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 (emphasis added).
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.