UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_____________________
No. 93-2634
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UNITED STATES OF AMERICA,
Plaintiff,
VERSUS
RALPH L. LOWE, ET AL.,
Defendants,
and
RALPH L. LOWE,
Cross-Plaintiff/
Appellant,
VERSUS
JOC OIL EXPLORATION COMPANY, INC.,
Cross-Defendant/
Appellee.
____________________________________________________
Appeal from the United States District Court
for the Southern District of Texas
_____________________________________________________
(August 15, 1994)
Before POLITZ, Chief Judge, and DUHÉ and BARKSDALE, Circuit Judges.
RHESA HAWKINS BARKSDALE, Circuit Judge:
This review of a summary judgment concerns the determinative
factors for whether a corporation is required by its bylaw
(indemnity, under certain conditions, for officers and directors
sued "by reason of" their corporate status) to indemnify an
officer/director, Ralph L. Lowe, for his individual liability
incurred under the Comprehensive Environmental Response
Compensation and Liability Act, 42 U.S.C. § 9601 et seq. (CERCLA).
Apparently because CERCLA permits personal liability to be imposed
against an officer or director, the district court held that Lowe
was not entitled to indemnity. We REVERSE.
I.
This case arises out of the disposal of wastes at the Brio
Superfund Site in Texas; the following facts are not in dispute.
From the late 1950s until 1969, the site was owned by Hard-Lowe
Company, and its successor Lowe Chemical Company (Lowe I). Lowe,
an investor in Hard-Lowe, became the sole stockholder of Lowe I;
and in 1969, he sold Lowe I to Chemical Pollution Control, Inc.
(CPC). The transaction was financed by Lowe, who took a security
interest in the Brio property. When CPC went bankrupt in 1972,
Lowe foreclosed on the site.1
In anticipation of the foreclosure, Lowe incorporated Lowe
Chemical Company (Lowe II). According to Lowe, he exchanged the
Brio Site for stock in Lowe II in May 1972, but the attorneys
handling the transaction "neglected to file and record a deed
reflecting the conveyance of the property, and title to the
property remained in [Lowe's] name." Due to this claimed
oversight, Lowe was shown as the record owner of the site until
1977. Lowe claims that JOC discovered the error, and a "corrective
1
Although JOC does not dispute the preceding facts, some of the
following facts regarding the chain of title are described by JOC
as "disputed". It states that "[i]f summary judgment had not been
granted on JOC's motion ..., these facts would have been fully
developed at the district court level."
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deed" was recorded; it "recited that it was given by [Lowe] and
accepted by JOC Oil Aromatics to `evidence the sale and intended
conveyance made on May 2, 1972, and it shall be effective as of and
retroactive to, such date.'"
According to Lowe, the purpose of the corrective deed related
to the 1975 purchase of all of Lowe II's stock by JOC at a price
that assumed Lowe II's ownership of the Brio Site. JOC defaulted
on amounts owed Lowe, and conveyed the Brio Site back to him in
1978 in lieu of foreclosure. Later that year, Lowe conveyed the
property to another entity.
After the Brio Site was declared a superfund site, the
government spent $1.31 million taking remedial action at it, and
then filed an action against both JOC and Lowe to recover those
costs. In turn, Lowe cross-claimed against JOC for indemnifi-
cation under the corporate bylaw in issue. Without admitting
liability, Lowe settled with the government for $400,000.2 JOC
settled later for $20,000.
On Lowe's cross-claim for indemnification, JOC and Lowe both
moved for summary judgment. A magistrate judge recommended
granting JOC's motion and denying Lowe's. After overruling Lowe's
objections to that recommendation, the district court entered
judgment for JOC on Lowe's cross-claim.
2
The settlement occurred shortly after denial of the United
States' motion for summary judgment against Lowe.
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II.
Pursuant to Lowe II's bylaws, each of its officers and
directors was indemnified for liability and expenses incurred "in
connection with any claim made against him, or any action ... to
which he may be a party by reason of ... being" an officer or
director.3 JOC and Lowe agree that this bylaw governs the
indemnity claim; both assert here that they are entitled to summary
judgment.4
3
The indemnity clause provided:
Each director and each officer or former
director or officer of this corporation ... shall
be indemnified by the corporation against
liabilities imposed upon him and expenses
reasonably incurred by him in connection with any
claim made against him, or any action, suit or
proceeding to which he may be a party by reason of
his being or having been such director or officer,
and against such sums as independent counsel
selected by the board of directors shall deem
reasonable payment made in settlement of any such
claim, action, suit or proceeding primarily with a
view of avoiding expenses of litigation; provided,
however, that no director or officer shall be
indemnified with respect to matters as to which he
shall be adjudged in such action, suit or
proceeding to be liable for negligence or
misconduct in performance of duty, or with respect
to any matters which shall be settled by the
payment of sums which counsel selected by the board
of directors shall not deem reasonable payment made
primarily with a view to avoiding expenses of
litigation, or with respect to matters for which
such indemnification would be against public
policy.
4
It goes without saying that we review a summary judgment de
novo; it is appropriate only when, viewing the evidence in a light
most favorable to the non-movant, there are no genuine issues of
material fact and the movant is entitled to judgment as a matter of
law. E.g., Raju v. Rhodes, 7 F.3d 1210, 1212 (5th Cir. 1993),
cert. denied, ___ U.S. ___, 114 S. Ct. 1543 (1994); Fed. R. Civ. P.
56.
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The district court held that Lowe was not sued "by reason of"
his corporate status. The magistrate judge found "it to be of
significance" that the United States brought this action against
Lowe personally, and held a hearing to ascertain whether the United
States sued Lowe "in his capacity as an officer and director".
After examining the United States' summary judgment submissions in
the underlying litigation, and having discussions with a
representative of the United States at the hearing, the magistrate
judge concluded that Lowe was sued "because of actions he may have
taken in his personal capacity and not because of actions he may
have taken in his capacity as a director or officer." This
conclusion was driven by Lowe's personal involvement at the Brio
Site and the fact that CERCLA permitted personal liability for such
actions.
A.
Based upon the complaint in the underlying litigation, and,
alternatively, upon CERCLA, JOC presents several bases for
upholding its summary judgment.
1.
JOC seizes on the wording of the United States' complaint,
contending that the indemnity clause requires that Lowe be made a
party to an action in his capacity as an officer or director.
Thus, JOC urges that we focus on that complaint, and avoid asking
"why or for whom Lowe was involved with hazardous substances at the
Brio Site." We disagree.
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The parties agree that our interpretation of the indemnity
clause is governed by Texas law; and under it, because the bylaw is
not claimed to be ambiguous, its construction is a question of law.
University Savings Ass'n. v. Burnap, 786 S.W.2d 423, 425-26 (Tex.
Ct. App. 1990). Burnap addressed an issue very similar to that
here: whether a corporate bylaw obligated University Savings to
indemnify Burnap. Id. at 425. Burnap was an officer and director
of University Savings' predecessor, and he was sued by its former
shareholders for "tipping inside information". Id. at 424. Burnap
requested indemnification for his legal fees incurred in defending
the suit, pursuant to a bylaw that indemnified officers and
directors for expenses incurred defending a suit "to which such
person is made a party solely by reason of his being or having been
a director [or] officer". Id. (emphasis added). The Texas Court
of Appeals held that he was entitled to reimbursement. Id. at 426-
27.
Interestingly, both parties rely on Burnap. Lowe maintains
that it stands for the proposition that the pleadings are not the
sole determinant for whether one is sued by reason of having been
an officer or director; rather, the facts giving rise to the
complaint must be considered. See id. at 426 (interpreting factual
allegations made in complaint against Burnap and assessing trial
testimony, among other things, in ascertaining whether indemnity
clause applied). On the other hand, JOC contends that Burnap
relied solely on what was apparent on the face of the complaint,
and that the citation to trial testimony was "unnecessary" to the
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decision. See id. In fact, the decision did note that its holding
"is consistent with the law concerning an insurance company's duty
to defend under an insurance contract. Under those provisions, the
duty to defend is determined solely from the face of the pleadings
in light of the policy provisions." Id. (citation omitted).
We do not read Burnap to hold that indemnity is triggered
solely by the underlying pleadings reciting that the individual is
being sued as an officer or director. Obviously, this would give
considerable power to artful pleading in the underlying complaint
as to the application of the indemnity provision. Needless to say,
this could, among other things, lead to considerable mischief. The
examination of trial testimony and factual interpretation of the
complaint's allegations in Burnap do not appear to have been
surplusage.
In any event, we need not rely solely on Burnap; we are guided
by a recent decision by the same court that decided Burnap, Grove
v. Daniel Valve Co., 874 S.W.2d 150 (Tex. Ct. App. 1994),
application for writ of error filed (May 11, 1994).5 The court
interpreted a Delaware statute that permitted indemnification when
an individual is sued "by reason of the fact that he is or was a"
director or officer, id. at 153 (quoting Del. Code Ann. tit. 8, §
145(a) (1991); emphasis deleted). As here, relying on Burnap, the
appellee urged that the language of the complaint in the underlying
litigation determined indemnification vel non. Id. at 152. The
5
Two of the justices in Grove participated in Burnap; the same
justice authored both opinions.
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court found that reliance misplaced, ruling that "in Burnap we did
not hold so sacred the alignment and naming of parties as to
preclude any other analysis", id. at 156:
Appellee's argument proposes a static view of the
litigation process, locking in indemnification
rights at one stage of the process, namely at the
preliminary stage of the proceedings. The pleading
must be a primary part of any follow-up
indemnification suit because it informs a court not
involved in the original lawsuit of the substance
of the suit, but it cannot be the end-all.
Id. at 158. Accordingly, we agree with the district court that the
absence of a recitation in the United States' complaint that Lowe
was being sued because he was an officer and director of Lowe II is
not fatal to his indemnification claim. But, as discussed infra,
we part company with the district court as a result of the
determinative effect it apparently gave to CERCLA providing for
personal liability for actions taken by Lowe. While CERCLA does
permit such liability, this is not the end of the inquiry; a more
detailed factual inquiry was required as to Lowe's status during
the relevant period.
2.
JOC asserts that Lowe was personally involved in the operation
at the Brio Site, and thus liable under CERCLA.6 See 42 U.S.C. §
9607(a)(2) (imposing liability on "any person who at the time of
disposal of any hazardous substance owned or operated any facility
at which such hazardous substances were disposed of"); Riverside
Mkt. Dev. Corp. v. International Bldg. Prods., Inc., 931 F.2d 327,
6
As noted, without admitting liability, Lowe settled with the
United States on its claim against him.
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330 (5th Cir.) (per curiam) ("CERCLA prevents individuals from
hiding behind the corporate shield when, as `operators,' they
themselves actually participate in the wrongful conduct prohibited
by the Act."), cert. denied, ___ U.S. ___, 112 S. Ct. 636 (1991);
United States v. Northeastern Pharmaceutical & Chem. Co., 810 F.2d
726, 743-44 (8th Cir. 1986) (government can impose personal
liability on an officer or employee of a corporation as a "person"
within the meaning of CERCLA), cert. denied, 484 U.S. 848 (1987).
JOC contends that Lowe's liability under CERCLA precludes his
liability arising "by reason of" being an officer and director.
We disagree. Although Lowe's liability "was not derivative
but personal", see Northeastern Pharmaceutical, 810 F.2d at 744,
this does not preclude, per se, his being indemnified. A similar
argument was attempted in one of the few reported federal decisions
addressing whether an indemnity clause covered personal CERCLA
liability, Bowen Engineering v. Estate of Reeve, 799 F. Supp. 467
(D.N.J. 1992). There, the estate of a former officer sought
indemnification from the corporation, which had joined other
corporations in suing the estate for contribution for CERCLA
damages. In that case, the corporate plaintiffs "contend[ed] that
they [were] suing [the former officer], through his estate,
personally for the violation of CERCLA." Id. at 485 (emphasis in
original). Nevertheless, the court concluded that although the
officer (and therefore his estate) was liable personally under
CERCLA as an "operator" of the site, id. at 474, he was entitled to
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indemnification under a clause nearly identical to that in issue
here. See id. at 483-89.7
We agree with Bowen. Lowe's CERCLA personal liability does
not, without more, void the indemnity clause. In other words,
although Lowe is personally liable, he may be entitled to
indemnity. Cf. Grove, 874 S.W.2d at 154 ("It is true that ...
Grove could be individually liable for any negligent design ....
The indemnification statute, however, expressly provides that if an
employee's job exposes him to liability, then the corporation must
indemnify him if the employee is successful on the merits ....")
Indeed, if Lowe II's officers or directors were not subject to
personal liability for acts or omissions arising out of their
corporate positions, there would be little reason for the indemnity
clause. Cf. Riverside, 931 F.2d at 330 ("`Corporate officers are
liable for their torts, although committed when acting
officially.'") (quoting 3A S. Flanagan & C. Keating, Fletcher
Cyclopedia of the Law of Private Corporations § 1135 (1986)). As
stated, Lowe's CERCLA personal liability does not preclude per se
indemnification.8
7
New Jersey law controlled in Bowen. "In New Jersey a party
may receive indemnification `only if he or she is without fault and
his or her liability is purely constructive, secondary or
vicarious.'" Bowen, 799 F. Supp. at 484 (emphasis in original;
citation omitted). The court noted that strict liability statutes,
such as CERCLA, establish "secondary" liability under New Jersey
law. Id. at 484-85.
8
Of course, indemnity may be circumscribed by defenses that can
be raised under the indemnity clause, such as exclusion of
indemnification where the officer "shall be adjudged ... liable for
negligence or misconduct in performance of duty".
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3.
Alternatively, JOC contends that the bylaw's prohibition of
indemnification where such "would be against public policy"
prohibits it in this instance, asserting that "[a]llowing Lowe to
shirk his responsibility for the contamination he caused violates
CERCLA's policy."
But, assuming arguendo that this issue was raised properly in
district court, JOC does not contend that CERCLA prohibits
indemnification; to the contrary, it notes "that 42 U.S.C. §
9607(e)(1) freely allows parties to agree to indemnify one another
for liability under CERCLA." That being so, we cannot understand
why Lowe's personal liability under CERCLA would be contrary to
CERCLA's allowing indemnity. Obviously, indemnification does not
relieve Lowe of his liability vis-a-vis the government; it only
provides a possible source of payment for damages resulting from
that liability.9
9
JOC contends also that CERCLA's policies prohibit
indemnification, even apart from the indemnity clause. JOC's
proposed distinction -- that indemnity is only permissible for
officers or directors "who are expressly sued as such or who are
not named individually because their involvement with the
contamination is limited to general corporate matters removed from
actual participation in the handling and disposal of the hazardous
substances" -- finds no support in the statute. In fact, an
officer or director's individual liability under CERCLA depends
upon "actual[] participation", i.e., "personal participation in the
alleged wrongful conduct". Riverside, 931 F.2d at 330. Thus,
indemnity would be meaningless if it only covered officers or
directors who were "removed from actual participation", because
they would not be subject to underlying liability.
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B.
As noted, Lowe does more than merely challenge the adverse
summary judgment; he asserts that he is entitled to judgment.10
But, as noted earlier, more factual inquiry into the relationship
between Lowe's CERCLA liability and his status as an officer and
director is required.
The focus of that factual inquiry should be on the "connection
between the complaint and [Lowe's] corporate status". See Grove,
874 S.W.2d 156. In assessing this connection, we recognize the
breadth with which many courts have interpreted language such as
"by reason of". For example, the Seventh Circuit recently
interpreted the Delaware indemnification statute, and concluded
that the "`by reason of the fact that' phrase is broad enough to
encompass suits against a director in his official capacity as well
as suits against a director that arise more tangentially from his
role, position or status as a director." Heffernan v. Pacific
Dunlop GNB Corp., 965 F.2d 369, 375 (7th Cir. 1992).11
Keeping the breadth of the bylaw's "by reason of" language in
mind, Lowe's liability may be connected to his status as an officer
10
JOC responds that this issue is not before us, stating that
Lowe did not properly raise the issue of the denial of his cross-
motion for summary judgment. In the light of our disposition of
this issue, we need not reach this contention. In any event,
Lowe's notice of appeal concerned the district court granting
summary judgment to JOC and denying Lowe's summary judgment motion.
And, the issue Lowe presented for review includes whether the
district court erred in denying his summary judgment motion.
Moreover, he concludes his summary of argument by urging that he
"is entitled as a matter of law" to indemnity.
11
In Grove, the Texas Court of Appeals cited Heffernan with
approval. See Grove, 874 S.W.2d at 153-56.
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and director; much of his liability may have arisen "by reason of"
that status. Even JOC offers support for this position. For
example, it states that "Lowe personally oversaw the day-to-day
site activities, was actively involved in Lowe Chemical Company's
environmental compliance problems, supervised the initial pit
closure activities, and was involved in and had the authority to
control the disposal of waste generated by Lowe Chemical Company."
(Footnote omitted.) Similarly, JOC recognizes that "Lowe
personally participated in the disposal of styrene tar at the Brio
Site and maintained daily, on-site involvement in decisionmaking
regarding hazardous substances at Lowe Chemical Company -- a
company whose fundamental operations involved the use of hazardous
substances it placed in earthen pits." (Footnote omitted.)
Obviously, a number of other issues require exploration by the
district court. First, as discussed, Lowe was sued as both an
"operator" and an "owner" of the Brio Site. Lowe suggests that, to
the extent his liability arose as an "owner" rather than an
"operator", "this theory [of liability] does not entitle [him] to
indemnification." Therefore, there may be a need for apportionment
of Lowe's liability between that occasioned as an "owner" and that
as an "operator".12
Moreover, Lowe contends that he was not liable at all as an
"owner" of the Brio Site. If this is true, apportioning the
12
Lowe's settlement with the United States also involved another
superfund site, the "Hardage Site". The district court may also
need to apportion the settlement amount between that resulting from
the Brio Site and that from the Hardage Site if the latter is not
subject to the indemnity clause.
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liability may be pretermitted (assuming apportionment is
appropriate). Lowe advances two reasons for escaping "owner"
liability. First, he asserts that he is exempt from CERCLA
liability as a foreclosing lienholder. See 40 C.F.R. § 300.1100
(1993). Second, he contends that JOC's acceptance of the
"corrective" deed for the Brio Site estops it from asserting that
Lowe owned the Brio Site during the years preceding that deed.
These issues are appropriately first addressed by the district
court.
Last, assuming apportionment is required, the question of
attorneys' fees arises. Lowe notes that the indemnity clause
covers "expenses ... incurred ... in connection" with claims
subject to the clause. He contends that expenses include
attorneys' fees, and that they should not be subject to
apportionment. More specifically, he analogizes the expense
provision to an insurer's duty to defend. Under Texas law, "the
insurer is obligated to defend, as long as the complaint alleges at
least one cause of action within the coverage of the policy."
Rhodes v. Chicago Ins. Co., 719 F.2d 116, 119 (5th Cir. 1983)
(citations omitted); see also Burnap, 786 S.W.2d at 426 (inviting
comparison between indemnity clause and insurer's duty to defend).
On the other hand, Grove directed that, on remand, "the parties ...
apportion in some reasonable manner the monies spent by [Grove]
defending his status as general partner [for which indemnification
was not allowed] and as corporate personnel [for which it was]."
Grove, 874 S.W.2d at 158. We need not clarify Texas law on this
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issue; until the district court determines whether apportionment of
the liability is necessary, and, if so, how it should be made,
there is no issue before us regarding apportionment of attorneys'
fees. In short, this is another possible issue for the district
court.
III.
For the foregoing reasons, the judgment is REVERSED, and the
case REMANDED for further proceedings consistent with this opinion.
REVERSED and REMANDED
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