Commonwealth Natural Resources & Environmental Protection Cabinet v. Kentec Coal Co.

SCOTT, Justice.

We granted Discretionary Review of the Opinion of the Court of Appeals, which held KRS 350.0301(5) and 405 KAR 7:092, Section 6, unconstitutional, as in violation of the due process and equal protection clauses of the United States Constitution, as well as Section 2 of the Kentucky Constitution, banning arbitrary state action. Upon our considerations hereinafter set out, we affirm.

*720The Appellee, Kentec Coal Company, Inc. (KENTEC) is the holder of a surface mining permit located in Leslie and Perry Counties. The permit totals some 107 acres and is divided up into six (6) separate geographical increments for incremental bonding purposes. The permit was issued in 1987 and expired on December 1, 1992, although reclamation work was continuing in accordance with the permit obligations, per an agreed order between the parties.

KENTEC was owned by Mr. John Sie-gal, who apparently kept KENTEC’s main offices in Louisville, Kentucky. Mr. Brim Watts was the overseer for KENTEC’s reclamation work on the permit site. The reclamation inspector on the job site for the Environmental and Public Protection Cabinet (CABINET) was Lisa Baker (BAKER).

On May 30, 1996, inspector BAKER observed a disturbance on the permit site which appeared to be preliminary excavation of a basement or houseseat for a residential dwelling. Throughout the enforcement, and even on appeal, there has been some confusion as to just which increment was involved. Initially inspector BAKER felt the disturbance was on increment 5; yet cabinet office personnel believed it was on increment 1. The Appellee, at oral arguments, suggested the disturbance (would or did) straddle both increments 1 and 5. Increment 1 covers 17.2 acres of surface reclamation responsibilities, whereas increment 5 covers 24.44 acres.1 The post mining land use for increment 5 is forest land. For increment 1, it is hayland and pasture.

On this date, inspector BAKER issued KENTEC a mine inspection report (MIR) noting “[tjhird party disturbance has been made on the site. Building construction has started. Submit permit revision reflecting any post-mining land use change which will result.”

In July 1996, inspector BAKER met with KENTEC’s engineer, as well as Mr. Watts. The fact that a house was being built on the mine site was discussed at that meeting. It became apparent that Bruce Leedy (the former surface owner) had sold a portion, or all, of increment 5 to Mr. Kenneth Bowling and Mr. Bowling was building a house on his property. Bowling was noted to have said that he was not sure how much of the property would be devoted to the house and there was a possibility he, or his son, might build another house, as well as associated outbuildings such as a garage, etc. Later, even areas for gardens were noted.

At any rate, inspector BAKER continued to inspect the permit from June through November 1996. On her inspection of November 22, 1996, she issued KENTEC a Non-Compliance, noting that there was a house under construction on the permit and that KENTEC had failed to revise the permit to incorporate a change in its approved post mining land use for that area. As a result, KENTEC was directed to “submit and obtain a revision to permit to allow change in post mining land use” by December 22, 1996.

No revision having been submitted by KENTEC by December 27, 1996, inspec*721tor BAKER issued a Cessation Order noting that the remedial work had not been completed.

Mr. Watts, KENTEC’s reclamation manager, did not know of the issuance of the Cessation Order as the paperwork had been sent to KENTEC’s owner Mr. John Siegal. Apparently Siegal did not notify Watts of such. Watts testified, however, that he did not have their engineers working on the revision because he wasn’t sure of what would eventually be involved. He had tried to find out from Mr. Bowling exactly what he intended to do and tried to ascertain the location of the property affected by the sale, but apparently the Deed from Mr. Leedy to Mr. Bowling wasn’t on record. However, Mr. Bowling did claim his property encompassed the entire watershed, even extending outside of the permit. He also told Mr. Watts that he, or his son, might build another house on the property. As of March 1997, Watts was of the opinion the house had not been finished as Mr. Bowling was still living in a trailer adjacent to the house. In Watts’ opinion, the project was still on-going and there was no practical need for KENTEC to submit a revision until the extent of the ultimate disturbance could be ascertained.

The CABINET does not dispute that KENTEC did not have any association with Mr. Bowling, or that Mr. Bowling was not subject to the control of KENTEC. Neither did KENTEC authorize Mr. Bowling to construct a house on his property within its permit.

For one of KENTEC’s defenses, it relied on the applicability of the CABINET’S so-called “Third Party Violation Policy” along with a memorandum issued in relation thereto, by the CABINET’S assistant director of the Division of Field Services, David Nance, on May 2,1991; all of which was a clarification of a policy originally enunciated by the Federal Office of Surface Mining (OSM). According to Nance, OSM’s policy was a result of a series of discussions between OSM and the Department of Surface Mining Reclamation and Enforcement (DSMRE) concerning the problems associated with disturbances caused by third parties unrelated to the permittee or mining company. Ultimately OSM issued a letter on April 19, 1990, addressed to Kentucky’s Commissioner stating that OSM (in its oversight position) would not issue a 10-day notice for violations caused by third parties, if the area disturbed by a third party had not been previously disturbed by the per-mittee. Thereafter, on May 2, 1991, Nance issued the policy clarification memorandum pointing out that “third party disturbances” might entail an on-going process, the extent of which might not be known until it was completed. Consequently, he observed that “the permittee and the inspector should monitor the third party activity, and only when the activity is completed should any deadline (for corrections) be set.” Nance summed up this policy directive by stating “[o]ne should try to approach ‘third party situations’ with common sense. A violation should not be written prior to the permittee being able to do anything.” For purposes of this case, this policy was still in effect and had not been rescinded.

The reasons behind the later CABINET clarification were apparently related to the CABINET workload. Due to previous literal applications of the OSM policy, many permittees were submitting permit revisions within thirty (30) days of the first notice of disturbance. Many of the disturbances were caused by oil and gas pipeline companies constructing pipeline right-of-ways over multiple permit increments, resulting in multiple filings (as the right-of-way progressed from area to area over time) to revise each new disturbance, area *722or increment affected by the surface disturbance. Thus, Nance’s memorandum was intended to give the inspector more flexibility in dealing with third party disturbances by allowing the permittee and the inspector jointly to take a “wait and see” approach in order to determine just what the ultimate extent of the disturbance would be at the end of the construction. Once the totality of the disturbance was ascertained, the permittee would then submit a comprehensive permit revision.

However, based upon the issuance of the Cessation Order on December 27, 1996, the CABINET then issued KENTEC a “Notice of Proposed Assessment” for the violations in the amount of $29,700.00.2 At this point, the procedural aspects of this case become important.

Once a Cessation Order is issued and the Notice of Proposed Assessment is given, the administrative hearing procedures for mine operations (permittees) becomes bifurcated under the CABINET’s regulations. See KRS 350.0301(5).

405 KAR 7:092, Section 6, provides that any person issued a proposed penalty assessment may file a petition for review of the proposed assessment within thirty (30) days of the receipt of the proposed assessment or the mailing of the conference officer’s report. A parallel process exists under 405 KAR 7:092, Section 7, which allows an operator to have a formal review of any fact-of-violation. However, these are two (2) separate (parallel) administrative procedures, one based upon the assessment amount while the other is based upon the question of whether there was in fact, a violation.

KENTEC pursued both avenues, lost each; and appealed each to the Franklin Circuit Court, where they were consolidated. On November 6, 2001, the Franklin Circuit Court entered Judgment in the consolidated actions, overruling KEN-TEC’s positions and affirming the decisions of the CABINET. A subsequent Motion to Alter and Amend was denied on May 9, 2002.

KENTEC then appealed to the Court of Appeals which reversed the Order and Decisions of the CABINET and the Franklin Circuit Court. We granted Discretionary Review on Motion of the CABINET.

THE ADMINISTRATIVE PROCEDURES

In Franklin v. Natural Resources and Environmental Protection Cabinet, 799 S.W.2d 1 (Ky.1990), we found a similar CABINET hearing procedure unconstitutional, wherein we held, “this regulation which denies the due process hearing to an aggrieved party based solely on his financial inability to pay the penalties which he seeks to appeal is unconstitutional, in violation of the equal protection clauses of the United States and Kentucky Constitutions.” Id. at p. 3. Following Franklin, the General Assembly then amended Chapter 350 of the Kentucky Revised Statutes to add the current version of KRS 350.0301(5), which allows for the parallel hearing procedures discussed previous. Yet, KRS 350.0301(5) still includes a requirement of prepayment of penalties for hearings contesting the amount of the penalty — but not the “fact-of-violation” hearings.

Pursuant to the authority then established in KRS 350.0301, 350.028 and 350.465(3)(i), the CABINET promulgated *723405 KAR 7:092. Section 3 of 405 KAR 7:092, sets forth the requirements for the proposed penalty assessment and the options the permittee has following the issuance of a “Notice of Proposed Assessment.” Section 4 recites the procedures for the informal assessment conference, a permittee may utilize to contest the assessment without having to prepay. However, this is not a formal recorded proceeding; nor is a record created from which an Appeal on record may be taken. Moreover, in this conference, the CABINET selects the conference officer to handle the conference. 405 KAR 7:091, Section 10. In particular, 405 KAR 7:092, Section 4(3) states: “The assessment conference shall not be governed by the requirements for administrative hearings [405 KAR 7:091, Section 3] or by the provision of 400 KAR 1:040,”3 Section 6 outlines the procedures that must be followed by the permittee to obtain a formal hearing to challenge an assessment, and requires the prepayment of the assessment as proposed, or if an assessment conference has been held, prepayment of the penalty recommended by the conference officer. Section 7 allows permittees to challenge the Issuance of a Non-Compliance or Cessation Order in a formal hearing without a prepayment (the fact-of-violation hearing).

Upon prepayment of the pending assessment under Section 6, the formal penalty hearing is de novo and on the record. Finally, Section 15 allows individuals (but not corporations), the opportunity to prove their inability to prepay the proposed assessment and to obtain a waiver from the prepayment requirements of Section 6.4 According to the CABINET, the prepayment requirement for corporations is necessary to assist in the collection of corporate fines and penalties, while the waiver for individuals is predicated on their potential need for necessary living expenses.

As a result of the proposed assessment, KENTEC filed a request for an informal Assessment Conference pursuant to 405 KAR 7:092, Section 4. An assessment conference was scheduled for April 17, 1997; however, KENTEC did not attend and the conference officer entered a report and recommendation on May 22, 1997, recommending the Secretary enter an Order upholding the assessment as proposed. The conference report gave notice that KEN-TEC could request a formal administrative hearing by filing a Petition accompanied by full payment of the proposed assessment.

KENTEC did file a Petition for Hearing on the proposed assessment by June 19, 1997. However, in its Petition KENTEC stated “it did not have sufficient funds to prepay the proposed assessment.” Thus, the CABINET filed a Motion to Dismiss KENTEC’s Petition for reasons the prepayment was not attached. The CABINET’s Motion noted the waiver of prepayment provisions did not apply to KENTEC, since it was a corporation. Thus, the hearing officer recommended dismissal of KENTEC’s timely Petition on ground of failure of prepayment to which KENTEC filed exceptions. An Order dismissing KENTEC’s Petition and affirming the penalty was entered by the Secretary on July 28,1998.

KENTEC also petitioned for “temporary relief’ from the Non-Compliance and Cessation Order on June 27, 1997, and a hearing officer — different than the one as*724signed to hear the fact-of-violation case— granted temporary relief from the violation. This temporary relief order abating the violation was effective until the Secretary’s Order was entered on April 1, 1998, in the formal “fact-of-violation” case, denying KENTEC relief and upholding the issuance of the violation and the Cessation Order.

CONSTITUTIONALITY OF KRS 350.0301(5) & 405 KAR 7:092, SECTION 6 AND SECTION 15

Based upon KRS 350.0301(5), 405 KAR 7:092, Section 6(2)(b) requires the Petition to “be accompanied by full payment of the proposed penalty assessment” which is to be placed in an escrow account pending final determination of the assessment. 405 KAR 7:092, Section 15 allows for a waiver of the prepayment of the proposed penalty for individuals. The waiver is not available for corporate permittees, notwithstanding that the General Assembly has vested in corporations, “the same power as an individual to do all things necessary or convenient to carry out its business and affairs...” KRS 271B.3-020(1).

In reviewing the “parallel procedures” which the General Assembly enacted after Franklin, supra—one procedure with formal evidentiary hearings on the record to contest the fact of the violation, but another requiring prepayment prior to the formal evidentiary hearing to contest the penalty — we note the wisdom in the Court of Appeals’ comment that “as a practical matter, the amount or propriety of the penalty imposed could be as critical as or perhaps even more weighty, than the fact of the violation itself.”5

With this in mind, we are not unmindful of the rule of construction in constitutional considerations, that “[w]hen the constitutionality of a statute is challenged, the court should try not to destroy it, but to construe it, if consistent with the will of the legislature, so as to comport with constitutional limitations.” United States Civil Service Commission v. National Association of Letter Carriers, 413 U.S. 548, 571, 93 S.Ct. 2880, 2893, 37 L.Ed.2d 796 (1973). However, hard as we may try, we cannot construe the word corporation as an “individual” as specifically referenced in KRS 350.0301(5).

Section 2 of the Kentucky Constitution provides the Commonwealth shall be free of arbitrary action. With respect to adjudications, whether judicial or administrative, this guarantee is generally understood as a due process provision whereby Kentucky citizens may be assured of fundamentally fair and unbiased procedures. Smith v. O’Dea, 939 S.W.2d 353 (Ky.App.1997). As noted in Pritchett v. Marshall, 375 S.W.2d 253 (Ky.1963), the state is enjoined against arbitrariness by Section 2 of the Kentucky Constitution which, we have held is “a concept we consider broad enough to embrace both due process and equal protection of the laws, both fundamental fairness and impartiality.” Id. at p. 253.

EQUAL PROTECTION

The standards for equal protection in Kentucky are well set out in D.F. v.Codell, 127 S.W.3d 571 (Ky.2003), wherein we stated: “Sections 1, 2 and 3 of the Kentucky Constitution provide Kentuckians with the rights of equal protection under the Kentucky Constitution. Commonwealth v. Howard, 969 S.W.2d 700 (Ky.1998). This clause applies to all governmental activity, whether legislative, executive, or judicial.... Willowbrook v. Olech, 528 U.S. 562, 120 S.Ct. 1073, 145 *725L.Ed.2d 1060 (2000). This is consistent with the simple goal of the equal protection clause to ‘[kjeep governmental decision makers from treating differently persons who are in all relevant respects alike.’ Nordlinger v. Hahn, 505 U.S. 1, 10, 112 S.Ct. 2326, 2331, 120 L.Ed.2d 1 (1992). But, as a practical matter, nearly all legislation differentiates in some manner between different classes of persons and the Equal Protection Clause does not forbid such classification per se. Romer v. Evans, 517 U.S. 620, 631, 116 S.Ct. 1620, 1627, 134 L.Ed.2d 855 (1996). The level of judicial scrutiny applied to such challenges depends on the classification made in the statute and the interest affected by it.” See Memorial Hospital v. Maricopa County, 415 U.S. 250, 253, 94 S.Ct. 1076, 1079 39 L.Ed.2d 306, 312 (1974).

“Currently, there are three levels of review, rational basis, strict scrutiny, and the seldom used intermediate scrutiny, which falls somewhere between the other two. See Steven Lee Enterprises v. Varney, 36 S.W.3d 391, 394-95 (Ky.2000). Where the statute merely affects social or economic policy, it is subject only to a ‘rational basis’ analysis.” Steven Lee Enterprises, 36 S.W.3d at 394. Under this standard of review “legislative distinctions. . .must bear a rational relationship to a legitimate state end.” Chapman v. Gorman, 839 S.W.2d 232, 239 (Ky.1992).

Thus, since the distinction is allegedly based upon economics, the discriminatory distinction contained in KRS 350.0301(5) and its implementing regulations, 405 KAR 7:09(6) and (15) can survive only if it bears a rational relationship to a legitimate state end. The distinction being one between “individuals” and “corporations,” the “legitimate state interest” is said to be, (1) that it facilitates the collection of fines and penalties from corporations and (2) the individual “waiver” provisions recognize that individuals have necessary living expenses, while corporations do not.

This having been said, KENTEC, which plead “its inability to make the prepayment,” is deprived of a right to a due process hearing, while the hearing is secured to a corporation that can afford it, and even an indigent individual who has the means of securing a waiver. Like the Court of Appeals before us, we too have been unable “to discern any rational basis or legitimate state interest to explain— much less to justify— the arbitrary singling out of a corporation for such disparate treatment.”6

Thus, it is still our opinion, that a process “which denies a ‘due process hearing’ to an aggrieved party based solely on its financial inability to pay the penalties which he seeks to appeal is unconstitutional, in violation of the equal protection clauses of both the United States and the Kentucky Constitutions.” Franklin, supra, p. 4.

In stating our position, we do not ignore the multitude of federal cases cited by the CABINET; we simply disagree with their holdings as we did in 1990, when we decided Franklin. Decisions of the lower federal courts are not conclusive as to state courts, Steenbergen v. Commonwealth, 532 S.W.2d 766 (Ky.1976) and Bell v. Commonwealth, 566 S.W.2d 785 (Ky.App.1978). It is just not within our democratic ideas, customs or maxims to grant equal justice and due process only to those who can afford to pay and to deny such rights to those who cannot. Such a notion flies in the face of the belief of “equal justice under the law.” KENTEC, in its *726Petition for a hearing on the amount of the assessment plainly said “it could not afford to prepay the assessment.” However, no process was allowed it to prove the fact plead and no relief was afforded it had it been able to do so.

In Kentucky we remain committed to an Administrative process which guarantees the right to a formal due process hearing for aggrieved parties without regard to their financial inability to pay. Notwithstanding the protestations of the CABINET, we cannot discern any rational basis, or legitimate state interest, to explain— much less justify — the arbitrary singling out of a corporation for such disparate treatment7.

“There is no attempt to classify corporate permittees differently from individuals anywhere else in the statute, or regulation, for any other purposes other than the grace of this waver exception.” Kentec Coal Co. v. Commonwealth of Kentucky, 2003 WL 217145828

ABSOLUTE AND ARBITRARY POWER

“Section 2 of our Bill of Rights is unique, only the Constitution in Wyoming having a like declaration.... Section 2 of our Constitution reads: ‘absolute and arbitrary power over the lives, liberty and property of freemen exists nowhere in a republic, not even in the largest ma-jority_’ So it may be said that whatever is contrary to democratic ideas, customs and maxims is arbitrary. Likewise, whatever is essentially unjust and unequal or exceeds the reasonable and legitimate interests of the people is arbitrary.” Sanitation District of Jefferson County v. Louisville, 213 S.W.2d 995, 308 Ky. 368 (Ky.1948)

“Unequal enforcement of the law, if it rises to the level of a conscious violation of the principle of uniformity, is prohibited by this section.” Kentucky Milk Marketing v. Kroger Company, 691 S.W.2d 893, 899 (Ky.1985). The question of reasonableness is one of degree and must be based on the facts of a particular case. Boyle County Stockyards Company v. Commonwealth, 570 S.W.2d 650, 654 (Ky.App.1978).

Third party disturbances have been a thorn in the side of the mining industry, and the regulatory agencies, since the advent of surface mining regulation. To date, no practical solution for the problem has been acceptable to all the parties, involved in the regulatory scheme; albeit, the “wait and see policy,” if properly implemented, is the best on the block at the moment. An attempt by the General Assembly through KRS 350.093(9), to create a framework to resolve the problem did not meet the approval of OSM as it was less restrictive than the federal requirements pursuant to 30 USC § 1255, et. seq. The “wait and see” approach thus resulted.

Under the current surface mining regulatory scheme, a third party disturbance constitutes a violation against the permit-tee who, in this instance, admittedly has no right, or recourse, for the occurrence of the third party building his home on his own property. Thus, the occurrence, whenever cited, is a violation which is generally uncontestable. The parallel policy of a hearing on the “fact of violation” is, *727thus, of no consequence, or assistance, to the permittee. The critical avenue of the appeal then is the assessment, which in this instance is unavailable, simply because the permittee cannot afford to post the fine it wishes to contest.

While we do not (in light of its “wait and see policy”) criticize the CABINET’s action in this regard9, we can, and do hold, the CABINET’s assessment of a penalty without access to a subsequent formal hearing based upon a permittee’s inability to pay was unreasonable and arbitrary and in violation of Section 2 of the Kentucky Constitution. In addition, given the minimum four (4) weeks advertising required for a major revision after submission, not to mention the time consumed by correspondence and corrections from the office of permits, it was impossible for KENTEC to “obtain” a permit revision by December 22, 1996 — -as required by the citation. Obviously it could have filed one — but it could not have “obtained” one within that time, unless it was guaranteed extensions on the deadline, which are essentially discretionary with the CABINET. See 405 KAR 5:085, Section, 8(4) and Section, 4(4).

Thus, we reaffirm our prior holding in Franklin and to this extent affirm the Court of Appeals. This matter is now remanded to the Environmental and Public Protection Cabinet for a formal hearing in review of the purposed assessment consistent with this opinion.

LAMBERT, C.J.; GRAVES, and WINTERSHEIMER, JJ., concur. COOPER, J., concurs in part and dissents in part by separate opinion with Johnstone and ROACH, JJ., joining that opinion. ROACH, J., dissents by separate opinion with COOPER and JOHNSTONE, JJ., joining that opinion.

. At oral arguments, counsel for the CABINET, suggested the way to ensure that the post mining land use on the area of disturbance was properly included in the revision, was to revise the post mining land use for the whole increment within which the disturbance occurred, or is occurring. However, the record and arguments did not provide us with the revision costs, or the reclamation costs for this change to either increments 1, 5 or both, as opposed to just the smaller area of disturbance, the extent of which had yet to be determined.

. 7,200.00 of the assessment represented an assessment for the Non-Compliance. The remaining $22,500.00 was assessed for the Cessation Order, which has a statutory minimum of $750.00 for each day the Cessation Order remains unabated. This amount is mandated by KRS 350.990(1).

. 400 KAR 1:040 would ordinarily allow pre-hearing discovery between the parties. No such right exists for this informal conference.

. This is consistent with the Federal scheme under the Surface Mining Control and Reclamation Act; See, 30 USC § 1268, 30 CFR § 723.19 and§ 845.19, 43 CFR § 4.1152.

. Court of Appeals opinion, page 6.

. Court of Appeals opinion, page 7.

. It would be interesting to see the statistics on the number of mining corporations regulated by the CABINET today versus the number of individuals actually regulated by it as operators or permittees.

. Court of Appeals opinion, page 7.

. It seems however that it would be more prudent and cost effective to utilize the "Wait and See policy" until the parameters of the disturbance were known and then limit the revision/post mining land use change to the actual area of expected disturbance, rather than the larger existing increment boundary, as long as environmental damage and safety are not in question. However, we acknowledge the CABINET's need to insist on operator compliance and cooperation.