Amicus Curiae Brief — United States v. Bestfoods

‘i Supreme Court, U.S

' i

No. 97-454

——————————

In THE CLERK

Supreme Court of the

OCTOBER TERM, 1997

UNITED STATES OF AMERICA,

j . Petitioner,

CPC INTERNATIONAL, INC., et al.,

Respondents.

On Writ of Certiorari to the

United States Court of Appeals

for the Sixth Circuit

BRIEF AMICI CURIAE OF THE NATIONAL

ASSOCIATION OF MANUFACTURERS AND THE

CHAMBER OF COMMERCE OF THE UNITED STATES

IN SUPPORT OF PRIVATE RESPONDENTS

Of Counsel Bruce J. ENNIS, JR.*

JAN S. AMUNDSON PaAuL M. SMITH

General Counsel ANN M. KAPPLER

QUENTIN RIEGEL Liz APPEL BLUE

Deputy General Counsel JENNER & BLOCK

THE NATIONAL ASSOCIATION 601 Thirteenth Street, N.W.

OF MANUFACTURERS Twelfth Floor

1331 Pennsylvania Avenue, N.W. Washington, D.C. 20005

Washington, D.C. 20004-1790 (202) 639-600

(202) 637-3000 Counsel for Amici

Rosin 8S. ConRAD National Association of

LITA Manufacturers and the

ee oe omg _ Chamber of Commerce of the

1615 H Street, NW. United States

Washington, D.C. 20062

(202) 463-5337

ROBERT L. GRAHAM

JENNER & BLOCK

One IBM Plaza

Chicago, Illinois 60611

(312) 222-9350 * Counsel of Record

WILSON - Eres PRINTING Co., Inc. ~- 789-0096 - WASHINGTON. D.C. 20001

TABLE OF CONTENTS

TABLE OF AUTHORITIES .

INTEREST OF AMICI

SUMMARY OF ARGUMENT

ARGUMENT

[.

STATE CORPORATE LAW HAS ESTAB-

LISHED SETTLED RULES FOR DETER-

MINING WHEN A CORPORATION’S SHARE-

HOLDERS ARE LIABLE FOR THE CORPO-

RATION’S ACTIVITIES, AND THE GOVERN-

MENT’S PROPOSED TEST TRAMMELS

THOSE RULES

A. State Corporate Law Limits the Liability

of Shareholders, Including Corporate Share-

holders, for Acts That Are Ostensibly by and

on Behalf of the Corporations They Own,

Even When the Shareholders Actively Par-

ticipated in and Exercised Control Over the

Activities of Those Corporations

. The Government’s Proposed Test Ignores and

Would Completely Undermine State-Law

Norms of Corporate Liability, Effectively

Converting Subsidiaries Into the Parents’

Agents

’. The Government’s Proposed Test Would Dis-

rupt the Settled Expectations of Participants

in the Marketplace

CERCLA CANNOT FAIRLY BE READ TO

IMPOSE LIABILITY ON A SHAREHOLDER

CORPORATION AS AN “OPERATOR” OF A

SUBSIDIARY CORPORATION’S FACILITY

SIMPLY BECAUSE THE SHAREHOLDER

ACTIVELY PARTICIPATED IN OR EXER-

CISED CONTROL OVER THE SUBSIDIARY,

OR ITS FACILITY

ii

TABLE OF CONTENTS—Continued

A. Nothing in the Language of the Act Supports

the Government’s Position ...........................-

B. Neither of the Government’s Other Argu-

ments Justifies Treating Controlling Share-

holders as “Operators” ..............<-.-.-s-0

. THE COURT SHOULD REJECT THE GOV-

m ERNMENT’S INVITATION TO SUBSTITUTE

A NEW FEDERAL COMMON LAW FOR DE-

TERMINING SHAREHOLDER LIABILITY

IN PLACE OF THE WELL-ESTABLISHED

BODY OF STATE COMMON LAV ........... .

CONCLUSION ........---2----0-ec-secerenerenssaessenesenenenes seeibibscaads

Page

14

18

30

iii

TABLE OF AUTHORITIES

Ameast Indus. Corp. v. Detrex Corp., No. 588-620,

1990 U.S. Dist. LEXIS 15191 (N.D. Ind. 1990).

American Protein Corp. v. AB Volvo, 844 F.2d 56

CASES Page

22

ms 5, 6,7

Atherton v. FDIC, 117 S. Ct. 666 (1997) SS 25

Austin v. Michigan State Chamber of Commerce,

I I ga ee 11

Beazer East, Inc. v. Mead Corp., 34 F.3d 206 (3d

RSIS A Ey Re AIL lee he 26

Board of Governors v. Dimension Financial Corp.,

474 U.S. 361 (1986) . | 21

Bonanza Hotel Gift Shop, Ine. | v. . Bonanza No. 2,

>’ | gf: eee 6

Ciprotti v. United Inns, Inc., 433 S.F.2d 585 (Ga.

a nL 7

Crandon v. United States, 494 US. 152 (1990). 17

Edwards Co, Inc. v. Monogram Industrial, 730

F.2d 977 (5th Cir. 1984) 6,8

Fisser v. International Bank, 282 F.2d 231 ‘(2d

Civ. 2668) .......... -

Grease Monkey Int'l, Ine. v. _ Godat, 916 s. W.2d 257

(Mo. Ct. App. 1995) . 5

Hystro Products, Inc. v. MNP Corp., ‘18 F.3d 1384

(7th Cir. 1994) ........... 6

Isbrandtsen Co. v. Johnson, 348 US. 779 (1952). 24

Joslyn Manufacturing Co. v. T.L. James & Co., 893

F.2d 80 (5th Cir. 1990) 15, 17

Korson v. Independence Mall I, Ltd., 598 So. 24

981 (La. Ct. App. 1992) x

Lusk v. Formeyer Health Corp., 129 F. 3d 773 ( 5th

Cir. 1997) ......... x

Massey v. City of New ‘York, 589 N.Y.S.24 145

(Sup. Ct. 1992) ............ ‘ 16

Miles v. AT&T, 703 F.2d 193 (5th Cir. 1983) . . 6, 7,8

Mountain States Telegraph & Telegraph Co. v.

Pueblo of Santa Ana, 472 U.S. 287 (1985) _ 17

NEC Techs., Inc. v. Nelson, 478 S.E.2d 769 (Ga.

Re ges Sa ee Ae ame RIN, AU ad OO 6

iv

TABLE OF AUTHORITIES—Continued

Page

NLRB v. Deena Artware, Inc., 361 U.S. 398

CIDE <cocecpecenensetetnneneieomnennenibeimeiamasstinigetneinnamitiiids 5

O'Melveny & Myers v. FDIC, 512 U.S. 79 (1994) ....24, 25,

26, 27, 29

Pullman's Palace-Car Co. v. Missouri Pacific Ry.

NI RD 8 kM, yxy ae 16

Quill Corp. v. North Dakota, 504 U.S. 298 (1992).. 11

Reconstruction Finance Corp. v. Beaver County,

bi F. a 27

Robertson v. Wegmann, 436 U.S. 584 (1978) ....... 29

Steven v. Roscoe Turner Aeronautical Corp., 324

+ § @€, +t GB jen Swe Ses 7,9

TNS Holdings, Inc. v. MKI Security Corp., 663

N.Y.S.2d 144 (N.Y. App. Div. 1997) —............... 6

Total Care Health Industrial v. Department of

Soc. Service, 535 N.Y.S.2d 15 (N.Y. App. Div.

REE EL SR a OE a ee 8

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

MRR vas SA ET 6, 7, 8,9

United States v. Kimbell Foods, Inc., 440 U.S. 715

| SERRE aR Se Se SE et 11, 26, 29

United States v. Texas, 507 U.S. 529 (1983) _...... 24

United States v. Yazell, 382 U.S. 341 (1966)... 29

Villanueva v. Astroworld, Inc., 866 S.W.2d 690

G9 EE 6

Westfarm Associates Ltd. Partnership v. Wash-

ington Suburban Sanitary Commission, 66 F.3d

669 (4th Cir. 1995), cert. denied, 116 S. Ct. 1318

(1996) .. 20

Yoder v. Honeywell, ‘Ine. “104 “F.3d ‘1215 “(10th

Cir.), cert. denied, 118 S. Ct. 55 (1997) —............ 6

LEGISLATIVE MATERIALS

6 EF EE ae ae ee Aare ann erenn 14

LD | scetisaumidsa odie eal 14

8 FS RI eee RT 14

26 U.S.C. § 650A .................. ead ae Tra te TE VA 29

v

TABLE OF AUTHORITIES—Continued

Page

ead Ce en 2 29

26 U.S.C. §9507(b)..... ei ae

ng ee gs 14

| eS" re 14

SARI RPS ce 17

Ye a 16

te 16

42 U.S.C. §9601(20).. 4, 16, 18

42 U.S.C. § 9601(20)(A) 2, 14, 16, 17, 19

42 U.S.C. § 9601(20) (E) (I) (i). 19

42 U.S.C. § 9601(20)(F) 20

a 2, 4, 14, 15

ae 27

USC. $9607 (a)... 1

42 U.S.C. §9607(b) neers -

ell sagem "96

I ee gt ae 26

| ieee esse saa ease 26

SINNER RRR Ser 26

°° ‘Salas 18

126 Cong. Rec. 30,932 (1980)... 27

126 Cong. Rec. 30,984 (1980)... ss 28

126 Cong. Rec. 30,986 (1980). tS 28

126 Cong. Rec. 31,965 (1980). S~™S 25

126 Cong. Ree. 31,966 (1980)... 26

126 Cong. Rec. 31,968-69 (1980) sits 25

57 Fed. Reg. 18,344 (1992) aR Pe Tener 19

H.R. Rep. No. 582, 103d Cong. 2d Sess. 100

"GUSTS URN BER areas 29

MISCELLANEOUS

Richard G. Dennis, “Liability of Officers, Directors

and Stockholders Under CERCLA: The Case

t — State Law,” 36 Vill. L. Rev. 1367

ES Le ee ee ee 7,12

William O. Douglas and Carrol M. Shanks, Insula-

tion from Liability Through Subsidiary Corpo-

rations, 39 Yale L.J. 193 (1929-30) _—_—s_ 7,8

vi

TABLE OF AUTHORITIES—Continued

Page

Frank H. Easterbrook & Daniel R. Fischel, Limited

Liability and the Corporation, 52 U. Chi. L. Rev.

| a 7,11

Richard S. Farmer, “Parent Corporation Respon-

sibility for the Environmental! Liabilities of the

Subsidiary: A Search for the Appropriate

Standard,” 19 J. Corp. L. 769 (1994) —................ 17

Wm. Meade Fletcher et al., Fletcher Cyclopedia of

the Law of Private Corporations:

. 4% eee ae En. mt 5, 6, 7,8

. SF. | 3 ee eee 5, 7

. § f ae 10

RF ering pee es 5

5 | i 5

Harry G. Henn & John R. Alexander, Laws of

Corporations (3d ed. 1983) —......000.00....... pee

Oxford English Dictionary (2d ed. 1989) ........... 16

Frederick J. Powell, Parent and Subsidiary Cor-

|) 10

Richard Stewart & Bradley Campbell, “Lessons

From Patent Liability Under CERCLA,” 6

Nat. Resources & Env’t 7 (ABA Section of Na-

tural Resources Law 1992) ..................--..-------------- 20

18A Am. Jur. 2d Corporations § 856 (1985) —........... 5, 7

INTEREST OF AMICI *

The National Association of Manufacturers (“NAM”)

is the nation’s oldest and largest broad-based industrial

trade association. Its more than 14,000 member com-

panies and subsidiaries, including 10,000 small manufac-

turers, employ approximately eighty-five percent of all

manufacturing workers and produce over eighty percent

of the nation’s manufactured goods. More than 158,000

additional businesses are affiliated with NAM through its

Associations Council and National Industrial Council.

The Chamber of Commerce of the United States

(“Chamber”) is the world’s largest business federation.

The Chamber represents an underlying membership of

more than three million businesses and organizations of

every size, sector and region. Ninety-six percent of the

Chamber's members are businesses with less than 100

employees. The Chamber regularly advocates the inter-

ests of its members in courts throughout the country on

issues of national concern to the business community.

SUMMARY OF ARGUMENT

It is a fundamental principle of state corporate law

that shareholders—including corporate shareholders—are

insulated from liability for acts attributable to the cor-

porations they own. Under state law, shareholders do not

lose that insulation from liability simply because they

actively participate in and exercise control over those

corporations. Point I.

There is no statutory basis for the Government's argu-

ment that because CERCLA is a remedial statute, it should

* Pursuant to Supreme Court Rule 37.6, emici state that no

counsel for a party has authored this brief in whole or in part,

and that no person or entity, other than amici, their members, or

their counsel, has made a monetary contribution to the preparation

or submission of this brief. The parties have consented to the fil-

ing of this brief amici curiae and their letters of consent have

been filed with the Clerk of the Court.

2

be construed to supplant state law and to impose retro-

active liability on corporate shareholders whenever they

“actively participate in and exercise control over” their

subsidiaries, in order to permit the Government to enlarge

the pool of “persons” liable to pay cleanup costs. U.S.

Br. at I (Question Presented). Congress expressly de-

fined the “persons” who are subject to CERCLA, and

Congress's definition does not include “shareholders” of

covered persons. 42 U.S.C. § 9601(21). And the Gov-

ernment’s argument that Congress “plainly” intended to

impose liability on some shareholders—those who exercise

“too much” control—but not on others, finds even less

support in the statutory text. Moreover, because corpo-

rate shareholders commonly participate in and exercise

control over their subsidiaries, the Government's “par-

ticipation and control” test would subject most parent

corporations to liability under CERCLA. If Congress

had intended for parent corporations to be liable for the

operations of subsidiaries the parents controlled, it could

easily have said so. But it did not. To the contrary, Con-

gress’s definition of the word “operator” does not by its

plain meaning include an entity that “controls” another

operator. Congress’s definition plainly distinguishes be-

tween “operating” a covered facility and “controlling activ-

ities” at a facility, and makes clear that the latter is

insufficient to establish liability under CERCLA. 42

U.S.C. § 9601(20)(A). Point II.

Moreover, the Government’s proposed “participation

and control” test would require this Court to find that

Congress intended to ignore the extensive and well-estab-

lished body of state corporate law, and to disrupt, retro-

actively, deeply embedded business expectations reason-

ably based on that body of law, by substituting a new

federal common law for determining when a corporate

“shareholder” is liable for acts attributable to a subsidiary

it controlled. However, absent clear intent to the contrary,

3

and here there is none, Congress is presumed to have leg-

islated against the backdrop of state law. Point III.

ARGUMENT

The Government’s basic contention is that Congress

intended to impose CERCLA liability, as “operators,” on

companies or individuals who owned stock in a corpora-

tion operating a covered facility and who exercised some

unspecified degree of control over that corporation. Such

a rule would completely undermine the basic principle of

corporate law that shareholders are insulated from liability

for the actions of the corporation they own. Shareholders

frequently exercise control over the policies and conduct

of corporations in which they have controlling interests,

by electing a board of directors in which they vest the

power and responsibility to conduct corporate affairs.

When the shareholders are themselves corporations. those

parent corporations often have directors or officers in

common with their subsidiaries. Under state corporate

law the acts of those common directors and officers, when

conductine the affairs of the subsidiary, are presumed

to be on behalf of. and the resnonsibility of. the sub-

sidiary and its board, not the shareholder parent. In cer-

tain cases. where the corporate form is abused and the

distinction between the shareholder and the corporation

is a sham, state law “pierces the corporate veil.” But

where the standards for piercing the veil have not been

met, it is inconsistent with the very idea of a “corpor-

ation” to treat a corporation and a controlling shareholder

as having jointly engaged in an activity—such as operating

a facility—where the shareholder’s only act was to control

the corporation. As we show, there is no basis for con-

cluding that Congress intended for courts to ignore that

settled body of state law and to substitute an amorphous

federal common law under which, in the vast majority of

cases, subsidiaries that are operating facilities would be

4

treated as mere “agents” of their controlling shareholders,

not as legally separate entities.

I. STATE CORPORATE LAW HAS ESTABLISHED

SETTLED RULES FOR DETERMINING WHEN A

CORPORATION’S SHAREHOLDERS ARE LIABLE

FOR THE CORPORATION’S ACTIVITIES, AND

THE GOVERNMENT'S PROPOSED TEST TRAM-

MELS THOSE RULES

CERCLA expressly provides that a “person” who “oper-

ated” a covered facility is liable, and that a “person” may

be a “corporation.” 42 U.S.C. §§ 9607(a)(2), and

9601(20), (21). Accordingly, courts have properly found

corporations liable when they themselves were the “oper-

ators” of facilities.' The issue here is whether, in addition

to such corporate “operators,” Congress intended to hold

liable their shareholders (whether corporations or indi-

viduals) whenever the shareholders “actively participated

in, and exercised control over, the operations of [the]

subsidiary,” U.S. Br. at I (Question Presented), or “ac-

tively participate[d] in, and exercise[d] control over, the

operations of [the] subsidiary’s facility,” U.S. Br. at 17

(emphasis added).* In arguing that this was Congress’s

intent, the Government totally ignores the well-established

1 Here, and in the typical case, the swbsidiary corporation was

properly found to be the operator of the covered facility.

2 Although these are the principal variants of the Covernment’s

proposed test, it also offers several other inconsistent formulations.

See, e.g., U.S. Br. at 8, 11 (exerci ing control over the subsidiary’s

“business”), 15 (participation in and control over “day-to-day man-

agement of the subsidiary’s business”), 23 (“participat!es| in tho

management of a facility”), 25 (“exercises manageria! or decision-

making control”). The Government’s inability to articulate and

rely on a single test is itself powerful evidence that the Govern-

ment’s test does not flow “plainly” from the statutory lan,uage.

See Point LI.

5

body of state corporate law limiting the liability of cor-

porate shareholders.

A. State Corporate Law Limits the Liability of Share-

holders, Including Corporate Shareholders, for Acts

That Are Ostensibly by and on Behalf of the Cor-

porations They Own, Even When the Shareholders

Actively Participated in and Exercised Control

Over the Activities of Those Corporations

The most basic and uniform premise of state corporate

law is that the corporation is not the “agent” of its share-

holder owners, but a distinct and separate entity. The

corollary of this premise is the principle of limited liabil-

ity—shareholders are not liable for their corporation’s

acts. NLRB vy. Deena Artware, Inc., 361 U.S. 398,

402-03 (1960); Harry G. Henn & John R. Alexander,

Laws of Corporations $$ 73, 146 (3d ed. 1983); Wm.

Meade Fletcher et al., 1 Fletcher Cyclopedia of the Law

of Private Corporations § 25 (1997 Supp.). This same

principle extends to corporate shareholders who own sub-

sidiary corporations. The law treats the corporate parent

just as it would any other shareholder, and extends to it

the same limited liability the law extends to any share-

holder. Wm. Meade Fletcher et al., 10 Fletcher Cyclo-

pedia of the Law of Private Corporations § 4878 (1993):

Wm. Meade Fletcher et al., 13 Fletcher Cyclopedia of the

Law of Private Corporations § 6222 (1995): 18A Am.

Jur. 2d Corporations § 856 (1985): Grease Monkey Int'l,

Inc. v. Godat, 916 S.W.2d 257, 262 (Mo. Ct. App. 1995):

American Protein Corp. v. AB Volvo, 844 F.2d 56. 60

(2d Cir. 1988) (New York law).

Limited liability creates a strong presumption that the

parent is not liable for acts that are ostensibly by and on

behalf of a subsidiary. NLRB. 361 US. at 402-03 (“in-

sulation of a stockholder from the debts and oblizations of

his corporation is the norm, not the exception”): 1 Fletcher

Cyclopedia § 43 (1990); Grease Monkey, 916 S.W.2d

6

at 262. Under state law, this presumption is overcome

only where the subsidiary does not have an independent

will of its own and becomes what the law often refers to

as the mere “alter ego” or “instrumentality” of the parent

company.® Ownership alone, even 1(0 percent owner-

ship, is not sufficient to pierce the corporate veil.* Thus,

courts only “pierce the veil” and treat the two separate

legal entities of parent and subsidiary as one entity where

they are, in fact, operating as one—that is, where the

subsidiary is a mere “front” for the parent, without an

independent will or mind of its own. Miles v. AT&T, 703

F.2d 193, 195 (Sth Cir. 1983) (Texas law); see also

Hystro Prods., Inc. v. MNP Corp., 18 F.3d 1384, 1388-

90 (7th Cir. 1994) (Illinois law); 1 Fletcher Cyclopedia

§ 43 (1990) (listing cases).°

81 Fletcher Cyclopedia § 43 (1990); Yoder v. Honeywell, Inc.,

104 F.3d 1215, 1220 (10th Cir.) (Colorado law), cert. denied, 118

S. Ct. 55 (1997): American Protein, 844 F.2d at 60 (New York

law): United States v. Jon-T Chems., Inc., 768 F.2d 686, 691 (5th

Cir. 1985) (state and federal common law): TNS Holdings, Inc. v.

MKI Sec. Corp., 663 N.Y.S.2d 144, 146 (N.Y. App. Div. 1997);

Villanueva v. Astroworld, Inc., 866 S.W.2d 690, 695 (Tex. Ct. App.

1993).

4 Jon-T Chems., 768 F.2d at 691; Miles v. AT&T, 703 F.2d 193,

195 (5th Cir. 1983) (Texas law); Edwards Co. Inc. v. Monogram

Indus., 739 F.2d 977, 986 (5th Cir. 1984) (en banc).

5 Often courts also require an additional showing that failure to

hold the parent liable would promote an injustice or fraud. 1

Fletcher Cyclopedia § 43.10 (1990): NEC Techs., Inc. v. Nelson,

478 S.E.2d 769, 775 (Ga. 1996); Hystro Prods., 18 F.3d 1384

(Iilinois law); Jon-T Chems., 768 F.2d at 692-93 (Texas law re-

quires additional showing of fraud in contract actions, but not in

tort lawsuits); Bonanza Hotel Gift Shop, Inc. v. Bonanza No. 2,

596 P.2d 227, 229 (Nev. 1979). A number of cases also require an

additional element of causation, thus applying a three-part test:

(1) mere alter ego; (2) improper or fraudulent purpose: and (2)

causation between the improper purpose and the injury. 1 Flctcher

Cyclopedia §§ 43, 43.10 (1990). There are thus several formulations

of the veil piercing test, but they all ask whether the parent and

subsidiary were in reality one entity.

.

Parent corporations routinely participate in and control

the activities of their subsidiaries. That is common prac-

tice among the corporate members of NAM and the

Chamber, and is the norm throughout the country.® “In

reality, in the normal course of operations a corporate

parent will have both an ownership interest in the sub-

sidiary and effective control over the management and

operations of the subsidiary.”* But that is not sufficient

to eradicate the distinction between the two separate legal

entities of parent and subsidiary. 1 Fletcher Cyclopedia

§ 25 (1997 Supp.): id., § 43 (1990); Henn & Alexander,

supra $§ 148, 207; William O. Douglas and Carrol M.

Shanks, Insulation from Liability Through Subsidiary Cor-

porations, 39 Yale L.J. 193, 196 (1929-30). If it were,

nearly every subsidiary would be an alter ego of its parent.

See Jon-T Chems., 768 F.2d at 691.

The Government is flat wrong when it contends that

it is atypical for a parent and subsidiary to share officers.

See U.S. Br. at 44. A common incident of ownership

frequently present in the parent/subsidiary relationship is

identical or overlapping corporate officers and directors."

® Fletcher Cyclopedia § 43.10 (1990) (“domination is a factor that

will always be present in parent-subsidiary relationships”) ; Ameri-

can Protein, 844 F.2d at 60 (New York law).

* Richard G. Dennis, “Liability of Officers, Directors and Stock-

holders Under CERCLA: The Case for Adopting State Law,” 36

Vill. L. Rev. 1367, 1436 (1991).

5 See, e.g., Frank H. Easterbrook & Daniel R. Fischel, Limited

Liability and the Corporation, 52 U. Chi. L. Rev. 89, 111 (1985)

(noting that it “often will be the case” that “managers of sub-

sidiaries . . . are also managers of the parent”). See also 18A Am.

Jr. 2d Corporations § 857; Henn & Alexander, supra § 148; Ameri-

can Protein, 844 F.2d at 57 (New York law) (“it is entirely ap-

propriate for directors of a parent corporation to serve as directors

of its subsidiary”); Miles, 703 F.2d at 195 (Texas law) ; Steven

v. Roscoe Turner Aeronautical Corp., 324 F.2d 157, 161 (7th

Cir. 1963) ; Ciprotti v. United Inns, Inc., 433 S.E.2d at 585, 587

8

Again, that is a common practice among the corporate

members of NAM and the Chamber. Courts uniformly

have found that this factor alone does not “justify treat-

ment of the two [legal entities} as one business unit.”

Miles, 703 F.2d at 195. Nor do communications between

the two distinct legal entities signify any atypical rela-

tionship. The Government’s proposed test would wrongly

attribute to the shareholder parent any act taken by a

director or officer of a subsidiary who is also a director or

officer of the parent.’ But state law recognizes and pre-

sumes that overlapping directors and officers “can change

hats and represent the two corporations separately, despite

their common ownership.” Jon-T Chems., 768 F.2d at

691; see also Douglas & Shanks, /nsulation from Liability

Through Subsidiary Corporations, 39 Yale L.J. at 196-97.

Thus, an officer or director acts for the subsidiary when

conducting the subsidiary’s business, including communi-

cating with the parent, and those acts do not transfer to

the parent the liability and responsibility of the subsidiary

board for conducting the subsidiary’s corporate affairs.

That is the rule unless there is strong evidence that the

individual was acting only in his or her capacity as an

officer or director of the parent, or the acts are actually

contrary to the interests of the subsidiary.”° It is only

where other factors are present that the parent and sub-

sidiary are held to be one entity rather than two.”

(Ga. Ct. App. 1993); Korson v. Independence Mall J, Ltd., 592

So.2d 981, 984-85 (La. Ct. App. 1992); Total Care Health Indus. v.

Department of Soc. Serv., 535 N.Y.S.2d 15, 17 (N.Y. App. Div.

1988).

* Worse, the Government attributes the same acts to both the sub-

sidiary and parent in order to make both liable as operators.

See, e.g., Lusk v. Foxmeyer Health Corp., 129 F.3d 773, 779

(5th Cir. 1997); Jon-T Chems., 768 F.2d at 691: Edwards Co. v.

Monogram Indus., Inc., 730 F.2d at 985-86; Fisser v. International

Bank, 282 F.2d 231, 238 (2d Cir. 1960).

" Although ownership and shared officers and directors can be

relevant factors under state veil piercing doctrine, they are not

9

B. The Government’s Proposed Test Ignores and

Would Completely Undermine State-Law Norms of

Corporate Liability, Effectively Converting Sub-

sidiaries Into the Parents’ Agents

Contrary to the norms of state corporate law, the Gov-

ernment contends that the parent should be directly liable

when it “actively participated in, and exercised control

over, the operations of a subsidiary.” U.S. Br. at I. In

its only concrete example, the Government argues that

“{ijf the parent corporation . . . employs its own agents

as executive officers (or as board members performing the

typical functions of an executive officer) to manage the

subsidiary, then a court may conclude that the parent cor-

poration is, in fact, ‘operating’ the subsidiary’s facility”

and should be held directly liable. U.S. Br. at 44 (em-

phasis added). Thus, even though the fact of identical or

overlapping board members or officers would be insuffi-

cient under state corporate law to disregard the subsid-

iary’s status as a distinct legal entity, under the Gov-

ernment’s expansive test, that fact alone would expose

dispositive, as they would appear to be under the Covernment's

proposed test. Compare U.S. Br. at 44 with 1 Fletcher Cyclopedia

§ 43.20 (1990) ; Jon-T Chems., 768 F.2d at 691-92; Steven, 324 F.2d

at 161. Instead, other factors must be examined to determine if

the separate corporate identity of the subsidiary is really a sham,

including whether: (1) the subsidiary does not observe the basic

corporate formalities, such as keeping separate books and records

and holding shareholder and board meetings; (2) the subsidiary

operates with grossly inadequate capital; (3) the parent and sub-

sidiary file consolidated financial statements and tax returns; (4)

the parent uses the subsidiary’s property as its own; (5) the sub-

sidiary receives no business except that given to it by the parent:

(6) the parent and subsidiary have common business departments ;

and (7) the daily operations of the two corporations are not kept

separate. 1 Fletcher § 43 (1990); sce also Jon-T Chems., 768 F.2d

at 691-92; Steven, 324 F.2d at 161. These factors are not exhaus-

tive. Each court looks at the totality of the circumstances to deter-

mine whether the subsidiary and parent are not, in fact, two

separate entities. /:’.

10

many parent corporations to liability under CERCLA as

“operators.”

The Government's test treats a subsidiary’s directors and

officers as the agents of the subsidiary’s shareholders. This

is a dramatic break with state corporate law principles.

Board members are not agents of the shareholders who

elect them. Henn & Alexander, supra § 207 (“Although

elected by the shareholders and removable by them for

cause and possibly without cause, the directors are not

the agents of the shareholders”) (emphasis added). Nor

are Officers of a corporation the agents of that corpora-

tion’s parent; they act with delegated authority from the

subsidiary corporation’s Board—on behalf of the subsid-

iary. See Wm. Meade Fletcher et al., 2 Fletcher Cyclo-

pedia of the Law of Private Corporations § 505 (1990);

Henn & Alexander, supra § 219. And the subsidiary cor-

poration is not the agent of its parent or the parent's

shareholders, regardless of the fact that it ultimately func-

tions in their interests, as subsidiaries are appropriately

expected to do.” To hold otherwise would be contrary to

the most fundamental principle of corporate law—separa-

tion between owner and corporation.

The flaw in the Government’s “agency” argument is

highlighted in the context of a subsidiary corporation not

wholly owned by another corporation. If, for example,

corporation A owns 75% of a subsidiary, and corpora-

tion B owns 25% and an officer of A serves also as an

Officer of the subsidiary, his actions for the subsidiary

cannot be regarded as the actions of corporation A. When

he acts for the subsidiary, the officer has an obligation to

serve the interests of the subsidiary. He could not be an

agent of shareholder A without violating the owed

obligations he owes to the subsidiary and, ultimately,

shareholder B.

% The subsidiary is only treated as the agent of the parent cor-

poration where state law veil piercing isappropriate. Sve Frederick

J. Powell, Parent and Subsidiary Corporations §§ 21-22 (1931).

Il

C. The Government’s Proposed Test Would Disrupt

the Settled Expectations of Participants in the

Marketplace.

As this Court has recognized, “[i]n structuring financial

transactions, businessmen depend on state commercial law

to provide the stability essential for reliable evaluation of

the risks involved.” United States v. Kimbell Foods, Inc.,

440 U.S. 715, 739 (1979). Settled rules are particularly

important in the commercial context, because they en-

courage settled expectations and thereby “foster investment

by businesses and individuals.” Quill Corp. v. North

Dakota, 504 U.S. 298, 316 (1992). See Austin v. Michi-

gan State Chamber of Commerce, 494 “US. 652, 658-59

(1990) (basic features of corporations “such as limited

liability . . . enhance their ability to attract capital and to

deploy their resources in ways that maximize the return

on their shareholders’ investments”). See also Frank H.

Easterbrook & Daniel R. Fischel, Limited Liability and

the Corporation, 52 U. Chi. L. Rev. 89, 90-95 (1985)

(purpose of limited liability rule is to encourage invest-

ment and credit which in turn spur economic growth).

Adoption of the Government’s proposed test would un-

questionably disrupt the settled expectations of participants

in the marketplace. “[A] stockholder who has invested in

a corporation prior to the advent of the new [Government

test], believing that his liability would be limited except

[when the corporate veil can be pierced], now would find

himself potentially personally liable under the CERCLA

rules simply by virtue of his participation in the manage-

ment of the corporation. He would not have contemplated

or evaluated potential liability of this nature prior to in-

18 The law has developed these limited liability principles to ad-

vance the economic interests of society as a whole. When individ-

uals choose to incorporate, they obtain the benefits of limited

liability. But their corporations must then pay separate taxes and

comply with extensive regulations and requirements that are ap-

plicable only to corporations.

12

vesting in the corporation.” Richard G. Dennis, Liability

of Officers, Directors and Stockholders Under CERCLA:

the Case for Adopting State Law, 36 Vill. L. Rev. 1367,

1506 (1991). Put simply, the Government’s proposed

test, particularly given its vagueness and breadth, “will

thwart the ability of a stockholder to evaluate the risk

before investing.” /d.

Moreover, the disruption of settled expectations and

impairment of rational business planning that would result

from adoption of the Government's test is not limited to

shareholders. That test would significantly impact those

who contract with shareholders. For example, those who

lend to parent corporations would have to assess the risk

of parental liability based on the Government’s amorphous

test; insurance companies would have te attempt to ascer-

tain the potential exposure of parent corporations for their

subsidiaries’ operations. In the past these third parties

have been able to look to well-established state law to

govern the potential liability of the parent corporation or

stockholder; that law allowed them to focus on the parent’s

own activities on its own behalf (absent evidence sufficient

to pierce the corporate veil). Further, under the Govern-

ment’s test, these lenders and insurers would have to con-

sider not only environmental damage attributable to the

parents’ activities, but also damage attributable to their

subsidiaries, since under CERCLA, if a parent is liable

at all, it is potentially liable for all cleanup costs. “Thus,

the commercial relationships predicated on traditional

state piercing the corporate veil and direct liability laws

would be disrupted on an ongoing basis.” /d. at 1510.

See also id. at 1511 (“Anyone working for, investing in

or extending credit to a corporation (or to a corporation’s

officers, directors or stockholders) will certainly have a

substantial body of expectations concerning the law of

liability, based on long traditions and precedent.” ).

The disruption to settled commercial expectations is

exacerbated by the fact that CERCLA not only imposes

strict liability (thereby creating potential exposure to

13

literally billions of dollars of damages), but also has

been interpreted to impose retroactive liability."* Thus,

under the Government's test, parent corporations and

stockholders could be held liable for actions taken by

their subsidiaries decades ago, based on their partici-

pation in the subsidiaries’ activities decades ago; indeed,

the subsidiaries’ actions may have been completely legal

at the time, and may have been encouraged, or even

required, by state or federal regulation. At the time the

actions were engaged in, the parties reasonably relied upon

settled state law principles of limited liability, and those

principles encouraged and fostered the commercial en-

deavor. Accordingly, although the constitutionality of

retroactive application of CERCLA is not presently before

the Court, the statute’s sweeping impact counsels against

adoption of the Government’s invitation to expand the

scope of retroactive application further than can be justi-

fied by the text of CERCLA.

Il. CERCLA CANNOT FAIRLY BE READ TO IMPOSE

LIABILITY ON A SHAREHOLDER CORPORATION

AS AN “OPERATOR” OF A SUBSIDIARY CORPO-

RATION’S FACILITY SIMPLY BECAUSE THE

SHAREHOLDER ACTIVELY PARTICIPATED IN

OR EXERCISED CONTROL OVER THE SUBSIDI-

ARY, OR ITS FACILITY

If Congress had intended CERCLA to eliminate the

limited liability that is a fundamental feature of corporate

law, it surely would have said so. But it did not. The

Government, however, seeks to reach that result by argu-

ing that Congress’s use of the term “operator” itself re-

flects a clear intent to reach all parties that functionally

control companies that, in turn, are operating a facility.

That argument ignores the crucial fact that we are dealing

4 The retroactive application of CERCLA raises sirnificant con-

stitutional questions that have not been resolved by this Court.

Expanding the seope of CERCLA as the Government proposes

would greatly exacerbate those constitutional problems.

14

with facilities operated by corporations, and the parties

the Government is seeking to hold liable are corporate

shareholders who acted only to manage or control those

corporations. If Congress had intended to reach such

entities, one would expect to find some language in the

statute expressly holding shareholders liable for the actions

of corporate operators.” But no such language exists."

A. Nothing in the Language of the Act Supports the

Government’s Position.

The Government's “plain meaning” argument is im-

plausible on its face. It is hardly likely that Congress

decided to enact a greatly watered-down version of tradi-

tional state-law veil piercing—under which all shareholders

who exercised control over corporate operators would

themselves be liable in a broad range of circumstances that

would not justify liability under state law—and then de-

cided to convey that preemptive message simply by using

the term “operator” to describe a category of “persons”

liable under CERCLA. If Congress had wanted to man-

date such a rule, it would have said so in one of three

places: the listing of “covered parties” in § 9607(a); the

definition of “owner or operator” in § 9601(20)(A); or

15 Congress has enacted legislation expressly making shareholders,

parents and affiliated corporations liable for the acts of the corpora-

tions they own or are affiliated with when that was Congress's in-

tent. See, e.g., 15 U.S.C. §31 (“owned, chartered, controlled, or

operated”); 15 U.S.C. § 770 (those “who, by or through st ck

ownership, agency or otherwise . . . control”); 15 U.S.C. § 78t

(those “who, directly or indirectly, control”) ; see also 29 U.S.C.

§§ 203(r), 1301(b)(1); 15 U.S.C. §24 (directors, officers and

agents). Similarly, Congress could easily have imposed liability on

persons who “directly or indirectly” operate a facility. But it did

not.

16 All of the examples contained in the statutory definition of

“person” describe entities that would themselves be liable for their

ownership or operation of a facility. There are no examples of

“persons” who are included in the definition because of their affilia-

tion or relationship with such a covered entity. That is particularly

significant because 42 U.S.C. § 9601(21) says the term “person”

“means” the listed entities, not that it “includes” them.

15

most naturally, in the definition of “person” in § 9601(21).

See Joslyn Mfg. Co. v. T.L. beara Co., 4 ¥34 80,

83 (Sth Cir. 1990) (“If Congress wanted to extend lia-

bility to parent corporations it could have done so, and it

remains free to do so.”) None of these provisions, how-

ever, gives the slightest indication that Congress wanted

to reach controlling shareholders of corporate “operators.”

b Section 9607(a). Although 9607(a)(1) (referring to

the owner and operator”) suggests that Congress made

the common-sense assumption that ordinarily each facility

would have only one operator, the Government finds sig-

Sesatiien tae that in § 9607(a)(2), the statute uses

ctive language—imposing liability on any person

who at the time of disposal of any hazardous. substance

owned or operated” a facility. U.S. Br. at 21. This

word choice merely indicates that Congress intended to

cover non-owner “operators.” The evident purpose of

separating ownership from operation was to ensure that

an owner of title to a facility would not be the only liable

party in a situation where the facility is operated by a

separate lessee. But Congressional intent to impose lia-

bility on the operator as well as the owner does not mean,

or even suggest, that Congress intended to impose liability

os o operator and the controlling shareholders of that

Section 9601(21). In § 9601(21), Con i

that the “term person’ means an individual, firm, corpora-

tion, association, Partnership, consortium, joint venture,

commercial entity” or various governmental entities. This

definition provides no indication Congress intended to

disregard the usual significance accorded to distinctions

among corporate entities and between corporations and

their shareholders, and to impose liability on the corporate

shareholders of corporate operators. Moreover, this defi-

nition provides even less support for the Government's

16

not others. CERCLA contains no language suggesting

that affiliation with or control over a corporate operator

would be a basis for liability—let alone language pro-

viding guidance about what kinds of affiliation and con-

trol would suffice. This is another indication that Con-

gress intended to respect the legally separate nature of

“corporations” and their shareholders established by state

law.”

Section 9601(20). The statute defines “operator” sim-

ply as “any person . . . operating” a facility. 42 U.S.C.

§ 9601(20)(A) (emphasis added). The Government ex-

trapolates from dictionary definitions of “operate” to the

conclusion that Congress intended to hold liable any entity

exercising control over a company operating a facility.

This so-called “plain meaning” interpretation is singularly

unpersuasive. The term “operator” does not, in common

parlance, include those who exercise control over opera-

tors. The “operator” of a car is the driver, not someone

in the back seat giving advice or instructions, and the

operator of an airplane is the pilot, not an air traffic con-

troller. See Massey v. City of New York, 589 N.Y.S.2d

145, 147 (Sup. Ct. 1992) (school crossing guard who

controlled vehicles within approaches to intersection did

not “operate” a vehicle within meaning of state statute).”

17 The definition of “person” parallels the definition used in other

federal environmental statutes. See 33 U.S.C. § 1362(5) (Clean

Water Act); 42 U.S.C. §6903(15) (Resource Conservation and

Recovery Act). And none of those statutes has been interpreted to

expose (corporate or individual) shareholders of corporate actors

to liability.

18 The Government suggests that a company would be an operator

of a business like a railway if it “‘directs[s] the working of’” or

“‘manages’” the railway. U.S. Br. at 20 (quoting Oxford English

Dictionary (2d ed. 1989)). But that is not the plain or natural

meaning. To the contrary, this Court has held that the corporation

that owns a railway “operates its own road,” even if that corpo-

ration is owned and controlled by a parent corporation. Pullman’s

Palace-Car Co. v. Missouri Pacific Ry. Co., 115 U.S. 587, 596 (1885) ;

see id., at 597 (“Practically [the parent] may control the [sub-

sidiary], but the [subsidiary] alone controls its road. In a sense,

_ <6 ee

17

For that reason, when Congress wanted to adopt a

broader conception of “operator”—in the closely analo-

gous context of imposing liability for black lung benefits—

it did so expressly by defining the term to include one who

“operates, controls, or supervises” a coal mine. 30 U.S.C.

§ 802(d) (emphasis added) (enacted in 1969 and sub-

stantively revised in 1977, just three years prior to passage

of CERCLA). As Congress obviously recognized in pass-

ing that provision, controlling or supervising a facility

would not be considered “operating” that facility, unless

a statute expressly included such a broader definition.

Here, by contrast, Congress not only avoided use of such

broad language but drew an express distinction between

“operating” and “controlling” in the same paragraph. In

the special case of a facility conveyed for specified reasons

to a unit of State or local government, the statute defines

“owner or operator” as “any person who owned, operated,

or otherwise controlled activities at such facility immedi-

ately beforehand.” 42 U.S.C. § 9601(20)(A) (iii) (em-

phasis added). Under the Government's interpretation,

however, this additional language would be redundant.”

This portion of the definition is thus a strong indication

that Congress did not equate “operation” with “control,”

and instead made a deliberate decision that exercising

“control” was sufficient only in a narrow category of cases

where a facility has been transferred to state or local

government.”

the stockholders of a corporation own its property, but they are not

the managers of its business or in the immediate control of its

affairs.”’).

1° Of course, it is an “ancient and sound rule of construction that

each word in a statute should, if possible, be given effect.” Crandon

v. United States, 494 U.S. 152, 171 (1990) (Scalia, J., concurring) ;

Mountain States Tel. & Tel. Co. v. Pueblo of Santa Ana, 472 U.S.

237, 249 (1985).

* See Joslyn Mfg. Co. v. T.L. James & Co., 893 F.2d 80, 88

(5th Cir. 1990) (“No such ‘control’ test appears in subsection (ii),

. .. and we will imply none.”) ; Richard 8. Farmer, “Parent Corpo-

ration Responsibility for the Environmental Liabilities of the Sub-

sidiary: A Search for the Appropriate Standard,” 19 J. Corp. L.

18

In sum, the plain language of the statute—far from

mandating that a corporation and its controlling share-

holder be deemed jointly liable for actions taken by the

corporation—says nothing of the kind. Reduced to its

essence, the Government’s argument is that Congress relied

on the courts to discern in its selection of the word “oper-

ator” a clear intent to impose liability not only on com-

panies directly operating facilities, but also on their share-

holders, if those shareholders exercise too much control.

The word “operator” cannot bear the weight the Govern-

ment’s argument requires.

B. Neither of the Government’s Other Arguments

Justifies Treating Controlling Shareholders as

“Operators”

The Government attempts to shore up its remarkably

weak textual argument by drawing an analogy to the

statutory treatment of lenders, and by arguing that its

proposed test is consistent with the “statutory objectives.”

Neither argument has merit.

The Lender Liability Analogy. In § 9601(20), Con-

gress dealt with the special problem presented by lenders

who would ordinarily be liable as “owners” because they

hold indicia of ownership to protect security interests in

769, 792 (1994) (“By not including a provision for direct con-

trolling person liability in the previous liability provision, Congress

manifested its intention not to impose direct liability on such

persons or corporations.”). Congress drew the same distinction

between operation and control in the 1986 Superfund Amendments,

which included a new definition of the term “facility”: “all build-

ings, equipment, structures, and other stationary items which are

located on a single site or on contiguous or adjacent sites and

which are owned or operated by the same person (or by any person

which controls, is controlled by, or under common control with, such

person).” 42 U.S.C. §11049(4) (emphasis added). This provision

contemplates situations in which affiliated companies, such as 3

parent and a subsidiary, separately own adjacent buildiags or

equipment, and makes clear Congress’s understanding that euch

buildings are not “operated by the same person” even where the

parent “controls” the subsidiary. Here again is confirmation that

“control,” in the view of Congress, siraply ie sot the same as

“operation.”

\

19

facilities. Congress exempted this category of owner from

the automatic liability that would otherwise have attached,

and then created an exception to the exemption if the

lender “participat[ed] in the management of a . . . facility.”

42 U.S.C. § 9601(20) (A) (iii), (E) (1) (i). The Govern-

ment argues that “[b]y the same reasoning, a stockholder

Or parent corporation that ‘participate[d] in the manage-

ment’ of a facility is potentially liable as an ‘operator.’ ”

U.S. Br. at 23.

This argumeni is flawed for two reasons. First, there

is no parallel provision in the statute stating that share-

holders of operators are liable if they “participated in the

management” of the operator. The lender liability provi-

sions show that Congress knew how to base liability on

“participation” or “control” if it wanted to. But it did so

only with respect to lenders with indicia of ownership.

Second, there is no basis for assuming that Congress

intended for courts to use the criteria applied to exempt

one category of “owners” (lenders with indicia of owner-

ship of a facility) to define the situations in which a

category of non-owuers (shareholders of an operator)

would be held liable as “operators.” As the EPA itself

noted in 1992, “[cJourts considering the meaning of section

[9601(20)(A)] have also made clear that ‘participation in

management’ and ‘operator’ do not have the same mean-

ing.” 57 Fed. Reg. 18,344, 18,359 (1992) (citing cases)

(emphasis added). The EPA noted that “facts showing

operation of a facility will be sufficient to establish par-

ticipation in management,” id., but impliedly recognized

that the obverse is not true.”

21 The EPA was commenting on the final rules that were later

incorporated into the detailed statutory exemptions for lenders on

which the Government here relies.

22 In any event, the Government fails to recognize that the statu-

tory standards applied to lenders require a much more substantial

degree of “participation in management” than would be needed to

hold shareholders liable under the Government’s proposed test. The

secured lender provisions define “participation in management” as

(1) exercising “decisionmaking control” such that the lender “has

undertaken responsibility for . . . hazardous substance handling or

20

Consistency With Statutory Objectives. The Govern-

ment suggests that its proposed test is consistent with the

goal of seeking payment from those “responsible” for prob-

lems caused by disposal of hazardous materials. U.S. Br.

at 26. But actual responsibility simply is not the touch-

stone for liability under CERCLA. See Richard Stewart &

Bradley Campbell, “Lessons from Parent Liability Under

CERCLA.” 6 Nat. Resources & Env’t 7, 7-8 (ABA Sec-

tion of Natural Resources Law 1992) (noting that the

scope of liability under CERCLA cannot be justified by

reference to traditional tort goals of compensation and de-

terrence and the goal of placing responsibility for clean-up

on those responsible for the problem). CERCLA imposes

strict liability on parties regardless of whether they were

“responsible” for committing any act that was illegal at

the time of the act—indeed, often regardless of whether

they committed any act relating to hazardous substances.

For example, an “owner” of a facility can be liable even

if it was merely a lessor of the property,” and a generator

disposal practices,” or (2) controlling the “overall management”

of a facility encompassing “day-to-day decisionmaking with respect

to environmental compliance” or encompassing “all or substantially

all of the operation functions . . . other than the function of environ-

mental compliance.” 42 U.S.C. § 9601 (20) (F) (ii).

Indeed, the statute specifically provides that a lender would not

become a participant in management by contractually mandating

any form of “environmental compliance,” id. § 9601 (20) (F) (iv)

(11), by monitoring the facility and enforcing compliance mandates,

id. § 9601 (20) (F) (iv) (IIT), (IV), or even by requiring a “response

action or other lawful means of addressing the release or threatened

release of a hazardous substance,” id. § 9601(20) (F) (iv) (V).

Under the Government’s theory, by contrast, any or all of these

kinds of participation in management by a parent corporation

would make the parent an “operator” fully liable under the statute.

23 42 U.S.C. §§ 9607(a)(1), (b); see Westfarm Associates Ltd.

Partnership v. Washington Suburban Sanitary Comm’n, 66 F.3d

669, 682 (4th Cir. 1995) (owner is liable even if third party was

sole cause of release and owner exercised due care to guard against

foreseeable acts and omissions of third party, if the third party

caused the release in connection with a contractual relationship with

the owner such as a lease), cert. denied, 116 S. Ct. 1318 (1996).

ea A a lh ls le CL I: Na A COE AT A iy A Ee

21

of hazardous waste that was delivered to a transporter is

strictly liable for any dumping of the material, regard-

less of the circumstances. 42 U.S.C. §§ 9607(a)(3),

(b). Accordingly, there is no reason to believe Con-

gress intended the otherwise irrelevant factor of “re-

sponsibility” to be dispositive when deciding whether a

“shareholder” should be held liable. Indeed in the context

of a statute imposing liability without fault or moral re-

sponsibility, it would have been easy for Congress to have

imposed liability on parent corporations of subsidiary

corporations that were themselves liable as owners or

operators, if Congress had wanted to impose liability on

all parties that were affiliated with, or had the power to

control or supervise, entities that would be liable as own-

ers Or operators. But it did not.

*4 Although this is a remedial statute, Congress obviously did not

intend to impose liability on every entity that had ever had anything

to do with ownership or operation of a covered facility. For example,

although the current “owner and operator” of such facilities is

always liable, a previous “owner or operator” of a facility is not

liable unless hazardous substances were disposed of during his

period of ownership or operation. 42 U.S.C. §§ 9607(a) (1), (2).

Under this statutory scheme, if corporation A owned and operated

a facility which disposed of hazardous substances between 1840 and

1940, and corporation B owned and operated the same facility from

1940 until immediately before passage of CERCLA, and corporation

C owned and operated the same facility from that point until enact-

ment, and neither B nor C disposed of any hazardous substances,

under CERCLA corporations A and C would be strictly and jointly

and severally liable for all costs of cleaning up the hazardous

substances disposed of between 1840 and 1940, but corporation B

would not be liable at all. Obviously, if Congress had wanted to

impose liability on as many deep pockets as possible, it could have

imposed liability not only on current owner/operators, who might

have owned and operated for only a few weeks, but also on previous

owner/operators, who might have owned and operated for decades.

But it did not. Thus, CERCLA cannot be interpreted simply by

construing its provisions to cast the broadest net possible, because

that was obviously not Congress’s objective. See generally Board

of Governors v. Dimension Financial Corp., 474 U.S. 361, 373-74

(1986) (cannot invoke “plain purpose” of statute at expense of

terms of the statute itself; even if Congress unanimously agrees to

22

It makes even less sense for the Government to theorize

that Congress intended to draw a line imposing liability

on some corporate parents based on their degree of in-

volvement in the management of a subsidiary operator.

Why would Congress have invited such a fact-intensive

inquiry to decide whether particular shareholders should

be liable? *

Nor does the Government explain why Congress would

have wanted to enact a special rule of liability for share-

holders of corporate operators without doing so with re-

spect to shareholders of corporate owners. Short of pierc-

ing the corporate veil, the Government would presumably

concede that in a case where a corporation is liable solely

as an owner—because it owned title to a facility but did

not conduct any of the operations—a parent of that cor-

poration would not also be liable as an “owner” even if it

actively exercised control over its subsidiary.” Yet it

posits that Congress intended radically different treatment

of shareholders of “operators,” even though there is no

language in the statute reflecting such intent.

Finally, the Govcrnment also suggests that its rule

creates an “ince “uve” for parents to control the actions

of their subsidiaries. But just the opposite is true. As the

Sixth Circuit observed, under the Government’s proposed

test, “the threat of unlimited liability will likely deter

remedial purpose, differences in how to effectuate are often reflected

in compromise final language).

% This amorphous test would embroil the federal courts in ex-

tensive litigation and would consume enormous societal resources.

Congress has expressed concern over the amount of monies expended

on litigation regarding who is liable for cleanups, rather than on

performing the cleanups themselves. See, e.g., H.R. Rep. No. 582,

103d Cong., 2d Sess. 100 (1994).

26 See Amcast Indust. Corp. v. Detrex Corp., No. 588-620, 1990

U.S. Dist. LEXIS 15191 at *8 (N.D. Ind. 1990) (refusing to hold

former stockholders of corporation liable as “owners” of facility

with respect to property actually owned by corporation, reasoning

that nothing in CERCLA “even remotely suggests a Congressional

intent to abrogate the common law of corporations by subjecting

stockholders to liability as the ‘owners’ of corporate property’’).

23

Private sector participation in the cleanup of existing sites.”

Pet. App. 14a. Under the Government's proposed test, a

parent corporation that does nothing to control its sub-

sidiary—and sits idly by while the subsidiary improperly

dumps hazardous materials—would not be held liable.

See U.S. Br. at 31 n.17 (expressly rejecting the Fourth

Circuit's test imposing liability by virtue of a party’s

authority to control a facility). It is only when the

parent becomes involved in management of the opera-

tions of the subsidiary that it risks liability under the

Government’s vague and expansive definition of the term

“operator.” Here again, it is implausible to suppose

that Congress—having decided _not to impose liability on

all Parents simply by virtue of their power to control sub-

sidiaries—nevertheless chose to hold liable a subcategory

of parents that actually exercised such control.

lil. THE COURT SHOULD REJECT THE GOVERN-

MENT’S INVITATION TO SUBSTITUTE A NEW

FEDERAL COMMON LAW FOR DETERMINING

SHAREHOLDER LIABILITY IN PLACE OF THE

ia cat BODY OF STATE COMMON

Because the “participation and control” test the Govern-

ment advocates has no foundation in the statutory lan-

guage, the Government is, in effect, urging the creation

of a body of federal common law to determine when a

corporation’s shareholder is liable under CERCLA for the

corporation’s operation of a facility. But the Government

cannot even articulate what the test is. Instead, the Gov-

ernment proposes a vague standard that must be worked

out by the courts by applying unspecified factors, in an

unguided fashion, on a case-by-case basis. See, e.g., U.S.

Br. at 44 n.32 (acknowledging “inherently fact-based”

*7 Under the Government’s test, a parent could be held liable

because it was involved in operations of a facility unrelated to any

discharge of hazardous materials. Moreover, a parent would be

liable if it became involved with the subsidiary’s discharges of

hazardous materials solely for the purpose of developing an alter-

native system that was not environmentally damaging. Liability

in that circumstance would disserve CERCLA’s goals.

24

nature of the inquiry and lising “some” of the relevant

factors); n.2 supra.” There 8 no basis for adopting this

nebulous federal common lav test in place of the well-

established body of state comnon law that has been used

for decades to determine when it is appropriate to look

beyond the corporate actor t the (individual or corpo-

rate) shareholder for liability purposes.

Given that Congress did not “speak directly to the

question” of the liability of 1 corporation’s shareholders

for operations by and on behalf of the corporation,

CERCLA must be presumed to “favor[] the retention of

long-established and familiar principles” of limited liability

under state law. United Stars v. Texas, 507 U.S. 529,

534 (1983) (quoting /sbrardtsen Co. v. Johnson, 343

U.S. 779, 783 (1952)). O'Melveny & Myers v. FDIC,

512 U.S. 79 (1994), illustrates this principle in an analo-

gous context. In O’Melveny, this Court unanimously re-

fused to substitute federal conmon-law for state corporate

law. O’Melveny involved ai action by the FDIC, as

receiver for a failed savings ind joan association, against

that corporation’s former lesal counsel, alleging profes-

sional negligence and breach of fiduciary duty stemming

from the lawyers’ failure to inyuire into the S&L’s financial

status. The law firm argue that, under state common

law, the S&L officers’ knowleige of corporate wrongdoing

must be imputed to the coporation, and therefore the

FDIC, standing in the shoes co the corporation as receiver,

was estopped from suing the law firm. The FDIC urged

the creation of federal conmon law for determining

whether knowledge of corponte officers is imputed to the

28 The Government assures the Court that “mere investors” or

“interested investors” or investor: who act in a manner “consistent

with their investment relationshb,” or who exercise “mere over-

sight of a subsidiary’s business in a manner appropriate and

consistent with the investment ‘elationship” would not be held

liable as operators. U.S. Br. at 30, 35 n.21, 48 n31. But the

Government’s assurances would na avoid the necessity for extensive

litigation to decide when an investor is acting appropriately or

consistently with its investment rdationship.

a

i Oe

25

corporation and to the FDIC when it sues as receiver of the

corporation. The O'Melveny Court refused to “adopt a

court-made rule to supplement federal statutory regulation

that is comprehensive and detailed; matters left unaddressed

in such a scheme are presumably left subject to the dis-

position provided by state law.” 512 U.S. at 85. The

Court cautioned that creation of federal common law is

proper only in “extraordinary cases.” /d. at 89. Unless

there is a “significant conflict with an identifiable federal

policy or interest,” state law governs. Jd. at 88.” As in

O'Melveny, “this is not one of those cases in which judicial

creation of a special federal rule [is] justified.” Jd. at 87.

The Government argues that adherence to the limited

liability norms that are the fundamental feature of state

corporate law “would frustrate Congress’s intent to provide

a national solution to the nationwide public health and

environmental problems resulting from hazardous waste

disposal.” U.S. Br. at 40. As this Court has explained,

“[tlo invoke the concept of ‘uniformity,’ however, is not

to prove its need.” Atherton v. FDIC, 117 S. Ct. 666,

671 (1997). Nothing in the text or legislative history of

CERCLA demands uniform liability standards, particu-

larly in the context of shareholders’ and parents’ liability

as operators.” In O'Melveny, the Court specifically re-

2° Even in the context of federally chartered corporations, this

Court has declined to create a federal body of corporate law, instead

relying upon state corporation law. See Atherton v. FDIC, 117

S. Ct. 666, 669-76 (1997) (holding that state law, not federal

common law, governs the standard of care owed by officers and

directors to federal savings banks). Reliance on state law is even

more appropriate in cases, such as this, involving state chartered

corporations, which literally exist only because of state law.

%° The Government cites the isolated comments of one legislator

on the House Floor in support of its claim that Congress intended

uniformity. See U.S. Br. at 40 n.27 (citing 126 Cong. Reg. 31,968-

969 (remarks of Rep. Florio)). But the record reflects that Repre-

sentative Florio was addressing specifically the quite different issue

of joint and severa) liability, and he opined that CERCLA would

encourage the development of federal common law “in this area.”

Id. See also 126 Cong. Rec. 31,965. There is no evidence that any

26

jected the argument that state law should be supplanted

by federal common law in order to “facilitate . . . nation-

wide litigation of these suits, eliminating state-by-state

research and reducing uncertainty.” 512 U.S. at 88. The

Court explained that acceptance of that argument would

result in the courts being “awash in ‘federal common-

law.’” Id. See also United States y. Kimbell Foods,

Inc., 440 U.S. at 730 (rejecting “generalized pleas for

uniformity”).

Uniformity arguments are particularly inappropriate

with regard to CERCLA, in which Congress contemplated

and expressly sanctioned the continued operation of state

law, thereby making uniform enforcement of liability im-

lien against other creditors, however, is expressly governed

by state law. Id. § 9607( 1)(3). Congress also provided

attain, if the state law is more stringent than federal law.

Id. § 9621(d)(2)(A). In addition, Congress provided for

of private indemnity agreements, id. § 9607(e),

which the courts have uniformly held are interpreted under

State law. E.¢., Beazer East, Inc. y. Mead Corp., 34 F.3d

206, 212 (3d Cir. 1994)" This Court has recognized

27

that where, as here, Congress enacts a statutory scheme

that relies upon state law, any “assumption” that uniform-

ity is necessary is foreclosed. See Reconstruction Fin.

Corp. v. Beaver County, 328 U.S. 204, 209 (1946).

Indeed, if resort to the legislative history were neces-

sary, the legislative history strongly suggests that Con-

gress intended for courts to rely on state common law

when interpreting and enforcing CERCLA. There are no

Senate or House reports on the bill that became CERCLA

because it was a floor amendment offered one week before

enactment. Accordingly, the floor statements of the bill's

sponsors—Senators Stafford and Randolph—constitute the

best indication of how Congress intended the statute to be

interpreted. In discussing which persons would be liable

under CERCLA for costs resulting from a “federally per-

mitted release,” Senator Randolph said: “The fund in

recouping such costs, or any private damage actions, must

rely on other law—common law or Federal or State statu-

tory law—in lieu of the liability provisions of section 107

[42 U.S.C. § 9607]. The determination of exactly what

liability standards, defenses, or other rules apply will be

made on a case-by-case basis pursuant to regimes other

than that of this bill.” 126 Cong. Rec. 30,932 (emphasis

added). Because “common law” normally means state

common law, and Senator Randolph did not say “federal

common law,” and because he specified both federal and

State “statutory law.” the plain and natural meaning of

this statement is that “liability standards” would be deter-

mined by statutes or by state common law. That meaning

is confirmed by Senator Stafford, the co-sponsor, who told

his colleagues that the bill was “not an embodiment of

regarding contribution shall be brought in accordance with Federal

Rules of Civil Procedure and governing law shall be federal law).

This Court has declined to interpret statutes including such express

provisions as requiring federal uniformity in connection with other

provisions, despite congressional silence regarding those other pro-

visions. See O’Melveny, 512 U.S. at 79 (invoking “[i)nclusio unius,

exclusio alterius”) .

28

other forms of no fault liability or innovative Federal

intrusion into the law now developing within individual

State jurisdiction.” 126 Cong. Rec. 30,986 (emphasis

added). See also 126 Cong. Rec. 30,984 (Stafford)

(noting that “no obligations or liabilities of any person

under other Federal or State law, including common law,

are diminished by the provisions of [CERCLA]”). Thus,

the legislative history, though sparse, strongly suggests that

Congress did not intend to displace state law.

Moreover, reliance on state law would not conflict with

or thwart CERCLA’s purposes. The Government argues

that adherence to state law “would thwart the fundamental

policy expressed in CERCLA that those who are responsi-

ble for creating hazardous conditions, rather than the

innocent public, should bear the costs of responding to

those hazards.” U.S. Br. at 41. First, as noted supra,

pp. 20-21, CERCLA actually imposes liability without re-

gard to fault or moral responsibility; owners and operators

are liable even if they did not create the hazardous condi-

tions, and they have been held liable even if their actions

were legal at the time, or even mandated by state regu-

lators. Moreover, an assertion that “responsible” parties

should be liable simply begs the question of how one

determines corporate responsibility in this context. There

is no evidence or reason to believe that application of

state corporation law would allow truly “responsible” par-

ties to escape liability. The Government has not demon-

strated that state veil-piercing law permits corporate par-

ents to avoid liability when the distinction between the

parent and its subsidiary is a sham, or creates “safe

havens” for polluters. Indeed, there would be no incentive

for States to shield culpable corporate entities from lia-

bility, because States have very substantial interests in

protecting their citizens and state resources, and in remedy-

ing environmental contamination in their States. See gen-

erally MDEQ Br. at 1-2; Brief of Amici States at 1-2.

To the extent the Government is arguing that corporate

shareholders should be held liable even when state law

\

29

would shield them from liability, in order to enlarge the

pool of parties available to pay cleanup costs and to pro-

tect taxpayers from bearing the cost of hazardous waste

cleanup, the O’Melveny Court expressly rejected such an

argument for the creation of federal common law. Sim-

ilar to the Government here, the FDIC argued in O’Mel-

veny “that it would disserve the federal program to permit

California to insulate the attorney's . . . malpractice,

thereby imposing costs on the nation’s taxpayers, rather

than on the negligent wrongdoer.” 512 U.S. at 88 (quot-

ing FDIC's brief). The Court found that reasoning “posi-

tively probative of the dangers of [a] facile approach to

federal-common-law-making.” /d. To paraphrase the Court,

“[bly presuming to judge what constitutes [a parent cor-

poration’s being responsible], this argument demonstrates

the runaway tendencies of ‘federal common law’ unteth-

ered to a genuinely identifiable (as opposed to judicially

constructed) federal policy.” Id. See also United States

v. Kimbell Foods, Inc., 440 U.S. at 737-38 (similarly

rejecting “more money” arguments): United States vy.

Yazell, 382 U.S. 341, 348 (1966) (same).” In any

event, CERCLA’s scheme of both strict and joint and

several liability ensures that in virtually all cases, private

resources “tytll pay for the cost of cleanup. And even

where no private “responsible parties” are available, the

Superfund—not the taxpayer—bears the cost.**

In sum, there is no basis for concluding that Congress

intended to displace traditional state law rules of limited

“A finding that application of state law would significantly

Fs

crude oil, and petroleum products and by a corporate environmental

tax. See 26 U.S.C. §§ 59A, 4611, 4661, 9507(b).

30

liability, particularly the state law rules for determining

when a parent corporation should be deemed liable for

acts ostensibly by and on behalf of a subsidiary, in the

context of determining which corporate entities should be

deemed “operators” under CERCLA. And there is no

reason to conclude that state law would significantly

frustrate CERCLA’s purposes. Accordingly, the presump-

tive and general rule should apply, and corporate liability

issues not clearly governed by CERCLA should be re-

.\ved by reference to state law.

CONCLUSION

The judgment below should be affirmed.

Of Counsel

JAN 8S. AMUNDSON.-

General Counsel

QUENTIN RIEGEL

Deputy General Counsel

THE NATIONAL ASSOCIATION

OF MANUFACTURERS

1331 Pennsylvania Avenue, N.W.

Washington, D.C. 20004-1790

(202) 637-3000

ROBIN S. CONRAD

NATIONAL CHAMBER LITIGATION

CENTER, INC.

1615 H Street, N.W.

Washington, D.C. 20062

(202) 463-5337

ROBERT L. GRAHAM

JENNER & BLOCK

One IBM Plaza

Chicago, Illinois 60611

(312) 222-9350

Respectfully submitted,

Bruce J. ENNIS, JR. *

PAUL M. SMITH

ANN M. KAPPIER

Liz APPEL BLUE

JENNER & BLOCK

601 Thirteenth Streci, N.W.

Twelfth Floor

Washington, D.C. 20005

(202) 639-6000

Counsel for Amici

National Association of

Manufacturers and the

Chamber of Commerce of the

United States

* Counsel of Record