In Cyprus Amax Minerals Co. v. TCI Pacific Comm. Inc., No. 4:11-cv-00252-CVE-PJC (N.D. Ok., Feb. 2, 2015), the U.S. District Court for the Northern District of Oklahoma addressed a successor-in-interest issue in an environmental cleanup case where plaintiff Cyprus Amax Minerals Company (“Cyprus”) sought contribution payments from defendant TCI Pacific Communications, Inc. (“Pacific”). The court examined Cyprus’s claim that Pacific was the successor-in-interest to New Jersey Zinc Company (“N.J. Zinc”) and that Tulsa Fuel and Management Company (“Tulsa”) was a subsidiary of N.J. Zinc. Cyprus alleged that Tulsa was the alter ego of N.J. Zinc and that Pacific had assumed responsibility for N.J. Zinc’s liabilities. Based on this argument, Cyprus sought to hold Pacific liable for environmental harms caused by one of Tulsa’s smelting operations. As discussed below, the court accepted Cyprus’s alter ego argument; however, it did not actually determine Pacific’s CERCLA liability.
The history preceding the dispute in Cyprus is somewhat arduous and is easier to discuss when divided into two distinct categories:
- The general corporate history between Pacific, N.J. Zinc and Tulsa.
- The events concerning environmental contamination at the Bartlesville Zinc Smelter (“BZ Smelter”) that eventually led to Cyprus suing Pacific for contribution under CERCLA.
General Corporate History of Tulsa & N.J. Zinc
Tulsa was incorporated under Kansas law in 1906 and started with $50,000 in capital. Tulsa filed an annual statement in Kansas from 1907 to 1925 and performed regular corporate duties, including electing officers and a board of directors, listing a registered agent and issuing stock, all of which was owned by individuals. N.J. Zinc, Tulsa’s parent company, had corporate officers who served the same position for N.J. Zinc and Tulsa. For example, by 1922, the president, vice president, general counsel, comptroller, treasurer, general sales manager and purchasing agent were identical for N.J. Zinc and Tulsa.
Tulsa officially began operations in 1912 with varied involvement from N.J. Zinc’s officers. During its existence, Tulsa participated in court proceedings on its own behalf, but also received assistance from N.J. Zinc. For example, in 1921, N.J. Zinc filed an informal claim with the Interstate Commerce Commission (“ICC”) on Tulsa’s behalf alleging that Tulsa had been charged excessive freight charges. Although N.J. Zinc engaged in informal negotiations with the ICC, Tulsa was ultimately required to file a formal complaint. Given the passage of time, however, the ICC held an administrative hearing (the “ICC Hearing”) in January 1923 to determine whether Tulsa’s formal complaint was time-barred. To avoid the statute of limitations, N.J. Zinc argued that the filing of the informal complaint on Tulsa’s behalf satisfied the timeliness requirement. In furtherance of that argument, N.J. Zinc made several representations in the ICC Hearing concerning its control of Tulsa, which significantly impacted the outcome of the Cyprus case.
Cyprus’s Environmental Claim
The corporate history summarized above directly relates to Cyprus’s claim against Pacific for contribution under CERCLA. Specifically, Cyprus claimed that it was the successor-in-interest to the entity that owned BZ Smelter, a facility that was located ¼ miles from the Tulsa Fuel and Manufacturing Smelter (“Tulsa Smelter”). Prior to asserting its claim against Pacific, Cyprus entered into a consent decree with the United States Environmental Protection Agency and Oklahoma Department of Environmental Quality, which required Cyprus to incur costs associated with investigating and remediating the BZ Smelter site. In April 2011, Cyprus sued Pacific claiming that it was the successor-in-interest to N.J. Zinc and Tulsa (i.e., N.J. Zinc’s subsidiary). At trial, the court applied Kansas law in its piercing the corporate veil analysis since Tulsa was incorporated in Kansas.1
State Law Veil-Piercing Analysis Despite Federal CERCLA
Even though Pacific never directly owned or operated the Tulsa Smelter, as the Supreme Court ruled in U.S. v. Bestfoods, a corporate parent may be indirectly liable for environmental harm caused by a subsidiary if piercing the corporate veil is warranted.2 It is important to note, however, that the federal CERCLA does not replace or supersede state corporation law, including state factors governing veil piercing. Under Kansas law, the creation of a subsidiary company by a parent company to avoid liability does not automatically erode the protection of incorporation. Rather, the court must be able to identify “fraud or other invidious and vitiating circumstances” to hold the parent company liable for the wholly-owned subsidiary’s actions.3 Additionally, the Kansas Supreme Court outlined 10 factors for analyzing whether to pierce the corporate veil (the “Doughty” factors).4 No one factor or combination of factors controls the analysis. Instead, courts examine the factors on a case-by-case basis to determine the extent the parent dominates the subsidiary.
Previous Aggressive Legal Strategy Impacts Outcome on New Facts
In weighing Pacific's and Cyprus’s arguments regarding whether Tulsa was N.J. Zinc’s alter ego, the court exhaustively considered all of the Doughty factors and additional evidence that did not “fit squarely within the Doughty analysis.”5 Consistent with the guidelines above, the court assigned different degrees of weight to each factor. However, the court gave special attention to N.J. Zinc’s arguments made during the 1923 ICC Hearing. In the ICC Hearing, N.J. Zinc argued that it “possesse[d] consequent to [its] absolute ownership, complete control of all the affairs of its subsidiaries…and in actual practice  exercise[d] complete control…of its subsidiaries.” Moreover, N.J. Zinc made several showings, including the commonality of officers between N.J. Zinc and Tulsa, as evidence that “the line of authority shown [in N.J. Zinc’s organizational chart] extend[ed] to all companies” and that “the word ‘company’…include[d] all allied companies.”
Ultimately, the court reviewed the entire ICC Hearing transcript and determined that N.J. Zinc’s motive was to convince the ICC of N.J. Zinc’s authority to file a complaint on behalf of Tulsa. However, the court emphasized N.J. Zinc’s methodology for proving control as particularly relevant to the alter ego analysis. Specifically, N.J. Zinc could have argued that it had limited authority to act on Tulsa’s behalf to file a complaint with the ICC. By contrast, N.J. Zinc “made a more general argument that it controlled and dominated all of its subsidiaries” to support its authority to act on Tulsa’s behalf. In fact, N.J. Zinc “expressly disclaimed a more narrow argument…and made clear that it was relying on a more general argument that it had the authority to act for [Tulsa] on all matters.” The court found the broad and sweeping claims of general authority in the ICC Hearing as “compelling evidence” that N.J. Zinc wanted third parties to believe that Tulsa operated as part and parcel of N.J. Zinc.
Based on these conclusions, the court ruled in Cyprus’s favor, explaining that Tulsa “had no separate mind, will, or existence of its own and was but a business conduit for [N.J. Zinc].” Thus, Tulsa was found to be N.J. Zinc’s alter ego. Because Pacific was the undisputed successor-in-interest to N.J. Zinc, and because Tulsa was N.J. Zinc’s alter ego, the court allowed Cyprus to seek contribution from Pacific via a theory of indirect liability under CERCLA.
The court’s decision in Cyprus is important because it demonstrates the potential pitfall of over-emphasizing a parent corporation’s control of its subsidiaries. Although N.J. Zinc’s arguments in the ICC Hearing prevented Tulsa’s formal complaint from being blocked by the statute of limitations, N.J. Zinc’s repeated assertions of broad and overarching control resurfaced in a harmful way such that its successor-in-interest, Pacific, could face indirect liability for costs of cleanup and investigation under CERCLA. The court’s analysis suggests that N.J. Zinc likely could have succeeded in persuading the ICC that it had limited authority to file a complaint on Tulsa’s behalf. Nevertheless, N.J. Zinc rejected that course of action and chose to demonstrate its utter control of Tulsa. Thus, Cyprus shows the potential danger of not evaluating how today’s decision could affect tomorrow’s outcome.
To date, the court’s ruling has not been appealed, and the parties are engaged in settlement discussions.
For additional information regarding direct or indirect liability under CERCLA, especially in a successor liability context, please contact Julian Harrell or any member of Taft’s Environmental practice group.
1See U.S. v. Bestfoods, 524 U.S. 51, 62-63 (1998).
2See n. 1, supra.
3Proof of fraud is not a “necessary element” for establishing alter ego liability, however. See Milgo Elec. Corp. v. United Bus. Comm., Inc., 623 F.2d 645, 662 (10th Cir. 1980).
4The Doughty factors are as follows: (1) the parent corporation owns all or a majority of the capital stock of the subsidiary; (2) the corporations have common directors or officers; (3) the parent corporation finances the subsidiary; (4) the parent corporation subscribed to all of the capital stock of the subsidiary or otherwise caused its incorporation; (5) the subsidiary has grossly inadequate capital; (6) the parent corporation pays the salaries or expenses or losses of the subsidiary; (7) the subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to it by the parent corporation; (8) in the papers of the parent corporation, and in the statements of its officers, the subsidiary is referred to as a department or division; (9) the directors or executives of the subsidiary do not act independently in the interest of the subsidiary but take direction from the parent corporation; and (10) the formal legal requirements of the subsidiary as a separate and independent corporation are not observed. Doughty v. CSX Transp., Inc., 905 P.2d 106, 111 (Kan. 1995).
5See Cyprus, No. 4:11-cv-00252-CVE-PJC at 16-29.