Employment Bulletin
Many employers have implemented policies mandating employees involved in an accident at the workplace to undergo drug and alcohol screening. Effective August 10, 2016 such blanket, automatic policies will likely run afoul of the injury reporting requirements of the Occupational Safety and Health Act (Act).
On May 12, 2016, the Occupational Safety and Health Administration (OSHA) issued its Final Rule amending employers’ obligations to report and record injuries, and clarifying its interpretation of the injury reporting requirements of the Act. 29 CFR §1904.35(b)(1)(i) requires the employer to establish a “reasonable procedure for employees to report work-related injuries and illnesses ….” OSHA “clarified” this requirement by adding the following: “A procedure is not reasonable if it would deter or discourage a reasonable employee from accurately reporting a workplace injury or illness …”
In the comments accompanying the Final Rule, OSHA noted that many commenters to the proposed rule complained that employer policies requiring automatic post-injury drug and alcohol testing were a form of adverse action that discouraged reporting. The comments state that:
Although drug testing of employees may be a reasonable workplace policy in some situations, it is often perceived as an invasion of privacy, so if an injury or illness is very unlikely to have been caused by employee drug use, or if the method of drug testing does not identify impairment but only use at some time in the recent past, requiring the employee to be drug tested may inappropriately deter reporting.
OSHA concluded that “the evidence in the rulemaking record shows that blanket post-injury drug testing policies deter proper reporting.” OSHA did not ban all post-incident reporting, but the comments set forth the agency’s view that it should be severely limited:
[T]his final rule does not ban drug testing of employees. However, the final rule does prohibit employers from using drug testing (or the threat of drug testing) as a form of adverse action against employees who report injuries or illnesses. To strike the appropriate balance here, drug testing policies should limit post-incident testing to situations in which employee drug use is likely to have contributed to the incident, and for which the drug test can accurately identify impairment caused by drug use. For example, it would likely not be reasonable to drug-test an employee who reports a bee sting, a repetitive strain injury, or an injury caused by a lack of machine guarding or a machine or tool malfunction. Such a policy is likely only to deter reporting without contributing to the employer’s understanding of why the injury occurred, or in any other way contributing to workplace safety. Employers need not specifically suspect drug use before testing, but there should be a reasonable possibility that drug use by the reporting employee was a contributing factor to the reported injury or illness in order for an employer to require drug testing. In addition, drug testing that is designed in a way that may be perceived as punitive or embarrassing to the employee is likely to deter injury reporting.
Post-incident drug testing may still be done to comply with the requirements of other state and federal laws, e.g., Department of Transportation requirements for post-accident testing of commercially licensed truck drivers.
As a consequence of this regulatory change, employers should modify their post-incident drug testing policies to conform to the newly restrictive interpretation announced by OSHA.
Babst Calland’s Employment and Labor Group will continue to keep employers apprised of further developments related to this and other employment and labor topics. If you have any questions or need assistance in addressing the above-mentioned area of concern, please contact John A. McCreary, Jr. at (412) 394-6695 or jmccreary@babstcalland.com.
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The Legal Intelligencer
The Rolling Stones said it best: “Time is on my side, yes it is.” This has never been more accurate after the publication of the much-anticipated final rule updating overtime regulations, as an estimated 4.2 million workers who were previously exempt from receiving overtime pay may be eligible for overtime starting Dec. 1, 2016.
On May 18, President Obama and Department of Labor Secretary Thomas E. Perez announced the publication of the Department of Labor’s Final Rule titled “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees.” The final rule updated overtime regulations, including an update on the salary and compensation levels needed for employees to be considered exempt, (29 CFR Part 541).
The Fair Labor Standards Act
Pursuant to the Fair Labor Standards Act (FLSA), an employee is entitled to overtime of one and one-half times the employee’s regular rate of pay for hours worked over 40 in a workweek. However, certain executive, administrative, and professional employees are exempt from this rule. These employees are commonly referred to as “exempt employees.” To be considered exempt, three tests must be met: The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (salary basis test); the amount of salary paid must meet a minimum specified amount (salary level test); and the employee’s job duties must primarily involve executive, administrative or professional duties as defined by the regulations (duties test).
Combination of ‘Long’ and ‘Short’ Duties Test
Prior to 2004, the regulations implemented both a “long” and “short” duties test. The long test paired a lower salary requirement with a more stringent duties test—meaning that to qualify a worker could perform no more than 20 percent of their time on nonexecutive, administrative, or professional duties. The short test paired a higher salary requirement with a less rigorous duties test. In 2004, the U.S. Department of Labor (DOL) eliminated the long and short duties test, combining the less-stringent duties test with a higher salary level derived from the long duties test. The executive summary to the DOL’s final rule concluded that the 2004 modifications “had the effect of making it easier for employers to both pay employees a lower salary and not pay them overtime for time worked beyond 40 hours.” Thus, the DOL asserted that the combination of the long and short duties test in 2004 resulted in the exemption from overtime of many lower-paid workers who performed minimal executive, administrative, or professional work and “whose work was indistinguishable from their overtime-eligible colleagues.” The DOL further asserted that this resulted in the inappropriate misclassification of employees as exempt. On March 13, 2014, Obama issued a presidential memorandum directing the DOL to update its regulations, instructing the DOL to “look for ways to modernize and simplify the regulations while ensuring that the FLSA’s intended overtime protections are fully implemented.”
Increase of Minimum Standard Salary Level
Since 2004, the salary basis test was met if the employee was paid a salary of $455 a week ($23,660 annually). The final rule increases the minimum salary, effective Dec. 1. Principally, the final rule raises the minimum standard salary level for exempt employees to the 40th percentile of earnings of full-time salaried workers in the lowest-wage census region, which is currently the South. Applying this rule, the new standard salary level for exempt employees will rise from $455 per week to $913 per week (or from $23,660 annually to $47,476 annually).
Use of Other Payments
Under the new final rule, employers may, for the first time, use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level. To qualify, such payments must be made on a quarterly or more frequent basis, among other conditions set forth in the final rule.
Automatic Updates
Prior to the final rule, the last update to the overtime regulations was in 2004. In an effort to modernize the regulations and prevent a situation where wages outpace revisions to the rules, automatic updates to this minimum standard salary level will occur every three years beginning on Jan. 1, 2020. Originally, the DOL proposed annual automatic updates, but revised the automatic updates to occur every three years, in response to comments criticizing the annual update.
Revisions to the Minimum Standard Salary Level
In the 2004 update, a new highly compensated employee (HCE) exemption was established. The HCE exemption provided that certain employees were exempt from the overtime rules if they earn at least $100,000 in total annual compensation and customarily and regularly perform any one or more of the exempt duties or responsibilities of an executive, administrative or professional employee. The executive, administrative, or professional duties required by an HCE are less stringent than the duties requirement for nonHCEs. The final rule also increases the minimum salary level for employees that qualify for HCE treatment. Specifically, the final rule sets the HCE annual compensation level to the 90th percentile of earnings of full-time salaried workers nationally, which is currently $134,004. Additionally, an HCE employee must also receive $913 weekly (the remainder of the HCE salary may be paid in bonuses, commissions, or other incentive payments) and must pass one of the minimal duties tests.
The Job Duties Test Remains Unchanged
The final rule did not change the existing job duties test to qualify as an exempt employee. The DOL reasoned that the standard salary level in the final rule, along with the existing job duties tests, will effectively distinguish between overtime-eligible workers and exempt workers.
The Estimated Financial Effect
The DOL estimated that the final rule will extend the right to overtime pay to 4.2 million workers who are considered exempt. An additional 65,000 workers currently exempt under the HCE rules are estimated to become overtime eligible due to the implementation of the final rule. The DOL estimated that the average annualized direct employer cost resulting from the final rule will total $295.1 million per year. Additional transfers of income from employers to employees are estimated to average $1,189.1 million.
The Final Rule’s Effect on Litigation
Lawsuits under the FLSA have increased dramatically. The preamble to the final rule observes that the increase of wage-and-hour lawsuits from approximately 2,000 to approximately 8,000 per year has been due in part to employer confusion about which workers could be classified as exempt employees. The DOL concluded that while a reduction of litigation was not the purpose of the final rule, “we believe that reduced litigation will be one of the beneficial impacts” of the rule.
The DOL reasoned that the salary level in the final rule serves as a “clear and effective line of demarcation, thereby reducing the potential for misclassification and litigation.” In other words, the DOL stated that setting the new salary level test, along with automatic updates, will “alleviate the need for employers to apply the duties test in these types of cases, which is expected to result in decreased litigation as employers will be able to determine employee exemption status through application of the salary level test without the need to perform a duties analysis.
Of course, others criticize this reasoning. The Wage and Hour Defense Institute submitted comments to the proposed rule, saying that the rule will likely increase litigation. Specifically, the institute argued that by reclassifying millions of exempt employees as nonexempt employees, there will be a proliferation of disputes regarding issues that only apply to nonexempt employees, such as what is compensable time, the accuracy of time records, compliance with rest/meal period requirements and others, as in a letter from the Wage and Hour Defense Institute to Mary Ziegler, director of the Division of Regulations, Legislation, and Interpretation, Wage and Hour Division (Sept. 4, 2015) (https://www.regulations.gov/#!documentDetail;D=WHD-2015-0001-5585).
Additionally, the institute argued that the new salary level will create additional claims against employers who mistakenly fail to understand or apply the new salary level correctly or who fail to understand how to administer salary basis issues properly.
Conclusion
The consequences of the final rule are yet to be seen, but employers and their counsel must now make a decision for employees that were once considered exempt but no longer meet the minimum salary thresholds—either increase the worker’s salary to meet the threshold or pay overtime. The rule is effective Dec. 1, 2016, absent the U.S. Congress blocking the final rule under the Congressional Rule Act. Now is the time for all employers to re-examine their pay practices for compliance with the law.
*Reprinted with permission from the 6/29/16 issue of The Legal Intelligencer. © 2016 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
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The Legal Intelligencer
On March 2, the Commonwealth Court rendered a decision in Embreeville Redevelopment v. Board. of Supervisors of West Bradford Township, 134 A.3d 1122 (Pa. Commw. Ct. 2016), which clarified when a zoning ordinance amendment, although solely textual on its face, constitutes a zoning map change and triggers the additional notice requirements under Section 609(b) of the Municipalities Planning Code, 53 P.S. Section 10609(b).
The Municipalities Planning Code, 53 P.S. Section 10101 et seq., (MPC), which establishes the framework for zoning and land use regulation in Pennsylvania, sets forth the detailed procedure a municipality must follow when adopting or amending a zoning ordinance. In pertinent part, a municipality intending to amend its zoning ordinance, regardless of whether the proposed amendment is a text amendment or a zoning map change, must: transmit a copy of the proposed amendment to the county planning agency (if one has been created) for review and comment; transmit a copy of the proposed amendment to the municipality’s planning commission for review and comment (if the planning commission did not prepare the amendment); hold a public hearing on the proposed amendment; and publish notice of the public hearing on the proposed amendment twice, in two successive weeks, in a newspaper of general circulation in the municipality no more than 30 and no less than seven days before the public hearing, (see MPC Sections 304(a)(3) and 609; 53 P.S. Sections 304(a)(3) and 609). In addition to the foregoing requirements, if a proposed amendment involves a zoning map change, Section 609(b) of the MPC requires that a municipality also conspicuously post notice of the public hearing on the properties affected by the proposed map change; and mail notice of the public hearing to the owners of property affected by the proposed map change. The MPC does not define what constitutes a “zoning map change.”
In Embreeville, Embreeville Redevelopment purchased over 200 acres of land in West Bradford Township, intending to redevelop the property into a medium- and high-density residential use. However, the property, which was historically used as a psychiatric hospital, was located in the township’s IM-Industrial/Mixed Used District. That district did not permit residential uses. In light of the use restrictions in the IM-Industrial/Mixed Used District, Embreeville met with representatives of the township before and after purchasing the property to discuss its redevelopment plans.
After meeting with Embreeville, the township engaged a consultant to determine whether the township’s zoning ordinance was sufficient to meet the township’s fair share housing obligations. The consultant concluded that the township faced a projected deficit of more than 1,000 multifamily housing units. The township, in response to the consultant’s findings, declared its zoning ordinance substantively invalid and passed a resolution invoking the municipal curative amendment procedure pursuant to Section 609.2 of the MPC, which allows the municipality 180 days to cure an invalidity without threat of a land owner validity challenge (53 P.S. Section 10609.2). The township then attempted to cure the zoning ordinance’s failure to provide adequate land for development of multifamily dwellings by adding medium- and high-density residential uses, such as townhomes, semi-detached homes and apartments, as uses in the township’s I-Industrial District.
Because the township’s proposed cure did not add medium- and high-density residential uses to the township’s IM-Industrial/Mixed Used District, Embreeville submitted a memorandum to the township asking it not to adopt the amendment as proposed. Rather, Embreeville requested that the township develop an amendment that would allow multifamily residential uses on Embreeville’s 200-acre parcel in the township’s IM-Industrial/Mixed Used District.
Unpersuaded by Embreeville’s memorandum, the township, in accordance with Sections 609(c) and (e) of the MPC, transmitted the ordinance to the township’s planning commission and the Chester County planning agency for review and comment. The Chester County planning agency reviewed the proposed amendment and commented, among other things, that medium- and high-density residential development would be appropriate in the township’s I-Industrial District.
The township planning commission, over the course of two public meetings, also reviewed the proposed ordinance. During its review, the commission considered the Chester County planning agency’s comments. Various members of the commission also visited the township’s I-Industrial District to gauge whether medium- and high-density residential uses were appropriate and compatible with other uses in the district. Concluding, in accord with the Chester County planning agency, that the township’s I-Industrial District was suitable for the siting of medium- and high-density residential uses, the township planning commission unanimously recommended approval of the proposed amendment.
With a favorable recommendation from the township planning commission, the township published, pursuant to Section 609 of the MPC, notice of public hearing on the proposed amendment twice in a newspaper of general circulation within the township. However, the township did not post the notice on the affected properties (i.e., the properties located in the township’s I-Industrial District) or mail the notice to the affected property owners as required by Section 609(b) of the MPC when a zoning map change is proposed. At a meeting open to the public, the township board of supervisors held a public hearing on the proposed amendment and voted to adopt it.
Embreeville appealed the township’s approval to the trial court, alleging that the amendment constituted a zoning map change and therefore was procedurally invalid because the township failed to comply with the notice, posting and mailing requirements applicable to zoning map changes under Section 609(b) of the MPC. In response, the township argued that the amendment constituted a text amendment and not a zoning map change because the amendment did not: expressly propose a change to the zoning map; increase or decrease the size of any zoning district; or revise any zoning district boundaries. Thus, the township contended that it did not have to comply with the notice, posting and mailing requirements applicable to zoning map changes under Section 609(b). Agreeing with the township, the trial court ruled the township’s amendment did not constitute a zoning map change and thus dismissed the appeal.
On appeal to the Commonwealth Court, Embreeville again alleged that the amendment effectuated a comprehensive change to the township’s I-Industrial District by creating a new residential zoning district and therefore constituted a zoning map change. Accordingly, Embreeville argued that the township was required not only to publish notice of the public hearing, but also to mail and post notice of the public hearing pursuant to Section 609(b).
Agreeing with Embreeville, the Commonwealth Court reversed. In doing so, the court relied upon its earlier decisions in Takacs v. Indian Lake Borough Zoning Hearing Board, 11 A.3d 587 (Pa Commw. Ct. 2010), and Shaw v. Township of Upper St. Clair Zoning Hearing Board, 71 A.3d 1103 (A.3d 1103 (Pa. Commw. Ct. 2013). In Takacs, the court concluded the addition of a single permitted use to a zoning district does not constitute a zoning map change. Whereas in Shaw, the court concluded that the addition of a use permitting mixed-residential development that actually effectuates a comprehensive zoning scheme through the addition of at least 20 additional uses with a multitude of accompanying requirements does. The court further reiterated in Shaw that “if an ordinance contains changes that are so comprehensive in nature as to result in a substantial change to the manner in which the tract of land is zoned in comparison to the surrounding tracts of land that were similarly zoned, then the ordinance will constitute a map change.” Finally, the court observed that a determination of whether a comprehensive zoning scheme exists cannot be based upon the number of changes proposed, but rather upon analysis of the overall effect of the proposed changes.
Similar to the amendment challenged in Shaw, the township’s amendment in Embreeville added a use that permitted medium- and high-density residential development in the township’s I-Industrial District. This use, similar to the use in Shaw, in effect added several residential uses (townhomes, semi-detached homes and apartments) to the township’s I-Industrial District with a multitude of accompanying requirements and conditions. As a result, the court concluded the township’s amendment established a comprehensive zoning scheme that changed the entire nature of the I-Industrial District and, accordingly, constituted a zoning map change that not only required the township to publish notice of the public hearing in a general circulation newspaper, but also required the township to post notice of the public hearing on the affected properties and mail notice of the public hearing to the affected property owners in accordance with Section 609(b) of the MPC.
The Embreeville decision is significant as it provides more defined parameters for municipalities to follow when determining whether an ordinance amendment constitutes a text amendment or a zoning map change and the mandatory procedures for each. It is critical that municipalities ensure that they strictly follow all applicable procedural requirements, as a failure to comply could result in the invalidation of an otherwise substantively valid ordinance.
*Reprinted with permission from the 6/29/16 issue of The Legal Intelligencer. © 2016 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
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Marcellus Drilling News
The legal beagles of top energy law firm Babst Calland recently released their sixth annual energy industry report called, “The 2016 Babst Calland Report – An Unprecedented Time for the Oil & Gas Industry: Price Down, Supply Up, Reform Ahead; Legal and Regulatory Perspective for Producers and Midstream Operators.” This annual review of energy and natural resources development activity acknowledges the continuing evolution of this industry in the face of economic, regulatory, legal and local government challenges. In an MDN exclusive, we have the first six pages of the 68-page report (see below), along with details on how you can request a full copy. Worth the read!…
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The PIOGA Press
This article is an excerpt of the 2016 Babst Calland Report – “An unprecedented Time for the Oil & Gas Industry: Price Down, Supply Up, Reform Ahead. Legal and Regulatory Perspective for Producers and Midstream Operators.
In 2015, 42 North American oil and gas exploration and production companies filed for bankruptcy protection. At least another 29 have filed in 2016, and continuing price pressure may result in more bankruptcy filings. Given this state of affairs, companies operating in the oil and gas sector should understand how their rights and obligations are affected when their contractual counterparties become bankruptcy debtors, and how to take advantage of business opportunities presented through the bankruptcy process.
Assumption or Rejection of Contracts
One of the main purposes of the Bankruptcy Code is to afford a commercial debtor the opportunity to rehabilitate and reenter the stream of commerce as a productive enterprise. One tool afforded to debtors is the right under Section 365 of the Bankruptcy Code to determine which of its “executory contracts” dating from prior to the bankruptcy filing are beneficial, and which are burdensome, and to reject those that are burdensome, thereby relieving the debtor of the obligation to perform burdensome contracts going forward. The Bankruptcy Code does not define the term “executory contract,” but the term is generally understood to encompass those contracts where the obligations of both parties are unperformed to the degree that the failure of either party to complete performance would constitute a material breach. Section 365 also permits a debtor to reject its unexpired leases.
The question of whether a debtor can reject particular sorts of contracts can hinge on issues determined under state law. More specifically, the treatment of oil and gas leases, gathering agreements and transportation agreements can vary, depending on the treatment of those agreements under the state law governing those agreements.
Major developments in this area occurred in late 2015, and are continuing to develop this year.
Oil and Gas Leases
Under the law of certain states, including Pennsylvania and West Virginia, an oil or gas lease is not a true lease, but instead is the conveyance to the lessee of a real property interest in the oil or gas in place for its extraction and development. Upon termination of the lease, the interest reverts to the lessor. The interest conveyed to the lessee is referred to as a fee simple determinable with right of reversion. Prior to November 2015, cases interpreting Pennsylvania law generally held that, regardless of the language of the lease, an oil or gas lease was a conveyance of legal title to the oil or gas in place that vested when the property was brought into production. Those cases also held that, prior to production, an oil or gas lease was subject to rejection under Section 365 of the Bankruptcy Code because the conveyance of legal title to the oil or gas in place had not yet vested.
In November, 2015, the U.S. District Court for the Middle District of Pennsylvania, in the case of In re Mark Powell and Powell Development Company, Inc., determined on appeal that the underlying Bankruptcy Court, and indeed most courts that had examined the issue under Pennsylvania law to date, misinterpreted Pennsylvania law to the extent they based their rulings on the principle that an oil and gas lease, as a matter of law, conveys title that is inchoate and vests only when oil or gas is produced (and, therefore, is subject to rejection prior to when oil or gas is produced), regardless of the language used in the lease. Instead, the District Court ruled that the language of the specific oil or gas lease must be examined to determine if it grants a fee simple determinable. If that language is in the traditional form (that is, “the lessor hereby grants and conveys to the lessee…”), the court held that the lease constitutes the conveyance of a fee simple determinable that is not subject to rejection, even before oil or gas is produced.
This decision in the Powell case binds lower federal courts in the Middle District of Pennsylvania, including the Bankruptcy Court in that District. It remains to be seen how other courts will respond to this decision, but if it is followed by other courts (which certainly is likely), it represents a potentially significant change in law concerning Pennsylvania oil and gas leases.
Gathering and Transportation Agreements
The rejection of gathering and transportation agreements has taken center stage in several major bankruptcy cases involving debtor exploration and production companies. The agreements sought to be rejected generally provide for lengthy fixed terms and have minimum throughput-or-pay provisions that, when viewed in a depressed price and decreased production environment, present onerous burdens on the debtor producer.
Whether a debtor producer may avoid the burdens of a gathering or transportation agreement through rejection has come to turn on whether the agreement “runs with the land.” Non-debtor gatherer/transporters have argued, historically and in recent cases, that their contracts, which include provisions that say the contract “runs with the land,” are not susceptible to rejection, or, if they may be rejected, create property rights on the part of the non-debtor gatherer/transporter that survive rejection because they amount to an interest in real property that has been conveyed to the non-debtor counterparty rather than a mere contract right. Non-debtor gather/transporters also have argued that the language in their contracts dedicating acreage, or the production from specified acreage, to the contract also prevents them from being rejected or also creates property rights that survive rejection. Debtor producers have argued that the mere inclusion of running with the land or dedication language is not dispositive, and more specific requirements to be determined under state law must be satisfied.
These issues were presented in several recent bankruptcy cases, including In re Sabine Oil Gas Corporation, In re Quicksilver Resources, Inc. and In re Magnum Hunter Resources Corporation. [Editor’s note: An accompanying article explores the issue in more depth.]
Farmout Agreements
The characterization of farmout agreements under the Bankruptcy Code is also an important issue in the context of an oil and gas exploration and production company bankruptcy. Farmout agreements may be considered executory contracts subject to acceptance or rejection under Section 365; however, an analysis of the specific terms of the farmout agreement and what, if any, obligations remain to be performed by the parties at the time of the bankruptcy filing must be performed. Depending on the status of the specific farmout, it may be considered a performed agreement establishing interests in real property, which interests are not subject to assumption or rejection. Additionally, Section 541(b)(4) of the Bankruptcy Code contains a safe harbor protection for non-debtor farmees where the debtor-farmor seeks to reject a farmout agreement after the farmee has performed its contractual obligations, but before the required conveyance of the working interest has been recorded. If the Section’s criteria are met, rejection does not impact the rights of the farmee with respect to any interest it earned prior to the petition date. Such interests are generally considered to be the non-debtor farmee’s separate property, as opposed to a claim against the debtor farmor. While there are very few cases interpreting this Section of the Bankruptcy Code, it is available in the proper circumstances.
Master Agreements
Section 365 of the Bankruptcy Code requires the assumption or rejection of a contract in its entirety. A debtor may not pick and choose which elements of a contract to assume and which to reject. Sometimes, multiple contracts comprise a single, integrated agreement. For example, a master agreement may contain the general terms and conditions that govern a series of similar transactions to be entered into overtime. Where a debtor seeks to reject some, but not all, of the related agreements, the non-debtor counterparty will argue that the agreements are so interrelated as to form an integrated whole, and therefore all of the interrelated contracts must be assumed or rejected together.
This fact pattern is present in the Magnum Hunter case, where the debtor has agreements with a gatherer and is seeking to reject some, but not all, of its agreements with the counterparty. Specifically, the debtor and the gatherer are parties to a master agreement and several subsidiary agreements, or confirmations, that support a pipeline network of multiple lateral segments and transportation lines. The gatherer argues that these segments are not individually viable, and are instead maintained as components of an integrated system. As with so many critical issues in bankruptcy, the counterparties argue that the question of whether the related agreements constitute an integrated whole must be determined under state law. The issue remains to be decided in the Magnum Hunter case.
Mineral Interests
Investors in the energy sector make their investments in a variety of ways, including purchasing overriding royalty interests, net profits interests, working interests, production payments and other interests. The nature of the interest purchased can have a dramatic effect on the investor’s recovery in a bankruptcy case.
Generally, an overriding royalty interest is an interest in oil or gas flowing from an underlying oil and gas lease that is free of the costs of production, similar to the usual landowner’s royalty. A net profits interest is a share of the gross production of a property measured by net profits from operations. In either case, these interests are often conveyed through documentation reflecting the parties’ intent to transfer an interest in real property. One reason that an investor would want to structure its investment as an interest in real property is that, under bankruptcy law, such an interest would be excluded from the debtor’s estate, and therefore not subject to divestment in the bankruptcy case. The Bankruptcy Code specifically excludes from property of the estate “any interest of the debtor in liquid or gaseous hydrocarbons to the extent that . . . the debtor has transferred such interest pursuant to a written conveyance of a production payment [as defined in Section 101(42A)] to an entity that does not participate in the operation of the property from which such production payment is transferred. . . .” This language may be read to mean that the exclusion from property of the estate is only available to assignees that provide financing, as opposed to assignees that receive production payments as compensation for services rendered in the operation of the property. There is little case law on this issue, though the recent spate of oil and gas bankruptcy cases may change that.
By the time a bankruptcy case begins, a debtor production company may owe substantial royalty payments to lessors. Generally, a lessor’s pre-petition royalty claim may be treated as a general unsecured claim. However, a lessor may challenge this treatment based on specific language in its lease, or based on specific state law peculiarities. Leases may include language that allows the lessor to terminate a lease for non-payment of royalties. The Bankruptcy Code’s automatic stay notwithstanding, such provisions can be enforced in some states, including Texas. To prevent termination, debtors may seek court approval to pay prepetition royalty payments in order to preserve the value of the lease.
Purchase of Assets in a Section 363 Sale
Use, sale or lease of property of the estate. Section 363 of the Bankruptcy Code sets forth the rights and powers of debtors with respect to the use, sale or lease of property of the estate other than in the ordinary course of business. Generally, a bankruptcy debtor may enter into transactions, including the sale, use or lease or property of the estate, without involvement by the Bankruptcy Court, so long as such transactions are within the ordinary course of the debtor’s business. The use, sale or lease of property of the estate other than in the ordinary course of business requires notice, a hearing and an order of the Bankruptcy Court approving such use, sale or lease.
Advantages and Disadvantages of a Section 363 Sale
Some of the advantages to a buyer in a bankruptcy sale are the opportunity to negotiate a reduced price from a seller whose leverage is impaired, and the opportunity to be selective about the assets to be purchased. Perhaps the most compelling advantage of a 363 sale, however, is the quality of title that may be acquired. The order confirming the sale will provide that the assets are conveyed free and clear of at least the liens identified in the pleadings. The order might alternatively provide that the assets are conveyed free and clear of all liens. Section 363(f) authorizes sales free and clear of “any interest in such property,” provided one of five criteria is satisfied. This provision is most commonly understood to enable the assets to be transferred free from liens and other similar encumbrances. Even at this most basic level, this feature is a powerful argument for purchasing assets inside, rather than outside, of a Chapter 11 proceeding. Section 363(f), however, has been construed even more broadly by some courts. In the case of In Re Trans World Airlines, Inc., airline workers’ employment discrimination claims against a Chapter 11 debtor airline, as well as flight attendants’ rights under a travel voucher program that the debtor airline had established in settlement of sex discrimination actions, both qualified as “interests in property” under Section 363(f). This case established for the Third Circuit that Section 363(f)’s “interest in property” language means more than in rem interests, such as liens.
There may also be disadvantages to a sale under Section 363. Although an auction process is not mandated by the Bankruptcy Code, the prospective purchaser should assume that the transaction will be subject to higher and better offers where the assets to be acquired are material to the debtor. Also, the timing of a Section 363 transaction can be problematic, particularly if the bankruptcy case has not yet been commenced. In either case, the bankruptcy proceeding adds an additional layer of cost to the transaction. An acquired business or business unit may also have impaired relationships with its customers, vendors and employees. Finally, the differing interests among the debtor, the secured creditors and the unsecured creditors’ committee can complicate and delay the deal-making process.
Special Considerations for Section 363 Agreements of Sale
The negotiation of an agreement of sale where the seller is a Chapter 11 debtor involves some unique considerations, including the following:
Although the preferred goal of Chapter 11 is for the debtor to emerge from bankruptcy as a reorganized, viable business, it is entirely possible that the Chapter 11 debtor/seller will not emerge as a business at all. Accordingly, representations and warranties that serve to shift risk in non-bankruptcy transactions can be meaningless in Chapter 11 transactions. Instead, matters that might typically be addressed in such representations and warranties in non-bankruptcy transactions (e.g., the condition of the assets and required consents) should be viewed merely as conditions to closing.
Assuming the Chapter 11 debtor/seller will not emerge from bankruptcy as a viable business, the buyer might be inclined to negotiate special price concessions, hold backs or escrows to address potential claims. Such mechanisms, however, may not be favored by creditors of the seller who have little interest in waiting for additional payments to be distributed at some point in the distant future, if at all.
The increased likelihood that the prospective buyer will be unsuccessful in a Chapter 11 sale, whether because of competitive bidding or otherwise, suggests that extensive efforts should not be devoted to due diligence while the Chapter 11 sale remains uncertain. The debtor/seller’s status, however, puts even more pressure than normal on the due diligence process. One way to address this concern is to include an expense reimbursement feature in the sale procedures, whereby the unsuccessful bidder may recoup at least its out-of-pocket expenses (i.e., attorneys’ fees).
The assignment and assumption of significant contracts is an important component of the acquisition of any on-going business. Chapter 11 sales, however, involve a number of additional concerns relating to the assignment and assumption of contracts. Pursuant to Code Section 365(f), the debtor/seller has the right to assign most contracts without the consent of the counterparty, even if the contract being assigned requires such consent. The buyer/assignee, however, must be prepared to provide adequate assurance of future performance. In addition, all monetary defaults must be cured before an executory contract can be assumed and assigned in a Chapter 11 case. The buyer should be prepared to bear those costs where the debtor/seller is liquidating.
In non-bankruptcy transactions, the agreement of sale usually contains various conditions to the parties’ respective obligations to close. One of the most common of these is a financing contingency. In bankruptcy sales, however, such conditions can severely hamper the prospective purchaser’s prospects for success, either because a competitive bid might not include such conditions (and might therefore be a “better” if not “higher” offer), or because the inclusion of such conditions will lose the support of creditors and other parties-in-interest for the proposed transaction.
Stalking Horse Issues and other Sale Procedures
The prospective buyer who enters into an agreement of sale with a Chapter 11 debtor/seller where the sale is subject to competitive bidding at a court-ordered auction is referred to as a “stalking horse.” A stalking horse bidder bears the risk of losing the desired assets to a higher or better bid. Accordingly, the first decision any prospective purchaser of assets in a Chapter 11 sale faces is whether to become the stalking horse bidder, or whether to wait to let another prospective purchaser do the initial heavy lifting – getting the deal put together and mustering the support of the various parties-in-interest for a transaction – then bid at the ensuing auction. Based on the theory that the interests of the estate and its creditors are served by encouraging someone to step up and begin the bidding process, bankruptcy law and practice affords some protections for the stalking horse bidder, including the opportunity to establish the procedures by which the sale will be conducted, and the opportunity to collect a fee or be reimbursed for expenses if the stalking horse bidder is not the successful purchaser.
For more information, contact David W. Ross (dross@babstcalland.com or 412-394-6558), Gregory D. Cribbs (gcribbs@babstcalland.com or 412-394-5405) or Erica K. Dausch (edausch@babstcalland.com or 412-773-8706). A full copy of The 2016 Babst Calland Report is available by writing info@babstcalland.com.
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Pipeline & Gas Journal
The department of Transportation’s (DOT) Pipeline and Hazardous Materials Safety Administration (PHMSA), the federal agency charged with administering the nation’s pipeline safety program, published a long-awaited notice of proposed rulemaking (NPRM) for gas transmission and gathering pipelines
Under development for more than four years, the NPRM proposes significant changes to PHMSA’s safety standards for gas pipeline facilities in 49 C.F.R., Part 192. Of particular importance to the upstream and midstream sectors, the NPRM includes a proposal to modify the federal safety standards for onshore gas gathering lines in four significant ways.
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Pittsburgh Post-Gazette
No one wants to drill for oil and gas in South Fayette anymore.
That’s not part of a new settlement that aims to put to bed a years-long conflict between the township and a group of landowners who felt South Fayette was trying to exclude drilling from its borders.
But it’s a loud unsaid.
The low price of natural gas has likely dampened the appetite of Range Resources, the Texas-based shale operator that once leased land from the Kosky family and their business interests, and of the landowners who continue to spend hundreds of thousands of dollars fighting the township.
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Pittsburgh Tribune Review
Attracting companies such as Royal Dutch Shell to build their petrochemical plants along the Ohio River was the easy part, as far as Keith Burdette is concerned.
The challenge will come in accommodating a related manufacturing complex that officials in three states hope to establish around ethane crackers, said Burdette, executive director of the West Virginia Development Office.
“We’re not trying to build a facility anymore. We’re trying to build an industry,” he told several hundred people Monday at a petrochemical conference in Downtown Pittsburgh. “Building an industry is a lot more complicated.”
As Shell prepares to start construction of a multibillion-dollar facility in Beaver County, and two other companies weigh building crackers in Ohio and West Virginia, officials at the conference said they must make sure the region has the infrastructure, workforce and real estate that the industry needs to expand.
“We have to work that much harder with respect to what our next steps are,” said Dennis Davin, secretary of Pennsylvania’s Department of Community and Economic Development.
Shell this month said it made the decision to go ahead with construction, nearly five years after it started looking in the region. The cracker, which will convert ethane liquids from Marcellus shale wells to the building blocks of plastics, is expected to attract manufacturers interested in using its products.
Davin said those companies will need a place to build.
“Our issue right now is that in Western Pennsylvania … we don’t have enough construction-ready sites for things that we know are going to happen in follow-on investment from this,” he said. “We know that there are going to be plastics manufacturers, fertilizer manufacturers … and downstream companies that are going to look for sites.”
As his boss, Gov. Tom Wolf, goes into another state budget deadline period this week, Davin said officials are looking to shift state money toward redevelopment funds that can aid in preparing real estate for such businesses.
The state also needs to collaborate with Ohio and West Virginia to ensure companies have enough trained employees, starting with 6,000 construction workers for the Shell plant, Davin and others said.
Contractors are working directly with union locals to plan for increased demand for welders and other craftsmen, said Sam Lyon, a manager at Bechtel, which did engineering and design work for the Shell plant.
“There will be demand in excess of local union” membership, said Lyon, who expects those locals to get help from affiliates across the country.
Nagging issues of inadequate infrastructure remain a problem.
Burdette said plans are afoot to find places to store liquid ethane in the region for use at crackers and other facilities.
Energy consultant Kathryn Klaber noted bridges in Beaver County require upgrading. More pipelines must be built to carry gas and liquids from the shale fields to demand centers.
“We know that they need to get the gas to market,” Davin said. But he acknowledged that opposition to pipeline projects stands in the way.
Opposition from groups that don’t want fossil fuel industries to expand threaten to squelch growth, several people said.
“They are whipping the you-know-what out of the business right now when it comes to public sympathy and public buy-in,” said attorney Mike Krancer, a former Pennsylvania Department of Environmental Protection secretary.
Klaber, a former head of the Marcellus Shale Coalition, said the industry learned lessons from the initial drilling boom that can help as it moves to secondary manufacturing. It starts with trying to be a good neighbor.
“That community engagement, you cannot do enough of that,” she said.
Such outreach should also happen between government agencies and companies looking to take advantage of the cracker and its products, said Dean Calland, an environmental attorney at Downtown firm Babst Calland.
Manufacturers looking to build near the cracker will need help navigating complex permitting and regulatory hurdles, he said. Large companies like Shell have experience and people devoted to those processes, Calland noted. Other firms might not.
“These are not slam-dunk issues. These are issues you need to work through,” he said.
The Northeast U.S. & Canada Petrochemical Construction Conference continues Tuesday at the Marriott City Center, when Shell Appalachia Vice President Ate Visser is scheduled to speak.
David Conti is the assistant business editor at the Tribune-Review. Reach him at 412-388-5802 or dconti@tribweb.com.
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The Legal Intelligencer
Editor’s note: The authors represented Cardinal before the township, trial court and Commonwealth Court.
On Jan. 7, the Pennsylvania Commonwealth Court rendered a decision in Kretschmann Farm v. Township of New Sewickley, 2016 Pa. Commw. LEXIS 33 (Pa. Commw. 2016), which addressed the heated debate over the compatibility of oil and gas operations and agricultural uses.
In 2014, Cardinal PA Midstream, (Cardinal) applied to the board of supervisors of New Sewickley Township, Beaver County for conditional use approval to construct and operate a natural gas compressor station in the township’s A-1 agricultural district. Pursuant to the township’s zoning ordinance “compressor station” is permitted as a conditional use in the A-1 agricultural district, provided that the use meets certain express standards and criteria.
The township board of supervisors held a public hearing on Cardinal’s application, during which Cardinal presented testimony on: (1) its experience in the natural gas industry; (2) its operations; (3) compliance with the zoning ordinance’s express standards and conditions; (4) review and approval by the Pennsylvania Department of Environmental Protection of its erosion and sediment control plan and air permit; (5) incorporation of landscaping to block the site’s visibility from neighboring landowners and roads; (6) conformity to the township’s noise standards; (7) proposed driveway construction, traffic generation and road improvements.
Adjacent property owners, who operate an organic farm, and others opposed Cardinal’s application. During the public hearing, the property owners expressed concern over potential impacts of the compressor station on their produce, water and air, and the compatibility of natural gas drilling operations with agricultural uses. Township residents also expressed concern over the potential placement of pipelines in the township, light pollution from flares, the compatibility of compressor stations with uses in residential/agricultural areas, and the potential long-term effects of emissions generated by oil and gas operations.
After closing the public hearing, the board found that Cardinal complied with all of the zoning ordinance’s express standards and criteria. It went on to approve the conditional-use application subject to 33 conditions, several of which it imposed in response to the property owners’ and others’ concerns. The property owners appealed the board’s decision to the trial court, which affirmed the approval. The property owners then appealed to the Commonwealth Court, which also affirmed the board’s approval.
On appeal to the Commonwealth Court, the property owners primarily argued that: (1) the township board abused its discretion because it did not consider nor address in its written decision their evidence; (2) the zoning ordinance violated their constitutional rights by permitting a compressor station in the A-1 district; and (3) the trial court erred in denying the their motion to present additional evidence related to the adoption of the zoning ordinance provisions at issue.
Addressing the property owners’ first argument—that the Township Board abused its discretion because it did not consider nor address in its written decision their evidence—the Commonwealth Court recited the extensive testimony by Cardinal and the property owners. In doing so, the court pointed out that Cardinal met all of the express standards and criteria of the zoning ordinance. At that point, pursuant to well-established Pennsylvania law, a presumption arose that the proposed compressor station was consistent with the general welfare of the community. This shifted the burden to the property owners to present substantial evidence that the proposed use would adversely affect the welfare of the community in a way not normally expected of that type of use.
The Commonwealth Court, citing its recent decision in Gorsline v. Board of Supervisors of Fairfield Township, explained that “expressions of concern,” similar to those presented by the property owners, do not constitute substantial evidence on which the board could base a finding of harm. Accordingly, the court, emphasizing that the property owners presented no expert reports or testimony to support their challenge, concluded that the property owners failed to meet their burden.
The property owners’ second argument—that the township’s zoning ordinance violated their constitutional rights by permitting a compressor station in the A-1 district—relied on the Pennsylvania Supreme Court’s plurality decision in Robinson Township v. Commonwealth, 83 A.3d 901 (Pa. 2013).
The Robinson Township decision invalidated various sections of Act 13, the General Assembly’s 2012 comprehensive update to the former Oil and Gas Act, including a uniform zoning standard for all oil and gas operations in the state. Specifically, the property owners argued that: (1) the zoning ordinance was not tailored to the local conditions within the community; and (2) the ordinance’s 750-foot setback provision was invalid because it is the same as the uniform setback invalidated in Act 13 by Robinson Township.
The Commonwealth Court rejected these arguments. The court noted that the status of the cited Robinson Township opinion as a plurality rendered the opinion binding only on the parties to that case. The court also explained that the Robinson Township decision “did not nullify [the 750-foot setback] provision of [the zoning ordinance]” because the decision “did not reach, or indeed even discuss, whether a municipality could choose to adopt a 750-foot setback, as the township did here.” Moreover, the court found that the statewide zoning enabling legislation, the Pennsylvania Municipalities Planning Code, 53 P.S. Section 10101 et seq., (MPC), requires that any challenge to the validity of a zoning ordinance be in the form of either a “curative amendment” submitted to the board, or a challenge to the zoning hearing board.
Rather than filing an ordinance challenge in accordance with the MPC’s procedures, which they previously initiated but later withdrew in a separate action before the township zoning hearing board, the property owners attempted to challenge the validity of the ordinance in the context of their challenge to Cardinal’s conditional-use application. Accordingly, the Commonwealth Court rejected the property owner’s constitutional argument because it was not pursued in accordance with the exclusive procedures available under the MPC.
Finally, the Commonwealth Court rejected the property owners’ argument that the trial court should have permitted them to introduce transcripts of two township public hearings related to the adoption of the zoning ordinance provisions in question, which took place several years prior to Cardinal’s filing of its conditional-use application.
The property owners contended that this legislative history supported their arguments that the township did not consider health and safety issues and did not tailor the ordinance to ensure residents’ rights to clean air and water. However, the court pointed out that the property owners had not sought to introduce those transcripts during the conditional use hearing, and, as noted above, failed to properly pursue an ordinance validity challenge. Accordingly, the court rejected the property owners’ contention.
The property owners have filed a petition for allowance of appeal with the Pennsylvania Supreme Court.
*Reprinted with permission from the 2/26/16 issue of The Legal Intelligencer. © 2016 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
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OOGA Bulletin
On October 14, 2015, the United States District Court for the Western District of Pennsylvania invalidated several sections of a Grant Township, Indiana County, Pennsylvania local ordinance that was enacted to prevent an oil and gas operator from operating an underground injection well that had been permitted by the United States Environmental Protection Agency. In Pennsylvania General Energy Company, L.L.C. v. Grant Township, Civil Action No. 14-209, 2015 U.S. Dist. LEXIS 139921 (W.D. Pa. Oct. 14, 2015), Pennsylvania General Energy Company, L.L.C. filed a complaint in federal court against Grant Township to challenge the constitutionality, validity and enforceability of a Grant Township ordinance that sought to establish a self-described Community Bill of Rights Ordinance (the Ordinance).
PGE drills for and produces natural gas in Grant Township and other municipalities in Pennsylvania. PGE took steps to reclassify an existing vertical gas well located in Grant Township as an underground injection well. As background, in Pennsylvania, most produced fluid from natural gas operations, particularly unconventional operations, is recycled by using it down-hole to complete other wells. Produced fluid that is not recycled is commonly treated at centralized wastewater treatment facilities or injected into permitted disposal wells. Most of the injected material is brine and other produced fluid that returns to the surface after drilling and during operation of a well. However, there are many fewer commercial and captive injection wells in Pennsylvania than there are in Ohio at this time.
In Pennsylvania, EPA is responsible for implementing the Underground Injection Control Program under the federal Safe Drinking Water Act, and for regulating the construction, operation, permitting, and closure of injection wells. When reviewing a UIC permit application, EPA evaluates whether the proposed injection will protect underground sources of drinking water from the subsurface injection of fluids. UIC permits, including the permit issued to PGE, often condition subsurface operations on stringent well integrity and operational requirements.
On March 19, 2014, EPA issued a UIC permit to PGE to authorize the injection of brine and produced fluids into the former production well. Three residents of Grant Township appealed the permit in April 2014, but the United States Environmental Appeals Board dismissed their appeals in August 2014. EPA then issued the permit in final form in September 2014.
Approximately three months after EPA issued the UIC permit, Grant Township adopted the Ordinance on June 3, 2014, to prevent PGE from injecting produced fluid under the UIC permit. The Ordinance stated that it is “establishing a Community Bill of Rights for the people of Grant Township, Indiana County, Pennsylvania, which prohibits activities and projects that would violate the Bill of Rights, and which provides for enforcement of the Bill of Rights.” The Ordinance expressly prohibited any corporation or government from depositing within Grant Township waste from oil and gas extraction activities, and invalidated any state or federal injection well permit. “Depositing of waste from oil and gas extraction” was defined broadly in the Ordinance to include:
The depositing, disposal, storage, beneficial use, treatment, recycling, injection, or introduction of materials including, but not limited to, brine, “produced water,” “fract [sic] water,” tailings, flowback or any other waste or by-product of oil and gas extraction, by any means. The phrase shall also include the issuance of, or application for, any permit that would purport to allow these activities.
The Ordinance likewise broadly defined “extraction” to mean “the digging or drilling of a well for the purposes of exploring for, developing or producing shale gas, oil, or other hydrocarbons.” Corporations that violated or tried to violate the Ordinance “shall not be deemed to be ‘persons,’ nor possess any other legal rights, privileges, powers, or protections,” and were denied the right to challenge the Ordinance on preemption or other grounds.
PGE filed its Complaint in the United States District Court for the Western District of Pennsylvania in August 2014, challenging the Ordinance on several federal grounds including equal protection, due process and the supremacy provisions of the U.S. Constitution. It also challenged the Ordinance on state law grounds. PGE requested (i) a declaration that the Ordinance is unconstitutional and invalid under state law, (ii) an injunction to prohibit Grant Township from enforcing the Ordinance, and (iii) compensatory damages, attorneys’ fees and costs. PGE subsequently moved for Judgment on the Pleadings in which it asked the court to enter judgment in PGE’s favor as a matter of law based on the factual and legal averments in its Complaint.
On October 14, 2015, the District Court granted PGE’s Motion for Judgment on the Pleadings, in part. The court invalidated, and enjoined Grant Township from enforcing, several provisions of the Ordinance on three state law grounds. First, it held that the provisions making it unlawful for a corporation to deposit oil and gas extraction waste and the provisions nullifying state or federal permits were invalid and unenforceable under the Pennsylvania Second Class Township Code. This Code is a state statute that grants legislative authority to Pennsylvania second class townships. The court held that Grant Township exceeded its authority under the Code. Second, the court struck down these provisions of the Ordinance as being exclusionary. Pennsylvania law prohibits local governments from enacting ordinances that ban legitimate uses of property. And third, the court invalidated the provisions that attempted to strip corporations of their legal rights and prevent them from legally challenging the Ordinance as being preempted by the Pennsylvania Limited Liability Company Law (which expressly provides that corporations have the legal capacity of natural persons to act) and the Second Class Township Code (which expressly provides that persons aggrieved by a local ordinance have the right to challenge an offending ordinance in court). However, the court declined to rule on the constitutionality of the Ordinance because it invalidated several provisions under state law.
Shortly after the court released its opinion, Grant Township moved the court to reconsider its decision. The court denied that motion on February 5, 2016. A trial on PGE’s damages and its remaining constitutional law claims is currently scheduled for May 16, 2016.
While the above litigation was proceeding, Grant Township developed a proposed Home Rule Charter for the Township that adopted verbatim many of the provisions of the Ordinance, including the prohibition against “depositing” oil and gas extraction waste and the provision invalidating any federal or state permit that would violate the Charter. As under the Ordinance, corporations that violate or try to violate the Charter are not deemed to legal “persons” and are stripped of their legal rights. The residents of the township voted for the Charter in November 2015, and it now replaces the Ordinance. However, this action is form over substance; provisions of the Charter violate the same laws as did their counterparts in the former Ordinance.
Grant Township is represented on a pro bono basis by Community Environmental Legal Defense Fund. CELDF has tried to convince communities across the country to enact self-styled Bill of Rights Ordinances that are designed to stop activities such as oil and gas production and management of wastes from those activities. Like in the PGE v. Grant Township case, CELDF has urged courts to modify or eliminate well-established legal principles. The Western District of Pennsylvania rejected CELDF’s effort on the basis of decades-long precedent. With respect to the remaining issues of damages, attorneys’ fees and costs, CELDF will again face century-old legal precedent interpreting and applying constitutional rights under the Supremacy Clause and the First and Fourteenth Amendments to the United States Constitution. In this regard, the United States Supreme Court has long held that corporations are deemed to be “natural persons” under the United States Constitution with the same constitutional rights as individuals.
The law firm of Babst, Calland, Clements and Zomnir, P.C. in Pittsburgh, Pennsylvania represents PGE in this case. If you have questions regarding this decision, please contact Kevin Garber at (412) 394-5404 or kgarber@babstcalland.com or Jim Corbelli at (412) 394-5649 or jcorbelli@babstcalland.com. Mr. Garber is a shareholder in the Environmental and Energy & Natural Resources Groups of the Pittsburgh law firm of Babst, Calland, Clements and Zomnir, P.C. Mr. Corbelli is a shareholder in the Litigation and Energy & Natural Resources Groups of Babst Calland. Mr. Garber and Mr. Corbelli represent energy clients in environmental, natural resource and energy disputes.
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West Virginia Record
WASHINGTON, D.C. — The House Judiciary Committee’s Subcommittee on Constitution and Civil Justice will be holding a hearing today on the ACCESS (ADA Compliance for Customer Entry to Stores and Services) Act, which aims to protect small businesses from the widespread abuse of the Americans with Disabilities Act (ADA).
Congressman Ken Calvert (R-CA), who is sponsoring the bill, will testify before the committee in support of the bill he says will help prevent plaintiffs’ lawyers from “trying to enrich themselves on the backs of the disabled.”
The ACCESS Act, also known as H.R 241, would require an aggrieved person to notify a business of an ADA violation in writing, and give the business owner 60 days to provide the aggrieved individual a detailed description of improvements to remedy the violation. Then, the owner would have 120 days to remove the infraction. Failure to meet these conditions would be grounds to further the lawsuit.
Calvert told the West Virginia Record that as a property owner himself, he has had to deal with complaints from people who find minor discrepancy in a building or in following the regulations, and instead of being given time to correct the infraction, owners get slapped with lawsuits and “lawyers get rich.”
“We all want to have access (for) the disabled, we just don’t want to make this an excuse for lawyers to sue small business owners,” he said. “Nobody is objecting to making sure that we have access for the disabled.”
Calvert said some of the infractions are very minor, like not having a sign in the right location or neglecting to paint a line in the right way.
Instead of rushing to file lawsuits, Calvert said business owners should be given an opportunity to fix infractions and comply with the law.
West Virginia has seen a wave of ADA lawsuits against large corporations within the last few years.
Earlier this year, an unnamed man brought a suit against Mylan Pharmaceuticals, claiming the company violated the ADA when it placed him on involuntary leave after his neurologist placed him on specific restrictions following a seizure in March. According to the complaint, Mylan had previously accommodated the plaintiff’s condition since the beginning of his employment in 2007.
Towards the tail of last year, the West Virginia Human Rights Commission found that despite having their own private bathrooms, CAMC-Teays Valley Hospital’s patient bathrooms were not ADA compliant.
And in Charleston in April 2015, Duane J. Ruggier II, an attorney, sued Go-Mart for allegedly failing to maintain its restroom stall in compliance with the West Virginia Human Rights Act and the ADA, according to the Complaint.
Ruggier has multiple sclerosis, which substantially limits his mobility and requires him to use a power wheelchair when traveling in public.
Although there are many legitimate cases of ADA violations, the growing number of frivolous lawsuits intended to make money instead of correcting ADA infractions is of particular concern to many.
According to a 2014 Manhattan Institute report, trial lawyers “have found ways to exploit legal rules in disability statutes to their personal benefit, fleecing taxpayers and business owners alike in the process.”
“Yearly ADA-related payouts paid through employment-discrimination claims filed with the federal Equal Employment Opportunities Commission (EEOC) exceed $100 million and have grown at an annualized rate of more than 12 percent over the last seven years, a period when overall tort-litigation costs in the U.S. have fallen,” the report stated. “These payouts, moreover, understate the true cost of such litigation, which almost always settles, given that the expected expense of defending against an ADA lawsuit to the employer tops $250,000.”
Darren McKinney, director of communications for the American Tort Reform Association, told the West Virginia Record that the association is in full support of the bill.
“Although realistically, being an election year and with the stranglehold that the trial bar has on senate Democrats generally, one can’t be particularly optimistic about the bill. But certainly it is needed; the congressman is to be applauded.”
McKinney said small businesses around the country are supportive of the bill because ADA lawsuits “are spreading like kudzu all around the country now.”
Calvert said the issue is not a Republican or Democrat issue, but just a common sense solution to a problem.
“This is supposed to help people that are disabled, not help some attorney get his kids through college,” he said
But he’s expecting resistance from those “trying to enrich themselves on the backs of the disabled.”
“I don’t think those guys really give a hoot about the disabled, they care about their own bank accounts,” he said.
Calvert has never had a complaint from disabled groups about being given a chance to fix infractions. In fact, people with disabilities want to get the problem fixed to make sure they get access, he said.
“This is the kind of thing that is common sense stuff, and I think we need to get this passed as soon as possible, he said.
But such complaints aren’t limited to how ADA compliant a business’ physical location is.
“An example of the proliferation of ADA lawsuits are the hundreds of businesses around the country receiving letters threatening lawsuits for allegedly ADA non-compliant websites,” Timothy M. Miller, an attorney at Babst Calland, told the West Virginia Record. “This is occurring even where there has been no identified ‘customer’ harmed or denied access.”
Miller said the law is not clear on whether the ADA even requires websites to be “accessible” and ADA compliant – a topic that has sparked a lot of debate in the legal sphere.
“The demand letters are being sent by a few technology savvy law firms and demand payment of money and modifications to websites to avoid a suit. Businesses must decide whether to spend the money to defend a lawsuit in an area where the law is uncertain, or pay off the demand and modify their websites.”
It is a classic “sue and settle” business model, Miller said.
‘All businesses should be forewarned to conduct a self-audit or have your website vendor verify compliance with the industry technical standards, Version 2.0 of the Web Content Accessibility Guidelines, published by the World Wide Web Consortium,” he said.
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American Oil & Gas Reporter
WASHINGTON–A pipeline safety regulation published in April by the U.S. Department of Transportation’s Pipeline and Hazardous Materials Safety Administration goes beyond traditional natural gas transmission to have serious implications for onshore gas gathering.
PHMSA published its long-awaited notice of proposed rule making for natural gas transmission and gathering pipelines on April 8. Under development for more than four years, the NOPR proposes significant changes to the regulations for gas pipeline facilities in 49 CFR Part 192, including regulations for onshore gas gathering lines.
Adopted a decade ago, the current regulations rely, in large part, on American Petroleum Institute Recommended Practice 80, Guidelines for the Definition of Onshore Gas Gathering Lines, which is a voluntary consensus standard for classifying onshore production operations and gas gathering lines. Current regulations contain an exemption for gas gathering lines in rural, Class 1 locations–i.e., areas where 10 or fewer buildings intended for human occupancy are located in the vicinity of a gathering line.
The NOPR proposes to change these regulations by:
• Modifying the requirements for determining whether a pipeline qualifies as an onshore gas gathering line;
• Applying portions of the Part 192 regulations to certain previously unregulated Class 1 gas gathering lines; and
• Applying federal reporting requirements to all gas gathering lines (whether regulated or not). Read more ›
The PIOGA Press
Three years after the Pennsylvania Supreme Court rendered its controversial decision in Robinson Township v. Commonwealth, the plurality opinion is still front-and-center in battles over local regulation of oil and gas activities. The 2013 Robinson Township case, in which a three-justice plurality of the Supreme Court relied on a new and much more extensive interpretation of the Pennsylvania Environmental Rights Amendment (ERA) to invalidate certain provisions of Act 13, made its way back to the Supreme Court for consideration of new issues in 2016. In the intervening time, the Commonwealth Court, county courts of common pleas and local zoning hearing boards grappled with the meaning of the 2013 decision and its impact on local zoning authority. These cases continue to work their way through the appeals process.
Robinson Township Returns to the Pennsylvania Supreme Court
In March 2016 the Supreme Court heard argument in the Robinson Township challenge to Act 13, the General Assembly’s 2012 comprehensive update to the former Oil and Gas Act. When it first decided the case in 2013, a three-justice plurality of the Supreme Court relied on a novel and broad interpretation of the ERA (i.e. that the ERA imposes on the Commonwealth and its municipalities a fiduciary duty to “conserve and maintain” natural resources) to invalidate several sections of Act 13, including two key sections of Chapter 33 which placed limits on local government authority to regulate the oil and gas industry.
The Court remanded several undecided issues to the Commonwealth Court, including whether the remaining local government provisions of Act 13 could stand alone as “severable” from the invalidated ones, or whether they must fail alongside them. The remanded sections address the conferral upon the Pennsylvania Public Utility Commission (PAPUC) and Commonwealth Court of original jurisdiction to review local ordinances regulating the industry (as opposed to having such challenges filed with local zoning hearing boards or governing bodies), the imposition of attorney’s fees to prevailing parties in ordinance challenges in certain instances, and a municipality’s loss of its Act 13 impact fees if its ordinance was invalidated. The Supreme Court also remanded the issues of: (1) whether notice by the Pennsylvania Department of Environmental Protection (DEP) to only owners of public drinking water systems, but not of private water supplies, following a drilling-related spill was unconstitutional; (2) whether prohibiting disclosure of the identity and amount of hydraulic fracturing additives claimed to be proprietary information was unconstitutional; and (3) whether Act 13 unconstitutionally conferred the power of eminent domain for gas storage or reservoir protective areas on a private party for a private purpose.
The Commonwealth Court rendered its decision in July 2014, invalidating the balance of the Chapter 33 local government provisions, with limited exceptions.[1] The definitions in Section 3301 and general preemption language in Section 3302, which essentially preserved the preemption language of Section 602 of the former Oil and Gas Act, appear to remain in effect. The Court upheld the remaining non-local government provisions of Act 13. The PAPUC and the participating municipalities appealed the decision to the Supreme Court, where the case is currently pending.
Supreme Court Considers Arguments Based on 2013 Robinson Township Plurality Opinion in Pennsylvania Environmental Defense Foundation v. Commonwealth
Pennsylvania Environmental Defense Foundation v. Commonwealth (PEDF) presents the Supreme Court with its first opportunity to interpret and apply the 2013 Robinson Township decision. PEDF had challenged Fiscal Code amendments that permitted the transfer of monies from the Oil and Gas Lease Fund, which is traditionally used to maintain and conserve public natural resources, to fund the Pennsylvania Department of Conservation and Natural Resources’ operations, the Treasury, and the General Appropriations Act of 2014. After the Robinson Township decision, PEDF added an argument that these amendments violated the ERA because they fail to fulfill the duty to conserve and maintain the public natural resources for the benefit of the people.
The Commonwealth Court rejected PEDF’s constitutional challenges and clarified the legal weight to be given to the Robinson Township plurality decision.[2] In a critical footnote, the Commonwealth Court stated that the Robinson Township decision is not binding precedent, but merely persuasive authority. The Court also acknowledged the remaining legitimacy of the pre-existing test for constitutionality under the ERA established by the Commonwealth Court in Payne v. Kassab[3]. Payne emphasized the need for the Commonwealth to balance its duties under the ERA against other duties owed by the Commonwealth to its citizens and acknowledged that the protections of the ERA are not absolute. PEDF appealed the decision to the Pennsylvania Supreme Court.
Commonwealth Court Rejects Robinson Township-based Argument that Oil and Gas Uses are Incompatible with Agriculture, Upholds Approval of Compressor Station in Agricultural District
In January 2016, the Pennsylvania Commonwealth Court in Kretschmann Farm, LLC v. Township of New Sewickley upheld the conditional use approval of a Cardinal PA Midstream, LLC natural gas compressor station located in New Sewickley Township’s A-1 Agricultural District.[4] Owners of an adjacent organic farm objected to the application and appealed its approval to both the trial court and Commonwealth Court.
During the initial public hearing before the Township Board of Supervisors, Cardinal presented evidence of compliance with all ordinance requirements. The owners of the organic farm then expressed concern over potential impacts of the compressor station on their produce, water and air, and the compatibility of natural gas drilling operations with agricultural uses. Township residents also questioned the potential placement of pipelines in the Township, light pollution from flares, the compatibility of compressor stations with uses in residential/agricultural areas, and the potential long-term effects of emissions generated by oil and gas operations.
The Board found that Cardinal complied with all of the zoning ordinance’s express standards and criteria. It approved the application subject to 33 conditions, several of which were in response to the farmers’ and others’ concerns. The adjacent farmers appealed the decision to the trial court, which affirmed the approval, as did the Commonwealth Court.
The adjacent farmers’ arguments included one based on the Robinson Township plurality opinion, namely that the zoning ordinance violated their constitutional rights by permitting a compressor station in the A-1 District. Specifically, the farmers argued that: (1) the zoning ordinance was not tailored to the local conditions within the community; and (2) the ordinance’s 750 foot setback provision was invalid because it is the same as the uniform setback invalidated in Act 13 by Robinson Township.
The Commonwealth Court rejected these arguments. The Court noted that the status of the cited Robinson Township opinion as a plurality rendered the opinion binding only on the parties to that case. The Court also explained that the Robinson Township decision did not nullify the zoning ordinance’s 750 foot setback because the decision invalidated a state law; it did not discuss whether a municipality could choose to adopt a 750 foot setback, as New Sewickley Township did. The Court also found that the adjacent farmers did not follow the procedure necessary to challenge the validity of a zoning ordinance (which the adjacent farmers previously initiated, but later withdrew in a separate action before the Township Zoning Hearing Board). Rather, they incorrectly tried to raise validity arguments in the context of a conditional use appeal. Accordingly, the Commonwealth Court rejected the adjacent farmers’ constitutional argument.
The Commonwealth Court found that applicant proved compliance with the zoning ordinance and, therefore, “it established that its proposed use was presumptively consistent with the public welfare.”[5] Although there is no automatic right to appeal, the adjacent farmers have filed a petition for allowance of appeal with the Pennsylvania Supreme Court.
The Commonwealth Court’s ruling in Kretschmann Farm is consistent with its previous decision in Gorsline v. Board of Suprvisors[6], upholding a local decision to permit oil and gas wells in a Residential Agriculture zoning district. The Gorsline case is summarized in the October 2015 issue of the PIOGA Press.
Zoning Ordinances Continue to Survive Validity Challenges
Municipal zoning hearing boards in three of the five Pennsylvania municipalities facing Robinson Township-based zoning ordinance substantive validity challenges have upheld those ordinances. All of the cases generally rely on the theory that the regulations in the challenged zoning ordinances are insufficient to protect the environment to the extent required by Robinson Township and the ERA. Objectors commonly argue that zoning ordinances cannot permit oil and gas uses in agricultural or residential districts and that the municipalities must engage in extensive environmental assessments when enacting regulations.
- In Middlesex Township, Butler County four residents, the Clean Air Council of Philadelphia, and the Delaware Riverkeeper Network challenged the local zoning ordinance and issuance of a well permit. The Middlesex Township Zoning Hearing Board rejected the challenge, and the Butler County Court of Common Pleas upheld that decision on appeal.[7] This case is currently on appeal before the Commonwealth Court.
- Three residents challenged Allegheny Township, Westmoreland County’s zoning ordinance and the issuance of a gas well pad approval. The Allegheny Township Zoning Hearing Board rejected the challenge and the Westmoreland County Court of Common Pleas upheld that decision on appeal. An appeal in this case is pending in the Commonwealth Court.
- Pulaski Township, Lawrence County faced a zoning ordinance validity challenge from four residents, which the Pulaski Township Zoning Hearing Board rejected. An appeal from that decision is currently pending before the Lawrence County Court of Common Pleas.[9]
The remaining two Robinson Township-based zoning ordinance validity challenges filed in Pennsylvania have not been decided on the merits at the local level. As referenced with respect to the Kretschmann Farms summary above, objectors in New Sewickley Township, Beaver County withdrew their case after presenting their witnesses, and before ordinance proponents presented their cases. A validity challenge filed in Robinson Township, Washington County is pending in the Court of Common Pleas, on appeal from the Robinson Township Zoning Hearing Board’s dismissal of the case on standing and ripeness grounds.
If you would like additional information about developments in this article, please contact Krista Staley at (412) 394-5406 or kstaley@babstcalland.com, or Blaine Lucas at (412) 394-5657 or blucas@babstcalland.com.
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Employment Bulletin
On May 18, 2016, the United States Department of Labor (DOL) published a longexpected final rule that more than doubles the salary threshold required for employees to qualify for the executive, professional, or administrative exemptions allowed by the Fair Labor Standards Act (FLSA).
Under the current law, for an employee to be exempt from the FLSA’s overtime provisions, he or she must earn at least $23,660 per year ($455 per week) on a “salary basis” and perform the job duties described in the Executive, Administrative, Professional and other exemption categories recognized by DOL. Effective December 1, 2016, however, that salary threshold will rise to $47,476 ($913 per week). The job duties tests will not change. This salary increase will mark the first increase in the salary threshold since 2004. The updated final rule is expected to enable approximately 4.2 million additional employees to earn overtime pay.
In addition to doubling the overtime salary threshold, the final rule also:
• increases the total annual compensation requirement for highly compensated employees (HCE) from $100,000 to $134,004;
• establishes a mechanism for automatically updating the salary and compensation levels every three years, beginning on January 1, 2020; and
• amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level.
The full text of the final rule can be accessed beginning May 23, 2016 at http://federalregister. gov/a/2016-11754.
Babst Calland’s Employment and Labor Group will continue to keep employers apprised of further developments related to this and other employment and labor topics. If you have any questions or need assistance in addressing the above-mentioned area of concern, please contact John A. McCreary, Jr. at (412) 394-6695 or jmccreary@babstcalland.com, or Stephen A. Antonelli (412) 394-5668 or santonelli@babstcalland.com.
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Law360
Babst Calland Clements & Zomnir PC announced on Thursday that it’s building out its new Washington, D.C., office with the addition of a third shareholder in its pipeline and hazmat safety practice who used to be an attorney for the Pipeline and Hazardous Materials Safety Administration.
After three years as a regulatory counsel to the Interstate Natural Gas Association of America, Brianne Kurdock told Law360 on Friday she’s happy to once again be working with James Curry and Keith Coyle, two attorneys she worked with as a senior attorney at the PHMSA.
“To have three of us together with that kind of agency expertise was really compelling,” she told Law360 on Friday. “I enjoyed my days at INGA but this is an opportunity I just had to take.”
Kurdock plans to help clients with strategic and compliance counseling, audit preparation, incident response, enforcement proceedings, regulatory comment preparation and litigation.
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