Birth Control Mandate | Fracking | Assumption of Lease

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Close Corporations May Opt Out of Birth Control Mandate

Close Corporations May Opt Out of Birth Control MandateIn our January 21, 2014 newsletter we reported that a Brooklyn Federal Court had recently granted a permanent injunction that exempts nonprofit affiliates of the Roman Catholic Archdiocese of New York and the Roman Catholic Diocese of Rockville Centre from a federal requirement that they provide contraceptive care, among other things, through third parties. There, the claims were brought under the Religious Freedom Restoration Act (“RFRA”) and the Administrative Procedures Act, as well as under the Establishment, Free Exercise, and Free Speech clauses of the First Amendment to the U.S. Constitution.

Recently, a divided U.S. Supreme Court in Burwell v. Hobby Lobby Stores, Inc., ruled 5-4 that this same contraceptive mandate violated the religious freedom rights of private closely held for-profit corporations under the RFRA. A close corporation is generally recognized as the type of business corporation that is owned and operated by a small group of people. Also known as a family corporation, in this type of corporation all of the functions are usually performed by the same parties, as in a partnership. These individuals serve as shareholders, officers, and directors and are involved in the management and operation of the business. A close corporation differs from a publicly held corporation since its stock is neither issued nor traded to the public at large.

At issue before the Supreme Court were the regulations promulgated by the Department of Health and Human Services (“HHS”) under the Patient Protection and Affordable Care Act of 2010, which requires specific employers’ group health plans to furnish “preventative care and screenings” for women without “any cost-sharing requirements.”

In two related cases joined before the Supreme Court, the owners of three closely held for-profit corporations have sincere Christian beliefs that life begins at conception and that it would violate their religion to facilitate access to contraceptive drugs or devices that operate after that point.

According to the Court, Congress did not specify what types of preventive care must be covered; it authorizes the Health Resources and Services Administration, a component of HHS, to decide. Nonexempt employers are generally required to provide coverage for the 20 contraceptive methods approved by the Food and Drug Administration, including four that may have the effect of preventing an already fertilized egg from developing any further by inhibiting its attachment to the uterus. Religious employers, such as churches, are exempt from this contraceptive mandate. HHS has also effectively exempted religious nonprofit organizations with religious objections to providing coverage for contraceptive services. Under this accommodation, the insurance issuer must exclude contraceptive coverage from the employer’s plan and provide plan participants with separate payments for contraceptive services without imposing any cost-sharing requirements on the employer, its insurance plan, or its employee beneficiaries.

Ultimately, the Supreme Court, in its opinion authorized by Justice Samuel Alito Jr., held that “closely held” for-profit corporations cannot be required to provide the coverage. The federal government violated the RFRA by placing too heavy a burden on the owners’ exercise of religion without proving that the mandate was the “least restrictive” option for ensuring cost-free access to contraceptive care. “If the owners comply with the HHS mandate, they believe they will be facilitating abortions, and if they do not comply, they will pay a very heavy price–as much as $1.3 million per day, or about $475 million per year, in the case of one of the companies,” Justice Alito wrote. “If these consequences do not amount to a substantial burden, it is hard to see what would.”

The Court reasoned that to overcome the burden on the owners’ religious rights, the federal government had to prove that the mandate was the “least restrictive” means of serving a “compelling governmental interest”–in this case, providing cost-free contraceptives to women. Justice Alito concluded that the federal mandate “plainly fails this test” because there were other ways Congress or the executive branch could further that interest.

Towns May Ban Fracking

Towns May Ban FrackingIn a 5-2 decision, the highest Court of the State of New York held that towns may ban oil and gas production activities, including hydrofracking, within municipal boundaries through the adoption of local zoning laws, without violating State mining laws. See, Norse Energy Corp. v. Town of Dryden, 2014 Slip. Op. 04875 (2014).

In another victory for a town’s “home rule” powers, the Court decided that zoning bans against fracking, or hydraulic fracturing, enacted by the Towns of Dryden in Tompkins County and Middlefield in Otsego County, were not barred by the “suppression” clause contained in New York State’s Environmental Conservation Law. The State environmental statute states that it shall “supersede all local laws or ordinances relating to the regulation of the oil, gas and solution mining industries.” Notwithstanding, the Court held that the clause refers only to local laws or ordinances that seek to supplant the State’s role as regulator of the “safety, technical and operational aspects of oil and gas activities across the state” –not local zoning laws about where mining may be conducted.

As the Court noted, “[n]othing in the Legislative history [of the State’s Environmental Law] undermines our view that the suppression clause does not interfere with local zoning laws regulating the permissible and prohibited uses of municipal lands.”

The Court’s analysis began with a review of what it called the “source of municipal authority to regulate land use and the limits the State may impose on this power.” “Article IX, the ‘home rule’ provision of the New York Constitution, states that ‘every local government shall have power to adopt an amended local laws not inconsistent with the provisions of this constitution or any general law… except to the extent that the legislature shall restrict the adoption of such a local law.’ To implement this constitutional mandate, the State Legislature enacted the Municipal Home Rule Law, which empowers local governments to pass laws both for the ‘protection and enhancement of [their] physical and visual environment,’ and for the ‘government, protection, order, conduct, safety, health and well-being of persons or property therein.’ The Legislature likewise authorized towns to enact zoning laws for the purpose of fostering ‘the health, safety, morals, or general welfare of the community.’ As a fundamental precept, the Legislature has recognized that the local regulation of land use is ‘among the most significant powers and duties granted… to a town government.’” The Court emphasized that “the regulation of land use through the adoption of zoning ordinances [is] one of the core powers of local governance.”

The Court then turned to the language of the relevant State law to determine whether the suppression provision preempts local control over land-use. It concluded that the “plain language [of the statute] does not support preemption with respect to the Towns’ zoning laws.”

The Court stressed that its decision was not a pro- or anti-fracking position. “At the heart of these cases lies the relationship between the State and its local government subdivisions, and their respective exercise of legislative power. These appeals are not about whether hydrofracking is beneficial or detrimental to the economy, environment or energy needs of New York, and we pass no judgment on its merits. These are major policy questions for the coordinate branches of government to resolve. The discrete issue before us, and the only one we resolve today, is whether the State Legislature eliminated the home rule capacity of municipalities to pass zoning laws that exclude oil, gas and hydrofracking activities in order to preserve the existing character of their communities. There is no dispute that the State Legislature has this right if it chooses to exercise it.” But in light of the “plain language” of the statute, the Court concluded that the State Legislature did not do so here.

Debtor-Tenant May Assign Lease Months After Assumption

Debtor-Tenant May Assign Lease Months After AssumptionIn In re Eastman Koday Co., 495 B.R. 619 (Bankr. S.D.N.Y 2013) the Bankruptcy Court for the Southern District of New York issued an opinion that expands the authority and flexibility for a debtor-tenant to determine whether, and when, to assign executory contracts and unexpired leases.

Whether to assume or reject a lease is one of most important decisions a debtor-tenant will need to make within its bankruptcy case and courts are generally deferential to a debtor-tenant’s business judgment. If the debtor-tenant assumes a lease, the lease becomes a binding obligation upon the debtor-tenant requiring it to completely and timely perform all of its obligations under the lease post-filing (as opposed to rejecting the lease and being released from its obligations under the lease). A debtor has only 120 days after the bankruptcy petition is filed within which to assume or reject. The Bankruptcy Code also provides that this 120-day period can only be extended one time, for a period of 90 days for cause. After that one 90-day extension, the debtor-tenant can extend the time to assume or reject only if it has the landlord’s consent. The result: a debtor-tenant will have, at best, 210 days (seven months) to assume or reject and the landlord will have significant bargaining leverage (essentially a veto and rejection power of its own) over the debtor-tenant and over the issue of whether or not the time period to assume or reject is extended beyond the 210 days.

Here, Eastman Kodak Company filed for bankruptcy protection on January 19, 2012. Kodak was a party to a commercial lease for approximately 2,200 square feet. As with the typical commercial lease, Kodak’s lease prohibited it from assigning the lease without prior written consent of the landlord. The original deadline set by the Bankruptcy Code for Kodak to assume or reject the lease was May 18, 2012. On May 10, 2012, the Court entered an order extending Kodak’s time to assume or reject the lease through August 16, 2012. This was the maximum extension permitted under the Bankruptcy Code. On July 17, 2012, Kodak filed a motion seeking to assume the lease and several others. The proposed order provided:

Nothing included in or omitted from the motion or this order, nor as a result of any payment made pursuant to this order, shall impair, prejudice, waive or otherwise affect the rights of the debtors and their estates, subject to appropriate notice and a hearing and this court’s approval unless otherwise agreed to by the parties, to assign any of the assumed leases pursuant to, and in accordance with, the requirements of §365 of the Bankruptcy Code.

The landlord did not object or otherwise respond to the proposed order, which was entered on August 15, 2012. Several months after the entry of the assumption order, Kodak decided to sell the business that related to the lease and entered into an asset purchase agreement providing for the assignment of the lease. Kodak requested the Court’s approval but the landlord objected to the proposed assignment because Kodak failed to seek the assignment of the lease at the time it sought to assume the lease, and because the lease prohibited the proposed assignment without landlord’s consent.

The Bankruptcy Court concluded that, in a case of apparent first impression, assumption and assignment of an unexpired lease pursuant to the Bankruptcy Code does not necessarily have to occur at the same time. While the Bankruptcy Code provides for a specific time period for it to explicitly assume the lease, or else it is deemed rejected, the Court found that there is no equivalent time frame or deadline under the Code for a debtor-tenant to assign an assume the lease. And while the landlord further argued that when the debtor-tenant assumed the lease it was assuming subject to all of its burdens, one of which being the anti-assignment clause, the Court reasoned that if a debtor-tenant is still in a Bankruptcy case, one of the benefits of the Bankruptcy Code is to assign a contract notwithstanding an anti-assignment clause in a lease. The Court concluded that “the power to assign and override an anti-assignment clause is an important right that carries out one of the main purposes of §365 of the Bankruptcy Code–to allow debtors to maximize value for the benefit of their creditors.”

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