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Court Rejects ADEQ’s Attempt to Remove Corporate Protections For Small Businesses

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The Arizona Department of Environmental Quality (“ADEQ”) filed suit against a company alleging that it was violating an Administrative Consent Order (“ACO”). What made the lawsuit unusual was that ADEQ also sued 3 individual officers of the company, alleging that because the company was small, the individual Officers and Board members were each “operators” and therefore personally liable for penalties and other sanctions.  

ADEQ first took the position the “Responsible Corporate Officer Doctrine” applied. This Doctrine holds that any officer who knew or should have known that a company was violating the law, and didn’t stop it, is liable for the violation. Arizona has never adopted that doctrine, and the Court threw out the allegations. But ADEQ refused to retreat. ADEQ’s management testified that they wanted all officers of small companies to be individually liable, and did not care about the law in Arizona or corporate protections and form. They thus authorized the lawsuit as a ”test case” to try and change the law in Arizona to wipe out corporate form and protections for small businesses and make any individual associated with a small company personally liable for the actions of the company. So ADEQ continued to pursue the case.

Even though the Best Foods opinion issued by the United States Supreme Court defined the term Operator, and stated that an individual could only be held liable if the person personally directed the environmental violation AND the person acted in an “eccentric” manner that was beyond the typical scope of a corporate officer, ADEQ still took the position that this meant that every officer of a small company was automatically personally liable for the company’s actions if the company violated an environmental law, rule, or regulation.

The Court resoundingly rejected this attempt at overturning 200 years of jurisprudence regarding corporate forms and protections.  In State Of Arizona v Tombstone Gold & Silver, Inc., CV2021-005917, the Court held that the State had no evidence that the individuals specifically and deliberately directed an environmental violation and did not act in an eccentric matter, and were thus not individual operators of the facility under the Best Foods analysis, or any other rational definition of the term. The Court dismissed the individuals from the case and invited a petition for their attorney fees and costs.

For now, so long as they act as typical Officers or Board members of corporations doing business in Arizona, individuals remain safe from the attempts of the State to disregard the corporate form and make them personally liable for the company’s actions.