In re Farley, Inc.
| Decision Date | 07 June 1999 |
| Docket Number | Bankruptcy No. 91 B 15610. |
| Citation | 237 BR 702 |
| Parties | In re FARLEY, INC., Revested Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
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Mark K. Thomas, Amy A. Hijjawi, Katten Muchin & Zavis, Chicago, IL, for Debtor.
Benjamin J. Randall, Lawrence Karlin, Rusty A. Payton, Katz Randall & Weinberg, Chicago, IL, for Claimant.
This proceeding was started on July 24, 1991, by the filing of an involuntary petition against Farley Inc. ("Farley" or "Debtor") under Chapter 7 of the Bankruptcy Code. Farley consented to entry of an order for relief, and exercised its right under 11 U.S.C. § 706(a) to convert the proceeding to one under Chapter 11 of the Bankruptcy Code. 11 U.S.C. § 101, et seq. Farley operated as debtor-in-possession until December 1, 1992, when its Fourth Amended Plan of Reorganization was confirmed.
On December 9, 1991, the Ohio Bureau of Workers' Compensation ("Bureau" or the "State") filed its proof of claim, Claim No. 509, amended on September 18, 1995, again on September 26, 1995, and finally September 10, 1997 ("Claim 509"). The final version claims reimbursement based upon Farley's asserted statutory obligation for workers' compensation payments, a common law right of suretyship, and an executed guarantee document.
Farley objected to an earlier version of this claim and moved for summary judgment. Although that motion was granted, the ruling was reconsidered and the motion denied as it was determined that the initial ruling was based on an inadequate record. The final amended proof of claim was later filed and the matter was set for trial.
At trial, the parties stipulated to all fact issues and then rested, leaving only matters of law to be determined. Final arguments were presented through post-trial filings. The Court now makes and enters the following Findings of Fact and Conclusions of Law. Pursuant thereto and based upon the pleadings, exhibits, stipulations, undisputed findings in the earlier summary judgment proceeding1 and for reasons stated herein under Ohio Law, the claim as amended will be entirely disallowed, and judgment will enter separately thereon in favor of the Debtor. The State of Ohio has proved to be the victim of a gap in its statute that was amended too late to help it in this case.
Subject matter jurisdiction lies under 28 U.S.C. § 1334. This matter is here pursuant to 28 U.S.C. § 157 and Local General Rule 2.33(A) of the United States District Court for the Northern District of Illinois. Venue lies properly under 28 U.S.C. § 1409. This matter constitutes a core proceeding under 28 U.S.C. § 157(b)(2)(B) ().
Prior to the bankruptcy filing, Farley operated in the state of Ohio at its Doehler-Jarvis Division. It operated in Ohio from October 1982 through July 25, 1990, under the name Farley Metals, Inc. Farley Inc. was the parent corporation of Farley Metals. In February 1988, Farley Metals changed its corporate name to Farley Inc.
Pursuant to the Ohio Workers' Compensation Act ("Ohio Act"), Farley elected and was granted the privilege of operating in Ohio as a self-insuring employer. It was in compliance with Section 4123.35 and Section 4123.351 of the Ohio Act at all times that it operated and employed persons in the State of Ohio.
Under the Ohio workers' compensation system, an employer may apply for the privilege of self-insurance rather than paying premiums to the state insurance fund. Section 4123.35 provides the requirements for self-insurance. As discussed below, a self-insured employer was originally able to purchase a bond from any number of commercial bond companies. The statute was later amended to require a self-insurer to purchase the bond from a state run surety bond program.
During the period October 1, 1982, through October 1, 1986, Farley posted the following surety bonds issued by private third-party sureties:
BOND BOND
SURETY BOND PERIOD AMOUNT NUMBER
The Travelers Indemnity Co. 10/1/82 to 10/1/83 $ 565,000 19SE2453
The Travelers Indemnity Co. 10/1/83 to 10/1/84 $ 205,000 19SE2453
Safety Mutual Casualty Corp. 10/1/84 to 10/1/85 $ 680,000 SIB351OH
Employers Reinsurance Corp. 10/1/85 to 10/1/86 $1,000,000 DC-33599X
Each of the bonds posted and identified above provided surety solely for the specified Bond Period (i.e. claims year) stated. The Bureau does not make any claim for payment from Farley based upon workers' compensation claims which arose between October 1, 1982, and October 1, 1986, during periods for which those bonds were posted.
Pursuant to an amendment of the Ohio Act effective August 22, 1986, self-insuring employers were required to obtain surety bonds from the Self-insuring Employers' Surety Bond Fund ("Surety Bond Fund"), now known as the Self-Insuring Employer's Guaranty Fund. The Industrial Commission of Ohio ("Commission") was the entity required by the amended Ohio Act to issue the bonds. The state thereby was to become its own guarantor through the Commission bonds. However, despite the change in law giving it that responsibility, it never actually issued bonds to Farley or to any other self-insuring employer.
Farley nonetheless paid all premiums charged to it by the Bureau on behalf of the Surety Bond Fund under the amended Ohio Act. Farley also paid all assessments charged to it by the Bureau to cover the Bureau's costs and fees incurred in administering the Surety Bond Fund. Farley thereby paid the following amounts to the Surety Bond Fund which entitled it to issuance of statutory surety bonds from October 1, 1997, to September 30, 1990, the period now in dispute (the "Claims Period"):
AMOUNT
PERIOD FARLEY PAID
10/01/87 to 9/30/88 $ 2,400.00
10/01/88 to 9/30/89 $25,062.84
10/01/89 to 9/30/90 $49,969.54
On or about September 4, 1990, Farley informed the Bureau that it had sold its Doehler-Jarvis division and requested that its self-insurance privileges be rescinded retroactively as of July 25, 1990. Farley's active self-insured status was thereupon canceled by the Bureau. After cancellation of its self-insured status effective July 25, 1990, Farley continued to process workers' compensation claims which arose prior to July 25, 1990. On or about April 2, 1991, Farley notified the Bureau that, as of May 1, 1991, it no longer had the financial ability to pay claims which arose during its self-insurance period. Farley also notified the Bureau that it had posted security for each of the claims years at issue to cover payment of the claims of its former workers.
Subsequent to May 1, 1991, the Bureau started to administer employee claims that arose during Farley's self-insurance period. As discussed below, Farley and the Bureau have stipulated that the Bureau has paid $2.6 million on account of claims by former Farley workers which arose during the Claims Period. Each payment the Bureau made in that regard was made from the Surplus Fund established under the Ohio Act and then charged to the Surety Bond Fund under the same Act. The Surety Bond Fund then reimbursed the Surplus Fund for each payment.
The Surety Bond Fund is, and always has been, funded exclusively by the self insuring employers operating in Ohio, either through assessments paid or from recoveries received by the Bureau from self insured employers on behalf of the Surety Bond Fund. The Bureau also administers the State Insurance Fund which is funded exclusively by employers operating in Ohio. A portion of the State Insurance Fund is reserved and referred to as the Surplus Fund. The Surety Bond Fund and the Surplus Fund are distinct statutory funds with distinct payment obligations and bank accounts. The Bureau makes payments on behalf of each of the funds through the State Insurance Fund.
On June 17, 1998, the parties entered into a stipulation herein. Among other things, the stipulation provided that, if Farley is found to be liable to the Bureau on Claim 509, Farley's possible liability would be $2.6 million for total payments already made by the Bureau to former Farley employees. It was further agreed that liability (if adjudged) would also lie for certain projected permanent total disability employee claims to be liquidated in the future, amounting to the total of actual payments to be made by the State to former Farley employees if and when such projected payments are actually made. The parties also stipulated that, if the amended claim were allowed, it would be treated as a Class 5 General Unsecured Claim under Debtor's confirmed plan of reorganization.
Additional facts set forth in the Conclusions of Law will stand as additional Findings of Fact. Legal conclusions in the Findings will stand as additional Conclusions of Law.
A filed proof of claim constitutes prima facie evidence of the claims validity. Fed. R. Bankr.P. 3001(f). The initial burden of going forward falls on an objector to the claim, but once an issue is presented the burden shifts back to claimant who has the ultimate burden to prove entitlement. See Matter of Missionary Baptist Foundation of America, 818 F.2d 1135, 1143 (5th Cir.1987); In re Stoecker, 143 B.R. 879, 883 (N.D.Ill.1992), aff'd in part, vacated in part, 5 F.3d 1022 (7th Cir.), reh'g denied, (1993); see also Matter of Chapman, 132 B.R. 132, 143 (Bankr.N.D.Ill. 1991) and cases cited.
The Bureau's final version of its amended proof of claim was filed under three alternative...
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