When environmental lawyers explain the scope of CERCLA liability to property owners, we frequently tell them that they could be liable for all contamination at a property even that dating back to the Civil War. Of course, an southern attorney might refer to that 19th century conflict as the War Between the States or the “Late Unpleasantness”.
Following the opinion of United States District Judge C. Weston Houck in South Carolina Electric & Gas Company v UGI Utilities, 2012 U.S. Dist. LEXIS 61487 (D.S.C. 4/11/2012), that advice may no longer be applicable for properties located in areas that were occupied by the Union Army. Judge Houck ruled that an orphan share was to be awarded for contamination that occurred at a former manufactured gas plant (MGP) in Charleston, South Carolina for the period 1864 to 1866 when the MGP owner had been under the supervision of the United States government. It is unknown if the defendant tried to assert the Act of War defense.
Otherwise, this was a rather unremarkable MGP case. South Carolina Electric & Gas Company (SCE&G), the current owner of the site where the MGP was located and a successor of the entities that owner or operated the former MGP, sought to recover a portion of the response costs in incurred from defendant UGI Utilities, Inc (UGI), perhaps the public utility holding company in the United States. SCE&G asserted that UGI exerted sufficient control over and actively participated in the operations of two subsidiaries that had owned or operated the MGP. SCE&G claimed that UGI exercised control by sending UGI employees to serve as plant managers and superintendents. SCE&G said those plant managers and superintendents had direct control over gas making operations as well as the storage and transportation of the gas making by-products that resulted in contamination at the Charleston MGP.
The facts in this case are numbing because of the similarity in names. In 1855, Carolina Gas Company (CGC) constructed and operated an MGP in downtown Charleston. In 1858, CGC merged with Charleston Gas Light Company (CGLC). Except for the period between 1864 and 1866, CGLC owned and operated the MGP. From 1899 to 1910, Charleston Consolidated Railway Gas & Electric Company (“CCRG&E”) operated the MGP pursuant to a lease from CGLC. From 1910 to 1926, CCRG&E subleased the MGP to Charleston Consolidated Railway & Lighting (“CCR&L”) who operated the MGP. In 1926, CGLC, CCRG&E, CCR&L, and Charleston-Edison Light Company were merged into a new company known as South Carolina Power Company (“SCPC”). From 1926 to 1928, SCPC owned and operated the MGP. In 1929, SCPC sold the MGP to South Carolina Public Service Company and then re-acquired the MGP in 1934. The period 1928-1934 was identified as a second orphan share period. SCPC owned and operated the MGP from 1934 until 1950 when it with SCE&G.
The Court held that SCE&G was the corporate successor to all the entities that owned or operated the MGP during its roughly 100 year period of operation including. Thus, SCE&G was liable for contamination resulting from MGP operations except for the two orphan share periods. SCE&G sought contribution from UGI for the time period from 1910 to 1926 when UGI owned 90% of the stock of CCR&L.
During the relevant time period, UGI operated as a holding company that invested in utilities that had electrical, manufactured gas and transportation businesses. Not surprisingly, it has been involved in a number of MGP lawsuits. These cases are factually complex and the parties usually retain numerous experts to unravel the corporate histories. One of the more popular experts for plaintiffs is Yale Law School professor Jonathan Macey. Not surprisingly then, UCE&G retained Professor Macey to prepare an expert report to support the claim that UGI’s involvement in the operations of its subsidiaries exceeded corporate norms. However, as in most of his other MGP cases, Professor Macey failed to convince Judge Houck that the relationship between UGI and its subsidiary violated the principles articulated in the Supreme Court’s landmark decision in U.S. v.Bestfoods, 524 U.S. 51 (1998).
After a ten-day bench trial, Judge Houck ruled that UGI’s conduct fell well within the acceptable parameters of the parent-subsidiary relationship. He said UGI’s investment strategy was not to directly manage its numerous subsidiaries located across the country but to provide advice and consulting services to its subsidiaries to maximum efficiencies and hence improve its investment return. The court said UGI’s establishment of engineering and centralized purchasing functions fell within the bounds of permitted parental oversight, that SCE&G had presented no evidence that dual officers or directors departed so far from the norms of appropriate conduct so as to serve UGI’s interests instead of CCR&L’s interests, or that actions taken in CCR&L’s name could not be attributed to CCR&L. He found that SCE&G had not produced any evidence that any UGI officer managed or directed activities relating to the leakage or disposal of hazardous waste at the MGP. Moreover, he reasoned, even if SCE&G had produced such evidence, it failed to rebut the “dual hat” presumption that the employees would have been acting in their separate capacity as a CCR&L officer and not as a UGI corporate officer. Evidence that CCR&L was an independent company and not impermissibly controlled by UGI was that CCR&L:
- held weekly engineering meetings;
- made the decision to increase storage capacity;
- developed a daily inspection program;
- supervised improvement programs in all three operating departments at CCR&L (gas, electric, and rail);
- independently sold its property;
- implemented an independent budget system;
- guaranteed its own loans;
- authorized its own expenditures, including amounts above those recommended by UGI;
- disregarded UGI’s repair expenditure limits without formal authorization;
- had sole authority to approve its annual dividends;
- initiated bonus payments to employees;
- hired its own in-house counsel;
- negotiated various contracts;
- independently restructured its organization;
- UGI Did Not Manage or Direct the Operations of CCR&L;
- Cadet Engineers Did Not Operate the Plant for UGI;
- UGI superintendent conferences were used to exchange ideas and information;
- UGI Engineering & Operating Notes were to exchange ideas and information;
- Centralized Purchasing and Routine Testing consistent with good corporate practices
- CCR&L Was Operated Locally
The court also found that UGI could not be held liable as a CERCLA owner of the MGP through a veil-piercing analysis. The court found that CCR&L Was Not the Alter-ego of UGI because CCR&L:
- Observed Corporate Formalities
- Had Prepared its Own Charter and Bylaws
- Had a Functioning Board, with Properly Noticed Meetings and Elections
- Was Well Capitalized
- Paid Dividends to its Shareholders
- Was Never Insolvent
- Maintained its Own Corporate Records
- UGI Never Siphoned Funds from CCR&L
- Dual officers and directors did not violate the Bestfoods presumption
- Raw Materials Were Selected in Charleston
- UGI Recommendations were not directives
The court went on to say that even if SCE&G could establish improper domination or control by UGI, it could not establish the second prong under the state or common law veil piercing test that requires evidence of fraud or fundamental unfairness.
In its complaint, SCE&G alleged that UGI used its corporate form to accomplish a wrongful purpose and to promote injustice by way of “monopolistic practices and deliberate dealings to exercise virtually monopolistic control of local gas plants for its own benefit.” The court said there was no evidence that UGI forced CCR&L to enter into any transactions that benefitted UGI to the detriment of CCR&L. For example, the court said, SCE&G did not prove that UGI engaged in financial abuses such as “siphoning” or “upstreaming” CCR&L’s operating revenue, that UGI forced CCR&L to outsource its essential corporate functions or its oversight of the MGP, or that UGI misused CCR&L’s corporate form to avoid a judgment or creditor. To the contrary, the court said, the record established that UGI’s early financial assistance to CCR&L such as injecting capital, and providing expert advice and centralized purchasing were intended to and made CCR&L a more efficient and profitable company.
To pierce the corporate veil under South Carolina law, the court said SCE&G had to show an intent to misuse the form to avoid known obligations. General control over the subsidiary’s affairs, even if pervasive, was insufficient to establish such intent. To establish such intent, the court said, a plaintiff had to establish that the defendant was aware of the plaintiff’s claim against the corporation and then acted in a self-serving manner to disregard of the plaintiff’s claim in the corporate assets. Any conduct by UGI or CCR&L would have had to occur during the time period from 1910 to 1926 , the court said, and could not have been designed to avoid CERCLA claims that did not arise until 2006.
The court also said that even if UGI were a monopoly or injured other companies, federal and state precedent clearly required more than some general injustice or fraud. There had to be a nexus between the fraud or injustice resulting from the misuse of the corporate form and an injury to SCE&G, and general environmental harm was not enough to establish a nexus between a defendant’s misuse of the corporate form to create an injustice and plaintiff’s injury. While environmental harm could flow from a misuse of the corporate form such as when a parent corporation uses a subsidiary to shield itself from liability for its own polluting activities, the court ruled SCE&G had not produced any evidence of misuse of the corporate form, and thus failed to make a showing under the second prong of the piercing test.
The court said in Bestfoods , the Supreme Court had “sharpened” the definition of operator liability to require the management, direction or conducting of operations at the facility specifically related to pollution. The “operational control” theory put forth by SCE&G, the court said, fundamentally conflicted with the teaching of Bestfoods. The court went on to say that SCE&G’s claim that UGI should be liable as a CERCLA operator because it designed and purchased some of the equipment or materials that leaked and caused contamination would stretch CERCLA into a product liability statute. The court said that the Supreme Court made it clear in Bestfoods that Congress never intended such sweeping operator liability.