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The Responsible Corporate Officer Killed the LLC

By John R. Bashaw and Mary Mintel Miller – February 11, 2016


Traditionally, the limited liability company (LLC) form of business structure provides liability protection to the members and manager of the LLC for the actions of the company. In the 1940s, the U.S. Supreme Court determined that for certain violations of laws that protect the public welfare, a “responsible corporate officer” (RCO) could be held individually liable for the actions of a corporation. This RCO doctrine applies even if the officer was unaware of the offending action or did not partake in it. Liability arose simply as a result of the officer’s position in the corporation and ability to control policies or procedures that may have prevented the offense. At first, the RCO doctrine was applied sparingly to offenses that resulted in minor penalties. Many state courts have expanded the RCO doctrine to civil environmental violations committed by corporations and LLCs. Further, the monetary penalties sought for environmental violations have increased substantially. The result is that almost any violation of an environmental law by any closely held LLC or corporation may result in substantial personal liability for the individual members, managers, officers, directors, or shareholders solely as a result of the practical reality that such individuals have day-to-day control of the operations of the LLC or corporation. The same environmental violations performed by a larger corporation rarely result in RCO liability because of the inability to establish that the officers, directors, or shareholders of large corporations had such control. In short, when small closely held entities are structuring a deal that involves contaminated property or a business that handles hazardous waste, you also have to consider the protection of personal assets so as to better protect against liability as an RCO.


This article looks at the RCO doctrine through the case law of the state of Connecticut, where the authors have defended RCO actions. While this article focuses on Connecticut, a limited review of case law in other states suggests that some states have adopted similar legal theories. A complete review of each state’s specific RCO common law is beyond the scope of this article, but the fundamental bases of the RCO doctrine are similar in other states. To avoid repetition, the authors refer mostly to the LLC form of company ownership, but the RCO doctrine applies with equal vigor to small closely held corporations.


The LLC is a popular business structure because it provides tax benefits while—in theory—shielding its individual members and managers from individual liability. But that liability shield has been so weakened in recent years in environmental cases that it barely exists for smaller LLCs. Members and managers of LLCs need to understand the risks they face and consider a broader range of actions to protect themselves from individual liability that could run into the millions of dollars.


State statutes, and the common law, do limit the liability of individual LLC members. See, e.g., Conn. Gen. Stat. §§ 34-100 et seq. But in the area of environmental liability, Connecticut and other states have eroded the LLC protection for individuals, and a company executive can be individually liable if the following criteria are met:


1. the individual is in a position of responsibility that allows the person to influence company policies or activities;

2. there is a nexus between the individual’s actions or inactions in that position and the environmental violation such that the individual influenced the company actions that constituted the violations; and

3. the individual’s actions or inactions resulted in the violations.


BEC Corp. v. Dep’t of Envtl. Prot., 256 Conn. 602, 618 (2001).


Almost all members and managers of small LLCs have direct involvement in the day-to-day operations of the LLC and therefore will per se be found to be an RCO under this standard. As a result, those members and managers will have personal liability for the actions of the LLC. Even in complex organizational structures in which, for example, members, and managers are themselves corporations, LLCs, or partnerships, the RCO doctrine will find its way to those individuals who are ultimately responsible for the LLC’s policies and operations.        


Traditional Liability Protection for LLC Members and Managers
An LLC is a hybrid between a corporation and a partnership. It is often preferred over the corporate form because of the avoidance of double taxation of corporate earnings and its flexibility in formality and structure. And while a partnership offers the same tax and structure advantages, a partnership does not provide limited liability to the individual partners, whereas an LLC provides its members the liability protection provided shareholders in a corporation. For many situations, the LLC offers the best qualities of the corporate and partnership structures. It is particularly advantageous to many small businesses.


While the tax and structure advantages of the LLC are important, the focus for purposes of the RCO doctrine is on the benefit of limited liability. As with shareholders, directors, and officers in a corporation, the members and managers of an LLC normally do not shoulder the liability for the obligations of the LLC, except when they agree to do so. With the exception of the RCO doctrine, courts almost uniformly respect the existence of the LLC liability shield. On rare occasions, a court might disregard this shield where the LLC is a sham or fraud. An individual can also be held personally liable for the actions of the LLC where that individual guarantees a company debt or personally commits a tort. But, overall, the liability of LLC members and managers is distinct from the liability of the LLC itself. With the exception of the RCO doctrine, an LLC member or manager generally is not liable for the actions or inaction of the LLC merely as a result of that person’s status or title in the LLC.


The Crack in the LLC Liability Shield
The inviolate corporate liability shield began to crack, and the RCO doctrine took life, in the 1940s. This crack began in the context of criminal prosecutions for mislabeled drugs and for adulterated foods. In United States v. Dotterweich, 320 U.S. 277 (1943), the United States Supreme Court held that a company president could be held criminally culpable for the mislabeling of a drug by the corporation solely on the basis of his authority and responsibility as president and general manager of the corporation. Id. at 285. There was no evidence that the company president was personally guilty of the offense, that he actively participated in it, or that he even was aware of the conduct. The Court reached this result because the statute at issue was designed to protect the public welfare.


Three decades later, in United States v. Park, 421 U.S. 658 (1975), the RCO doctrine was applied to a similar public welfare statute. In that case, the company was a national food store chain that had been found culpable of adulterating food. The company president was also convicted because he “‘by virtue of his position . . . had . . . authority and responsibility’ to deal with the situation.” Id. at 674. There was no evidence, however, that he had any personal involvement with the crime or that he even knew that it had occurred.


Since Park, several environmental laws, including the federal Clean Water Act and Clean Air Act, were drafted to expressly provide that RCOs are among the “persons” who can be prosecuted for any violations. The federal common law that created the RCO doctrine for public welfare offenses has been codified in some of the federal and state environmental statutes. See, e.g., 33 U.S.C. § 1319(c)(6); 42 U.S.C. § 7413(c)(6); Conn. Gen. Stat. § 22a-354s(c).


From Criminal to Both Criminal and Civil Liability
From its beginnings in cases of modest criminal culpability—the fine imposed in Dotterweich was $500; in Park, $250—the RCO doctrine has expanded into the area of civil liability for environmental violations. While the specter of jail time is not at issue, the fines that are typically sought in the civil and administrative area are substantial. For example, in a California case, the court applied the RCO doctrine to hold two corporate officers and directors personally liable for environmental violations, and they were ordered to pay civil penalties of $2.5 million. People v. Roscoe, 169 Cal. App. 4th 829 (2008). As in other RCO cases, there was no evidence that these individuals were aware of, or participated in, the corporate wrongdoing. They were held liable as a result of their status and because a public welfare environmental statute had been violated. Id. at 839.


Growth of the RCO Doctrine in Connecticut
The State of Connecticut has applied the RCO doctrine in several environmental cases. It first arose in BEC Corp. v. Department of Environmental Protection, 256 Conn. 602 (2001), in which the Connecticut Department of Energy and Environmental Protection (DEEP) issued an order to BEC to abate pollution on the company’s property. That order, however, also was issued to the two individual officers of the company, holding them personally liable for the company’s violations. The individuals appealed the individual liability determination to a Connecticut trial court, which upheld the DEEP administrative decision. The individuals appealed to the Appellate Court, and the Connecticut Supreme Court transferred the case to its jurisdiction.


The issue on appeal was simple: Are individual corporate officers personally liable for the actions of the corporation under Connecticut’s water pollution control statute, section 22a-432 of the Connecticut General Statutes? Under that statute, DEEP can issue an order to “any person” who has established a facility or created a condition—or who is maintaining the same—that can be expected to create a source of pollution to the waters of the state. The definition of “person” for purposes of this statute includes “any officer or governing or managing body of any partnership, association, firm or corporation or any member or manager of a limited liability company.” Conn. Gen. Stat. § 22a-423. The court found that individual corporate officers can be held liable under section 22a-432 of the Connecticut General Statutes for the acts of the corporation even if the officer did not personally commit the offending acts or even know about them. To define who can be liable as an RCO, the court adopted the three elements of the RCO doctrine listed above but expressly limited BEC to alleged violations of section 22a-432.


 Next, in Celentano v. Rocque, Commissioner of Environmental Protection, 282 Conn. 645 (2007), the court expanded the RCO doctrine to state laws that regulate dams. There DEEP had issued an order to a developer corporation and to the individual who was the president, sole officer, sole director, and sole shareholder of the corporation, demanding that they repair a dam. The administrative order was appealed to the trial court, which dismissed the appeal. The company and the individual owner appealed to the Connecticut Supreme Court.


The court easily determined that the statute at issue concerned the public welfare, thus opening the door for potential application of the RCO doctrine. The definition of “person” as used in section 22a-402 of the Connecticut General Statues was different from the definition in the BEC case. It did not specifically list corporate officers and directors in the definition of a “person,” but that did not deter the court from directly applying the RCO doctrine. Having made that leap, the rest was a foregone conclusion. After all, how difficult is it to find that a person who is the president, sole officer, sole director, and sole shareholder has the requisite control to make decisions for the corporation? There is no one else to make those decisions. Both BCE and Celentano have been applied beyond Connecticut’s borders. See, e.g., People v. Roscoe, 169 Cal. App. 4th 829 (2008) (referencing both BEC and Celentano in its application of the RCO doctrine to California laws governing underground storage of hazardous substances).


There has been only one limitation to date on the court’s willingness to apply the RCO doctrine to any law that ostensibly affects the public welfare, and that limitation occurs only where the legislature has explicitly excluded RCOs from liability. In Underpass Auto Parts v. Connecticut Department of Environmental Protection, 319 Conn. 80 (2015), DEEP attempted to hold the president of an LLC personally liable for violations of the state’s aquifer protection act (Conn. Gen. Stat. §§ 22a-354a et seq.). While the law at issue protected the public welfare, the court could not ignore the explicit words of the statute, which included RCOs in the definition of “person” where the violation of the act was willful but excluded RCOs for negligent violations. In this case, there was no finding that the LLC’s president acted willfully; therefore, he could not be held liable as an RCO. Following Celentano, however, if the aquifer protection statute did not use the term “responsible corporate officer” in its definitions, there is little doubt that the court would have imposed individual liability.


The most recent pronouncement of the RCO doctrine in Connecticut comes from the Appellate Court in Vorlon Holding, LLC v. Connecticut Department of Energy & Environmental Protection, 161 Conn. App. 837 (2015). The issue was whether the RCO doctrine could be extended to an individual who was the sole member and president of a LLC that held title to contaminated property. DEEP ordered the LLC and the individual to study, remediate, and monitor the condition of the property because under section 22a-432 of the General Statutes, they were “maintaining a facility or condition which reasonably can be expected to create a source of pollution to the waters of the state.” As in the other cases, the order was appealed at both the administrative and trial court levels, each resulting in a determination that the individual was liable as an RCO.


Not surprisingly, because the individual was the sole member and president of the LLC, the court held that the three conditions of the RCO doctrine had been met. The LLC president was the only person who could be responsible for approving activities conducted on the property. Furthermore, she was aware of contamination on the property, and she failed to influence policies or operations of Vorlon to remediate the problem. And, third, as the owner of contaminated property, Vorlon had an obligation to conduct remediation when issued an order, and it was the individual member’s actions that prevented the company from performing such work. Thus, the court held her personally liable for the environmental condition of the real property.


 And So, the RCO Has Killed the LLC
These cases tell us that any member or manager of a small LLC has a high probability of becoming an RCO for environmental liability. While the courts typically limit application of the RCO doctrine to the specific environmental law at issue in the case, the courts make clear that the doctrine can be applied to any state law that could be characterized as a public welfare statute. The smaller the LLC, the more likely the liability, because proving the three elements of the RCO case is automatic in a single-person LLC and an easy case for one with only a few active LLC members and managers.


Not surprisingly, many small and medium-size companies that handle hazardous materials or discharge contaminants, or that are in the business of acquiring contaminated properties, have managers or members who are involved in the day-to-day operations of the LLC. Many are family-run businesses. These individuals make the LLC policy decisions, many of which have a direct or indirect impact on the handling of hazardous materials, the investigation and remediation of soil, or the budgets that pay for such work. The elements of establishing RCO liability exist from the moment such LLCs are formed. Violations of environmental laws that are committed by others within the company, even without the knowledge of the managers or members, might become the multimillion-dollar individual liabilities of the managers or members.


The risk of individual liability for LLC members and managers applies equally to officers, directors, and shareholders of small corporations, but the officers, directors, and shareholders of large corporations appear to be shielded from RCO liability as a practical matter. Research did not find any case in Connecticut in which DEEP has sought to impose RCO liability on the president or other officers of a large corporate entity. Proving the elements that create RCO liability in such large entities is difficult. While the president of the large corporation and the manager of the small LLC may be equally unaware of an environmental violation committed by the employees, the manager of the small LLC is the one who will be haled into court as an RCO and who will be subject to devastating penalties. Meanwhile, the larger corporation continues without fear of RCO liability.


What Is the Answer to the LLC Liability Issue?
Although the RCO doctrine is alive and well, many business persons will appropriately create LLCs to run their businesses or to take title to contaminated property. In each such case, the LLC should establish clear policies for handling hazardous materials and petroleum products, and all employees involved with such materials should be trained in those policies. While these actions will not absolve individual members and managers of RCO liability, they make the risk of a release or violation less likely.


There may also be ways to shield certain members from RCO liability by structuring the LLC so that the class of individuals with no control or influence on company policies is clearly segregated from the manager or another member who may have that sole responsibility.


More importantly, however, potential members or managers of small LLCs must understand that the LLC structure is not necessarily going to protect them from personal environmental liability. As a result, personal assets need to be carefully protected. That may mean that assets are held in different names or by different entities, and that liquid assets are put into funds that are otherwise exempt from personal liability. In other words, forming the company is only part of the equation. At the same time, members and managers need to assess the structure of their personal assets.


Keywords: environmental litigation, responsible corporate officer, liability, LLC


John Bashaw is a shareholder and Mary Mintel Miller is an associate of Reid and Riege, P.C., in Connecticut. They represented the defendants in the Underpass Auto Parts case.


 
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