September 12, 2011

Massachusetts Court Upholds Collective Knowledge and Veil Piercing in Criminal Prosecution for Environmental Violations

In a case of first impression, the Appeals Court of Massachusetts recently affirmed criminal convictions against four different corporate defendants for failure to report one release of oil to the Massachusetts Department of Environmental Protection (“MADEP”).  Commonwealth v. Springfield Terminal Railway Company, 80 Mass. App. Ct. 22 (2011)(“Springfield Terminal”).  The Appeals Court upheld the Commonwealth’s combined use of collective knowledge and piercing the corporate veil theories to expand the number of defendants and multiply the maximum criminal penalties.  The Appeals Court’s adoption of the collective knowledge theory and its extension to multiple criminal defendants at once is without precedent.  Despite that fact, the opinion has garnered surprisingly little attention. 

Springfield Terminal concerned a substantial release of diesel fuel from a freight locomotive parked in a railyard.  Testimony and evidence at trial established that hundreds of gallons of fuel spilled out of the locomotive “like . . . a waterfall.”  Workers who observed the spill reported it to their supervisors and immediately took measures to contain the spill.  A train dispatcher, train master, and corporate vice president all were made aware of it.  The Appeals Court saw no need to specify in its opinion which workers and supervisors were employed by which corporate defendant.  The train dispatcher testified that there were contingency plans in place for reporting diesel spills; however, none of the defendants’ employees or officers reported the spill to MADEP.  Within 17 hours, workers began excavating contaminated soil and ballast, placing it in drums, and replacing it with clean fill.  At that point, an “anonymous informant” called MADEP to report the spill.

It was uncontested that: (i) a spill of diesel equal to or greater than 10 gallons must be reported to MADEP; (ii) more than that “Reportable Quantity” had been spilled in a period of 24 consecutive hours or less; and, therefore, (iii) the spill should have been reported to MADEP “as soon as possible but not more than two hours after obtaining knowledge” that the release met those criteria (emphasis added).  310 C.M.R. 40.0311(3).  None of the parties contested the trial court’s instruction that both knowledge that the release had occurred and knowledge that it was 10 or more gallons were required to trigger the reporting requirement.  The Appeals Court highlighted but made no ruling with respect to that issue.

The Commonwealth brought criminal charges under M.G.L. c. 21E, § 11, for failure to notify MADEP “as soon as [one] has knowledge of a release or threat of release of oil or hazardous material,” as required by M.G.L. c. 21E, § 7.  Section 11 states that the maximum criminal fine for each such violation is $100,000, and that “[e]ach day such violation occurs or continues shall be considered a separate violation.”  In an effort to multiply the maximum criminal penalties permitted under the statute, the Commonwealth argued that failure to report over the course of two calendar days, during a period of less than 24 hours, constitutes two “days” of violations under Section 11.  In addition, the Commonwealth charged that the three corporations that owned and operated the railyard (Springfield Terminal Railway Company, Boston & Maine Corporation, and Maine Central Railroad Company), as well as the parent of those corporations (Pan Am Railways, Inc.), all were accountable for failure to report the release.  The trial court agreed, and it sentenced each defendant to pay a fine of $125,000 (i.e., a total of $500,000 for two days of violation under Section 11).  The Appeals Court affirmed.

With respect to the number of days of violation, the Appeals Court cited a “long-standing” rule that the word “day” when not qualified with a modifier such as “business” day means a calendar day.  It upheld the trial court’s instruction that each calendar day that ensued after a duty to report was triggered constituted a separate violation under Section 11.

The Appeals Court’s analysis concerning the basis for holding all four corporate defendants liable was less clear.  At the outset of its opinion, the Appeals Court stated that it would refer to all four defendants collectively as “Pan Am,” as if they constituted one corporation, and as if the evidence were the same in every instance as to each individual defendant.  The Appeals Court recited the following in support of its collective approach:

The four corporations coordinate their operations; train cars bearing the railroads’ insignias are frequently mixed, and employees of all four corporations do not meaningfully distinguish between them.  Many official corporate documents and employee business cards bear the names and insignias of two or more of these entities.

Because the Appeals Court refers throughout its opinion to all defendants as “Pan Am,” it is not clear how each defendant obtained knowledge of a reportable spill, and when, based on what particular evidence.  It also is not clear to what extent the opinion purports to endorse collectivization of knowledge among employees of different corporations to prove a material element of a criminal offense for all four of them.  The opinion states, in the same sentence in fact, that “Pan Am argues that the judge improperly instructed that the Commonwealth could establish Pan Am’s knowledge of the release through collective corporate knowledge,” and that the judge described collective corporate knowledge as “the totality of what all of [a corporation’s] employees and agents [knew] within the scope of their employment” (emphasis added).  Notably, in their special verdict forms, the jury did not find that any one employee or agent acting for any one of the corporate defendants had knowledge sufficient to meet the requirements of Section 11.

The corporate defendants were held collectively responsible based on three interdependent rulings, all of which they challenged:  (i) “mere knowledge” of a release of a reportable quantity of oil or hazardous materials, and not “willful failure” to report a release, is all that is required to support imposition of criminal penalties under Section 11; (ii) “mere knowledge,” unlike willfulness, may be aggregated from the awareness of different employees (or, apparently, employees of related corporations), and may be found even if no one employee has the requisite degree of knowledge; and (iii) “the knowledge and/or criminal conduct of one corporation may be imputed to another corporation where there is confused intermingling of activity of two or more corporations engaged in a common enterprise with substantial disregard of the separate capacity in which the various corporations and their respective representatives are acting” (emphasis added).  Pervasive control by one corporation over another, or fraudulent purpose or conduct, was not required.

Much of the Appeals Court’s analysis of these three issues was directed to distinguishing a recent decision in which the Massachusetts Supreme Judicial Court (“SJC”) unequivocally rejected “collective knowledge” as a basis for corporate criminal liability.  In Commonwealth v. Life Care Centers of America, Inc., 456 Mass. 826 (2010), the SJC stated that “the Commonwealth may not prosecute a corporation for criminal conduct based on a theory that requires aggregating the knowledge and conduct of multiple employees.”  In Life Care Centers, the SJC distinguished an old federal decision, United States v. Bank of New England, 821 F.2d 844 (1987), in which the U.S. Court of Appeals for the First Circuit let stand a trial judge’s instruction that corporate knowledge could be inferred from the accumulation of facts known separately by different employees.  In sum, the Appeals Court adopted as precedent a federal decision which the SJC declined to follow.  In doing so, the Appeals Court acknowledged “the absence of prior Massachusetts law aggregating corporate knowledge in the criminal context.”

First, the Appeals Court held, the word “willfully” does not appear anywhere in Section 7 or 11.  To establish criminal liability, the Commonwealth was required to prove only that a defendant had the required knowledge of the release and failed to notify MADEP within the prescribed time limit.  The Appeals Court characterized this as “mere knowledge.”  However, it also stated, “‛[K]nowledge by the accused of the facts giving rise to criminality’ is a ‘blameworthy condition of the mind” (citation omitted), and Section 11 therefore “does not impose strict criminal liability.”

Second, the Appeals Court stated,“[w]here a mens rea requirement of mere knowledge attaches to a material element of a statutorily-created crime unknown at common law, ‘[a] collective knowledge instruction is entirely appropriate in the context of corporate criminal liability’” (quoting Bank of New England).  As the SJC and other courts that have distinguished and refused to follow Bank of New England have pointed out, however, in that case the First Circuit ultimately concluded that one individual employee in fact had the proscribed criminal intent.  See Life Care Centers, and Saba v. Compagnie Nationale Air France, 78 F.3d 664 (D.C. Cir. 1996). 

Third, the Appeals Court stated, proof of confused intermingling of corporate activity disregarding formal corporate separation, without proof of fraudulent purpose or conduct in the parent’s control of the subsidiary, is sufficient basis to pierce the corporate veil.  The Appeals Court acknowledged the SJC’s pronouncement in Scott v. NG U.S. 1, Inc., 450 Mass. 760 (2008), that “[i]n the environmental context, as in other contexts, corporate veils are pierced only in ‘rare particular situations,’ and only when an ‘agency or similar relationship exists between the entities.’”  Nonetheless, the Appeals Court ruled that the judge appropriately charged the jury to apply a circumscribed list of factors that fit the evidence in this particular case to determine whether to pierce the corporate veil.  As noted above, given the Appeals Court’s collective use of the term “Pan Am,” it is not clear from its opinion whether it meant to uphold an instruction that criminal conduct of one corporation may be imputed to multiple corporations, or just to the parent. 

Since it is only a month old, it remains to be seen how Springfield Terminal may be treated by the SJC.  Springfield Terminal may be repudiated, or, like Bank of New England, it may be regularly distinguished based upon its unique facts.  See, e.g., United States v. Science Applications International Corporation, 626 F.3d 1257 (D.C. Cir. 2010)(declining to apply Bank of New England even though applicable statute required “no proof of specific intent”). 

Regardless of whether and to what extent Springfield Terminal survives, certain core messages cannot prudently be ignored.  First, it is clear that both the Commonwealth and the courts take very seriously the duty to report releases of oil and hazardous substances under M.G.L. c. 21E.  It is not enough for a company to institute immediate and effective response actions to contain and clean up a spill.  The release must be reported as prescribed by the regulations.  Furthermore, evidence that a company had a reporting procedure in place but did not follow it may be offered as further proof of knowing failure to report.

Second, related corporations that rely on one integrated environmental management structure to respond to spills – including a system for “reporting up” to compliance officers at the parent corporation – should take care to preserve the independence and separate accountability of the entity that originated the spill.  The touchstone of the Appeals Court’s entire legal analysis was that the four related corporations were highly integrated, to the point that their employees “do not meaningfully distinguish between them.” 

Finally, one reason that Springfield Terminal is a case of first impression may be that, in similar circumstances, a prudent defendant may be inclined to negotiate a resolution with the agency rather than go to trial, particularly a criminal trial.  It was undisputed at trial that hundreds of gallons of diesel fuel spilled in a short time, many employees and senior supervisors quickly became aware of the spill, some or all of the defendants had emergency response procedures in place requiring that such spills be reported, the applicable regulations required that the spill be reported within two hours, and yet the spill was not reported to MADEP.  Given these facts, one may question whether the case could have been decided on narrower grounds, and whether the Appeals Court could have avoided making sweeping pronouncements of new law.  Ultimately, Springfield Terminal may exemplify the old adage that bad facts make bad law.