Calif.’s DIR Opposes Injured Workers Settling Claims in Bankruptcy Court

August 15, 2002

The California Department of Industrial Relations (DIR) and its Office of Self Insurance Plans (SIP) is reportedly opposing the bankrupt Henry Mayo Hospital’s reported attempt 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.

Henry Mayo Newhall Memorial Hospital (Henry Mayo), Valencia, in Chapter 11 bankruptcy proceedings since Nov. 2001 reportedly stopped paying workers’ compensation benefits to its injured employees in May.

The hospital has 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. A ruling in their favor reportedly 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,” SIP Manager Mark Ashcraft commented. “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 the injured workers.”

Henry Mayo and its related companies were self-insured from 1983 to 1997. The hospital filed for bankruptcy in Nov. 2001 but continued paying on its self insured benefits to injured employees through its third-party administrator, RSKCo, until May 17, 2002 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 reportedly asked repeatedly whether they intended to lift the automatic stay, to continue paying benefits, or if they intended to default on their self-insured workers’ compensation obligations.

SIP conducted a special audit of remaining liabilities and found Henry Mayo had allegedly 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.

Ceasing to pay claims benefits put Henry Mayo in default, triggering DIR to order the security deposit and all liability for the claims be turned over to the Security Fund, as permitted by the California Labor Code. Disputes involving workers’ compensation claims and their settlement fall under the jurisdiction of the WCAB within DIR.

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 added.

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