Collateral Agreement Didn’t Mention Tort Claims, Cutting SUNZ Out of BP Funds
If insurance carriers want to have dibs on a company’s assets as premium security or collateral, they had better specify that those assets include potential tort-claim settlements, a federal appeals court said Wednesday.
In a case that involved a Florida staffing company, the 2010 BP oil spill in the Gulf of Mexico, SUNZ Insurance Co. and the Internal Revenue Service, the U.S. 11th Circuit Court of Appeals said it all came down to one thing: Whether a $1 million oil-spill compensation plan was considered a tort claim or a contract.
It was a tort claim, the appellate judges concluded, upholding a bankruptcy court’s and a federal district court’s rulings. SUNZ, headquartered in Bradenton, Florida, had provided workers’ compensation insurance to the ailing Payroll Management staffing firm, based in Fort Walton Beach. Because Payroll was in some financial trouble and was struggling to make its workers’ comp payments, SUNZ had required a collateral/security agreement when it sold the new comp insurance policy. The agreement mandated that Payroll give SUNZ an interest in its assets, including “existing contracts.”
The insurer, however, had not specified that the security agreement applied to lawsuit awards, so the insurance company did not have precedence over the IRS in later bankruptcy proceedings, the judges found.
IRS tax liens often are given priority in bankruptcy proceedings – if the liens are perfected first, before other claims. In this case, Payroll Management had failed to pay millions of dollars in federal employment taxes as it slid into financial difficulties. The IRS filed a $23 million lien against the staffing company in 2017, a year before Payroll sought bankruptcy protection.
SUNZ argued in U.S. Bankruptcy Court that it had perfected its own claim – the security agreement – earlier, when Payroll agreed to be part of the settlement with BP, one of thousands under multi-district litigation after the oil spill, which offered compensation to Gulf Coast companies that had been affected by the oily mess and economic slowdown.
By agreeing to be part of the settlement and avoiding further lawsuits, Payroll had converted the tort claim to a contract, the insurer argued.
The appeals court explained that the Uniform Commercial Code, adopted by Florida, does, in fact, dictate that a creditor’s security interest attaches to a debtor’s collateral when the debtor signs the agreement that describes the collateral. But for tort claims, a creditor’s interest does not attach unless the security agreement explicitly describes the tort claim.
On top of that, federal law, which generally preempts state law, notes that an IRS lien attaches to all of a debtor’s assets, including tort claims, once taxes are assessed. The lien perfects, the court said, when the IRS files a lien notice with the state.
“Sunz did not have a security interest in Payroll’s commercial tort claims because its security agreement did not describe commercial tort claims as collateral, much less specifically describe them,” the appeals court noted.
Payroll’s settlement plan with BP did not convert to a contract early on because it was not finalized until later, the judges said. The staffing firm had asked for more than BP had initially offered, and had to go through a review and final settlement approval before the payment became available.
“A contractual obligation to pay did not arise until that claims review process ended with a signed individual release that stated the amount to be paid,” the court said. “And in March 2017, Payroll hadn’t yet reached the end of the claims review process.”
The full opinion can be seen here.
Photo: The Deepwater Horizon rig burns on April 21, 2010. (AP Photo/Gerald Herbert, File)