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Corporate responsibility: who pays for subsidiary actions?

By Charles Bierbauer
CNN Senior Washington Correspondent

In this story: March 27, 1998
Web posted at: 12:21 p.m. EDT (1221 GMT)
Bierbauer

WASHINGTON (CNN) -- If my kid tears up the neighbor's garden, Dad -- yours truly -- is going to have to get out his checkbook to repair the damage.

But when a chemical manufacturer messes up a Michigan neighborhood, should the manufacturer's parent corporation be held responsible?

That's the case Supreme Court justices were asked to resolve this week. It will test the traditional relationship of parent and subsidiary companies.

And it will cost someone -- shareholders or taxpayers -- millions of dollars, depending on the justices' decision.

"We've got $136 million at stake," said Michigan Attorney General Frank Kelly.

Acid fumes and foaming groundwater

acid

The Muskegon, Michigan, chemical manufacturing site was considered one of the country's worst cases of pollution when the Environmental Protection Agency began the cleanup in 1982 as part of the "Superfund" effort to purge industrial pollution.

Cancer-causing chemicals were left in open lagoons. Rotted storage drums released acid fumes. Groundwater foamed the color of root beer.

"The toll exacted by decades of hazardous waste and contamination was abundantly clear," Kelly told CNN in an interview.

Lots of relatives, but whose kid is it?

But responsibility for the pollution was as murky as Little Bear Creek, which crept by the site. The complex web of the property's ownership makes pinpointing responsibility difficult.

  • From 1957 to 1965, the plant was owned by the Ott Chemical Company, "Ott I."
  • CPC International bought the plant in 1965 and created a subsidiary -- "Ott II" -- to run it.
  • In 1972, Story Chemical bought the plant and ran it into bankruptcy in 1976.
  • In 1977, Aerojet-General purchased it through its California subsidiary Cordova, which set up Cordova-Michigan.

Who's responsible? No one is volunteering. Only Aerojet and CPC still exist, and they're the obvious targets.

"CPC never owned the site. It never operated the site," said J. Michael Smith, an attorney for Bestfoods, which now owns CPC.

"What we're saying is, it might be CPC, but it's not Aerojet," says John Tully, an attorney for Aerojet.

Aerojet has a point. The damage was done during decades of neglect between the 1950s and 1970s. Michigan officials encouraged Aerojet to purchase the place and help clean up the mess that earlier owners had left behind.

And CPC has more explaining to do. It had overlapping officers among its executives and its Ott II subsidiary, which operated the chemical plant. That's not unusual.

The question arises as to whether those officers took off their corporate hats when making decisions about the Muskegon operation.

To suggest CPC is really the culprit, one would have to penetrate the complexities of corporate structures and establish there was no separate chain of command.

Cordova

"What is magic about the word 'operate'?" Justice Antonin Scalia asked during the court's oral arguments.

But the case raises the smoke-and-mirror prospect of a sham subsidiary set up to duck responsibility if a parent is actually calling the shots.

"We, the state and federal governments, have to prove that the major corporations, the owning corporation, knew what the subsidiary was doing and was an active part in the operation," Kelly explained.

The justices contemplated just what it would take to demonstrate that kind of parental control over the polluting activities at the Michigan chemical plant.

"What if CPC sent a memo," Chief Justice William Rehnquist hypothesized, "saying, 'We know the inspectors are coming Friday, so dump this stuff on Saturday instead of Thursday'?"

Would that be "operating" from corporate headquarters?

"There isn't a stitch of evidence anything like that happened," CPC attorney Kenneth Geller replied.

Picking up the tab: Taxpayers vs. stockholders

If the Supreme Court's ruling, expected by the end of June, finds in the corporations' favor, the taxpayers pick up the bill.

"If we were to lose this case, the precedent would be set for corporations all over the country to escape liability, and it could cost the taxpayers and citizens of this country billions of dollars," Kelly warned.

If the Supreme Court reverses the 6th Circuit Court decision, it visits the sins of the child on the parent. It also would shatter the traditional corporate presumption of immunity. That's where the stakes are highest.

"The ramifications of this decision could go beyond just parent corporations that could affect how liability is determined for other shareholders, individuals, officers," CPC attorney Smith cautioned. "It's a very important case."

It's less important now for Muskegon, which has had the benefit of the Superfund cleanup, than it may be for the rest of us, either as potentially liable investors and stockholders or as taxpayers tapped for the toll.

And whatever the Supreme Court decides, I'm still out of luck -- it won't get me off the hook if my son and his soccer swarm trample the neighbors' tulips.