Environmental Law Blog

Categories: Environmental Insurance

Personal Liability of Business Executives for the Cost of Environmental Cleanups

January 17, 2019

Recently, in Morris Plains Holding VF, LLC v. Milano French Cleaners, Inc., the New Jersey courts held the sole shareholder of a corporation personally liable for the cost to clean up the property on which his business operated. The defendant operated a dry cleaning business in a shopping center.  When dry cleaning solvents were discovered in 1999, the defendant spent $140,000 over 10 years remediating the property before closing its business and filing for bankruptcy in 2012.  At that point, the corporate defendant had no assets to complete the cleanup.  Plaintiff, who owned the shopping center and assumed responsibility for the remediation, sued the dry cleaner’s sole shareholder, individually, and the trial court found he was personally liable under the New Jersey Spill Compensation and Control Act.  Thus, the corporate shareholder was required to spend his own money on the cleanup costs.

Defendant argued that the facts proven at trial did not show that he was a “discharger” as defined in the Spill Act, was responsible for the discharge of hazardous substances or that there was a basis for piercing the corporate veil to hold him personally liable.  The Appellate Division affirmed the trial court’s decision that there was no need for a “smoking gun witness” who had seen the sole shareholder actually discharge the solvents onto the property, since the dry cleaning business used 15 gallons of dry cleaning solvent annually for 25 years, was the only dry cleaning business ever on the property, the machinery sat on a concrete floor with no drains, and the soil located directly beneath the machinery was contaminated with the dry cleaning solvents.  The Appellate Division agreed that the evidence supported holding the sole shareholder personally liable because he was ”everything” vis-à-vis this business:  its sole shareholder, the operator of the business, responsible for handling the dry cleaning solvents and charged with ensuring legal and regulatory compliance.  The court concluded that by imposing liability on persons “in any way responsible,” the New Jersey legislature intended to expand the scope of liability under the Spill Act “without regard for corporate veils and the like.”  Thus, the court concluded that a shareholder of a close corporation could not contaminate property, put his corporation in bankruptcy and walk away from the problem.

This case expands the liability of corporate shareholders under the Spill Act.  Previously, courts had required that the test for corporate veil piercing must be met to hold shareholders, officers or directors personally liable under the Spill Act for cleanup costs.  Basically, those cases refused to hold shareholders personally liable where they were acting for the corporation, not for themselves individually, so that they would not be personally liable unless the corporation was used to perpetrate fraud, to accomplish a crime or to otherwise evade the law.  Previously, under the federal Comprehensive Environmental Response, Compensation and Liability Act which was modelled after New Jersey’s Spill Act, the most significant exception to the rule that the shareholders, officers and directors could not be held personally liable absent veil piercing was where the shareholder, officer or director was shown to have personally participated in the hazardous substance disposal activities so that he or she was held to be an “operator.”  The court in the Morris Plains Holding held that New Jersey’s Spill Act imposes the same liability on shareholders as “operators,” without the need to pierce the corporate veil.  Those operating businesses that involve hazardous substances should take affirmative steps to insulate themselves from liability arising either from being an “operator” or the piercing of the corporate veil, including by buying environmental insurance to protect their businesses and personal assets.

Attorney: Gordon Duus
Related Practice: Environmental Law
Category: Environmental Liability, Environmental Remediation, Environmentally Sensitive Businesses