In re North Side Lumber Co., Bankruptcy No. 385-00316

• Decision Date: 24 April 1986
• Docket Number: Bankruptcy No. 385-00316,Adv. No. 85-0521.
• Citation: 59 BR 917
• Court: U.S. Bankruptcy Court — District of Oregon
• Parties: In re NORTH SIDE LUMBER COMPANY, a partnership of Anna M. Bevens; The Estate of Dorval Bevens, deceased, Norman Jean Vincent and H. David Smith, Trustees of the Norma Jean Vincent Trust; and H. David Smith, Trustee of the Ryan D. Vincent Trust, the Pamela Jean Vincent Trust, and the Timothy L. Vincent Trust, Debtor. NORTH SIDE LUMBER COMPANY, Plaintiff, v. INDUSTRIAL INDEMNITY COMPANY, a corporation, Barclays American/Business Credit, Inc., Seattle-First National Bank, United Pacific Reliance, Nelli Scott, Leasco of Washington, Inc., Hyster Credit Corporation, G. Moser, Starker Forests, Inc., Gassner Logging, D.T.L. Logging Co., Ramco Logging, R.L. Rose Logging, Inc., R & T Logging, J T W, Inc., Richard Van Damme, Gerald Smallwood Logging, Inc., A.C. Brown & Son Logging, Dale Crocker, Shot Pouch Logging, Inc., William A. Smith, Raymond D. Friend, Ferguson Logging Co., Ted Stephens, John Thompson, Inc., E.G. Construction, Inc., Atchley Bros., W E H Corp., L & M Welding, Inc., Devco Engineering, Inc., Morse Brothers, Inc., North Star Surveying, Inc., Ralph Cole, dba R & J's Radiator Service, George Van Dyke, and Ronald G. Oleman, Defendants.

59 B.R. 917 (1986)

In re NORTH SIDE LUMBER COMPANY, a partnership of Anna M. Bevens; The Estate of Dorval Bevens, deceased, Norman Jean Vincent and H. David Smith, Trustees of the Norma Jean Vincent Trust; and H. David Smith, Trustee of the Ryan D. Vincent Trust, the Pamela Jean Vincent Trust, and the Timothy L. Vincent Trust, Debtor NORTH SIDE LUMBER COMPANY, Plaintiff, v. INDUSTRIAL INDEMNITY COMPANY, a corporation, Barclays American/Business Credit, Inc., Seattle-First National Bank, United Pacific Reliance, Nelli Scott, Leasco of Washington, Inc., Hyster Credit Corporation, G. Moser, Starker Forests, Inc., Gassner Logging, D.T.L. Logging Co., Ramco Logging, R.L. Rose Logging, Inc., R & T Logging, J T W, Inc., Richard Van Damme, Gerald Smallwood Logging, Inc., A.C. Brown & Son Logging, Dale Crocker, Shot Pouch Logging, Inc., William A. Smith, Raymond D. Friend, Ferguson Logging Co., Ted Stephens, John Thompson, Inc., E.G. Construction, Inc., Atchley Bros., W E H Corp., L & M Welding, Inc., Devco Engineering, Inc., Morse Brothers, Inc., North Star Surveying, Inc., Ralph Cole, dba R & J's Radiator Service, George Van Dyke, and Ronald G. Oleman, Defendants.

Bankruptcy No. 385-00316, Adv. No. 85-0521.

United States Bankruptcy Court, D. Oregon.

April 24, 1986.

Lucy E. Kivel, Portland, Or., for North Side Lumber Co. Elizabeth H. Yeats, Portland, Or., for defendant United Pacific Reliance Co.

M. Christie Helmer, Portland, Or., for defendant Seattle First Nat. Bank and Leaseco. of Washington, Inc.

Margaret Leek Leiberan, Portland, Or., for defendant Barclays American/Business Credit, Inc.

Gregory J. Christensen, Corvallis, Or., for defendant Nellie Scott.

James P. Laurick, for defendant Indus. Indemnity Co.

ELIZABETH L. PERRIS, Bankruptcy Judge.

This is an adversary proceeding brought by the Debtor-in-Possession, North Side Lumber Co., to determine the validity of the lien claimed by Industrial Indemnity Co. under ORS 656.564.¹ Industrial Indemnity provided North Side workers' compensation insurance from July 1983 until cancellation in February, 1985. North Side's secured creditors have joined in its attempt to defeat the Industrial Indemnity lien because the lien, if valid, would be superior to their liens.

FACTUAL BACKGROUND

North Side and Industrial Indemnity entered into Workers' Compensation Policy No. 852-5234 for the policy year July 1, 1983 through June 30, 1984 and Policy No. 858-9925 for the policy year July 1, 1984 through June 30, 1985. Both policies covered the workers at all three sawmill sites owned by North Side.

The policies have two central characteristics: a retro-spective premium endorsement and a deferred payment plan. Retro-spective premium endorsements, which are common in the workers' compensation insurance industry, require that the insured pay a premium based on an estimated standard premium. The first retro-adjustment takes place between six and nine months after the close of the policy term. At that point the insurer conducts an audit and calculates the actual loss experience of the insured. The initial premium is then adjusted upward or downward according to the amount of loss suffered. Further adjustments are made during a period lasting as long as five years after the policy term expires. Retro-spective premiums operate as an incentive for employers to provide safe work places by allowing them to reap the benefit of a low injury rate by lowering their insurance rates.

Deferred premiums allow the insured to pay only a fraction of its estimated premium during the policy period. The remainder is due at a specified time after the end of the policy period. The employer who has a low accident year can hope to offset the refund from his retro-spective adjustment with the amount owing on the deferred premium. If the employer has a high accident year he may have no refund coming after the retro-adjustment, and will face a large lump sum payment when the deferred amount comes due.

Prior to entering into a contract which includes deferred premiums, the insurer will usually require that a financial statement be submitted and approved. The decision of whether to defer a certain employer's premiums is strictly a business decision on the part of the insurer. In this case during the 1983-84 policy year, Industrial Indemnity deferred 70% of the estimated monthly premium. During 1984-85, 40% was deferred. Both policies called for payment of the deferred premium nine months after the close of the policy period.

The preliminary audit conducted by Industrial Indemnity in August, 1984 showed that North Side's losses were unexpectedly high in 1983-84. In September 1984, North Side agreed to make monthly payments of $30,783 in order to decrease the amount owed on the deferred premium. North Side failed to pay the premium billed on November 28, 1984. On January 28, 1985, Industrial Indemnity sent written demand for payment to North Side. The demand was made by certified mail, return receipt requested. The demand letter was received by plaintiff on January 31, 1985, the same day it filed bankruptcy. In its formal notice of default, Industrial Indemnity, apparently in accordance with its rights under the contract, chose to accelerate the balance due on the deferred premiums for both policy years. The demand was for $586,584.47. This figure reflected Industrial Indemnity's preliminary estimate of North Side's total liability for both policy periods, including full payment of deferred premiums and retro-adjustments.

In February, 1985, Industrial Indemnity caused a field audit of North Side's records to take place. This audit revealed that the amount owed by North Side was actually much less than Industrial Indemnity's first estimate. The audit determined that $142,862.47 was owed under the 1983-84 policy and $184,524.75 was owed for the 1984-85 policy year. The total amount due is $327,387.23.

On April 3, 1985, Industrial Indemnity moved for relief from the automatic stay in order to file its lien. Relief was granted on April 23, 1985. The order granting the motion states, "nothing in this order shall be construed to enhance Industrial Indemnity Company's rights under Bankruptcy Code §§ 362(b) and 546(b), or to establish that Industrial Indemnity Company has any rights under ORS 656.564, and that all issues with respect to the amount, validity and priority of the lien are reserved for determination at a future date." On October 23, 1985, Industrial Indemnity was granted relief from stay for the limited purpose of filing a complaint to foreclose its lien within the statutorily mandated time.

STATUTORY BACKGROUND

Chapter 656 of the Oregon Revised Statutes contains two provisions for the enforcement of workers' compensation insurance premium payment. ORS 656.564 provides a lien for "insurers". ORS 656.566 provides a lien in favor of the State Accident Insurance Corporation (SAIF). Since "insurer" is defined to mean SAIF or a private insurance company authorized to transact workers' compensation insurance in Oregon, ORS 656.005(15), it appears that SAIF has two liens available to enforce premium payment while private insurers only have one.

ORS 656.564(1) provides a lien for amounts due from an employer on the real property and structures upon which the workers, who are covered by the policy, work. The lien is for a sum equal to the "amount at any time due from such employer . . . on account of labor performed" on that property.

ORS 656.564(2) provides a lien on all "lumber, sawlogs, spars, piles, ties or other manufactured articles of whatsoever kind or nature, and upon all machinery, tools and equipment of the employer used in connection with the employment on which contribution, premiums or assessments are due." The lien is for a "sum equal to the amount at any time due" from the employer on account of workers covered by the policy.

ORS 656.564(3) states that, "in order to avail itself of the lien created by this section, the insurer shall, within 60 days after the employer is in default, as provided in ORS 656.560, file with the county clerk of the county within which such property is then situated a statement in writing describing the property upon which a lien is claimed and stating the amount of the lien claimed by the insurer." ORS 656.560 defines default as failure of an employer to make payment within 30 days after written demand is made for payment. The demand must be sent by registered or certified mail.

Suit to foreclose the lien must be commenced within six months of the filing of the statement. ORS 656.564(4). The lien created by ORS 656.564 is given priority over "all other liens and encumbrances, except labor liens and liens for taxes and other amounts due the state of Oregon." ORS 656.564(5).

The lien available to SAIF under ORS 656.566 allows a lien on "all property, whether real or personal, belonging to such employer." It attaches upon the filing of a notice of a claim of lien with the county clerk of the county in which the property is located. ORS 656.566(2). This lien is not given super-priority but is only prior to liens and encumbrances recorded subsequently to the filing of the claim of notice, except taxes and labor liens. ORS 656.566(5).

The super-priority lien which is today ORS 656.564 was first granted to the predecessor of SAIF in 1913. 1913 Or. Laws c. 112 § 24 (1913). In 1935, the lien now at 656.566 was created. 1935 Or.Laws c. 392 § 1. In 1979, ORS 656.564 was amended to allow private insurers to avail themselves of the super-priority lien. 1979 Or.Laws c. 815 § 6.

In 1971 the Oregon Court of Appeals in State Compensation Department v. Beaver Creek Lumber Co., 5 Or.App. 1, 480 P.2d 441 (1971), described ORS 656.564 as "ambiguous" and stated that it was the court's duty, when faced with such a statute, "to construe it so that it can be applied in a reasonable manner." 480 P.2d at 443. While the legislature amended the statute to address the...