Type: Law Bulletins
Date: 07/02/2018

Texas Finds Individual Liable for Corporate Environmental Violations

For the first time, the Texas Supreme Court has ruled that a corporate officer can be held personally liable for civil penalties for environmental violations. State v. Morello, ___ S.W.3d ___, No. 16-0457, 2018 WL 1025685 (Tex. Feb. 23, 2018). Even for corporate officers, the Texas Supreme Court held that “an individual cannot use the corporate form as a shield when he or she has personally participated in the prohibited conduct that violates the statute.” Id. at *5.

The site’s former owner operated a pipe-manufacturing facility that caused groundwater contamination. Part of the former owner’s hazardous waste permit required it to close various waste impoundments as part of a compliance plan. Bernard Morello formed White Lion Holdings, LLC and purchased the site at a bankruptcy auction with full knowledge of the contamination and established White Lion Holdings, LLC. The hazardous waste permit was transferred to White Lion.

Five months after the permit transfer, the Texas Commission on Environmental Quality notified White Lion and Morello of various violations of the compliance plan. After sending several notices of violation, Texas sued White Lion and Morello. The trial court granted summary judgment for the State on its claims against White Lion and severed the claims against Morello. The State alleged that Morello, as the sole decision maker for White Lion, “personally removed the [acid neutralization treatment system], removed the facility’s domestic wastewater treatment plant, and threw away (or directed to be thrown away) monitoring well protective housing caps,” in violation of Texas Water Code § 7.101. Id. at *2. The trial court granted summary judgment for the State on this claim. The court of appeals reversed, holding that the State failed to establish that Morello could  be held individually liable as a matter of law because the formation of an LLC shields members from the company’s liabilities and obligations.

Reversing the court of appeals, the Texas Supreme Court held that “under an environmental regulation applicable to a ‘person,’ an individual cannot use the corporate form as a shield when he or she has personally participated in conduct that violates the statute.” Id. at *5. Relying on the broad and plain language of the statute which forbids acts by a “person,” the Court found that the term “individual,” as used in the statute, constituted a person, and was thus grounds for holding Morello individually liable.

In Texas, this case may have significant impact. The corporate form, once thought of as a safe-harbor, can no longer always be used as a shield to protect against individual environmental liability. Even if a company is the entity to which a permit has been issued, a corporate officer may now be held personally liable when that individual personally participates in conduct that violates an environmental statute.

Over 15 years ago a similar decision by the Indiana Supreme Court, Commissioner, Dept. of Environmental Management v. RLG, Inc, 755 N.E.2d 556 (Ind. 2001), left many officers and shareholders of regulated entities in Indiana in fear of personal liability. However, those fears have proven to be largely unfounded. The RLG decision invoked the Responsible Corporate Officer doctrine in order to find a sole shareholder, CEO, liable personally for corporate violations of the Indiana Environmental Management Act without traditional corporate veil piercing. Suffice it to say, the violations in RLG were particularly egregious and involved personal acts of an executive similar to those in Morello. It is likely in Indiana, Texas and in other states that recognize the Responsible Corporate Officer doctrine that the corporate veil will continue to be a viable defense so long as shareholder/officers do not engage in outrageous behavior.

David Haba, Taft summer associate, contributed to this article.

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