Article

Note: As a result of an agreement formalized in a memorandum of understanding, the Department of Consumer and Industry Services, Bureau of Workers' and Unemployment Compensation of the State of Michigan, granted Mitchell Corporation of Owosso the status of a self-insured employer for purposes of funding its workers' compensation obligations. The Company was required to post security in the amount of US$400,000, which it did through the issuance of a standby letter of credit.

When the Company subsequently filed a Chapter 11 (reorganization) petition under the US Bankruptcy Code, the Self-Insurers' Security Fund (Fund), a legislatively created body that acts when the selfinsured employer becomes insolvent, drew on the LC and established a trust with the proceeds. It used the trust to defend and settle various workers' compensation claims.

Once all claims were settled, the Company requested that the Fund return the unused portion of the proceeds of the letter of credit. When the Fund refused, the Company brought this action, claiming breach of the memorandum of understanding and an unlawful action.

The Court of Appeals of Michigan, Zahra, P.J., Talbot, and Wilder, JJ., in an opinion by Wilder, J., applying Michigan law, affirmed the award of summary judgment to the Fund by the Court of Claims.

The Company argued that neither the memorandum of understanding nor the applicable regulation authorized the Fund to hold the unused proceeds from the letter of credit at its discretion. The appellate court disagreed, concluding "that inherent in [the Fund's] authority to determine when the funds are needed is the authority to determine how long the needs exists. The memorandum of understanding and [the regulation] give [the Fund] broad discretion to determine what constitutes a need, when the need arises, and what portion of the letterof- credit funds are needed."

In a concurring opinion, Zahra, P.J., opined that under the applicable regulation, the Fund's Director was given discretion regarding when and how much security was required. Accordingly, the concurring opinion concluded, the test would be abuse of discretion. Since the Director's action was reasonable in this case, there was no abuse.

Comment: The memorandum of understanding between the Beneficiary and Applicant provided in part:

4. If the Bureau is notified that the Letter of Credit will not be renewed and a new Letter of Credit acceptable to the Bureau is not filed, the Bureau may, at its discretion and thirty or more days after it received the notice, draw on the Letter of Credit.

5. The Bureau may, at its discretion, draw on the Letter of Credit at any time if needed to pay any Michigan workers' disability compensation liability which is the Employer's responsibility.

6. All proceeds resulting from the Bureau drawing on the Letter of Credit shall be deposited with the State Treasurer and shall only be used to pay Michigan workers' disability compensation liability which is the Employer's responsibility.

[JEB/sal]

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