Division of Longshore and Harbor Workers' Compensation (DLHWC)
CHAPTER 6-202 SECTION 18(B)
1. Purpose and Scope. This Chapter describes the procedures for obtaining payment from the Special Fund in cases involving EC insolvency and/or bankruptcy. It identifies the information and material which must be submitted to the DO, and by the DO to the National Office, to initiate payment from the Special Fund.
2. Definitions. The following definitions apply to this Chapter:
- U.S. Bankruptcy Act. A federal law (Title 11 U.S.C.) for the benefit and relief of creditors and their debtors when the latter is unable to pay debts. The U.S. Bankruptcy Court is an adjunct to the U.S. District Court and Federal Rules of Civil Procedure apply. Congress enacted the statute to provide for uniformity among the states within its Constitutional authority.
- Insolvency. A financial condition in which a company is unable to meet its financial obligations during the ordinary course of business.
- Formal Bankruptcy. The legal process wherein the debtor is granted legal protection from creditors so an orderly settlement of the financial affairs may occur. A company may be liquidated or reorganized. In a liquidation, assets are sold and creditors paid. In a reorganization, the debtor continues in business and pays creditors. Transactions occur under the direction of the bankruptcy court.
- Chapter 11. Generally referred to as reorganization of the company. Under this chapter of the Bankruptcy Act a time limit is specified for filing claims against the estate and the debtor may continue to operate under court supervision.
- Chapter 7. Generally referred to as liquidation of the debtor company where all assets are sold to pay debts and the company is ultimately dissolved. A time limit will also be specified for filing claims against the debtor.
- Automatic Stay. A provision in the bankruptcy code under 11 U.S.C. section 362 which prevents commencement, issuance, or execution of any legal proceedings against the debtor until all assets are identified and an equitable distribution takes place. (See Exhibit 14, PM 10-300.)
- State Guaranty Fund. A state run insurance program funded by fees from all licensed and admitted carriers which write business in the state. Its purpose is to pay obligations and claims of any member companies which are adjudged insolvent. The amount of coverage available to workers' compensation claimants varies widely by state. Some states exclude workers' compensation entirely and others specifically exclude Longshore cases.
- Unsecured Creditors. Claims against the debtors estate which are not secured by lien or property such as bills of sale, etc. These are a general claims category into which workers' compensation cases fall.
- Trustee in Bankruptcy. An official appointed by the Bankruptcy Court to hold the debtor's property and assets in trust to provide for an equitable distribution to creditors. The trustee must concur with the issuance of a compensation order by the DD.
- Waiver from Automatic Stay. A petition by the claimant to the bankruptcy court to permit lifting of the automatic stay so a case may be adjudicated under the U.S. Bankruptcy Act (11 U.S.C. section 362). (See Exhibit 15, PM 10-300.)
- Director's Compensation Award. An award letter issued at the discretion of the Director, OWCP, awarding the claimant benefits under section 18(b) from the Special Fund. Prior orders issued by the DD or ALJ can only be awarded against the EC.
- Rehabilitation. The take over of an insurance carrier's operations by a state insurance department to insure financial integrity of the company. Usually claims continue to be paid and most business operations continue under the close guidance of an appointed administrator.
- Parties in Interest. A term used to include the claimant, his/her attorney, the insurance carrier, the employer, the state guaranty fund if liable for benefits, the state insurance department if the carrier is under active rehabilitation, the bankruptcy trustee if the employer is in formal bankruptcy, and the president, secretary and treasurer of a corporate employer if the employer was uninsured.
3. Section 18(a) Requirements. Except as noted further in these procedures relating to employers in formal bankruptcy, the following requirements of section 18(a) must be met prior to consideration of a case for payment from the Special Fund under section 18(b):
- Default in the payment of compensation under an order for a period of thirty days after the compensation is due and payable.
- Issuance of a default order pursuant to section 18(a).
- Filing of a copy of the default order with a Federal District Court. (Requirement waived if employer is in formal bankruptcy.)
- Obtaining a judgment pursuant to the filing of the default order. (Requirement waived if employer is in formal bankruptcy.)
- Documenting attempts to satisfy the outstanding judgment which may include:
(1) Proof of service by the U.S. Marshal's Office.
(2) Copies of relevant correspondence.
(3) Answers to any interrogatories issued.
(4) Copies of any depositions taken.
(5) Copies of any credit or other investigations made. This requirement will be waived if the employer is in formal bankruptcy.
4. Obtaining Compliance Under Section 21(d). Section 21(d) provides for obtaining compliance with a final compensation order in the Federal District Court for the judicial district in which the injury occurred. This section provides that the court shall enforce obedience to the order by writ of injunction or by other proper process. It should be noted that this section applies only if the compensation order has become final, i.e., if the order has not been timely appealed. If the employer is not in formal bankruptcy or defunct, or if the employer was uninsured and the officers of the company are financially viable, consideration may be given to filing an action under this section to obtain compliance rather than proceeding under section 18(a) which requires the obtaining and execution of a judgment. If an action is filed under this section, and if as a result of the court proceedings it is determined that the employer/officers are insolvent, the judgment requirement under section 18(a) may be waived for the purpose of paying benefits in the case from the Special Fund.
5. Initial Determination. Prior to consideration of paying benefits from the Special Fund under section 18(b), it must first be established that the liable insurance carrier, employer, officers (if an uninsured employer) and any State insurance guaranty association are unable to pay benefits. Documentary proof must be submitted to support any allegations concerning nonpayment of benefits.
6. Requirement for Compensation Order and Default Order. Before a case may be considered for payment of compensation benefits from the Special Fund, a compensation order must have been issued in the case which has been in default for a period of at least thirty days pursuant to section 18(a). A default order may be issued prior to thirty days if the employer is in formal bankruptcy and court approval is obtained or if it is certain that no claim will ever be made against the bankrupt employer's estate. If the case does not have a compensation order, and the district office cannot obtain the agreement of all parties in interest to issue an order, the case should be referred for a formal hearing and issuance of an order. Certain exceptions may apply such as in those cases in which it can be conclusively shown that an insurance carrier cannot be identified and the employer is defunct, as in certain asbestos cases. In such cases, the district office may issue a compensation order with the concurrence of the claimant and the National Office.
7. Situations Requiring Payment Under Section 18(b). The following situations may result in payment from the Special Fund:
- Uninsured Insolvent Employer. In this situation, the employer is not making, or has refused to make, compensation payments but is not in formal bankruptcy. Since the employer is uninsured, the president, secretary and treasurer of the corporation are also personally liable for benefit payments pursuant to section 38(a) of the Act. These officers should be informed by letter (Exhibit 16, PM 10-300) of their personal liability under the Act.
(1) If a compensation order has not been issued in the case, and if all parties in interest will not agree to the issuance of an order, the matter must be referred to the Office of Administrative Law Judges for a formal hearing and issuance of a binding order. The names and addresses of the liable corporate offices should be forwarded to the OALJ so that they can be notified of the hearing.
(2) After issuance of an order, and whether or not an appeal has been taken by the employer, if the order has not been paid for a period of thirty days after compensation is due and payable, the claimant may apply to the DD to issue a supplementary order declaring the amount of the default.
(3) Before issuing a supplementary order, the DD shall, under section 19, cause such investigation to be made as is necessary to confirm that the employer exists, is in business and may be subject to a judgment. The DD will contact the employer, and determine its position relative to payment of the award. If it appears such action will encourage the cooperation of the employer, the DD may give appropriate notice and conduct a conference with the employer to further apprise it of the responsibilities and risks incurred in refusing to pay the award.
(4) The claimant may then file a certified copy of the supplemental order with the clerk of the federal district court for the judicial district in which the employer has his principal place of business/or maintains an office, or the judicial district in which the injury occurred. If the compensation order has not been appealed and is therefore final, an action under section 21(d) against the company or its liable officers, if financially solvent, may be considered as an alternative to obtaining a judgment.
(5) If the supplementary order is in accordance with law, the court, upon filing, shall enter judgment as in civil suits for damages at common law. Final proceedings to execute the judgment may be had by writ of execution in the form used by the court in suits at common law in actions of assumpsit.
(6) Before payment can be authorized from the Special Fund, a diligent effort must be made to satisfy the judgment. To this end, it is appropriate for the DO to assist the court (U.S. Marshal) by attempting to locate the employer or senior corporate officers. Inquiries may be made to such organizations as:
(a) State Corporation Commission
(b) State Corporation Tax Bureau or Commission
(c) State Licensing Bureau, etc., or their counterparts within the State jurisdiction.
(7) Once the employer (or one or more of the corporate officers) is located, the U.S. Marshal should proceed to execute the judgment, pursuant to section 18(a) of the Act. If the employer or its officers cannot respond by paying the full amount of the judgment, efforts should be made by the DO to reach a compromise concerning the method of payment of benefits and have the company or its officers pay as much as possible. However, any such compromise must be approved by the National Office.
(8) If it is determined that the employer (with its officers) are judgment proof, the claimant must present adequate documentation of the efforts made to execute the judgment. (An unsupported statement that the employer cannot be located or is judgment proof will not be adequate to justify payment from the Special Fund.) The claimant should file the following documents with the DD:
(a) Certification that the supplementary order was filed with the appropriate U.S. District Court;
(b) A copy of the court's order to the U.S. Marshal to execute judgment;
(c) A copy of the Marshal's return and report to the court;
(d) Copies of all other pertinent documents which provide evidence of efforts to locate and pursue execution against the employer. (See subparagraph 3e, above.) Upon review and consideration of all actions taken to recover compensation from the employer, the DD shall submit all documents to the Director, DLHWC in the National Office, with a brief resume of the case and a recommendation that payment should be made from the Special Fund.
(9) If the Director, OWCP, or the Director, DLHWC, approves payment from the Special Fund, an award letter will be issued authorizing payment from the Special Fund. When payment is approved from the Special Fund, such payment will cover necessary medical care, compensation and an attorney's fee if so ordered. No payment will be made for penalties or interest. If payment is not authorized, the Director, DLHWC shall advise the DD who shall inform all parties concerned. The Director, OWCP may delegate authority to the Director, DLHWC to authorize payment from the Special Fund and issue the award letter.
(10) If payment is made from the Special Fund, the Secretary of Labor shall be subrogated to all rights of the person receiving such benefits and, through the SOL, will pursue the matter against the employer.
(11) Cases arising under the jurisdiction of the District of Columbia Workmen's Compensation Act are processed in a slightly different manner. To pursue a judgment against an employer within the District of Columbia, the petitioner must post a bond with the U.S. Marshal's office in an amount twice the sum of the judgment, before that office will undertake judgment proceedings. This procedure will prevent many claimants from pursuing defaults under sections 18(a) and 18(b). However, if the liable corporate officers are financially viable, an action to compel compliance with the outstanding order should be instituted under section 21(d) if the order has become final.
(12) In such a situation, it is recommended that the DD issue the supplemental order under section 18(a) and that order be filed with the U.S. District Court for the District of Columbia to obtain a judgment. When the Marshal's office refuses to take action without posting of the above mentioned bond, the claimant may return to the DD with proof of that action and request that payment be made under section 18(b) based on the provision that there are ". . . other circumstances precluding payment . . . ."
(13) The DD may then refer the matter, with all pertinent documents, to the National Office, recommending either approval or disapproval of payment under section 18(b).
(14) If payment is made from the District of Columbia Special Fund, the Secretary of Labor shall be subrogated to all rights of the person receiving such benefits and, through the SOL, may pursue the matter against the employer. Where the bond is required, the Office of the Solicitor may, after careful consideration of the merits of the case, recommend posting the bond by the Special Fund and pursue the matter against the employer as provided by section 18(b).
- Uninsured Employer in Bankruptcy. In this situation, the uninsured employer has filed a formal bankruptcy petition in bankruptcy court. The employer is thus protected by the bankruptcy laws and therefore no action can be taken which would represent a claim against its assets. Under these circumstances, a judgment cannot be obtained or executed.
(1) If the employer is a corporation, the president, secretary and treasurer are also personally liable for the payment of benefits pursuant to section 38(a) of the Act. These officers should therefore be informed by letter (Exhibit 16, PM 10-300) of their personal liability under the Act. It should be determined if the officers are financially viable and if the corporate bankruptcy action also protects them against legal action. If they are not protected, and are financially viable, the claimant should pursue them for payment.
(2) If a compensation order has not been previously issued in the case, an order awarding benefits cannot be issued by the DD without the express agreement of all parties in interest which would include the liable corporate officers and the bankruptcy court. A waiver from the automatic stay (see subparagraph 2.j., above) is also required. If approval cannot be obtained, the case should be referred to the OALJ for a formal hearing. The names of the liable corporate officers should be furnished to the OALJ so that any decision is also rendered against them personally.
(3) After a compensation order is obtained, a default order may be issued after a period of thirty days has elapsed pursuant to section 18(a) of the Act. In some jurisdictions, the parties may object to the issuance of the default order as a violation of the section 362 automatic stay. If an objection is received, a waiver from the bankruptcy court must be obtained prior to issuing the default order.
(4) Since the employer is in formal bankruptcy, a judgment cannot be obtained or executed and thus the requirement is waived as it applies to the corporation. However, if the corporate bankruptcy action does not extend to the liable corporate officers, and they are financially viable, and the compensation order issued in the case has become final (not timely appealed) an action against the officers to compel compliance with the outstanding order pursuant to section 21(d) of the Act should be considered. The financial ability of the liable officers must therefore be established. This documentary proof can be in the form of either sworn interrogatories, depositions, comprehensive credit investigations, court documents relating to personal bankruptcy, or other such proof which clearly establishes the ability or inability of the officers to pay benefits.
(5) If the liable corporate officers cannot be located, or if it has been determined that they are not financially viable, a waiver from the automatic stay must be obtained from the bankruptcy court to permit the issuance of an award letter by either the Director, OWCP, or Director, DLHWC to initiate payment from the Special Fund. The waiver would pertain to the bankrupt employer. (See Exhibit 15, PM 10-300, for a sample waiver.) The waiver should be obtained by the claimant's attorney. If a large number of claims are expected to be presented against the employer, the DOL Regional Solicitor should be contacted so that a blanket waiver can be obtained from the court which would cover all claims that would be presented.
(6) After the appropriate waiver is obtained from the bankruptcy court, the case file containing the compensation and default orders, the results of the investigations relating to the financial viability of the liable corporate officers, copies of all relevant bankruptcy documents, and a memorandum summarizing the facts of the case should be referred to the National Office with the request that benefits be paid in the case from the Special Fund pursuant to section 18(b) of the Act.
- Insolvent Insurance Carrier and Viable Employer. In this situation, the insurance carrier is insolvent and unable to pay benefits. However, the employer is not insolvent or in bankruptcy and is a financially viable entity.
(1) In all such cases, the employer is liable for the payment of all benefits due under the Act. The employer should therefore be made aware of its obligations under the Act by letter as soon as it is determined that the insurance carrier is insolvent and is unable to make the required compensation payments.
(2) In carrier insolvency cases, a State Insurance Guaranty Fund may be liable for the payment of benefits. The claimant and the employer should be encouraged to request relief from the State Fund.
(3) If the employer refuses to pay benefits, and there are no benefits payable by a State Guaranty Fund, the case should be referred for a formal hearing to obtain a compensation order if an order is not already contained in file. After an order is obtained, compliance with the order may be obtained pursuant to section 18(a) of the Act (see paragraph 3, above) or by commencing an action under section 21(d) of the Act if the order is final (not timely appealed). A judgment is not required to proceed under section 21(d).
- Insolvent Insurance Carrier and Employer in Bankruptcy. In this situation, the insurance carrier is insolvent and the employer is in formal bankruptcy. The carrier may be under rehabilitation by a State insurance department.
(1) Obtain copies of the documents relating to the insolvency of the insurance carrier.
(2) Obtain copies of the documents relating to the bankruptcy of the employer.
(3) If a compensation order has not been previously issued, and agreement cannot be obtained from all of the relevant parties in interest to issue an order, the case must be referred for a formal hearing to determine entitlement to benefits and for issuance of an order. If objection to the referral is raised by any party in interest on the basis that it is in violation of the automatic stay, a waiver may be required from the bankruptcy court. The claimant's attorney should be requested to contact the bankruptcy trustee to determine what action needs to be taken so that the case can go forward for a hearing.
(4) After a compensation order has been issued, ascertain that payments are in default under the order for a period of thirty days after compensation is due and payable as required by section 18(a). This should be in the form of a letter to the District Director from the claimant advising of the default and requesting issuance of a default order. Inquiry may also be made by the district office to the insurance carrier and the employer to verify that payments are in default.
(5) Determine from the appropriate officials having jurisdiction over the carrier and employer if they will permit the issuance of a default order pursuant to section 18(a) and the subsequent issuance of an award under section 18(b) from the Special Fund. The automatic stay provisions of the bankruptcy code that relates to private employers will preclude the issuance of such orders unless an appropriate waiver is first obtained from the bankruptcy court. You may request the claimant's attorney to obtain this information and to obtain the appropriate waiver(s) or you may obtain assistance from the Regional Solicitor's Office. If it is anticipated that a large number of cases may be presented for payment as a result of the bankruptcies, the Regional Solicitor's Office should be requested to obtain blanket waivers for all required actions to avoid delays in the payment of benefits.
(6) After obtaining all waivers which may be required, issue the default order pursuant to section 18(a). It is not necessary to obtain a judgment in such cases since the judgment requirement of section 18(a) is rendered invalid by the automatic stay provision and it would be fruitless to obtain a judgment since the court would not permit execution on it.
(7) Refer the case file to the National Office by cover memorandum summarizing the facts of the case and attaching all relevant bankruptcy documents. Note: An appropriate waiver from the bankruptcy court must be attached to permit the issuance of an award from the Special Fund. A draft order awarding benefits from the Fund should also be attached which clearly shows the benefits which are to be paid to the claimant.
- Defunct Insurance Carrier and Defunct Employer. In a situation where it can conclusively be shown that the employer and carrier are no longer in existence, prior approval for a DD to issue a compensation order is required only from the claimant and the National Office. In such cases, the file, with a cover memorandum outlining the facts of the case, should be sent to the National Office. A draft compensation order, which the DD intends to issue, should also be attached to the memorandum. The memorandum must state how it was determined that the employer and carrier no longer exist, e.g., the corporate charter may have been retired, or the company's assets may have been liquidated in a prior bankruptcy action which has been concluded. After approval is received from the National Office, the DD may issue the appropriate compensation order. A default order must also be issued pursuant to section 18(a). However, in such cases it is not required that a judgment be obtained. After the default order is issued, the case should again be referred to the National Office, with the recommendation that compensation benefits be paid from the Special Fund under section 18(b).
- Cases in Which Payment Is Being Made by A State Guaranty Fund. In all cases in which partial payments are being made at State compensation rates by a State Guaranty Fund, the Guaranty Fund must be considered as a party in interest, and therefore must be given notice of any proposed action. The Guaranty Fund has, in effect, become the insurance carrier, and therefore, where notice or agreement was required of the insurance carrier prior to taking an action, it is now also required of the Guaranty Fund. For those payments which are in addition to the State benefits which are in default under our Act, the requirements of section 18(a) apply relative to the issuance of default orders and judgments in the same manner as though total compensation benefits were in default. Also see PM 8-100.3 with regard to State Guaranty Funds and the assessment of penalties and interest.
8. Maintenance of Records. To facilitate the processing of carrier insolvency and employer bankruptcy cases, each district office should maintain a separate master folder for each insolvency or bankrupt carrier and employer. All documents relevant to each bankruptcy should be placed in their respective folders. These should include copies of the court documents filed in the bankruptcy actions, correspondence relative to obtaining waivers from the automatic stays of the bankruptcy laws, copies of judgments obtained, documented efforts to satisfy the judgments, and any other relevant correspondence.