In the
United States Court of Appeals
For the Seventh Circuit

No. 00-1976

In the Matter of:
Farley Inc., doing business as
Tool & Engineering and Magnus Metals,

Debtor.


Appeal of:

Ohio Bureau of Workers’ Compensation



Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 99 C 4789 (91 B 1560)--Charles R. Norgle, Sr., Judge.


Argued November 27, 2000--Decided December 29, 2000




  Before Bauer, Posner, and Easterbrook, Circuit Judges.

  Easterbrook, Circuit Judge. Like most states,
Ohio requires employers to insure their workers’
compensation obligations. Ohio permits well-
heeled firms to dispense with insurance if they
post surety bonds. Bonds are less costly than
insurance because the surety has a right of
subrogation against the employer in the event the
surety is called on to pay. In 1986 Ohio entered
the bonding business, requiring self-insuring
employers to obtain surety bonds from the state.
Ohio Rev. Code sec.4123.351(B). Between October
1987 and July 1990 Farley Inc. paid Ohio to stand
behind benefits for workers at the firm’s
Doehler-Jarvis plant, which Farley sold in the
latter month. For almost a year Farley continued
to remit benefits for injuries that had occurred
while it was the plant’s operator, but in May
1991 it ceased, asserting insolvency. The Ohio
Bureau of Workers’ Compensation, as Farley’s
surety, met its responsibility by paying on
Farley’s behalf. The Bureau then filed a
subrogation claim in Farley’s bankruptcy. After
needlessly protracted proceedings, Bankruptcy
Judge Schmetterer denied the Bureau’s claim,
ruling that Farley fulfilled all of its
obligations by paying the annual premiums for the
bond. 237 B.R. 702 (Bankr. N.D. Ill. 1999). The
district court affirmed in an unpublished
opinion, and now the dispute is in our bailiwick.

  Farley never paid more than $50,000 annually
for surety bonds that guaranteed a workers’
compensation bill that exceeded $1 million each
year. This sum looks like a bonding premium
rather than an insurance premium. Yet both the
bankruptcy court and the district court held that
Farley had acquired insurance--at least,
insurance that took effect on its insolvency--and
therefore did not have an obligation to reimburse
the Bureau for sums paid to injured employees on
its behalf. Both courts held, in other words,
that Ohio made a gift to Farley’s other creditors
in bankruptcy (perhaps to its shareholders, if a
surplus remains after all debts have been paid)
by assuming all responsibility for its workers’
compensation rolls. The cornerstone of that
conclusion in both courts was their observation
that until 1993, when the state enacted Ohio Rev.
Code sec.4123.351(G), no provision in state law
expressly established the Bureau’s right to
subrogation when it made payments on the bond.
Nor did the bond itself establish such a right,
for the "bond" was a statutory construct, a legal
obligation of both employer and bureau without
existence as a separate piece of paper containing
detailed terms. We bypass the question whether
Ohio law before 1993 gave the Bureau a right to
recover on the theory that by failing to make
payments to employees, and thus activating the
Bureau’s obligation to pay as surety, Farley
became liable under Ohio Rev. Code sec.4123.75
because it "failed to comply" with Ohio Rev. Code
sec.4123.35. An opinion by the Supreme Court of
Ohio says that failure to pay employees is
"failure to comply." Holben v. Interstate Motor
Freight System, 31 Ohio St. 3d 152, 156, 509
N.E.2d 938, 941 (1987). But Ohio follows its
unique Syllabus Rule, Ohio St. Rep. R. 1, which
limits holdings to the syllabus preceding the
opinion, and this statement, which does not
appear in the syllabus, therefore is not
authoritative. "Failure to comply" with the
workers’ compensation laws in Ohio has far-
reaching consequences, including restoration of
all employees’ rights under the common law of
torts. Thus the Bureau’s argument under
sec.4123.75 amounts to a contention that bankrupt
employers fall out of the strict-liability
system, and their employees can initiate tort
litigation. There is a better route to decision
in this case, a solution with fewer side effects.

  Farley treats a surety bond as the equivalent
of bankruptcy insurance because it assumes that
a surety, like an insurer, owes its obligation to
the employer, and that, when the surety pays, the
employer’s debt to its employees has been
satisfied. End of transaction. That is how
insurance works, but it is not how suretyship
works. A surety undertakes an obligation to third
parties, promising to step in if the principal
obligor defaults. But a surety does not take the
principal’s obligation for its own; it pays on
the principal’s behalf. Like a bank that has
issued a letter of credit (or pays on a check),
the issuer of a surety bond is entitled to
recover from the principal the amount it has laid
out. See Restatement (3d) Suretyship & Guaranty
sec.sec. 22, 24 (1995); Kerr v. Personal Service
Insurance Co., 335 N.E.2d 741, 743 (Ohio App.
1975). The premium for the bond (or for a letter
of credit) covers the costs of carrying out this
obligation and the risk that the surety will be
unable to recover because the principal has
insufficient assets; the premium does not
compensate the surety for forswearing recovery
from the principal even when assets are available
(as they are in Farley’s case). If "surety bond"
has its normal meaning, then, the Bureau must be
recognized as one of Farley’s creditors, to the
extent the Bureau made payments on Farley’s
behalf.

  Ohio used a phrase--"surety bond"--with an
established legal meaning. A legislature that
chooses language with time-tested effects does
not have to narrate those effects in order to
achieve them; a statute is not a legal
encyclopedia and need not ape one in order to
specify the normal consequences of ordinary legal
words and phrases. See Phoenix Containers, L.P.
v. Sokoloff, No. 00-1466 (7th Cir. Dec. 18,
2000), slip op. 4. All language depends for
meaning on its context, and one vital context is
the way those persons affected by legislation,
the law’s addressees, understand the statutory
words. Legally trained readers of the phrase
"surety bond" know that a surety has a right of
subrogation. A legislature may of course use
language idiosyncratically; words are options
rather than prisons. If Ohio had made it clear
that the phrase "surety bond" has an unusual
meaning, its special meaning would be respected,
but nothing in Ohio law says that the issuer of
a "surety bond" for workers’ compensation
payments lacks the normal right to recover from
the principal.

  Nonetheless, Farley insists, state law has wiped
out subrogation indirectly, through Ohio Rev. Code
sec.4123.351(C) (1989 ed., before the 1993
amendments):

If a self-insuring employer defaults, the bureau
shall recover payments of compensation or benefits
from the self-insuring employer’s surety bond.
Payment from the bond relieves the employer of any
liability for damages at common law or by statute
that arises out of the injury or occupational
disease that forms the basis of the workers’
compensation claim to the extent of the payment,
except in bankruptcy proceedings.

Farley reads this language to mean that when the
Bureau pays from the bond fund, the employer is
relieved of "any liability"; and as liability in
subrogation to the Bureau is included in "any
liability," then the surety can’t recover. This is
not, however, what the statute says. When the
surety pays the employees, the employer is relieved
of "any liability for damages at common law"--which
means that the employer is not exposed to tort
damages even if its failure to pay was "failure to
comply" with the workers’ compensation statute. The
employer also is relieved of statutory liability
for "the injury or occupational disease"--which
means that the employer need not pay its workers a
second time, for they have already been compensated
by the surety. Nothing in former sec.4123.351(C)
says or implies that the employer need not
reimburse the Bureau as surety; its rights stem
from making payment on the employer’s behalf,
rather than from an "injury or occupational
disease". To the extent the statute has any bearing
at all on this subject, the exception for
bankruptcy proceedings suggests that the Bureau can
invoke the normal entitlements of a surety.

  The 1993 amendments expressly authorize
subrogation actions by the Bureau as surety. Farley
tells us that these amendments show that until 1993
the law did not authorize subrogation. That’s not
the right question; we need to know whether until
1993 Ohio forbade subrogation (for otherwise the
established meaning of "surety bond" furnishes all
the required authority). Amending a law to
authorize something in 1993 does not retroactively
change the meaning of prior law. Legislatures often
amend statutes to avoid misinterpretations, or just
to avoid controversies such as the one between
Farley and the Bureau that now has consumed almost
a decade of litigation yet would be resolved in a
flash under the 1993 statute. What Ohio enacted in
1993 does not affect the meaning of Ohio’s pre-1993
statutes. See Rivers v. Roadway Express, Inc., 511
U.S. 298 (1994). The law on the books when the
Bureau acted as Farley’s surety and sought
reimbursement did not annul the right of
subrogation that the phrase "surety bond" implies.
The Bureau therefore is entitled to recover from
Farley’s estate in bankruptcy.

Reversed and Remanded
