COMMONWEALTH OF KENTUCKY NATURAL RESOURCES AND ENVIRONMENTAL PROTECTION CABINET V FRANKLIN CIRCUIT COURT NO . KENTEC COAL CO ., INC .
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2003-SC-000622-DG
COMMONWEALTH OF KENTUCKY
NATURAL RESOURCES AND
ENVIRONMENTAL PROTECTION
CABINET
V
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APPELLANT
ON REVIEW FROM COURT OF APPEALS
2002-CA-001239
FRANKLIN CIRCUIT COURT NO.
98-CI-00580 AND 98-CI-02002
KENTEC COAL CO ., INC .
APPELLEE
OPINION OF THE COURT BY JUSTICE SCOTT
AFFIRMING
We granted Discretionary Review of the Opinion of the Court of Appeals,
which held KRS 350 .0301(5) and 405 KAR 7:092, Section 6, unconstitutional, as
in violation of the due process and equal protection clauses of the United States
Constitution, as well as Section 2 of the Kentucky Constitution, banning arbitrary
state action . Upon our considerations hereinafter set out, we affirm .
The Appellee, Kentec Coal Company, Inc. (KENTEC) is the holder of a
surface mining permit located in Leslie and Perry Counties . The permit totals
some 107 acres and is divided up into six (6) separate geographical increments
for incremental bonding purposes . The permit was issued in 1987 and expired
on December 1, 1992, although reclamation work was continuing in accordance
with the permit obligations, per an agreed order between the parties.
KENTEC was owned by
Mr. John
Siegal, who apparently kept
KENTEC's main offices in Louisville, Kentucky . Mr. Brim Watts was the overseer
for KENTEC's reclamation work on the permit site . The reclamation inspector on
the job site for the Environmental and Public Protection Cabinet (CABINET) was
Lisa Baker (BAKER) .
On May 30, 1996, inspector BAKER observed a disturbance on the permit
site which appeared to be preliminary excavation of a basement or houseseat for
a residential dwelling . Throughout the enforcement, and even on appeal, there
has been some confusion as to just which increment was involved .
Initially
inspector BAKER felt the disturbance was on increment 5; yet cabinet office
personnel believed it was on increment 1 .
The Appellee, at oral arguments,
suggested the disturbance (would or did) straddle both increments 1 and 5.
Increment 1 covers 17.2 acres of surface reclamation responsibilities, whereas
increment 5 covers 24.44 acres.'
The post mining land use for increment 5 is
forest land. For increment 1, it is hayland and pasture .
On this date, inspector BAKER issued KENTEC a mine inspection report
(MIR) noting "[t]hird party disturbance has been made on the site . Building
' At oral arguments, counsel for the CABINET, suggested the way to ensure that
the post mining land use on the area of disturbance was properly included in the
revision, was to revise the post mining land use for the whole increment within
which the disturbance occurred, or is occurring . However, the record and
arguments did not provide us with the revision costs, or the reclamation costs for
this change to either increments 1, 5 or both, as opposed to just the smaller area
of disturbance, the extent of which had yet to be determined .
construction has started . Submit permit revision reflecting any post-mining land
use change which will result."
In July 1996, inspector BAKER met with KENTEC's engineer, as well as
Mr. Watts. The fact that a house was being built on the mine site was discussed
at that meeting . It became apparent that Bruce Leedy (the former surface owner)
had sold a portion, or all, of increment 5 to Mr. Kenneth Bowling and Mr. Bowling
was building a house on his property . Bowling was noted to have said that he
was not sure how much of the property would be devoted to the house and there
was a possibility he, or his son, might build another house, as well as associated
out-buildings such as a garage, etc. Later, even areas for gardens were noted .
At any rate, inspector BAKER continued to inspect the permit from June
through November 1996. On her inspection of November 22, 1996, she issued
KENTEC a Non-Compliance, noting that there was a house under construction
on the permit and that KENTEC had failed to revise the permit to incorporate a
change in its approved post mining land use for that area . As a result, KENTEC
was directed to "submit and obtain a revision to permit to allow change in post
mining land use" by December 22, 1996.
No revision having been submitted by KENTEC by December 27, 1996,
inspector BAKER issued a Cessation Order noting that the remedial work had
not been completed.
Mr. Watts, KENTEC's reclamation manager, did not know of the issuance
of the Cessation Order as the paperwork had been sent to KENTEC's owner Mr .
John Siegal .
Apparently Siegal did not notify Watts of such .
Watts testified,
however, that he did not have their engineers working on the revision because he
wasn't sure of what would eventually be involved . He had tried to find out from
Mr. Bowling exactly what he intended to do and tried to ascertain the location of
the property affected by the sale, but apparently the Deed from Mr. Leedy to Mr.
Bowling wasn't on record .
However, Mr. Bowling did claim his property
encompassed the entire watershed, even extending outside of the permit.
He
also told Mr. Watts that he, or his son, might build another house on the property .
As of March 1997, Watts was of the opinion the house had not been finished as
Mr. Bowling was still living in a trailer adjacent to the house . In Watts' opinion,
the project was still on-going and there was no practical need for KENTEC to
submit a revision until the extent of the ultimate disturbance could be
ascertained .
The CABINET does not dispute that KENTEC did not have any
association with Mr. Bowling, or that Mr. Bowling was not subject to the control of
KENTEC . Neither did KENTEC authorize Mr. Bowling to construct a house on
his property within its permit .
For one of KENTEC's defenses, it relied on the applicability of the
CABINET'S so-called "Third Party Violation Policy" along with a memorandum
issued in relation thereto, by the CABINET'S assistant director of the Division of
Field Services, David Nance, on May 2, 1991 ; all of which was a clarification of a
policy originally enunciated by the Federal Office of Surface Mining (OSM) .
According to Nance, OSM's policy was a result of a series of discussions
between OSM and the Department of Surface Mining Reclamation and
Enforcement (DSMRE) concerning the problems associated with disturbances
caused by third parties unrelated to the permittee or mining company.
Ultimately
OSM issued a letter on April 19, 1990, addressed to Kentucky's Commissioner
stating that OSM (in its oversight position) would not issue a 10-day notice for
violations caused by third parties, if the area disturbed by a third party had not
been previously disturbed by the permittee . Thereafter, on May 2, 1991, Nance
issued the policy clarification memorandum pointing out that "third party
disturbances" might entail an on-going process, the extent of which might not be
known until it was completed .
Consequently, he observed that "the permittee
and the inspector should monitor the third party activity, and only when the
activity is completed should any deadline (for corrections) be set."
Nance
summed up this policy directive by stating "[o]ne should try to approach "third
party situations" with common sense . A violation should not be written prior to
the permittee being able to do anything ." For purposes of this case, this policy
was still in effect and had not been rescinded .
The reasons behind the later CABINET clarification were apparently
related to the CABINET workload .
Due to previous literal applications of the
OSM policy, many permittees were submitting permit revisions within thirty (30)
days of the first notice of disturbance . Many of the disturbances were caused by
oil and gas pipeline companies constructing pipeline right-of-ways over multiple
permit increments, resulting in multiple filings (as the right-of-way progressed
from area to area over time) to revise each new disturbance, area or increment
affected by the surface disturbance . Thus, Nance's memorandum was intended
to give the inspector more flexibility in dealing with third party disturbances by
allowing the permittee and the inspector jointly to take a "wait and see" approach
in order to determine just what the ultimate extent of the disturbance would be at
the end of the construction . Once the totality of the disturbance was ascertained,
the permittee would then submit a comprehensive permit revision .
However, based upon the issuance of the Cessation Order on December
27,
1996,
the CABINET then
issued KENTEC a "Notice of Proposed
Assessment" for the violations in the amount of $29,700.00 .2 At this point, the
procedural aspects of this case become important .
Once a Cessation Order is issued and the Notice of Proposed
Assessment is given, the administrative hearing procedures for mine operations
(permittees) becomes bifurcated under the CABINET's regulations . See KRS
350.0301(5) .
405 KAR 7:092, Section 6, provides that any person issued a proposed
penalty assessment may file a petition for review of the proposed assessment
within thirty (30) days of the receipt of the proposed assessment or the mailing of
the conference officer's report. A parallel process exists under 405 KAR 7:092,
Section 7, which allows an operator to have a formal review of any fact-ofviolation .
However, these are two (2) separate (parallel) administrative
procedures, one based upon the assessment amount while the other is based
upon the question of whether there was in fact, a violation .
2 7,200.00 of the assessment represented an assessment for the NonCompliance . The remaining $22,500 .00 was assessed for the Cessation Order,
which has a statutory minimum of $750 .00 for each day the Cessation Order
remains unabated. This amount is mandated by KRS 350.990(1) .
KENTEC pursued both avenues, lost each; and appealed each to the
Franklin Circuit Court, where they were consolidated . On November 6, 2001, the
Franklin Circuit Court entered Judgment in the consolidated actions, overruling
KENTEC's positions and affirming the decisions of the CABINET . A subsequent
Motion to Alter and Amend was denied on May 9, 2002 .
KENTEC then appealed to the Court of Appeals which reversed the Order
and Decisions of the CABINET and the Franklin Circuit Court .
We granted
Discretionary Review on Motion of the CABINET.
THE ADMINISTRATIVE PROCEDURES
In Franklin v. Natural Resources and Environmental Protection Cabinet,
799 S.W.2d 1 (Ky. 1990), we found a similar CABINET hearing procedure
unconstitutional, wherein we held, "this regulation which denies the due process
hearing to an aggrieved party based solely on his financial inability to pay the
penalties which he seeks to appeal is unconstitutional, in violation of the equal
protection clauses of the United States and Kentucky Constitutions." Id. at p. 3.
Following Franklin , the General Assembly then amended Chapter 350 of the
Kentucky Revised Statutes to add the current version of KRS 350 .0301(5), which
allows for the parallel hearing procedures discussed previous . Yet, KRS
350.0301(5) still includes a requirement of prepayment of penalties for hearings
contesting the amount of the penalty - but not the "fact-of-violation"
hearings.
Pursuant to the authority then established in KRS 350 .0301, 350.028 and
350.465(3)(i), the CABINET promulgated 405 KAR 7:092 . Section 3 of 405 KAR
7:092, sets forth the requirements for the proposed penalty assessment and the
options the permittee has following the issuance of a "Notice of Proposed
Assessment ."
Section 4 recites the procedures for the informal assessment
conference, a permittee may utilize to contest the assessment without having to
prepay .
However, this is not a formal recorded proceeding ; nor is a record
created from which an Appeal on record may be taken .
Moreover, in this
conference, the CABINET selects the conference officer to handle the
conference . 405 KAR 7:091, Section 10. In particular, 405 KAR 7 :092, Section
4(3) states : "The assessment conference shall not be governed by the
requirements for administrative hearings [405 KAR 7 :091, Section 3] or by the
provision of 400 KAR 1 :040,"3 Section 6 outlines the procedures that must be
followed by the permittee to obtain a formal hearing to challenge an
assessment, and requires the prepayment of the assessment as proposed,
or if an assessment conference has been held, prepayment of the penalty
recommended by the conference officer.
Section 7 allows permittees to
challenge the issuance of a Non-Compliance or Cessation Order in a formal
hearing without a prepayment (the fact-of-violation hearing) .
Upon prepayment of the pending assessment under Section 6, the formal
penalty hearing is de novo and on the record . Finally, Section 15 allows
individuals (but not corporations), the opportunity to prove their inability to
prepay the proposed assessment and to obtain a waiver from the prepayment
3 400 KAR 1 :040 would ordinarily allow pre-hearing discovery between the
parties. No such right exists for this informal conference .
requirements of Section 6 .4 According to the CABINET, the prepayment
requirement for corporations is necessary to assist in the collection of corporate
fines and penalties, while the wavier for individuals is predicated on their
potential need for necessary living expenses .
As a result of the proposed assessment, KENTEC filed a request for an
informal Assessment Conference pursuant to 405 KAR 7 :092, Section 4. An
assessment conference was scheduled for April 17, 1997; however, KENTEC did
not attend and the conference officer entered a report and recommendation on
May 22, 1997, recommending the Secretary enter an Order upholding the
assessment as proposed.
The conference report gave notice that KENTEC
could request a formal administrative hearing by filing a Petition accompanied by
full payment of the proposed assessment.
KENTEC did file a Petition for Hearing on the proposed assessment by
June 19, 1997.
However, in its Petition KENTEC stated "it did not have
sufficient funds to prepay the proposed assessment." Thus, the CABINET
filed a Motion to Dismiss KENTEC's Petition for reasons the prepayment was not
attached . The CABINET's Motion noted the waiver of prepayment provisions did
not apply to KENTEC, since it was a corporation . Thus, the hearing officer
recommended dismissal of KENTEC's timely Petition on ground of failure of
prepayment to which KENTEC filed exceptions . An Order dismissing KENTEC's
Petition and affirming the penalty was entered by the Secretary on July 28, 1998.
4 This is consistent with the Federal scheme under the Surface Mining Control
and Reclamation Act; See, 30 USC § 1268, 30 CFR § 723.19 and § 845.19, 43
CFR § 4.1152 .
KENTEC also petitioned for "temporary relief" from the Non-Compliance
and Cessation Order on June 27, 1997, and a hearing officer - different than the
one assigned to hear the fact-of-violation case - granted temporary relief from the
violation .
This temporary relief order abating the violation was effective until the
Secretary's Order was entered on April 1, 1998, in the formal "fact-of-violation"
case, denying KENTEC relief and upholding the issuance of the violation and the
Cessation Order.
CONSTITIONALITY OF KRS 350.0301(5)
& 405 KAR 7:092, SECTION 6 AND SECTION 15
Based upon KRS 350 .0301(5), 405 KAR 7:092, Section 6(2)(b) requires
the Petition to "be accompanied by full payment of the proposed penalty
assessment"
which is to be placed in an escrow account pending final
determination of the assessment . 405 KAR 7 :092, Section 15 allows for a waiver
of the prepayment of the proposed penalty for individuals .
The waiver is not
available for corporate permittees, notwithstanding that the General Assembly
has vested in corporations, "the same power as an individual to do all things
necessary or convenient to carry out its business and affairs. . ." KRS 271 B.3020(1) .
In reviewing the "parallel procedures" which the General Assembly
enacted after Franklin , supra - one procedure with formal evidentiary hearings on
the record to contest the fact of the violation, but another requiring prepayment
prior to the formal evidentiary hearing to contest the penalty - we note the
wisdom in the Court of Appeals' comment that "as a practical matter, the amount
or propriety of the penalty imposed could be as critical as or perhaps even more
weighty, than the fact of the violation itself . ,,5
With this in mind, we are not unmindful of the rule of construction in
constitutional considerations, that "[w]hen the constitutionality of a statute is
challenged, the court should try not to destroy it, but to construe it, if consistent
with the will of the legislature, so as to comport with constitutional limitations ."
U nited States Civil Service Commission v. National Association of Letter
Carriers , 413 U.S . 548, 571, 93 S.Ct. 2880, 2893, 37 L.Ed .2d 796 (1973) .
However, hard as we may try, we cannot construe the word corporation as an
"individual" as specifically referenced in KRS 350.0301(5) .
Section 2 of the Kentucky Constitution provides the Commonwealth shall
be free of arbitrary action.
With respect to adjudications, whether judicial or
administrative, this guarantee is generally understood as a due process provision
whereby Kentucky citizens may be assured of fundamentally fair and unbiased
procedures . Smith v . O'Dea, 939 S .W.2d 353 (Ky .App . 1997) .
As noted in
Pritchett v. Marshall , 375 S.W .2d 253 (Ky. 1963), the state is enjoined against
arbitrariness by Section 2 of the Kentucky Constitution which, we have held is "a
concept we consider broad enough to embrace both due process and equal
protection of the laws, both fundamental fairness and impartiality ." Id. at p. 253.
EQUAL PROTECTION
The standards for equal protection in Kentucky are well set out in D.F. v.
Codell , 127 S.W.3d 571 (Ky. 2003), wherein we stated : "Sections 1, 2 and 3 of
5
Court of Appeals opinion, page 6.
the Kentucky Constitution provide Kentuckians with the rights of equal protection
under the Kentucky Constitution . Commonwealth v. Howard , 969 S .W .2d 700
(Ky. 1998) . This clause applies to all governmental activity, whether legislative,
executive, or judicial . . . . Willowbrook v. Olech, 528 U.S . 562, 120 S .Ct. 1073, 145
L. Ed .2d 1060 (2000) .
This is consistent with the simple goal of the equal
protection clause to "[k]eep governmental decision makers from treating
differently persons who are in all relevant respects alike ." Nordlinger v . Han , 505
U .S . 1, 10, 112 S .Ct. 2326, 2331, 120 L.Ed .2d 1 (1992) .
But, as a practical
matter, nearly all legislation differentiates in some manner between different
classes of persons and the Equal Protection Clause does not forbid such
classification per se. Romer v. Evans, 517 U.S . 620, 631, 116 S .Ct. 620, 627,
134 L.Ed .2d 855 (1996) . The level of judicial scrutiny applied to such challenges
depends on the classification made in the statute and the interest affected by it."
See Memorial Hospital v. Maricopa County, 415 U.S . 250, 253, 94 S .Ct. 1076,
1079 39 L. Ed.2d 306, 312 (1974) .
"Currently, there are three levels of review, rational basis, strict scrutiny,
and the seldom used intermediate scrutiny, which falls somewhere between the
other two . See Steven Lee Enterprises v. Varney, 36 S.W.3d 391, 394-95 (Ky.
2000) . Where the statute merely affects social or economic policy, it is subject
only to a "rational basis" analysis ." Steven Lee Enterprises, 36 S.W.3d at 394 .
Under this standard of review "legislative distinctions . . .must bear a rational
relationship to a legitimate state end." Chapman v. Gorman , 839 S .W.2d 232,
239 (Ky. 1992) .
Thus, since the distinction is allegedly based upon economics, the
discriminatory distinction contained in KRS 350.0301(5) and its implementing
regulations, 405 KAR 7 :09(6) and (15) can survive only if it bears a rational
relationship to a legitimate state end.
The distinction being one between
"individuals" and "corporations," the "legitimate state interest" is said to be, (1)
that it facilitates the collection of fines and penalties from corporations and (2) the
individual "wavier" provisions recognize that individuals have necessary living
expenses, while corporations do not.
This having been said, KENTEC, which plead "its inability to make the
prepayment," is deprived of a right to a due process hearing, while the hearing is
secured to a corporation that can afford it, and even an indigent individual who
has the means of securing a wavier. Like the Court of Appeals before us, we too
have been unable "to discern any rational basis or legitimate state interest to
explain - - much less to justify - - the arbitrary singling out of a corporation for
such disparate treatment . ,6
.
Thus, it is still our opinion, that a process "which denies a "due process
hearing" to an aggrieved party based solely on its financial inability to pay the
penalties which he seeks to appeal is unconstitutional, in violation of the equal
protection clauses of both the United States and the Kentucky Constitutions ."
Franklin , supra, p. 4 .
In stating our position, we do not ignore the multitude of federal cases
cited by the CABINET; we simply disagree with their holdings as we did in 1990,
6 Court of Appeals opinion, page 7.
13
when we decided Franklin .
Decisions of the lower federal courts are not
conclusive as to state courts, Steenbergen v. Commonwealth , 532 S.W .2d 766
(Ky. 1976) and Bell v. Commonwealth , 566 S .W.2d 785 (Ky.App. 1978) . It is just
not within our democratic ideas, customs or maxims to grant equal justice and
due process only to those who can afford to pay and to deny such rights to those
who cannot. Such a notion flies in the face of the belief of "equal justice under
the law." KENTEC, in its Petition for a hearing on the amount of the assessment
plainly said "it could not afford to prepay the assessment ." However, no process
was allowed it to prove the fact plead and no relief was afforded it had it been
able to do so.
In Kentucky we remain committed to an Administrative process which
guarantees the right to a formal due process hearing for aggrieved parties
without regard to their financial inability to pay. Notwithstanding the protestations
of the CABINET, we cannot discern any rational basis, or legitimate state
interest, to explain - much less justify -. the arbitrary singling out of a corporation
for such disparate treatment' .
"There is no attempt to classify corporate permittees differently from
individuals anywhere else in the statute, or regulation, for any other purposes
other than the grace of this waver exception ." Kentec Coal Co. v. Commonwealth
of Kentucky,$
it would be interesting to see the statistics on the number of mining
corporations regulated by the CABINET today versus the number of individuals
actually regulated by it as operators or permittees .
8 Court of Appeals opinion, page 7.
14
ABSOLUTE AND ARBITRARY POWER
"Section 2 of our Bill of Rights is unique, only the Constitution in Wyoming
having a like declaration . . . . Section 2 of our Constitution reads : "absolute and
arbitrary power over the lives, liberty and property of freemen exists nowhere in a
republic, not even in the largest majority. . . ." So it may be said that whatever is
contrary to democratic ideas, customs and maxims is arbitrary .
Likewise,
whatever is essentially unjust and unequal or exceeds the reasonable and
legitimate interests of the people is arbitrary ."
Sanitation District of Jefferson
County v. Louisville , 213 S.W.2d 995, 308 Ky. 368 (Ky. 1948)
"Unequal enforcement of the law, if it rises to the level of a conscious
violation of the principle of uniformity, is prohibited by this section ." Kentucky Milk
Marketingv Kroger Company, 691 S.W.2d 893, 899 (Ky. 1985) . The question of
.
reasonableness is one of degree and must be based on the facts of a particular
case . Boyle County Stock Yards Company v Commonwealth , 570 S.W.2d 650,
654 (Ky.App . 1978) .
Third party disturbances have been a thorn in the side of the mining
industry, and the regulatory agencies, since the advent of surface mining
regulation . To date, no practical solution for the problem has been acceptable to
all the parties involved in the regulatory scheme ; albeit, the "wait and see policy,"
if properly implemented, is the best on the block at the moment. An attempt by
the General Assembly through KRS 350.093(9), to create a framework to resolve
the problem did not meet the approval of OSM as it was less restrictive than the
federal requirements pursuant to 30 USC § 1255, et. seq. The "wait and see"
approach thus resulted .
Under the current surface mining regulatory scheme, a third party
disturbance constitutes a violation against the permittee who, in this instance,
admittedly has no right, or recourse, for the occurrence of the third party building
his home on his own property.
Thus, the occurrence, whenever cited, is a
violation which is generally uncontestable . The parallel policy of a hearing on the
"fact of violation" is, thus, of no consequence, or assistance, to the permittee .
The critical avenue of the appeal then is the assessment, which in this instance is
unavailable, simply because the permittee cannot afford to post the fine it wishes
to contest.
While we do not (in light of its "wait and see policy") criticize the
CABINET's action in this regard s, we can, and do hold, the CABLNET's
assessment of a penalty without access to a subsequent formal hearing based
upon a permittee's inability to pay was unreasonable and arbitrary and in
violation of Section 2 of the Kentucky Constitution .
In addition, given the
minimum four (4) weeks advertising required for a major revision after
submission,
not to mention the time consumed by correspondence and
corrections from the office of permits, it was impossible for KENTEC to "obtain" a
s
It seems however that it would be more prudent and cost effective to utilize the
"Wait and See policy" until the parameters of the disturbance were known and
then limit the revision/post mining land use change to the actual area of expected
disturbance, rather than the larger existing increment boundary, as long as
environmental damage and safety are not in question . However, we
acknowledge the CABINET's need to insist on operator compliance and
cooperation .
16
permit revision by December 22, 1996 - as required by the citation . Obviously it
could have filed one - but it could not have "obtained" one within that time,
unless it was guaranteed extensions on the deadline, which are essentially
discretionary with the CABINET . See 405 KAR 5:085, Section, 3(4) and Section,
4(4).
Thus, we reaffirm our prior holding in Franklin and to this extent affirm the
Court of Appeals . This matter is now remanded to the Environmental and Public
Protection Cabinet for a formal hearing in review of the purposed assessment
consistent with this opinion .
Lambert, C.J. ; Graves, and Wintersheimer, JJ., concur. Cooper, J.,
concurs in part and dissents in part by separate opinion with Johnstone and
Roach, JJ ., joining that opinion.
Roach, J., dissents by separate opinion with
Cooper and Johnstone, JJ ., joining that opinion .
COUNSEL FOR APPELLANT :
Jennifer Cable Smock
Office of Legal Services
#2 Hudson Hollow
Frankfort, Kentucky 40601
COUNSEL FOR APPELLEE:
Donald Duff
212 Washington Street
Frankfort, Kentucky 40601
RENDERED : SEPTEMBER 22, 2005
TO BE PUBLISHED
,,iuyrrnzr 0
1.11aurf of ~rufuxhV
2003-SC-0622-DG
COMMONWEALTH OF KENTUCKY,
NATURAL RESOURCES AND
ENVIRONMENTAL PROTECTION
CABINET
V
APPELLANT
ON REVIEW FROM COURT OF APPEALS
2002-CA-1239
FRANKLIN CIRCUIT COURT NOS. 98-CI-580 AND 98-CI-2002
KENTEC COAL CO., INC.
APPELLEE
OPINION BY JUSTICE COOPER
CONCURRING IN PART AND DISSENTING IN PART
From reading the majority opinion, one might suspect that the Natural Resources
and Environmental Protection Cabinet was regulating the Little Sisters of the Poor
instead of Kentec Coal Company, which apparently is part of a conglomerate of
corporations engaged in the business of strip-mining coal .' I dissent from the majority
opinion because (1) Kentec's present difficulties are traceable to its own refusal to
respond to six Mine Inspection Reports (MIRs), a Non-Compliance Notice, and a
' The administrative record in this case reflects that Kentec's address is 1534 Starks
Bldg., Louisville, Ky ., the same address as Puma Energy Corp ., and that John J . Siegel,
Jr., is the president of Kentec and the Chief Executive Officer of Puma . By Agreed
Order of May 29, 1992, executed by Siegel, Puma also assumed the reclamation permit
of Flaget Fuel, Inc ., and specifically represented that it had the power and authority to
act on behalf of Kentec, Flaget, and another permittee, Shiva Coal, Inc. In the Order,
Puma agreed to pay fines totaling $67,620 .00 for permit violations attributed to Flaget
and fines totaling $71,000.00 for permit violations attributed to Kentec (violations
pertaining to the same reclamation permit that is the subject of this appeal) .
Cessation Order issued by the Cabinet, and its failure to attend an assessment
conference which Kentec, itself, requested (and which did not require prepayment of the
proposed penalty assessment) ; (2) Kentec has no standing to attack the constitutionality
of the statutes and regulations at issue; and (3) Kentucky's statutory and regulatory
scheme, which substantially mirrors the Federal Surface Mining Control and
Reclamation Act (SMCRA), is not unconstitutional . I would note at the outset that KRS
350.028 provides, inter alia, as follows :
The Natural Resources and Environmental Protection Cabinet shall have
and exercise the following authority and powers :
To adopt administrative regulations to allow the state to administer
and enforce the initial and permanent regulatory programs of Public
Law 95-87, "Surface Mining Control and Reclamation Act of 1977."
Administrative regulations shall be no more stringent than required
by that law . Nothing in this chapter shall be construed as
superseding, amending, modifying, or repealing any of the acts
listed in Section 702(a) of Public Law 95-87, or any administrative
regulation promulgated thereunder .
(Emphasis added.)
To fully understand Kentucky's present regulatory scheme, we must first examine
Franklin v. Natural Resources and Environmental Protection Cabinet, 799 S.W .2d 1 (Ky .
1990), in which this Court struck down portions of the previous regulatory scheme as
unconstitutional . The statutes and regulations in place when Franklin was decided
provided that after the Cabinet issued a Notice of Non-Compliance and Order for
Remedial Measures to a permittee, there would be an informal initial hearing in the
nature of a settlement conference . Thereafter, the permittee could request a formal
hearing with respect to both the fact of violation and the proposed penalty assessment;
but the applicable regulation, 405 KAR 7:090 § 4, required prepayment of the proposed
penalty assessment before the right to a formal hearing could be exercised on either
issue. Franklin held the regulation requiring prepayment to be invalid because (1) the
enabling statutes, KRS 224.083 and KRS 350.028, did not require prepayment of the
proposed penalty assessment as a prerequisite to entitlement to a formal hearing, id . at
3 (citing KRS 13A .120(1)(i) [now KRS 13A .120(2)(i)] (administrative agency cannot
promulgate regulations which modify or vitiate a statute or its intent)) ; (2) the regulatory
scheme was more stringent than the federal scheme, which provided an initial
emergency public hearing on the fact of violation without requiring prepayment of the
proposed penalty assessment, id . (citing KRS 13A.120(1) (when regulations are
required by federal law, they shall be no more stringent than federal law or
regulations 2)) ; and (3) 405 KAR 7 :090 § 4 violated the Equal Protection Clauses of both
the United States and Kentucky Constitutions because it denied a permittee the right to
a due process hearing based solely on his inability to prepay the penalties. Id. at 3-4.
Franklin was rendered on September 6, 1990, and rehearing was denied on
December 27, 1990 . At that time, the General Assembly met only in even-numbered
years. Ky. Const. § 36 (prior to 2000 amendment). In 1992, the General Assembly
revised the statutory scheme to comply with Franklin . 1992 Ky. Acts, ch . 304 .
Specifically, KRS 350 .0301(5) now authorizes the Cabinet to promulgate administrative
regulations establishing both formal and informal hearing procedures and to require
prepayment of proposed civil penalty assessments into an escrow account prior to a
formal administrative hearing on the amount of the assessment. KRS 350.0301(5)
further provides for a waiver of prepayment "for those individuals who demonstrate with
substantial evidence an inability to pay the proposed civil penalties into escrow ."
(Emphasis added .)
2 See also KRS 350.028(5), supra , which has been on the books with substantially the
same language since 1978 . 1978 Ky. Acts, ch . 330, § 15(5).
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The Cabinet then promulgated 405 KAR 7:092, which provides numerous
remedies for an "aggrieved" permittee . Section 4 provides for an informal assessment
conference at which the permittee may show why the amount of the proposed penalty
assessment should be reduced. No prepayment is required before this conference is
held. Sections 6 and 7 allow the permittee to request formal administrative hearings
with respect to both the proposed assessment and the fact of violation . To obtain
formal administrative review of the proposed assessment, the permittee must pay the
amount of the proposed assessment into escrow, id . § 6(2)(b) and (c), unless the
permittee is an individual who produces proof that he is indigent and cannot make the
payment . Id. § 15. However, any permittee can obtain formal administrative review of
the fact of violation without prepaying the proposed assessment, id. § 3(4)(c) ; and
payment of the assessment is abated until and unless the fact of violation is affirmed .
Id. § 3(4)(a)3 .
I. KENTEC'S DERELICTION .
From May 1996 through November 1996, the Cabinet's reclamation inspector
issued six MIRs to Kentec notifying it of its need to revise its reclamation permit to
reflect that a residence was being constructed on property that had previously been
designated for reclamation as forestry. Kentec did not respond to any of these MIRs.
On November 22, 1996, the inspector issued a Notice of Non-Compliance for failure to
take action to revise the permit . Again, Kentec did not respond . On December 27,
1996, a Cessation Order was entered . Again, Kentec did not respond. On January 24,
1997, Kentec, by counsel, filed a petition for review of the fact of violation . On February
12, 1997, the Cabinet served Kentec with a Notice of Proposed Assessment in the
amount of $29,700 .00, representing $7,200 .00 for the noncompliance and $22,500.00
-4-
for failure to abate the violation listed in the Cessation Order (the statutory minimum of
$750 .00 per day for a maximum of thirty days, per KRS 350 .990(1)). However, because
it had filed a petition for review of the fact of violation, Kentec had no immediate
obligation to pay the assessment. 405 KAR 7 :092 § 3(4)(a)3 .
On February 21, 1997, Kentec, by counsel, filed a request for an assessment
conference . 405 KAR 7:092 § 3(4)(b) . The Cabinet appointed an assessment
conference officer who scheduled the assessment conference for April 17, 1997 . When
Kentec failed to appear at the conference, the officer, as required by 405 KAR 7 :092 §
4(7), issued a report recommending that the Secretary of the Cabinet impose the
proposed penalty assessment . On June 19, 1997, Kentec, through counsel, filed a
petition for a formal administrative review of the proposed assessment. 405 KAR 7:092
§ 6(1). However, it did not prepay the proposed penalty assessment as required by
KRS 350 .0301(5) and 405 KAR 7 :092 § 6(2)(b). Instead, the unverified petition
contained the following statement:
Petitioner does not have sufficient funds by which .to pay this large and
excessive proposed assessment. Further the terms and conditions of
Section 15 of 405 KAR 7:092 for obtaining a waiver of the prepayment
requirement are so strict and unreasonable as to preclude Petitioner's
qualification for use thereof.
(Emphasis added.) The emphasized language in Kentec's petition is, of course,
essentially an admission that Kentec could not qualify for the waiver even if it were an
individual instead of a corporation . 405 KAR 7 :092 § 15 provides in pertinent part:
Section 15. Determinations as to Inability to Prepay .
(1)
Inability to pay. Notwithstanding the provisions of Section 6(2) of
this administrative regulation, an individual, upon filing a petition for
review pursuant to Section 6 of this administrative regulation, may,
in lieu of paying into the cabinet's escrow account the amount of the
proposed assessment, simultaneously submit a petition and
affidavit requesting the office to accord the individual a waiver of
the requirement to prepay .
-5
(2)
Contents of petition . The petition for waiver of prepayment
requirements shall set forth :
(a)
A statement of facts underlying the request for a
determination that the individual is unable to comply with
Section 6(2) of this administrative regulation ; and
(b)
An affidavit, subject to penalties for perjury, setting forth the
applicant's income, property owned, outstanding obligations,
the number and age of dependents, and a copy of his most
recent Kentucky and federal income tax returns.
(4)
Interim report . Within thirty (30) days of filing of the petition, the
hearing officer shall issue an interim report accepting or denying
the petition for waiver. If the waiver is accepted, it shall be so noted
in the record and shall remain in effect, subject to review upon
proper motion . . . .
Presumptions.
(a)
It shall be prima facie evidence that the individual is unable
to comply with Section 6(2) of this administrative regulation if
the petition is accompanied by a certified copy of a petition
for bankruptcy or the individual is receiving or is eligible to
receive public assistance payments at the time a petition for
waiver is filed .
(b)
It shall be prima facie evidence a person is not eligible for a
waiver if he owns real property ; is not receiving, or is not
eligible to receive, public assistance payments at the time
the affidavit is submitted; or owns more than one (1) motor
vehicle .
(5)
(Emphasis added.)
In addition to ignoring the six MIRs, the Notice of Non-Compliance, the Cessation
Order, the assessment conference, and the requirements of Section 15 of 405 KAR
7:092, Kentec has yet to present one shred of evidence that it is indigent or otherwise
unable to prepay the proposed penalty assessment in order to obtain formal review of
the amount of the assessment . Nor has it offered any proof that it would qualify for a
waiver under Section 15 of the regulation even if it were an individual instead of a
corporation.
Nevertheless, because Kentec was entitled to an administrative hearing
regarding the fact of violation, payment of the proposed assessment was abated until
resolution of that issue. 405 KAR 7 :092 § (3)(4)(a)3. A two-day formal hearing was
held on that issue on July 16-17, 1997, at which Kentec was represented by counsel .
On April 1, 1998, the Secretary of the Cabinet affirmed the fact of violation and entered
an order imposing the proposed penalty assessment . The ensuing seven years have
been consumed by judicial appeals .
II . CONSTITUTIONALITY OF THE PREPAYMENT REQUIREMENT.
Today's majority opinion has held two separate elements of Kentucky's surface
mining regulatory scheme to be unconstitutional under the Equal Protection Clause of
the United States Constitution and the equal protection principles embodied within
Section 3 of the Constitution of Kentucky. The first, contained in KRS 350.0301(5) and
405 KAR 7 :092 § 6, requires a permittee seeking a formal administrative hearing on the
amount of a proposed penalty assessment to prepay the amount of the proposed
assessment . According to the majority, this requirement unconstitutionally discriminates
between corporations that are able to prepay the amount of the proposed assessment
and those that are not.
A. Standing to Claim an Equal Protection Violation .
It is fundamental that the existence of standing is a prerequisite to any equal
protection challenge . See , e .g:,, United States v. Hays, 515 U.S . 737, 742-45, 115 S .Ct.
2431, 2435-36, 132 L.Ed.2d 635 (1995) ; Northeastern Fla . Chapter of Assoc. Gen.
Contractors of Am. v. City of Jacksonville , 508 U .S . 656, 663-64, 113 S .Ct. 2297, 2302,
124 L.Ed .2d 586 (1993) ; Vill . of Arlington Heights v. Metro . Hous . Dev. Corp ., 429 U .S .
252, 260-61, 97 S.Ct. 555, 561, 50 L.Ed .2d 450 (1977) ; Warth v. Seldin , 422 U .S. 490,
498-99, 95 S .Ct. 2197, 2205, 45 L .Ed.2d 343 (1975) . See also Associated Indus . of Kv.
v . Commonwealth , 912 S.W.2d 947, 950-51 (Ky. 1995) (First Amendment challenges to
portions of Kentucky code of legislative ethics and executive branch code of ethics were
properly dismissed where the complaining party lacked standing) . The standing inquiry
is essential to ensure that the complaining party has "such a personal stake in the
outcome of the controversy as to assure that concrete adverseness which sharpens the
presentation of issues upon which the court so largely depends for illumination of
difficult constitutional questions ." Baker v. Carr , 369 U .S . 186, 204, 82 S.Ct. 691, 703, 7
L .Ed .2d 663 (1962). See also Larson v. Valente, 456 U.S . 228, 238-39, 102 S .Ct. 1673,
1680, 72 L.Ed.2d 33 (1982) . Standing, at its "irreducible minimum," is composed of
three well-settled requirements . Northeastern Fla. Chapter of Assoc . Gen . Contractors
of Am . , 508 U.S . at 664, 113 S.Ct. at 2302; Luian v. Defenders of Wildlife , 504 U .S . 555,
560, 112 S .Ct. 2130, 2136, 119 L.Ed.2d 351 (1992) . First, the complaining party must
have suffered an "injury in fact," i .e . , "an invasion of a legally protected interest which is
(a) concrete and particularized, and (b) actual or imminent, not conjectural or
hypothetical ." Lujan, 504 U .S . at. 560, 112 S .Ct. at 2136 (emphasis added) (internal
citations and quotations omitted) . Second, a causal relationship must exist between the
complaining party's alleged injury and the challenged conduct . Simon v. E . Ky. Welfare
Rights _Org. , 426 U .S . 26, 41-42, 96 S .Ct. 1917, 1926, 48 L .Ed.2d 450 (1976) . Finally,
there must be a likelihood that a favorable decision will redress the injury, meaning that
"the 'prospect of obtaining relief from the injury as a result of a favorable ruling' is not
'too speculative ."' Northeastern Fla. Chapter of Assoc. Gen . Contractors of Am . , 508
U .S. at 663-64, 113 S .Ct. at 2302 (quoting Allen v. Wright, 468 U .S. 737, 752, 104 S .Ct.
3315, 3325, 82 L.Ed .2d 556 (1984)) . Because Kentec has failed to set forth any facts
establishing an injury-in-fact, it lacks standing to claim that the prepayment provisions of
KRS 350.0301(5) and 405 KAR 7:092 § 6 violate its equal protection rights .
"In equal protection cases, persons are required to show that they have been in
fact injured in order to have standing to challenge the validity of laws that apply to
them ." 16 Am . Jur. 2d Constitutional Law § 142 (1998) . In addressing various
constitutional challenges to other statutes, Kentucky courts have long adhered to a strict
injury-in-fact requirement . Esc ., Second St. Prop ., Inc. v. Fiscal Court of Jefferson
County , 445 S .W .2d 709, 716 (Ky. 1969) ("Before one seeks to strike down a state
statute he must show that the alleged unconstitutional feature injures him.") ; Merrick v.
Smith, 347 S.W.2d 537, 538 (Ky. 1961) ("It is an elementary principle that
constitutionality of a law or its application is not open to challenge by a person or
persons whose rights are not injured or jeopardized thereby .") ; Steel v . Meek, 312 Ky.
87, 226 S .W .2d 542, 543 (1950) (constitutional challenge to statute governing absentee
voting procedures on grounds that it made no provisions for absentee voting by the
blind, the illiterate, or the disabled, dismissed for lack of standing where appellant failed
to show that he, himself, was prejudiced by the alleged discrimination) ; Stein v. Ky.
State Tax Comm'n , 266 Ky. 469, 99 S .W.2d 443, 445-46 (1936) ("It is incumbent upon a
party who assails a law invoked in the course thereof to show that the provisions of the
statute thus assailed are applicable to him and that he is injuriously affected
thereby. . . . We advert to the established principle in testing the validity of a statute,
that objections thereto are not available to one not injured thereby .").
Kentec's allegations must be tested to ensure compliance with this injury-in-fact
requirement . Simon , 426 U.S . at 39, 96 S .Ct. at 1925; Ass'n of Data Processing Serv .
Org., Inc . v. Camp, 397 U .S . 150, 152, 90 S .Ct. 827, 829, 25 L.Ed .2d 184 (1970) . "It is
the responsibility of the complainant clearly to allege facts demonstrating that he is a
proper party to invoke judicial resolution of the dispute and the exercise of the court's
remedial powers ." Warth, 422 U .S. at 518, 95 S .Ct. at 2215 (emphasis added) .
Moreover, it is improper to rely on Kentec's representations before this Court to
establish standing . Bender v. Williamsport Area Sch . Dist. , 475 U .S . 534, 547, 106
S.Ct. 1326, 1334, 89 L.Ed.2d 501 (1986) ("[T]he necessary factual predicate may not be
gleaned from the briefs and arguments themselves ."). Finally, the allegations of fact
that would give rise to standing must affirmatively appear in the record and cannot be
inferred from the averments in Kentec's pleadings . FW/PBS, Inc . v. City of Dallas , 493
U .S . 215, 231, 110 S .Ct . 596, 608, 107 L.Ed.2d 603 (1990) ("It is a long-settled principle
that standing cannot be inferred argumentatively from averments in the pleadings, but
rather must affirmatively appear in the record .") (emphasis added) (internal citations and
quotations omitted) .
To allege an injury-in-fact in the context of an equal protection challenge, the
complaining party must set forth facts showing that it was personally denied equal
treatment by the challenged conduct . Hays , 515 U.S . at 743-44, 115 S .Ct. at 2435;
Allen , 468 U .S. at 755, 104 S .Ct. at 3326. Stated another way, a party cannot challenge
the constitutionality of a statute "unless he can show that he is within the class whose
constitutional rights are allegedly infringed ." Barrows v. Jackson, 346 U .S . 249, 256, 73
S.Ct. 1031, 1035, 97 L.Ed . 1586 (1953) . Kentec's equal protection argument is
essentially that the prepayment requirement denies a formal administrative hearing on
the amount of the proposed penalty assessment to those corporations that cannot
afford to prepay the proposed assessment. Kentec was, therefore, required to allege
specific facts showing that it, personally, was unable to prepay its proposed
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assessment . If it failed to make the necessary allegations, it has no standing . FW/PBS
Inc. , 493 U .S. at 231, 110 S .Ct. at 608 .
The only averment in the entire record that even approaches the required
showing was Kentec's statement in its unverified petition for formal administrative
review that "Petitioner does not have sufficient funds by which to pay this large and
excessive proposed assessment." At no point in this litigation has Kentec set forth any
facts in support of this threadbare allegation . In the absence of such facts, Kentec's
claim that it will be denied formal administrative review of its proposed assessment is, at
best, "conjectural or hypothetical ." Lujan, 504 U.S . at 560, 112 S .Ct. at 2136 . See also
Warth , 422 U .S. at 508, 95 S.Ct . at 2210 ("We hold only that a plaintiff . . . must allege
specific, concrete facts demonstrating that the challenged practices harm him, and that
he personally would benefit in a tangible way from the court's intervention . Absent the
necessary allegations of a demonstrable, particularized iniury , there can be no
confidence of a real need to exercise the power of judicial review . . . .") (emphasis
added) (internal citation and quotation omitted) .
Nevertheless, even if Kentec's allegation were sufficient to confer standing under
other circumstances, two additional problems exist.
[I]t is within the trial court's power to allow or to require the plaintiff to
supply, by amendment to the complaint or by affidavits, further
particularized allegations of fact deemed supportive of plaintiff's standing .
If, after this opportunity, the plaintiff's standing does not adequately appear
from all materials of record, the complaint must be dismissed .
Id. at 501-02, 95 S .Ct. at 2206-07 . While Warth dealt with a case originally brought in
federal district court, its principles are applicable to matters subject to initial
administrative adjudication . In this case, the Cabinet was acting as the "trial court."
See KRS 350.0305 ("No objection to the final order shall be considered by the
[reviewing] court unless it was raised before the cabinet or there were reasonable
grounds for failure to do so. The findings of the cabinet as to the facts, if supported by
substantial evidence, shall be conclusive."). In this capacity, the Cabinet has already
exercised the power discussed in Warth, establishing requirements for pleading a claim
of inability to prepay a proposed assessment . The requirements include, inter alia , "[a]
statement of facts underlying the request," and "[a]n affidavit . . . setting forth the
applicant's income, property owned, outstanding obligations, the number and age of
dependents, and a copy of his most recent Kentucky and federal income tax returns ."
405 KAR 7:092 § 15(2) . Kentec's pleading did not contain any of these elements. As
Kentec failed to show an inability to prepay as required by the Cabinet's regulations, its
equal protection claim should be dismissed under the analogous principles articulated in
Warth.
Finally, Kentec's failure to plead facts demonstrating that it was personally denied
equal treatment is exacerbated by its own admission . In the same petition for review,
Kentec stated that "the terms and conditions of Section 15 of 405 KAR 7:092 for
obtaining a waiver of the prepayment requirement are so strict and unreasonable as to
preclude Petitioner's qualification for use thereof ." This statement, which likely referred
to the presumption against a waiver that arises under the circumstances set forth in 405
KAR 7:092 § 15(5)(b), is effectively an admission that Kentec would indeed have the
assets to prepay the amount of its proposed assessment . This admission contradicted
Kentec's earlier averment and eviscerates its present claim that it is within the class of
entities that are allegedly denied equal treatment by the prepayment requirement. Cf.
McNutt v. Gen. Motors Acceptance Corp . , 298 U.S . 178, 190, 56 S .Ct. 780, 785, 80
L. Ed. 1135 (1936) ("Here, the allegation in the bill of complaint as to jurisdictional
- 1 2-
amount was traversed by the answer. The court made no adequate finding upon that
issue of fact, and the record contains no evidence to support the allegation of the bill .
There was thus no showing that the District Court had jurisdiction and the bill should
have been dismissed upon that ground.") .
Despite Kentec's claim that it was unable to prepay, it has neglected to allege
facts supporting this claim, failed to offer a scintilla of evidence to maintain it, and acted
in a manner completely contrary to it. Kentec therefore has not shown that it was
personally denied equal access to a formal hearing . It cannot now be heard to claim
that the prepayment requirement injures other corporations that actually are unable to
prepay. Broadrick v. Oklahoma , 413 U.S . 601, 610, 93 S.Ct. 2908, 2915, 37 L.Ed .2d
830 (1973) ("Embedded in the traditional rules governing constitutional adjudication is
the principle that a person to whom a statute may constitutionally be applied will not be
heard to challenge that statute on the ground that it may conceivably be applied
unconstitutionally to others, in other situations not before the Court ."); Barrows, 346
U .S . at 255, 73 S.Ct. at 1034 ("Ordinarily, one may not claim standing in this Court to
vindicate the constitutional rights of some third party."); Martin v. Commonwealth , 96
S.W .3d 38, 50 (Ky. 2003) ("Generally, a person to whom a statute may constitutionally
be applied cannot challenge it on the ground that it may conceivably be applied
unconstitutionally to others in other situations not before the Court .") . As Justice
Holmes stated in United States v. Wurzbach , 280 U .S . 396, 50 S.Ct. 167, 74 L.Ed . 508
(1930), "if there is any difficulty . . . it will be time enough to consider it when raised by
some one whom it concerns." Id. a t 399, 50 S.Ct. at 169.
Because Kentec has failed
to show that it, personally, was injured, it has no standing to assert an equal protection
challenge to the prepayment provisions .
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B. Procedural Due Process.
The majority opinion repeatedly refers to the formal administrative hearing on the
amount of the proposed penalty assessment as a "due process hearing," ante , at
(slip op . at 13-14), implying that the federal Due Process Clause and Section 2 of the
Kentucky Constitution require this hearing to be held before payment of the proposed
assessment . In dismissing the host of decisions holding to the contrary, the majority
states that "[d]ecisions of the lower federal courts are not conclusive as to state courts ."
Ante , at - (slip op . at 14) . While this proposition is certainly correct with respect to
matters of state law, Bell v. Commonwealth , 566 S .W .2d 785, 788 (Ky. App. 1978),
when this Court analyzes state legislation under the federal Due Process and Equal
Protection Clauses, it is bound by the decisions of the United States Supreme Court.
Minnesota v . Clover Leaf Creamery Co . , 449 U .S . 456, 461 n .6, 101 S .Ct. 715, 722 n .6,
66 L.Ed .2d 659 (1981) ("[W]hen a state court reviews state legislation challenged as
violative of the Fourteenth Amendment, it is not free to impose greater restrictions as a
matter of federal constitutional law than this Court has imposed.") ; Oregon v. Hass, 420
U.S . 714, 719, 95 S .Ct. 1215, 1219, 43 L.Ed.2d 570 (1975).
When a claim is made that the Due Process Clause requires a particular
procedure, the governing principles are found in Mathews v. Eldridge , 424 U .S . 319, 96
S.Ct. 893, 47 L.Ed .2d 18 (1976) :
[I]dentification of the specific dictates of due process generally requires
consideration of three distinct factors: First, the private interest that will be
affected by the official action ; second, the risk of an erroneous deprivation
of such interest through the procedures used, and the probable value, if
any, of additional or substitute procedural safeguards ; and finally, the
Government's interest, including the function involved and the fiscal and
administrative burdens that the additional or substitute procedural
requirement would entail .
- 1 4-
Id . at 335, 96 S .Ct. at 903. Further, this Court has previously held that the Mathews test
is applicable to procedural due process claims raised under Section 2 of the Kentucky
Constitution . Transp . Cabinet v. Cassity, 912 S.W.2d 48, 51 (Ky. 1995) . Despite the
binding precedents mandating application of the Mathews standard, the majority has
concluded without analysis that due process requires a formal hearing on the amount of
the proposed assessment to be held before a permittee can be required to pay this
amount.
Before applying the Mathews test to Kentucky's regulatory scheme, it is worth
discussing the fact that the federal scheme is substantially identical . In such
circumstances, it is appropriate to examine how the federal courts have resolved similar
issues. E.g ., Brooks v. Lexington- Fayette Urban County Hous. Auth., 132 S.W.3d 790,
801-02 (Ky. 2004) (interpreting Kentucky Civil Rights Act) ; Meyers v. Chapman Printing
Co. , 840 S.W.2d 814, 820-21 (Ky. 1992) (same) . This is especially true where our
statute specifically states, as does KRS 350 .028(5), that its purpose is to administer and
enforce the regulatory programs established by federal law. See Couch v. Natural Res.
& Envtl. Prot. Cabinet , 986 S.W .2d 158, 162 (Ky. 1999) (adopting, for purposes of the
Kentucky surface coal mining laws, the definition of "agent" used by the Sixth Circuit,
because of "the relationship between the SMCRA and KRS Chapter 350" and "in the
interest of consistency") . In fact, the SMCRA is a more stringent scheme with respect to
prepayment of proposed penalty assessments than is the Kentucky scheme . Under the
SMCRA, the permittee may request, without prepayment, an expedited public hearing
on the fact-of-violation issue, 30 U.S.C. § 1275(a) ; 30 C.F.R . § 843.16; 43 C.F.R. §
4.1160 et sea . ; but, by doing so, the permittee waives the further right to a more formal
administrative review of that issue . 30 C .F.R. § 723.19(a) . Like 405 KAR 7 :092 §
- 1 5-
3(4)(b), the federal scheme affords the permittee the right to request an assessment
conference without prepayment. 30 C.F.R . §§ 723.18 & 845 .18. However, if the
permittee does not request the expedited hearing on the fact of violation, the permittee
must prepay the proposed penalty assessment into escrow in order to obtain further
review of either the fact of violation or the proposed penalty assessment. 30 U .S.C. §
1268(c) ; 30 C .F.R . § 723.19(a); 43 C .F .R. § 4.1152(b)(1) . Despite the SMCRA's
prepayment barrier to formal administrative review of both the fact of violation and the
proposed penalty assessment, the federal courts have consistently held that the
scheme is in accord with the Due Process Clause .
In B & M Coal Corp . v. Office of Surface Mining Reclamation and Enforcement ,
699 F.2d 381 (7th Cir. 1983), the United States Court of Appeals for the Seventh Circuit
held that the Due Process Clause did not require a formal adjudicatory hearing on either
issue prior to the escrow deposit of the penalty assessment . Id. at 386. In doing so, the
court employed the Mathews analysis, and concluded that (1) the effect of the
prepayment on the private interest (the permittee's use of its money during the review
process) was not of such a magnitude to render prepayment unconstitutional ; (2) the
opportunity for less formal hearings on the fact of violation and the amount of the
assessment before prepayment sufficiently reduced the likelihood of an erroneous
deprivation of the permittee's interest; and (3) a sufficient governmental interest
validated the prepayment requirement, i .e. , promotion of effective collection of assessed
civil penalties and promotion of the goals of the SMCRA. Id. at 385-86 . See also
United States v. Finley , 835 F.2d 134, 137 n.4 (6th Cir. 1987) ; Graham v. Office of
Surface Mining Reclamation and Enforcement, 722 F.2d 1106, 1111-12 (3rd Cir. 1983)
("We find, as has every other court which has considered the question, that the review
- 1 6-
procedures which were available . . . without prepayment of the proposed penalty are
more than sufficient to comply with due process requirements as set forth in
[Mathews .") ; Blackhawk Mining Co ., Inc . v. Andrus , 711 F .2d 753, 757-58 (6th Cir.
1983); John Walters Coal Co. v. Watt, 553 F. Supp. 838, 840-41 (E .D . Ky. 1982) ("While
the Court is aware that under some circumstances, the enforcement of the prepayment
requirement 'might' force some operators to choose between contesting a violation or
staying in business, this private interest is simply not sufficient to offset the
government's interest in collecting these prepayment penalties.") (internal citation
omitted) ; United States v. Crooksville Coal Co., Inc, 560 F.Supp. 141, 144 (S .D . Ohio
1982) ; United States v. Hill , 533 F. Supp. 810, 815 (E.D. Tenn . 1982) .
The Mathews analysis first requires consideration of the private interest affected
by the official action. Where the private interest is not of overriding importance,
something less than an evidentiary hearing prior to adverse administrative action
suffices . Mackey v. Montrym , 443 U.S. 1, 13, 99 S.Ct. 2612, 2618, 61 L. Ed .2d 321
.(1979) ; Dixon v. Love, 431 U .S . 105, 113, 97 S .Ct. 1723, 1728, 52 L.Ed.2d 172 (1977) ;
Mathews , 424 U .S. at 343, 96 S .Ct. at 907. In Mathews , the complaining party was a
disabled worker deprived of his disability benefits, on which he depended for income,
during the pendency of the administrative review process . 424 U .S . at 340, 96 S.Ct. at
905. Yet, the Court held that this private interest was not of sufficient overriding
importance to mandate a pretermination hearing . Id. at 343, 96 S .Ct. at 907. The
private interest implicated by the prepayment requirement of KRS 350.0301(5) and 405
KAR 7 :092 § 6 is the use of the permittee's money, in the amount of the proposed
penalty assessment, while the assessment review process is ongoing . In contrast to
the situation presented in Mathews , the permittee retains its source of income.
- 1 7-
Moreover, if the permittee is successful in obtaining a reduction in the amount of the
penalty assessment, the Cabinet is required to refund the appropriate amount of money
within thirty days of receipt of the order reducing the assessment, plus interest . 405
KAR 7:092 § 13(6)(c) . Interest is adequate compensation for the permittee's loss of use
of its money during the review process. Accord B & M Coal Corp . , 699 F.2d at 385.
Thus, the private interest affected is not substantial and certainly is not of sufficient
overriding importance to per se require a formal hearing before payment of the
assessment .
Second, Mathews mandates consideration of the risk of erroneous deprivation of
the private interest . "[T]he Due Process Clause has never been construed to require
that the procedures used to guard against an erroneous deprivation of a protectible
'property' or 'liberty' interest be so comprehensive as to preclude any possibility of
error." Mackev, 443 U.S . at 13, 99 S .Ct. at 2618. In light of the procedural safeguards
available to a permittee before it prepays the proposed penalty assessment, the risk of
an erroneous deprivation of the private interest is minimal.
Permittees are not only
entitled to an informal conference on the proposed assessment amount, but also can
obtain a formal administrative hearing on the fact of violation, without prepayment,
unlike the federal scheme. The fact-of-violation procedure provides a formal evidentiary
hearing that will necessarily include many of the same issues that are relevant to the
amount of the penalty assessment, and thus reduces the risk of erroneous deprivation .
In Kentec's particular case, the risk of erroneous deprivation is even less substantial.
Kentec was unsuccessful in its fact-of-violation appeal, so logic dictates that it would
inevitably be deprived, rightfully, of some amount of money. Moreover, seventy-five
percent of the proposed penalty assessment ($22,500 .00) was the minimum
- 1 8-
assessment authorized by law. With respect to this amount, further review of the
penalty assessment would never yield a more favorable ruling for Kentec; thus, the
possibility of erroneous deprivation of that sum was impossible once the fact of violation
was affirmed . Kentec was subject to almost no risk of erroneous deprivation of its
property ; regardless, the preliminary administrative review procedures are sufficient to
guard against that risk .
Finally, we must consider the government interest involved . According to the
Cabinet, the prepayment requirement serves the government interest in the prompt
collection of civil penalties . Undoubtedly, the prepayment requirement promotes this
purpose by discouraging frivolous requests for hearings seeking only to delay the
collection process . The government interest also "includes the administrative burden
and other societal costs that would be associated with requiring, as a matter of
constitutional right, an evidentiary hearing upon demand in all cases prior to the
[collection of the penalty assessment] ." Mathews , 424 U .S. at 347, 96 S.Ct. at 909.
Thus, it is relevant that the costs of providing additional procedural safeguards to those
permittees "whom the preliminary administrative process has identified as likely to be
found undeserving," will eventually be spread to the taxpayers . See id . at 348, 96 S.Ct.
at 909 . As the government has articulated a sufficient interest to justify the prepayment
requirement, and the private interest affected and the risk of erroneous deprivation are
minimal, the prepayment barrier to a formal administrative hearing on the amount of a
proposed penalty assessment is consistent with the due process provisions of the
United States and Kentucky Constitutions.
III. CONSTITUTIONALITY OF THE PREPAYMENT WAIVER PROVISIONS .
The majority has also held KRS 350 .0301(5) and 405 KAR 7:092 § 15 to be
unconstitutional insofar as they provide a waiver of the prepayment requirement for
individuals who plead and demonstrate their inability to prepay, while making no such
provision for corporations . There is no question that Kentec is a corporation and is thus
within the class that was allegedly denied equal protection for purposes of this claim. 3
Even upon assuming the existence of Kentec's standing, however, its equal protection
challenge must fail, because the classification between individuals and corporations is
rationally related to a legitimate state interest.
The pecuniary private interest implicated by the classification is not a
fundamental right, see Part II(B) of this opinion, supra , and statutory classifications
between individuals and corporations have never been considered suspect . See San
Antonio Indep . Sch . Dist. v. Rodriguez, 411 U.S. 1, 28, 93 S.Ct. 1278, 1294, 36 L.Ed.2d
16 (1973) ("The system of alleged discrimination and the class it defines have none of
the traditional indicia of suspectness: the class is not saddled with such disabilities, or
subjected to such a history of purposeful unequal treatment, or relegated to such a
position of political powerlessness as to command extraordinary protection from the
majoritarian political process .") . Accordingly, the general rule applies: legislation
3 The existence of an injury-in-fact remains dubious. As stated above, Kentec's petition
for formal administrative review failed to meet the requirements for pleading an inability
to prepay, set forth in 405 KAR 7:092 § 15 . Even an individual submitting such a
request for a waiver would have faced summary dismissal as a result . As such, it defies
logic for Kentec to claim that it was denied equal treatment solely because of its
corporate status . Cf. Northeastern Fla. Chapter of Assoc. Gen . Contractors of Am. , 508
U.S . at 666, 113 S .Ct, at 2303 ("To establish standing, therefore, a party challenging a
set-aside program like Jacksonville's need only demonstrate that it is able and ready to
bid on contracts and that a discriminatory policy prevents it from doing so on an equal
basis.") (emphasis added) . Nevertheless, because the question of standing is a closer
one than that presented by Kentec's challenge to the prepayment requirement, I will
assume its existence for purposes of Kentec's challenge to the waiver provisions .
- 20-
regulating an economic matter enjoys a strong presumption of constitutionality and will
be upheld if the classification drawn by the statute is rationally related to a legitimate
state interest. City of Cleburne v. Cleburne Living Ctr. , 473 U.S . 432, 440,105 S .Ct.
3249, 3254, 87 L.Ed.2d 313 (1985) . See also Holbrook v. Lexmark Int'l Group, Inc . , 65
S .W .3d 908, 914 (Ky . 2001); Steven Lee Enter. v. Varney , 36 S.W.3d 391, 394 (Ky.
2000) ; Yeoman v . Commonwealth, Health Policy Bd . , 983 S .W.2d 459, 470 (Ky. 1998) ;
Wynn v. (bold, Inc. , 969 S .W.2d 695, 696 (Ky. 1998) ; Ky. Harlan Coal Co. v. Holmes ,
872 S .W.2d 446, 455 (Ky. 1994) . Under the guise of "rational basis" review, however,
the majority has held the Cabinet to a much stricter standard than that required by the
equal protection jurisprudence of both the United States Supreme Court and this Court .4
Statutory classifications based on nonsuspect criteria "must be upheld against
equal protection challenge if there is any reasonably conceivable state of facts that
could provide a rational basis for the classification ." Fed . Communications Comm'n v.
Beach Communications . Inc . , 508 U.S. 307, 313,113 S.Ct. 2096, 2101, 124 L.Ed.2d211 (1993) (emphasis added), See also Heller v. Doe by Doe , 509 U .S. 312, 320, 113
S.Ct . 2637, 2642, 125 L.Ed .2d 257 (1993) ; Walker v. Commonwealth , 127 S .W.3d 596,
602 (Ky. 2004); Steven Lee Enter. , 36 S.W.3d at 395 ; Preston v. Johnson County Fiscal
Court , 27 S .W.3d 790, 795 (Ky. 2000); Weiand v. Bd. of Tr. of Ky. Ret. Sys. , 25 S .W.3d
88, 93 (Ky . 2000) ; Commonwealth v. Howard , 969 S.W.2d 700, 703 (Ky . 1998) . The
possibility that a classification might result in some practical inequity does not cause it to
fail the rational basis test. Steven Lee Enter. , 36 S .W .3d at 395 (If a rational basis is
4 Application of any standard of review other than rational basis would be patently
improper, given the fact that the Court of Appeals based its decision upon the rational
basis standard . See Heller v. Doe by Doe , 509 U .S. 312, 318-19, 113 S .Ct. 2637, 2642,
125 L.Ed .2d 257 (1993) ; Fed . Communications Comm'n v. Beach Communications,
Inc . , 508 U .S . 307, 314 n .6, 113 S .Ct. 2096, 2101 n .6, 124 L.Ed .2d 211 (1993) .
Moreover, both parties have argued that the rational basis standard applies.
- 21 -
found for the discrimination, the statute "must be upheld even if it is perceived to be
unwise, unfair or illogical ."); Howard , 969 S.W.2d at 703. See also Dandridge v.
Williams , 397 U.S . 471, 485, 90 S .Ct. 1153, 1161, 25 L. Ed .2d 491 (1970); Lindsley v.
Natural Carbonic Gas Co. , 220 U .S . 61, 78, 31 S .Ct. 337, 340, 55 L.Ed . 369 (1911) .
The first step in the rational basis test is to examine the state interests served by
the classification . Wynn , 969 S .W.2d at 696. Here, the Cabinet points out that KRS
350 .0301(5) and 405 KAR 7 :092 § 15 serve two state interests: (1) effective collection
of penalties assessed under Kentucky's surface mining laws ; and (2) ensuring that
individuals are not deprived of the financial resources needed to meet basic living
expenses . Despite the majority's out-of-hand dismissal of these purposes, it cannot
seriously dispute that both of these articulated purposes are "legitimate state interests."
A statutory classification can fail rational basis review only if it is completely irrelevant to
the achievement of these legitimate state interests . Heller, 509 U .S . at 324, 113 S .Ct.
at 2645 ; Holt Civic Club v . City of Tuscaloosa , 439 U .S . 60, 71, 99 S.Ct. 383, 390, 58
L . Ed.2d 292 (1978) ; McGowan v. Maryland, 366 U .S . 420, 425, 81 S .Ct. 1101, 1105, 6
L.Ed.2d 393 (1961) . See also Chapman v . Gorman , 839 S .W.2d 232, 239-40 (Ky.
1992) .
By allowing individuals to obtain prepayment waivers while denying corporations
the same right, the classification promotes the effective collection of penalties . In
Lehnhausen v. Lake Shore Auto Parts Co. , 410 U.S . 356, 93 S .Ct. 1001, 35 L. Ed .2d
351 (1973), the United States Supreme Court addressed an equal protection challenge
to a state personal property tax that applied to corporations, but not individuals. Noting
that the Illinois legislature had determined that the tax was almost impossible to
administer consistently with regard to individuals, but was "uniformly enforceable" with
- 22-
respect to corporations, the Court held that the discriminatory treatment did not violate
the Equal Protection Clause . Id. at 365, 93 S.Ct. at 1006. It is important to note that the
tax, itself, was unchanging : the tax that the state found difficult to apply to individuals
was the same tax that it easily applied to corporations . Thus, the "rational basis" for this
differential treatment inhered in the very nature of the corporate form . In other words,
fundamental differences between corporations and individuals can give rise to rational
bases for imposing differential burdens between the two. See Quaker City Cab Co. v.
Pennsylvania , 277 U .S . 389, 406, 48 S .Ct. 553, 556, 72 L.Ed . 927 (1928) (Brandeis, J.,
dissenting) ("The difference between a business carried on in corporate form and the
same business carried on by natural persons is, of course, a real and important one."),
abrogated by Lehnhausen , 410 U .S . at 365, 93 S.Ct. at 1006.
For purposes of the effective collection of penalties, the relevant difference
between individuals and corporations lies in the ability of a corporation to quickly
undercapitalize itself . For example, the shareholders of a closely held corporation can
easily transfer the corporation's assets to themselves, or to another corporate entity,
thus divesting the corporation of its property while retaining ownership of such assets.
Individuals have less ability to divest themselves of assets while retaining control
thereof. If given the opportunity to seek prepayment waivers, corporations can
undercapitalize in order to claim an "inability to prepay," and, ultimately, attempt to
evade the penalty assessment. Therefore, as the differential treatment appears to be
rationally related to the legitimate state interest in collecting penalties, the equal
protection analysis should be at an end. See Beach Communications, 508 U .S . at 315,
113 S .Ct. at 2102 ("[A] legislative choice is not subject to courtroom factfinding and may
be based on rational speculation unsupported by evidence or empirical data .") ; Hughes
- 23-
v. Alexandria Scrap Corp . , 426 U.S. 794, 812, 96 S.Ct. 2488, 2499, 49 L.Ed.2d 220
(1976) ("The State is not compelled to verify logical assumptions with statistical
evidence.") ; Yeoman, 983 S .W.2d at 470 ("The rational review standard is not hard for a
legislature to meet. It merely requires one to postulate that the legislature could have
envisioned that [the statute] would promote a legitimate state purpose - any legitimate
state purpose.") .
Even if the state interest in collecting penalties were not sufficient to justify the
differential treatment, the distinction between individuals and corporations provides
individuals with relief from the prepayment requirement insofar as they require a
minimum amount of finances to meet basic human necessities . Kentec argues that
corporate employees also require basic necessities . However, a classification's
underinclusiveness with respect to its articulated purpose is insufficient to hold it
unconstitutional under the rational basis test. "By itself, the fact that a legislative
classification is underinclusive will not render it unconstitutionally arbitrary . The
legislature is free to choose to remedy only part of a problem. . . . [I]t may 'select one
phase of a field and apply a remedy there, neglecting the others ."' Holbrook , 65 S.W .3d
at 915 (quoting Cleland v. Nat'l College of Bus . , 435 U .S . 213, 220, 98 S .Ct. 1024,
1028, 55 L. Ed .2d 225 (1978)). See also Clover Leaf Creamery Co. , 449 U .S . at 466,
101 S.Ct. at 725 ("[A] legislature need not strike at all evils at the same time or in the
same way .") (internal citation and quotation omitted) ; Dandridge, 397 U .S . at 486-87, 90
S.Ct. at 1162 ("[T]he Equal Protection Clause does not require that a State must choose
between attacking every aspect of a problem or not attacking the problem at all. It is
enough that the State's action be rationally based and free from invidious
discrimination .") (internal citation omitted) . There being no evidence of an invidious
- 24-
purpose here, I conclude that the General Assembly acted rationally in drawing this
classification to ensure that indigent individuals are not deprived of their basic human
necessities .
The party seeking to have a classification declared unconstitutional "is faced with
the burden of demonstrating that there is no conceivable basis to justify the legislation ."
Holbrook , 65 S .W.3d at 915 (emphasis added) . Kentec has failed to carry this burden .
In fact, the classification between individuals and corporations is rationally related to two
legitimate state purposes. This alone is sufficient to justify it under the Equal Protection
Clause, and "the fact [that] the line might have been drawn differently at some point is a
matter for legislative, rather than judicial, consideration ."
United States R .R . Ret. Bd. v .
Fritz, 449 U .S. 166, 179, 101 S.Ct . 453, 461, 66 L.Ed .2d 368 (1980) .
Accordingly, I concur in the majority opinion's affirmance of the Secretary's order
with respect to the fact of violation and dissent from the majority opinion's reversal of the
Secretary's penalty assessment and its conclusion that the prepayment provisions of
the statutory and regulatory schemes are unconstitutional .
Johnstone, and Roach, JJ ., join this opinion .
RENDERED : SEPTEMBER 22, 2005
TO BE PUBLISHED
,$uyrnut (9ourf of ~Rmfurkg
2003-SC-000622-DG
COMMONWEALTH OF KENTUCKY,
NATURAL RESOURCES AND
ENVIRONMENTAL PROTECTION CABINET
V.
APPELLANT
ON REVIEW FROM COURT OF APPEALS
2002-CA-01239
FRANKLIN CIRCUIT COURT
NOS . 98-CI-580 AND 98-CI-2002
KENTEC COAL CO., INC.
APPELLEE
DISSENTING OPINION BY JUSTICE ROACH
I join Justice Cooper's excellent dissent . I write separately, however, to discuss
my dismay at the majority's cavalier use of Section 2 of the Constitution of Kentucky.
While Section 2 certainly means something, its language cries out for a standard to
guide its use and application . Unfortunately, the majority opinion fails to articulate any
such standard . Quite simply, the majority's approach allows the courts of this
Commonwealth to discard traditional standards for evaluating legislation and effectively
allows the courts to sit as super-legislative bodies. This will allow the courts of the
Commonwealth to use Section 2, as interpreted in the majority opinion, to reach any
result that suits a particular judge's whims.
Almost fifteen years ago, in a pair of articles published in the Northern Kentucky
Law Review and the Kentucky Bench & Bar, John David Dyche exhaustively traced the
origins of Section 2 and its historic use by the courts of Kentucky . See John David
Dyche, Section 2 of the Kentucky Constitution-Where Did It Come From and What
Does It Mean?, 18 N . Ky. L . Rev. 503 (1991); John David Dyche, The History and
Meaning of Section 2 of the Kentucky Constitution , Ky. Bench & Bar, Vol . 55, No. 4, at
17 (Fall 1991) . He concluded the law review article by stating :
If the court desires to continue employing section 2 as a
substantive protection of property rights it must articulate the
rationale and standards on which it does so. Arguments in
support of a revival of substantive due process have been
advanced by scholars on grounds including economic
efficiency and institutional competency as well as history and
political theory . The Kentucky Supreme Court should
recognize and address these arguments . Unless it does so,
the court itself will appear to be arbitrary in its interpretation
of a constitutional provision which denies the existence of
arbitrary power.
18 N . Ky. L . Rev. at 524.
This Court has once again failed to adopt such standards. I too find it quite ironic
that this Court is more than willing to apply Section 2 to the legislative branch, yet
remains unwilling to consider the possibility that its haphazard use of that section is
itself tantamount to an exercise of absolute and arbitrary power.
Cooper and Johnstone, JJ ., join this dissenting opinion .
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