Environmental Incidents can Lead to Lost Corporate Assets, Individual Criminal Penalties

“Corporations are people, my friend.”

Mitt Romney

Mitt Romney said the quote above in response to a question about taxation in the early days of the 2012 general election primary season. He tried to convey the concept that Environmental Liability Shieldtaxes on corporations are ultimately paid by people (i.e., the shareholders, employees and owners or those corporations).

The corporate form also provides benefits to people, like shareholders and owners of those corporations, in the form of liability protection. However, in certain circumstances, environmental liabilities may attach to individuals normally protected by the corporate form.

A corporation is a legal fiction created by the government that allows the creation of an entity that exists separately from its owners. Those who loan money to a corporation, for example, acknowledge that the corporation will pay back the obligation from its own assets and not from the private assets of its owners.

A significant environmental liability or fine could jeopardize a corporation’s assets. The corporate form normally protects the owners and shareholders of the corporation, limiting their exposure to the assets of the company. There are times, however, when a regulator may elect to seek assets beyond the corporation’s assets. For example, if the corporation does not follow the corporate formalities to make it a legitimate corporation (“derivative” liability) to fully pay for the costs of compliance or if an owner's activities directly implicate them in illegal activity (“direct” liability).

With respect to derivative liability, the Supreme Court considered the issue of a regulator’s ability to “pierce the corporate veil” for environmental liabilities in United States v. Bestfoods. The United States brought a cost recovery action under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) for costs of contamination against a corporation and a parent corporation

CERCLA imposes liability to an “owner” of a facility, but also to an “operator.” The United States argued that because the parent corporation had control of its subsidiary’s business, it was also liable for its environmental obligations. The Supreme Court disagreed and determined that because (1) the parent observed all the corporate formalities it could not pierce the corporate veil to attach liability to the parent and (2) the parent did not manage or direct the subsidiary’s operations related to hazardous waste, the corporate form protected the parent corporation from the subsidiary’s environmental liabilities.

One common practice to limit a company’s environmental liabilities in the real estate context is the creation of “special purpose entities.” Companies purchasing property on which to operate will often create a separate entity that owns the real property apart from the operating entity, which then will lease the property on which it operates from the special purpose entity. In that way, if there is some sort of environmental liability associated with the property, the operating entity is shielded from liability and only the assets of the special purpose entity are at risk.

However, a regulator can try to pierce the corporate veil to attach normally protected assets if, for instance, the special purpose entity is inadequately capitalized, did not keep separate books and accounts, or had no difference between members of the boards of the corporations.

The corporate form may fail to shield owners or employees from operations if their actions directly cause environmental harm.

In January 2014, thousands of gallons of a coal-cleaning compound were released into the Elk River in West Virginia, resulting in thousands of people being unable to drink their water. Nearly a year later, a federal grand jury indicted four of the company’s owners and managers under the Clean Water Act. Two former owners of Freedom Industries pleaded guilty to environmental violations stemming from the chemical spill.

The CEO of Massey Energy was indicted for alleged violations of mine safety and health regulations that resulted in the 2010 Upper Big Branch Mine explosion that killed dozens of miners.

So, how do companies protect themselves from losing their corporate assets or avoid criminal penalties?

  • Ensure that all the corporate formalities are observed when creating and maintaining subsidiaries so liability is limited to those subsidiaries and not the parent.
  • Do not involve the parent in day-to-day activities related to hazardous waste disposal or environmental compliance, instead assigning those responsibilities to competent employees or directors of the subsidiary.
  • Develop strict guidelines and compliance plans and assign people to ensure that employees and visitors comply strictly with them.
  • Meticulously record compliance with local, state and federal laws and regulations and store records and process requirements where they can be found easily by employees, operators and regulators (during inspections).
  • Leave compliance issues with trained personnel and do not directly get involved in areas beyond your expertise, especially if one reason is to create incentives to cut corners or cover up noncompliance issues.

Businesses enjoy the protections offered by the corporate form to develop and grow their businesses. In the environmental context, however, owners who do not follow the strict legal requirements for maintaining their corporation or that become directly involved in regulated activity that results in a violation of law risk not only their assets, but their freedom.

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