No Proof of Claim Needs to be Filed if Company is Insolvent

Saturday, May 19, 2007 | 0

By John H. Geaney

The New Jersey Self-Insurers Guaranty Association steps in when a self-insured company goes bankrupt. The case of Morella v. Grand Union, A-0056-05T3, is now the most important New Jersey reported case dealing with the procedures in making a claim against the Guaranty Fund.

The petitioner was injured on Jan. 26, 1991 during her work for Grand Union. She filed a claim petition on Aug. 4, 1992. She amended her claim petition on June 30, 1997 to join the Second Injury Fund.

The parties eventually reached an agreement entitling petitioner to Second Injury Fund benefits.

Petitioner was declared totally and permanently disabled with a split of 65% against Grand Union and 35% of the first 450 weeks against the Second Injury Fund.

The order also rendered Grand Union liable for $1,355.01 in prescription costs and future prescription costs of $220 per month.

On June 24, 1998, Grand Union filed a Chapter 11 bankruptcy petition. Petitioner never received notice of any requirement to file a proof of claim in the bankruptcy action. She did learn of the bankruptcy status from Grand Union's attorney who advised her lawyer that she would not have to file a proof of claim in the bankruptcy action "because respondent was self-insured and had a bond."

Grand Union continued to make total disability payments until Aug. 7, 1999. On Oct. 2, 2000, Grand Union filed a second Chapter 11 bankruptcy petition, and its first petition was dismissed. On Oct. 8, 2002, the bankruptcy court confirmed Grand Union's Chapter 11 Plan of Liquidation. The Plan provided that unsecured creditors, which included workers' compensation claimants, "will not receive any distributions on account of such claims."

A problem arose when petitioner stopped getting reimbursements for her prescriptions. This impelled petitioner to file a motion to compel Grand Union to pay her prescription costs under the settlement order, and Grand Union paid such costs from March 2003 through November 2003. Around this time Grand Union's bond was exhausted and the monthly prescription costs again went unpaid. Counsel for Grand Union was then relieved, and the Guaranty Association took over.

Petitioner filed a claim with the Association on June 3, 2004. However, the Association declined the claim on June 21, 2004 because petitioner never had filed a proof of claim in bankruptcy.

The Honorable Beverly Karch rendered a decision on July 20, 2005 determining that petitioner was entitled to past and future prescription expenses, directing the Association to reimburse petitioner.

The Association first argued that the Division of Workers' Compensation did not have jurisdiction over such an issue.

The Appellate Division disagreed, holding that the N.J.S.A. 34:15-120.18, which renders the Association liable for the claims of an insolvent, implies that the Division has authority to hear such issues.

"Because the Act permits a direct proceeding in the Division against the Association, the Division has subject matter jurisdiction to construe the statute."

Next, the Association argued that N.J.S.A. 34:15-120.18 requires petitioner to file a proof of claim in bankruptcy before it has to pay. It relied on an unpublished Appellate Division decision which this court disapproved of. In this case the entire determination hinged on the meaning of a semicolon. The Act states:

Upon creation of the Insolvency fund pursuant to the provisions of section 5 of this act, the association is obligated for payment of compensation under chapter 15 of Title 34 of the Revised Statutes to insolvent members' employees resulting from: (1) incidents and injuries existing prior to the member becoming an insolvent member; and (2) incidents and injuries occurring after the member has become an insolvent member, if the employee makes timely claim for those payments according to procedures set forth by a court of competent jurisdiction over the delinquency or bankruptcy proceedings of the insolvent member.

The court held that the use of a semicolon between (1) and (2) was intended to separate the first phrase from the second. It creates two classes, one whose injuries occur prior to the insolvency and who do not have to file proof of claim; and a second group whose injuries occur after the date of insolvency who do have to file proof of claim. In this case the accident occurred prior to the insolvency, and, therefore, the injured employee did not have to file proof of claim.

The court affirmed the decision of Judge Karch. It added that normally speaking, an insolvent party has to list all creditors at the time it files its petition for bankruptcy, including workers' compensation claims.

"Therefore, generally speaking, there would be no reason for an employee, injured pre-insolvency, to file a proof of claim; however, there would be a need for an employee to file who was injured post-insolvency because his or her claim would not have been scheduled in the bankruptcy petition."

John H. Geaney is an attorney at Capehart Scatchard. This column first appeared in the law firm's case law newsletter. The law firm's Web site is http://www.capehart.com.

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