Subsidiary Vs. Parent: Utility Environmental Contribution Claims Against Historic Holding Company Parents

By Bruce W. Felmly and Barry Needleman

At the end of the Nineteenth century, the developing gas and electrical business in the United States experienced concentration of ownership in a relatively small number of holding companies. From 1870 to 1935, hundreds of local utility operating companies were acquired by holding companies which were essentially parent corporations offering proprietary equipment and technology, and an organizational structure that often relied on extensive operational control of the subsidiaries. Today, many of these operating companies, long ago separated from their ancestral parents, are faced with liabilities for environmental contamination, most notably from old manufactured gas plants.

As utility companies now the bear burden of remediating these sites, they are confronted with a critical question: how can they pursue contribution claims against the successors to former holding companies that once owned or controlled these sites? The answer depends on an assessment of many issues, including an evaluation of whether you can (1) pursue an "operator" claim for direct liability or an "owner" claim for indirect liability (veil piercing) in light of United States v. Bestfoods, 542 U.S. 51 (1998); and (2) develop admissible evidence to prove that a parent controlled the operation and management of a subsidiary between 50 and 120 years ago, especially where it is virtually certain there will be no live fact witnesses.

The practitioner, working with experts, must build the case through intensive historic analysis focusing on the design, construction and maintenance of storage facilities and manufacturing equipment, and parental control over waste management. The following points will be critical to this effort:

• Scientific evidence, coupled with specific operational knowledge about the facility, must be used to tie the contamination to a particular manufacturing process or time period. This evidence will not only be invaluable to help prove your claim, but the allocation of costs may be heavily dependent on it as well.
• How you prove liability under Bestfoods could vary substantially depending on whether there was an intentional discharge of waste to the environment, as opposed to the contamination arising predominantly from unintended incidents, such as tar leaking from the subsurface foundations of masonry storage holders.
• Corporate records from the parent and subsidiary, while invaluable, are only one potential source of information. There are various local, state and federal sources that can provide critical evidence. For example, we have used a plant manager's personal correspondence, obtained at a local historical society, as key trial exhibits.
• To fill gaps in your site-specific evidence you many want to focus on how the parent engaged in a system-wide pattern of control. Gaining discovery regarding other subsidiaries may be instrumental to your case and will likely be an area of substantial dispute.

Although complex and challenging, these cases have been successfully pursued in numerous instances. The key to prevailing is understanding the pitfalls inherent in this unique type of contribution litigation and designing strategy that avoids those traps.

Bruce W. Felmly is a trial lawyer and co-chair of the Litigation Department at McLane, Graf, Raulerson & Middleton, Professional Association, New Hampshire's largest law firm. Bruce has substantial litigation experience in environmental, anti-trust, and commercial matters, and leads the firm's Environmental Litigation team with his extensive experience in bringing contribution claims on behalf of utilities against historic controlling parent companies. He can be reached at (603) 625-6464 or by e-mail at bruce.felmly@mclane.com.

Barry Needleman is a partner in the Environmental Group of McLane, Graf, Raulerson & Middleton, Professional Association. In addition to handling a wide range of environmental compliance matters, Barry represents insurance policyholders in federal and state court regarding environmental coverage disputes and has worked closely with Bruce Felmly to develop the specialized type of contribution claims described in this article. He can be reached at (603) 226-0400 or by e-mail at barry.needleman@mclane.com.