In re Georgetown Steel Co., LLC

• Decision Date: 28 April 2004
• Docket Number: C/A No. 03-13156-W.,Adversary No. 03-80544-W.
• Citation: 318 B.R. 313
• Court: U.S. Bankruptcy Court — District of South Carolina
• Parties: In re GEORGETOWN STEEL COMPANY, LLC, Debtor. Georgetown Steel Company, LLC and Cananwill, Inc., Plaintiffs, v. Capital City Insurance Company, Inc., Defendant.

318 B.R. 313

In re GEORGETOWN STEEL COMPANY, LLC, Debtor Georgetown Steel Company, LLC and Cananwill, Inc., Plaintiffs, v. Capital City Insurance Company, Inc., Defendant.

C/A No. 03-13156-W.

Adversary No. 03-80544-W.

United States Bankruptcy Court, D. South Carolina.

April 28, 2004.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Michael M. Beal, Lead Attorney, Columbia, SC, for Debtor.

Joseph F. Buzhardt, III, Office of the United States Trustee, Columbia, SC, for trustee.

ORDER

JOHN E. WAITES, Bankruptcy Judge.

THIS MATTER came before the Court for hearing upon the filing of an Adversary Complaint filed by Georgetown Steel Company, LLC ("Debtor") and an Amended Adversary Complaint of Debtor and Cananwill, Inc. (collectively the "Complaint").¹ The Complaint seeks an Order: (1) enjoining Capital City Insurance Company, Inc. (the "Carrier") from any postpetition cancellation of its workers' compensation insurance policy (the "Policy") based on prepetition claims without moving for and obtaining an order from this Court granting such relief; (2) directing Carrier to immediately remit a refund in the amount of $1,960,001 to Cananwill, Inc. ("Cananwill"); (3) enjoining Carrier from offsetting any portion of the alleged Refund; (4) ruling that the Loss Sensitive Rating Plan ("LSRP") Endorsement is invalid and unenforceable as to the first Policy coverage period and any additional LSRP Premium due and owing is $0; (5) ruling that the LSRP Endorsement is invalid and unenforceable as to the current or second Policy coverage period and no LSRP Premium is due and owing thereunder; and (6) for such other and further relief as is just and proper. Debtor also asserts that Carrier violated the automatic stay pursuant to 11 U.S.C. § 362. The Carrier opposes the relief sought and asserted affirmative defenses of setoff, or alternatively recoupment, for anything it is determined to owe Debtor against what Debtor owed to Carrier.

Having considered the record of the case including the pleadings, the arguments of counsel, and the testimony of witnesses, the Court makes the following findings of fact and conclusions of law.²

FINDINGS OF FACT

1. Debtor owns and operates a steel mill located in Georgetown, South Carolina (the "Steel Mill").

2. Cananwill is an insurance premium finance company whose business consists of lending money to companies to finance their insurance premiums.

3. The Carrier is licensed and authorized to provide insurance services in South Carolina (the "State") by the South Carolina Department of Insurance ("SCDOI").

4. The Carrier provides workers' compensation insurance to Debtor. The relationship commenced in 2002 when the Carrier provided coverage to the former operator and owner of the Steel Mill, Georgetown Steel Corporation ("Former Owner") prior to Debtor. In order to obtain workers' compensation coverage, the Former Owner employed AON Risk Services, Inc. of the Carolinas ("AON"). For a variety of reasons, the Former Owner was unable to obtain workers' compensation coverage in the voluntary insurance market. Consequently, AON, on behalf of the Former Owner, submitted an application for coverage under South Carolina's assigned risk workers' compensation program.

5. Pursuant to South Carolina law, the Former Owner (and later, Debtor) maintained a level of employees such that they were required to maintain workers' compensation insurance coverage. For those entities that cannot obtain workers' compensation coverage in the voluntary market, the State has an established "assigned risk" or "residual market." Rates for such a program are established by the State, and rules and procedures have been promulgated by the State as they relate to the assigned risk market — the South Carolina Workers Compensation Assigned Risk Plan, Operating Rules and Procedures (the "S.C. Plan"). The plan administrator for the residual market is the National Counsel on Compensation Program, Inc. ("NCCI").

6. Following submission of an application to SCDOI (or NCCI),³ a procedure is followed for assignment to a particular approved carrier. In 2002, the Former Owner's application was eventually submitted to the Carrier, and the Carrier and the Former Owner entered into a workers' compensation policy for the period June 1, 2002 to June 1, 2003 (the "Prior Policy"). The Former Owner filed for bankruptcy protection, and the Prior Policy was assumed and assigned to Debtor as buyer of substantially all of the assets.

7. The Former Owner initially paid $1.1 million for coverage under the Prior Policy. The $1.1 million premium was subsequently increased to $2,044,281 as a consequence of accurate expense modification information and a 20% Loss Sensitive Rating Plan Premium ("LSRP").⁴

8. Debtor also paid an additional $291,256 premium payment for the Prior Policy, as a result of the Carrier's audits of the Former Owner's and Debtor's payroll records during and shortly after expiration of the Prior Policy term 9. In the spring of 2003, Debtor anticipated the expiration of the Prior Policy and asked AON to attempt to obtain workers' compensation coverage for Debtor in the voluntary market. Testimony was presented concerning whether a certain quote received constituted a voluntary offer, but in the end Debtor was unable to procure voluntary workers' compensation coverage and AON, on behalf of Debtor, submitted an application to the NCCI for workers' compensation coverage through South Carolina's assigned risk program.

10. Around June 16, 2003, the Carrier issued a workers' compensation policy to Debtor for the period June 1, 2003 to June 1, 2004 (the "Current Policy").

11. Based on Debtor's estimates of payroll for the one-year period commencing June 1, 2003 and a 20% LSRP deposit, the cost of the Current Policy was $2,677,914.

12. In order to pay the premium, Debtor financed the premiums related to the Current Policy through a loan from Cananwill.⁵ It is undisputed that the Carrier received notice with respect to Cananwill's interest in return premiums.

13. As a result of a retrospective audit of payroll for the Prior Policy period, the Carrier invoiced Debtor for $195,031 of additional premium for the Prior Policy (the "Audit Claim").

14. Debtor did not pay that amount when it was due and, on October 9, 2003, the Carrier's computer system automatically issued a notice of cancellation of the Policy.

15. Debtor eventually wrote and submitted a check dated October 14, 2003 to the Carrier for the $195,031 additional Audit Claim. After receiving Debtor's check for $195,031, the Carrier reinstated the status of Debtor's coverage on October 16, 2003.

16. On October 21, 2003, (the "Petition Date"), Debtor filed its voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the District of South Carolina.

17. As of the petition date, Debtor continued to operate its business and manage its properties as a debtor and debtor-in-possession pursuant to §§ 1107(a) and 1108 of title 11 of the United States Code, 11 U.S.C. § 101, et seq. (the "Bankruptcy Code").

18. On the Petition Date, Debtor ceased essentially all operations and reduced the number of employees from 500 to 52.

19. Although Debtor had issued a check for payment of the Audit Claim for the Prior Policy prior to the Petition Date, the check did not clear Debtor's banking institution prior to the commencement of Debtor's bankruptcy case and was not honored. As a result of the dishonored check, the Carrier's computer system automatically sent Debtor a second notice of cancellation on October 27, 2003. The second notice stated that the Carrier intended to cancel Debtor's current policy if Debtor did not pay the Audit Claim by December 2, 2003.

20. The parties have stipulated that the $195,031 Audit Claim is a valid and enforceable pre-petition claim that Debtor owes to the Carrier.

21. After the Petition Date, Debtor asked AON to seek a recalculation of the premiums under the Current Policy and turnover of the excess premium from the Carrier based on Debtor's actual payroll figures from June 1, 2003 to the Petition Date of October 21, 2003 and revised and reduced estimated payroll from October 22, 2003 through the end of the Current Policy period. As a result, the Carrier requested that AON forward Debtor's revised payroll information to the Carrier.

22. On November 5, 2003, AON sent Debtor's actual payroll amounts through October 21, 2003 and estimates of payroll for October 22, 2003 through June 1, 2004 to the Carrier.

23. At or about the same time, the Carrier advised AON telephonically that Debtor owed the Carrier an additional premium for the Prior Policy because of an LSRP provision contained in the Prior Policy. The Carrier asserted that Debtor owed $1.5 million on the Prior Policy under the LSRP endorsement that provided for a retroactive premium based on actual losses incurred during the Prior Policy's coverage period.

24. As a follow-up to the telephone conversation, on November 11, 2003, the Carrier sent a letter, with attachments, stating:

Based on the payroll projections you provided from the insured, once the current term is endorsed, there will be credit on the account of $1,960,000. We will send the finance company, Cananwill, a refund of $971,933.12 representing the unpaid installments. The remaining $988,067.88 will be applied to the LSRP Calculation [for the Prior Policy] ... This leaves a balance due on the account of $366,750.12.

We'll be processing the above within the next week. The balance of $366,450.12 will need to be paid prior to the cancellation date of 12/2/03 in order for the policy to be reinstated.

25. In the November 11, 2003 letter, the Carrier also asserted that Debtor still owed the $195,031 Audit Claim, along with an additional LSRP premium totaling approximately $1.16 million after the initial 20% LSRP deposit was subtracted.

26. Shortly after the November 11, 2003...