After setting up new locations in Texas, N. O. Smelz, owner of Smelz Rug Cleaning, obtained a hazardous waste permit from the Texas Commission on Environmental Quality for the disposal of the company’s cleaning chemicals after use.  In addition to the permit, the TCEQ issued a compliance plan to Smelz.  Because he was too busy managing the financial side of the company, N.O. delegated oversight and implementation of the compliance plan to Wright Handman.  Compliance is running smoothly for about a year, but business is growing quickly and Handman doesn’t have time to train Rhule Brecker, a new carpet cleaning technician.  In fact, Handman never trains Brecker.  During Brecker’s second year on the job, Handman sees that Brecker is pouring the used cleaning chemicals into a storm drain on the street, which violates the compliance plan.  Two weeks later, Smelz gets a notice from TCEQ that it believes Smelz is violating the compliance plan and that an investigation will be conducted.  Brecker fesses up, and Handman also admits he didn’t train Brecker properly.  TCEQ sues Smelz, Handman and Brecker for civil penalties of $50 per day for failing to properly implement the compliance plan.  Are Handman and Brecker personally liable to the State?     

There is Personal Liability Under the Water Code?

The Texas Supreme Court recently addressed this issue in State of Texas v. Morello.   Mr. Morello established a single-member LLC that purchased property out of bankruptcy.  The property had been owned by a company operating a pipe manufacturing facility on the property.  The facility caused groundwater contamination.  The State issued a hazardous waste permit and a compliance plan for the facility.  As part of the purchase of the property, the pipe manufacturer transferred the permit and compliance plan to the LLC.  Subsequently, the TCEQ notified the LLC and Morello that they were violating the compliance plan.  When the LLC and Morello failed to respond, the State first sued the LLC.  Later, it amended the lawsuit to add Morello and claimed he personally violated the Texas Water Code.

The State initially obtained a summary judgment against the LLC for nine years’ of violations, amounting to $325,600 in civil penalties.  But the State was not finished.  Over a year later, the State sought summary judgment against Morello for the same violations, alleging Morello was personally and substantially involved with decisions concerning the facility’s compliance with the plan.  Morello argued he could not be held personally liable for the LLC’s failure to comply because he was acting as the LLC’s agent.  The trial court disagreed, and awarded summary judgment for the State, this time for $367,250 in civil penalties.

Morello appealed.  The court of appeals reversed.  Relying on the common law principle that a corporate officer is not individually liable unless the officer knowingly participates in tortious or fraudulent acts, the court found no evidence that the alleged failures to comply with the plan were tortious or fraudulent.

The Texas Supreme Court reversed.  Instead of addressing the court of appeals’ reasoning, the Supreme Court found that the Water Code provisions at issue applied directly to Morello individually.  Those provisions state a “person may not cause, suffer, allow, or permit a violation of  . . . an order or permit issued.”  Water Code § 7.101.  The Court noted the Water Code did not define the term “person,” which commonly means an individual.  Thus, “under the plain language of the Water code, an individual may be assessed a penalty for causing, suffering, allowing, or permitting a violation of a permit relating to the TCEQ.”

Are Wright and Brecker Both Personally Liable?

Brecker is personally liable because he caused the violation of the permit.  Notably – and the Supreme Court did not address this in its opinion – nothing in the Water Code requires proof that the individual knew that they were violating the permit, or even knew the permit existed.

Handman is also arguably liable.  Because Smelz tasked Handman with overseeing and implementing the compliance plan, and Handman failed to properly train Brecker, the State could argue that Handman allowed or permitted a violation of the permit.

Tilting the Scales in Your Favor

The Morello case is another illustration of the trap for the unwary.  The lesson: instead of trying to implement the compliance plan in house, hire a third-party consulting company to manage and oversee compliance.  As part of your agreement, ensure that the consulting company has commercial general liability insurance that covers your company as an additional insured.  Also, make the consulting company indemnify you from any losses, penalties, judgments, or other costs (including attorney’s fees and court costs) relating to their compliance work.

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