Beveridge & Diamond PC
James M. Auslander, Ryan J. Carra, Virginie R. Casey, Andrew C. Silton, Shengzhi Wang and Nicole B. Weinstein

October 1, 2018

 Liability

 Types of liability

 What types of liability can arise for environmental damage (eg, administrative, civil, criminal)?

There is no US generalised regime for environmental damages. Statutes, regulations and common law can impose various types of liability, including administrative, civil and criminal. Courts in turn establish precedent for liability in cases arising under various environmental laws. Alleged violators may face government administrative actions, civil suits or citizen suits. Only the government can prosecute criminal liability in court.

The government generally follows proportional enforcement. Minor offences may trigger administrative or civil sanctions; more serious and intentional violations trigger more severe sanctions or even criminal charges. The government’s burden of proof is highest in criminal cases.

Some programmes also impose strict liability based on party status. For example, for remediation and cost recovery for contaminated sites, the Comprehensive Environmental Response, Compensation and Liability Act imposes joint and several liability on each potentially responsible party (PRP), including current or former owners or operators, transporters or arrangers who disposed of hazardous substances, absent sufficient evidence to apportion the harm among PRPs or other applicable defences to liability. Separately, the Resource Conservation and Recovery Act authorises the government or private parties to seek relief for “imminent and substantial endangerment” to the environment.

 Directors’ and officers’ liability

 Can directors and officers be held personally liable for company environmental offences? If so, can liability be limited through insurance coverage and/or contractual indemnities?

 Generally not for routine environmental violations. However, some federal environmental statutes, including the Clean Air Act, specifically state that an ‘operator’ or ‘responsible corporate officer’ can include “any person who is senior management personnel or a corporate officer”. In addition, a number of reports submitted to the Environmental Protection Agency and state agencies are required to include formal certifications (under oath) with regard to the accuracy of the information contained therein, which can provide the basis for claims against corporate officers.

More often, various theories under laws governing the internal governance of corporations and other business enterprises can support personal liability of corporate directors and officers under environmental and other public health laws – for example:

• The corporate veil is pierced;
• The director or officer personally participated in the improper activity; or
• The director or officer personally exercised substantial control and supervision over the project in question.

US law generally does not permit liability based only on the corporate position or job title of director or officer. However, federal prosecutors can rely on a range of surrogates to prove the executive’s knowledge. Therefore, criminal charges can be pursued when the directors or officers: are personally aware of, or involved in, the commission of a crime;

• aid and abet a crime;
• fail to prevent the commission of a crime by others within the corporation by either turning ‘wilfully blind’ or negligently supervising the conduct of those subject to their control; or
• fail to implement preventive measures to ensure that violations do not occur.

Directors’ and officers’ (D&O) liability insurance is available to cover loss incurred by individual directors or officers due to legal actions against them in their capacity as directors and officers, generally including defence costs. Most corporations also contractually indemnify their directors and officers for their individual risk, although some states place limits on corporate indemnification, such as in shareholder derivative and bad-faith suits. Corporations can obtain coverage under D&O insurance for reimbursement of their indemnification obligations, and sometimes for their own liability risk. D&O insurance is not standardised and coverage can vary.

Liability for authorised activity

 Can environmental liability arise even in the course of authorised activities (eg, operations subject to environmental permits)?

Yes, but not always. Many environmental statutes and common law causes of action are strict liability in nature and can therefore give rise to liability even for permitted operations. For example, the Comprehensive Environmental Response, Compensation and Liability Act imposes joint and several liability on PRPs to fund the clean-up of contaminated property regardless of whether the activities were permitted. However, the fact that activities are authorised may be considered in allocation among PRPs. By contrast, Clean Air Act or Clean Water Act permits often provide a shield to the permittee for actions in compliance with the permit. The case law is not uniform regarding the scope of the permit shield for different Clean Air Act or Clean Water Act permits and it is important to include clear permit shield language in an individual permit.

Defences

 What defences are available to environmental offenders?

In civil cases:

• statutes of limitations;
• ambiguity of statutory or regulatory language;
• compliance with a valid permit; and
• factual defences.

Limited statutory defences also may be available.In criminal cases, additional defences include:

• lack of knowledge;
• the government’s failure to meet its heightened burden of proof; and
• other constitutional arguments uniquely applicable to criminal cases (eg, lack of fair notice or void for vagueness).

Liability in share sale/asset purchase

 What rules govern the transfer of environmental liability in share sales and asset purchases?

A share purchaser generally acquires all the corporate target’s assets and liabilities, including the predecessor’s environmental liabilities. An asset purchaser may be able to acquire the assets free of environmental liabilities arising from pre-closing regulatory non-compliance by the target and from historic offsite disposal.

However, various courts have held asset purchasers responsible for these types of environmental liabilities. Additionally, an asset purchaser may have ownership-based liability under the Comprehensive Environmental Response, Compensation and Liability Act or state statutes when acquiring contaminated real property. Limited statutory defences apply to entities that qualify as a ‘bona fide prospective purchaser’ or ‘innocent landowner’. State or local property transfer laws also can impose remedial, investigatory and other obligations for property or business transactions, and thereby affect the negotiating position and obligations of the parties.

What environmental due diligence measures are recommended before concluding share sales/asset purchases?

 Purchasers should:

• check for regulatory compliance of the facilities;
• conduct “all appropriate inquiries” under the 2002 Brownfields Amendments to the Comprehensive Environmental Response, Compensation and Liability Act, including evaluating the target facilities’ environmental conditions and assessing potential liability and costs associated with onsite remediation; and
• evaluate the potential liabilities associated with the current and historical generation and offsite disposal of wastes from the target’s operations.

A purchaser of an interest in real property (fee simple or leasehold) also should conduct environmental due diligence specific to the land acquisition.

 Lender liability

 Can lenders be held liable for environmental offences?

Yes, but some lender defences and safe harbours may be available. Additionally, specialty lender liability insurance policies can provide coverage to lenders against borrower default for risks relating to new, unknown or undisclosed environmental conditions, and sometimes for conditions that are disclosed in a Phase I assessment.

Because the borrower bears the brunt of potential environmental exposure in a real estate or business transaction, its environmental representations in a credit agreement generally have a high threshold for breach. For example, environmental representations may have a qualifier of “except as [would/could] be expected to have a Material Adverse Effect”. While this language is customary, lenders should review the agreement provisions and definitions – particularly the definition of ‘material adverse effect’ or its equivalent – to ensure that they have not made themselves vulnerable to liability for environmental offences under the contract.

 This article is being provided for informational purposes only and not for the purposes of providing legal advice or creating an attorney-client relationship. You should contact an attorney to obtain advice with respect to any particular issue or problem you may have. In addition, the opinions expressed herein are the opinions Mr. Auslander, Mr. Carra, Mr. Silton, Mr. Wang,  Ms. Weinstein and Ms. Casey and may not reflect the opinions of Synergy Environmental, Inc., Beveridge & Diamond PC  or either of those firms’ clients.