Directors and Officers Held Personally Liable for Bankrupt Company's Environmental Liabilities

 In a case that has important implications for the potential liabilities of individual directors and officers, on October 28, 2013 twelve former directors and officers of bankrupt Northstar Aerospace agreed to pay a total of $CAN 4.75 million to the Ontario environmental regulator for costs to remediate environmental contamination at the company’s manufacturing site. The case also raises important D&O liability insurance questions as well.

An October 28, 2013 new report describing the settlement can be found here. A November 12, 2013 memo from the McCarthy, Tetrault law firm about the case can be found here. A November 6, 2013 memo from the Faskin Martineau law firm can be found here. A November 1, 2013 memo from the Osler, Hoskin & Harcourt law firm can be found here.

Background

Between 1981 and 2009, Northstar Aerospace (Canada) manufactured airplane parts at a plant in Cambridge, Ontario. In 2010, it was determined that chemicals the company had used in its manufacturing operations had migrated to nearby residential properties. Northstar had commenced remediation efforts prior to its 2012 bankruptcy. The proceeds realized from the bankruptcy sale of the company’s assets were not sufficient to fund further remediation efforts.

The Ontario Ministry of the Environment (MOE) took over the remediation efforts and filed a regulatory action against twelve former directors and officers of the company seeking to hold them responsible for remediation costs of approximately $CAN 15 million. In June 2013, the Environmental Review Tribunal entered an order holding the individuals personally responsible for the ongoing costs (about $CAN 1.4 million per year) while they pursued an appeal of the regulator’s action against them.

In their appeal, the individuals argued among other things that they had not been involved with the company at the time of the alleged contamination, and that in any event they had not been responsible for environmental issues at the company.

Undoubtedly because they were obliged to provide interim funding while they pursued their appeal, the individuals reached a settlement agreement with the MOE. According to news reports, the MOE said that the settlement represents “the first time that the Ministry has held corporate directors of a public company personally responsible for an environmental cleanup after a company has gone bankrupt.”

Francis Kean has additional interesting background regarding this case in an earlier  post on the Willis WIre blog, here.

Discussion

It is true that this case involves only the activities of a provincial regulator pursuing its mandate according to the particular requirements of the specific jurisdiction’s laws. I am not an environmental attorney and there may well be important differences between Ontario’s laws and those applicable in other jurisdictions that limit the significance of this case to the specific jurisdiction, circumstances and situation involved.

Nevertheless, the case presents yet another example where regulators have aggressively disregarded the corporate form in order to hold individual directors and officers responsible for corporate liabilities without regard to the individual’s personal culpability, a deeply troubling phenomenon on which I have frequently commented on this blog (most recently here). Because of regulators increasing willingness to try to impose direct personal liability on individual directors and officers for corporate violations – including for environmental violations – this case presents important implications for all individuals serving as directors and officers, not just those in Ontario.

At a minimum, this case has important implications for individuals serving companies whose operations potentially could produce environmental contamination. These individuals certainly will want to become informed about their company’s operations’ environmental impacts, as well as about their company’s environmental monitoring efforts.

Directors and officers concerned about their potential liabilities will also want know whether their directors’ and officers’ liability insurance will be available to protect them against their potential environmental remediation liabilities. (Because environment liability insurance is outside my area of expertise, I do not attempt to address here whether that type of insurance would provide protection. I certainly welcome comments from readers who have greater knowledge about the protection available from that type of insurance.)

The traditional D&O insurance policy typically includes an exclusion precluding coverage for all loss arising from pollution and environmental liabilities. These standard exclusions often include a coverage carve back for securities and shareholder claims, but a carve back of this type would be of little help for individual directors and officers’ remediation cost liabilities. The standard D&O pollution exclusion also sometimes will include a carve back preserving defense cost coverage protection for claims under the policy’s Insuring Agreement A (that is, when the company is insolvent or otherwise unable to indemnify them). While defense cost coverage could be very important, it provides no protection for remediation cost liabilities.

More recently some public company D&O insurers have eliminated the pollution exclusion from their base policy forms. However, carriers willing to remove the exclusion from the policy typically will require the policy’s definition of “loss” covered under the policy to specify that “loss” does not include environmental remediation costs. With remediation costs precluded from covered loss, even one of the new style policies that lack an actual pollution exclusion would not provide individual directors and officers remediation cost protection.

These days, many publicly traded companies also purchase Excess Side A/DIC insurance as part of their D&O insurance program. Many of these policies have no pollution exclusion, which raises the question whether one of these policies would “drop down” and provide insurance protection for insured directors and officers for the environmental remediation liabilities. Side A/DIC policies do not affirmatively grant coverage for these kinds of liability exposures, but then again the exposures are not excluded either, which suggests the possibility that the Side A/DIC policies could be called upon to provide protection for individuals’ environmental remediation liabilities.

In any event, these questions are likely to be raised with increasing frequency in the future. Though this case involved only a provincial environmental regulator in Canada, the issues involved are hardly unique to that jurisdiction. Give the increasing willingness of regulators everywhere to try to impose personal responsibility on individual directors and officers for corporate liabilities, these issues are likely to recur elsewhere.

It is a topic for another day, but I think we need to be seriously concerned about what regulators are trying to do to the corporate form. Modern economic activity requires the recognition of the corporation as a separate legal “person.” If this construct is undermined, many forms of economic activity could be imperiled. At the same time, our entire legal system is built around the principle that liability should not be imposed without culpability. Regulators’ willingness to impose liability on corporate officials for their company’s legal violations without regard to the individuals’ personal culpability also threatens to undermine the basic principles of liability.

Special thanks to a loyal Canadian reader for calling my attention to this case.

Corporate Officials Can Be Held Liable for Company’s Copyright Infringement: Speaking of the potential liabilities of individual directors and officers for their company’s legal violations, Northern District of Illinois Thomas Durkin held in an August 26, 2013 order (here) that under the facts presented, the two former corporate officials who ran their company as their “alter ego” could be held liable for their company’s alleged copyright infringement.

Asher Worldwide sells commercial kitchen equipment online. It has filed for copyright protection for the descriptions of the kitchen equipment that it uses on its website. In its complaint, Asher alleged that Housewaresonly.com had infringed on Asher’s copyright by using hundreds of Asher’s website’s kitchen equipment product descriptions for its own website.

Asher’s complaint also named as defendants Housewaresonly.com’s principals, Stuart and Marcia Rubin. After the lawsuit was filed, the Rubins allegedly shut down their website and allegedly depleted the company’s assets, according to Asher, to “avoid financial liability.”

The Rubins moved to dismiss Asher’s claims against them on the ground that Asher’s allegations were insufficient to hold them personally liable for their company’s alleged copyright infringement.

In his August 26 order, Judge Durkin, first noted Seventh Circuit standards specify that directors and officers typically cannot be held liable for their company’s copyright infringement absent a “special showing” that the individuals acted “willfully and knowingly” by “personally participating” in the infringement.

Judge Durkin noted that it was a “close question” whether Asher’s allegations were sufficient to impose liability on the Rubins personally given these standards. However, based on Asher’s allegations that the Rubins were the only two individuals associated with the company and therefore “comprised the entire work force” – which Judge Durkin found to lead to the “reasonable inference that they were personally involved in the corporate infringement” – the Rubins were “in fact ‘the corporation’” which they treated as their “alter ego.”

Judge Rubin concluded that Asher had alleged a sufficient level of personal participation to allow Asher’s copyright infringement claim against the Rubins to survive a motion to dismiss.

Housewaresonly.com was obviously a private company. Private company D&O insurance policies will typically include an entity- only intellectual property exclusion, meaning that the policy would not provide insurance coverage for the insured company’s copyright violations. The exclusion typically does not apply to individuals; however, because individual company officials can only be held liable for their company’s copyright violations for having acted “willfully” or “knowingly,” the imposition of liability on individuals would potentially trigger the policy’s conduct exclusion. The policy would, however, presumptively provide the individuals with defense cost protection, at least in the absence of a judicial determination that would trigger the conduct exclusion.

Given my comments above about regulators’ disregard of the corporate form, It is worth noting that the allegations in this copyright infringement case represent the kind of circumstances in which court historically have been willing to disregard the corporation’s separate legal existence. Judge Durkin also found that Asher had sufficiently alleged “personal participation” in the alleged infringing activity. My concerns about regulators and courts disregarding the corporate form do not involve the kind of circumstances involved in this case, in which the individuals allegedly were directly involved in the alleged wrongdoing.

A November 8, 2013 memo from the McDermott, Will & Emery law firm about the copyright case can be found here.

Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.

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