REPLY OF THE NEW YORK STATE WORKERS COMPENSATION BOARD IN FURTHER SUPPORT OF ITS MOTION FOR RELIEF FROM THE AUTOMATIC STAY

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1 In re: Pg 1 of 9 promoted. papers, however, make it clear that no one would be prejudiced and judicial economy would be stay would prejudice them and that it would not promote judicial economy. The WCB s moving ( UHY ) object to the WCB s motion primarily on the grounds that terminating the automatic Creditors ), Hickey-Finn & Co., Inc. ( Hickey-Finn ), SGRisk, LLC ( SGRisk ), and UHY LLP 1. The Debtors, the official committee of unsecured creditors ( Unsecured ( Debtors ) in New York State Supreme Court to the extent of a certain insurance policy. Capital, Ltd., Majestic USA Capital, Inc., Compensation Risk Managers, LLC, and Eimar, LLC to 11 U.S.C. 362 to permit the WCB to pursue certain claims that is has against Majestic motion for an order terminating or, alternatively, modifying the automatic stay imposed pursuant Rupp, Baase. Pfalzgraf, Cunningham & Coppola LLC, submits this reply in further support of its The New York State Workers Compensation Board ( WCB ), by its attorneys, ITS MOTION FOR RELIEF FROM THE AUTOMATIC STAY REPLY OF THE NEW YORK STATE WORKERS COMPENSATION BOARD IN FURTHER SUPPORT OF Debtors. BK No IN PROCEEDINGS MAJESTIC CAPITAL, LTD., et a!. UNDER CHAPTER 11 (Jointly Administered) SOUTHERN DISTRICT OF NEW YORK UNITED STATES BANKRUPTCY COURT

2 should be terminated. The Debtors have an insurance policy that defends and indemnifies them Pg 2 of 9-2- GSITs are duplicative, yet somehow are separate and distinct. cannot argue simultaneously that the claims of the WCB and the individual members of the See Debtors objection, dated October 19, 2011, at 9[ 21, 22, 36, 43, 45, 46, and 54. The Debtors GSIT members are derivative of the WCB s claims, which the Debtors admit in their objection. ( GSIT ) to which the WCB is the successor in interest. The claims, however, of individual filed claims in this bankruptcy case also are members of one of the eight group self-insured trusts litigation on the same claims in multiple forums, they point out that certain creditors that have 4. With respect to the Debtors argument that they would be subjected to Unsecured Creditors filed a statement in support of the Debtors objection. terminating the stay would subject the Debtors to burdensome litigation in multiple forums. The argue that the WCB s motion should be denied for reasons of judicial economy and because 3. The Debtors, who have taken the lead at objecting to the WCB s motion, A. The Debtors and Unsecured Creditors Objections. likelihood of success on the merits in its case in New York State Supreme Court. the WCB will suffer prejudice if the automatic stay is not terminated, and the WCB has a from the WCB s claims, the WCB s claims involve complex questions of New York State law, 2. The WCB s motion is a textbook example of why an automatic stay

3 Pg 3 of 9-3- York State court action. claims are derivative of the WCB s claims and necessarily dependent on the outcome of the New pending a determination of the WCB s claims by the New York State Supreme Court. Those Supreme Court. The claims of the individual members can and should be held in abeyance owed by individual members of the GSITs are questions best decided by the New York State 7. The amounts of the GSITs deficits and the amounts of the pro rata shares determine the value of those members claims. total deficits of the eight GSITs at issue, the outcome of the WCB s state court action will members. Since the individual members claims are based on the WCB s calculations of the capacity as successor in interest, the WCB is representing the interests of those individual 6. The WCB also is the successor in interest to the GSITs at issue. In its bankruptcy case based on those assessments. See Debtors objection at 36. court action. Those same individual members have submitted proofs of claim in the Debtors has levied assessments on the individual members of the GSITs that are the subject of the state its capacity as the governmental entity charged with the administration of the WCL, the WCB Papa, sworn to October 6, 2011, in support of the WCB s motion, at 26 ( Papa Affidavit ). In employers that make up a GSIT are liable for the GSIT s underfunding. See affidavit of Michael 5. tinder New York State Workers Compensation Law ( WCL ), all

4 Pg 4 of 9-4- not a member, it would have other rights and remedies available to it. member of one of the GSITs, its claim would be covered by the WCB s claim. If a creditor were prejudice to other creditors if the stay were lifted. There would be none. If a creditor were a 10. The Debtors offer only a conclusory allegation that there would be compensation insurance for members of the GSITs. The Insurance Policy applies to claims arising out of the Debtors sale and servicing of workers by someone for whom the insured is legally responsible. See Exhibit D to the WCB s motion. omission including personal injury in the performance of professional services by the insured or language of the Insurance Policy, it applies to claims against the Debtors arising from an act or 9. The Insurance Policy is an errors and omissions policy. According to the assets of the estate. have no claim to the proceeds of that policy. These claimants would have claims against other Company errors and omissions insurance policy ( Insurance Policy ) and, therefore, they would These claimants do not have a claim that would be covered by the Indian Harbor Insurance landlords), those claims would not be prejudiced by the Court terminating the automatic stay. assessments levied pursuant to the WCL to cover a GSIT deficit (e.g., the claims of lenders or 8. With regard to the claims of unsecured creditors that do not involve the

5 Pg 5 of 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 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 47. Justice Platkin is the commercial division justice in Albany County, and, in addition to the 5-

6 GSIT litigation. Pg 6 of 9-6- and other entities sued them for their numerous breaches. Office and the WCB began investigating and auditing their practices, and the fact that the WCB acts. They blame their financial troubles on the fact that the New York State Attorney General s to do with their violations of the WCL, their mismanagement of the GSITs, or their fraudulent the successor in interest. The Debtors have represented that their financial troubles had nothing overstated its damages, i.e., the amount of the deficit for the eight GSITs for which the WCB is 15. The Debtors have stated that they believe that the WCB has grossly concessions. In fact, they have used negotiation only as a means of delay. They never have negotiated in good faith with the WCB, even when the WCB offered them avoiding the substance of the allegations against them until the WCB has forced their hand. that they mismanaged. They have shuffled this case from one procedural stage to another, Debtors have handled the WCB s litigation against them in much the same manner as the GSITs contradict their arguments before the New York State Litigation Coordination Panel. The Court terminating the automatic stay are not credible. Their present arguments directly 14. The Debtors arguments that they will be unnecessarily burdened by the coordinated cases, he has presided over several other cases involving the WCB, including other

7 Debtors will argue that they properly accounted for GSIT liabilities, that they properly valued Pg 7 of 9-7- Supreme Court. Court grant it relief from the automatic stay and allow it to pursue its claims in New York State market in New York State. See Papa Affidavit at 67. The WCB respectfully requests that the individual GSIT members, unrelated employers, and the workers compensation insurance avoided adjudication of their wrongdoing. legal duties that the Debtors committed. violation is in addition to the myriad other statutory and regulatory violations and breaches of Debtors, however, did not utilize a valid actuarial basis, thus violating this requirement. This applicable statutes and regulations. See generally WCL 15(8) and 12 NYCRR The previous permanent physical impairment as defined by the WCL. This is a requirement of the necessary to cover future assessment liability for workers who suffered a disability following a the Debtors have claimed that they utilized a valid actuarial basis to calculate the reserves reserving philosophies were consistent with the WCL and its attendant regulations. For example, future claims, that they properly accounted for incurred but not reported losses, and that their 16. In defending against the WCB s allegations, it is anticipated that the 17. To date, by procedural maneuvering, the Debtors have successfully 18. The outcome of the WCB s claims will affect the WCB itself, the

8 point out that Majestic Insurance Company, a subsidiary of Majestic Capital, Ltd., was put into Pg 8 of 9-8- terminate the automatic stay for each case and party involved the coordinated New York State 21. UHY and Hickey-Finn have requested as alternative relief that the Court them. irrespective of the outcome of this motion. Therefore, the WCB s motion does not prejudice filed a summons with notice against them. The WCB will proceed with this litigation automatic stay. As pointed out, however, in both UHY s and SGRisk s objections, the WCB has rest on conclusory allegations that they would be prejudiced by the Court terminating the 20. The objections of UHY, SGRisk, and Hickey-Finn to the WCB s motion B. UHY s, SGRisk s, and Hickey-Finn s Objections. too should the claims of the WCB against the Debtors. marketplace. Just as the conservation of Majestic Insurance Company is yenned in state court, so outcomes of those proceedings impact state governments, insureds, and the insurance complex affairs that are inextricably entwined with state statutes and regulatory authority. The these state statutory schemes is that the obligations of insurance companies are necessarily has a statutory framework for governing the conservation of insolvent insurers. The reason for conservation by the CDOI. These proceedings currently are in California state court. Each state 19. Coincidentally, in the background portion of their objection, the Debtors

9 alternate relief. Contrary, though, to UHY s and Hickey-Finn s assertions, terminating the Pg 9 of 9-9- (716) Daniel E. Sarzynski, Esq., of Counsel Buffalo, New York Liberty Building By: Is! Daniel E. Sarzvnski Compensation Board Attorneys for the New York State Workers RUPP, BAASE, PFALZGRAF, CUNNINGHAM & COPPOLA LLC Buffalo, New York Dated: October 21, 2011 other and further relief as this Court deems just and proper. Policy s limits to form the basis of the WCB s claim against debtors estate; together with such Action to the extent of the Insurance Policy, and allow any recovery in excess of the Insurance automatic stay imposed by 11 U.S.C. 362, permit the WCB to pursue the State Supreme Court WHEREFORE, the WCB respectfully requests that the Court terminate the those actions largely are derivative of the WCB s claims. automatic stay with respect to each coordinated action is not necessary because the claims in Court action pending before Justice Platkin. The WCB has no objection to that proposed