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Paying the Piper May Become More Difficult
Posted By Tina Grady Barbaccia On March 1, 2012 @ 9:30 pm In On Review,Regulatory Roundup | No Comments
A few new developments suggest that Mine Safety and Health Administration (MSHA) civil penalties — which increased enormously starting in 2007 when MSHA’s final rule eliminated the “single penalty” fine for non significant and substantial (S&S) citations and implemented new penalty criteria to add points for repeat violations and flagrant violations — may be going up again soon. This, coupled with two recent decisions and positions taken by the Department of Labor’s Solicitor’s Office, could make it much more difficult for smaller operators to stay in business under the weight of MSHA sanctions and brings the issue of the statutory criteria concerning impact on the operator’s ability to continue in business to the forefront.
The first development involves the MSHA reorganization to centralize its assessments and accountability programs. This was announced on February 8, 2012, and creates a new Office of Assessments, Accountability, Special Enforcement and Investigations (OAASEI) that will better coordinate the handling, investigation and assessment of flagrant violations, retaliation claims under Section 105(c) of the Mine Act, impact inspections, pattern of violations, and even civil and criminal actions under Section 110(c) (those involving personal penalties against salaried and hourly “agents of management” as well as the threat of incarceration arising from unwarrantable failure violations).
To put it plainly, everything that mine operators most fear about MSHA will be put into a single office, so that right hand will more fully know what the left hand is doing. As MSHA put it, “The formation of OAASEI will enable MSHA to better manage and coordinate its use of special enforcement tools against the most serious violators.”
The next development was announced on January 20, 2012, when the agency’s semi-annual regulatory agenda was released. MSHA announced its plans to (again) revise its criteria and procedures for assessment of civil penalties.
In the regulatory narrative, the agency stated: “MSHA plans to publish a proposed rule to revise the process for proposing civil penalties. The assessment of civil penalties is a key component in MSHA’s strategy to enforce safety and health standards. The Congress intended that the imposition of civil penalties would induce mine operators to be proactive in their approach to mine safety and health, and take necessary action to prevent safety and health hazards before they occur. MSHA believes that the procedures for assessing civil penalties can be revised to improve the efficiency of the Agency’s efforts and to facilitate the resolution of enforcement issues.” It is apparent to anyone reading this that penalties will only go one way as a result of this rulemaking: upward!
The last increase, in 2007, was a major contributor to creating the huge backlog of contested cases at the Federal Mine Safety & Health Review Commission (FMSHRC), which at one point topped 19,000 cases.
The Commission began FY 2011 with a backlog of 18,170 cases, and 10,594 new cases were filed during the year. By the start of FY 2012, the backlogged cases numbered just under 16,000, despite the addition of many new Administrative Law Judges. Congress, in turn, is considering legislation (the Republican “Capito” bill, HR. 3697, and the Democratic “Byrd” bills, HR 1579 and S 153) that would start imposing interest on any contested penalties from the date of contest until the case was finally adjudicated. Given the backlog, if these bills pass, several years’ worth of interest would accrue on any contested cases where MSHA prevailed or the citations were sustained in settlement. Currently, interest is only charged starting 30 days after a civil penalty order becomes final.
MSHA has also been making headlines for using collection agencies against operators who are delinquent in paying their civil penalties that have become final, as well as for using their powers in federal court to seek injunctions and close down mines for failure to pay significant penalties. This is permitted under Section 108(a)(1)(A) of the Mine Act, because it is viewed as failing to comply with a civil penalty order that has been finalized.
Now, things have gotten even more challenging for mine operators who are looking to argue for reduction of penalties based on the statutory criteria. Court rulings that ave consistently held that civil penalties are to have a deterrent effect, not be punitive. But arranging payment plans has gotten much more difficult, and MSHA attorneys who once routinely agreed to payment schedules for smaller operators have gotten tougher — demanding financial records going back five years or more, and not accepting that a mining company is in dire straits where it has run at a significant loss for several years, claiming that “things can turn around.”
I have had multiple cases recently where the MSHA attorney has argued that, if a company does not affirmatively plead financial hardship in their initial Answers filed in response to MSHA’s Petition for Assessment, that “affirmative defense” is waived. Fortunately, in those situations to date, the Administrative Law Judge has accepted an amended answer, but operators representing themselves should be on notice that they need to consider and articulate their position on economic hardship from day one, and be prepared to back it up with financial documentation (and, for sole proprietors and partnerships, personal tax returns and financial disclose as well).
A pair of decisions provides some insight into what the ALJs are looking for if a case comes to trial and economic hardship is being used as an argument for reduction of penalties and/or for approval of a payment plan. In the first, Apex Quarry LLC (ALJ McCarthy, December 2011), the operator’s owner, Todd Harris, appeared representing himself in a case involving just under $20,000 in proposed penalties. The operator admitted the violations and only challenged the amount of penalties, claiming he was unable to pay them and still remain in business. The Secretary admitted that the operator was small in size, had a moderate history of prior violations, and had abated the violations at issue in good faith.
ALJ McCarthy noted that the Commission previously has held that the mine operator has the burden of proving any claim that the penalties would affect its ability to remain in business. He had initially left the record open so the company could submit the following documentation: audited financial statements, evidence of an IRS tax lien, evidence of a state treasury tax lien, and operating agreements governing the relationship of the quarry and an excavating company owned by Mr. Harris and between the quarry and two other individuals.
The judge noted that in another decision, Johnco Materials Inc. (ALJ Melick, June 2011), it was held that audited financial statements were required to meet the burden of proof. In Apex Quarry, Mr. Harris failed to provide audited statements, although he did provide a “host of documents establishing past legal difficulties, judgments and liens, [and] unaudited tax returns” for the previous three years. The tax returns were provided by a CPA firm, but were “without verification,” and, the judge noted, the financial statements were unaudited. Although he acknowledged that the company had significant losses in 2008, 2009, and 2010, the judge said that they “may offset any increase in Respondent’s net operating income going forward,” and that Respondent had shown the ability to pay other creditors on an installment basis. Therefore, he held that Apex Quarry failed to sustain its burden of proof, although he did allow the operator to make payments on the total reduced penalty (after adjudication, the fines dropped to $9,791), although any missed payments would make the total immediately due and payable.
The other case addressing financial hardship recently was Ember Contracting Corporation (ALJ Paez, November 2011), which involved a proposed total civil penalty of over $226,500. The sole issue in that case was also whether the proposed penalties would adversely affect Ember’s ability to continue in business. The Secretary argued that, because Ember had “effectively shut down its mining operation,” it was no longer in business and, therefore, that factor would not apply and Ember should be held liable for the entire amount. Ember argued that it could, in the future, resume mining operations and should still be considered “in business.” Ember noted that the proposed penalties caused its bank to cancel its line of credit and that caused the cessation of mining activities.
Ember had submitted unaudited financial statements, as well as four years’ worth of federal income tax returns to prove its financial situation. At the time of the hearing, Ember’s assets consisted of $1,000 cash and $17,000 owed by the IRS as a refund for COBRA benefits paid to laid off workers. Ember had another $100,000 in outstanding debts.
ALJ Paez concluded that Ember did not satisfy its burden of proving the affirmative defense, noting that, after the line of credit was cancelled, the bank called in its loan and Ember’s assets were sold to a related company and an incorporated new company was presently engaged in mining operations. He noted that the ALJs have discretion to determine the proper civil penalty and that the deterrent purpose of a civil penalty is to induce those officials responsible for the operation of a mine to comply with the Act and its standards. He found that past financial records are “not necessarily dispositive of this issue” where documentation is “unreliable” or there is evidence about future business prospects that contradict assertions about inability to pay. He wrote: “employers who were going out of business … would have little incentive to comply with safety regulations to the end if monetary penalties could be evaded once the business quit altogether.”
In the end, ALJ Paez accused Ember of “playing possum” by pretending to be out of business or dormant, and did not credit its justifications for the actions (e.g., selling off assets). He held: “It is not enough to show … that a proposed civil penalty could have a substantial negative impact on profits. A civil penalty can and should have an adverse effect on an operator because that is the point … to make compliance … and the protection of miners, more profitable than noncompliance.” Ember was ordered to pay the $226,508 in full within 40 days.
The bottom line is that mine operators will have an uphill battle under prevailing case law when trying to make the financial hardship argument, and must have audited, verified, financial records and, probably, involve the services of an expert when making its case. Most importantly, when filing the initial response to proposed civil penalties, the operator must decide from the start whether it will attempt to make the affirmative defense of economic inability to pay and make sure that this is clearly articulated in its response to the agency.
About the author: Adele L. Abrams is an attorney, Certified Mine Safety Professional and trained mediator who is president of the Law Office of Adele L. Abrams P.C. in Beltsville, Md., a seven-attorney firm focusing on safety, health and employment law nationwide. Abrams also provides consultation, safety audits, and training services to MSHA- and OSHA-regulated companies. She is a member of the Maryland, D.C., and Pennsylvania Bars, the U.S. District Courts of Maryland and D.C., the U.S. Court of Appeals, D.C. Circuit and 4th Circuit, and the United States Supreme Court. She is a graduate of the George Washington University’s National Law Center, and earned her Bachelor of Science in Journalism from the University of Maryland, College Park. For more information, contact her at firstname.lastname@example.org  or visit the The Law Office of Adele L. Abrams on the Web at www.safety-law.com .
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