Appeals Court Upholds Penalty Against Members of LLC that Owned Landfill for Violations of Oregon’s Landfill Closure Law

A long-running dispute over a substantial civil penalty issued by the Oregon Department of Environmental Quality (DEQ) for violations of Oregon’s landfill closure requirements continued with the Oregon Court of Appeals’ recent decision, Kinzua Resources, LLC v. Oregon Dep’t of Envtl. Quality, --- P.3d ---, 323 Or. App. 37 (2022) (Kinzua IV). Through the Environmental Quality Commission, DEQ assessed a penalty to Kinzua Resources, LLC for violations of the closure requirements at the Pilot Rock Landfill, a discontinued sawmill waste site, under ORS 459.205 and ORS 459.268. The commission also assigned responsibility to the two corporate members of Kinzua, Frontier Resources, LLC and ATR Services, Inc., and an individual principal shareholder of both members for the same violations as Kinzua under the theory that they “controlled” the landfill. Frontier, ATR, and the individual shareholder petitioned for judicial review in 2018, arguing partly that the evidence before the commission had not established that the LLC members managed Kinzua’s day-to-day operations.

In a 2020 decision, as discussed in a previous B&D news alert, the Oregon Supreme Court held that if ATR and Frontier had the legal authority to control the site, they could be responsible for the violations.

Key Takeaways

• On remand from the Oregon Supreme Court, the appeals court held that the imposition of liability on the two LLC members was supported by substantial evidence because the authority to control a landfill can be inferred from Oregon’s default LLC rule, ORS 63.130(1), which provides that each member “has equal rights in the management and conduct of the [LLC].”

• Under the appeals court’s interpretation of ORS 63.130(1), DEQ may be able to impose a fine on LLC members without developing a factual record that they exerted actual decision-making authority over the LLC and landfill.

• Using layered corporate structures may not shield ultimate landfill owners from liability for violations of landfill closure requirements in Oregon.
• Though this decision suggests that contracting to change the default LLC rules may afford additional protections to LLC owners, the dominant theme in the Kinzua matter is the treatment of typical corporate protections as subservient to Oregon’s landfill closure laws to ensure responsibility for environmental harms.

Oregon Supreme Court Precedent on Definition of “Control”

If a landfill permit holder does not comply with statutory closure requirements, the “persons owning or controlling” the site are responsible. ORS 459.205; ORS 459.268. In Kinzua Resources, LLC v. Oregon Dep’t of Envtl. Quality, 366 Or. 674, 468 P.3d 410 (2020) (Kinzua III), the Oregon Supreme Court broadly interpreted the term “controlling” in ORS 459.205 and ORS 459.268 to include any entity or person with legal authority to control—i.e., not the actual exertion of control. Liability limits for LLC members did not prevent the LLC’s owners from being directly liable for violations of landfill closure requirements where the owners were persons “controlling” the landfill. Id. at 683–84. The Supreme Court remanded the case to the appeals court to consider whether the commission’s finding that Frontier and ATR were liable, under the court’s interpretation of “controlling” in Kinzua III, was supported by substantial evidence. See id. at 689.

Oregon’s Default LLC Law Can Constitute “Substantial Evidence” of Control

The Oregon Court of Appeals needed limited evidence on remand to conclude that Frontier and ATR had the legal authority to control the landfill under the Supreme Court’s test. The court held that ORS 63.130(1), the Oregon LLC law’s default rule governing LLCs’ management and control, alone provided “substantial evidence” of Frontier and ATR’s legal authority to control the landfill. Kinzua IV, 323 Or. App. at 46. The appeals court found that the default LLC management rule applied to Kinzua’s members because there was no evidence of any other arrangement. The appeals court did not examine the record for any other evidence of whether either Frontier or ATR, in fact, unilaterally made decisions for Kinzua. The court’s view of a procedural issue—that Frontier and ATR effectively conceded that they had legal authority over Kinzua and the landfill, basing their challenge only on the now-invalidated reasoning that the legal authority they retained was unexercised, and, therefore, not sufficient to satisfy the applicable standard for control under the environmental statute – also informed the decision.

A member of the appeals panel partially dissented because the evidence relied upon by the majority only showed that Frontier and ATR had collective authority over Kinzua. The dissenting judge would have required evidence of individual control by Frontier or ATR over Kinzua’s management, opining that “co-equal” LLC management authority limited their authority without the consent of the other member. The dissent may set the stage for a further appeal to the Oregon Supreme Court.

Conclusion

The Kinzua decisions demonstrate Oregon courts’ willingness to disregard fundamental corporate protections to advance environmental goals where the two appear to conflict. In light of the Kinzua cases, landfill owners should consider whether their corporate documents may affect which related entities and/or individuals may be deemed in “control” of the site.

B&D's attorneys will continue to monitor developments in this case, including potential further appeals.

Beveridge & Diamond's Waste and Recycling practice group and Waste Treatment, Recycling, and Disposal Services industry group, including attorneys in the Pacific Northwest, advise companies and municipalities on waste issues, including compliance counseling, litigation, and regulatory advocacy under federal and state law. We help clients comply with constantly-changing requirements, minimize exposures to environmental liabilities, develop business opportunities, and enhance profitability. For more information, please contact the authors.