Daily Development for Tuesday November 21, 2000

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

HAZARDOUS SUBSTANCES; CERCLA; BANKRUPTCY: Bankruptcy court may not incorporate state settlement in reorganization plan so as to eliminate claims of private claimants.

Southern Pacific Transportation Co. v. Voluntary Purchasing Groups, 252 B.R. 373 (Bkrtcy E.D. Tex. 2000)

A bankruptcy court may not approve a confirmation plan incorporating a CERCLA settlement between the debtor and a state environmental agency. The ruling will allow parties faced with potential liability under CERCLA to bring contribution actions against the debtor if the debtor lies lower on the "food chain" of CERCLA responsibility.

The defendant here was a nonprofit agricultural cooperative that owned and operated a Texas chemical plant that manufactured arsenicbased herbicides. Hazardous substances including arsenic were released at the site and affected contiguous properties owned by railroads, a nearby creek and residential properties. In 1988, the state ordered the defendant, the railroads and other parties who were "potentially responsible parties within the meaning of CERCLA to remediate the contamination. The defendant entered into a settlement with the state to address the onsite contamination.

In 1994, the plaintiffs sued the defendant for personal injury, wrong death and property damage and the railroads filed CERCLA contribution and cost recovery actions.

The defendant then filed a voluntary chapter 11 reorganization petition and the railroads filed a proof of claim for $7.2 million for property damage claims. The bankruptcy court included the CERCLA settlement in the confirmation plan which effectively barred the plaintiffs from pursuing their claims. The plaintiffs appealed the confirmation of the plan, arguing that only a federal district court was empowered to determine if the agreement was "fair and reasonable" under CERCLA. In particular, the plaintiffs said that the court must determine if the settlement fairly allocates liability under CERCLA which requires the court to evaluate the potential liability of settlors and nonsettlors under CERCLA.

The district court ruled that the bankruptcy court did not have jurisdiction to address these issues.

Editor's Comment: Readers of this service are quite familiar with the editor's views about the lack of objectivity of bankruptcy courts with regard to concerns other than those associated with the efficient resolution of the bankruptcy estate. Needless to say, the settlement that a "primary polluter" might reach with a state agency may have very little to do with the propriety of private parties to participate in a bankruptcy claim against that polluter.

CERCLA has its own polices which have driven the Congress to establish extraordinary liability obligations on landowners who are totally innocent of any pollution activity. These policies are unlikely to be fully appreciated by a bankruptcy court in weighing the claims of creditors or others who have done business with the polluter. It is much better for a court less involved with the bankruptcy issues to weigh the CERCLA liability issues. HAZARDOUS SUBSTANCES; STATE LAW LIABILITY; CORPORATE OFFICER LIABILITY: Sole corporate officer not liable for corporate pollution under "responsible corporate officer" doctrine by virtue of office alone control, nexus and causation must be shown.

Commissioner, Indiana Department of Environmental Management v. RLG Inc., 735 N.E.2d 290, (Ind. App. 2000)

A landfill was owner and operated by a corporation that had a single shareholder, officer and director Lawrence, Roseman.. In 1993, the Indiana Department of Environmental Management ("IDEM") filed a complaint against the company seeking civil penalties and injunctive relief requiring the company to comply with the state solid waste management regulations. The company entered into an agreement to remediate the site and submit closure and postclosure plans. After the company failed to comply with the agreement, the IDEM added the sole corporate officer as a defendant and obtained a default judgment against the company for $3.1 million. The company is insolvent, the State having seized the bulk of its assets in the process of the remediation effort.

The State then proceeded to establish that Roseman was personally liable under the "responsible corporate officer" doctrine, apparently accepted in a number of federal courts but not yet the law in Indiana. Under this doctrine, a corporate officer becomes personally liable for actions taken in carrying out the corporate enterprise, notwithstanding the longstanding rule that normally such officers are not personally liable when functioning as corporate agents.

The trial judge refused to hold the officer personally liable under the "responsible corporate officer" finding that Roseman, at all times, had acted in his capacity as a corporate officer and not as an individual.

The appeals court affirmed, but in language that apparently acknowledged that Indiana law might accept application of the doctrine in a particular case.

As the court gives us very few of the operative facts in this case, it is difficult to know exactly why the doctrine wasn't applicable here.

The court said that to hold an individual liable under the doctrine, the plaintiff must establish that the person was in a position of authority to control or influence the activities, that there was a nexus between the individual's position and the violation, and that the individual actions or omissions facilitated the violation. The court held that even if it could infer from the officer's position that the individual was in a position to influence his company's policies, there had been no showing of a nexus between his position and the violations, or his actions or inactions and the violations. The court said the individual could not be held liable solely on the basis of the position or title he held.

The court's discussion of other authority in which the doctrine has been discussed suggests that corporate officers can be held liable under the doctrine only when they are personally involved specifically in the criminal or tortious activity in question. Apparently, although Roseman was the sole corporate employee, officer and owner, the corporation must have functioned through independent contractors or other agents in the carrying out of its business. Consequently these agents, and not Roseman personally, must have been the parties responsible for the actualy release of the hazardous substances and the failure to remediate such release.

Comment: It's unfortunate that we know so little of the operative facts. The court appears to embrace the notion that corporate officers can be personally liable when environmental offenses occur and they shape or participate in such offenses, but they fail to give us any notion of what relationship has to exist, other than a lot of language that is meaningless until actually applied to facts. If, indeed, this was the sole officer, shareholder and employee of the corporation, there must have been some close relationship between what the corporation did and this individual. What is it that is lacking? Curious people want to know.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

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