Daily Development for Thursday, August 24, 2006
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

BUSINESS ORGANIZATIONS; “PIERCING THE CORPORATE VEIL:” Ohio court finds sole owner of corporation liable for civil fines for failure to comply with state environmental rules solely on the basis of owner’s control of corporate decisions, even when all corporate formalities are observed and corporation is adequately capitalized. 

State ex rel Petro v. Mercomp, Inc., 2006 Ohio 2729,   2006 Westlaw 1495230 (Ohio App. 6/1/06)

Rock was a co-owner of a corporation that owned and operated a landfill for 13 years. During that time, Rock became the sole owner of that company.  When the landfill closed, Rock formed a corporation that acquired the landfill property from the other corporation.  A few years later, the two corporations merged, with Rock remaining as the sole shareholder.  The name of the surviving corporation was Mercomp. 

For a number of years following the termination of operations at the landfill, Mercomp attempted to satisfy the requirements of the Ohio EPA regarding the environmental issues surrounding landfill closures.  Mercomp clearly undertook a number of activities in an effort to reach compliance, and asked a number of times for continuances in order to meet the EPA demands.  Seven years after the closure, and despite many missed deadlines and compliance reports, Mercomp got approval of a report that the landfill was in a “post-closure period.”  Nevertheless, there were still a number of activities required by Mercomp, perhaps most notably the provision of a financial assurance program to guarantee continued performance of maintenance and oversight activities.

The Ohio EPA soon observed violations of environmental standards in stuff oozing from the landfill, and noted that Mercomp still had not satisfactorily set up a financial assurance program.  Ultimately it initiated an enforcement action both against Mercomp and Rock for failure to carry out detection and monitoring, for the late closure of the landfill, and for failure to establish the financial assurance program.

Among other things, Rock contended that the complaint against him as an individual should be dismissed because all of the alleged offenses were committed by Mercomp, if at all.  Rock’s only activities were as owner and principal officer of Mercomp. 

Ultimately, the trial court entered judgment against Rock individually for civil penalties for the various violations, and Rock appealed.

The State argued that piercing the corporation’s veil was necessary since Rock’s position as the sole officer director and shaerholder of Mercomp showed his control of Mercomp’s operation.  It alleged that “[s]uch control deprived Mercomp of having a separate mind or existence of its own.”

Rock argued first that he in fact did not solely control the operations of Mercomp or other entites involved in the closure of the landfill.  The trial court held that this was not true - Rock did have such control, and granted summary judgment to the State.  The appeals court, reviewing the record, agreed. 

But Rock then argued that in fact Mercomp, throughout the operative period, did not exhibit any of the characteristics generally relied upon by courts to justify disregarding  corporate form.  Here’s where things get interesting.  The appeals court, affirming the court below, stated that the absence of these indicia really didn’t matter if an individual in fact was responsible for controlling the affairs of a corporation.  It quoted for an earlier Sixth Circuit Federal Court of Appeals case, in which an individual was held liable for fraud, despite the fact that the actual fraud was done on behalf of the corporation:

“[the shareholder’s] argument, if we adopted it, would straightjacket the courts in situations where equity demands that the fiction of corporate personhood be ingnored.  Consider, for example, a case in which a corporation with a single shareholder kept immaculate corporate records, observed all the formalities required by corporate law, and was adequately capitalized.  The shareholder never commingled funds, and never held himself out as personally liable for the corporation’s debts.  The corporation even does some legitimate business.  Can it be that the shareholder is immunized from personal liability if he causes the corporation to commit an illegal act, no matter the degree of his control over the corporation with regard to the illegal act, no matter the harm to third parties, and no matter the other equities.  Neither we nor the Ohio courts hold that such immunity exists.”

Consequently, when the corporation here failed to meet the requirements of the Ohio EPA, the sole shareholder could be personally liable for civil penalties.

Comment 1: In a world in which increasingly individuals are relying upon corporate form to avoid liabilities stemming from real estate ownership, and where many such entities are wholly owned by individuals, this holding struck the editor as provocative, unusual, and scary.  In checking with UMKC business organizations law scholar Tony Luppino, the editor discovered that Tony, also, found the opinion a few steps beyond where corporate experts believe the law to be.

Tony noted that federal CERCLA rules do not necessarily protect individuals who work through corporations, but this is because of the special definition of an “operator” of a facility, not because of normal corporate common law analysis.

Tony also noted that LLC statutes in many states have distinct language providing insulation from liability, and of course many solely owned corporations that hold real estate as their primary asset now are LLC’s for tax reasons. 

Nevertheless, many individuals do conduct business through solely owned corporations specifically because they do want to limit their liability to the corporation’s assets.  This opinion seems to authorize judges to smash through that veil of protection whenever the feel like it, whenever “the equities compel.”

Comment 2: In virtually all solely owned corporations, the sole shareholder is going to have a great deal to say about what’s going on.  Certainly any major decision of the corporation will not be taken without the express or implicit consent of that shareholder.  Therefore, even where there are other managers, it still must be said that an argument exists that the sole shareholder in fact is in control of the corporation’s actions.

 Assuming the opinion should be limited to solely owned corporations, it is possible that we are looking at judicial usurpation of a legislative decision.  In many states (Ohio?) The statutes at one time prohibited single owned corporate entities.  Those statutes were amended to permit such sole ownership, apparently expressly a legislative judgment that such business formats should be permitted to confer limited liability on their owners.  Does the court’s decision here pretty much eviscerate that legislative decision?

Comment 3: Note that we are not talking about a situation in which a sole shareholder, acting on behalf of the corporation, individually commits a wrongful act - such as driving the company delivery truck into a school bus while making a delivery.  In such a case, the individual may be liable for his own negligence as well as the corporation.  Here we are simply talking about the inaction of the corporation in not adequately meeting the Ohio EPA requirements for cleaning up the landfill.  The decisions to do or not do what Mercomp was fined for clearly were made by Rock acting by and through the corporation. 

Isn’t there a line in there somewhere as to what acts render someone individually liable and what acts don’t?  If not, should we be strapping on our lobbying boots, because the corporate form we’ve been selling to our entrepreneur real estate clients for these many years may in fact not provide the protection that was anticipated.

Comment 4:  Tony Luppino also raised the question of whether the opinion ought be limited to sole owners.  What if there are two or three owners?  Aren’t they going to collectively control the actions of the corporation?  It likely has little independence from them.  Should they be jointly and severally liable for civil penalties against the corporation?

Readers are encouraged to respond to or criticize this posting.

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