FEDERAL MINE SAFETY AND HEALTH REVIEW COMMISSION

Office of Administrative Law Judges

601 New Jersey Avenue, N.W., Suite 9500

Washington, D.C. 20001

November 4, 2011

DECISION

Appearances:  Matt Shepherd, Esq., U.S. Department of Labor, Office of the Solicitor, Nashville, Tennessee, for Petitioner;

  Charles J. Baird, Esq., Baird & Baird, P.S.C., Pikeville, Kentucky, for Respondent.

Before:           Judge Paez

            This case is before me upon the Secretary’s Petitions for the Assessment of Civil Penalty pursuant to section 105 of the Federal Mine Safety and Health Act of 1977 (“Mine Act”). 30 U.S.C. § 815. The Secretary seeks a total civil penalty of $226,508 against Respondent Ember Contracting Corporation (“Ember”) for the single order and 247 citations at issue in the 29 dockets consolidated into this matter. (Sec’y Ex. 1.)

            The parties filed with the Commission a Joint Motion to Consolidate Proceedings in twenty-six of the twenty-nine above-captioned dockets on December 17, 2009. On November 9, 2009, the Chief Judge concluded on remand from the Commission that adequate cause supported reopening Docket Nos. KENT 2008-1346, KENT 2008-1347, and KENT 2008-1348, which had become final orders, and the parties filed a Joint Motion to Consolidate Proceedings in these three matters on January 22, 2010. On March 9, 2010, I issued an Order to Consolidate and Notice of Hearing setting this case for hearing on September 21 and 22, 2010, in Pikeville, Kentucky. At the hearing, the parties submitted documentary evidence as well as the testimony of one witness appearing on behalf of Ember—Charles R. Gilkerson, President and co-owner of Ember. The Secretary filed her post-hearing brief on January 4, 2011. Ember filed its post-hearing brief on February 7, 2011, pursuant to an extension granted due to a family emergency with Ember’s counsel.

I. Parties’ Stipulations

            The parties entered into the following stipulations, which they submitted as a joint exhibit at the hearing:

            1. The Respondent is subject to the jurisdiction of the Federal Mine Safety and Health Act of 1977. The Administrative Law Judge has the authority to hear this case and issue a decision regarding this case.

            2. The citations and orders included in these dockets were properly issued. The Respondent accepts the citations and orders as issued. The Respondent does not contest the Secretary’s characterization of the violations, including the Secretary’s findings regarding gravity, negligence or the number of miners affected. The Respondent only contests the amount of the proposed assessments.

            3. The citations and orders at issue in these cases were properly served by a duly authorized representative of the Secretary upon an agent of the Respondent. The Respondent timely contested the violations.

            4. The Respondent is a small operator. The Respondent’s history of violations is not an aggravating factor.

            5. The only fact that remains to be litigated at trial is the effect of the proposed civil money penalties on the Respondent’s ability to continue in business.

(Joint Ex. 1, at 3–4.) 

 II. Parties’ Arguments

            As stipulated by the parties, the sole issue before me is whether a proposed penalty assessment would adversely affect Ember’s ability to continue in business. Under well-settled Commission precedent, it is presumed that a proposed penalty assessment will not adversely affect an operator’s ability to continue in business. Broken Hill Mining Co., 19 FMSHRC 673, 677–78 (Apr. 1997). Consequently, the burden here is on Ember to prove that the proposed penalty assessment will adversely affect its ability to continue in business. Id.

            As a threshold matter, the Secretary argues that Ember has effectively shut down its mining operation, and as a result, is no longer “in business” for the purposes of section 110(i) of the Mine Act. (Sec’y Br. 6–11.) According to the Secretary’s interpretation of the Mine Act, section 110(i) does not apply to mine operators that are out of business. (Id.) As a result, the Secretary urges me to find Ember liable for the full amount of the proposed penalty assessment. (Id. at 14.) Ember disagrees with the Secretary’s characterization of its business, maintaining it is still “in business” based on the Commission’s decision in Spurlock Mining Co., 16 FMSHRC 697 (Apr. 1994) (holding that the Commission reviews the record for evidence supporting the conclusion that the operator could resume mining operations). (Ember Br. 13, 15.)

            Ember argues it neither has the financial means to pay the full proposed penalty assessment nor could it have paid the entire proposed penalty even at the time the penalties were initially proposed. (Ember Br. 8.) Ember stresses that the proposed penalty assessments caused its bank to cancel its line of credit, and as a result, it cannot continue its mining operations. (Id. at 14.) In support of reducing the Secretary’s proposed civil penalty, Ember again relies on Spurlock Mining as well as the Administrative Law Judge decision in Granite Mountain Crushing, LLC, 26 FMSHRC 126 (Feb. 2004) (imposing a reduced penalty based, in part, on finding no evidence operator’s decision to liquidate assets was based on Secretary’s proposed penalty (ALJ).

             The Secretary counters that the full civil penalty should be imposed because Ember failed to explain why it had not paid the civil penalties when they were initially imposed or why the penalties would prevent it from resuming its mining operations. (Sec’y Br. at 11–14.) Additionally, the Secretary argues that under these circumstances, equity requires imposition of the full amount of the proposed civil penalty. (Id. at 12–13.) The Secretary points out that around the time that Ember wound down its mining activities, its owners sold Ember’s assets to a related company and incorporated a new company presently engaged in mining operations. (Id.)

            For the reasons that follow, I conclude that Ember has not satisfied its burden of proving that imposition of the total proposed civil penalty would adversely affect its ability to continue in business.

III. Background and Findings of Fact

A.        Ember’s Mining Business

            Charles (“Randy”) R. Gilkerson incorporated Ember as a Kentucky corporation in 1992. (Tr. 13:6–16; Resp’t Ex. 1.) Ember is owned solely by Gilkerson and Gary Boyd. (Tr. 15:10–11, 81:7–9.) Gilkerson has served as President of Ember and Boyd as Secretary of Ember since the company’s incorporation. (Tr. 15:14–19.) Gilkerson handles the business aspect of Ember while Boyd handles the operations side of the company. (Tr. 79:7–14.) In addition to having ownership stakes in Ember, Gilkerson and Boyd each take commissions of 25¢ per ton on the coal mined by Ember. (Tr. 40:9–23.)

            Ember is in the business of contract mining at underground coal mines. In contract mining, larger coal operators pay smaller companies, such as Ember, to extract coal from small “reserve blocks,” which is the coal remaining after a large operator has finished removing the largest reserves of coal from a particular mine site. (Tr. 14:1–13, 27:2–21.) Ember has always mined coal using “conventional mining” methods. (Tr. 68:20–22.) Thus, to extract coal, Ember uses a machine to drill a hole into the coal underground and then inserts dynamite into the hole. (Tr. 68:23–69:9.) The dynamite’s ignition breaks up the coal, allowing its removal from underground. (Tr. 69:7–9.)

            Contracting operators pay Ember on a per-ton basis. (Tr. 14:7–8.) Ember’s contracts involve relatively small coal reserves, and the longest Ember has remained at any particular mine site is 3.5 years. (Tr. 27:24–28:4.) Overall, Ember typically mines approximately 200,000 tons of coal per year. (Tr. 28:5–10.) According to Gilkerson, Ember must mine approximately 100,000 tons of coal per year for its operation to be economical. (Tr. 28:10–29:3.) Ember mines a particular site until it extracts all of the available coal. (Tr. 27:2–5.)

            Each time Ember obtains a new mining contract and begins operation at a new mine site, it must cover the costs of starting up the new operation. The start-up cost of a single one of its mining operations usually varies between $100,000 and $300,000. (Tr. 24:19–25:2.) To get the mine up and running, Ember must cover the cost of its employees’ payroll, equipment, and utilities. (Tr. 25:15–26:19.) Typically, Ember will go to its local bank and obtain financing based on its contract. (Tr. 25:3–15.) Ember may also be able to secure equipment from a vendor based on the strength of its contract. (Tr. 25:9–25.)

            To secure a mining contract, Ember must compete against other contract mine operators bidding for the contract. (Tr. 56:3–4.) The per-ton price awarded to Ember in its mine contract may vary between $20 per ton and $45 per ton. (Tr. 56:12–22.) This price reflects negotiations allocating certain costs between Ember and the contracting mine operator, such as equipment and coal haulage. (Tr. 56:24–57:7.) Ultimately, Ember takes on a contract when the price, less the cost of running the proposed mine operation, makes it a profitable venture. (Tr. 56:4–11.)

B.        Ember’s Recent Operational History, Business Prospects, and Financial Performance

            1.         Recent Operational History

            The bulk of Ember’s violations were issued as a result of its operations during February and March of 2008. During that time, the Secretary issued forty-four citations and proposed a penalty assessment totaling $156,228. (Docket No. KENT 2008-1347, Sec’y Ex. A.) According to Gilkerson, Ember did not pay the proposed penalty assessment because it was not in any financial position to do so. (Tr. 19:24–20:3.) Nevertheless, Ember continued to pay some of the civil penalties assessed against it when it was “able,” paying approximately $10,000 to $20,000 following the large civil penalty assessment. (Tr. 21:2–14; Resp’t Ex. 11, at 4; Resp’t Ex. 12, at 4.) Ember attempted to negotiate the civil penalties at issue in this case to “come to some sort of settlement that we could live with.” (Tr. 23:4–5.)

            By end of the summer of 2009, Ember’s then-current contract mining operation had removed all of the coal available at the mine site. (Tr. 32:15–20.) As the operation wound down, Ember needed to borrow money to pursue a new mining contract. (Tr. 32:23–24.) However, based on the penalty assessments against it, Ember made the determination that it could not proceed to finance a new operation until it “did something with the fines.” (Tr. 32:10–33:1.) During this time, Ember also engaged in talks with its bank to refinance its $100,000 line of credit, and in those discussions Ember revealed the pending civil penalty assessments. (Tr. 31:1–24, 37:4–22.) Ember asserts its bank refused to renew its line of credit based on the proposed penalty assessments. (Tr. 31:1–16.) Ultimately, the bank did not renew Ember’s line of credit, indicating Ember would not have generated enough revenue to pay off its debt. (Tr. 37:17–19; Resp’t Ex. 3.)

            When Ember’s bank cancelled the line of credit, it also required Ember to repay its outstanding debt of $100,000. (Tr. 37:20–22.) To pay off the loan, Ember sold its equipment to E.C. Management for $115,000. (Tr. 32:21–22, 33:2–19; Resp’t Ex. 4, at 1.) E.C. Management is a corporation owned solely by Gilkerson and Boyd that they formed to provide consulting advice on mine site development. (Tr. 34:2–4, 34:8–13, 49:15–50:1.) Ember has never purchased any consulting services from E.C. Management. (Tr. 66:12–14.) E.C. Management, however, has loaned money to Ember for various purposes, including payment of COBRA healthcare benefits to workers Ember laid-off at the end of its mining contract. (Tr. 39:14–40:4, 92:2–5.)

            The “book value” of the equipment involved in the equipment sale—i.e., its value after accounting for depreciation deductions that allowed Ember to spread the cost of its equipment’s deterioration over time—was approximately $32,000, although Gilkerson estimated its market value to be $103,000. (Tr. 66:15–67:22; Resp’t Ex. 4, at 2.) Some of the equipment was junk and had no value other than for recoverable spare parts. (Tr. 35:22–7; Resp’t Ex. 4, at 2.) E.C. Management is still in possession of the equipment, and so far, efforts to sell it have been unsuccessful. (Tr. 36:15–18.) When E.C. Management bought Ember’s equipment, E.C. Management sent the payment directly to Ember’s bank in satisfaction of its debt. (Tr. 36:8–11.) E.C. Management had no need for the equipment it purchased from Ember. (Tr. 34:14–16.) Gilkerson admitted that E.C. Management bought Ember’s equipment solely to pay off Ember’s debt. (Tr. 34:17–19.)

            2.         Current Prospects in Contract Mining

            At the time of the hearing, Ember had no coal mining contracts or even any employees. (Tr. 84:9–13.) Gilkerson does not consider Ember to be out of business but rather considers it “to be in waiting.” (Tr. 84:14–18.) Ember would like to resume mining, and Gilkerson considers the company to be “a brand” with a positive reputation among the companies with whom it contracts, as well as equipment vendors and regulators. (Tr. 54:11–25.)

            Business opportunities are presently available to Ember, and Gilkerson predicts even greater demand for contract mining in the future, particularly in eastern Kentucky. (Tr. 55:1–3, 61:25–62:18, 63:20–64:23.) Indeed, shortly before the hearing on this matter, Ember, through Gilkerson, considered the possibility of pursuing a mining contract. (Tr. 55:4–9.) Ember, however, neither made a bid on the contract nor even explored the potential financial costs and benefits of the proposal. (Tr. 55:10–12, 55:15–22.) Rather, Ember determined it was not “in the position to know what [it] could do until [it] knew what was happening [in this proceeding].” (Tr. 55:25–56:1.) Gilkerson testified that Ember would be working today had the fines at issue in this case not been assessed. (Tr. 72:9–15.)

            In January 2010, Gilkerson and Boyd formed G.R. Mining, a separate Kentucky corporation owned solely by them, which is engaged in the business of contract underground coal mining. (Tr. 67:25–68:10, 89:15–25, 90:4–6, 90:15–18.) G.R. Mining operates out of the same location where Gilkerson and Boyd operate Ember. (Tr. 90:19–22.) Boyd manages the operational aspects of G.R. Mining, just as he does at Ember. (Tr. 91:2–8.) At the time of the hearing, G.R. Mining had a contract to extract coal for McCoy Elkhorn, a large operator in eastern Kentucky. (Tr. 90:7–12.) G.R. Mining had approximately eighteen employees, some of whom, including Gilkerson and Boyd, were the same ones who had previously worked for Ember. (Tr. 70:4–11, 90:23–91:4.) Indeed, Gilkerson and Boyd draw the same 25¢ per ton commission from G.R. Mining’s output as they do from Ember’s. (Tr. 74:6–13.) Rather than using conventional mining at this project, G.R. Mining uses a continuous miner, which is a large piece of machinery fitted with a rotating metal drum covered in bits that grinds the coal from the underground seam. (Tr. 69:10–13.) Gilkerson predicted that G.R. Mining’s contract could last for 2.5 years if it is able to extract the total reserves remaining at the mine. (Tr. 74:14–17.) In explaining whether Ember could have pursued this opportunity, Gilkerson stated that G.R. Mining’s contract “didn’t suit Ember’s mode of operation.” (Tr. 69:22–70:3.)

            3.         Financial Performance

            Ember submitted unaudited annual financial statements (Tr. 89:8–14) from December 31, 2006, through December 31, 2009 (Resp’t Exs. 9–12), as well as its federal income returns for the years 2006 through 2009, as proof of its recent financial performance (Resp’t Exs. 5–8). Ember operates on a calendar year system, meaning that it records and reports its yearly financial performance—its revenues, costs, assets, and liabilities—over the same period as the calendar year. (Tr. 87:12–16.) Ember had yearly revenues of approximately $11 million in 2006 (Resp’t Ex. 9, at 3), $8.5 million in 2007 (Resp’t Ex. 10, at 3), $5.9 million in 2008 (Resp’t Ex. 11, at 3), and $2.2 million in 2009 (Resp’t Ex. 12, at 3).

            According to its unaudited annual income statements, Ember had a net income of $48,062.90 in 2006 (Resp’t Ex. 9, at 4), a net income of -$32,106.49 in 2007 (Resp’t Ex. 10, at 4), a net income of -$153,060.74 in 2008 (Resp’t Ex. 11, at 4), and a net income of -$95,031.45 in 2009 (Resp’t Ex. 12, at 4). Ember’s federal taxable income was $34,493 in 2006 (Resp’t Ex. 5, at 1), $36,656 in 2007 (Resp’t Ex. 6, at 1), -$128,261 in 2008 (Resp’t Ex. 7, at 1), and -$82,478 in 2009 (Resp’t Ex. 8, at 1).

            Ember’s unaudited balance sheets provide a snapshot of the total value of its assets (i.e., cash, equipment, and payments due to it) and liabilities (i.e., expenses owed to third-parties and debt) at a particular point in time. Ember’s balance sheets also show the amount of the owners’ equity in the company, which is the value of Gilkerson and Boyd’s stakes in Ember as measured by the difference between Ember’s assets and liabilities. On December 31, 2006, Ember had approximately $1.1 million in assets, $976,000 in liabilities, and $165,000 in equity. (Resp’t Ex. 9, at 1–2.) Ember had approximately $745,000 in assets, $612,000 in liabilities, and $133,000 in equity on December 31, 2007. (Resp’t Ex. 10, at 1–2.) Ember had approximately $212,000 in assets, $232,000 in liabilities, and -$20,000 in equity on December 31, 2008. (Resp’t Ex. 11, at 1–2.) Ember had approximately $4,000 in assets, $119,000 in liabilities, and -$115,000 in equity on December 31, 2009. (Resp’t Ex. 12, at 1.)

            At the time of the hearing, Ember’s assets consisted of approximately $1,000 in cash in a bank account and $17,000 owed to it by the IRS as a refund for COBRA benefits paid to laid-off workers. (Tr. 37:23–39:13.) Ember had no outstanding debts with its bank. (Tr. 46:11–14.) However, Ember owes Gilkerson and Boyd approximately $30,000 in commissions based on the amount of coal it mined. (Tr. 40:24–41:7.) Ember owes approximately $70,000 on its loans from E.C. Management. (Tr. 92:2–8.)

IV. Principles of Law

            Section 110(i) of the Mine Act provides:

In assessing civil monetary penalties, the Commission shall consider the operator’s history of previous violations, the appropriateness of such penalty to the size of the business of the operator charged, whether the operator was negligent, the effect on the operator’s ability to continue in business, the gravity of the violation, and the demonstrated good faith of the person charged in attempting to achieve rapid compliance after notification of a violation.

30 U.S.C. § 820(i) (emphasis added).

            The determination of the proper civil penalty is committed to the Administrative Law Judge’s discretion, which is bounded by the statutory criteria of section 110(i) of the Mine Act as well as the deterrent purpose of the Mine Act’s penalty assessment scheme. Sellersburg Stone Co., 5 FMSHRC 287, 294 (Mar. 1983) (citation omitted), aff’d sub nom. Sellersburg Stone Co. v. FMSHRC, 736 F.2d 1147 (7th Cir. 1984). According to the Mine Act’s legislative history:

[T]he 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.

. . . .

[A] penalty should be of an amount which is sufficient to make it more economical for an operator to comply with the Act’s requirements than it is to pay the penalties assessed and continue to operate while not in compliance.

S. Rep. No. 95-181, at 37–38 (1977).

            In evaluating whether an operator is “in business” for the purposes of section 110(i) of the Mine Act, the Commission reviews the record for evidence supporting the conclusion that the operator could resume mining operations. Spurlock Mining, 16 FMSHRC at 699. It is well-established that “[i]n the absence of proof that the imposition of authorized penalties would adversely affect its ability to continue in business, it is presumed that no such adverse [e]ffect would occur.” Id. at 700 (quoting Sellersburg Stone, 5 FMSHRC at 294). The operator must introduce specific evidence to show that the proposed civil penalty would adversely affect its ability to continue in business. Broken Hill Mining, 19 FMSHRC at 677–78.

            Past financial records showing net losses are not necessarily dispositive of this issue, particularly if the operator’s documentation is unreliable or other evidence, such as future business prospects or assets, contradicts the operator’s assertions about its inability to pay. Spurlock Mining, 16 FMSHRC at 700 (citing Peggs Run Coal Co., 3 IBMA 404, 413–14 (Nov. 1974)). See, e.g., Heritage Res., Inc., 21 FMSHRC 626, 638 (June 1999) (ALJ) (finding no effect on ability to continue in business in light of operator’s substantial assets); L&T Fabrication & Constr., 21 FMSHRC 71, 73–74 (Jan. 1999) (ALJ) (discrediting reliability of unaudited financial records); Kennie-Wayne, Inc., 16 FMSHRC 2441, 2442–44 (Dec. 1994) (ALJ) (finding no effect on ability to continue in business in light of operator’s future business prospects).

            The Commission has repeatedly affirmed that its “function is not to pass on the wisdom or fairness of . . . asserted business justifications, but rather only to determine whether they are credible and, if so, whether they would have motivated the particular operator as claimed.” Sec’y ex rel. McGill v. U.S. Steel Mining Co., 23 FMSHRC 981, 991 (Sept. 2001) (quoting Bradley v. Belva Coal Co., 4 FMSHRC 982, 993 (June 1982)). This rule, however, has been applied only to discrimination proceedings. Nevertheless, it reflects the common law business judgment rule, which directs courts not to second-guess the decision of a corporation’s board of directors, so long as the decision was made without corrupt motive and in good faith. 3A William Meade Fletcher, Fletcher Cyclopedia of the Law of Corporations § 1036, available at Westlaw, 3A Fletcher Cyc. Corp. § 1036.

            Similarly, this Administrative Law Judge is in no position to criticize Ember’s determination that the proposed penalty negatively impacts its ability to continue in business unless Ember does not meet its burden of proof or its conclusion is not credible. Likewise, the Commission has noted:

Our decision should not be interpreted to suggest that any mine operator can obtain a reduction in the penalty assessed against it for a Mine Act violation pursuant to the “effect on the operator’s ability to continue in business” criterion by going out of business.

. . . .

[W]e need to “worry about creating an economic incentive to avoid a penalty by going out of business and perhaps, then reincorporating under a different name.” . . . Moreover, even “employers who were going out of business for ordinary commercial reasons would have little incentive to comply with safety regulations to the end if monetary penalties could be evaded once the business quit altogether.”

Unique Electric, 20 FMSHRC 1119, 1123 (Oct. 1998) (quoting Reich v. OSHRC, 102 F.3d 1200, 1203 (11th Cir. 1997)). See Granite Mountain Crushing, 26 FMSHRC at 130 (imposing reduced penalty based, in part, on finding no evidence that operator’s decision to liquidate assets was based on Secretary’s proposed penalty). 

V. Further Findings of Fact, Legal Analysis, and Conclusions of Law

A.        Ember’s Status as a Going Concern 

            A preliminary matter is the Secretary’s argument that Ember is out of business and section 110(i) does not apply to this case. Ember refutes the Secretary’s contention and offers the Commission’s decision in Spurlock Mining to support the conclusion that it remains in business. 16 FMSHRC at 699. In Spurlock Mining, the Commission considered several factors in determining that the operators could resume mining operations and thus were “in business.” The Commission noted that the operators had ceased mining operations yet had not formally dissolved. Id. Moreover, the operators retained a significant amount of equipment and planned to resume operations if they could secure financing. Id. Because no evidence supported the conclusion that the operators in Spurlock Mining would not resume mining operations in the future, the Commission concluded that the operators were still in business. Id.

            As correctly noted by Ember, Spurlock Mining is instructive on this point. Ember, through its president, Gilkerson, asserts it is an active business with intentions to resume mining. (Tr. 54:11–25, 84:14–18.) Ember has not dissolved as a corporation. Indeed, shortly before the hearing, Ember even considered a potential mining contract. (Tr. 55:4–9.) Had Ember secured financing for another mining project, it would have continued operations. (Tr. 32:23–24.) Additionally, even though Ember sold its equipment (Tr. 32:21–22, 33:2–19), it typically obtained equipment through vendors (Tr. 25:9–25) or through contracting with a large operator pursuant to the mining contract itself (Tr. 56:24–57:7). Moreover, Ember could obtain its former equipment from E.C. Management because it is still available. See discussion supra Part III.B.1. Ember’s lack of equipment is not a significant obstacle to the resumption of its mining activities. Accordingly, because the evidence suggests Ember may resume mining again, if possible, I reject the Secretary’s arguments and conclude that Ember is still “in business.” Therefore, section 110(i)’s requirement to consider Ember’s ability to continue in business applies to this case.

B.        Ember’s Ability to Pay the Proposed Civil Penalty

            Ember has the burden of proving that the proposed civil penalty assessment would adversely affect its ability to continue in business. Ember asserts it did not have the financial means to pay the full penalty assessments when issued. Ember further argues that the unresolved total civil penalty has prevented it from resuming its mining operations by causing its bank to deny it credit. Finally, Ember argues that Commission case law supports reduction of the proposed civil penalty.

            1.         Ember’s Recent Financial Performance

            Between 2006 and 2009, Ember’s financial performance followed a downward trend. Ember’s financial records in 2006 reveal a net income of $48,062.90, notwithstanding paying $13,514 in civil penalties. (Resp’t Ex. 9, at 4.) On December 31, 2006, Ember’s $1.1 million in assets included $698,932.23 in cash. (Id. at 1.) Also at that time, Ember’s shareholders’ equity was $164,625.77, consisting of $116,462.87 in retained past profits and $48,062.90 in current earnings. (Id. at 2.) During the next year in 2007, Ember reported a net income of $36,656 for the purposes of federal taxes (Resp’t Ex. 6, at 1) and a net income of -$32,106.49 after accounting for the payment of $56,248.60 in civil penalties and other adjustments (Resp’t Ex. 10, at 4). On December 31, 2007, Ember still maintained a relatively robust balance sheet with approximately $745,000 in assets, $612,000 in liabilities, and $133,000 in equity. (Resp’t Ex. 10, at 1–2.) However, during 2008 and 2009, Ember’s net income, as well as the value of its assets, liabilities, and shareholders’ equity, declined markedly. (Resp’t Ex. 11, at 1–2, 4; Resp’t Ex. 12, at 1, 4.)

            The downward trend in Ember’s financial performance tracked the diminution of the receipts and bills for its mining operations. In 2006 and 2007, Ember’s cash and accounts receivable—receipts due for its mining activities—equaled approximately $1 million (Resp’t Ex. 9, at 1) and $671,000 (Resp’t Ex. 10, at 1), respectively. At the same time in 2006 and 2007, Ember’s accounts payable—costs incurred for its mining activities—equaled approximately $572,000 (Resp’t Ex. 9, at 1) and $564,000 (Resp’t Ex. 10, at 1), respectively. By the end of 2008, the sum of Ember’s cash and accounts receivable had fallen to approximately $161,000, and its accounts payable had declined to $92,000. (Resp’t Ex. 11, at 1.) At the end of 2009, Ember had no accounts receivable or accounts payable and only about $3,000 in cash. (Resp’t Ex. 12, at 1.)

            The decline of Ember’s net profits, assets, receipts for coal output, and bills for mining expenses coincided with the period leading up to the exhaustion of its mining contract in late-summer 2009. Indeed, relying on Ember’s reported commissions expenses as a yardstick of the company’s output, Ember mined approximately 302,000 tons of coal in 2006 (Resp’t Ex. 9, at 3), 158,000 tons of coal in 2007 (Resp’t Ex. 10, at 3), 166,000 tons of coal in 2008 (Resp’t Ex. 11, at 3), and 87,000 tons of coal in 2009 (Resp’t Ex. 12 at 3). Standing alone, Ember’s recent financial performance would suggest that a reduction in the Secretary’s proposed civil penalty is appropriate. However, as set forth more fully below, the deterioration of Ember’s financial condition between 2006 to 2008 stemmed from Gilkerson and Boyd’s decision to let it wither on the vine by foregoing the pursuit of new mining contracts until the resolution of this civil penalty proceeding. Ember’s unaudited past financial records are not dispositive of its ability to pay the proposed civil penalty.

            2.         Ember’s Present Ability to Continue in Business

            Ember submits that its bank declined to renew its line of credit based on the pending civil penalties. (Tr. 31:1–16.) Because of these penalties, Ember argues it cannot resume its mining operations. (Ember Br. 14.) Nevertheless, in discussing the bank’s official notification letter denying renewal of the line of credit, Gilkerson admitted that Ember decided not to pursue further mining contracts until it resolved this civil penalty proceeding: “[W]e were in a position that we would have to refinance to start up a new operation. And so we chose then, basically, we wouldn’t be able to do that until we did something with the fines.” (Tr. 32:23–33:1 (emphasis added).) Yet had the pending civil penalty assessment adversely impacted Ember’s credit, Ember’s bank could have indicated so in the notification letter, which contained the category checkbox “[g]arnishment, attachment, foreclosure, repossession or suit” under the list of rationales for denying the credit request. (Resp’t Ex. 3.) The bank did not mark this category. (Id.) Instead, it marked “[c]ash flow unable to service debt.” (Id.) The evidence demonstrates that the bank denied Ember’s line of credit based on Ember’s decision not to pursue further business opportunities. The proposed civil penalty itself did not cause the bank to deny Ember’s financing. See Spurlock Mining, 16 FMSHRC at 700 (“We decline to reduce the penalties based on the operators’ mere speculation that the penalties would result in the imposition of judicial liens and that those liens would foreclose financing.”).

            Ember asserts it cannot pursue any new mining contracts until it resolves this civil penalty proceeding. (Tr. 55:25–56:1.) Ember made this decision because it needed to “find something that would justify the start up of a new mine plus pay off these fines.” (Tr. 24:14–18.) However, when presented with an opportunity to pursue a mining contract, Ember did not explore the potential revenues and costs of the arrangement, asserting instead that it first needed to resolve this civil penalty proceeding. (Tr. 55:10–56:1.)

            Ember’s business model sheds light on the credibility of its decision not to pursue new mining contracts. Ember’s mining operation is significantly leveraged in that it borrows substantially to finance the start-up costs of its mining operations. As Ember’s president candidly admitted, the proposed civil penalty constituted one of those costs. (Tr. 24:14–18.) Gilkerson further stated:

[W]e have to price what it takes to do the business plus we have to price what it takes to pay off $230,000 in fines. And once we price that in, then we’re out of the game. Or if we price it where we’re competitive, we can’t absorb the money, can’t absorb the fines. We can do it, you know, maybe one of these days, the world will get better and we can, but right now, the margins are too close. 

(Tr. 56:4–11.)

            At Ember’s average yearly 200,000-ton production rate, the $226,508 proposed civil penalty would, spread out over a year like Ember’s other costs, levy a $1.13/ton cost on its production, or 2.5% to 5.7% of its usual $20 to $45/ton contract price. No specific evidence in the record before me suggests that Ember could not have financed this cost to spread the burden of the civil penalty payment over time. In light of Ember’s past profitability, the opportunities available to it, and its self-proclaimed positive reputation in the industry, I do not find Ember’s purported difficulties in pursuing new mining contracts to be credible.

            Rather, the activities of G.R. Mining reveal why Ember has been so reluctant in seeking additional mining contracts. Gilkerson and Boyd, the sole owners of Ember, incorporated G.R. Mining, another contract underground coal mining company, approximately four months after Ember exhausted its last mining contract. (Tr. 67:25–68:10, 89:15–25, 90:4–6.) Gilkerson and Boyd are the sole owners of G.R. Mining, too. (Tr. 89:22–25.) Boyd, who ran Ember’s mining operations, also runs G.R. Mining’s operational side. (Tr. 91:5–8.) Some of Ember’s former employees work at G.R. Mining. (Tr. 70:4–11, 90:23–91:1.) G.R. Mining is run out of the same location where Ember operates. (Tr. 90:19–22.) Gilkerson and Boyd receive the same rate of commissions from G.R. Mining’s output as they do from Ember’s output. (Tr. 74:6–13.)

            Ember insists that G.R. Mining is a “completely separate” company (Tr. 68:5–8) engaged in mining activity “totally different” from the mining conducted by Ember (Ember Br. 13). Gilkerson differentiates G.R. Mining from Ember based on the fact that G.R. Mining uses a continuous miner as opposed to the conventional mining method, which is the type of mining Ember has always practiced. (Tr. 68:14–22.) Ember also notes that G.R. Mining works for McCoy Elkhorn, a company Ember has never contracted with, at a site where Ember has never mined before. (Tr. 69:14–21.) In explaining whether Ember could have pursued G.R. Mining’s contract, Gilkerson stated that it “didn’t suit Ember’s mode of operation.” (Tr. 69:22–70:3.)

            With overlapping owners and corporate officers, the major alleged difference between Ember and G.R. Mining is that G.R. Mining uses a continuous miner whereas Ember does not. However, Ember’s open-ended Articles of Incorporation permit it to engage in contract mining using either the conventional method or a continuous miner, as well as any number of other business activities: “The Corporation shall have the powers allowed to it by law, including but not limited to those enumerated in KRS 271B.” (Resp’t Ex. 1.) See Ky. Rev. Stat. Ann. § 271B.3-010(1) (West 2011) (“Every corporation incorporated under this chapter has the purpose of engaging in any lawful business unless a more limited purpose is set forth in the articles of incorporation.”); id. § 271B.3-020 (enumerating the general powers of a corporation formed under Kentucky law).

            Moreover, when Ember’s contract ran out, it sold all of its equipment and thus needed to obtain new equipment to pursue another mining contract. It is Ember’s standard practice to obtain equipment from vendors and to negotiate flexible contracts with large operators, which also may provide for equipment. With Ember’s operations manager, Boyd, at the helm of G.R. Mining, as well as some former Ember employees on board, nothing in the record suggests that Ember could not have obtained a continuous miner for its next mining contract.

            Additionally, the fact that G.R. Mining has a contract with an operator at a mine site where Ember has never done business is unsurprising. Ember has done business with several operators at over a dozen mine sites throughout its history (Tr. 14:14–20), and Ember’s positive reputation, likely associated with its owners, probably contributed to G.R. Mining’s success. Gilkerson acknowledged that some in the industry probably associated G.R. Mining with the first names of it and Ember’s owners—Gary and Randy. (Tr. 73:2–5.) Given these considerations, the purported differences between Ember and G.R. Mining are mere smoke and mirrors conjured up to create a distinction that exists in name only.

            It is also apparent that Gilkerson and Boyd’s companies, as well as Gilkerson and Boyd themselves, share a less-than-arm’s-length relationship with each other. When Ember wound down its mining operation and needed to pay off its bank debt, E.C. Management, another one of Gilkerson and Boyd’s companies, directly paid off Ember’s debt in exchange for Ember’s mining equipment. (Tr. 36:8–11.) As a mine development consulting company, E.C. Management had no need to buy the equipment. (Tr. 34:14–16.) Gilkerson admitted the transaction’s sole purpose was to satisfy Ember’s debt (Tr. 34:17–19), even though Ember had no prior business with E.C. Management (Tr. 66:12–14) other than borrowing money from the company (Tr. 39:14–40:4, 92:2–5).

            Furthermore, Gilkerson conflated his, Boyd’s, and E.C. Management’s debts with Ember:

            Q.        And is Ember, how do they get the money to make those COBRA payments?

            A.        They borrowed it.

            Q.        And borrowed it from whom?

            A.        From us.

            Q.        E C Management?

            A.        Well, E C, yeah.

            Q.        And approximately how much money is E C Management or are you – is it E C Management or you all personally, which one is it?

            A.        Well, it could be either. I’m not exactly sure how that breaks down now because we’ve . . .

            Q.        How much money is owed either you and Gary or E C management for these payments or loans to E –

            A.        Loans for several different things. Probably [$]70,000.

(Tr. 39:14–40:4.)

            In purchasing Ember’s equipment and by loaning it money, E.C. Management expressly aided Ember while making deals that had no relationship with, and quite possibility created significant risks to, its core business of mine development consulting. These “transactions” were mere artifices created by Gilkerson and Boyd to shift money between E.C. Management and Ember. Funneling approximately $185,000 through E.C. Management to Ember to shore up the costs associated with winding down Ember’s business may have helped preserve Ember’s credibility in the mining industry, but Ember did not go to similar lengths to meet its civic duty to pay the civil penalties of the numerous violations it has acknowledged committing. The Mine Act’s concession to operators having difficulties in continuing their businesses does not reward those engaged in shell games like the one played by Ember.

            Finally, Ember relies on Spurlock Mining and Granite Mountain Crushing in support of reducing the civil penalty in this case. In Spurlock Mining, the Commission affirmed the Administrative Law Judge’s decision not to reduce the operators’ civil penalties, noting that the operators had not introduced specific evidence that the penalties would adversely affect their ability to continue in business. 16 FMSHRC at 700. In that case, the operators had ceased mining operations and presented unaudited financial statements and tax records showing losses. Id. at 699. At the same time, the Commission determined that nothing suggested the operators could not resume mining in the future and that the operators had substantial assets relative to the amount of the imposed penalties. Id. at 699–700. Concluding that no specific evidence supported the operators’ argument that the penalties would adversely affect their ability to continue in business, the Commission affirmed the Administrative Law Judge’s decision not to reduce the proposed civil penalties. Id. at 700.

            In Granite Mountain Crushing, the Administrative Law Judge found that the operator had auctioned off its equipment and ceased its mining activities due to high operational expenses. 26 FMSHRC at 127. By the time of the hearing, the operator had a high amount of debt relative to its assets. Id. However, the operator acknowledged the possibility that it could resume its mining activities with new equipment, new contracts, and a better market for its products. Id. Finding no evidence that the operator’s decision to cease mining and liquidate its assets was motivated by the Secretary’s proposed penalty, the Administrative Law Judge concluded that the proposed penalty would have a negative effect on the operator’s ability to continue in business. Id. at 130.

            The record of this case is not similar to either Spurlock Mining or Granite Mountain Crushing. Here, the evidence demonstrates that G.R. Mining was founded as an alter ego of Ember to perpetuate Boyd and Gilkerson’s contract mining business without the burden of the Secretary’s proposed penalty assessment. Ember’s decline dovetailed with the rise of G.R. Mining. Using E.C. Management, Gilkerson and Boyd paid off the liabilities Ember incurred in ceasing mining operations except, of course, the Secretary’s civil penalties. Given these facts and the inseparable connections between Gilkerson, Boyd, and their companies, it is apparent that Gilkerson and Boyd let Ember decay into an empty husk while they perpetuated their contract mining business through their new company.

            By remaining “in waiting” pending the outcome of this proceeding, Ember is “playing possum” by pretending to be out of business or dormant, so it can later spring back to life and drum up business and solicit contracts once the danger of federal penalties has passed. This is not the way the system works. If Ember were truly unable to operate and meet its obligations, then it should have declared bankruptcy. Instead, Ember chose to shift money, business opportunities, and contracts between the other companies owned by its principals like a corporate shell game. Ember admits that it committed the nearly 250 violations cited by the Secretary in this case. But here, Ember and its owners want taxpayers to give Ember a pass and waive these civil penalties so it can continue to pocket profits for its owners while shirking its responsibilities under the Mine Act. 

            Accordingly, I cannot credit Ember’s business justifications for its actions, as they are mere pretext for avoiding payment of the proposed civil penalty. It is not enough to show, as in this case, 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 of the Mine Act’s civil penalty system—to make compliance with the Mine Act, and the protection of miners, more profitable than noncompliance. An operator’s owners may not simply determine that, in light of a proposed civil penalty, their company cannot achieve an optimal level of profit and form a new company to escape an undesirable civil penalty assessment. See Unique Electric, 20 FMSHRC at 1123 (expressing concern over creating the incentive for operators to close down their businesses to avoid payment of civil penalties). Cf. United Energy Servs., 15 FMSHRC 2022, 2085 (Sept. 1993) (ALJ) (“[T]he fact that an operator must spend money to bring its operations into compliance with MSHA’s safety and health standards, or fails to budget money for paying penalties, is no basis for not imposing civil penalty assessments for proven violations.”), aff’d sub nom. United Energy Servs. v. FMSHRC, 35 F.3d 971 (4th Cir. 1994).

            Based on the foregoing, I reject Ember’s claim that it cannot continue in business. Ember has not met its burden of proving that the proposed civil penalty would adversely impact its ability to continue in business.

VI. Conclusion

            The parties have stipulated to the remaining civil penalty criteria under section 110(i) of the Mine Act. (Joint Ex. 1.) In light of these stipulations and my conclusions above, I conclude that the proposed civil penalty of $226,508 is appropriate.  

VII. Order

            It is hereby ORDERED that Ember pay a civil penalty of $226,508 within 40 days of this decision.

                                                                                    /s/

                                                                                    Alan G. Paez

                                                                                    Administrative Law Judge

Distribution:

Matt S. Shepherd, Esq., U.S. Department of Labor, Office of the Solicitor, 618 Church Street, Suite 230, Nashville, TN 37219-2456

Charles J. Baird, Esq., Baird & Baird, P.S.C., P.O. Box 351, Pikeville, KY 41502

/jts