Ohio Environmental Law Blog : Ohio Environmental Lawyer & Attorney : Joseph Koncelik : Frantz Ward Law Firm : Environmental Regulation, Land Use, Compliance : Cleveland, Ohio

Owners of small business form corporations, in part, to insulate themselves from personal liability. A recent trend in Ohio is that the State has become far more aggressive in pursuing owners of small businesses personally in environmental enforcement actions.

A business owner could still be pursued even if the corporate formalities were followed.  More and more the State is pursuing any president or owner of a small business who has an active role in managing his company day-to-day.

Due to the high costs associated with environmental compliance, this is a trend that owners of small businesses should be aware of and take prudent steps to try and protect themselves. 

"Piercing the Corporate Veil"

A fundamental rule of corporate law is that, normally, shareholders, officers, and directors are not liable for the debts of the corporation. There are exceptions to this rule  Courts have found that the “veil” of the corporation can be “pierced” and individual shareholders held liable for corporate misdeeds when it would be unjust to allow the shareholders to hide behind the fiction of the corporate entity.  This is commonly referred to as "piercing the corporate veil."

The test in Ohio for disregarding the corporate form is whether:

1. Control over the corporation by those to be held liable was so complete that the corporation has no separate mind, will or existence of its own;
2. Control over the corporation by those to be held liable was exercised in such a manner as to commit fraud or an illegal act against the person seeking to disregard the corporate entity; and 
3. Injury or unjust loss resulted to the plaintiff from such control and wrong.

[See, Belvedere Condominium Unit Owners' Assn. v. R.E. Roark Cos. (1993), 67 Ohio St.3d 274, 287, 617 N.E.2d 1075]

It had been a rare instance when the AGO would try to "pierce the corporate veil" and pursue shareholders, owners or officers of a corporate personally for environmental violations.  That has changed since the State won a victory in 2006 in case of State of Ohio v. Mercomp.  In that case, the State successfully pierced the corporate veil attaching personal liability to Manny Rock, a shareholder of a landfill.

What Actions Gave Rise to Liability?

 Here are some of the facts that the Court gave rise to personal liability:

• Mr. Rock was the sole shareholder of the corporation;
• The name of the corporation was based upon his initials;
• Regulatory violations by a corporation, absent affirmative wrongful conduct by the shareholder, is sufficient; and
• The failure of the Corporation to correct the environmental violations threatened public health and the environment.

It is important to note that the Court found liability even though it did not find under-capitalization, failure to observe corporate formalities, insolvency, or diversion of corporate funds for personal use.

Since 2006 State Seeks Individual Liability Frequently

Since the Mercomp decision in 2006, the State of Ohio has frequently sought (and obtained) personal liability of owners of small businesses.  Individuals are not only required to perform clean up, they are also subject to civil penalties if they don't perform on a timely basis. 

For small businesses that have a sole or large majority shareholder, the Mercomp case increases the liability risks for individuals.  If a company has environmental violations that have gone unaddressed, the State may argue for personal liability.

Owners of small businesses must be aware of these risks and take steps to try and protect themselves. .

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There are a myriad of federal statutes that require your company to report a spill to any of the following:

• National Response Center
• State Emergency Response Center (SERC)
• Local Emergency Planning Committee (LEPC)
• Local Fire Department

Failure to report a spill can lead to an enforcement action as well as civil penalties.  Also, failure to respond appropriately following a spill can lead to serious ramifications for your company in terms of exposure to greater clean up costs, property damages, or environmental harm. 

Due to the liability exposure associated with managing and reporting spills appropriately, its wise for all corporations to have prepared an internal corporate policy for spill response.  The policy would not only cover when you have a legal obligation to report a spill to regulators, but also how to communicate about a spill internally within the company.

Depending on the facts and circumstances surrounding the spill event, you are not always under a legal obligation to report a spill to the authorities.  Its wise to know your regulatory obligations before making the decision to report.  Otherwise, you may be inviting teams of regulators to your facility unnecessarily. (Click here for U.S. EPA's Website on Spill Reporting)

The facts of each event are different.  Therefore, each must be analyzed independently to determine your regulatory obligations.  However, its wise to get familiar with the triggers for mandatory reporting.

Attached is a series of power point slides which contains information regarding the most commonly applied federal regulations that may trigger mandatory reporting to federal or state regulators.  The spreadsheet shows the event, regulation, trigger level and reporting requirement. 

These charts were based upon a more limited spreadsheet prepared by Region VII of U.S. EPA called the Fact Sheet on Emergency Release Reporting Requirements.  They are meant for reference only and cannot substitute for analysis of each regulation and the facts surrounding your particular event.  However, I hope they are useful to you in getting familiar with the mandatory reporting obligations that exist.

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Federal hazardous waste regulations (RCRA) have long been referred to as management from "cradle to grave."  In order meet this management principle, the regulations require detailed paper work and reporting from both small and large businesses. 

Failure to maintain the proper paper work can result in significant penalties or even change your regulatory status which will have even greater implications.  Just in 2008, Ohio EPA Division of Hazardous Waste Management (DHWM) has taken 24 formal enforcement actions that included assessment of civil penalties.  Those penalties have ranged from $4,000 to $75,000.  Many of the actions were against small to medium sized businesses.

In addition, hazardous waste enforcement cases will often be reported in the newspaper, even in the small town local newspaper.  If you want to avoid the bad publicity and a costly fine, it pays to review your company's paper work practices. 

A recent EHS blog post provided a good example of the dangers of missing paperwork. 

But in the absence of any documentation that showed the facility never generated more than 2200 lbs of waste in a calendar month, the inspector assumed incorrectly that the facility generated all the wastes that were shipped out in August of 2001 in that month. [shipped out more than 2200 lbs in the month] The reality was that the wastes in the two shipments made in August had been accumulated over the past several months.

The fact the company did not maintain good records resulted in the inspector citing them for being a Large Quantity Generator (LQG) even though in reality the company was a Small Quantity Generator (SQG).  Without the proper records, the inspector's conclusion becomes difficult to refute.

Ohio EPA has identified the most frequently cited RCRA violations in Ohio.  Reviewing the following list of frequent  categories of violations is a good place to start in determining if your company is property managing hazardous waste. 

• Waste Determination- The regulations require all waste to be evaluated.  This is often an area overlooked by businesses. Failing to evaluate just one barrel of waste can result in a citation. Ohio EPA developed a handy fact sheet that is worth reviewing to get yourself familiar with these requirements.
• Annual Reports-  All LQG must submit a report by March 1st for the preceding year.  Review your files to makes sure you have submitted annual reports. 
• Container Management- Must inspect your hazardous waste storage areas at least once a week and maintain a log documenting those inspections.  Ohio EPA has provided a hazardous waste storage inspection log sheet that can be used to maintain your records.
• Emergency Equipment Inspections- SQG and LQG must maintain a log of inspections showing all emergency equipment (fire suppression, spill containment, alarms) were inspected as recommended by the manufacturer or supplier of the equipment.  Ohio EPA also has a emergency equipment inspection log sheet you can use to maintain these required records.
• Used Oil Storage-  All containers use to store used oil must be properly labeled with a sign that says "used oil."  Using terms like "hazardous waste" or "waste oil" is not sufficient.
• Large Quantity Tank Systems-  All LQG's that use tanks to store hazardous waste must inspect the tank once "each operating day."  A log of inspections must be maintained. According to an Ohio EPA fact sheet, this means each day the tank is in use.  Even if workers are not on-site seven days a week.

(photo from flickr: Ashe-Villian)

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