Matter of: Farley, Inc., 00-1976
| Decision Date | 23 January 2001 |
| Docket Number | No. 00-1976,00-1976 |
| Citation | 236 F.3d 359 |
| Parties | (7th Cir. 2000) In the Matter of: Farley Inc., doing business as Tool & Engineering and Magnus Metals, Debtor. Appeal of: Ohio Bureau of Workers' Compensation |
| Court | U.S. Court of Appeals — Seventh Circuit |
Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 99 C 4789 (91 B 1560)--Charles R. Norgle, Sr., Judge.
Before Bauer, Posner, and Easterbrook, Circuit Judges.
Like most states, Ohio requires employers to insure their workers' compensation obligations. Ohio permits well- heeled firms to dispense with insurance if they post surety bonds. Bonds are less costly than insurance because the surety has a right of subrogation against the employer in the event the surety is called on to pay. In 1986 Ohio entered the bonding business, requiring self-insuring employers to obtain surety bonds from the state. Ohio Rev. Code sec.4123.351(B). Between October 1987 and July 1990 Farley Inc. paid Ohio to stand behind benefits for workers at the firm's Doehler-Jarvis plant, which Farley sold in the latter month. For almost a year Farley continued to remit benefits for injuries that had occurred while it was the plant's operator, but in May 1991 it ceased, asserting insolvency. The Ohio Bureau of Workers' Compensation, as Farley's surety, met its responsibility by paying on Farley's behalf. The Bureau then filed a subrogation claim in Farley's bankruptcy. After needlessly protracted proceedings, Bankruptcy Judge Schmetterer denied the Bureau's claim, ruling that Farley fulfilled all of its obligations by paying the annual premiums for the bond. 237 B.R. 702 (Bankr. N.D. Ill. 1999). The district court affirmed in an unpublished opinion, and now the dispute is in our bailiwick.
Farley never paid more than $50,000 annually for surety bonds that guaranteed a workers' compensation bill that exceeded $1 million each year. This sum looks like a bonding premium rather than an insurance premium. Yet both the bankruptcy court and the district court held that Farley had acquired insurance--at least, insurance that took effect on its insolvency--and therefore did not have an obligation to reimburse the Bureau for sums paid to injured employees on its behalf. Both courts held, in other words, that Ohio made a gift to Farley's other creditors in bankruptcy (perhaps to its shareholders, if a surplus remains after all debts have been paid) by assuming all responsibility for its workers' compensation rolls. The cornerstone of that conclusion in both courts was their observation that until 1993, when the state enacted Ohio Rev. Code sec.4123.351(G), no provision in state law expressly established the Bureau's right to subrogation when it made payments on the bond. Nor did the bond itself establish such a right, for the "bond" was a statutory construct, a legal obligation of both employer and bureau without existence as a separate piece of paper containing detailed terms. We bypass the question whether Ohio law before 1993 gave the Bureau a right to recover on the theory that by failing to make payments to employees, and thus activating the Bureau's obligation to pay as surety, Farley became liable under Ohio Rev. Code sec.4123.75 because it "failed to comply" with Ohio Rev. Code sec.4123.35. An opinion by the Supreme Court of Ohio says that failure to pay employees is "failure to comply." Holben v. Interstate Motor Freight System, 31 Ohio St. 3d 152, 156, 509 N.E.2d 938, 941 (1987). But Ohio follows its unique Syllabus Rule, Ohio St. Rep. R. 1, which limits holdings to the syllabus preceding the opinion, and this statement, which does not appear in the syllabus, therefore is not authoritative. "Failure to comply" with the workers' compensation laws in Ohio has far- reaching consequences, including restoration of all employees' rights under the common law of torts. Thus the Bureau's argument under sec.4123.75 amounts to a contention that bankrupt employers fall out of the strict-liability system, and their employees can initiate tort litigation. There is a better route to decision in this case, a solution with fewer side effects.
Farley treats a surety bond as the equivalent of bankruptcy insurance because it assumes that a surety, like an insurer, owes its obligation to the employer, and that, when the surety pays, the employer's debt to its employees has been satisfied. End of transaction. That is how insurance works, but it is not how suretyship works. A surety undertakes an obligation to third parties, promising to step in if the principal obligor defaults. But a surety does not take the principal's obligation for its own; it pays on the principal's behalf. Like a bank that has issued a letter of credit (or pays on a...
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...Counsel, Legislative Drafting Manual 10 (1997). Koons, 543 U.S. at 60-61, 125 S.Ct. 460 (citation omitted). Cf. In re Farley Inc., 236 F.3d 359, 361-62 (7th Cir.2000) ("A legislature that chooses language with time-tested effects does not have to narrate those effects in order to achieve th......
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