The Strange Case of Irving Tanning

1. The Strange Case of Irving Tanning How the bankruptcy process may pose a threat to states’ self-insured workers’ compensation programs Presented by Liz Wyman, AAG, State of Maine To State Self-Insurance Guaranty Fund Administrators June 3, 2012

2. Introduction • Irving/Prime Tanning processed leather for use in manufacture of shoes. Two facilities in Maine and one in Missouri • Came through Chapter 11 bankruptcy in 2005 • Irving/Prime Tanning filed a second Chapter 11 in Maine bankruptcy court on November 16, 2010 • Initial skirmish over self-insurance funds through a TRO process • Irving sold its business to Tasman Leather Group in February, 2011 • As a liquidating chapter 11, it is no longer about reorganizing and “saving jobs in Maine”

3. The Self-Insurance Funds • Maine: Irving was secured through the Vista Trust, held in a private bank trust account, in the amount of $330,000 as of bankruptcy filing; currently 74 open claims • Prime funds originally held through letter of credit. Terminated self-insurance in 2008. When Prime declined to renew LOC in 2010, Superintendent demanded payment of the full value: $718,000, which was paid into an account held by the Treasurer of the State of Maine. As of December 31, 2011, $392,000 in fund, with 6 open claims and unknown number of potential claims (within 6-year statute of limitations) • Cash collateral held by Acstar to secure surety bonds issued to Missouri and New Hampshire

4. Irving sets the trap: claims bar date • On May 11, 2011, Irving files a motion to set a bar date for all workers’ compensation claimants to file a proof of claim • Court enters an order allowing a bar date of September 19, 2011 • Irving sends the order to all former employees • Only 9 workers’ compensation claimants file claims • The self-insurance funds file protective claims

5. The Plot Thickens • The Plan of Reorganization Highlights (or low blows) Channeling injunction Requires turnover of all self-insurance funds to the bankruptcy estate Allows the bankruptcy court to estimate the value of workers’ comp claims Bars workers’ comp claims Irving expects to pay only $230,000 to claimants $1,000,000 to go to the estate Third party releases The plan prohibits the self-insured guarantee funds to pay claims to workers

6. The Process • Irving files adversary complaint and TRO against Missouri • Missouri responds with Maine’s help • Maine and Missouri file objections to plan of disclosure • Hearings: February 2 and February 28, 2012 • Current procedural posture

7. The Legal Argument • Self-insurance funds are not property of the estate • As a matter of state statute: Maine statute prohibits distribution of security to creditors • As a matter of contract law: the trust documents and the letter of credit state that the funds may only be used for payment of workers’ compensation claims (no diverted purpose allowed) • All the debtors have is a “chose in action” (the right to request the Superintendent to adjust the security and release any excess when he deems it appropriate) • The right to “excess proceeds” of a letter of credit requires that the claims be liquidated (there are 80 open claims subject to liability for six years from the date of last payment – we are probably undersecured)

8. Keeping the Bankruptcy Court out of State Law Matters • Workers’ comp is uniquely within the province of the state – it is not for the bankruptcy court to estimate the claims or determine what is sufficient amount of money to be available to satisfy these claims • Workers’ comp claimants are not typical tort claimants: the claims have a very long tail and the claimants are statutorily entitled to recovery

9. What Happens Next? • If the Court rules against Maine and Missouri, we file an appeal to the Bankruptcy Appellate Panel of the First Circuit Court of Appeals • Request for amicus filings • Worst-case scenario – seek amendment of the Bankruptcy Code to create a special classification for workers’ compensation claims