Prime Tanning (In Re Irving Tanning): Threat to State Self-Insurance Law

Daniel R. Sovocool

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Overview: Three Topics

Background of the dispute

The bankruptcy and the Court’s ruling, now being appealed to the BAP

Policy and practical ramifications for other states

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The Key Issue

Key issue: Where GFs exist, can the bankruptcy court impose procedures to estimate the self-insured claims at the time of bankruptcy and return any “excess” collateral to the estate, for the benefit of other creditors?

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The Principal Parties• Leather tanning companies in Maine and Missouri• Started with Irving Tanning Company in 1936

› Maine self-insured operations (Prime Maine and Irving)› Missouri self-insured operations (Prime Missouri)

• History of plant closures, rising costs and litigation arising from use of toxic chemicals.

• Toxics and leather tanneries

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The Maine Regulatory Framework

• Two general requirements (annual privilege to self-insure):› Have the “financial ability to pay” › Secure the obligation under certain security approved by the

Maine Superintendent of Insurance• Self-insurer can request a reduction of excess collateral;

ultimately up to the regulator’s discretion

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The Missouri Regulatory Framework

• Similar collateral requirements • Self-insurers can request the release of collateral after

three years from the date of closure of all cases• Discretionary right to return excess,

at most

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Bankruptcy

• In November and December, 2010, the various Prime Tanning companies filed for Chapter 11 and became jointly administered.

• November 2011, debtors filed a plan of reorganization• Liquidating plan funded by (among other things) the

“self-insurance funds” held by state authorities and a bonding company to secure the self-insured workers compensation liabilities in Maine and Missouri

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Prime Missouri’s Collateral and the Automatic Stay

ACSTAR took position that the stay prohibited its disbursement of the bond proceeds

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The Original Proposed Plan

• Immediate turnover of all collateral• Bar date• Estimation process• Distribution of excess• Channeling injunction

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Original Plan, Illustrated

All potential claims

Claims made before bar

date

Escrow funds

Other creditors

GF

Barredclaims

Collateral

C/I

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Just a Crazy Idea?State law and GF functions aside:• Not unlike how bankruptcy courts handle liquidating

claims• GFs use actuaries to value shortfall claims in bankruptcy

why not the other way around?• Would have theoretical merit if:

› Could completely identify all claimants› Could perfectly value their claims› You were positive you had excess

• Will come back to why it is a crazy idea shortly

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Maine’s Long Tail Claims• Maine’s long state law limitations periods• Two years from date of injury• Six year period of repose• Latent toxic claims possible

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The Bankruptcy Court Ruling

• Denied confirmation of the Plan, without prejudice• Made no determination as to whether there were

excess funds• Debtors’ property interest in the funds determined by

state law• Property interest as of commencement of case was, at

most, a “chose in action to recover excess funds….”• Amended plan with placeholder (in the alternative) for the

objectionable provision, pending outcome of appeal.

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Bankruptcy Court Ruling, continued

“Chose in Action” versus “Immediate Right to Collateral”

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Primary Legal Arguments Advanced by Debtors

• Usual bankruptcy court functions• Federal/state preemption issues regarding

ownership/timing for return of excess collateral• Bar date/channeling injunction protect both injured

workers and guaranty funds, while making provision for the excess

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Primary Legal Arguments Against the Proposed Plan

• State law says no immediate right to collateral• Escrow funding mechanism impractical for long tail claims• Third party channeling injunctions disfavored and subject

to challenge

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Policy Considerations Raised by Amicus Parties

• Focused on broader policy implications beyond this case• It is a crazy idea

› Entire concept disrupts bargain struck by state Legislatures between employer and employee

› Undercuts function of guaranty funds› What happens if there isn’t enough in the end?

– To injured workers– To guaranty funds

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McCarran-Ferguson

• No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any state for the purpose of regulating the business of insurance…” 15 U.S.C. §1012(b).

• Has been applied to prohibit the bankruptcy code to modify state law insurance provisions.

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What Next?

• If ruling upheld?› State law critical› Alienation clauses› “String rights”› Forfeiture provisions

• If ruling reversed?

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Questions?

Daniel R. Sovocool Partner

(415) 984-8286 directdsovocool@nixonpeabody.com