Liability for environmental contamination, under both state and federal law, can complicate any transaction and can threaten the existence of even a profitable enterprise. The state and federal statutes that impose this liability are Draconian. The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) imposes strict liability on owners and operators regardless of whether they caused or contributed to the environmental contamination. 42 U.S.C. § 9601. States laws also impose liability on owners and operators of environmentally compromised sites. Those liabilities are major headaches for managers and shareholders, and often lead to astronomical remediation costs for owners and operators. Worse yet, parent corporations, in some cases, can be held liable for their subsidiaries’ environmental liabilities.
In spite of this threat to corporate existence, there is good news for parent corporations. Often, but not always, the corporate form protects a parent corporation from other associated entities’ environmental liabilities. In Trinity Indus., Inc. v. Greenlease Holding Co., 903 F.3d 333 (3d Cir. 2018), the Third Circuit provided a refreshed understanding of the factors used to determine parent entity liability by applying United States v. Bestfoods, 524 U.S. 51, 67–68 (1998) to protect a parent corporation from its subsidiary’s environmental liability.
Trinity involved a former rail manufacturing plant in Pennsylvania. The plant was initially used by Greenlease Holding Co. (“Greenlease”) to build and repair railcars, a process that involved heavy metals, paint waste, and other volatile organic compounds. Greenlease became a subsidiary of Ampco-Pittsburgh Corporation (“Ampco”) in 1983. Trinity Industries Railcar (“Trinity”) purchased the plant from Greenlease in 1986. In 2004, Trinity sold the property. Only two years later, the Commonwealth of Pennsylvania charged Trinity with three felonies and eight misdemeanors for environmental violations. Trinity entered a consent decree requiring an almost $9 million remediation.
The district court held that Trinity was entitled to contribution under 42 U.S.C. § 9613(f), from Greenlease for 62% of the total cleanup cost. The court also held that the corporate form protected Ampco from both direct and derivative liability for Greenlease contribution liability.
In vacating in part and affirming in part, the Third Circuit held that Greenlease had to contribute to the remediation costs incurred by Trinity, and that Ampco, as the parent of Greenlease, was not directly or derivatively liable. In doing so, the Third Circuit preserved the corporate form, while staying true to the harsh strictures of CERCLA and state environmental laws.
The Court first addressed the criteria under which a parent corporation can be held directly liable for the environmental contamination of its subsidiary. Under Bestfoods, a parent will be directly liable for the cleanup costs of a facility owned by its subsidiary if it is or was “operated on the behalf of the parent.” Trinity, 903 F.3d at 363 (referencing Bestfoods, 524 U.S. at 65). Operating a facility, in this context, refers to “someone who directs the workings of, manages, or conducts the affairs of a facility.” Id. (quoting Bestfoods, 524 U.S. at 66). This does not apply to all operations at the site, but rather “[t]o be directly liable, ‘an operator must manage, direct, or conduct operations specifically related to pollution, that is, operations having to do with the leakage or disposal of hazardous waste, or decisions about compliance with environmental regulations.’” Id. (citing Bestfoods, 524 U.S. at 66, emphasis added). Importantly, the inquiry centers on the parent-facility relationship, not the relationship between the parent and subsidiary.
Thus, to hold Ampco liable for the environmental liability, Trinity needed to show that there was Ampco “‘participation in the activities of the North Plant.” Id. at 364 (quoting Bestfoods, 524 U.S. at 68). In contrast, there could be no direct liability if “dual officers and directors made policy decisions and supervised activities at the facility.” Id. (quoting Bestfoods, 524 U.S. at 69–70). In this way, direct liability would only exist if Ampco managed the day-to-day activities of the North Plant in a manner that exceeds “the interference that stems from the normal relationship between parent and subsidiary.” Id. (quoting Bestfoods, 524 U.S. at 71).
In holding that there was no direct liability, the court stated that 1) Greenlease employees were responsible for day-to-day operations, including waste disposal, waste handling and manufacturing; 2) Greenlease employees communicated with the state environmental agency and contractors regarding the permitting and disposal of waste; and 3) Ampco “did not employ any engineers or persons with technical experience in manufacturing that could make decisions for [Greenlease] with respect to environmental compliance or waste management” but rather only professional staff. Id. Ampco’s administration activities were merely the normal day-to-day parent-subsidiary relationship.
Notably, Trinity did not allege that Ampco actually operated the site. Trinity’s only allegations were that Ampco 1) advised about and ensured compliance with environmental laws; 2) monitored the activities of the site; and 3) assisted Greenlease in planning for and carrying out an expansion of the facility. The court gave these facts no weight, stating that Trinity did not “explain how any of those activities...turn Ampco’s supervision of Greenlease into anything other than a typical parent-subsidiary relationship.” Id. Crucial here was the premise that “[a]ctivities that involve the facility but which are consistent with the parent’s investor status, such as monitoring of the subsidiary’s performance, supervision of the subsidiary’s finance and capital budget decisions and articulation of general policies and procedures should not give rise to direct liability.” Id. (citation omitted). Because Trinity failed to tie its allegations to the site’s operations of the site, Ampco’s supervisory relationship with Greenlease, including providing advice on environmental matters, did not “change the calculus.” Id at 365.
The Court also analyzed derivative liability. As in other contexts of corporate law, to hold a parent derivatively liable for the actions of its subsidiary, one must successfully pierce the corporate veil. In evaluating whether to do so, the Trinity court analyzed the relationship under both the federal common law and state corporate law.
Analyzing the well-worn veil piercing factors, the court determined that piercing was not appropriate. Perhaps the closest question was the closeness of the relationship between the parent and subsidiary companies. Relying on Bestfoods, the court was not troubled by the significant overlap between the parent and subsidiary boards because “Greenlease ran the North Plant and hired all of the employees on the ground.” Id at 365. Although “Ampco was required to approve large decisions, Greenlease generally functioned with autonomy on decisions concerning manufacturing, environmental compliance and disposal of waste.” Id. The court, therefore, held that Trinity failed to meet both the threshold requirements for piercing the corporate veil under Pennsylvania law, and did not satisfy the factors for piercing the corporate veil under the federal common law.
Trinity provides a clear analysis of how courts should weigh the Bestfoods factors in determining whether a parent entity will be considered directly or derivatively liable for the environmental liabilities of its subsidiary. Companies with extensive corporate structures, particularly those in manufacturing and real estate, would be wise to ensure that they allow their subsidiaries to operate their own enterprises and that they maintain the proper parent-subsidiary relationship.