A Bankruptcy Court Flirts With Dangerous Precedent

A very interesting legal fight is going on in Maine involving the bankruptcy of a self-insured employer.

The case is In re Irving Tanning Co. et al, No. 10-11757-LHK.

At issue is an attack on bankruptcy subject, Prime Tanning-Hartland's, set aside reserves for future claims.

The bankruptcy trustee wants to liquidate the reserves except for the amount that has been estimated as necessary to fulfill the outstanding claims obligations.

Those opposed to the plan (the Maine superintendent of insurance, the Maine Self-Insurance Guarantee Association, the Missouri Department of Labor and Industrial Relations and the Missouri Private Sector Individual Self-Insurers Guaranty Corp. have filed objections to the reorganization plan; Prime Tanning-Hartland had operations in both Maine and Missouri) say the move is unprecedented and threatens a precedent where self-insured reserve accounts may be fodder for future liquidations.

Apparently, according to the International Association of Industrial Accident Boards and Commissions (IAIABC), there is much more in the reserve account than the face value of the outstanding claims.

The liquidation plan proposes that the bankruptcy court estimate the total amount of Prime's present and future workers' compensation liabilities and then release any amount of security determined to be in excess of this estimate to Prime for payment to its creditors.

Objectors to the plan have some valid concern.

As we know because of our connection to the industry, it is very difficult to estimate the future liability of long tail claims, in particular those with outstanding future medical for catastrophic injuries.

Greg Krohm, a consultant for and former executive director of the IAIABC, pointed out that if the court's estimate under the proposed plan is too low, injured workers will be "left holding the bag." IAIABC's report notes, "adverse surprises are common in workers' compensation," since claims are "exposed to substantial swings in cost due to medical treatments, costs of care, and claimant life expectancies…"

I think worse, however, is that if this court action is allowed to proceed the availability of bonds to secure such reserves will either become uneconomical or unavailable.

Surety bonds are absolutely necessary for smooth insurance financial transactions in the self-insured industry. Bond-makers will not look at the self-insured risk as acceptable if there is the threat that, should an employer file bankruptcy, its surety bonds will be looked upon as the first line of guarantee for injured worker claims.

What's more - this is a federal attack on the sole province of state jurisdiction.

Prime's lead attorney, Robert J. Keach of Bernstein, Shur, Sawyer & Nelson in Maine, dismisses the alarms and told WorkCompCentral that all claims "will be fully adjudicated and liquidated at the state level," and the bankruptcy court is being asked to "set aside enough money in excess of any conceivable amount to pay those claims."

Keach related that Prime was willing to "take the claims at face-value," and have the court base its estimate on the amounts the injured workers and their attorneys have demanded. "One would assume they erred on the high side," he said.

We have all seen civil attorneys flounder in workers' compensation proceedings to the point of malpractice. I have no reason to believe that a bankruptcy court judge or trustee would fare any better.

The court in this case is tinkering with dangerous precedent.