A major reason corporations conduct some of their operations through subsidiaries with a corporate life of their own is to shield the parent firm from legal liability.
In the environmental area, it may not work. Kayser-Roth Corp., the clothing conglomerate, recently lost a battle with the federal government over its obligation to pay for cleaning up a long-ago spill of a toxic solvent called trichloroethylene, and the ruling may stand as a warning to all corporations that operate through subsidiaries.
The government turned to Kayser-Roth for reimbursement for the cleanup because the subsidiary that owned the textile plant where the mishap took place had been dissolved in 1977. The government's authority: the "superfund act," formally known as the Comprehensive Environmental Response, Compensation and Liability Act.
Federal officials persuaded the trial court judge that Kayser-Roth should be considered the plant's operator because headquarters was actively involved in managerial decisions of the subsidiary and had given the approval necessary for the trichloroethylene cleaning system at the factory.
Kayser-Roth insisted that as a matter of law, it cannot be stuck with the blame. The responsible party -- the subsidiary -- simply is no more, the company argued. On Aug. 2, the U.S. Court of Appeals in Boston rejected that theory. The superfund act, Judge Hugh H. Bownes said, is meant to cast a wide net: By pinning liability on operators as well as owners, Congress was trying to go after as many sources of money as possible.
An earlier decision, for instance, approved using the operator factor in deciding to bill an individual who owned a majority of stock in a company for cleaning up hazardous wastes spilled by the firm.
Bownes made it clean that the Boston ruling cannot be applied to every parent corporation.
The key is whether the corporate brass were so actively involved in managerial decisions at the subsidiary that they could be deemed to be operators of its plants.
A hands-off approach that leaves it up to the officers of the subsidiary to make decisions on their own will protect the corporate parent.
In the Kayser-Roth case, however, the trail judge had found the parent corporation intimately involved in running the subsidary.
The appellate judges said they wouldn't second-guess the original decision.
Daniel B. Moskowitz is a Washington editor for Business Week newsletters.