The Massachusetts Supreme Judicial Court recently declined an opportunity to expand the circumstances in which the corporate form may be disregarded.
The court in Scott v. NG U.S. 1, Inc. et al., 450 Mass. 760, 881 N.E. 2d 1125 (2008), reaffirmed the requirements for piercing the corporate veil that it articulated 40 years ago in My Bread Baking Co. v. Cumberland Farms, Inc., 353 Mass. 614, 233 N.E.2d 748 (1968).
Relying on those settled principles, the SJC held in Scott that the defendant parent corporation could not be derivatively liable for environmental contamination allegedly caused by a former subsidiary decades before the parent purchased the subsidiary.
In this important decision, the SJC expressly declined to follow the Massachusetts Appeals Court, which had ruled that the plaintiff should be permitted to develop evidence concerning the parent corporation’s alleged pervasive control over its subsidiary – notwithstanding that any such control would have commenced decades after the alleged contamination had occurred and the property at issue had been sold.
The facts of the case appeared, in the Appeals Court’s view, to pit against each other the policy goal embodied in the state’s Superfund law (i.e., that “the party that caused environmental contamination should be responsible for its cleanup”), and the fundamental corporate law principle that, except in rare circumstances, corporations are legally considered to be separate and distinct entities.
However, the SJC has now made clear, that “[n]either Federal (CERCLA) not State environmental laws displace bedrock principles of corporate common law.”

Migrating contamination

The plaintiff filed suit in the Massachusetts Superior Court seeking damages and reimbursement for cleanup costs for contamination on property in Salem, Mass. that he purchased in 2002.
The plaintiff alleged the contamination migrated from abutting land owned and operated in the 19th century by the Salem Gas Light Company as a gas works.
Among the defendants named was National Grid U.S.A., the corporate successor of New England Electric System (NEES). Since NEES had been the parent of Salem Gas, the plaintiff asserted that National Grid should be liable for cleanup costs resulting from Salem Gas’s alleged contamination.
However, it was undisputed that NEES did not become Salem Gas’s parent until long after the alleged contamination would have occurred. Specifically, in 1890, Salem Gas ended gas manufacturing operations on the abutting land and sold the property to a third party. The gas works itself was dismantled by 1906. Not until 20 years later, in 1926, did the corporate transactions begin that ultimately led to Boston Gas becoming a subsidiary of NEES in 1947.
The Superior Court awarded summary judgment to National Grid. The trial court reasoned that because no corporate relationship existed between NEES and Salem Gas when the alleged contamination occurred no legal basis existed for piercing the corporate veil and holding NEES’s successor, National Grid, liable as the successor parent of Salem Gas.

Policy considerations

The Massachusetts Appeals Court disagreed, however, and reinstated the plaintiff’s claim against National Grid based primarily on two considerations.
First, the Appeals Court read an earlier SJC decision, Attorney General v. M.C.K., Inc., 432 Mass. 546, 736 N.E. 2d 373 (2000), as permitting the disregard of the corporate form to prevent frustration of a significant statutory purpose (such as that embodied in the state Superfund Act).
Second, the Appeals Court rejected the Superior Court’s view that, for the corporate veil to be pierced, the parent corporation’s pervasive control over its subsidiary had to be contemporaneous with the allegedly offensive conduct.
Rather, the Appeals Court regarded as relevant the relationship between parent and subsidiary at any point in time. The Appeals Court reasoned that, just as the contamination on the plaintiff’s property did not disappear in the years after Salem Gas ceased operations on and sold the abutting land, neither did the parent corporation’s potential liability disappear so long as it failed to clean up the property during the time it exercised pervasive control over Salem Gas.
Apparently the Appeals Court concluded this should be regardless of whether the parent even knew the contaminated property had been owned decades earlier by its subsidiary.

Firm rejection

In its illuminating discussion of the equitable doctrine of corporate disregard in Massachusetts, the SJC firmly rejected the Appeals Court’s approach. Its opinion should be required reading for practitioners who deal with Massachusetts corporations. Some salient points are highlighted below.
First, the court in essence reinstated the Superior Court’s “contemporaneity” standard, by reaffirming the fundamental requirement of My Bread Baking that “corporate veils are pierced only in ‘rare particular situations,’ and only when an ‘agency or similar relationship exists between entities’. . . ‘and there is some fraudulent and injurious consequence of the intercorporate relationship.’”
In other words, pervasive control by the parent alone is not enough. For the veil to be pierced, both corporations – the subsidiary and the parent – must be engaged in the wrongful conduct “with substantial disregard of the separate nature of the corporate entities.” Thus, as the Superior Court had found, there could be no parental liability in this case because the corporations in question had no relationship whatsoever at the time of the alleged contamination.
The SJC also corrected as overly broad the Appeals Court’s apparent reading of Attorney General v. M.C.K., Inc. as potentially permitting disregard of the corporate form on policy grounds alone. To the contrary, the SJC emphasized that only where the My Bread Baking factors are present can frustration of a public policy or statute justify piercing the corporate veil. As the SJC put it: “[T]he statutory purpose of [the state’s Superfund Act] . . . is not advanced by doing violence to bedrock principles of corporate law.”
Finally, regarding the Appeals Court’s suggestion that, decades after the contamination, NEES might still be held liable for its subsidiary’s past conduct based on a failure to clean up the site, the SJC – taking into account that NEES sold its interest in Salem Gas in 1973 – noted that the lower court had “identified no source of a pre-1973 continuing duty to investigate possible contamination on properties sold by a related entity decades before there was any corporate relationship.” Absent any such duty, the focus of the case remained with the original alleged contamination, not any subsequent failure to remediate.
In short, the SJC’s decision affirms what corporate practitioners and commercial litigators have long believed: “[T]he corporate form may not be pierced to impose liability for actions taken (or not taken) by another entity long before the formation of a corporate relationship.”
This is welcome confirmation of a fundamental principle of Massachusetts common law. The decision should provide comfort to businesses and their counsel that they need not fear the imposition of liability on parent corporations under Massachusetts law for historic actions of newly acquired subsidiaries over which there was no possible parental control.

Martin Newhouse is president of the New England Legal Foundation, which filed amicus curiae brief in support of National Grid USA in the SJC appeal of Scott v. NG U.S. 1, Inc. discussed in this article.