility whatsoever

in connection with the provision of any water

supply system or potable water pending

availability of an acceptable water supply

system to said residents and commercial

establishments.

87a

Cordova Chemical Company shall not have any

responsibility or liability in connection with any

other corrective actions which the Department of

Natural Resources or any other governmental

agency may hereafter deem necessary or advisable

in connection with the contamination emanating

from the Story Chemical Corporation property,

including, without limitation, the creation, main-

tenance and operation of any purge wells.

8. Compliance with this Consent Order shall

constitute full satisfaction of all relief, civil or

administrative, which might have been, or

which otherwise might be obtained against

Cordova Chemical Company for any contamina-

tion of groundwater or other pollution, injury,

or damage, to the environment or otherwise,

caused by acts or omissions of Story Chemical

Corporation facilities, which acts, omissions or

operations occurred prior to the effective date

of this Consent Order, whether the contamina-

tion, pollution, injury or damage occurs prior to

or after the effective date hereof.

9. By entering this Order the Department of

Natural Resources agrees to indemnify and

hold Cordova Chemical Company Harmless

from any and all losses, damages, injury, costs

and expenses (including reasonable attorney’s

fees) incurred or sustained by Cordova Chemi-

cal Company on account of or in connection with

the Department’s excavation, removal and dis-

posal operations pursuant to paragraphs 2 and 3

of this Consent Order. This provision does not

88a

apply to losses, damages, injuries, costs and

expenses caused by the willful or negligent acts

of Cordova Chemical Company’s employees or

agents.

Consent order, J 6, 8, 9.

In sum, as a result of the negotiations that resulted

in the terms and conditions of the stipulation and

consent order, MDNR secured assistance and financ-

ing from Cordova/California in its regulatory effort

to remedy the severe environmental problems at

the site. Specifically, Cordova/California agreed to

remedy the phosgene problem itself and provide

$600,000 to pay for or subsidize MDNR’s removal of

8,700 drums, the excavation and removal of 8,000 cubic

yards of contaminated soils, and effort to remedy the

water supply problem.

However, the agreement did not provide for a total

cleanup of the site’s severe environmental problems.

Some aspects of MDNR’s ongoing regulatory efforts

at the site were not covered by the terms and con-

ditions of the agreement.

In particular, MDNR and Cordova/California did

not reach an agreement regarding a remedy for the

groundwater contamination problem. Instead, the

fate of the groundwater problems was not resolved,

with MDNR left to tackle the problem as part of its

overall regulatory responsibility for the site.

In addition, the stipulation and consent order did

not provide for removal of all of the site’s con-

taminated sludge. MDNR had determined that the

actual quantity of contaminated soil was 71,000 cubic

yards, although the stipulation and consent order

only proved for removal of 8,000 yards.

89a

Thus, the cleanup responsibilities set forth in the

stipulation and consent order were not sufficient to

effectuate a total cleanup at the site. The piecemeal

nature of the cleanup agreements caused some

consternation among MDNR staff. But agency

officials had determined that it was desirable to reach

an agreement that would secure some assistance and

financial support from the site’s new owner as the

MDNR began its initial regulatory activities.

After the signing of the stipulation and consent

order, MDNR obtained a legislative appropriation to

pay for the cleanup. On February 6, 1978, Michigan’s

Governor William Milliken signed a bill appropriating

$1.27 million in funds for MDNR’s cleanup of the site.

The appropriation consisted of $670,000 of state

money and $600,000 paid to MDNR by Cordova/

California under the consent order. The bill allocated

$500,000 for “barrel and sludge removal”, $600,000 for

“alternative water supply” and $170,000 for “new

ground water purging system.”

Although the bill did not allocate money for a total

cleanup, the appropriation contained funding for

MDNR regulatory cleanup activities at the site that

were not part of the agency’s express obligations

under the stipulation and consent order. Specifically,

the allocation of $170,000 for groundwater purging

was not related to any obligations set forth in the

stipulation and consent order. Instead, the $170,000

allocation for the purging system funded MDNR’s

own regulatory effort to begin the cleanup of ground-

water contamination. The $170,000 was requested by

MDNR to pay for the design, installation and

first-year of operation of a purge well system.

90a

Several legislative and gubernatorial aides who

became involved in passage of the appropriations bill

did not understand that MDNR was requesting

funding for regulatory activities at the site that were

outside of the obligations made under the stipulation

and consent order. The aides had not participated in

the negotiations between MDNR and

Cordova/California. They also did not understand that

the appropriations would not effectuate a total

cleanup of the site. This lack of knowledge about the

cleanup led to the drafting of three documents that

contained erroneous information: a letter drafted for

Governor Milliken stating that the $1.27 million bill

would pay for a “total cleanup” and two legislative

fiscal analyses that implied that the stipulation and

consent order obligated MDNR to install a ground-

water purging system by MDNR. Trial exhibits

1028, 1027, 1059.

Following passage of the bill, Cordova/California

and MDNR fulfilled their cleanup obligations under

the stipulation and consent order. Cordova/California

neutralized and removed the phosgene gas at the site.

MDNR, with private contractors, removed 8,000 cubic

yards of sludge and 8,700 drums of waste.

During its cleanup activities, MDNR discovered

additional drums that had been buried by previous

owners and not previously identified by the state in

its investigation. One of the drums exploded during

excavation work. MDNR did not have funds appropri-

ated to pay for this additional cleanup. As a result,

the drums were reburied as a precautionary measure

until funding for their removal could be obtained.

91a

MDNR’s attempts to address the groundwater con-

tamination problem continued. In an April 3, 1978,

“special program directive”, an MDNR official, de-

signated as a “highest” priority the task of “removal

of contaminated groundwater and installation of

public water supply” at the site.

MDNR subsequently commissioned studies in an

attempt to determine the most effective plan for

eliminating contaminated groundwater. The studies

aimed to analyze the extent of the problem and the

flow of groundwater in order to place purge wells in

locations that would most effectively control and

recapture spreading contamination. Based on the

studies, MDNR determined that an effective ground-

water purging system might cost $37.7 million.

In its efforts to determine the most effective way to

implement a purge system, the state expended the

$170,000 it had been allocated for the new purging

system. As a result, MDNR was not able to initiate

any actual purging operations with the appropria-

tions.

Following MDNR’s and Cordova/California’s ful-

fillment of their cleanup obligations under the stipu-

lation and consent order, contamination remained at

the site. Groundwater contamination continued to

migrate. Thousands of yards of contaminated sludge

remained in the ground and continued to leech. The

recently discovered barrels also remained.

92a

F. Ownership by Cordova/California and

Cordova/Michigan: Since 1977

1. Acquisition of the site

Aerojet was actively involved in Cordova/

California’s acquisition of the site.

A team of Aerojet officials led the initial negotia-

tions with MDNR in March 1977. One Aerojet

individual was the company’s director of risk manage-

ment, and another was the vice president of opera-

tions for the Cordova division.

When negotiations resumed after the Cordova

division learned it would be losing its principal

supplier of ethelenimine, it was Aerojet officials again

who became involved. Aerojet officials and employees

conducted economic, environmental, and engineering

studies regarding the site to determine its compati-

bility with the Cordova division. Aerojet’s chief

negotiators were its Cordova division’s controller and

vice president of operations.

In addition to signing two consecutive stipulations

with the bankruptcy trustee giving the company the

right of first refusal to purchase the site for a

two-week period, Aerojet officials drafted an initial

stipulation and consent order that it presented to

MDNR shortly before the incorporation of Cordova/

California.

93a

2. Incorporation of Cordova/California, Cordova/

Michigan

At two significant junctures in the history of

ownership of the site, Aerojet incorporated a wholly

owned subsidiary to take title of the property.

Aerojet incorporated its Cordova division as

Cordova/California in October 1977, just before ac-

quisition of the site. Then, shortly before the com-

mencement of its chemical manufacturing at the site,

Aerojet incorporated Cordova/Michigan as a wholly

owned subsidiary of Cordova/California.

On October 3, 1977, just eleven days before the

formal purchase of the site, Aerojet incorporated

its Cordova division as a wholly owned subsidiary,

Cordova/California. Cordova/California was capitaliz-

ed by Aerojet with $10,000 in common stock and $7.1

million in addition paid-in capital. As a result, a

subsidiary of Aerojet, rather than Aerojet itself,

purchased the site.

Despite the change in form, the company officials

participating in the acquisition remained the same

during the final stages of negotiation. Richard

Swanson, Marshall Howes, and TJ. Glad, formerly

the negotiators on behalf of Aerojet’s Cordova di-

vision, represented Cordova/California. This sudden

change in corporate form resulted in some confusion

within the company. Swanson, who signed the con-

sent order on behalf of “Cordova Chemical Company”,

did not know whether he signed the document on

behalf of the Cordova division or Cordova/California.

After its incorporation and acquisition of the site in

October 1977, Cordova/California began a major

94a

construction project to convert the facilities into a

manufacturing plant for EI, the chemical which

Aerojet’s Cordova division had received from an out-

side supplier.

Then, on November 2, 1978, with construction com-

plete and manufacturing operations about to begin,

Cordova/California created its own wholly owned

subsidiary, Cordova Chemical Company of Michigan

(“Cordova/Michigan”), and transferred ownership of

the site to Cordova/Michigan. Cordova/Michigan was

capitalized by Cordova/California with $250,000 in

common stock and $2.8 million in additional paid-in

capital.

As a result, a subsidiary of Aerojet’s subsidiary,

rather than Aerojet’s subsidiary itself, owned the site

at the time that chemical manufacturing commenced.

3. Aerojet’s direct involvement with the site

After the incorporation of each of its two sub-

sidiaries for operations of the site, Aerojet continued

to participate directly in decision-making regarding

use of the facility.

In 1978, Aerojet closely supervised the construc-

tion of additional facilities at the site that were neces-

sary for the conversion to a manufacturing plant for

ethelenimine.

From 1979 until at least 1984, Aerojet participated

in periodic discussions and negotiations with prospec-

tive purchasers regarding possible sale of the site.

An Aerojet vice-president of corporate development

served as the companies’ designated individual for

meetings with prospective purchasers.

95a

In November 1979, one year after the incorporation

of Cordova/Michigan, Aerojet prepared a prospectus

for review by a West German company considering

acquisition of the site.

After production activities at the site ceased in

1985, Aerojet participated in the continuing manage-

ment of the site and leased portions of the site to

third parties. Cordova/Michigan’s manager of the

Muskegon site reported directly to Aerojet officials

working in an unincorporated division, Aerojet In-

vestments. The manager’s budget was approved by

Aerojet.

4. Integration of business

Despite their separate corporate existence,

Cordova / California and Cordova/ Michigan operated as

a single, integrated business entity. The subsidiaries

performed functions that previously had been part of

the operations of Aerojet’s own Cordova division prior

to the incorporation.

EI manufactured by Cordova/Michigan at the site

was shipped to Cordova/California’s main plant for

use in the production of several drug intermediates.

Receiving supplies of EI was critical to the success of

Cordova/California, which was the largest user of the

chemical in the United States.

Integration of the businesses of Cordova/California

and Cordova/Michigan extended beyond the supplying

of EI. Cordova/California handled marketing services

for Cordova/Michigan, including solicitation of busi-

ness and the processing of orders received. Cordova/

Michigan did not even retain the paperwork regarding

its customers’ orders. In addition to providing

96a

marketing services for Cordova/Michigan, Cordova/

California managed all payroll, management, and

accounting matters for both companies. Cordova/

Michigan periodically paid Cordova/California for

these services.

Cordova/California also established the sales

schedule for Cordova/Michigan, and Cordova/

California participated in decisions regarding

Cordova/Michigan’s production quotas and inventory

controls.

5. Board of directors

Following the separate incorporation of Cordova/

California and Cordova/Michigan, the subsidiaries’

board of directors were inactive and nearly non-

existent. As a result, policy-making for the com-

panies was primarily handled by Aerojet officials

serving in the subsidiaries’ management.

Cordova/California and Cordova/Michigan never

actually held regular board of directors meetings.

Benjamin Simmons, president of Cordova/California

and Cordova/Michigan as well as a director of both

corporations, could not recall ever attending a board

of directors meeting or even that any such meeting

was ever held.

The boards of Cordova/California and Cordova/

Michigan were composed almost entirely of Aerojet

employees, and the boards essentially functioned to

consent to the policies established by management.

6. Management

Aerojet participated actively in and exerted control

over day-to-day operations at Cordova/California and

Cordova/Michigan through widespread representa-

tion within the management ranks of the subsidiaries.

As a result, the managements of Cordova/California

and Cordova/Michigan were separate from Aerojet in

form, not substance.

Throughout the Cordova era, leading Aerojet cor-

porate officers held identical or similar positions

with the wholly owned subsidiaries. After the

incorporation of Cordova/California and Cordova/

Michigan, no major distinction among the man-

agement groups for the three companies existed.

Aerojet officials dominated the management of the

Cordova subsidiaries. At least 20 different corporate

officers simultaneously held identical or nearly

identical positions with Aerojet, Cordova/California

and Cordova/Michigan during the Cordova era. At

least 25 officers held the same posts with Cordova/

California and Cordova/Michigan at the same time.

The president of the three companies was the same

individual on at least two oceasions totalling more

than four years. In addition, the president of

Cordova/California and Cordova/Michigan was the

same person on three occasions. Individuals who

served simultaneously as officers with Aerojet,

Cordova/California and Cordova/Michigan were paid

by Aerojet. Other Cordova/Michigan officers were

paid by Cordova/California.

Other individuals held the same or nearly identical

posts in triplicate, serving simultaneously as vice

98a

president, treasurer, assistant treasurer, secretary,

and assistant secretary of Aerojet, Cordova/

California and Cordova/Michigan. In addition to these

positions, Cordova/California and Cordova/Michigan

shared officials serving as executive vice-president

and controller.

This domination occurred from the inception of the

separate corporate existence of Cordova/California.

Immediately after Cordova/California’s incorporation,

a number of Cordova division officials merely assumed

identical titles and responsibilities with Cordova/

California, including the president, vice-president for

operations, controller, and vice-president for market-

ing. In short, Cordova/California was operated as it

had when it was the unincorporated Cordova division;

a change in form, not substance had occurred.

Similarly, the separate incorporation of Cordova/

Michigan merely resulted in a multiplicity of titles,

not a change in the way operations functioned at the

site. ;

Aerojet further exercised influence over the

management of its subsidiaries by having top officers

report directly to the parent company, rather than to

the subsidiaries’ board of directors. For example,

Benjamin Simmons, president of Cordova/California

from 1977 to 1979, reported to Aerojet president J.H.

Volbrecht and senior vice-president Clay Matthews.

Delores Dorsey, who served as treasurer of all three

companies for nearly eight years, reported directly to

Aerojet’s vice-president of finance, not the directors

or presidents of the subsidiaries.

Aerojet also exerted control over the management

of its subsidiaries by handling personnel decisions.

Aerojet officials interviewed applicants and selected

99a

replacements for vacancies within Cord i

and Cordova/Michigan. Ae ee yy

In sum, Aerojet actively participated in the man-

agement and direction of Cordova / California and

Cordova/ Michigan through representation within

their management groups, which frequently mirrored

the management of Aerojet itself. As a result of this

widespread involvement in the management of its

subsidiaries, Aerojet participated in and controlled

decision-making in all facets of the company, in-

cluding sales, marketing, manufacturing and waste

disposal.

7. Financial matters

In addition to Aerojet’s control over day-to-day

operations at the subsidiaries through domination of

management, Aerojet exercised total financial control

over Cordova/California and Cordova/Michigan.

Cordova/California and Cordova/Michigan lacked

authority to open a bank account, a power retained

solely by Aerojet. All money generated by the

subsidiaries was deposited into an Aerojet account.

Siow tog and Cordova/Michigan advised

customers to send payments to a Californi

box belonging to Aerojet. 1808

In 1984, Aerojet assigned $25 million in worthless

debt owed to it by Cordova/Michigan to Cordova/

California, which eliminated more than $13 million

owed by Aerojet to Cordova/California. The agree-

ment assigning the debt was prepared by an Aerojet

attorney and signed by Cordova/California’s treas-

urer, who did not make any independent determina-

100a

tion of whether the agreement was in the best

interest of Cordova/California.

III. CONCLUSIONS OF LAW

A. CERCLA overview

CERCLA liability attaches if: 1) a release of

hazardous substances has occurred, 2) at a facility, 3)

causing a plaintiff to incur response costs, 4) and the

defendant is a responsible party as defined under

section 107(a), 42 U.S.C. § 9607(a). Amoco Oil Co. v.

Borden, Inc., 889 F.2d 664, 668 (5th Cir. 1989); United

States v. Aceto Agricultural Chemicals Corp., 872

F.2d 1373 (8th Cir. 1989); CPC Int'l Inc. v. Aerojet-

General Corp., 731 F.Supp. 783, 786 (W.D.Mich.1989).

In this liability trial, the parties stipulated to the

first three elements of liability, including that each

party has incurred response costs in connection with

the cleanup at the site. As a result, the central

liability issue is whether CPC, MDNR, Aerojet,

Cordova/California or Cordova/Michigan are respon-

sible parties under section 107(a).

Section 107(a) establishes four bases for CERCLA

liability. It provides:

Notwithstanding any other provisions or rule of

law, and subject only to the defenses set forth in

subsection (b) of this section—

(1) the owner and operator of a. . . facility,

(2) any person who at the time of a disposal of

any hazardous substance owned or operated

10la

any facility at which such hazardous

substances were disposed of,

(3) any person who by contract, agreement, or

otherwise arranged for disposal or treat-

ment, of hazardous substances owned or

possessed by such person, by any other

party or entity, at any facility .. . owned or

operated by another party or entity and

containing such hazardous substances, and

(4) any person who accepts or accepted any

hazardous substances for transport to

disposal or treatment facilities, incinera-

tion vessels or sites selected by such

person, from which there is a release, or a

threatened release which causes the incur-

rence of response costs, of a hazardous

substance, shall be liable.

42 U.S.C. § 9607(a).

In this action, the parties have invoked the first

three of these liability provisions in bringing their

claims: liability under section 107(a)(1) as a present

owner and operator; liability under section 107(a)(2)

as a past owner and operator at a time of a disposal;

and liability under section 107(a)(3) as an arranger for

disposal. Because the parties have stipulated that

each is a “person” as defined under CERCLA, the

question of their respective liability turns solely on

whether status as a present owner and operator, past

owner or operator at a time of disposal or arranger for

disposal applies.

In applying these liability provisions to the facts

of this case, the court is mindful that CERCLA

102a

is a broadly remedial statute. Although some of

CERCLA’s provisions are vague and its legislative

history sparse, the statute clearly aims to achieve

prompt cleanup of hazardous waste sites by placing

the ultimate financial responsibility for cleanup on

those responsible for the pollution. J.V. Peters & Co.

v. Administrator, 767 F.2d 263, 264 (6th Cir. 1985);

Walls v. Waste Resource Corp., 761 F.2d 311, 318 (6th

Cir.1985). As one court stated after examining the

statute’s legis

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