Irving Tanning Co. v. Me. Superintendent of Ins.

496 B.R. 644

IRVING TANNING COMPANY, et al.,¹ Debtors.Irving Tanning Company, et al., Appellants,

v.Maine Superintendent of Insurance, Maine Self–Insurance Guarantee Association, Acstar Insurance Company, Missouri Department of Labor and Industrial Relations, and Missouri Private Sector Individual Self–Insurers Guaranty Corporation, Appellees.

BAP No. EB 12–077.

Bankruptcy No. 10–11757–LHK.

United States Bankruptcy Appellate Panel of the First Circuit.

Aug. 15, 2013.

Robert J. Keach, Esq., and Máire B. Corcoran, Esq., on brief, Portland, ME, for Appellants.

Paula–Lee Chambers, Esq., on brief, Boston, MA, for Appellee, Acstar Insurance Company.

Thomas C. Sturtevant, Jr., Esq., and Elizabeth J. Wyman, Esq., on brief, Augusta, ME, for Appellee, Maine Superintendent of Insurance.

R. Scott Moore, Esq., on brief, St. Louis, MO, for Appellee, Missouri Private Sector Individual Self–Insurers Guaranty Corporation.

Jeff Klusmeier, Esq., on brief, for Appellee, Missouri Department of Labor and Industrial Relations.

Daniel L. Cummings, Esq., on brief, Portland, ME, for Appellee, Maine Self–Insurance Guarantee Association.

Brent A. Singer, Esq., on brief, Bangor, ME, for Amici Curiae, The International Association of Industrial Accident Boards and Commissions, and The Southern Association of Workers' Compensation Administrators.

Peter G. Cary, Esq., and Robert E. Mittel, Esq., on brief, Portland, ME, for Amicus Curiae, Self–Insurance Guaranty Funds of America, Inc.

Daniel W. Sklar, Esq., Manchester, NH, Daniel R. Sovocool, Esq., San Francisco, CA, and Christopher M. Desiderio, Esq., New York, NY, on brief, for Amici Curiae, National Council of Self–Insurers, California Self–Insurers' Security Fund, Safety National Casualty Corporation, and California Self–Insurers Association.

Before LAMOUTTE, BAILEY, and CABÁN, United States Bankruptcy Appellate Panel Judges.

BAILEY, Bankruptcy Judge.

Six related debtors in jointly-administered cases (the “Debtors”) appeal from the bankruptcy court's October 18, 2012 order denying confirmation of their joint liquidating plan (the “Plan”). At issue are Plan provisions through which the Debtors would: (i) reach and distribute certain funds (the “Self–Insurance Funds”) held, variously, by state authorities, a private trustee, and a bonding company to secure the statutory obligations of three of the six Debtors under the self-insurance provisions of the laws regulating workers' compensation claims in Maine, New Hampshire, and Missouri; and (ii) through a channeling injunction terminate the liability of third party guarantors of these obligations and otherwise nullify and supplant the workers' compensation laws in these states as to the Debtors' employees. The bankruptcy court determined that the Debtors held no property interest in the Self–Insurance Funds themselves, only a “chose in action” to recover any surplus that may remain after payment of workers' compensation claims, as and when state laws permit. Implicitly, the court also rejected the Debtors' argument that § 1123(a)(5)² permits them to override the state law limitations on their ability to reach these funds. The bankruptcy court concluded that, without immediate access to the Self–Insurance Funds, the Plan would be underfunded and thus fail to satisfy the feasibility requirement in § 1129(a)(11). Agreeing with the bankruptcy court on the property interest and § 1123(a)(5) issues, we AFFIRM.

BACKGROUND

I. The Parties

A. The Debtors

The Plan that was denied confirmation was proposed jointly by all six Debtors, and accordingly, all six now appeal from that denial. Prior to the petition date, five of the six Debtors were engaged in the tanning, manufacture, and sale of leather. Among them, they had operations in Maine, New Hampshire, Wisconsin, and Missouri. The sixth Debtor, Prime Tanning Company Inc. (“Prime Delaware”), is a holding company, the parent company of Debtors Irving Tanning Company (“Irving”), Cudahy Tanning Company, Inc. (“Cudahy”), and Prime Tanning Co., Inc. (“Prime Maine”). Debtor Prime Tanning Corp. (“Prime Missouri”) is a wholly-owned subsidiary of Prime Maine. And Debtor Wismo Chemical Corp. (“Wismo”) is a wholly-owned subsidiary of Prime Missouri.

Irving, a manufacturer and seller of leather, operated its business in Hartland, Maine. Cudahy and Prime Maine were involved in the leather tanning process. Prime Maine's operations were in Berwick, Maine until, in 2008, they were consolidated with Irving's operations in Hartland. Cudahy's finishing facility was in Cudahy, Wisconsin until its production was transitioned to Irving's facility in Hartland. Until it ceased operations in 2009, Prime Missouri operated a “wet blue” operation in St. Joseph, Missouri, supplying Prime Maine with processed hides. Wismo operated a chemical business related to the processing of hides for leather.

B. The Appellees

The “Appellees” are the Missouri Private Sector Individual Self–Insurers Guaranty Corporation (the “Missouri Guaranty”), the Missouri Department of Labor and Industrial Relations (“MDLIR”), the Maine Superintendent of Insurance (“Maine Superintendent”), the Maine Self–Insurance Guarantee Association (“MSIGA”), and Acstar Insurance Company (“Acstar”). MDLIR and the Maine Superintendent are state agencies charged with administering the workers' compensation schemes in Missouri and Maine. Missouri Guaranty and MSIGA are quasi-governmental entities created under the laws of their respective states to administer self-insurance funds for the benefit of injured workers and to guarantee payment of claims against insolvent employers. Acstar is a surety company that issued bonds to Prime Missouri and Prime Maine to secure their obligations under their self-insurance programs.

II. The Debtors' Self–Insurance Programs

In the course of operating their respective businesses, Irving, Prime Maine, and Prime Missouri maintained self-insurance programs for workers' compensation claims in Maine, New Hampshire, and Missouri. In his Memorandum of Opinion, the bankruptcy judge made findings of fact and rulings of law about the relevant state laws and the nature and status of the Debtors' self-insurance programs. The Debtors take no issue with these findings and rulings on appeal, ³ and the relevant facts are not in dispute.

A. Maine Workers' Compensation Self–Insurance Law

Irving and Prime Maine maintained self-insurance programs pursuant to the Maine workers' compensation statute. SeeMe.Rev.Stat. tit. 39–A, § 403 (1991). Under the Maine statute, if an employer wishes to self-insure, it must secure its obligations to pay compensation in one or more of the ways described in the statute. Id. (“An employer subject to this Act shall secure compensation and other benefits to the employer's employees in one or more of the ways described in this section.”). These include the posting of cash, a surety bond, or an irrevocable standby letter of credit with the Maine Superintendent in an amount determined by the Maine Superintendent. Id. at § 403(3). These also include the establishment of an actuarially determined, fully-funded trust. Id. at § 403(3)(C). Any “security deposit must be held by the Treasurer of State in trust for the benefit of the self-insurer's employees for the purposes of making payments” under the state's self-insurance law. Id. at § 403(3). If the employer opts to secure its obligations with a letter of credit, the letter must give the Maine Superintendent the right to call the letter if the self-insurer fails to renew it. Id.; 02–031–250 Me.Code R. § II(D)(7). If the letter is called, its proceeds must be deposited with the Treasurer of State to be held in trust for the benefit of the employees for the purposes of making payments under the workers' compensation statute. Me.Rev.Stat. tit. 39–A, § 403(3)(A). The proceeds shall be so held in trust “until either the superintendent authorizes the Treasurer of State to release those proceeds to the employer upon provision by the employer of replacement security adequate to meet the requirements for security set by the superintendent or the superintendent directs distribution of the proceeds in accordance with this Title.” Id. at § 403(3)(A). If the employer opts to secure its obligations by depositing funds into a trust, “[t]he trust must be established and maintained subject to the condition that trust assets may not be transferred or revert in any manner to the employer except to the extent that the superintendent finds that the value of the trust assets exceeds the present value of incurred claims and claims settlement costs with an actuarially indicated margin for future loss development.” Id. at § 403(3)(C)(4).

Virtually all self-insured employers in Maine are required to join MSIGA, which is the payor of last resort if a self-insurer becomes unable to pay its workers' compensation obligations. See Me.Rev.Stat. tit. 39–A § 404(4)(A)(4). MSIGA is required to pay workers' compensation benefits that a self-insurer fails to pay due to insolvency. Id. MSIGA pays such obligations from a fund it administers, which in turn is funded through assessments on its members. Id. at § 404(4)(A)(3). If the assets in the fund are insufficient to pay workers' compensation liabilities, MSIGA is required to make an additional assessment on its members. Id. at § 404(4)(C)(1).

B. Irving

As security for its obligations under the Maine statute, Irving paid funds into a trust known as the Vista Trust (the “Vista Trust”), established in 1993 and amended in March 2010. In 2007, the Maine Superintendent permitted Irving to terminate its self-insurance program on the condition that the Vista Trust “shall be maintained on a continuing basis until all claims are paid and corresponding exposure concluded.” The agreement establishing the Vista Trust restricted the transfer of Irving's interest in the Vista Trust as follows:

Exclusive Purpose: the Trust Fund shall not be subject to seizure by creditors under...