Corporate Officer Individual Liability for Environmental Violations Upheld by the Texas Supreme Court
The Texas Supreme Court recently reinstated an assessment of civil
penalties against a corporate official for violations of the Texas Water Code.
In State of Texas v. Morello, No. 16-0457
(February 23, 2018), the Court overturned the decision by the Austin Court of
Appeals, which had held that a corporate official could not be personally
liable for environmental violations unless the individual had engaged in
“tortious” or “fraudulent” acts. The Supreme Court, in looking at the plain
meaning of the Water Code, held that “under an environmental regulation
applicable to a ‘person,’ an individual cannot use the corporate form as a
shield when he or she has personally
participated in conduct that violates the statute.” Slip op. at 12
The case involved a civil enforcement action brought by the State of
Texas against both Bernard Morello (“Morello”) and White Lion Holdings, L.L.C. (“White
Lion”) for failure to comply with a compliance plan with the Texas Commission
on Environmental Quality (“TCEQ”) that was in place to address contaminated
groundwater on the property owned by White Lion. Morello was the only member of
White Lion. The State alleged that Morello personally engaged in activities,
such as removing treatment systems necessary to meet the requirements of the
compliance plan, which constituted violations of the Texas Water Code. The
State sought and was granted summary judgment on liability against White Lion.
These claims were then severed from the claims against Morello, and a final judgment
for civil penalties of $325,600 (based on the statutory minimum of $50 per day
of violation) was entered against White Lion. This judgment was affirmed on
appeal and was not before the Texas Supreme Court.
In the subsequent proceedings against Morello, the State was also
granted summary judgment and was awarded civil penalties against Morello of
$367,250, also based on the statutory minimum of $50 per day of violation penalty. Morello appealed
the judgment and the Austin Court of Appeals overturned the liability finding
against Morello. In doing so the Austin Court parsed the underlying limited
liable company statutes and the common law and concluded that corporate
officials could only be liable if their individual conduct was “tortious” or
“fraudulent.” Finding that violations of the compliance plan did not constitute
fraud or a tort, the Court of Appeals reversed the judgment against Morello.
At the Supreme Court, the State argued and the Court agreed that the
proper analysis should focus on the plain meaning of the Texas Water Code.
Specifically, the Court relied upon Water Code Section 7.101, which provides:
“A person may not cause, suffer,
allow or permit a violation . . .” and Water Code Section 7.102, which states
“A person who causes, suffers,
allows or permits a violation . . .shall be assessed for each violation a civil
penalty of not less than $50 nor greater than $25,000 for each day of violation
. . . ” Texas Water code §§ 7.101, .102 (emphasis
added). Since the term “person” encompasses an individual, the court held that
an individual who personally engages in acts that constitute violations of the
law may be held liable, regardless of their status as a corporate officer. In
so holding, the Texas Supreme Court joined numerous other state and federal
courts that have held that a person’s status as a corporate officer does not
shield them from liability if they personally participate in the wrongful
conduct. Slip. Op. at 11-12.
A related issue addressed by the court was the imposition of separate
penalties against White Lion and Morello. Morello argued that the trial court
improperly severed the claims against White Lion, and the penalty imposed
should have been joint and several. The Supreme Court rejected this claim, holding
that the trial court did not abuse its discretion, noting that while the two
claims were related, the claims against Morello involved evidence of his
personal actions that were not part of the case against White Lion.
It is interesting to note that application of principles of joint and
several liability to environmental liability might not always favor defendants.
For example, if Morello had been the actual owner of the property as an
individual and faced liability in that capacity, but had played a minor part in
the violative conduct, he might have wanted to treat his case as separate from
the company’s, as his behavior could be viewed as less culpable and therefore
warranting a lesser penalty than White Lion. This strategy was obviated in this
case by the provision of the Texas Water Code that provides for a minimum
penalty of $50 for a violation, which apparently was the per day penalty amount
sought by the State against both defendants. If the state had been seeking per
day penalties higher than the statutory minimum (as noted earlier, the statute
allows per day penalties of up to $25,000), based on the nature of the conduct,
one can posit a situation where a less culpable defendant would not want the
penalties to be joint and several.
As a result of Morello,
corporate officials should be cognizant of the potential personal liability
that may attach to their own actions. While this is more likely to occur in the
closely-held business situation, as occurred in this case, officials in larger
organizations with involvement in environmental compliance activities should
also be aware of the potential for personal liability for their own acts, even
when acting in a corporate or business capacity.