KAKE TRIBAL CORPORATION v. EAGLE PACIFIC INS. CO

JAMES K. SINGLETON, JR., United States District Judge.

INTRODUCTION

This case comes before the Court on appeal from the Bankruptcy Court. On September 14, 2000, the Honorable D. MacDonald, United States Bankruptcy Judge, entered a final order awarding Appellee Eagle Pacific Insurance Company ("Eagle Pacific") administrative expenses totaling $110,076, adjudging that amount to be the reasonable value of Eagle Pacific's services rendered on behalf of Appellant Kake Tribal Corporation ("KTC"). See Docket No. 5, Attach. 271 (Order Allowing Claim for Administrative Expense, In re: Kake Tribal Corp., (No. J99-01111-DMD)). KTC now appeals the award. See Docket No. 8. This Court has jurisdiction pursuant to 28 U.S.C. § 158. See 28 U.S.C. § 158; 28 U.S.C. § 1334(a).

FACTUAL AND PROCEDURAL BACKGROUND

The facts of this case are largely undisputed. In January 1999, KTC, "an Alaska Native Village Corporation," see Docket No. 8 at 4, contracted with Eagle Pacific for the provision of workers' compensation insurance for a period of one year. See id. The policy covers work subject to the Longshore and Harbor Workers' Compensation Act ("LHWCA"), 33 U.S.C. § 901-950 (1986), Alaska's workers' compensation system. See Docket No. 5, Attach. 64

The LHWCA is a workers' compensation system that provides compensation to certain employees "with respect to disability or death resulting from injury." See 5 U.S.C. § 8171(a); see also Sample v. Johnson, 771 F.2d 1335, 1346 (9th Cir. 1985) ("The LHWCA's exclusivity of remedies provision, 33 U.S.C. § 905 (a), states that `The liability of an employer prescribed in [this title] shall be exclusive and in place of all other liability of such employer.' LHWCA liability occurs for `accidental injury or death arising out of and in the course of employment.' 33 U.S.C. § 902(2). Thus, the employer is not liable under the LHWCA for intentional injuries that it causes and section 905(a) is not applicable to claims concerning such injuries.") (alterations in the original).

(Decl. of William Rayome), Exh. 1 (Workers' Compensation and Employers Liability Insurance Policy) ("the policy") at 2. "The premium for the policy will be adjusted by an experience rating modification factor." Id., Exh. 1 at 3. The policy is updated by an endorsement entitled, "Alaska Work Place Safety Rate Reduction Plan" ("AWSRRP"). See id., Exh. 1 at 8.

KTC's "Experience Modification Factor" was 0.77. See Docket No. 5, Attach. 64, Exh. 1 at 1.

It is understood and agreed that the premium the insured will pay to the company for the policy will be changed as defined in this agreement.

Loss Ratio will be calculated by the company using the following formula:

Total Incurred Losses

___ = Loss Ratio

Earned Premium

The company will compute the loss ratio for the policy at premium adjustment dates defined below. If the loss ratio exceeds .52, the company will compute the exact amount of increase in premium required to reduce the loss ratio to .52, and will provide the insured with an invoice for the additional premium due. The insured will pay this additional premium immediately upon receipt of the invoice. If the loss ratio is less than .52, the company will compute the exact amount of reduction in premium required to increase the loss ratio to .52, and will provide a credit invoice or check to the insured for the return premium due.

The premium due to the company after premium adjustments will not be less than 75% of earned premium, or more than 210% of earned premium.

Id. Relevant terms are defined as:

Earned Premium means premium computed at the rates, experience modification factor (if any), and AWSRRP plan credit factor indicated in the policy.

Incurred Losses means the sum of all paid losses and expenses, all estimated future loss payments and expenses, paid and unpaid allocated loss adjustment expenses, and Second Injury Fund assessments and contributions, if any, as determined solely by the company.

Premium Adjustment and Payment Schedule. Premium adjustments will occur in the 9th, 12th, and 18th month after the policy inception date. After the eighteenth month from the policy inception date, the premium adjustments will occur on an annual basis for a period of four years. Additional premiums are due and payable at any of the premium adjustment dates described above. Return premiums will not be paid by the company for premium adjustments occurring before eighteen months from the inception date of the policy.

In the event of cancellation of the policy for any reason, this agreement will continue throughout the entire term of the premium adjustment dates defined above. If the policy is canceled mid-term at the insured's election, the AWSRRP plan premium credit will be rescinded and a short rate penalty will be computed using premium at the rates and experience modification factor (if any) included in the policy.

See id. Sixteen workers' compensation claims were filed under the policy prior to October 9, 1999, when KTC filed for bankruptcy pursuant to Chapter 11 of the Bankruptcy Code. See Docket No. 8 at 6-7; Docket No. 10, Exh. A. Eagle Pacific moved to have KTC assume or reject the policy, pursuant to 11 U.S.C. § 365. See Docket No. 8 at 6-7.

The parties agree that the "most significant by far" of these claims is that "submitted by Larry Cambronero, a former Kake executive. Mr. Cambronero suffered a stroke early in 1999 and . . . . filed for workers' compensation benefits on the theory that the stroke was work-related." See Docket No. 8 at 7. However, while "Mr. Cambronero's claim was initially reserved at $327,165," "medical evidence was obtained establishing that Mr. Cambronero's injury was not compensable, and the reserves are now set at $0.00." See Docket No. 10 at 4. While the initial estimate was factored into the earned premium total, the amount was not actually paid by KTC.

Subsequent to filing its bankruptcy petition, but prior to rejecting the policy, three KTC employees were injured. See id. at 7. The largest of these post-petition claims was filed by employee Stanley Adams, injured on November 9, 1999: "as of June 30, 2000, [Adams] had received $89,610 in benefits with additional reserves established of $132,034, for total losses of $221,645." See id. at 8. Based on that amount, Eagle Pacific filed a motion in Bankruptcy Court "for reimbursement of $114,610 in administrative expenses incurred in connection with the post[-]petition workers' compensation claim of Stanley Adams. Of this amount, $59,598 represents the total paid losses and $55,012 represents [a] charge for general expense, loss adjustment and claims handling services provided by Eagle Pacific." See Docket No. 5, Attach. 238 at 1. The Bankruptcy Court found that

Eagle Pacific's "total losses for . . . Adams as of November 30, 2000[,] are $287,218.64." See Docket No. 10 at 4.

the debtor received the benefit of insurance reasonably worth $110,076.00, until January 1, 2000, despite rejecting the contract. As the Supreme Court has noted:

If the debtor in possession elects to continue to receive benefits from the other party to an executory contract pending a decision to reject or assume the contract, the debtor in possession is obligated to pay for the reasonable value of those services which, depending on the circumstances of a particular contract, may be what is specified in the contract.

Here, I find the reasonable value of the insurance services to be $110,076.00 for the period from October 9, 1999 to January 1, 2000.

See id., Attach. 271 at 1-2 (quoting NLRB v. Bildisco Bildisco, 465 U.S. 513, 531 (1984)).

The year's calculation yielded an earned premium of $97,646 for 1999. See Docket No. 8 at 8. KTC is correct that "[t]he 210% premium ceiling in the policy thus limited KTC's total premium for 1999 to $205,057." See id. KTC argues that "[s]ubtracting the $94,981 which KTC had already paid, the most KTC can be required to pay under the policy for 1999, regardless of losses actually incurred, is an additional $110,076." See id.; see also Docket No. 10 at 11. KTC sees a coincidence in the fact that this is the amount awarded by the Bankruptcy Court. While the parties agree that the policy allows for assessment of administrative expenses for post-petition coverage, see Docket No. 8 at 10-11, in dispute are the questions of (a) whether an assessment is here proper; and (b) if an assessment of administrative expenses is proper, what amount is reasonable?

DISCUSSION

A. Standard of Review

The ultimate resolution of this appeal turns on whether the Bankruptcy Court properly assessed administrative expenses against KTC. The Court appreciates that KTC frames the question as whether the Bankruptcy Court erred "in ordering a Chapter 11 estate to pay an administrative expense for workers' compensation `adjustment' premiums on a rejected insurance policy when the adjustments were based upon post-petition claims and pre-petition claims had already capped the premiums," see Docket No. 8 at 2, whereas Eagle Pacific views the inquiry as being solely based on the amount of expenses assessed, see Docket No. 10 at 1 ("The dispositive issue is whether the Bankruptcy Court correctly found that the post-petition insurance services provided by Eagle Pacific . . . had a reasonable value of $110,076.00."). Given these respective readings, the conflict is apparent: KTC contends that "[t]he issues in this appeal are legal rather than factual," and that the Bankruptcy Court's decision is therefore subject to de novo review, see Docket No. 8 at 3 (citing In re Devers, 759 F.2d 751, 753 (9th Cir. 1985)), whereas Eagle Pacific argues that the questions at issue are factual, and that the decision is thus subject to review under the appellee-friendly "clearly erroneous" standard. See Docket No. 10 at 2 (citing Fed.R.Bankr.P. 8013; Preblich v. Battley, 6 ABR 126, 181 F.3d 1048, 1051 (9th Cir. 1999)). Because the inquiry as to which standard of review obtains will necessarily impact the conclusion reached by the Court, this question must first be addressed. The Court finds that the question of whether administrative expenses were proper given the circumstances is a legal question mandating de novo review, whereas the question of what amount of expenses was indeed reasonable is one of fact, reviewed under the "clearly erroneous" standard. See Preblich, 181 F.3d at 1051; In re Brown, 951 F.2d 564, 567 (3d Cir. 1991) ("Mixed questions of law and fact must be divided into their respective components and the appropriate test applied.").

The Court presumes that counsel for Eagle Pacific intended to reference Preblich, and that the reference to the Prebish case named in its briefing, see Docket No. 10 at 2, was an error.

B. Post-Petition Claims Under Federal Bankruptcy Rule of Procedure 503

The parties seem to be in agreement that 11 U.S.C. § 365 governs the policy. See Docket No. 8 at 10 (quoting § 365(g)(1) for the proposition that "[t]he rejection of an executory contract constitutes a breach of that contract `immediately before the date of the filing of the petition'"); Docket No. 10 at 10 (citing § 365(b)(1)(B) for the proposition that KTC, should it have chosen to accept the policy, would have had to first cure its effective default, including paying Eagle Pacific compensation "for," as allowed by statute, "any actual pecuniary loss . . . resulting from such default"). They also agree that "`the claims of insurance carriers based on post-petition injuries are administrative expenses and claims based on pre-petition injuries are not.'" See Docket No. 10 at 5-6 (quoting Docket No. 8 at 16); see also In re Texscan Corp., 107 B.R. 227 (9th Cir. B.A.P. 1989). There would seem to be no debate, then, that KTC's claims based on post-petition injuries ( e.g., Stanley Adams' November 9, 1999, injury) are administrative expenses.

KTC, however, argues that because pre-petition liabilities capped the amount possibly due Eagle Pacific in premiums under the loss ratio established by the policy, any administrative expense levied would be an unfair consumption of estate assets: "[t]he effect of allowing Eagle Pacific an administrative expense is to elevate its pre-petition claim to favored administrative status." See Docket No. 8 at 14. Eagle Pacific argues that KTC is asking Eagle Pacific to provide post-petition coverage for free. But this is inaccurate. KTC is merely asking Eagle Pacific to provide the coverage Eagle Pacific agreed to provide when it issued the policy in the first place. Under the policy, Eagle Pacific took the risk that losses would exceed $106,629 and Eagle Pacific undertook to pay all losses above that level without asking for any additional funds from KTC. All of the losses needed to reach the premium ceiling occurred long before the bankruptcy filing and under the insurance contract Eagle Pacific cannot ask for extra payments just because KTC filed a bankruptcy petition after its loss limit had been reached during the policy year.

Id. KTC's argument is flawed. To follow its rationale, Eagle Pacific is afforded no payment for the services provided post-petition. While Eagle Pacific might have been limited regarding premium charges by the "`premium ceiling,'" see id. at 16, it is not limited regarding administrative expenses, which are clearly authorized under 11 U.S.C. § 503. Thus, while it may be true that the policy gives no indication as to the propriety of post-petition coverage, the Section itself permits an award.

KTC argues that the because the amount of the Cambronero claim, like the amount of all other claims under the policy, "is `determined solely by [Eagle Pacific]'. . . . Eagle Pacific is stuck with the consequences of that determination. The reserves set for that claim established the premium; under the policy it is irrelevant that Mr. Cambronero has only been paid a relative pittance." See Docket No. 8 at 12-13 n. 9. Eagle Pacific counters that, due to the finding that the claim was non-compensable, "the premium ceiling of approximately $210,000 was neither reached, nor paid pre-petition," and that "[e]ven if the premium ceiling had been reached temporarily, the periodic retrospective adjustments called for in the policy would have resulted in recalculating the premium at a later date." See Docket No. 10 at 12.

C. The Award

The Court must now examine whether the particular award granted by the Bankruptcy Court was "clearly erroneous." See Fed.R.Bankr.P. 8013 ("On an appeal the district court . . . may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings. Findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses."). The order itself offers no discussion as to how the Bankruptcy Court calculated the amount assessed against KTC. See Docket No. 5, Attach. 271 at 1-2. However, the transcript of the hearing held on the application for reimbursement belies any assumption that the Bankruptcy Court "engaged in the regrettable practice of adopting the findings drafted by the prevailing party wholesale," see Sealy, Inc. v. Easy Living, Inc., 743 F.2d 1378, 1385 n. 3 (9th Cir. 1984) (internal quotation omitted), such as would necessitate that this Court "review its findings with special scrutiny." See id.

The arguments and methods of calculation posed by the parties look something like this: KTC, apparently presuming that the Bankruptcy Court intended to mask an award of premium payments in administrative expense clothing, argues that the "general principle of apportioning expense to the period of time in which it was incurred" is a proper method of calculation. See Docket No. 8 at 19. On the other hand, Eagle Pacific argues that KTC has failed "to assert any reasoned criticism of the Bankruptcy Court's finding" with regard to the reasonable value of post-petition services, and that even if a prorated premium were the accepted method of calculation, that amount would total far more than the award currently appealed. See Docket No. 10 at 13. Yet neither party has suggested a method advanced by caselaw or contract to calculate administrative expenses in insurance policy cases. Moreover, while KTC may find it suspect that the value set by the Bankruptcy Court "is the exact difference between the premium ceiling of $205,057 and the $94,981 which KTC had already paid," see Docket No. 8 at 9, it appears that this is the most reasonable basis upon which to resolve the parties' dispute. While KTC "rejected" the policy, it in effect received coverage for the entire policy term. Judge MacDonald appears more than likely to have assessed expenses based on his concern that it would be unfair for KTC to have reaped the benefits of Eagle Pacific's post-petition risk while Eagle Pacific went uncompensated. See Docket No. 5, Attach. 294 at 16. In this case, the benefit reaped was $110,076. Regardless of the method he used to calculate the appropriate expenses, there is no doubt that he acted with due attention to both the policy and the Bankruptcy Code, and with a concern for this case's affect on future holdings. See id., Attach. 294 at 26.

CONCLUSION

Because the Court finds the value of post-petition coverage extended KTC for a period of roughly three months to have been reasonably assessed at $110,076, the Court hereby affirms the Bankruptcy Court's order and shall dismiss this appeal.