SIGNIFICANT DECISION REGARDING PIERCING THE CORPORATE VEIL

The Third Circuit has issued a significant precedential opinion addressing piercing the corporate veil for purposes of assessing liability against a parent corporation for the obligations of its subsidiary.  The decision was issued in an environmental remediation context.  The plaintiff had signed a consent decree with the Commonwealth of Pennsylvania under which it agreed to remediate a former railcar manufacturing site and later filed suit under the federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA,” more commonly known as Superfund), seeking recovery of its remediation costs from a prior owner of the site, Greenlease Holding Company (“Greenlease”).  Greenlease manufactured railcars at the site from 1910 to 1986, and was and still exists as a wholly-owned subsidiary of its parent corporation, Ampco-Pittsburgh Corporation (“Ampco”). 

The plaintiff sued the parent company Ampco under two theories: first, that it had direct operator liability under CERCLA as a result of its alleged operation of the subsidiary’s plant; and second, that Ampco was liable under a veil-piercing, or “alter ego,” theory.  The Third Circuit affirmed the U.S. District Court for the Western District of Pennsylvania’s entry of summary judgment in favor of Ampco both with respect to direct liability and liability under a veil-piercing theory.  Although the direct liability decision applies strictly within the context of environmental claims, the decision on veil piercing will have more general application and is likely to be relied upon by courts in various contexts in the future.

Under the United States Supreme Court’s decision in United States v. Bestfoods, a parent corporation only has direct liability under CERCLA as an “operator” of the subsidiary’s facility in narrow circumstances where the parent corporation’s actions go beyond the normal parent-subsidiary relationship and the parent directly operates and manages the subsidiary’s facility with respect to waste and other pollution-generating activities.  A parent corporation also may be held responsible for a subsidiary’s environmental liability under the same standards for which any parent corporation may be held liable for the conduct of its subsidiary: where the corporate “veil” between the parent corporation and its subsidiary is “pierced.” 

The determination as to whether the veil may be pierced – and as a consequence, the parent and subsidiary may be treated as “alter egos,” with liability for the subsidiary’s acts flowing to the parent – involves the consideration of many factors, no one of which is dispositive.  Within the Third Circuit and many other jurisdictions, these factors include: “gross undercapitalization; failure to observe corporate formalities; nonpayment of dividends; insolvency of the subsidiary corporation; siphoning of funds from the subsidiary corporation by the dominant stockholder; nonfunctioning of officers and directors; absence of corporate records; and whether the corporation is merely a façade for the operations of the dominant stockholder.”

The Third Circuit, after conducting its “own independent assessment of the record evidence,” affirmed the District Court’s entry of summary judgment in favor of Ampco.  In so doing, the Court found that, in employing a professional staff of accountants, actuaries, and lawyers, Ampco had acted in a way “consistent with a typical parent-subsidiary relationship.”  The fact that the parent advised its subsidiary as to environmental laws and regulations did “not, on this record, change the calculus.”  Direct operator liability under CERCLA was not justified. 

As to the veil-piercing analysis, the Court emphasized the high burden imposed upon a plaintiff.  After assessing the evidence, the Court found that piercing the veil would “result in rendering useless Ampco’s legitimate use of the corporate form when setting up Greenlease as a subsidiary.”  It found no nefarious purpose on the part of Ampco to find otherwise.  Finally, the Court rejected the plaintiff’s argument that the public policy that the “polluter pays” under CERCLA should somehow trump the traditional veil-piercing analysis.  In a strong defense of corporate separateness, the Court declared: “Because the evidence does not suggest that there was fraud or an attempt to use a corporate façade as an alter ego, public policy first favors upholding the integrity of the corporate form.”

Eckert Seamans briefed and argued summary judgment at the District Court level and in the Third Circuit appeal in which judgment in favor of Ampco now has been affirmed.

This Litigation Alert is intended to keep readers current on matters affecting environmental issues, and is not intended to be legal advice. If you have any questions, please contact  Paul Steinman at (412) 566-5993 (psteinman@eckertseamans.com) or any other attorney with whom you have been working.

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Authors

Paul D. Steinman

Member - Pittsburgh

Jessica Sharrow Thompson

Member - Pittsburgh