by Jerry W. Venters¹

I. Introduction

Workers' compensation law in the United States is unique in that it is a form of social insurance paid for by the users of products and services.² Employers - not the state - are obligated to maintain workers' compensation coverage, either by qualifying as self-insured entities or by using a third-party insurance company.³ Because workers' compensation is an employee's exclusive remedy for workplace injuries, Missouri mandates that every employer provide coverage,⁴ unless otherwise exempted.⁵

To maintain this scheme of workers' compensation, adequate funding is essential and is also required by statute.⁶ In an effort to coerce compliance with workers' compensation laws, and to deter subterfuge in cutting the costs of providing coverage, Missouri law makes it a class A misdemeanor for "any person [to] knowingly misrepresent any fact in" an effort to obtain workers' compensation coverage. Repeat offenses are punishable as class D felonies.⁷

Unfortunately, this system of responsibility, adequate funding, and coerced honesty does not always work as envisioned. Employers sometimes fail to operate a profitable business and file for bankruptcy. Likewise, an insurer's obligations sometimes far exceed the insurer's assets, and the insurer may seek state insolvency protection.⁸ This article is designed to give an overview of the typical themes that occur when each, or all, of the three primary parties involved in the workers' compensation system - the worker, the employer, and the insurer - fall upon financial hardship and seek federal bankruptcy or state insolvency protection. This article focuses first on what happens when an employee who is entitled to receive compensation benefits files bankruptcy; next on what happens to workers' compensation benefits when an employer files for bankruptcy; and, finally, on what happens to workers' compensation benefits when an insurance company becomes insolvent.

II. A Worker's Bankruptcy

When a worker who is entitled to compensation benefits declares bankruptcy, the governing rules are relatively straightforward. In short, with the exception of child support, workers' compensation benefits are not assignable, subject to "attachment, garnishment, [or] execution;" and the benefits are not "subject to setoff or counterclaim."⁹ Thus, a worker's right to continue to receive compensation benefits is largely unaffected by the worker's personal bankruptcy. Care should be taken, however, that the worker specifically claims an entitlement to workers' compensation benefits as being exempt from property of the bankruptcy estate; otherwise, as a matter of federal law, that entitlement is property of the bankruptcy estate and is subject to administration for the benefit of the worker's creditors.¹⁰

A more interesting situation arises when a worker with a pending compensation case files for bankruptcy. Upon the filing of a bankruptcy petition, the bankruptcy court's automatic stay takes effect.¹¹ The automatic stay prohibits, inter alia, the "commencement or continuation" of a "proceeding against the [worker] that was or could have been commenced before the commencement of the [bankruptcy] case."¹² By itself, a suit by a worker to obtain benefits¹³ is not a suit "against the [worker]" and is not affected by the automatic stay.¹⁴ Problems arise, however, when the defendant employer/carrier asserts counterclaims for affirmative relief inasmuch as a counterclaim may constitute an action against the worker/debtor that is prohibited by the automatic stay.¹⁵ On the other hand, there is some room for argument that affirmative defenses, which merely seek avoidance of a worker's claim - and which do not seek any relief from the debtor - are not proceedings against the debtor prohibited by the automatic stay.¹⁶ Likewise, if an employer/carrier's claim is one based in recoupment- i.e., obtaining funds from a worker because of an overpayment - there is some authority for finding that recoupment claims are not subject to the automatic stay because those funds never became part of the bankruptcy estate in the first instance, inasmuch as the worker never had any legal or equitable interest in those funds.¹⁷ An important distinction to note is that a proceeding by the employer/insurer against the employee that arose after the worker filed a bankruptcy petition,¹⁸ but before the worker obtained a discharge, is not affected by the automatic stay by the plain language of the statute.¹⁹ In any event, the safest course of action for the employer or carrier in any of the above circumstances, whether a party believes that the automatic stay is applicable or not, is to pay the filing fee and seek relief from the automatic stay in the bankruptcy court for cause.²⁰ In fact, 30 days after a request for relief from the automatic stay is filed, the stay is terminated unless the bankruptcy court, after notice and a hearing, orders that the stay continue in effect.²¹

Even more interesting than the effect of the automatic stay on a worker's suit for benefits is the effect that the worker's right to receive benefits has on a worker's Chapter 13 bankruptcy proceeding. Almost all workers are eligible to file bankruptcy under Chapter 13,²² which is designed "to facilitate adjustments of all types of debts of individuals with regular income through extension and composition plans funded out of future income."²³ In proposing a Chapter 13 plan to adjust the worker's debts, the Chapter 13 trustee, or any holder of "an allowed unsecured claim," may object to the bankruptcy court's confirmation of that plan, and the "court may not approve [it] unless . . . the plan provides that all of the [worker's] projected disposable income [will] be received" into the plan for three years after its effective date.²⁴ "Disposable income" is specifically defined by statute, and includes any amount not "reasonably necessary to be expended ... for maintenance or support of the debtor."²⁵

The issue then arises in Chapter 13 cases over whether an exempt asset - such as the worker's right to receive future compensation benefits - may be included in a calculation of how much disposable income a worker has to fund a Chapter 13 plan. At least one Missouri court, in In re Jackson, determined that the disposable income test did not "quantify income by reference to its exempt status," and the judge required that the debtor's workers' compensation benefits be included in the calculation of the worker's disposable income on the basis that the compensation proceeds "must be devoted to the Chapter 13 plan unless [they were] reasonably necessary for [the worker's] maintenance and support."²⁶ The obvious criticism of this viewpoint is that the worker, under the right circumstances, may end up paying over to creditors the very asset that is wholly exempt from a creditor's attachment under Missouri law. In fact, Jackson is not universally accepted by other courts within the 8th Circuit.²⁷ The law in this area is still unsettled, and a more in-depth analysis is beyond the cursory scope of this article.

In sum, the legal standard applicable to a workers' compensation recipient who files for bankruptcy is relatively straightforward. With the exception of child support obligations, the workers' compensation benefits are not attachable by the worker's creditors. If a worker's entitlement to benefits is controverted by the employer/insurer, and if the worker's right to receive benefits accrued prior to filing his or her bankruptcy petition, the employer/insurer is prohibited by the automatic stay from commencing or continuing any action against the worker/debtor. Although there are some exceptions to this general rule, the safest course of action is to file a motion for relief from the automatic stay in the bankruptcy court. Finally, a worker filing a Chapter 13 plan should be wary that the Bankruptcy Court for the Eastern District of Missouri has determined that even though his or her compensation benefits are wholly exempt under Missouri law, that income may nevertheless be used in calculating the amount of a worker's disposable income that could be devoted to a Chapter 13 plan.

III. The Employer's Bankruptcy

The intersection between workers' compensation laws and bankruptcy proceedings are more complicated when an employer files for bankruptcy protection. In the event the employer is fully insured, an employer's bankruptcy is of little importance to the injured worker who is receiving benefits, or who has commenced a suit to obtain such benefits, because the insurer is primarily and directly liable for payment.²⁸ If not insured, then the employer is required to self-insure its entire liability for workers' compensation benefits.²⁹

When an employer files for bankruptcy, it generally only has two options - a complete liquidation of its assets under Chapter 7, or a reorganization or liquidation of its business under Chapter 11. In a Chapter 7 proceeding, or a liquidating Chapter 11 proceeding, either a new company purchases the employer's business, in which case the new company will likely assume the employer's workers' compensation program or institute a new program - as allowed by law - or all the employees are terminated and there is no need for a continued workers' compensation program to cover any new claims. In a Chapter 11 proceeding, the employer is typically attempting to reorganize the business and maintain continuing operations. In Chapter 11 cases, the employer generally files a motion for authorization to continue workers' compensation programs and related agreements on the first day of the case.³⁰ Maintenance of the workers' compensation program is a necessity for any reorganization inasmuch as the employer is required by law to have workers' compensation coverage for its employees.³¹

Regarding the treatment of an employer's obligation to pay back-due compensation claims, Missouri law provides that, in the event of insolvency, the workers' compensation claims are entitled to the same priority in payment from the bankrupt estate as a claim for wages, but without limit as to the time or amount.³² Unfortunately for the injured employee, however, under federal law workers' compensation claims in the bankruptcy estate are given general unsecured creditor status and are not entitled to any priority in payment.³³ Because Missouri law is preempted by the Bankruptcy Code, the provisions regarding what claims are given priority status in the Bankruptcy Code govern, and the Code simply does not provide any priority for pre-petition workers' compensation claimants.³⁴ On the other hand, under Missouri law, workers' compensation benefits are not liable for any debts of the employer, or for the insolvency of the employer or insurer.³⁵ Therefore, to the extent that a bankruptcy action exists that relies on state law to recover for the estate the paid workers' compensation benefits, those benefits cannot be brought back into the estate for payment to all creditors generally.

As stated above, in Chapter 11 cases the debtor often files a first day motion to continue its workers' compensation programs. When the debtor is a self-insured entity, that usually means that the debtor is assuming its existing self-insured status with the state of Missouri. To the extent that being self-insured is an executory contract, and to the extent that the executory contract requires the debtor to pay past due compensation claims, the debtor may be obligated to cure any pre-petition arrearage owing to compensation claimants if the court approves the assumption of the debtor's self-insured status.³⁶ Of course, if the debtor's pre-petition, unpaid workers' compensation claims are sizeable, the debtor might make the business judgment to reject its existing self-insured status and opt for a third party insurer to cover post-petition claims.

Absent an assumption of self-insured status after filing for bankruptcy, the fact that a pre-petition worker entitled to past due compensation payments is not entitled to any type of bankruptcy priority payment does not mean that the injured worker is limited to receiving pennies on the dollar, if anything, for the value of his or her claim. Perhaps because the prospect of a pre-petition injured worker receiving little or nothing on a legitimate claim for compensation is such an anathema to the entire philosophic underpinnings of the workers' compensation system, the Missouri Generally Assembly created the Second Injury Fund and the Missouri Private Sector Individual Self Insurers Guaranty Corporation ("guaranty corporation") to pay those claims.

If an employer fails to adequately self-insure, monies from the Second Injury Fund may be withdrawn to cover the fair, reasonable, and necessary expenses of the injured employee.³⁷ The Second Injury Fund maintains a separate existence from the guaranty corporation, and is funded by annual surcharges against every self-insurer and policy holder.³⁸ The guaranty corporation, which is comprised of all self-insured employers, also maintains an insolvency fund for purposes of meeting the obligations of its insolvent members after the exhaustion of all of the insolvent member's assets.³⁹ Money in the insolvency fund is used solely to compensate persons entitled to receive workers' compensation benefits from a Missouri self insurer that is unable to meet its workers' compensation benefit obligations.⁴⁰

In administering the insolvency fund, the guaranty corporation is obligated to pay compensation to an insolvent member's employees resulting from incidents and injuries to the extent of covered claims existing prior to the issuance of an order of liquidation as long as the employer is unable to pay such obligations.⁴¹ All incidents giving rise to claims for compensation must occur during the year in which the insolvent, self-insured employer is a member of the guaranty corporation, and the injured worker must make a timely claim for workers' compensation benefits.⁴² Any proceeds derived from that claim by the injured employee - either from the insolvent employer itself or through filing a proof of claim in the employer's bankruptcy proceedings - is an offset to any amounts due and owing to the employee under the workers' compensation law.⁴³ Accordingly, just because a worker has an allowed claim in the employer's bankruptcy estate does not mean that the worker's recovery is limited by the bankruptcy estate's distribution to creditors. The Second Injury Fund and the guaranty corporation's insolvency fund are safety nets to ensure that the workers' compensation benefits are paid regardless of an employer's bankruptcy proceeding.

Injured workers should be wary, however, in that the guaranty corporation has recently taken the position that it is not liable to pay any compensation benefits to pre-petition injured workers if that worker failed to timely submit a proof of claim in the employer's bankruptcy.⁴⁴ Enforcement of this requirement helps ensure that all the assets of the insolvent employer are liquidated in an effort to pay its compensation obligations, because any amount received by the injured worker through the employer's bankruptcy is an offset to the amount the guaranty corporation must pay. Although the guaranty corporation could protect those injured workers by filing a proof of claim in the employer's bankruptcy for the total amount of its compensation exposure,⁴⁵ it is not required by law to do so. Likewise, the employer may schedule the particular compensation liability as owing in a certain amount to individual injured workers, which would alleviate the need for the worker to file a proof of claim because that worker would already be entitled to any distribution to unsecured creditors in the amount scheduled by the employer.⁴⁶ Of course, if a worker has no knowledge of an employer's bankruptcy, and if that worker is neither listed nor scheduled by the employer as a creditor of the estate, the bankruptcy of the employer has no effect on the validity of the debt.⁴⁷ Naturally, any argument by a worker that he or she had no knowledge of the employer's bankruptcy is inherently weak from the outset. Thus, to avoid future litigation, and to protect the entitlement to compensation benefits from the guaranty corporation's insolvency fund, the injured worker should always submit a proof of claim in the employer's bankruptcy to ensure that his or her claim is entitled to a pro rata share of the distribution, if any, to the general unsecured creditors.

Regarding the treatment of pending, contingent and unliquidated compensation cases of an employer in bankruptcy, the automatic stay prohibits the continued prosecution of any worker's petition for benefits.⁴⁸ Likewise, the automatic stay would ordinarily prohibit the forced continuation of payments on pre-petition workers' compensation benefits by the employer, because any act to enforce the employer's payment obligations would be an attempt to collect on an antecedent debt.⁴⁹ Note, however, that an employer, or trustee administering the employer's estate, is obligated to obey state law,⁵⁰ and a failure to seek a lift of the automatic stay to pay existing compensation benefits violates Missouri law mandating that an employer provide workers' compensation coverage.⁵¹

Interestingly, some authority exists providing that workers' compensation proceedings are not automatically stayed where the benefits are to be paid from an insurance fund or from security bonds that were not part of the employer's bankruptcy estate.⁵² Under Missouri law, even when an employer is insured, the employer's liability remains "secondary and indirect."⁵³ Thus, if the employer is a named defendant in the suit, then the automatic stay would seemingly apply to prohibit the continuation of the suit against the employer. Suit should be allowed to continue against any non-bankrupt third party or co-defendant simply because the automatic stay is only for the debtor's benefit and not that of the insurer.⁵⁴ Similarly, continued payment of workers' compensation benefits from the Second Injury Fund or the guaranty corporation's insolvency fund would not be prohibited by the automatic stay because neither fund is part of the employer's bankruptcy estate.⁵⁵

In the event an injured worker must sue his or her employer to obtain compensation benefits, such as when the employer is self-insured, the automatic stay prohibits the commencement or continuation of the action.⁵⁶ To continue a workers' compensation case against an employer, the worker must file a motion for relief from the automatic stay in the bankruptcy court having jurisdiction over the employer's case.⁵⁷ If the employer and worker settle the worker's claim for a lump sum payment after relief from the automatic stay is granted, and the parties obtain the approval of the administrative law judge,⁵⁸ the employer should, as a precautionary measure, file a motion to compromise the dispute in the bankruptcy court under Federal Rule of Bankruptcy Procedure 9019.⁵⁹ If no objections are filed, the worker's claim will then be allowed in the bankruptcy proceedings for the settled amount. Failing a settlement, and failing resolution of the issue prior to the distribution of the employer's assets to creditors, the bankruptcy court has the general power to set the amount of a disputed worker's claim in administering a case for purposes of allowing distributions from the estate to creditors.⁶⁰ In setting the amount of the claim, the bankruptcy court is not necessarily adjudicating the merits of the worker's case.⁶¹ If the parties are not able to settle the matter, the bankruptcy court will almost certainly grant relief from the automatic stay, because allowing the worker's claim to be determined by the administrative law judge is the most efficient means of adjudication.⁶²

Thus, in the event an employer declares bankruptcy, the workers' compensation program is continued either by the new purchaser of the company or through a reorganization of the employer's business and the maintenance of existing workers' compensation coverage. To the extent that the employer is unable to meet its workers' compensation obligations, a worker may have recourse against the Second Injury Fund or the guaranty corporation's insolvency fund.

IV. Insurer Insolvency

Insurers are not eligible for federal bankruptcy protection⁶³ and must rely on Missouri or another state's insolvency laws to liquidate or rehabilitate. In Missouri, laws governing insurer insolvency first appeared in 1879.⁶⁴ In 1976, the Missouri General Assembly adopted the Uniform Insurers Liquidation Act (UILA).⁶⁵ In 1991, the law was updated, and patterned after the National Association of Insurers' Rehabilitation and Liquidation Model Act.⁶⁶

By law, insurance companies are required to maintain adequate reserves to meet their obligations.⁶⁷ If an employer is insured, the insurer is primarily and directly liable to the injured employee.⁶⁸ If an insurer fails, the employer is secondarily liable for meeting the obligations it sought to have insured.⁶⁹ In the event an insurer becomes insolvent, however, much, if not all, of the insolvent insurer's obligations may be assumed by an insurance guaranty association, relieving the employer of having to bear both the burden of the workers' compensation insurance premium and the amount of the worker's claim.

The Missouri General Assembly created the Missouri Property and Casualty Insurance Guaranty Association ("MIGA"), a non-profit unincorporated legal entity to which all insurers doing business in Missouri are required to have membership.⁷⁰ One account of MIGA deals specifically with workers' compensation issues.⁷¹ In fact, MIGA is obligated to pay "covered claims existing prior to the date of a final order of liquidation . . . and arising within thirty days from the date" of the final order of liquidation,⁷² and it pays the full amount of any covered claim arising out of a workers' compensation policy.⁷³ Funds to pay for these obligations are obtained from assessments on all member insurers.⁷⁴

The mere fact that an insurer's insolvency proceeding is a creature of state law, however, does not rob such proceedings of the power to stay actions pending in foreign jurisdictions. For example, under Missouri law, any action involving an insurer subject to a rehabilitation order must be stayed for 90 days and for such additional time as is necessary for the rehabilitator to obtain proper representation and prepare for further proceedings.⁷⁵ The rehabilitator must "consider all litigation pending outside [of the] state . . . having jurisdiction over" the insurer's insolvency proceeding, and must petition those courts "for stays whenever necessary to protect the estate of the insurer."⁷⁶ Any receiver may "apply for, and any court of general jurisdiction may grant, such restraining orders, preliminary and permanent injunctions, and other orders as may be deemed necessary and proper to prevent . . . the institution or further prosecution of any actions or proceedings."⁷⁷

The federal McCarran Ferguson Act⁷⁸ also provides for a type of "inverse preemption" allowing a court in one state to stay proceedings in a sister state. Specifically, Congress provided that the business of insurance is subject to state law and "[n]o [a]ct of Congress [may] be construed to invalidate, impair or supercede any law enacted by any State" to regulate insurance.⁷⁹ "This policy, however, does not translate into state preemption of federal jurisdiction or void every federal statute under which a plaintiff may sue an insolvent insurer in federal court, but it merely counsels that a federal court consider the propriety of abstaining from or staying the federal action."⁸⁰ In most circumstances, an abstention consistent with Burford v. Sun Oil Co. or Colorado River Water Conservation Dist. v. United States may be appropriate.⁸¹

Thus, when an insurer is insolvent, MIGA is obligated to pay the insurer's workers' compensation claims. Should MIGA fail to pay all claims, the employer is secondarily liable. When an insurer in Missouri or a sister state is in receivership and a rehabiliator is appointed, it is the obligation of the rehabilitator to notify the court that the action should be stayed for 90 days pursuant to Missouri law.

V. Conclusion

As stated at the outset of this article, workers' compensation is unique in that it is a form of social insurance paid for by the users of products and services. Although workers' compensation is not an obligation undertaken by the state, both state and federal law provide for the continuation of workers' compensation programs notwithstanding an individual employer's bankruptcy or insurer's insolvency. For the injured worker, some pitfalls exist, but the injured worker can be reasonably well assured that he or she will not be left destitute - and a burden on the state - merely because the worker's employer files for bankruptcy, or because the employer's insurance company files for insolvency protection.

Footnotes

¹ The Honorable Jerry W. Venters is United States Bankruptcy Judge for the Western District of Missouri. Judge Venters received journalism and law degrees from the University of Missouri-Columbia. From 1976 until his appointment as a bankruptcy judge on February 1, 1999, Judge Venters was engaged in the private practice of law in Jefferson City, representing both creditors and debtors. Judge Venters acknowledges the extensive work of his former law clerk, Ryan W. Johnson, in the preparation of this article.

² Arthur Larson, The Law of Workers' Compensation 1-1.1-2 (2003).

³ Section 287.280, RSMo 2000.

⁴ Section 287.120.1, RSMo Supp. 2004. An uninsured employer's liability to an injured employee is "primary and direct." Section 287.300, RSMo 2000. If the employer is insured, however, the insurer is also "primarily and directly liable." Id. The statute explains, "The liability of the immediate employer shall be primary, and that of the others secondary in their order, and any compensation paid by those secondarily liable may be recovered from those primarily liable, with attorney's fees and expenses of the suit." Section 287.040(4), RSMo 2000. An employee is relieved of any obligation to pay for the employer's workers' compensation obligations. Section 287.290, RSMo 2000.

⁵ For example, the employers of certain "farm laborers, domestic servants," "[q]ualified real estate agents," inmate laborers, and "[v]olunteers of tax exempt organization[s]" are not subject to Missouri's workers' compensation laws. Section 287.090.1, RSMo 2000.

⁶ Section 287.340, RSMo 2000.

⁷ Sections 287.129, RSMo 2000 and 287.128(4), RSMo Supp. 2004. A class A misdemeanor is one in which the offender is subject to a term of imprisonment "not to exceed one year." Section 558.011(5), RSMo 2000. A class D felony is one in which the offender is subject to a term of imprisonment "not to exceed four years." Section 558.011.1(4), RSMo 2000.

⁸ Insurers are not eligible for federal bankruptcy protection. 11 U.S.C. § 109. Insurers must file for insolvency protection under Missouri's Insurers Supervision, Rehabilitation and Liquidation Act. Sections 375.1150-375.1246, RSMo 2000.

⁹ Section 287.260.1. Disability or illness benefits are also specifically exempted from the reach of creditors by § 513.430.1(10)(c), RSMo Supp. 2004. Missouri's exemption laws are made applicable to federal bankruptcy proceedings under § 513.427, RSMo 2000, and 11 U.S.C. § 522(b)(2)(A). See also In re Jackson, 173 Bankr. 168, 170 (Bankr. E.D. Mo. 1994) (stating that the Missouri exemption is broad enough to cover unliquidated workers' compensation benefits that were not being paid on the date the debtor filed bankruptcy).

By statute, workers' compensation benefits are attachable to satisfy a debtor's outstanding child support obligations. The statute provides:

Notwithstanding subsection 1 of this section, the compensation payable under this chapter other than compensation for medical expenses and therapy under section 287.141, shall be assignable for the purpose of satisfying child support obligations, shall be subject to attachment, garnishment and execution for the purpose of collecting and satisfying unpaid and delinquent child support obligations, and shall be subject to the lien provided for in section 454.517, RSMo. Section 452.140, RSMo, shall apply to limit property exemptions available in an action to collect child support under this subsection.

¹⁰ Notwithstanding a worker's entitlement to a state law exemption, when a person files for relief under the federal Bankruptcy Code an estate is created that broadly consists of, inter alia, "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). A right to receive workers' compensation benefits is certainly one of those "legal or equitable interests" that form part of the bankruptcy estate. Once property is part of the estate, a Missouri debtor may exempt some (or all) of that property pursuant to 11 U.S.C. § 522(b)(2)(A), which allows a debtor in bankruptcy to use Missouri state law exemptions. See § 513.427, RSMo 2000 (opting out of the federal bankruptcy exemptions provided in 11 U.S.C. § 522(d)). Importantly, a right to receive workers' compensation benefits must be part of the bankruptcy estate before it may be exempted; thus, a worker could lose the right to receive those workers' compensation benefits unless the specific exemption is claimed under § 287.260.1, RSMo 2000. A bald conclusion that a worker's benefits are automatically free from the claims of creditors is contrary to 11 U.S.C. § 541(a) and the United States Constitution. U.S. Const. art. VI, § 4, cl. 2 ("This constitution, and the laws of the United States which shall be made in pursuance thereof ... shall be the supreme law of the land ... any thing in the constitution or laws of any state to the contrary notwithstanding."); U.S. Const. art I, § 8 cl. 4 (granting Congress the power to establish uniform laws on bankruptcy). If a worker fails to initially claim workers' compensation benefits as exempt, Fed. R. Bankr. P. 1009(a) specifically provides that the debtor may amend the schedules "as a matter of course at any time before the case is closed."

¹¹ 11 U.S.C. § 362.

¹² 11 U.S.C. § 362(a)(1).

¹³ This article assumes that the worker has appropriately acted to exempt an unliquidated workers' compensation suit from property of the bankruptcy estate under 11 U.S.C. § 541(a). Generally, if a cause of action belonging to an individual debtor is not exempted, the bankruptcy trustee is the party that prosecutes the lawsuit because it is the trustee who is charged with the obligation - at least in Chapter 7 proceedings - to "collect and reduce to money the property of the estate for which the trustee serves, and close such estate as expeditiously as is compatible with the best interests of the parties in interest." 11 U.S.C. § 704(1).

¹⁴ 11 U.S.C. § 362(a)(1).

¹⁵ Id. Garland Coal & Mining v. United Mine Workers, 778 F.2d 1297, 1304 (8th Cir. 1985) (stating that the automatic stay should be lifted before a party proceeds against a debtor on a counterclaim). Notably, "the automatic stay implicitly does not bar a party from commencing a proceeding against the debtor in the court where the bankruptcy petition is pending," and does not apply to actions in the bankruptcy court having jurisdiction over the bankrupt. In re Briarwood Hills Assocs., L.P., 237 Bankr. 479, 480 (Bankr. W.D. Mo. 1999) (citing cases). Furthermore, if a governmental unit or organization is a named defendant in the worker's lawsuit, the automatic stay would not apply to any action by that unit or organization to enforce a police or regulatory power. 11 U.S.C. § 362(b)(4).

¹⁶ 11 U.S.C. § 362; In re Transp. Sys. Int'l, 110 Bankr. 888, 893 (D. Minn. 1990) (holding that a complaint seeking a declaratory judgment does not violate the automatic stay); Rett White Motor Sales Co. v. Wells Fargo Bank, 99 Bankr. 12 (Bankr. N.D. Cal. 1989) (stating that "counterclaim[s] for interpleader and declaratory relief" are not subject to the automatic stay).

¹⁷ 11 U.S.C. § 541(d); Matter of Holford, 896 F.2d 176, 179 (5th Cir. 1990).

¹⁸ "Arising after filing a petition" means that the worker's right to assert a claim did not accrue until after the worker filed bankruptcy. An action that is contingent and unliquidated, which accrued before the worker filed bankruptcy, is property of the estate pursuant to 11 U.S.C. § 541(a), and is subject to the automatic stay.

¹⁹ 11 U.S.C. § 362.

²⁰ 11 U.S.C. § 362(d).

²¹ 11 U.S.C. § 362(e). Under Local Rule of Practice 4001-1(A) for the United States Bankruptcy Court for the Western District of Missouri, after "a motion for stay relief" is filed, "the Court will issue an order setting an answer date and a hearing date if an answer is filed." If no answer is filed by the response date (typically 15 days after filing), "the motion is deemed [admitted] and the Court may enter a final order."

²² Generally, "[o]nly an individual with regular income," who owes "less than $307,675" in "noncontingent, liquidated, [and] unsecured debts," and who owes "less than $922,975" in "noncontingent, liquidated [and] secured debts" may be a debtor under Chapter 13 of the Bankruptcy Code. 11 U.S.C. § 109(e) (2004). A debtor whose sole support is workers' compensation benefits is an individual with regular income. 11 U.S.C. § 101(30) (stating that an "individual with regular income" is one "whose income is sufficiently stable and regular to enable such individual to make payments under a plan under chapter 13 of this title."); Id. at S. Rep. No. 95-989 at 24. ("[I]ndividuals on welfare, social security, fixed pension incomes, or who live on investment incomes, will be able to work out repayment plans with their creditors rather than being forced into straight bankruptcy."); In re Hammonds, 729 F.2d 1391 (11th Cir. 1984) ("[D]ebtors whose total income was derived from AFDC are entitled to seek relief under chapter 13."). Id.at 1395.

²³ 8 Collier on Bankruptcy ¶ 1300.02, 1300-11, 1300-12 (Lawrence P. King et al. eds., 15th ed. rev. 1996).

²⁴ 11 U.S.C. § 1325(b)(1)(B).

²⁵ 11 U.S.C. § 1325(b)(2)(A).

²⁶ 173 Banrk. 168, 171 (Bankr. E.D. Mo. 1994).

²⁷ See In re Berger, 61 F.3d 624 (8th Cir. 1995) (construing a nearly identical section of Chapter 12 of the Bankruptcy Code and concluding that exempt life insurance proceeds, under South Dakota law, may not be included in calculating the amount of disposable income to pay to creditors); In re Koch, 187 Bankr. 664, 667-68 (Bankr. D. S.D. 1995) (holding that income exempt under state law could not be included in a Chapter 13 disposable income calculation, and noting that different panels of the Eighth Circuit may have different points of view on the issue).

²⁸ Section 287.300, RSMo 2000.

²⁹ Section 287.280(1), RSMo 2000. A self-insured employer's liability for workers' compensation benefits is also primary and direct, § 287.300, but in the context of a self-insured employer's bankruptcy the worker's right to sue on that liability is not likely to produce the desired remedy.

³⁰ The "first day motion," as it and similar motions are popularly called, is typically based on 11 U.S.C. §§ 105(a), 363(c)(1), 364(b), 365, 1107(a) and 1108.

³¹ Nothing in the Bankruptcy Code allows an employer in bankruptcy to shirk its obligations under Missouri law. In fact, the Bankruptcy Code allows the State of Missouri to treat an employer in bankruptcy that is not providing compensation coverage the same as if the employer had never filed bankruptcy. This is because the automatic stay does not apply to any state criminal proceeding or to any action to enforce a governmental unit's police or regulatory power, other than enforcement of a money judgment. 11 U.S.C. § 362(b)(1) and (4). See also 28 U.S.C. § 959(b) ("Except as provided in section 1166 of title 11, a trustee, receiver or manager appointed in any cause pending in any court of the United States, including a debtor in possession, shall manage and operate the property in his possession as such trustee, receiver or manager according to the requirements of the valid laws of the state in which such property is situated, in the same manner that the owner or possessor thereof would be bound to do if in possession thereof."); 11 U.S.C. § 1166 (stating, with certain exceptions, that the trustee is "subject to orders of any Federal, State, or local regulatory body to the same extent as the debtor would be if a petition commencing the case . . . had not been filed").

³² Section 287.260(1), RSMo 2000. See also 11 U.S.C. § 507(a)(3) (assigning priority payment for employee wages).

³³ In re Rea Express, Inc., 442 F. Supp. 71, 72 (S.D. N.Y. 1977), aff'd, 591 F.2d 1331 (2nd Cir. 1978); In re Nat'l Bickford Foremost, Inc., 116 Bankr. 351, 352 (Bankr. D. R.I. 1990); Grantham v. Eastern Marine, Inc., 93 B.R. 752, 754 (Bankr. N.D. Fla. 1988); In re Columbia Packing Co., 34 B.R. 403, 404 (Bankr. D. Mass. 1983).

In the Eighth Circuit, workers' compensation programs are not entitled to priority payment from the assets of the employer under 11 U.S.C. § 507(a)(4) because the employee is covered for workers' compensation benefits in the event an employer fails to meet its obligations under the program. In re HLM Corp., 62 F.3d 224 (8th Cir. 1995). Unpaid workers' compensation premiums at the date of filing are general unsecured claims. In re Birmingham Nashville Express, Inc., 224 F.3d 511, 517 (6th Cir. 2000).

³⁴ 11 U.S.C. § 507.

³⁵ Section 287.260(1), RSMo 2000.

³⁶ 11 U.S.C. § 365(b) of the Bankruptcy Code states that when a debtor seeks to assume an executory contract, the debtor must cure any existing defaults, compensate the other party for the debtor's previous breach, and "provide adequate assurances of future performance." Id. See also In re St. Louis Globe-Democrat, Inc., 86 B.R. 606, 610 (Bankr. E.D. Mo. 1988) (stating that when a debtor assumes an executory contract it takes both its benefits and burdens).

³⁷ Section 287.220.5, RSMo 2000 ("If an employer fails to insure or self-insure as required in section 287.280, funds from the second injury fund may be withdrawn to cover the fair, reasonable, and necessary expenses to cure and relieve the effects of the injury or disability of an injured employee in the employ of an uninsured employer, or in the case of death of an employee in the employ of an uninsured employer, funds from the second injury fund may be withdrawn to cover fair, reasonable, and necessary expenses").

³⁸ Section 287.715, RSMo 2000

³⁹ Section 287.867(2), RSMo 2000.

⁴⁰ Section 287.865(2), RSMo 2000.

⁴¹ Section 287.865(5), RSMo 2000. This section does not predicate payment on the worker actually having a second work-related injury.

⁴² Id.

⁴³ Id.

⁴⁴ In re Wire Rope Corp. of Am., 300 Bankr. 1 (Bankr. W.D. Mo. 2003). In that case the guaranty corporation sought to deny benefits to approximately "135 injured workers who failed to timely file a proof of claim in [their employer's] bankruptcy." Id. at 5. The guaranty corporation based its argument on § 287.865.5, which states, in pertinent part, that an incident giving rise to a claim for compensation only occurs, in part, when "the injured [employee makes] a timely claim for payment in the bankruptcy [court]." Any amount recovered by the employee from the bankruptcy estate is an offset against the guaranty corporation's liability. To fix any due process problems with adequate notice, and to give effect to the statute, the bankruptcy court ordered the employer to amend its schedules to include all pre-petition injured workers as general unsecured creditors, and ordered the guaranty corporation to file a proof of claim on their behalf. Wire Rope Corp. of Am., 300 Bankr. at 10.

⁴⁵ Fed. R. Bankr. P. 3002 and 3003.

⁴⁶ 11 U.S.C. § 521; Fed. R. Bankr. P. 3004.

⁴⁷ 11 U.S.C. § 523(a)(3).

⁴⁸ 11 U.S.C. § 362.

⁴⁹ 11 U.S.C. § 362(a)(1), (2), and (6).

⁵⁰ 28 U.S.C. § 959; 11 U.S.C. § 1166.

⁵¹ Section 287.060, RSMo 2000.

⁵² 11 U.S.C. § 541; In re Mansfield Tire & Rubber Co., 660 F.2d 1108, 1115 (6th Cir. 1981). When the coverage is in the nature of a surety bond to insure the employer's performance of its workers' compensation obligations, the employer itself would have no legal or equitable interest in the surety bond. Matter of Lockard, 884 F.2d 1171, 1177 (9th Cir. 1989).

⁵³ Section 287.300, RSMo 2000.

⁵⁴ See, e.g., United States ex rel. Bowman v. Computer Learning Centers, Inc., No. 02-21354, 73 Fed. Appx. 735 (5th Cir. 2003) (vacating the order of the district court, which had dismissed the plaintiff's entire action without prejudice because one of the named defendants had filed for bankruptcy).

⁵⁵ 11 U.S.C. § 541.

⁵⁶ 11 U.S.C. § 362(a)(1).

⁵⁷ 11 U.S.C. § 362(d).

⁵⁸ The bankruptcy court has the power to approve the settlement of a disputed claim on the motion of the trustee and upon notice to creditors. Fed. R. Bankr. P. 9019. Under Missouri law, however, "any agreement of settlement or compromise of any dispute or claim for compensation under this chapter [shall not] be valid until approved by an administrative law judge or the commission" (Section 287.390.1, RSMo 2000). Thus, although the bankruptcy court may approve the settlement of the worker's claim for compensation, that settlement is not valid under state law until approved under state procedures. Once the commission or the administrative law judge has approved the settlement, the approval of the bankruptcy court would almost assuredly follow.

⁵⁹ Fed. R. Bankr. P. 9019(a) provides that the bankruptcy court may approve a settlement "after notice and a hearing." Most often, when an employer files bankruptcy, the bankruptcy court will authorize the trustee or debtor-in-possession to settle workers' compensation-type claims without further notice or hearing. Fed. R. Bankr. P. 9019(b).

⁶⁰ 11 U.S.C. § 502(c).

⁶¹ In re Mansfield Tire & Rubber Co., 660 F.2d 1108, 1113 (6th Cir. 1981) (stating that Congress did not give the bankruptcy courts jurisdiction to adjudicate state workers' compensation laws and Congress never intended that the bankruptcy proceedings be used to disrupt the orderly administration of the workers' compensation laws by the state).

⁶² In re Rose Exterminator Co., 135 B.R. 637, 639 (Bankr. E.D. Mo. 1992).

⁶³ 11 U.S.C. § 109.

⁶⁴ Sections 6035 to 6055, RSMo 1879.

⁶⁵ Sections 375.950-990, RSMo 1976.

⁶⁶ Insurers Supervision, Rehabilitation and Liquidation Act. §§ 375.1150 - 375.1246, RSMo 2000. Uniform Insurer's Liquidation Act, §§ 375.950-375.990, RSMo 2000, only applies to proceedings instituted prior to August 28, 1991.

⁶⁷ Section 287.340, RSMo 2000.

⁶⁸ Section 287.300, RSMo 2000.

⁶⁹ Id.

⁷⁰ Section 375.772, RSMo Supp. 2004.

⁷¹ Section 375.773, RSMo Supp. 2004.

⁷² Section 375.775.1, RSMo Supp. 2004.

⁷³ Section 375.775.1(1), RSMo Supp. 2004.

⁷⁴ Section 375.775.1(8), RSMo Supp. 2004.

⁷⁵ Section 375.1170.1, RSMo 2000.

⁷⁶ Id. "[S]tays during liquidation are not similarly qualified." State ex rel. Dykhouse v. Edwards, 908 S.W.2d 686, 689 (Mo. banc 1995).

⁷⁷ Section 375.1155, RSMo 2000. This provision creates only discretionary authority to seek injunctive relief against specific actions by others. The statute does not obligate the receiver to seek such an order, nor does it require Missouri courts to honor similar orders from reciprocal states. Dykhouse, 908 S.W.2d at 688.

⁷⁸ Codified at 15 U.S.C. §§ 1011-15.

⁷⁹ 11 U.S.C. § 1012(b) (2004).

⁸⁰ Murff v. Professional Medical Ins. Co., 97 F.3d 289, 293 (8th Cir. 1996).

⁸¹ See Burford v. Sun Oil Co., 319 U.S. 315 (1943) (abstaining when difficult questions of state law would be disruptive to the state's efforts to establish a coherent policy on an issue of public concern); Colorado River Water Conservation District v. United States, 424 U.S. 800, 814 (1976) (abstaining when a disposition by a court of equity would interfere with the proceedings or orders of state administrative agencies: (1) when there are "difficult questions of state law bearing on policy problems of substantial public import whose importance transcends the result in the case then at bar"; or (2) where the "exercise of federal review of the question in a case and in similar cases would be disruptive . . . to a matter of substantial public concern.").