Dear Current and Future Bulletproof Veil Subscribers,

As crude oil prices continue to skyrocket, a debate is raging in the United States over whether to change the federal government's policy of barring oil exploration and production on most federally-owned land. Supporters of domestic drilling argue that the US possesses billions of barrels of crude oil reserves, and tapping them would reduce US dependence on foreign oil and lower fuel prices. One of the primary arguments made by opponents is that domestic oil development would damage the environment.

The United States has rigorous environmental liability laws. The most significant is the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), commonly known as Superfund. This 1980 law gives the federal government broad authority to assign liability for hazardous waste releases. CERCLA allows liability to be imposed retroactively for activities that may have occurred decades earlier. As a result, the responsible corporate entity may no longer exist. When this happens, plaintiffs attempt to impose liability on a successor business entity. Corporate veil piercing and successor liability arguments have been used extensively in efforts to “tag” businesses and their owners with environmental liability.

Bulletproof Veil can help you avoid environmental liability arising from corporate governance failures. Enroll now or contact your Bulletproof Veil representative for more information.

The Oil Industry, CERCLA, and Corporate Veil Piercing

Basics of CERCLA

CERCLA provides for the liability of persons responsible for releases of hazardous waste at designated “Superfund” sites. Under CERCLA, four classes of parties, termed "potential responsible parties," may be liable for contamination at a Superfund site:

• the current owner or operator of the site;
• the owner or operator of a site at the time that disposal of a hazardous substance, pollutant or contaminant occurred;
• a person who arranged for the disposal of a hazardous substance, pollutant or contaminant at a site; and
• a person who transported a hazardous substance, pollutant or contaminant to a site; that transporter must have also selected that site for the disposal of the hazardous substances, pollutants or contaminants.

Business owners can run into CERCLA whenever they are involved with real estate that has been contaminated or may become contaminated by hazardous substances. Cleaning up contaminated land can be difficult, lengthy, and expensive. Via CERCLA, the federal government can force businesses to bear the cost of contamination cleanup. Veil piercing is often the method the government uses.

The US Supreme Court clarified the linkage between CERCLA law and corporate veil piercing in US v. BestFoods, 524 U.S. 51 (1998). This lawsuit showed that CERCLA can be used to apply indirect liability via a veil piercing action.

Veil Piercing Liability

Many small business operations consist of a parent corporation with separate incorporated subsidiaries. Often an individual entrepreneur or family will operate several separate businesses, each as a separate corporation.

In the Bestfoods case, the Supreme Court said that a parent company could be held indirectly liable for the actions of its subsidiary via a veil piercing action. As the court said, “operator liability may attach to a parent corporation both indirectly, when the corporate veil can be pierced under state law, and directly, when the parent has exerted power or influence over its subsidiary by actively participating in, and exercising control over, the subsidiary's business during a period of hazardous waste disposal.” (United States v. Bestfoods, 118 S.Ct. 1876, 141 L.Ed.2d 43)

Successor Liability

Many small businesses grow by purchasing the assets or equity of other businesses. These purchases could expose the buyer to environmental liability if the transaction is considered a "de facto merger" or if the purchasing company is considered a successor of the purchased company.

A de facto merger or successor relationship is found when:

• there is a continuation of the enterprise of the seller in terms of continuity of management, personnel, physical location, assets and operations;
• there is a continuity of shareholders;
• the seller ceases operations, liquidates and dissolves as soon as legally and practically possible;
• the purchasing corporation assumes the obligations of the seller necessary for uninterrupted continuation of business operations.

(Louisiana-Pacific Corp., 909 F.2d at 1264; In Re Acushnet River, 712 F. Supp. at 1014; Ametek, 709 F. Supp. at 559).

If you buy a business or assets such as real estate and continue to use the same locations, name, or equipment, you may make yourself liable for any environmental issues created by that business.

Oil Companies and CERCLA Liability

Oil companies are in the business of finding and extracting oil from the ground, and processing it into various items for sale. Virtually everything that comes out of the ground in drilling operations is considered hazardous waste. As a result, any energy-related business needs to be very mindful of its responsibilities under CERCLA law.

If you are a current or past owner or operator of a hazardous waste site, or an arranger or transporter of hazardous wastes, you are potentially responsible for any environmental liability costs that arise. For businesses facing the high cost of environmental liability, the key is to identify any other parties that should also share a liability burden.

A recent US Supreme Court case provides good news. In the case, U.S. v. Atlantic Research Corp., the Court ruled unanimously that potentially responsible parties (PRPs) for cleanup liability can pursue other PRPs for cost recovery. Sharing cleanup costs is very important because cleanup can be so costly that, without a legal mechanism to share costs, there is little incentive for voluntary cleanup efforts.

Summary & Conclusion

Corporate governance is critical because liability threats usually strike without warning. This is particularly true of environmental liabilities. Maintaining a compliant business entity can save you from expensive problems if you come up against any environmental problems.

Bulletproof Veil can help you avoid parent-subsidiary and successor liability claims. Enroll today and contact your Bulletproof Veil Representative for more information.

Bulletproof Veil can help keep you avoid parent-subsidiary and successor liability claims. Enroll today and contact your Bulletproof Veil Representative for more information.

Material discussed is meant for illustration and/or informational purposes only and it is not to be construed as tax or legal advice. Although the information has been gathered from sources believed to be reliable, note that individual situations can vary.