California Employer Wants Comp Claims Settled in Bankruptcy Court

California is opposing the efforts of one employer to try to force injured workers to settle their claims in bankruptcy court.

The California Department of Industrial Relations (DIR) and its Office of Self Insurance Plans (SIP) is opposing the attempt by bankrupt Henry Mayo Newhall Memorial Hospital to force injured workers to resolve unpaid workers' compensation claims in U.S. bankruptcy court rather than before the state's Workers' Compensation Appeals Board (WCAB).

Henry Mayo Hospital, in Valencia, filed for in Chapter 11 bankruptcy in November 2001, and stopped paying workers' compensation benefits to its injured employees in May. The hospital filed an emergency motion that would remove jurisdiction of those workers' appeals from the WCAB to the U.S. Bankruptcy Court. The motion also seeks sanctions against DIR for ordering the remaining self-insured claim files turned over for payment by the Self Insurers' Security Fund along with the security deposit posted by the hospital for this purpose.

DIR claims a ruling in the hospital's favor "could seriously jeopardize the integrity of California's self insurance program" by defeating the purpose of the deposit.

"Self insurance statutes protect injured workers by requiring self-insured employers to post a security deposit to pay their workers' compensation liabilities if the employer is unable to pay benefits due for any reason," said SIP Manager Mark Ashcraft. "Henry Mayo stopped payment of their workers' compensation benefits, causing DIR to turn over both the security deposit and the workers' compensation liabilities of the hospital to the Security Fund."

The Security Fund was created to ensure continued payment of self-insured workers' compensation benefits to injured workers. Henry Mayo and its related companies were self insured from 1983 to 1997.

Although the hospital filed for bankruptcy in November 2001, it continued paying on its self insured benefits without lifting the automatic stay on payment of pre-petition liabilities caused by filing a bankruptcy petition. After learning of the hospital's bankruptcy in March 2002, SIP repeatedly asked whether the hospital intended to lift the automatic stay, to continue paying benefits, or if they intended to default on their self-insured workers' compensation obligations.

As is customary when a self insurer files a bankruptcy petition but does not seek court permission to continue paying benefits, SIP conducted a special audit of remaining liabilities and found Henry Mayo had under-reported their potential liabilities in the hospital's annual report to SIP. The employer was ordered by SIP to increase their security deposit more than $1.3 million.

Henry Mayo alleges the workers' compensation security deposit and claims files are property of the estate, subject to the automatic stay, and wants sanctions imposed against DIR and the Security Fund for taking action to insure continued payment of benefits, which also prevents Henry Mayo from forcing the remaining injured workers into bankruptcy court with all the other creditors to settle their claims.

"To my knowledge, this is the first time since the Security Fund was created in 1984, in over 50 self-insured insolvencies, that an employer has attempted to change the court of jurisdiction for payment of self-insured workers' compensation claims from the WCAB to bankruptcy court or objected to the Security Fund performing its statutory duties," Ashcraft noted.

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