In Re Farley, Inc.
1999 WL 615519, 1999 Bankr. LEXIS 912, 237 B.R. 702 (1999)
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Rule of Law:
Under the Ohio Workers’ Compensation Act prior to its 1993 amendment, a self-insuring employer that made all required payments into the state's surety bond fund did not become a 'non-complying employer' liable for reimbursement to the state merely by later defaulting on its direct payment obligations to employees.
Facts:
- Farley Inc. operated in Ohio as a self-insuring employer, meaning it paid its employees' workers' compensation claims directly rather than paying premiums to the state insurance fund.
- An amendment to the Ohio Workers' Compensation Act effective in 1986 required self-insuring employers to obtain surety bonds from a new state-run Self-insuring Employers' Surety Bond Fund ('Surety Bond Fund').
- From 1987 to 1990, Farley paid all required premiums and assessments to the Bureau of Workers' Compensation ('Bureau') on behalf of the Surety Bond Fund.
- Despite Farley's payments, the Industrial Commission of Ohio never actually issued the physical surety bonds to Farley or any other self-insuring employer as required by the statute.
- Farley sold its Ohio division in 1990 and notified the Bureau in April 1991 that it could no longer financially pay its workers' compensation claims directly.
- Beginning in May 1991, the Bureau began paying the claims of Farley's former employees from the state's Surplus Fund, which was then reimbursed by the Surety Bond Fund Farley had paid into.
Procedural Posture:
- Creditors filed an involuntary Chapter 7 bankruptcy petition against Farley Inc. in the U.S. Bankruptcy Court for the Northern District of Illinois.
- Farley consented to bankruptcy relief and converted the case to a Chapter 11 reorganization.
- The Ohio Bureau of Workers’ Compensation filed a proof of claim (Claim No. 509) against Farley's bankruptcy estate, which it later amended multiple times.
- Farley objected to the claim and moved for summary judgment, which the court initially granted.
- The court reconsidered its ruling, vacated the summary judgment, and denied Farley's motion.
- The Bureau filed its final amended claim, and the matter proceeded to trial.
- At trial, the parties stipulated to all facts, presenting only legal questions for the court's determination.
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Issue:
Does a self-insuring employer that paid all required premiums into the state's surety bond fund, but later defaulted on direct payments to employees, qualify as a 'non-complying' employer under Ohio Rev. Code § 4123.75, thereby making it liable for reimbursement to the state for payments made on its behalf?
Opinions:
Majority - Schmetterer, J.
No. A self-insuring employer that fulfilled its statutory obligation to pay into the state's surety bond fund is considered a 'complying' employer and is not liable for reimbursement under Ohio Rev. Code § 4123.75, even if it later defaults on direct payments to employees. The court reasoned that the term 'compliance' in § 4123.75 refers to an employer's adherence to the requirements for obtaining self-insured status under § 4123.35, which involves making premium payments to the State Insurance Fund or, for self-insurers, making payments into the Surety Bond Fund. Farley's subsequent inability to pay claims directly constitutes a 'default,' a distinct concept not covered by the reimbursement provision in § 4123.75 at that time. The court found further support in the fact that the Ohio legislature enacted an amendment in 1993, § 4123.351(G), to explicitly grant the Bureau a right of reimbursement against defaulting self-insurers; if this right had already existed under § 4123.75, the 1993 amendment would have been redundant and meaningless. The Bureau's common law suretyship claim also fails because the Bureau is a statutory entity whose powers are limited to those expressly granted by the Ohio Act, which did not provide for such a right of recovery prior to 1993.
Analysis:
This decision illustrates the principle of strict statutory construction and the judiciary's reluctance to fill legislative gaps. The court refused to expand the definition of 'non-complying' to cover Farley's 'default,' highlighting that a remedy for this specific situation did not exist in the statute at the time. The case serves as a critical precedent on the interpretation of the Ohio Workers' Compensation Act prior to its 1993 amendments, demonstrating that a legislative fix for a statutory loophole cannot be applied retroactively. It reinforces the idea that statutory entities, like the Bureau, possess only the powers expressly conferred upon them by the legislature and cannot rely on broader common law principles to create remedies not found in their enabling statutes.
