State and Local Law Archives - Page 3 of 10

740,000 Reasons to Think Twice Before Putting a Company in Bankruptcy

A recent decision from a bankruptcy court in Delaware provides a cautionary tale about the risks of involuntary bankruptcy.

In the Delaware case, the debtor managed a group of investment funds. The business was all but defunct when several investors, dissatisfied with the debtor’s management, filed an involuntary Chapter 7 petition. They obtained an order for relief from the bankruptcy court, then removed the debtor as manager of the funds and inserted their hand-picked manager. So far, so good.

The debtor, who was not properly served with the involuntary petition and did not give the petition the attention it required, struck back and convinced the bankruptcy court to set aside the order for relief. The debtor then went after the involuntary petitioners for damages. After 8 years of litigation, the Delaware court awarded the debtor $740,000 in damages – all of it attributable to attorneys’ fees and costs.

If you file an involuntary petition and the bankruptcy court dismisses it, then a debtor can recover costs and reasonable attorneys’ fees. The legal fees include the amount necessary to defeat the involuntary filing. In addition, if the court finds that the petition was filed in bad faith, then the court also can enter judgment for all damages proximately caused by the filing and punitive damages. The Delaware court awarded the debtor $75,000 for defeating the involuntary petition.

The debtor also sought a judgment for attorneys’ fees in pursuit of damages for violating the automatic stay. The involuntary petitioners had replaced the debtor as manager without first obtaining leave from the court to do so. The investment fund was barely operating and had little income to support a claim for actual damages. Nevertheless, the Delaware court awarded $665,000 in attorneys’ fees related to litigating the automatic stay violation.

Because the debtor had no “actual” damages from the stay violation, the involuntary petitioners contended that the debtor was not entitled to recovery of attorneys’ fees. The Delaware court pointed out that “actual” damages (e.g., loss of business income) are not a prerequisite to the recovery of attorneys’ fees, much to the chagrin of the defendants. The court held that attorneys’ fees and costs are always “actual damages” in the context of a willful violation of the automatic stay.

The Delaware court also rejected defendants’ argument that the fee amount was “unreasonable” since there was no monetary injury to the business. In other words, the debtor should not have spent so much money on legal fees because it lost on its claim. The court held that defendants’ argument was made “with the benefit of hindsight” – at the end of litigation when the court had ruled, after an evidentiary trial, that debtor suffered no actual injury. The court pointed out that the debtor sought millions in damages for the loss of management’s fees, and even though the court rejected the claim after trial, it was not an unreasonable argument for the debtor to make. The court concluded that “the reasonableness of one’s conduct must be assessed at the time of the conduct and based on the information that was known or knowable at the time.”

The involuntary petitioners likely had sound reasons to want the debtor removed as fund manager. But by pursuing involuntary bankruptcy and losing, they ended up having to stroke a check to the debtor for over $700,000. Talk about adding insult to injury. The upshot is that involuntary bankruptcy is an extreme and risky action that should be a last-resort option undertaken with extreme caution.

Nevada Reaffirms Inquiry Notice Standards for Medical Malpractice Statutes of Limitations

Igtiben v. Eighth Jud. Dist. Ct., 140 Nev. Adv. Op. 9 (App. Feb. 22, 2024), concerned a prisoner who was transported to a hospital for medical treatment and died in the hospital after treatment began. At the time, the applicable statute of limitations contained in NRS 41A.097(2) was “1 year after the plaintiff discovers or through the use of reasonable diligence should have discovered the injury….” This also is known as inquiry notice.

Applied here, the prisoner’s mother obtained his complete hospital medical chart six weeks after the death. Approximately fourteen months after the death, a forensic pathologist the family hired concluded professional negligence contributed to the death. The family filed their lawsuit eight months after receiving the forensic pathologist’s report. The hospital and physician moved to dismiss, arguing the family’s one-year statute of limitations had expired. The district court denied the motion, concluding a genuine issue of material fact was present because the family filed suit within eight months of the pathologist’s report.

Nevada’s Court of Appeals reversed and directed the district court to dismiss the complaint. In Nevada, inquiry notice for potential medical malpractice begins when the plaintiff or the plaintiff’s representative receives “all relevant medical records.” Applied here, the only relevant medical records were the hospital records. Thus, the family had the information necessary to investigate the care and treatment and trigger inquiry notice just six weeks after the death. The date that the forensic pathologist provided his report was irrelevant.

Igtiben might provide greater certainty to providers and patients as they evaluate potential professional negligence claims. However, it underscores the importance of careful responses to requests for medical records because if other “relevant” records existed but were not provided, inquiry notice might not be triggered.

In Alabama, Pre-Embryos are “Extrauterine Children” Under the State’s Wrongful Death Statute

Background

On February 16, 2024, the Alabama Supreme Court issued an opinion in the consolidated cases LePage et al., v. The Center for Reproductive Medicine et al. and Burdick-Aysenne et al., v. The Center for Reproductive Medicine et al., SC-2022-0579, in which the Court reversed a trial court’s dismissal of the plaintiffs’ civil wrongful-death claims and allowed the plaintiffs to move forward with a cause of action under the Alabama Wrongful Death of a Minor Act (the “Act”).[1] In so holding, the Alabama Supreme Court found that fertilized pre-embryos stored outside of the human body are “extrauterine children” and thus are included in the definition of “minor children” for purposes of the Act.

Originally passed in 1872, when in-vitro fertilization (“IVF”) would have been considered science fiction, the Act allows the parents or legal representatives of a “minor child” to sue defendants in civil court for monetary damages for “any wrongful act, omission, or negligence” that caused the minor child’s death.[2] However, the Act does not define “child” or “minor child”. Instead, the Court relied on prior cases that interpreted the term “minor child” to include an “unborn child . . . regardless of the child’s viability or stage of development”.[3] The Court then extended that meaning to include pre-embryos, reasoning that “extrauterine children” must be children based on the Court’s interpretation of the dictionary definition of the meaning of the word “child”. As a result, the Court has created a pathway for plaintiffs to sue IVF providers under civil law for the wrongful death of a minor child for having terminated pre-embryos in Alabama. This type of decision has been a goal for those in the fetal personhood movement.[4]

Scope of the Alabama Supreme Court Decision

This decision is rightfully garnering attention from the IVF provider community and the wider public because it may be the first time a court has conferred even limited “personhood” rights to a pre-embryo that has never entered a human body. Historically, pre-embryos have been treated as property and have been the subject of disputes in the family law context across the country.[5] While some state abortion bans prohibit termination from the point of fertilization, such bans tend to govern only the activity that occurs within a uterus or at least within the human body.[6] Instead, re-classifying pre-embryos as human children in all contexts could make IVF treatment using pre-embryos impossible. For example, common practices such as cryogenic freezing of pre-embryos for long-term storage or disposal of stored pre-embryos for medical research purposes could be considered child endangerment or even homicide.

However, the Alabama Supreme Court’s decision is limited to the interpretation of what constitutes a “minor child” under the Act. The majority did not interpret the meaning of what constitutes a human being or a child under any other Alabama law. Thus, for the moment, the immediate impact of this decision is on the application of a particular statute – the Alabama Wrongful Death of a Minor Act – in a particular context – the alleged negligent termination of pre-embryos by a rogue patient in a fertility clinic.

Further, the Court did not resolve the defendant clinics’ claims that the plaintiffs waived the possibility of raising wrongful death claims by signing contracts with the defendant clinics that contained provisions governing the destruction of pre-embryos that had remained frozen for longer than five years, donation of pre-embryos to medical research, or discarding “abnormal embryos” created through IVF. Instead, the Court acknowledged the need for further briefing on whether the plaintiffs had indeed contractually waived wrongful death claims or were otherwise equitably estopped from bringing them against the defendant clinics.

In the near term, the defendant clinics could ask the Alabama Supreme Court to reconsider its decision, or the defendant clinics could petition the United States Supreme Court for certiorari. In the long term, the defendant clinics and other IVF providers could petition the Alabama legislature for an amendment to the Act that would define “minor child” in a manner that would exclude pre-embryos created and stored outside of the human body.

Impact on IVF in Alabama

Though the Alabama Supreme Court confined its holding to Alabama’s Wrongful Death of a Minor Statute, the limited nature of the ruling is causing confusion and uncertainty around what is and what is not allowed under Alabama law. For example, some fertility providers in the state have announced that they will pause IVF treatments to evaluate the impact of the Court’s decision.[7]

The majority justices were careful not to extend this interpretation of the meaning of a “child” to the state’s criminal code or other portions of Alabama law. Some future action would be required to apply this ruling beyond Alabama’s wrongful death statute, such as future litigation. Alabama’s criminal homicide and assault laws, at least, apply only to “unborn children in utero”.[8] Nevertheless, IVF clinics and providers in Alabama may not wish to serve as test cases for a possible expansion of the Alabama Supreme Court’s logic in the present case to laws such as Alabama’s child abuse and neglect laws, where the term “child” is similarly underdefined.[9] Alabama already has used Alabama’s child abuse and neglect laws to prosecute pregnant women for alleged harms to “unborn” children under a theory of child endangerment.[10] Moreover, aggravated child abuse – which includes abuse on more than one occasion or abuse that causes “serious physical injury” – is a felony in Alabama.[11]

At present, the most significant difference between allowing a plaintiff in Alabama to sue an IVF provider for the destruction of pre-embryos as property based on a theory of negligence versus allowing a plaintiff to sue for the wrongful death of a human child is the availability of punitive damages – plaintiffs cannot recover punitive damages from a claim of negligence in Alabama.[12] Moreover, there are no caps on punitive damages in wrongful death cases in Alabama[13] and thus, awards for damages can be exponentially higher in a wrongful death case.

At the very least, IVF providers in Alabama who wish to continue to offer the full range of IVF services in Alabama should evaluate whether they have in place appropriate controls to ensure pre-embryos are safely and securely stored and should also review insurance policies to ensure adequate coverage, given the possibility of expanding liability. Cautious providers in Alabama may choose to limit services, such as limiting the number of retrievals, so that no more than one pre-embryo is created at a time or eliminate storage options for multiple pre-embryos such as cryogenic freezing or only freezing eggs with the possibility of crossing state lines when it is time for the creation of the embryo. Unfortunately for patients in need of assisted reproductive therapies, the chilling effect of the Alabama Supreme Court’s decision in this case may mean some providers in Alabama may stop providing IVF services altogether. It will be interesting to see how other states respond in light of this new decision from the Alabama Supreme Court.

ENDNOTES

[1] Ala. Code § 6-5-391 (“When the death of a minor child is caused by the wrongful act, omission, or negligence of any person, persons, or corporation, or the servants or agents of either, the father, or the mother as specified in Section 6-5-390, or, if the father and mother are both dead or if they decline to commence the action, or fail to do so, within six months from the death of the minor, the personal representative of the minor may commence an action.”).

[2] Id.

[3] Citing Mack v. Carmack, 79 So. 3d 597 (Ala. 2011).

[4] See, e.g., Bloomberg Law, Alabama Embryo Ruling Gives Boost to Fetal Personhood Movement (Feb. 21, 2024)

[5] See, e.g., Davis v. Davis, 842 S.W.2d 588, 594 (Tenn. 1992), on reh’g in part, No. 34, 1992 WL 341632 (Tenn. Nov. 23, 1992) (“One of the fundamental issues the inquiry poses is whether the preembryos in this case should be considered “persons” or “property” in the contemplation of the law. The Court of Appeals held, correctly, that they cannot be considered “persons” under Tennessee law[.]”

[6] See, e.g., Idaho Code § 18-604(1) (““Abortion” means the use of any means to intentionally terminate the clinically diagnosable pregnancy of a woman with knowledge that the termination by those means will, with reasonable likelihood, cause the death of the unborn child”) and Idaho Code § 18-604(11) (““Pregnant” and “pregnancy.” Each term shall mean the reproductive condition of having a developing fetus in the body and commences with fertilization.”).

[7] Associated Press, Alabama hospital puts pause on IVF in wake of ruling saying frozen embryos are children (Feb. 21, 2024).

[8] Ala. Code § 13A-6-1 (emphasis added).

[9] See Ala. Code § 26-14-1 (defining “child” as “[a] person under the age of 18 years.”)

[10] Hicks v. State, 153 So. 3d 53, 58 (Ala. 2014). Note also that the Alabama Supreme Court in the present case cited to Hicks – which held that the term “child” included an “unborn” child – in support of extending the definition of “unborn child” to include an “extrauterine child”.

[11] Ala. Code § 26-15-3.1.

[12] Lafarge N. Am., Inc. v. Nord, 86 So. 3d 326, 335 (Ala. 2011) (“Punitive damages cannot be awarded on a negligence claim[.]”)

[13] Ala. Code § 6-11-21(j); see also Springhill Hosps., Inc. v. Patricia Bilbrey W., No. SC-2022-0719 (Ala. Aug. 4, 2023).

by: Erin Sutton , Lynn Shapiro Snyder , Amy K. Dow , Susan Gross Sholinsky of Epstein Becker & Green, P.C.

For more news on the Alabama Supreme Court’s IVF Decision, visit the NLR Litigation / Trial Practice section.

Premarital Agreements and the “Voluntary” Signature

Premarital agreements offer persons contemplating marriage the ability to plan for the distribution of their assets and liabilities in the event of separation and/or divorce.

While the concept of planning for divorce may seem counterintuitive for persons pledging promises of life-long fidelity and companionship, premarital agreements offer solutions for a variety of scenarios, including estate planning protection and the protection of interests in closely held businesses in the event of separation and/or divorce.

In many cases, the signed agreement will become a distant memory as the routines of married life evolve. Yet years later, the agreement will be retrieved from the file cabinet by the party seeking its protection when one or both spouses conclude that the marital contract should be dissolved. The agreement may then be challenged by the spouse, who concludes that enforcement of the bargain made decades earlier will produce egregiously “unfair” results.

As will be shown below, the burden to be met when challenging a premarital agreement is steep. It is, therefore, imperative that persons being asked to enter into such an agreement fully and completely understand its legal consequences before signing on “the dotted line.”

Legal Framework for Premarital Agreements in North Carolina

In North Carolina, premarital agreements are governed by the Uniform Premarital Agreement Act. See N.C. Gen. Stat. §§ 52B-1 through -11.

To avoid enforcement of a premarital agreement, the party challenging the agreement must prove either that (1) she did not execute the agreement “voluntarily” or (2) that the agreement was unconscionable when it was executed and before its execution she (a) was not provided, (b) did not waive the disclosure of, and (c) did not have, or reasonably could not have had, adequate knowledge of the property or financial obligations of the other party. N.C. Gen. Stat. § 52B-7(a).

In this article, we will review two North Carolina cases that shed light on what is meant by the term “voluntary” when it comes to the execution of a premarital agreement.

CASE STUDY 1: HOWELL V. LANDRY

In Howell v. Landry, Mary Landry challenged the enforcement of the couple’s premarital agreement. She challenged the agreement on the grounds that her execution of the agreement was not “voluntary.” She complained:

that her husband first presented her with a draft of a premarital agreement which had been prepared by his attorney without the wife’s knowledge at 8:00 pm on the day before they were to travel to Las Vegas, Nevada for their wedding;
that her husband told her that if the agreement was not signed, they would not get married;
that she had never seen a premarital agreement before, and she advised her husband that she wanted her own attorney to review the document;
that she advised her husband that she did not want to sign the agreement.

Ms. Landry argued that these facts support a conclusion that the agreement was the product of duress and was, therefore, unenforceable. The case came before Judge Russell Sherill in Wake County. Judge Sherill agreed with Ms. Landry and ruled in her favor, concluding that the Agreement was the product of duress and therefore invalid.

Mr. Howell appealed Judge Sherrill’s ruling to the North Carolina Court of Appeals. The Court of Appeals rejected wife’s argument that the agreement was the product of duress. The Court’s ruling is instructive. The Court observed that:

[d]uress is the result of coercion. It may exist even though the victim is fully aware of all facts material to his or her decision.

* * *

Duress exists where one, by the unlawful or wrongful act of another, is induced to make a contract or perform or forego some act under circumstances which deprive him of the exercise of freewill. An act is wrongful if made with the corrupt intent to coerce a transaction grossly unfair to the victim and not related to the subject of such proceedings.

* * *

The mere shortness of the time interval between the presentation of the premarital agreement and the date of the wedding is insufficient alone to permit a finding of duress or undue influence . . . . The shortness of the time interval when combined with the threat to call off the marriage if the agreement is not executed is likewise insufficient per se to invalidate the agreement.

* * *

Here, the threat to cancel the marriage and the execution of the premarital agreement were closely related to each other. The marriage would have redefined the respective property rights of the parties, and the premarital agreement would have avoided that re-definition to some extent. Indeed, the cancelation of a proposed marriage would be the natural result of failure of a party to execute a premarital agreement desired by the other party.

In summary, Ms. Landry’s decision to sign the agreement was deemed to have been a voluntary decision despite the fact that it was presented to her the night before the couple was to leave for their wedding and despite her request to have an attorney review it for her.

CASE STUDY 2: KORNEGAY V. ROBINSON

Our second real-life example contains facts that appear even more favorable to the complaining spouse than those presented in the Howell v. Landry matter. In Kornegay v. Robinson, the wife signed a premarital agreement that included a waiver of her spousal share of her husband’s estate.

When her husband passed away without providing for her in his will, she challenged the premarital agreement in an attempt to receive a share of the estate. Ms. Kornegay claimed that the premarital agreement had not been voluntarily executed because:

She had only a high school education;
She learned that her husband wanted her to execute a premarital agreement only after she had moved in with him and obtained a license to marry him;
She was presented with the agreement in her husband’s attorney’s office on the same day that she and her husband were to be married; and
She did not have the opportunity to review the agreement with independent counsel before signing it.

The trial judge who heard the case ruled against Ms. Kornegay. She appealed the matter to the North Carolina Court of Appeals. A majority of the panel who heard the case were persuaded that the trial court’s ruling was improper. However, one member of the panel filed a dissenting opinion and concluded that Ms. Kornegay’s claim to set aside the Agreement was properly denied. The husband’s estate appealed the matter to the North Carolina Supreme Court.

In a unanimous opinion, the Supreme Court adopted the dissenting opinion, which rejected Ms. Kornegay’s argument. The dissenting opinion adopted by the Court is informative.

Plaintiff (Ms. Kornegay) now contends she did not voluntarily sign the premarital agreement due to the totality of the circumstances existing at the time of execution of the Agreement. Plaintiff argues her lack of legal counsel and lack of an opportunity to obtain legal counsel are important elements in the circumstances surrounding her execution of the Agreement. Plaintiff acknowledged in her deposition she never requested “(1) additional time to read the Agreement; or (2) another attorney to be present to explain the Agreement before she signed it.” This case fits squarely within the facts and holding of Howell ….

This Court has held contract rules apply to premarital agreements.

Absent fraud or oppression . . . parties to a contract have an affirmative duty to read and understand a written contract before signing it.

Plaintiff’s argument that her execution was not voluntary because she did not read the agreement was without merit. Plaintiff had an affirmative duty to read and understand the premarital agreement before signing it. Plaintiff provided no evidence she was prevented from reading the agreement or that she sought separate counsel prior to signing the agreement. Plaintiff admitted both in the agreement and at her deposition that she voluntarily signed the agreement.

* * *

Plaintiff asserts no inequality in education or business experience between her and her husband. Plaintiff did not assert she made any disclosures to Defendant of her pre‑martial assets to any greater extent than her knowledge of Defendant’s assets on the date of the agreement.

* * *

Plaintiff’s chief complaint of unfair appears to be based upon the current value of her husband’s assets, from which she has received and enjoyed the income over the fifteen years of their marriage, and not her knowledge of the nature and extent of the decedent’s assets on the date of the agreement. The value of decedent’s assets on the date the contract was signed controls. Plaintiff’s bootstrapped claim that her execution of the agreement was not voluntary does not create any genuine issue of material fact to overcome the plain language in the agreement or her sworn admissions during her deposition. The trial court’s judgment should be affirmed in its entirety.

* * *

The fact that the decedent’s assets grew during the marriage does not make the agreement unconscionable or unfair.

The North Carolina Supreme Court rejected Ms. Kornegay’s claim the agreement should be set aside. Once again, not even the presentation of the agreement in the husband’s attorney’s office on the day of the wedding was sufficient fact from which to find that the Agreement had not been signed “voluntarily.”

Lessons Learned

The Howell v. Landry and the Kornegay v. Robinson decisions reveal the steep climb required to meet one’s burden of setting aside a premarital agreement on the grounds that it was not executed “voluntarily.”

Persons asked to sign a premarital agreement on the eve of the wedding should be aware that the “last minute” presentation will more than likely not be sufficient cause to set aside the agreement. When it comes to premarital agreements, the following advice is in order:

Timely ask your prospective spouse whether he or she is considering the use of a premarital agreement;
Advise your prospective spouse that you will need time to have an attorney of your choice review the agreement before you will be able to sign it;
While inconvenient and potentially embarrassing, consider postponing the wedding ceremony if an agreement is presented at the last moment.

Texas Supreme Court Rules to Foreclose Attorney’s Fees in First Party Appraisal Context

The Supreme Court of Texas has issued its much-anticipated opinion on an open attorney’s fees question in the area of First Party Property appraisals.

The issue came to the Texas Supreme Court on a certified question from the 5th Circuit and considers the practical effect of the Texas Legislature’s 2017 amendments to the Texas Prompt Payment of Claims Act, Chapter 542, Insurance Code. In short, Texas Insurance Code Chapter 542A, among other reforms, sets forth a statutory formula to determine the amount of an attorney’s fees awarded for a prevailing insured in a weather-related first party property case against an insurer. Under the statute, the amount of reasonable and necessary attorney’s fees a prevailing insured can recover is reduced when the “amount to be awarded in the judgment” is less than the amount the insured claims is owed. In the appraisal context, insurers have paid the appraisal award, along with an amount sufficient to cover any potential statutory interest under Chapter 542A, then made the argument there can be no “amount to be awarded in the judgment” such that there is no liability for attorney’s fees.

In the recent ruling, the Texas Supreme Court agreed with this argument, noting that when a carrier pays the appraisal amount plus any possible statutory interest, it has “complied with its obligations under the policy.” In doing so, there is no remaining “amount to be awarded in the judgment,” and attorney’s fees are not available.

Going forward, this ruling should return the appraisal process to its intended function – an inexpensive and prompt resolution of claims, without the need for litigation – and avoid late invocation of appraisal as gamesmanship.

As Foretold, California’s New Forced Speech Laws Are Being Challenged

Last year, I commented on the likely unconstitutionality of two California laws compelling forced speech:

The California legislature has of late adopted the tactic of driving behavior by compelling speech. SB 253 (Wiener), for example, compels disclosure of greenhouse gas emissions and SB 261 (Stern) requires disclosure of climate-related financial risks. Both of these requirements clearly compel speech arguably in contravention of the First Amendment to the U.S. Constitution. Rumsfeld v. Forum for Academic and Institutional Rights, Inc., 547 U.S. 47, 61 (2006) (“Some of this Court’s leading First Amendment precedents have established the principle that freedom of speech prohibits the government from telling people what they must say.”).

I had previously noted that SB 253 was very similar to an earlier bill that did not make it into law.

Yesterday, the Chamber of Commerce of the United States of America and several others filed suit in the Central District Court challenging these laws. In its complaint, the plaintiffs allege that the “State’s plan for compelling speech to combat climate change is unconstitutional – twice over.” The plaintiffs urge the court to apply “strict scrutiny” to both laws because they compel speech about a controversial subject – climate change. If the court applies strict scrutiny, the bills would be presumptively unconstitutional and may be upheld only by proof that they are narrowly tailored to serve compelling state interests. That is an exceedingly high hill to climb.

Because both bills quite obviously violate basic free speech rights, the question arises whether the authors knew or were grossly negligent in not knowing of the constitutional infirmities of the legislation. In 2020, I wrote Senator Wiener, the author of SB 253, that SB 260, “abridges free speech rights guaranteed by the U.S. and California Constitutions”. At the time, I was distressed that the legislative analyses for SB 260 failed to mention the constitutional infirmities of the bill. See Legislators Again Kept In Dark About Constitutional Infirmities Of Climate Corporate Accountability Act and Legislators Again Kept In Dark About Constitutional Infirmities of Climate Corporate Accountability Act.

Federal Court Directed to Rule on Challenge to WV Pooling Statute

A federal appeals court has instructed a lower court to resolve a pending suit challenging the constitutionality of West Virginia’s oil and gas pooling and unitization law. The federal district court previously declined to resolve certain constitutional issues presented in the suit on the grounds that those issues should be decided by a state court instead of a federal court.

In 2022, the West Virginia Legislature enacted Senate Bill 694 to revise West Virginia law governing the pooling and unitization of oil and gas formations associated with horizontal well development. Pooling and unitization essentially involves combining separately owned properties into a single “unit” through which one or more horizontal wells are drilled. The oil and gas produced from the horizontal well is then allocated among all the properties in the unit for purposes of calculating production royalties payable to the mineral owners.

Prior to Senate Bill 694 becoming effective on June 7, 2022, formation of a pooled unit for a horizontal well drilled through “shallow” oil and gas formations, which includes the Marcellus Shale, required consent of 100% of the mineral owners for all the properties to be included in the unit. This 100% consent requirement did not apply to horizontal wells drilled through “deep formations” such as the Utica Shale. One of the more significant changes made by SB 694 was to allow the West Virginia Oil and Gas Conservation Commission to approve units for shallow formations where at least 75% of the mineral owners consent, provided other requirements are also satisfied. This means that up to 25% of a unit could potentially include properties for which the mineral owner did not consent to being part of a unit.

Before Senate Bill 694 became effective, a pair of mineral owners (Scott Sonda and Brian Corwin) filed a lawsuit in the federal District Court for the Northern District of West Virginia seeking to preclude the law from taking effect. Governor Jim Justice was the only defendant named in the case. In their suit, Sonda and Corwin alleged that the law was illegal for several reasons, including the claim that the law authorizes the unconstitutional taking of private property without just compensation and deprives landowners of due process of law.

Federal Judge John Preston Bailey initially dismissed all of their claims for two reasons. First, Judge Bailey concluded that Sonda and Corwin lacked standing to bring the challenge because (a) their property had not been pooled into a unit without their consent and no operator had sought approval of a unit to include their property without their consent; and (b) the Commission, not the Governor, has the power to directly enforce Senate Bill 694.

Second, Judge Bailey ruled that, even if Sonda and Corwin established standing, Governor Justice had constitutional immunity from the suit because he had no direct authority to implement Senate Bill 694. Rather, the Commission has the authority to implement the law.

Instead of dismissing their suit entirely, Judge Bailey granted leave for Sonda and Corwin to amend their complaint to name the Commission as a defendant instead. Sonda and Corwin did so, and also named as defendants each person who serves on the Commission. The amended complaint still does not allege that mineral properties owned by Sonda or Corwin were pooled into a unit without their consent. Instead, the amended complaint attempts to address the standing issue by alleging that Senate Bill 694 effectively eliminates their ability to challenge whether they are being fairly compensated for oil and gas produced from their property that was pooled into a unit with their consent.

The Commission moved to dismiss the amended complaint for various reasons, including Sonda’s and Corwin’s lack of standing to bring the case. Judge Bailey did not address the standing issue, but agreed with the Commission with respect to three of the five claims asserted by Sonda and Corwin. Judge Bailey then abstained from addressing the Commission’s arguments for dismissal of the other two claims, which asserted constitutional violations, because he believed that those issues were more appropriate for resolution by a state court instead of a federal court.

The Commission appealed Judge Bailey’s decision to abstain from addressing the arguments for dismissal of the constitutional claims. By opinion issued on January 31, 2024, the Fourth Circuit Court of Appeals ruled that Judge Bailey should not have abstained. The appellate court also directed Judge Bailey to first address the standing issue before addressing any other pending issue. The opinion does not specify a deadline for Judge Bailey to rule on those issues. If Judge Bailey finds that Sonda and Corwin continue to lack standing to assert their claims, the case will presumably be dismissed on that ground alone. If Judge Bailey concludes that Sonda and Corwin have established standing, Judge Bailey will likely address the merits of the Commission’s other arguments for dismissal.

CalRecycle Seeks Stakeholder Feedback on Single-Use Packaging EPR Program

Tomorrow, February 1, the California Department of Resources Recycling and Recovery (CalRecycle) will host a hybrid question and answer session to discuss the draft rulemaking on their extended producer responsibility (EPR) program, as discussed below. A 45-day public comment period will follow. Members of the regulated community who wish to attend can find in-person and virtual information on the session here.

Members of B&D’s Plastics and Packaging team will attend the public meeting and will be prepared to answer any questions clients and contacts may have. A more substantive update on what to expect from CalRecycle and the rulemaking process is forthcoming.