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In re Dph Holdings Corp.

United States District Court, Second Circuit

August 1, 2013

In re: DPH HOLDINGS CORP., et al., Reorganized Debtors.


PAUL A. ENGELMAYER, District Judge.

This appeal, arising out of an adversary bankruptcy proceeding, involves the scope of workers' compensation coverage purchased from insurance carriers by the underlying debtor. It pits state regulators in Michigan, who argue for broad-ranging coverage, against the carriers, who argue that the coverage they agreed to provide was narrow. Because Michigan law provides that the state's workers' compensation fund will provide workers compensation to employees when an employer cannot do so, this litigation ultimately affects who is responsible for paying workers compensation benefits to various employees of the debtor, but it does not affect whether some entity has that responsibility.

Presently at issue before the Court is a November 1, 2012, order by the Hon. Robert D. Drain, United States Bankruptcy Judge, granting summary judgment in favor of the insurance carriers, ACE American Insurance Company and Pacific Employers Insurance Company (collectively, "ACE") on the coverage issue. The regulators-the State of Michigan Workers' Compensation Insurance Agency (the "Agency") and the State of Michigan Funds Administration (the "Funds Administration, " and collectively with the Agency, the "Michigan Defendants")-appeal that order. For the reasons that follow, the Bankruptcy Court's decision is affirmed.

I. Background[1]

Delphi Corporation (or "Delphi"), the debtor in the underlying bankruptcy proceeding, was headquartered in Troy, Michigan. In 2005, Delphi filed for Chapter 11 bankruptcy. In October 2009, it was eventually reorganized into DPH Holdings Corp. The dispute here involves the scope of coverage under workers' compensation insurance policies that Delphi entered into with ACE.

A. Michigan's Workers' Compensation Laws

Like many states, Michigan requires that employers provide their in-state employees with workers' compensation insurance. See Worker's Disability Compensation Act of 1969 ("WDCA"), Mich. Comp. Laws Ann. §§ 418.101 et seq. Under Michigan law, there are two methods by which an employer can do so: (1) "[b]y receiving authorization from the director to be a self-insurer"; or (2) "[b]y insuring against liability with an insurer authorized to transact the business of worker's compensation insurance within [Michigan]." Mich. Comp. Laws Ann. § 418.611(1).[2] Each method requires approval from the director of the Agency, which is charged with administering the WDCA. Id. ; id. § 445.2011(II)(O). It is undisputed that an employer may use one, or more than one, of those methods to provide workers' compensation insurance. See Bankr. Op. at 142-43; Transcript of Argument ("Tr.") at 4-5, 36-37.

Four provisions of Michigan law are necessary background to this controversy. First, under the WDCA, "[t]he state accident fund and each insurer issuing an insurance policy to cover any employer not permitted to be a self-insurer under section 611 shall insure, cover, and protect in the same insurance policy, all the businesses, employees, enterprises, and activities of the employer." Mich. Comp. Laws Ann. § 418.621(2).

Second, the WDCA requires that each worker's compensation insurance policy contain the so-called "Michigan Endorsement." Mich. Comp. Laws Ann. § 418.621(4). This mandatory language (discussed in detail infra ) is deemed to be controlling to the extent it conflicts with the language of the policy. Id.

Third, to assure that workers are not deprived of coverage, Michigan created the Funds Administration. It is responsible for providing additional coverage when a self-insured employer is insolvent. Mich. Comp. Laws Ann. §§ 418.501(1), 418.537.

Fourth, the WDCA requires that employers file a form known as a Form 400 with the Agency. See Mich. Comp. Laws Ann. § 418.625. This form gives the Agency notice of the insurance each employer has acquired.

B. Delphi's Insurance Policies

Delphi is a corporation headquartered in and doing business in Michigan. Since 1999, Delphi was authorized and approved by the Agency to self-insure. Each year between 2000 and 2008 (except 2002), Delphi purchased two sets of insurance policies from ACE.

The first, the Retention Policies, cover liabilities that exceed Delphi's self-insured limits. The retention amount-that is, the amount required to be paid by Delphi before the Retention Policies kick in-ranges from $2 million (in 2000) to $5 million (in 2008). See Bankr. Dkt. 163-5, at 2; 163-18, at 2. The second, the Deductible Policies, are nationwide workers' compensation policies, which encompass both Delphi and its subsidiaries. The Deductible Policies are not merely excess coverage; rather, they provide first-dollar coverage of any benefits due under applicable workers' compensation laws. As required by law, the Deductible Policies each contain the required Michigan Endorsement. (The Retention Policies do not contain the Michigan Endorsement, and were not required to.)

Also as required by law, ACE filed Form 400s for each year that it ensured Delphi. On the Form 400s, Delphi Corporation is listed as the insured employer. In addition, the Form 400s each state:

[T]he above referenced employer has been issued a policy of insurance by [ACE]. This policy covers all the liability imposed upon the employer by the provisions of the Michigan Workers' Disability Compensation Act for all employees in any and all of the employer's businesses.

See, e.g. , Bankr. Dkt. 18, at 10 (2004 Form 400). The Form 400s also state "[a] separate form 400 is required for each legal entity insured under a policy." Id.

C. Adversary Proceeding and the Bankruptcy Court's Decision

On October 8, 2005, Delphi filed for Chapter 11 protection in bankruptcy court. On January 6, 2006, the bankruptcy court authorized Delphi to assume the Retention and Deductible policies and to enter into post-petition policies and agreements. Delphi's obligations to ACE under the insurance policies are accorded administrative expense priority. Up until 2008, Delphi also continued to enter into new policies.

On October 6, 2009, ACE initiated this adversary proceeding. It sought a declaratory judgment establishing that none of the policies covered Delphi's Michigan self-insured workers' compensation liability. In the alternative, ACE asked the bankruptcy court to reform the policies to conform to the parties' mutual intent, such that they would not cover employees at Delphi's self-insured workplaces in Michigan.

On November 10, 2009, the Michigan Defendants moved to dismiss the adversary proceeding for lack of subject matter jurisdiction, sovereign immunity, and failure to state a claim. They also asked that the Bankruptcy Court abstain to allow the Michigan courts and administrative bodies to resolve the dispute. The Michigan Defendants' stake in the controversy is this: With Delphi in bankruptcy, to the extent ACE is not liable for payment of workers' compensation due to Delphi employees, the Funds Administration may be.

In a bench decision issued on January 12, 2010, the bankruptcy court ruled against the Michigan Defendants on each of the pre-merits defenses they had interposed. See Bankr. Dkt. 69. It held that (1) it had jurisdiction over the adversary proceeding, (2) the Michigan Defendants were not entitled to sovereign immunity, and (3) abstention was unwarranted. On an interlocutory appeal by the Michigan Defendants, all three of these rulings were affirmed. See In re DPH Holdings Corp. , 437 B.R. 88, 93-94 (S.D.N.Y. 2010), aff'd , 448 F.Appx. 134 (2d Cir. 2011), cert. denied , 133 S.Ct. 51 (2012).

On August 10, 2012, in response to a separate motion by the Michigan Defendants, the bankruptcy court later lifted the litigation stay as to a discrete issue relating to the effect of the Form 400s. The issue raised was whether ACE is liable to cover any workers' compensation claims against Delphi "solely because ACE or Pacific filed with the [Agency] any so-called Form 400 or any amendment thereto that identifies any insurance policy that names Delphi or any Delphi affiliate." Bankr. Dkt. 142, at 3. Following that ruling, ACE filed suit in the Michigan Court of Claims, to resolve that question. See Bankr. Dkt. 146 Ex. 1 (the "Form 400 litigation").[3]

The issue presently pending in this Court arises out of the parties' cross-motions for summary judgment. The Michigan Defendants have conceded that the Retention Policies do not cover Delphi's first-dollar workers' compensation liability ( i.e. , the amount up to which Delphi is self-insured under those policies). See Bankr. Dkt. 174 ("Bankr. Op."), at 140. As a result, the only disputed issue is whether the Deductible Policies covered (as the Michigan Defendants assert) all of Delphi's workers' compensation liability in Michigan or (as ACE contends) none of the Michigan liability of Delphi itself , but only discrete ...

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