The Strange Case of Irving Tanning

How the bankruptcy process may pose a threat to states’ self-insured workers’ compensation programs

Presented by Liz Wyman, AAG, State of MaineTo State Self-Insurance Guaranty Fund Administrators

June 3, 2012

Introduction

• Irving/Prime Tanning processed leather for use in manufacture of shoes. Two facilities in Maine and one in Missouri

• Came through Chapter 11 bankruptcy in 2005• Irving/Prime Tanning filed a second Chapter 11 in Maine

bankruptcy court on November 16, 2010• Initial skirmish over self-insurance funds through a TRO

process• Irving sold its business to Tasman Leather Group in February,

2011• As a liquidating chapter 11, it is no longer about reorganizing

and “saving jobs in Maine”

The Self-Insurance Funds

• Maine: Irving was secured through the Vista Trust, held in a private bank trust account, in the amount of $330,000 as of bankruptcy filing; currently 74 open claims

• Prime funds originally held through letter of credit. Terminated self-insurance in 2008. When Prime declined to renew LOC in 2010, Superintendent demanded payment of the full value: $718,000, which was paid into an account held by the Treasurer of the State of Maine. As of December 31, 2011, $392,000 in fund, with 6 open claims and unknown number of potential claims (within 6-year statute of limitations)

• Cash collateral held by Acstar to secure surety bonds issued to Missouri and New Hampshire

Irving sets the trap: claims bar date

• On May 11, 2011, Irving files a motion to set a bar date for all workers’ compensation claimants to file a proof of claim

• Court enters an order allowing a bar date of September 19, 2011

• Irving sends the order to all former employees• Only 9 workers’ compensation claimants file

claims• The self-insurance funds file protective claims

The Plot Thickens

• The Plan of Reorganization Highlights (or low blows)

Channeling injunctionRequires turnover of all self-insurance funds to the bankruptcy estateAllows the bankruptcy court to estimate the value of workers’ comp claims

Bars workers’ comp claimsIrving expects to pay only $230,000 to claimants$1,000,000 to go to the estate

Third party releasesThe plan prohibits the self-insured guarantee funds to pay claims to workers

The Process

• Irving files adversary complaint and TRO against Missouri

• Missouri responds with Maine’s help• Maine and Missouri file objections to plan of

disclosure• Hearings: February 2 and February 28, 2012• Current procedural posture

The Legal Argument

• Self-insurance funds are not property of the estate– As a matter of state statute: Maine statute prohibits distribution of

security to creditors– As a matter of contract law: the trust documents and the letter of

credit state that the funds may only be used for payment of workers’ compensation claims (no diverted purpose allowed)

– All the debtors have is a “chose in action” (the right to request the Superintendent to adjust the security and release any excess when he deems it appropriate)

– The right to “excess proceeds” of a letter of credit requires that the claims be liquidated (there are 80 open claims subject to liability for six years from the date of last payment – we are probably undersecured)

Keeping the Bankruptcy Court out of State Law Matters

• Workers’ comp is uniquely within the province of the state – it is not for the bankruptcy court to estimate the claims or determine what is sufficient amount of money to be available to satisfy these claims

• Workers’ comp claimants are not typical tort claimants: the claims have a very long tail and the claimants are statutorily entitled to recovery

What Happens Next?

• If the Court rules against Maine and Missouri, we file an appeal to the Bankruptcy Appellate Panel of the First Circuit Court of Appeals

• Request for amicus filings• Worst-case scenario – seek amendment of the

Bankruptcy Code to create a special classification for workers’ compensation claims