Fiduciary Liability for Environmental Contamination: How to Navigate CERCLA and Its State Law Counterparts

The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) imposes strict liability on current and former owners of environmentally contaminated property. The statute long has been a source of controversy when it comes to trustees and others who hold title to polluted property in a fiduciary capacity because the fiduciary’s relationship to the property typically provides little policy justification for imposing liability on the fiduciary. This article explores the circumstances in which a plaintiff can hold a fiduciary personally liable under CERCLA and similar state statutes, as well as practical implications of this issue for day-to-day administration of fiduciary estates.

Fiduciary Liability under CERCLA

CERCLA imposes joint and several liability for environmental contamination on a broad range of parties—including current and former owners and operators of contaminated sites, as well as those who arrange for the disposal of hazardous substances. The statute’s goal is “to promote the timely cleanup of hazardous waste sites and to ensure that the costs of such cleanup efforts [a]re borne by those responsible for the contamination.” CERCLA imposes liability without regard to fault or intent; mere status as a current or former owner or operator generally suffices.

State trust law generally provides that in the case of a common-law trust (as distinct from a business or statutory trust), the trustee, rather than the trust, holds title to trust assets, and only the trustee, not the trust, is legally capable of suing and being sued. State law typically is similar for other kinds of fiduciaries who hold assets for the benefit of others. This raises the question of whether CERCLA imposes liability on trustees or similar fiduciaries as “owners” and whether such liability may be satisfied from their personal assets despite their lack of a beneficial interest in the property.

In 1993, a federal district court issued a blockbuster decision answering these questions in the affirmative. In City of Phoenix v. Garbage Services Co., the court held that a trustee could be personally liable for environmental contamination, at least where the trustee had the power to control the use of trust property and knowingly allowed it to be used for hazardous waste disposal. The decision sent shockwaves through the trust services industry and became a “rallying cry” for fiduciaries, who lobbied Congress to amend the statute to avoid this result in future cases.

In response, Congress enacted the Asset Conservation, Lender Liability, and Deposit Insurance Protection Act of 1996 (referred to as the Asset Conservation Act). This legislation amended CERCLA to provide that “[t]he liability of a fiduciary under any provision of [CERCLA] for the release or threatened release of a hazardous substance at, from, or in connection with a vessel or facility held in a fiduciary capacity shall not exceed the assets held in the fiduciary capacity.” 42 U.S.C. § 9607(n)(1). The statute defines “fiduciary” to include “a person acting for the benefit of another party as a bona fide . . . trustee,” “executor,” “administrator,” “receiver,” or “conservator.” 42 U.S.C. § 9607(n)(5)(A)(i).

While the Asset Conservation Act provides significant protection for fiduciaries, it is not absolute. It also contains exceptions that permit liability beyond the assets of the fiduciary estate, as discussed below.

Exceptions to Fiduciary’s Typical Liability Limitations

Independent Liability Exception

The Asset Conservation Act’s limitation on liability does not apply “to the extent that a person is liable . . . independently of the person’s ownership of [the property] or actions taken in a fiduciary capacity.” 42 U.S.C. § 9607(n)(2). Thus, for example, the liability limitation would not protect someone who holds interests in contaminated property in a trustee capacity if the person previously held those same interests personally—in other words, transferring the interests into a trust would not shield the person from liability for contamination occurring prior to the transfer. Similarly, the liability limitation would not protect someone who personally holds interests in contaminated property, even if the person also holds other interests in the property in a fiduciary capacity (e.g., someone who personally inherits interests in the property under a will and who also holds other interests in the property as testamentary trustee for a relative who has not yet attained the age of majority). The liability limitation also would not protect a fiduciary who personally operated and polluted the contaminated property.

Negligence Exception

The Asset Conservation Act also provides that its limitation on liability does not apply “if negligence of [the] fiduciary causes or contributes to the release” of hazardous substances. 42 U.S.C. § 9607(n)(3). This has been, and continues to be, a source of concern for fiduciaries because CERCLA plaintiffs often argue that the fiduciary had a duty to prevent contamination of property held in the fiduciary estate and was negligent in nevertheless permitting it to occur (e.g., by not preventing a company with operations on the land from polluting it).

The negligence exception, however, has been construed to require affirmative negligence that directly causes or contributes to contamination—not a mere passive failure to prevent others from polluting. For example, in Canadyne-Georgia Corp. v. NationsBank, N.A. (South), a bank serving in a trustee capacity held a majority interest in a partnership that polluted certain land, and under state partnership law, the bank as trustee was deemed to own the land as well. The Canadyne court held that “under [state] law and, ipso facto, for purposes of CERCLA, the Bank was an ‘owner.’” The court went on to hold, however, that the Asset Conservation Act shielded the bank from liability, rejecting the argument that the bank’s failure to prevent the pollution triggered the “negligence” exception. The court reasoned that because CERCLA is a strict liability statute—imposing liability without regard to action or inaction—“CERCLA imposes no duty to act, and thus the Bank could not have been negligent in failing to prevent others from polluting.” The court thus required some “particular action by the Bank that caused or contributed to the release of hazardous substances”; mere passive negligence or failure to oversee the partnership in which the bank held a controlling interest was not enough.

“Trust-for-Profit” Exception

Another exception applies to “a trust or other fiduciary estate that was organized for the primary purpose of, or is engaged in, actively carrying on a trade or business for profit,” unless the trust or estate was created as part of an estate plan or due to incapacity. 42 U.S.C. § 9607(n)(5)(A)(ii). This generally is understood to connote “business trusts” (often called “Massachusetts business trusts”), which are akin to for-profit corporations and, unlike ordinary or common-law trusts, generally are treated as juridical “persons.” See, e.g., 11 U.S.C. § 101(9)(A)(v) (allowing a “business trust” to file a bankruptcy petition); Cal. Bus. & Prof. Code § 14001 (recognizing a “business trust” as a “person”); In re Sung Soo Rim Irrevocable Intervivos Tr. (holding that “business trusts” are a “type of profit-oriented, limited liability business entity” that are taxed as corporations and must comply with fictitious name statutes).

Other Exceptions

The Asset Conservation Act also contains a number of other exceptions: (i) when the fiduciary acquires control of the pertinent property “with the objective purpose of avoiding liability of the [fiduciary] or of any other person” (42 U.S.C. § 9607(n)(5)(A)(ii)(II)); (ii) when the fiduciary also acts in a separate nonfiduciary capacity and benefits from the fiduciary relationship (see 42 U.S.C. § 9607(n)(7)(A)); and (iii) when the fiduciary is also a beneficiary and receives benefits for its fiduciary role that exceed customary or reasonable compensation (see 42 U.S.C. § 9607(n)(7)(B)).

Can a Fiduciary Be Liable for Distributions Made During the Pendency of CERCLA Litigation?

The Asset Conservation Act also is ambiguous on a critical question: Though it provides that the fiduciary’s liability “shall not exceed the assets held in the fiduciary capacity,” when does one measure those assets? At the time the CERCLA case is commenced? If so, can the fiduciary be personally liable for the amount of distributions it makes to beneficiaries after the case is filed?

Of course, if the fiduciary distributes assets for the purpose of putting them beyond the reach of the plaintiff—i.e., attempts to abuse the Asset Conservation Act—the fiduciary would face a substantial risk of liability. Even apart from CERCLA, courts typically hold that a fiduciary can be liable in the amount of distributions if the fiduciary was “motivated by a desire to put trust assets beyond the reach of” the plaintiff because “[s]uch a distribution may violate the common law or statutory provisions prohibiting fraudulent conveyances or could conceivably constitute a tort similar to interference with prospective economic advantage.”

That scenario aside, when it comes to post-litigation distributions in the ordinary course, case law does not provide a clear answer as to whether the Asset Conservation Act protects the fiduciary from liability for the amount of such distributions, i.e., whether “the assets held in the fiduciary capacity” are measured as of the date the litigation is filed, with the fiduciary on the hook for any subsequent reduction in those assets resulting from distributions. In Palmtree Acquisition Corp. v. Neely, the CERCLA plaintiff argued that the trustee should be personally liable notwithstanding the Asset Conservation Act because, inter alia, he distributed trust assets and terminated the trust before all of the trust’s obligations had been discharged, thus allegedly breaching his fiduciary duty to the trust beneficiaries. The court rejected this argument, holding that the trustee “retained discretion in determining how to provide for future liabilities and obligations and when those liabilities had been discharged.” The court thus appeared to conclude that the trustee was permitted to make distributions while CERCLA claims were pending without incurring personal liability for the amount of the distributions.

Conversely, in United States v. Newmont USA Ltd., the court suggested that the Asset Conservation Act merely limits liability to “the value of the trust assets” without requiring that “payment for potential liability be from the trust assets” (emphasis added). In Newmont, the trustee—the United States government holding Native American land in trust—argued that selling land to satisfy CERCLA liability would violate statutory restrictions on alienating Native American land. The court held that, under the circumstances of the case, satisfying a CERCLA judgment would not require a sale, which implies that the court expected the trustee to satisfy the liability from its own personal funds (in that case, the United States Treasury). The court thus indicated that a trustee can be required to satisfy a CERCLA judgment from its own assets under some circumstances—which a CERCLA plaintiff could argue supports holding the fiduciary personally liable for the amount of post-litigation distributions if the remaining estate is not enough to satisfy the liability. Newmont, however, is inconsistent with a more recent case, El Paso Natural Gas Co. v. United States, also involving Native American land, which held that pertinent CERCLA liabilities “may be satisfied only out of assets held in trust by the United States and not from the general U.S. Treasury.” 390 F. Supp. 3d 1025, 1059–60 (D. Ariz. 2019).

The Newmont court’s interpretation, moreover, is in tension with the Asset Conservation Act’s purpose of protecting fiduciaries from personal exposure and would create a back door to personal fiduciary liability. Also, holding a fiduciary liable for the value of distributions generally should be unnecessary because the plaintiff can recover the value directly from the beneficiaries (assuming the beneficiaries do not dissipate the assets, which admittedly is a big assumption). This is because “CERCLA is merciless when it comes to beneficiaries” in that “[n]o statutory protection exists to protect beneficiaries from liability” where contaminated properties are held in trust for their benefit. Moreover, holding a fiduciary personally liable for post-litigation distributions would seem particularly unfair if the distributions were mandated by the trust or other governing instrument, if distributions were discretionary but a beneficiary threatened suit if they were not made (thereby placing the trustee on the horns of a dilemma), or if there was a pressing need for distributions (e.g., to cover the costs of elder care).

In short, the authors believe that the better view is that “the assets held in the fiduciary capacity” should be measured not as of the commencement of suit; rather, they should be measured as of the date on which the judgment becomes final—provided that interim distributions are made solely in the ordinary course and not for the purpose of putting the estate’s assets beyond the reach of the plaintiff.

Is State Law the Same?

Most states’ environmental laws are similar to CERCLA in this area. For example, the California Legislature responded to City of Phoenix by amending California’s Carpenter-Presley-Tanner Hazardous Substance Account Act to provide that, generally, “the liability of a fiduciary . . . under any [non-federal environmental remediation law] in connection with any property held at any time by the fiduciary as part of the fiduciary estate, shall be limited to, and satisfied only from, the assets held in the fiduciary estate.” Cal. Health & Safety Code § 25548.3(a). Similarly, New Jersey’s Spill Compensation and Control Act provides that “only the assets of the trust or estate, or assets of any discharger other than the fiduciary of such trust or estate, shall be subject to the obligation to pay for the cleanup of the discharge.” N.J. Stat. § 58:10-23.11g9. These statutes are more clearly favorable for fiduciaries than CERCLA in that they avoid the issue addressed in Newmont by specifying that the liability is not just limited to the amount of the assets in the estate but must be satisfied from those assets. Like CERCLA, however, state statutes contain various exceptions that may warrant careful consideration in an individual case (e.g., “[i]f the fiduciary’s negligent or intentional or reckless conduct causes or contributes to the release . . . of a hazardous material,” Cal. Health & Safety Code § 25548.5(c)).

How Does This Affect Whether to Establish a Reserve?

The foregoing leads to several practical questions regarding whether and to what extent a fiduciary can or should limit distributions to beneficiaries once environmental litigation is filed. As noted, a fiduciary may well be personally liable if it distributes funds for the purpose of putting those funds beyond the reach of the plaintiff. But does that mean that a fiduciary can or should establish a litigation reserve within the trust, and potentially withhold distributions on that basis? If the fiduciary does so, should it set the reserve in an amount sufficient to cover defense costs only, or also potential liability? Although answering these questions may turn in part on nuances of state trust or probate law that are beyond the scope of this article, we offer three points for consideration.

First, if insurance is covering both defense costs and liability, and policy limits are sufficiently high, then there would seem to be no reason to withhold distributions the fiduciary otherwise would make—and the fiduciary seemingly would have an obligation to make distributions to the extent they are mandated by the governing instrument or by general fiduciary duty principles.

Second, if insurance is not covering defense costs, then the fiduciary presumably will want to establish a reserve within the estate to fund those costs, assuming, as is typical, that applicable state law permits such a reserve. That way the fiduciary will not have to come out of pocket in connection with defending the litigation.

Third, if insurance is not covering potential liability associated with an eventual judgment, then that would raise the question of whether the fiduciary should increase the reserve to cover such liability. Whichever direction the fiduciary goes in on this, there are risks.

For example, if the fiduciary does not establish a reserve for liability, and instead makes whatever distributions it otherwise would make, then, given the legal uncertainties discussed above, there is a risk a court would hold that the fiduciary can be personally liable for the amount of the distributions (even in the absence of one of the exceptions to the limitations on fiduciary liability). This risk, however, would appear to be modest for the reasons discussed above. To mitigate any hypothetical risk, the fiduciary could consider conditioning distributions on the beneficiaries providing indemnity up to the amount of the distributions (recognizing that such an indemnity might prove worthless if the beneficiaries dissipate the money). Before the fiduciary does so, it will be important to check state trust or probate law regarding the circumstance in which a fiduciary is allowed to condition distributions on an indemnity. See, e.g., Cal. Prob. Code § 16004.5 (providing that although “[a] trustee may not require a beneficiary to relieve the trustee of liability as a condition for making a distribution . . . [that] is required by the trust instrument,” the trustee may “[r]equire indemnification against a claim . . . which may reasonably arise as a result of the distribution”).

On the other side of the coin, if the fiduciary establishes a reserve for liability and accordingly withholds or limits distributions the fiduciary otherwise would make, the beneficiaries could assert that the fiduciary improperly is administering the estate in the interests of a creditor rather than the beneficiaries. The beneficiaries also might argue that, regardless, the reserve is unreasonable in amount. Indeed, the beneficiaries could argue that any reserve for liability is necessarily unreasonable in amount because of the Asset Conservation Act and similar state laws; they could argue that, under those statutes, liability is limited to whatever remains in the estate following ordinary-course distributions, so there is no need to set a reserve or to withhold or limit distributions at all.

Balancing these risks in any given case will require carefully considering all the facts and circumstances and applicable state trust or probate law. Where the law and the facts are highly uncertain, or where the fiduciary-beneficiary relationship is particularly fraught or litigious, the fiduciary may wish to consider seeking judicial guidance via a petition for instructions.

Conclusion

CERCLA and its state law counterparts create a risk that a fiduciary can be held personally liable for environmental contamination at sites held in the fiduciary estate, but the statutes also contain provisions that sharply mitigate this risk. Those protections are not ironclad, however, so it is important to consider all the facts and circumstances, as well as applicable state trust or probate law, in assessing the potential for liability and its implications for the day-to-day administration of the estate.