In re Chateaugay Corp.
| Decision Date | 11 July 1990 |
| Docket Number | Bankruptcy No. 86 B 11270 (BRL) through 86 B 11334 (BRL),Adv. No. 88-5971A.,86 B 11402 (BRL) and 86 B 11464 (BRL) |
| Citation | 116 BR 887 |
| Parties | In re CHATEAUGAY CORPORATION, Reomar, Inc., the LTV Corporation, et al., Debtors. The LTV CORPORATION, LTV Steel Company, Inc., BCNR Mining Corporation and Nemacolin Mines Corporation, Plaintiffs, v. The AETNA CASUALTY AND SURETY COMPANY, National Fire Insurance Company of Hartford and the Commonwealth of Pennsylvania, Defendants. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
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Davis Polk & Wardwell by Karen E. Wagner, Regina Shannahan, New York City, for debtors.
Stroock & Stroock & Lavan by Mark Speiser, New York City, for Steel Creditors Committee.
LeRoy S. Zimmerman, Atty. Gen., Com. of Pa. by Calvin R. Koons, Harrisburg, Pa.
Hebb & Gitlin by Harold Horwich, Hartford, Conn., Thomas & Thomas by James K. Thomas, II, Harrisburg, Pa., Moses & Singer by Thomas R. Slome, Michael Luskin, New York City, Luskin & Stern, New York City, for Aetna Cas. & Sur. Co.
Zalkin, Rodin & Goodman by Richard S. Toder, New York City, for Nat. Fire Ins. Co. of America.
The central dispute which must be determined by this Court is whether certain surety bonds issued pursuant to the worker's compensation self-insurance program of the Commonwealth of Pennsylvania, were in effect when the principals filed for bankruptcy protection.
On July 17, 1986 and thereafter LTV Steel Company, Inc. ("LTV Steel") and sixty-six affiliated companies, including BCNR Mining Corp. ("BCNR") and Nemacolin Mines Corp. ("Nemacolin"), filed petitions for reorganization under Chapter 11 of the Bankruptcy Code (the "Code") and were continued in the management and possession of their businesses and properties as debtors-in-possession (collectively, the "Debtors").
Prior to the filing, LTV Steel was self-insured in twelve states.1 As of the Chapter 11 filings, LTV Steel had open workers' compensation liabilities of approximately $146 million. Upon the filing, LTV Steel was obligated to cease payment of all pre-petition obligations including pre-petition workers' compensation obligations. Most of LTV Steel's pre-petition workers' compensation obligations were shared by either surety companies or state-sponsored funds, which assumed and began paying such claims upon the default of LTV Steel. As a result of such payments the state funds and surety companies, including The Aetna Casualty and Surety Company ("Aetna") and National Fire Insurance Company of Hartford ("National"), have filed over 194 proofs of claim in these bankruptcy proceedings in excess of $450 million. Aetna and National alone have filed approximately forty-two proofs of claim for over $58 million with respect to the surety bonds which are in dispute in this action.
Prior to the filing date, LTV Steel, its predecessors, and its subsidiaries Nemacolin and BCNR, applied and qualified for status as self-insured employers under the Pennsylvania Workmen's Compensation Act, Pa.Stat.Ann. tit. 77 § 501 (Supp.1988) (the "Workmen's Compensation Act"). Pursuant to that statute and the regulations promulgated thereunder, the Commonwealth of Pennsylvania, Department of Labor and Industry, Bureau of Workers' Compensation (the "Bureau") reviews each employer's annual application for self-insured status. The Bureau conditions its approval on the requirement that the employer post a surety bond which will provide coverage in the event that the employer defaults on its workers' compensation obligations. 34 Pa.Code 121.19. Between 1978 and 1986 such bonds were supplied by Aetna and National.
Beginning in August 1986 and continuing thereafter, the Bureau made periodic demands upon Aetna, National and another surety, American Casualty Company of Reading Pennsylvania ("American Casualty") as sureties for the workers' compensation obligations of these Debtors in accordance with the applicable terms of the surety bonds2. In August 1988, due to the periodic demands made by the Bureau, the full value of the American Casualty surety bond No. 573 59 44 with a penal sum of $2 million, had been drawn down. The Bureau therefore made additional demands upon Aetna and National with respect to workers whose injuries occurred during or prior to the effective date of the American Casualty surety bond. In November 1988, the Debtors were informed by the Bureau that National and Aetna were refusing to make payments for workers injured prior to October 1983 because they were disputing the extent of their obligations as sureties for certain workers' compensation bonds issued to LTV Steel. The Bureau further informed the Debtors that due to the refusal of Aetna and National to fulfill their obligations, it would be forced to cease making payments to these workers.
In order to prevent hardship to the workers, on December 12, 1988, LTV Steel made an application for and received authority from this Court to make certain interim payments for the benefit of the injured workers. At the time of the application, based upon estimates presented to LTV Steel by the Bureau, LTV Steel expected those payments to be no more than $500,000 per quarter. However, at the hearing on the matter, the Debtors informed this Court that the Bureau had informed LTV Steel that the original estimates were incorrect. Rather than 70, there were approximately 242 injured workers whose compensation payments were not being paid by Aetna and National and the quarterly cost would be closer to $600,000 rather than the originally estimated $500,000. At that time, the Debtors asserted that they were concerned that future demands for interim hardship payments would become even greater and more burdensome as Aetna and National continued to deny liability for the full extent of their obligations as sureties. On December 27, 1988, pursuant to this Court's order, LTV Steel paid $200,000 over to the Bureau for the benefit of the affected workers.
Subsequently, in May 1990, the Debtors again applied to this Court for permission to make additional hardship payments. In its application, the Debtors stated that in March 1990 the Bureau informed LTV Steel that Aetna had announced its intention to cease making payments when the one surety bond, under which Aetna believed that it was solely liable, was exhausted. It was also represented to the Court that Aetna's bond would be exhausted sometime in June and that the Bureau does not have an established fund from which to pay benefits due to injured workers whose payments were covered by the disputed Aetna surety bonds. Moreover, the Debtors also stated that because of these circumstances, it now estimated that approximately 500 individuals will cease being paid workers' compensation benefits and will suffer hardship as a result. The Debtors estimated that the annual cost of providing such benefits would be $7 million. Consequently, LTV Steel sought authorization to pay interim hardship workers' compensation benefits for claims which are the focus of the instant controversy. On May 30, 1990, this Court approved the Debtors' request.
The dispute between Aetna and the Bureau essentially centers around the extent of Aetna's obligations under five surety bonds. Aetna alleges that from December 15, 1978 and thereafter, Aetna issued surety bonds on behalf of certain LTV Corporations and their predecessors. In connection with the merger of those corporations and their combination with other corporations, Aetna maintains that certain of those bonds were discharged by operation of law or by agreement. Consequently, Aetna contends that at the time of the filing, Aetna had outstanding only one surety bond on behalf of certain LTV Corporations in the penal sum of $27.0 million. In contrast, both the Debtors and the Bureau contend that Aetna is liable under all five bonds with an aggregate bond penalty of $51.0 million.
The bonds that the Debtors and the Bureau contend are collectible are as follows:
On December 1, 1988, the Debtors filed an action in this Court seeking a declaratory judgment that Aetna and National3 are liable to the full extent of their obligations as sureties as expressed by the terms of the bonds (the "Adversary Proceeding"). LTV Steel seeks judgment, inter alia, declaring that certain surety bonds issued by Aetna remain in force and effect and that Aetna's liability to the Bureau pursuant to those bonds is coextensive with the face value, as modified by rider, of each bond; and declaring that Aetna must reimburse the Debtors for any interim payments made for...
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