ENVIRONMENT: Court Decision Heralds Return of Shareholder/Director Liability

If you don’t like the status of shareholder-director liability for corporate environmental problems, hold your breath for a moment and it will probably change.

Such is the case with a recent Sixth Circuit Court of Appeals decision which held that a principal shareholder can be liable for the environmental liabilities caused by a corporation.

This case is the latest in a series of twists and turns related to shareholder-director-parent liability which can be visited upon individuals and businesses for corporate mismanagement and non-compliance with environmental regulations.

Prior to 1998, the law of the land stated that shareholders and directors could be liable if they were personally involved in decision making that caused the environmental liability for the corporation.

In 1998, the U.S. Supreme Court decided in U.S. EPA vs. Bestfoods that the purpose for creating a corporation is specifically to provide limited liability to the shareholders, officers and directors, and outside of knowingly criminal acts, corporate shareholders and directors could not be individually liable. If an environmental enforcement agency wanted to pursue corporate officers, shareholders and directors, it would have to do so under traditional standards of corporate law.

The latest case in this trilogy (Carter-Jones Lumber Company vs. LTV Steel Company; Sixth Circuit Court of Appeals decision rendered Jan. 23, 2001) decided that in some cases, equity may require a finding of liability for shareholders/directors even if traditional notions of shareholder liability cannot be proven.

In the LTV case, one of the defendants was involved in recycling PCB-laden transformers without reporting this information to the EPA. The subject defendant had followed all of the required formalities of a corporation, including having updated corporate records, corporate meetings and adequate capitalization. Apparently, the decisions to unlawfully recycle and sell the transfers was made by the corporation’s sole shareholder.

The Sixth Circuit Court of Appeals held that the sole shareholder could be individually responsible for the environmental liabilities of the corporation based upon principles of equity. Equity, loosely defined, is a principal of fundamental fairness.

Essentially, the court reasoned that the shareholder involved knew his decisions were probably out of compliance with required law and went ahead with a decision to violate anyway. Thus, such a decision should have consequences in the form of individual responsibility for the eventual environmental clean up.

Accordingly, we now have a third proposition upon which corporate officers and shareholders can be individually responsible for environmental liabilities of the corporation. They are:

1. Criminal acts

2. Acts of a corporation which is thinly capitalized, has poor or non-existent corporate record keeping or can otherwise be shown to be the alter ego of the corporation (traditional “corporate veil” piercing)

3. Any act when the acting shareholder-officer-director is aware that the actions they are authorizing on behalf of the corporation are a violation of law

If you are an officer, shareholder or director of a corporation which regularly deals with environmental media management, you should be aware of these new standards of potential liability and conduct your personal actions accordingly.

Joseph Quandt is a partner with the Traverse City law offices of Zimmerman, Kuhn, Darling, Boyd, Taylor and Quandt, PLC. He focuses on environmental and business matters. He was formerly an enforcement specialist with the Michigan DEQ. This article is intended to address information of general interest. It does not provide, nor is it intended to provide, any legal advice regarding any particular situation or subject. BN