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

1. Daniel R. Sovocool Prime Tanning (In Re Irving Tanning): Threat to State Self-Insurance Law

2. Overview: Three Topics

3. 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?

4. 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

5. 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

6. 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

7. 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

8. Prime Missouri’s Collateral and the Automatic Stay ACSTAR took position that the stay prohibited its disbursement of the bond proceeds

9. The Original Proposed Plan • Immediate turnover of all collateral • Bar date • Estimation process • Distribution of excess • Channeling injunction

10. Original Plan, Illustrated GF C/I Barred claims Collateral

11. 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

12. 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

13. 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.

14. Bankruptcy Court Ruling, continued “Chose in Action” versus “Immediate Right to Collateral”

15. 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

16. 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

17. 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

18. 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.

19. What Next? • If ruling upheld? • State law critical • Alienation clauses • “String rights” • Forfeiture provisions • If ruling reversed?

20. Questions? Daniel R. Sovocool Partner (415) 984-8286 directdsovocool@nixonpeabody.com