UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK Inre:
INPROCEEDINGS
MAJESTIC CAPITAL, LTD., et a!. UNDER CHAPTER 11
BK No. 11-36225 Debtors.
(Jointly Administered)
REPLY OF THE NEW YORK STATE WORKERS’
COMPENSATION BOARD IN FURTHER SUPPORT OF
ITS MOTION FOR RELIEF FROM THE AUTOMATIC STAY
The New York State Workers’ Compensation Board (“WCB”), by its attorneys, Rupp, Baase. Pfalzgraf, Cunningham & CoppolaLLC, submits this reply in further support of its
motion for an order terminating or, alternatively, modifying the automatic stay imposed pursuant to 11 U.S.C.
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362 to permit the WCB to pursue certain claims that is has against Majestic Capital, Ltd., Majestic USA Capital, Inc., Compensation Risk Managers, LLC, and Eimar, LLC (“Debtors”) in New York State Supreme Courtto the extent of a certain insurance policy.1. The Debtors, the official committee of unsecured creditors (“Unsecured Creditors”), Hickey-Finn & Co., Inc. (“Hickey-Finn”), SGRisk, LLC (“SGRisk”), and UHY LLP (“UHY”) object to the WCB’s motion primarily on the grounds that terminating the automatic stay would prejudice them and that it would not promote judicial economy. The WCB’s moving papers, however, make it clear that no one would be prejudiced and judicial economy would be
should be terminated. The Debtors have an insurance policy that defends and indemnifies them from the WCB’s claims, the WCB’s claims involve complex questions of New York State law, the WCB will suffer prejudice if the automatic stay is not terminated, and the WCB has a likelihood of success on the merits in its case in New York State Supreme Court.
A. The Debtors’ and Unsecured Creditors’ Objections.
3. The Debtors, who have taken the lead at objecting to the WCB’s motion, argue that the WCB’s motion should be denied for reasons of judicial economy and because terminating the stay would subject the Debtors to burdensome litigation in multiple forums. The Unsecured Creditors filed a statement in support of the Debtors’ objection.
4. With respect to the Debtors’ argument that they would be subjected to litigation on the same claims in multiple forums, they point out that certain creditors that have filed claims in this bankruptcy case also are members of one of the eight group self-insured trusts (“GSIT”) to which the WCB is the successor in interest. The claims, however, of individual GSIT members are derivative of the WCB’s claims, which the Debtors admit in their objection. See Debtors’ objection, dated October 19, 2011, at
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21, 22, 36, 43, 45, 46, and 54. The Debtors cannot argue simultaneously that the claims of the WCB and the individual members of the GSITs are duplicative, yet somehow are separate and distinct.-2-5. tinder New York State Workers’ Compensation Law (“WCL”), all
employers that make up a GSIT are liable for the GSIT’s underfunding. See affidavit of Michael Papa, sworn to October 6, 2011, in support of the WCB’s motion, at
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26 (“Papa Affidavit”). In its capacity as the governmental entity charged with the administration of the WCL, the WCB has levied assessments on the individual members of the GSITs that are the subject of the state court action. Those same individual members have submitted proofs of claim in the Debtors’ bankruptcy case based on those assessments. See Debtors’ objection at ¶ 36.6. The WCB also is the successor in interest to the GSITs at issue. In its capacity as successor in interest, the WCB is representing the interests of those individual members. Since the individual members’ claims are based on the WCB’s calculations of the total deficits of the eight GSITs at issue, the outcome of the WCB’s state court action will determine the value of those members’ claims.
7. The amounts of the GSITs’ deficits and the amounts of the pro rata shares owed by individual members of the GSITs are questions best decided by the New York State Supreme Court. The claims of the individual members can and should be held in abeyance pending a determination of the WCB’s claims by the New York State Supreme Court. Those claims are derivative of the WCB’s claims and necessarily dependent on the outcome of the New York State court action.
8. With regard to the claims of unsecured creditors that do not involve the assessments levied pursuant to the WCL to cover a GSIT deficit (e.g., the claims of lenders or landlords), those claims would not be prejudiced by the Court terminating the automatic stay. These claimants do not have a claim that would be covered by the Indian Harbor Insurance Company errors and omissions insurance policy (“Insurance Policy”) and, therefore, they would have no claim to the proceeds of that policy. These claimants would have claims against other assets of the estate.
9. The Insurance Policy is an errors and omissions policy. According to the language of the Insurance Policy, it applies to claims against the Debtors arising from “an act or omission including personal injury in the performance of professional services by the insured or by someone for whom the insured is legally responsible.” See Exhibit D to the WCB’s motion. The Insurance Policy applies to claims arising out of the Debtors’ sale and servicing of workers’ compensation insurance for members of the GSITs.
10. The Debtors offer only a conclusory allegation that there would be prejudice to other creditors if the stay were lifted. There would be none. If a creditor were a member of one of the GSITs, its claim would be covered by the WCB’s claim. If a creditor were not a member, it would have other rights and remedies available to it.
-4-11. The Debtors also argue that the California litigation, the conservation of Majestic Insurance Company by the California Department of Insurance (“CDOI”), and the winding down of Twin Bridges, Ltd. by the Bermuda regulatory authorities will have an impact on the WCB’s claims. They will not. This is particularly true because of the fact that the
Debtors, as they pointed out in their objection, have a second Indian Harbor Insurance Company errors and omissions policy to defend and indemnify them in the California litigation. See Debtor’s objection at
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30.12. Another deficiency with the Debtors’ objection is their attempt to simplify the WCB ‘s claims against them. While the Debtors correctly observe that this Court routinely hears claims involving allegations of breach of contract, breach of the duty of good faith and fair dealing, breach of fiduciary duty, fraud, conversion, and unjust enrichment, the Debtors
conveniently ignore the complex statutory and regulatory scheme that regulates GSITs.
13. New York State Supreme Court, by the Debtors’ own admission, is best suited for determining issues related to these statutes and regulations. As the Debtors argued in their motion to coordinate the state court actions, Justice Richard M. Platkin has experience handling GSIT litigation, and “Albany County is best suited to handle these actions because it frequently handles litigation involving the WCB.” See Exhibit B to the WCB’s motion at
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47. Justice Platkin is the commercial division justice in Albany County, and, in addition to theGSIT litigation.
14. The Debtors’ arguments that they will be unnecessarily burdened by the Court terminating the automatic stay are not credible. Their present arguments directly
contradict their arguments before the New York State Litigation Coordination Panel. The Debtors have handled the WCB’s litigation against them in much the same manner as the GSITs that they mismanaged. They have shuffled this case from one procedural stage to another,
avoiding the substance of the allegations against them until the WCB has forced their hand. They never have negotiated in good faith with the WCB, even when the WCB offered them concessions. In fact, they have used negotiation only as a means of delay.
15. The Debtors have stated that they believe that the WCB has “grossly overstated” its damages, i.e., the amount of the deficit for the eight GSITs for which the WCB is the successor in interest. The Debtors have represented that their financial troubles had nothing to do with their violations of the WCL, their mismanagement of the GSITs, or their fraudulent acts. They blame their financial troubles on the fact that the New York State Attorney General’s Office and the WCB began investigating and auditing their practices, and the fact that the WCB and other entities sued them for their numerous breaches.
-6-16. In defending against the WCB’s allegations, it is anticipated that the Debtors will argue that they properly accounted for GSIT liabilities, that they properly valued future claims, that they properly accounted for incurred but not reported losses, and that their reserving philosophies were consistent with the WCL and its attendant regulations. For example, the Debtors have claimed that they utilized a valid actuarial basis to calculate the reserves
necessary to cover future assessment liability for workers who suffered a disability following a previous permanent physical impairment as defined by the WCL. This is a requirement of the applicable statutes and regulations. See generally WCL
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15(8) and 12 NYCRR§
317.6. The Debtors, however, did not utilize a valid actuarial basis, thus violating this requirement. This violation is in addition to the myriad other statutory and regulatory violations and breaches of legal duties that the Debtors committed.17. To date, by procedural maneuvering, the Debtors have successfully avoided adjudication of their wrongdoing.
18. The outcome of the WCB’s claims will affect the WCB itself, the individual GSIT members, unrelated employers, and the workers’ compensation insurance market in New York State. See Papa Affidavit at
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67. The WCB respectfully requests that the Court grant it relief from the automatic stay and allow it to pursue its claims in New York State Supreme Court.point out that Majestic Insurance Company, a subsidiary of Majestic Capital, Ltd., was put into conservation by the CDOI. These proceedings currently are in California state court. Each state has a statutory framework for governing the conservation of insolvent insurers. The reason for these state statutory schemes is that the obligations of insurance companies are necessarily complex affairs that are inextricably entwined with state statutes and regulatory authority. The outcomes of those proceedings impact state governments, insureds, and the insurance
marketplace. Just as the conservation of Majestic Insurance Company is yenned in state court, so too should the claims of the WCB against the Debtors.
B. UHY’s, SGRisk’s, and Hickey-Finn ‘s Objections.
20. The objections of UHY, SGRisk, and Hickey-Finn to the WCB’s motion rest on conclusory allegations that they would be prejudiced by the Court terminating the
automatic stay. As pointed out, however, in both UHY’s and SGRisk’s objections, the WCB has filed a summons with notice against them. The WCB will proceed with this litigation
irrespective of the outcome of this motion. Therefore, the WCB’s motion does not prejudice them.
21. UHY and Hickey-Finn have requested as alternative relief that the Court terminate the automatic stay for each case and party involved the coordinated New York State
-8-Court action pending before Justice Platkin. The WCB has no objection to that proposed alternate relief. Contrary, though, to UHY’ s and Hickey-Finn’s assertions, terminating the automatic stay with respect to each coordinated action is not necessary because the claims in those actions largely are derivative of the WCB’s claims.
WHEREFORE, the WCB respectfully requests that the Court terminate the automatic stay imposed by 11 U.S.C. § 362, permit the WCB to pursue the State Supreme Court Action to the extent of the Insurance Policy, and allow any recovery in excess of the Insurance Policy’s limits to form the basis of the WCB’s claim against debtors’ estate; together with such other and further relief as this Court deems just and proper.
Dated: October 21, 2011 Buffalo, New York
RUPP, BAASE, PFALZGRAF, CUNNINGHAM & COPPOLALLC Attorneys for the New York State Workers’ Compensation Board
By: Is! Daniel E. Sarzvnski
Daniel E. Sarzynski, Esq., of Counsel 1600 Liberty Building
Buffalo, New York 14202 (716) 854-3400
