Opposition Brief — American Steamship Owners Mutual Protection & Indemnity Ass'n v. United States Lines, Inc., 120 S. Ct. 1532 (2000) (No. 99-1273)

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IN THE “4

Supreme Court of the ainited Stateg

AMERICAN STEAMSHIP OWNERS MUTUAL PROTECTION

AND INDEMNITY ASSOCIATION, INC., WEST OF ENGLAND

SHIPOWNERS MUTUAL PROTECTION AND INDEMNITY

ASSOCIATION (LUXEMBOURG), CONTINENTAL

INSURANCE COMPANY, THE UNITED KINGDOM MUTUAL

STEAM SHIP ASSURANCE ASSOCIATION (BERMUDA)

LIMITED, ASSURANCEFORENINGEN SKULD, LIVERPOOL

& LONDON MUTUAL STEAMSHIP PROTECTION AND

INDEMNITY ASSOCIATION LIMITED, AND MARINE OFFICE

OF AMERICA CORP.,

Petitioners,

UNITED STATES LINES, INC. AND UNITED STATES LINES

(S.A.) INC. REORGANIZATION TRUST AND ASBESTOS

CLAIMANTS,

Respondents.

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

BRIEF IN OPPOSITION FOR RESPONDENT

UNITED STATES LINES, INC. AND UNITED STATES

LINES (S.A.) INC. REORGANIZATION TRUST

Morris STERN

Counsel of Record

MAuRIice HRYSHKO

STERN, DuBROW & MARCUS

Attorneys for Respondent

United States Lines, Inc. and

United States Lines (S.A.) Inc.

Reorganization Trust

111 Dunnell Road

Maplewood, NJ 07040

(973) 762-3393

158061 @J Counsel Press LLC

(800) 274-3321 + (800) 359-6859

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PARTIES TO THE PROCEEDING

The Petition accurately lists the parties to the proceeding.

United States Lines, Inc. and United States Lines (S.A.)

Inc. Reorganization Trust (the “Trust’’), a trust created by

Bankruptcy Court order and Trust Agreement, does not issue

shares in itself to the public, and has neither a parent nor

subsidiary entities.

TABLE OF CONTENTS

Page

Parties to the Proceetiime .....6065cccseseuenes. i

Se OE CAMS as i ois eae ee il

sane of Cited Amthortieg: os ee vi

Stent of he Cae ois eee hie l

RB. CVOEWVUN oni dc cevetsaaten eee |

B. Course of Proceedings and Disposition in the

CUT DONNY oo ks cy occew ocr ee 2

C. Trust Organic Documents and the P&l

POD asin sa bbw clue eet eee 3

D. The P&I Policy Dilemma ............... 4

E. Declaratory Relief Sought in the Adversary

COUNDEOR: «5 iss ieee eee eee 6

F. Inter-Relation of Insurers’ Policies and

PIROOES soo kesh ins eereee ee 6

G. Plan Provisions Relevant to Litigation of the

Adversary Proceeding in the Bankruptcy

COUN iviks 5: dace we ee ee 8

H. Organic Injunctions and Other Pertinent

Adjustments in Claimants’ Rights ........ 9

. GOES so oii eee 10

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vee ays

cake PNY AI Vt AINE cases tatty Ro oie aI Ape asl

Contents

Reasons for Denying the Writ .................

The Second Circuit’s Decision That A

Complex Bankruptcy Litigation Is “Core”

When Implicating Property Of The Estate In

The Form Of Insurance Policies Fundamental

To Reorganization And Asbestos Mass Tort

Claims Resolution, Is Not In Conflict With

Decisions Of This Court, Is Not Of General

Utility In Clarifying The Law, Nor Is It

Readily Comparable To Decisions Of Other

ee eee

A. The Adversary Proceeding Involves a

Post-Petition Dispute as to P&I Policy

Interpretation in the Context of Asbestos

Mass Tort, an Essentially Different Case

than Northern Pipeline .............

B. The Adversary Proceeding Clearly and

Directly Affects Reorganization Asset

Allocation, Contrary to Petitioners’

SONI Si evs bbw cc eccleas

C. The Fact Sensitive Predicate of the

Second Circuit’s Decision Limits Both

the General Importance of its Core

Determination and its Utility to this

Court in Clarifying the Law .........

II.

Contents

D. Judge Calabresi’s Assessment That This

Case Is Not the Appropriate Vehicle for

Court Development of the Standard for

Determining Whether All or Only

Certain Post-Petition Breaches of Pre-

Petition Contracts Are Core, Is

IE ce cde Kees ss

E. The Second Circuit’s Essentially Sui

Generis Core Decision Is Not Readily

Comparable to Core Decisions of Other

Circuits in Order to Evaluate the Degree

or Significance of Conflict among the

NE 68 0058S 04 RS aks Pees eee

The Second Circuit’s Approval Of The

Bankruptcy Court’s Reasonable Exercise Of

Discretion To Centralize In A Single

Proceeding The Adjudication Of Core

Insurance Coverage Issues Having On-Going

Importance To A Major Reorganization And

Thousands Of Current And Future Asbestos

Mass Tort Claimants, In The Context Of A

Maze Of Intertwined Insurance Policies

Written Over A Forty-Year Period (Some

With And Some Without Arbitration

Clauses), Sensibly Accommodates Statutory

And Historical Bankruptcy Precepts As Well

As Arbitration Decisions Of This Court

ee 9 OC 8 24'S ON US. 82.8 U6 2 oe 4 Se a ee Se eS i8 eS

Page

Conclusion

Contents

The Second Circuit’s Decision

Supporting, in the Extraordinary

Circumstances of this Case, Centralized

Complex Bankruptcy Litigation in Lieu

of Both On-Going Limited Litigation

and Fragmented Foreign Arbitrations, Is

Consistent with Decisions of this Court

. & 8 6.2 6.6 .6:9.2:6:.6' 6 O.6/e 626-9 2 6 8.90.8 2 8.0 8.98 3

This Virtually Sui Generis Decision

Does Not Conflict with Decisions of

Other Courts of Appeals ............

This Factbound and Essentially Unique

Case Has Little Utility in Articulating a

General Standard Relating To

Adjudication or Arbitration. .........

Page

TABLE OF CITED AUTHORITIES

Page

Cases:

Aasma v. American S.S. Owners Mutual Protection

and Indemnity Assoc., Inc., 95 F.3d 400 (6th Cir.

SEE S56 oS Ge eee EDR EEK SONS L OOS EEE RRS 26

Amchem Products, Inc. v. Windsor, 521 U.S. 591

ee Os as ial cia, Seg Pk ra Sa 17

Barnett v. Stern, 909 F.2d 973 (7th Cir. 1990) .... 20

Beard vy. Braunstein, 914 F.2d 434 (3d Cir. 1990) . 19

Bender Shipbuilding & Repair Co., Inc. v. Morgan,

fo * Mee, ES eS A 1) ee 26

C. Itoh & Co. (America) Inc. yv. Jordan Int'l Co.,

og fh eo Le. 2 ay yg) Pm toes 25

Celotex Corp. v. Edwards, 514 U.S. 300 (1995) _.. 24

Diamond Mortgage Corp. of Illinois v. Sugar, 913

ee ee, PO ong a's icc vd kk eae 3 19

DiCola v. American S.S. Owners Mut. Protection &

Indem. Ass'n., 158 F.3d 65 (2d Cir. 1998) ..... 14

Ex parte Christy, 3 How. 292, 11 L. Ed. 603 (1845)

vil

Cited Authorities

Page

Filanto, S.p.A. v. Chilewich Int'l Corp., 789 F. Supp.

Bee SR ee Sear On ae eee 28

Hays & Co. v. Merrill Lynch, 885 F.2d 1149 (3d

RAs RES bed o1 ds SoA Coke C80 Sek US re 20, 24

In re Apex Express Corp., 190 F.3d 624 (4th Cir.

PPR SPAS ead P ASA A ew ee eee eee ee 20

In re Arnold Print Works, Inc., 815 F.2d 165 (lst

SO ROE 5 4bR ba S hdd COND REVERS CebeR A 16

In re Asbestos Bankruptcy Litigation, No. 950, 61

U.S.L.W. 2408, 1992 WL 423943 (J.P.M.L. Dec.

ae PER re rere eee re Eee ere 29

In re Ben Cooper, Inc., 896 F.2d 1394 (2d Cir.),

vacated on the other grounds, 498 U.S. 964

(1990), opinion reinstated, 924 F.2d 36 (2d Cir.),

cert. denied, 500 U.S. 928 (1991) ............ 16

In re Castlerock Properties, 781 F.2d 159 (9th Cir.

PN Se KkoN SRA MONDE TNR AN 20

In re Davis, 899 F.2d 1136 (11th Cir. 1990) ...... 20

In re Hart Ski Mfg. Co., Inc., 18 B.R. 154 (Bankr.

D. Minn. 1982); amended, 22 B.R. 762 (Bankr.

D. Minn. 1982), aff'd, 22 B.R. 763 (D. Minn.

1982); aff'd, 711 F.2d 845 (8th Cir. 1983)

‘SUCKS LA oak Ee SERGE RS ROE E ENE SEES 25, 26

vill

Cited Authorities

Page

In re Manville, 36 B.R. 743, 757-59 (Bankr.

S.D.N.Y.), appeal denied, 39 B.R. 234(S.D.N.Y.

| epee ee Petre Terr rr org eo 17

In re National Gypsum Co., 118 F.3d 1056 (Sth Cir.

| it ern reer res eis be tS tones. 24, 26

In re Prudential Lines, Inc., 148 B.R. 730 (Bankr.

S.D.N.Y. 1992), aff'd in part, 170 B.R. 222

(S.D.N.Y. 1994), appeal dismissed, 59 F.3d 327

(2d Cir. 1995) ......0-ceeeccecvccreuccccss 7,8

In re Sedco, Inc., 767 F.2d 1140 (Sth Cir. 1985)

nM at es a Ee ie aes akin ene oe werk se 25, 28

In re U.S. Brass Corp., 110 F.2d 1261 (7th Cir.

dp ee ee err harrr steer ey Paw ao 16,19

In re Wood, 825 F.2d 90 (5th Cir. 1987) ......--- 16, 20

LT.A.D. Assoc., Inc. v. Podar Bros., 636 F.2d 75

(4th Cir. 1981) ......--.ee eee eeeeecerereees 25

Katchen vy. Landy, 382 U.S. 323 (1966) ......---. 23

Keene Corporation v. Fiorelli, 14 F.3d 726 (2d Cir.

PONS ois KS a 6 Win 0k ot EEK SERRE = 17

McReary Tire & Rubber Co. v. CEAT S.P.A., 501

F.2d 1032 (3d Cir. 1974) .....---- eee eee cere 25

tte

ES. SR eae

Cited Authorities

Mitsubishi Motors Corp. v. Soler Chrysler-

Plymouth, Inc., 473 U.S. 614 (1985) ..........

Northern Pipeline Co. v. Marathon Pipe Line Co.,

Coe aia PED 6 6b bv een ce weib die dn chs

Pacor, Inc. v. Higgins, 743 F.2d 984 (3d Cir. 1984)

ee ok Oe Te Oe Se ee ee Ree ke es ee ae oe ee ee Oo ef es ie oe oe ee oe a a a

Phar-Mor, Inc. v. Coopers & Lybrand, 22 F.3d 1228

SE BN 000s oe Vb ny dass Wale Oo daw es

Pritzker v. Merrill Lynch, Pierce, Fenner & Smith,

eee ee ek Lo A

Rodriguez de Quijas v. Shearson/American Express,

eo A EE 1. Rae pease

Scherk v. Alberto Culver Co, 417 U.S. 506 (1974)

ee ee ee de ee ee ee oe oe oe ee oe oe ee i eo

Shearson/Am. Express, Inc. v. McMahon, 482 U.S.

RIED ci oh Cec aL Aa 6.6 ACERS a es

Victrix S.S. Co. v. Salen Dry Cargo A.B., 825 F.2d

PE, SE ieee k eae e a bueek ks

Page

. Cited Authorities

Page

Statutes:

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Bete Tae S| er tere eres 23

Geis kam Sok: rere ere ere re 17

ERGs ie f° | Pere were ee cr ree eK 17

Peis ogg & 5) reer ee aeeceaes LZ, £7, 22, 42

Tacs ae & . Grr eeen ee cy ni ae iZ, 1, de, £e

GREE Eom oo 6 a errr res ere at 12, 23

EGtS 2a eo | ee ere iZ, 17, 22, 23

LD USA. Bee ha 6 CRAs ea es res 20

LT U.S.C. § 1TODD) nce ccc eee senators. 20

Pek Ao Elbo | ree ere aes ec ree 17

ER's Poe sore er eee ee oe ee 12, 23

Peek See Pees: ter err ererr ce rie 10

qaih fae Ci Srey errs Tee re ee ee Pe i?, 23

Ot ae

EE FSI Sul OP OS

Cited Authorities

Page

geek Se Be Peer rr ee re Peet 12, 22

2 RAs SRE a eka Cre yon nae 12, 23

GRA SD PAPE oo Swe ee a Pesaaseee ia, 37

rt Ree Bh |) era 12

Be ee ERP 0 8 4 bs 0b hee cokes iz, 17

pe Oe fo re ee rrr ra ee i7

ye ae |) rere eee ae on erere eae 3

Pk ee See ee A ee er eee 20

United States Constitution:

Fes MMs Ss Be a oe a cba case eek ewe 17

Rule:

FOR, Tu GU. es SOME od ids bw b NN hewn 23

Cited Authorities

Page

Other Authorities:

The Convention on the Recognition and Enforcement

of Foreign Arbitral Awards, 31 US.7. 2517,

T.1.A.S. No. 6997, 330 U.N.T.S. 38 (1970)

rrr Serer er ete Tre. 22

). lain Murray, The Protection & Indemnity Club

and Bankruptcy: An English Perspective, 59

Tulane L. Rev. 1445 (1985) ..---- +e seer ee 7

—EEe

Be ON RS See

NST ye as PT eS

eae RR RL Oa “Pe

STATEMENT OF THE CASE

A. Overview

In January, 1993, the reorganization Trust filed a

comprehensivecomplaint in the Bankruptcy Court, seeking in

significant part a declaratory judgment defining its rights under

insurance policies so as to meet its obligations to seamen seeking

compensation for asbestos-related claims. Those claims,

manifesting and continuing to manifest well after the demise

of the insured shipping companies, generated a multi-faceted

coverage dispute between the Trust and all of its predecessors’

insurers. The eight insurers, four domestic and four foreign,

had issued policies over the forty-year period before the shipping

companies’ 1986 bankruptcy filing.

Asbestos illness, insidious in its long latency before

manifestation, was prominently considered in the Bankruptcy

Court's confirming of a 1989 plan of reorganization. The Trust

was then created, in part, to obtain insurance proceeds for the

ultimate benefit of thousands of existing and anticipated asbestos

claimants. After the reorganization, the Trust was met with

hypertechnical insurance defenses — including defenses which

linked each insurer to the others — constituting an insurance

maze. That insurance maze has been exploited by all of the

insurers to deny or drastically limit their responsibility,

notwithstanding the criticality of the insurance coverage to the

1989 reorganization plan.

Included in their 1993 summary judgment motions, the four

foreign insurers each sought foreign arbitration of the dispute

under foreign law, notwithstanding fundamental Bankruptcy

Code strictures which dictate the needs and responsibilities of

the Trust on behalf of asbestos mass tort claimants. The

Bankruptcy Court denied (in pertinent part) the insurers’

motions, including the effort by half of them to fragment the

unified litigation into a non-comprehensive case and multiple

foreign arbitrations, and deemed the adversary proceeding to

be core.

OQ OO) ee

Years of appeals have now resulted in the Second Circuit's

well-justified decision, which readily sustains the Bankruptcy

Court's detailed and painstakingly developed decision. By any

reading, this is a fact sensitive, intricate, and unique Case,

incorporating asbestos mass tort, bankruptcy, arbitration and

multi-party considerations. It is not a case which can be readily

synthesized, generalized about, or applied to large classes of

Cases.

B. Course of Proceedings and Disposition in the Court

Below

The Trust is successor-in-interest to United States Lines,

Inc. and United States Lines (S.A.) Inc. (collectively, “Debtors”),

pursuant to the First Amended and Restated Joint Plan of

Reorganization (“Plan”). The Plan was confirmed by order of

May 16, 1989. Debtors had filed a voluntary petition for relief

under Chapter 11 of the Bankruptcy Code on November 24,

1986. USL IV, 3a.' Petitioners (and non-petitioning insurers),

collectively referred to herein as the “defendants” or the “Clubs,”

each issued to the Debtors before the petition filing date certain

insurance policies (the “P&I policies”). There are four domestic

defendants and four foreign defendants. Jd. The defendants

issued all of the known maritime insurance coverage held by

the entities that comprised the Debtors for a period of two

generations. USL J, 76a. On January 5, 1993, the Trust initiated

an adversary proceeding (the “Adversary Proceeding”), seeking

a declaratory judgment defining the Trust’s insurance coverage

under the various P&I policies. USL1V, 4a. Asbestos claimants

represented by The Maritime Asbestosis Legal Clinic

(“MALC”) intervened as plaintiffs. When the Clubs moved for

|. The Trust refers to Petitioners’ appendix and the four opinions

below per the Petition (“USL JV” for the Court of Appeals, etc.). “Rb”

refers to the extremely lengthy Bankruptcy Court record below contained

in eight bound volumes and cataloged by document numbers 1-84, cited

extensively in USL II, 49a, et seq. These volumes are included in the

record forwarded to the Court of Appeals as “R2” (with “R” being the

signal for the District Court docket numbering system).

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summary judgment on a number of grounds, the foreign Clubs

each demanded arbitration.

The Clubs’ motions for summary judgment were, in all but

one respect, denied, as were the four separate demands for

arbitration. The proceeding was deemed to be “core.” USL J,

-136-37a. Defendants appealed, resulting first in the District

Court’s decision as to the scope of appeal, USL II, 49a, et seq.,

and then its reversal of the Bankruptcy Court’s core and

arbitration decisions. USL III, 29a, et seq. On motion of the

Trust, the District Court certified its order for interlocutory

appeal pursuant to 28 U.S.C. § 1292(b), the Court of Appeals

accepted the Trust’s appeal and then reversed the District Court.

USLIV, 17a.

C. Trust Organic Documents and the P&I Policies

The documents that are the genesis of the Trust (“Trust

Organic Documents’’) are: (i) the Second Amended and Restated

Disclosure Statement, dated February 23, 1989 (“Disclosure

Statement”); (ii) the Plan; and (iii) the United States Lines, Inc.

and United States Lines (S.A.), Inc. Reorganization Trust

Agreement (“Trust Agreement”), dated February 23, 1990.

See pertinent sections of the Disclosure Statement and complete

copies of the Plan, Trust Agreement and Confirming Order, at

Rb56 Exs. A, B, C and D, respectively. See generally, USL I,

79-80a.

The Trust, created to: (i) administer certain assets of the

Debtors; (ii) resolve disputed claims; and (iii) distribute the

Debtors’ assets, has succeeded to all of the Debtors’ nght, title

and interest in and to the P&I policies.* USL II, 51a; USL I, 79-

80a. The Disclosure Statement provides in pertinent part that

the Debtors “will transfer and assign to the USL Reorganization

Trust substantially all their assets”. Rb56 Ex. A at 34. The Plan

clarifies that this conveyance includes all P&I insurance and

that “[t}he USL Reorganization Trustee shall attempt to secure

2. See Trust Agreement Recitals, Declaration of Trust, Art. [I

§ 2.3 and Art. III § 3.1. RbS6 Ex. C.

for the benefit of the holders of the Personal Injury Claims all

such insurance rights and Indemnification and Contribution

Rights.” Rb56 Ex. B at 13. Moreover, the Trust Agreement

empowers the Trust “to enforce such Insurance Rights and

Indemnification and Contribution Rights and to receive and

retain as Reorganization Trust Assets any payments made with

respect to such rights.” Rb56 Ex. C at 6.

Accordingly “[{t]he Reorganization Trustee shall deal with

Insurers and Clubs, and make distributions to holders of Allowed

Personal Injury Claims ... as provided in the Plan. ... The

Reorganization Trustee shall release distributions from the USL

Disputed Claim Reserve to holders of Disputed Claims which

become Allowed Claims as provided in the Plan.” Rb56 Ex. C

at 7-8. Thus, the Trust is the entity intended by the Trust Organic

Documents to enforce the P&I policies. See USL 1, 79-80a.

D. The P&I Policy Dilemma

A maritime indemnity insurance program sits at the vortex

of the confirmed plan of reorganization.’ This insurance, as

“property of the estate,” provides the only mechanism for

personal injury claimants of the Trust to recover cash

compensation.’ USL I, 80a; Rb55 5. The vast majority of such

claims, now over some 18,000, on behalf of almost 12,000

claimants, are asbestos related. USL I, 75-76a, as up-dated at

q 5 of 1996 Paulyson Affidavit attached as an exhibit to R19

(hereinafter “1996 Paulyson Aff.’).

3. As noted, over approximately 40 years, the eight Clubs insured

Trust predecessors. Generally, one insurer covered a predecessor's entire

fleet for a particular year. Exceptions abound, however, where certain

ships were insured outside of fleet coverage by another insurer or under

a different policy. RbS5 44. See USL I, 79-80a.

4. The Plan dictates that distributions to pre-petition unsecured

personal injury claimants are limited to certain securities issued by the

reorganized entities (“Reorganization Securities”) unless cash funds,

as proceeds of the P&I policies, are forthcoming. (Plan Art. V(B)(1),

(2), Art. VII (A)(1)(i)-(iv), contained in Rb56 Ex. B at 11, 13-14.)

Implementation of the Plan, as well as the Trust’s

administration, have been hampered by the following nearly

overwhelming complexities:

(a) Thousands of known asbestos claimants (with

additional claims yet to mature) sailed for

various Trust predecessors, each claimant

frequently sailing on many ships (some owned

by Trust predecessors and some owned by

unrelated companies) over careers of up to forty

years, during which any number of different

insurers covered Trust predecessor ships and

those other ships pursuant to a patchwork of

policy covers, rules and deductibles;

(b) Over the years, these insurers claimed different

home territories, with all insurers distancing

themselves from settlement efforts relating to

asbestos-related claims filed in the Debtors’

proceeding, and the foreign defendants

maintaining their alleged inalterable and

individual rights to arbitration of insurer-

insured disputes in London;

mass tort covered by the P&I policies, was not

and could not have been contemplated by the

parties to the relevant insurance contracts at the

time of their issue, yet over the covered years

illness was developing in the bodies of effected

seamen (though manifesting in largest part

post-petition); and

(d) As to asbestos-related claims, the Clubs have

maintained extremely technical and, from the

Trust’s point of view, obstructionist positions

SO as to stymie the clear Plan requirement that

the Trust obtain cash from the P&I policies to

distribute to claimants.

Rb55 99 7 and 8; 44 5, 10, 11 and 27 of 1996 Paulyson Aff.

See USL I, 75-8 1a.

E. Declaratory Relief Sought in the Adversary Complaint

By declaratory judgment, the Trust seeks to define Club

obligations under the P&I policies.’ The Trust seeks resolution

of basic coverage issues as to the entire asbestos-related claim

base, such as joint and several liability of insurers and policies,

voiding Club efforts to “stack” deductibles, the propriety of a

“Liman” procedure to satisfy the “pay first” provisions of the

P&I policies (or Trust use of the PI Reserve established pursuant

to the Plan or a similar mechanism for that purpose),° as well as

Trust use of Reorganization Securities to satisfy deductible

amounts. Rb1 44 82-83. Declaratory relief is needed, inter alia,

to implement the Plan and accomplish the vital purposes of the

Trust. Rb55 4 10. See USL I, 81a. The Bankruptcy Court found

this to be the case, recognizing its subject matter jurisdiction

over the Trust’s declaratory action. USL I, 136-37a.

F. Inter-Relation of Insurers’ Policies and Practices

All of the Clubs have affirmatively adopted, or refused to

expressly reject, the position taken by American Club in a

parallel proceeding regarding coverage “allocation” based

upon an asbestos claimant’s sailing history’ as well as other

5. In pleadings no defendant has conceded any of the relief sought

by the Trust. Thus, all of the defendants deny the Trust’s claims to relief at

this stage of the Adversary Proceeding. Various defendants have affirmed

their disputes with coverage, as alleged by the Trust. RbS7 Exs. | and 2.

Moreover, certain defendants have raised affirmative defenses or

otherwise responded in pleadings that such coverage was in doubt

because of the insured’s “insolvency” and the Trust’s position as a

would-be “assignee” of the policies. RbS7 Ex. 2. See USL I, 78a, 8la.

6. The nullifying effect of “pay to be paid” policy provisions in

circumstances of shipowner insolvency was specifically referenced by

the Bankruptcy Court, USL /, 78a, and emphasized by the Court of

Appeals. USLIV, 11-12a.

7. Bankruptcy Judge Conrad summarized American

Club’s position regarding Prudential’s successor, the PLI Trust, in

(Cont'd)

ete

ee, Leer eer eee

factors.* American Club has argued, as an adjunct to its demand

that applicable policy deductible amounts should be “stacked,”

that each such policy is only to be the source of a portion of the

indemnification. The Trust seeks joint and several policy

exposure.

By Club dictate, the asbestos claim resolution process thus

includes a linkage among each and every potentially applicable

P&I policy.” Emanating from this linkage is the complexity of

(Cont'd)

In re Prudential Lines, Inc., 148 B.R. 730, 743 (Bankr. S.D.N.Y. 1992),

aff'd in part, rev'd in part, 170 B.R. 222 (S.D.N.Y 1994), appeal

dismissed, 59 F.3d 327 (2d Cir. 1995), as an allocation

pro rata according to each claimant's sea service and exposure

on PLI and other insured vessels. . .. Under this theory, if

more than one policy is triggered, the Club need indemnify

PLI only to the extent that exposure occurred on any given

insured ship during its policy period. All triggered policies

would then contribute to indemnify PLI for amounts paid

according to the amount of time a particular seaman spent on

PLI vessels as a proportion of the time he was exposed to

asbestos. Each triggered policy would contribute in proportion

to its policy limit to indemnify Trustee for the loss.

Judge Conrad’s rejection of American Club’s argument in favor of joint

and several liability of each policy, id. at 744-45, was affirmed on appeal

by the District Court. 170 B.R. at 233-36.

%. Adding to the bewildering complexity of the allocation approach,

is the Clubs’ argument that the Trust would have to seek out other allocate

sharers of liability beyond other ship owners. That is, the Trust (rather than

the Trust’s indemnity insurer) would be obligated to claim against land-

based co-tortfeasors such as manufacturers, suppliers and installers, in order

to develop any comprehensive claim settlement. Rb55 { 10.

9. Judge Conrad noted the existence of a multi-national entity

composed, as of 1984, of fifteen major insurers, known as the

International Group of Protection and Indemnity Associations

(“International Group”), whose members act in concert through

reinsurance or pooling agreements. USL /, 78a; see also J. lain Murray,

The Protection & Indemnity Club and Bankruptcy: An English

Perspective, 59 Tulane L. Rev. 1445, 1449 (1985).

dealing with all insurers and other parties-in-interest to resolve

but a single claim — given the typical seafarer’s long sailing

career.

The Trust also links all policies, but in a different manner.

The Trust identifies the issuer of that policy covering a particular

asbestos claimant having the lowest deductible amount as the

primarily liable insurer. See, e.g., Rbl J 29. Nevertheless, the

Trust claims the right to indemnification, on a contingent basis,

against each Club and every P&I policy that provided coverage

to a Trust predecessor at any time, relative to each and every

asbestos claimant.'® See Rb1 7 47. In the event the responsible

Club and/or the P&I policy does not fund a settlement or

judgment for any reason (including, e.g. insurer insolvency or

the exceeding of a particular policy’s limit), then the Trust would

seek recourse against other equally liable Club(s).

G. Plan Provisions Relevant to Litigation of the Adversary

Proceeding in the Bankruptcy Court

The Trust remains accountable to the Bankruptcy Court,

which has retained jurisdiction over implementation of the Plan.

“Notwithstanding confirmation of this Plan, the Court shall

retain jurisdiction for the following purposes: . . . adjudication

of any causes of action ... brought by ... the USL

Reorganization Trust or other successor of any of the Debtors

as the representative of the estates of the Debtors.” Rb56 Ex. B

at 20.'' Moreover, the Plan explicitly directs the Trustee to

litigate with the Clubs if the Clubs refuse to cover the Trust’s

exposure to asbestos-related claims.'* Fundamental to the Plan

10. This position is consistent with /n re Prudential Lines, supra.

11 Judge Conrad recognized this jurisdictional retention provision

of the Plan. See USL I, 93-94a; see also RbS6 Exh. B at 20.

12. Plan Article VII(A)(1)(ii) provides, in part:

[T]he Club shall fund the portion of the Allowed Claim

equal to the Allowed Excess P.I. Claims. To the extent any

Club shall refuse to consent to such a program, the USL

Reorganization Trustee is authorized and directed to

(Cont'd)

is the intent to facilitate asbestos claimant access to insurance

coverage, with the Trust as the vehicle to garner insurance

proceeds. See Plan Art. VII(A)(1)(i), contained in Rb56 Ex.

B at 13-14. -

H. Organic Injunctions and Other Pertinent

Adjustments in Claimants’ Rights

Personal injury claimants have been subject to a series

of injunctions against litigation with the Debtors’ estate, the

reorganized entities, and the Trust. In sum, throughout the

period of the record in this matter a permanent injunction

barred litigation by all claimants against the reorganized

entities, while a persisting injunction — subject to

applications for relief — assured that the Trust will not be

sued by personal injury claimants while settlement efforts

are on-going.'’ For a detailed history of these injunctions,

see RbS3 at 12-14.

In addition to the limitation on their rights to sue,

personal injury claimants are not entitled to receive cash other

than as proceeds of insurance. Rather, they are to receive

Reorganization Securities, described in various sections of

the Plan. See Rb56 Ex. B. See also Rb56 Ex. A at 26-28.

Thus, cash payments are to be derived solely from the P&I

policies. See USL I, 80a.

In sum, the rights of thousands of current asbestos

claimants and future claimants have been adjusted by

(Cont'd) -

bring suit against the Club and to take all reasonable

steps to obtain the benefits of Insurance above the

deductibles and the reimbursement of defense costs

exceeding the applicable deductible, including the making

of cash payments of Allowed Excess PI. Claims.

Rb5S6 Ex. B at 14 (emphasis added).

13. On June 30, 1997 the Bankruptcy Court lifted the injunction

barring litigation against the Trust by then existing MALC Asbestos

Claimants.

i 10

Bankruptcy Court ordered restructuring, premised upon

access to the P&I policies (“property of the estate”’).'*

I. Summary

The Clubs refuse to acknowledge coverage of asbestos

claims, coverage essential to the Trust’s implementation of the

Plan. That refusal takes the form of an “insurance maze,"

including a singular view of P&I policy provisions — such as

“pay first” — which directly affects the administration of

insolvent estates and the core function of asset allocation among

creditors. See USL IV, 11-12a. That uniform refusal forms the

basis for the Trust’s declaratory judgment Adversary Complaint.

See USL IV, 4a; USL I, 80-8 1a.

Given the complexity of this dispute, the Trust takes the

position that only a court hearing at one time all issues pertaining

to all parties in interest, can resolve the important matters raised

in the Adversary Proceeding. The Bankruptcy Court is

empowered to hear these issues, which go to the core of this

reorganization and involve fundamental bankruptcy principles.

Fragmented and multiple arbitrations would run counter to

reason and offend the very purpose of the Bankruptcy Court in

this case. The Bankruptcy Court, upon thorough review of the

14. Consider the following illustration of but one aspect of the

Clubs’ uniform position abrading the Bankruptcy Code: no Club will

concede that Plan created Reorganization Securities pro rata distributed

will satisfy the payment of deductible requirements of the P&I policies.

Yet the Trust cannot provide cash to pay deductibles, and the use of

securities such the Reorganization Securities here, is a fundamental

tool of Bankruptcy Code reorganizations. See 11 U.S.C. § 1123(a)(5)(J).

15. The “maze” consists of hyper-technical policy interpretations,

such as: forcing the insured to obtain agreement from all potential

sources as to apportionment of liability; stacking of deductibles

according to different theories; refusal to recognize accepted Liman-

type payment plans; resistance to the Trust’s use of Reorganization

Securities to satisfy deductible amounts; unjustified set-off claims;

refusal to acknowledge the Trust as successor to the P&I policies (or

even that an insolvent could remain insured); and like efforts to eliminate

or minimize insurance coverage. See, e.g., Rb55 JJ 10 and 15.

m Pare Tat wee

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Sah Kecdetesihabatie

applicable law and unique facts of this case, determined this

matter to be “core” and not appropriate for a melange of limited

litigation and multiple fragmented arbitrations. The Court of

Appeals, in reversing the District Court’s contrary determination,

reviewed and supported the Bankruptcy Court’s analysis and

findings.

REASONS FOR DENYING THE WRIT

THE SECOND CIRCUIT’S DECISION THAT A

COMPLEX BANKRUPTCY LITIGATION IS “CORE”

WHEN IMPLICATING PROPERTY OF THE ESTATE IN

THE FORM OF INSURANCE’ POLICIES

FUNDAMENTAL TO REORGANIZATION AND

ASBESTOS MASS TORT CLAIMS RESOLUTION, IS

NOT IN CONFLICT WITH DECISIONS OF THIS

COURT, IS NOT OF GENERAL UTILITY IN

CLARIFYING THE LAW, NOR IS IT READILY

COMPARABLE TO DECISIONS OF OTHER COURTS

OF APPEALS

A. The Adversary Proceeding Involves a Post-Petition

Dispute as to P&I Policy Interpretation in the Context

of Asbestos Mass Tort, an Essentially Different Case

than Northern Pipeline

This case is thoroughly imbued with those public rights

inherent in “the restructuring of debtor-creditor relations,” i.e.

those “at the core of the federal bankruptcy power”. Northern

Pipeline Co. v. Marathon Pipe Line Co., 458 U.S. 50, 71 (1982).

As such, it is “distinguishable from the adjudication of state-

created private rights, such as the right to recover contract

damages that [was] at issue in” Northern Pipeline. Id. Contrast:

(i) the reorganization trust’s efforts to implement a long-

confirmed plan as to even a single newly manifesting asbestos

claim, met with the insurance maze which includes challenges

to the Plan fundamentals derived from the Bankruptcy Code;

and (ii) a garden-variety pre-petition contract dispute.

The Adversary Proceeding, a dispute over insurance coverage,

developed after confirmation of a plan of reorganization that was

in significant part grounded upon that coverage. The Trust seeks,

in the Adversary Proceeding, a declaratory judgment defining its

rights and obligations under the Debtors’ marine insurance policies,

which, as property of the Debtors’ estate, were assigned to the

Trust. The insurance coverage is the sole source of cash funding

for the vast majority of claims filed, and to be filed, in this on-

going bankruptcy — i.e., those thousands of asbestos-related claims

that have manifested and will continue to manifest post-petition.

Thus, the matter at bar has the following bankruptcy characteristics

as reflected in the Bankruptcy Code: (i) concern for “the

administration of the estate” (28 U.S.C. § 157(b)(2)(A));

(ii) impact upon “the liquidation of the assets of the estate [and]

the adjustment of the debtor-creditor [and] the equity security holder

relationship” (28 U.S.C. § 157(b)(2)(O)); (iii) involvement with

“property of the estate” (11 U.S.C. § 541(a)(1)), which is critical

to aconfirmed plan of reorganization; (iv) specific inclusion in the

contents of a plan of reorganization as a “means for the plan’s

implementation,” and the corresponding approval of the use of

property of the estate (11 U.S.C. § 1123(a)(5) specifically, and

28 U.S.C. § 157(b)(2)(M), generally); and (v) the inherent and

necessary application of the overriding effect of the statutory scheme

on executory contracts (11 U.S.C. §§ 365, generally, and

363(1) and 541(c)(1)). Those basic bankruptcy characteristics

together with the mass tort continuing claim manifestation

context of the Adversary Proceeding, well justify the Bankruptcy

Court’s exercise of its statutory power to “issue any order,

process, or judgment that is necessary or appropriate to carry out

the provisions of [Title 11]”. 11 U.S.C. § 105(a); see also §§ 1142(a)

and (b). See USL I, 117a (referring to Plan implementation).

The Bankruptcy Court’s core holding, based upon a “strong nexus

_.. between the Trust’s adversary proceeding and the general

reorganizational process,” is likewise weli-justified. USL I, 107a.

a i babes a bir

B. The Adversary Proceeding Clearly and Directly

Affects Reorganization Asset Allocation, Contrary to

Petitioners’ Characterization

Petitioners mis-characterize the Adversary Proceeding,

simply concluding that it “might theoretically have an

indirect effect” on the important bankruptcy administrative

function of asset allocation among creditors. Petition at 9.

Such a conclusory presentation denudes this case of its

unique factual predicate (see Point IC, infra), and ignores

analysis and findings below.

At the Bankruptcy Court level a thorough analysis and

review of facts, centered on asbestos illness and mass tort

claims in bankruptcy, resulted in the following clear finding:

[W]e find that the Debtors’ insurance policies are

property of the estate earmarked for distribution

to a major class of claimants. The Debtors’ P&I

policies are essential to the integrity of the Trust

and to the Debtors’ ability to reorganize. The

strong nexus that exists between the Trust’s

adversary proceeding and the general

reorganizational process renders this declaratory

action core under 28 U.S.C. § 157(b)(2)(A) and

(O). Summary judgment for the Clubs will be

denied.

USL I, 107a (emphasis added).

Like the Bankruptcy Court, the Court of Appeals readily

accepted the undisputable proposition that “major insurance

contracts are bound to have significant impact on the

administration of the estate.” USL IV, 10a. The Court of

Appeals then painstakingly recounted its own recent

experience with the nettlesome pay-first provisions of P&I

policies as applied to insolvent insureds.'® USL 1V, 11-12a (citing

DiCola v. American S.S. Owners Mut. Protection & Indem.

Ass'n., 158 F.3d 65, 75 (2d Cir. 1998)). Court analysis then

developed as follows:

In addition to the difficulties involved in paying the

claims, the Trust faces a significant risk that the

payment scheme ultimately employed will be

deemed not to satisfy the pay-first requirement. .. .

If the Trust were initially to pay the claimants with

assets earmarked for other creditors only to be

informed afterwards that the payments did not

trigger the Clubs’ indemnification obligation, the

result would be an inequitable distribution among

the creditors. Therefore, in order to effectuate an

equitable distribution of the bankruptcy estate, a

comprehensive declaratory judgment is required to

determine (1) whether a chosen payment plan will

trigger the indemnification obligation and (2) the |

amounts payable under the insurance contracts.

Thus, the declaratory proceedings brought by the

Trust in this case directly affect the bankruptcy

court's core administrative function of asset

allocation among creditors, and for that reason they

are core.

USL IV, 12a (emphasis added).

The Second Circuit's solid reasoning and practical decision,

borne of its own experience and supported by the Bankruptcy

Court’s findings, is thus not as Petitioners portray that decision.

16. The Bankruptcy Court addressed “pay first” with particularity,

early in its opinion, as follows:

P&I policies often contain a “pay to be paid” or “pay first”

provision which, in the event of a shipowner’s insolvency

and absent creative undertakings, may render the policies

unenforceable.

USL I, 78a.

ceramics

C. The Fact Sensitive Predicate of the Second Circuit’s

Decision Limits Both the General Importance of its Core

Determination and its Utility to this Court in Clarifying

the Law

The case at bar has unique as well as highly complex

essential facts. In this regard, the Bankruptcy Couri found as

follows:

[T]}here is no doubt as a matter of law that the P&I

policies are property of the estate following the entry

of the order for relief. And there is also no doubt,

and we so hold, that the policies continue to exist as

property of the estate despite confirmation of the

Debtors’ plan of reorganization and the transfer of

the policies to a disbursement trust. Our reasons for

so holding are factual and, indeed, unique to the

resolution of mass toxic tort claims in chapter 11

reorganizations. ...

[T]he negotiation and liquidation of countless

personal injury claims would have delayed

‘ confirmation of a plan for years — at the expense of

other creditors and general policy goals favoring

prompt corporate rehabilitation.

Again, the unique facts of this proceeding play a

key role in our holdings. Asbestos-related diseases

are insidious and late-manifesting, thereby

necessitating the existence and maintenance of a

claims allowance process to compensate individuals

whose injuries manifest anywhere from ten to forty

years following initial exposure. Here, the Plan

created the Trust to manage the special

administrative concerns inherent in any chapter 11

case involving a large number of insidious personal

injury claims.

USL I, 104-106a (emphasis added; footnotes omitted).

The case at bar is thus difficult to abstract, cannot be readily

“boiled down” as Petitioners would offer (Petition at 2-3), and

is not an apt instrumentality for the grand and general review of

the law of bankruptcy sought by Petitioners.

D. Judge Calabresi’s Assessment That This Case Is Not

the Appropriate Vehicle for Court Development of the

Standard for Determining Whether All or Only Certain

Post-Petition Breaches of Pre-Petition Contracts Are

Core, Is Instructive

The three distinguished Court of Appeals Judges differed

in their approach to “core”, each suggesting his own formulation

in matters of post-petition breach of pre-petition contracts.

See USL IV, 9-10a, 18-22a, and 23-24a. However, Judge

Calabresi made the clear point that this case in not the one in

which general core law should or need be developed since “(like

Judges Walker and Newman, I have no doubt that this particular

post-petition breach of a pre-petition contract is core. That is

all I need to decide the instant case.” USL IV, 24a.

His Honor’s point is respectfully offered here in opposition

to the Petition.

E. The Second Circuit’s Essentially Sui Generis Core

Decision Is Not Readily Comparable to Core Decisions

of Other Circuits in Order to Evaluate the Degree or

Significance of Conflict among the Circuits

There are Court of Appeals cases which would appear to

conflict on the methodology for determining “‘core”.'’ Whether,

or the degree to which “matters concerning the administration

of the estate” and “other proceedings affecting the liquidation

of the assets of the estate or the adjustment of the debtor creditor

_. . relationship” have core vitality independent of a substantive

17. E.g., compare and contrast, on the one hand, /n re Arnold

Print Works, Inc., 815 F.2d 165 (1st Cir. 1987) and Jn re Ben Cooper,

Inc.. 896 F.2d 1394, 1399-1400 (2d Cir.), vacated on the other

grounds, 498 U.S. 964 (1990), opinion reinstated, 924 F.2d 36

(2d Cir.), cert. denied, 500 U.S. 928 (1991), with In re Wood, 825

F.2d 90 (Sth Cir. 1987) and Jn re U.S. Brass Corp., 110 F.2d 1261

(7th Cir. 1997).

NITE SETS SR | et.

NS AE BUSA MAL: eae aaa

Se ee

remedial Bankruptcy Code created right, would thus appear to

be at issue. See 28 U.S.C. §§ 157(b)(2)(A) and (O).'®

However, the Second Circuit’s decision here, factbound and

clearly Bankruptcy Code-dependent, does not in an illuminating

sense reflect conflict among the Circuits.

Sub judice, the Trust’s bankruptcy specific and bankruptcy

transformed causes of action would not continue to exist in a

simple contract action under state law. Indeed, the Bankruptcy

Code expressly overrides state and foreign law provisions that

would, outside of bankruptcy, vitiate bankruptcy-preserved or

created causes of action.'? (Congress may, within its

constitutional limitations, alter and adjust state law entitlements

in bankruptcy pursuant to its Bankruptcy Clause power, U.S.

Const. art. I, § 8, cl. 4.) And, the Bankruptcy Code-dependent

nature of this proceeding is not severable from its mass tort

context.”

18. Similarly, whether or the degree to which courts address the

non-exclusivity of the § 157(b)(2) core list and the statutory admonition

that “[a] determination that a proceeding is not a core proceeding shall

not be made solely on the basis that its resolution may be affected by

State law”, 28 U.S.C. § 157(b)(3), distinguishes cases.

19. See generally 11 U.S.C. §§ 363(1), 365, 541(c)(1), 1123(a)

and 1142(a); see also §§ 105(a), 362(a) and 1141.

20. The continuing manifestation of “late-filed” claims, also a

function of the extended bankruptcy proceeding, requires consistent

ongoing oversight by the Bankruptcy Court of the entire process. See

generally, In re Manville, 36 B.R. 743, 757-59 (Bankr. S.D.N.Y.), appeal

denied, 39 B.R. 234 (S.D.N.Y. 1984). This fact was envisioned by both

the drafters of the Plan and the Bankruptcy Court. See Disclosure

Statement III(F)(2)(c)(i); Plan Art. VII(A)(1)(iv), contained in Rb 56

Ex. B at 14; Confirming Order ¥ 28(x), contained in Rb 56 Ex. D at 23.

This regime necessarily includes jurisdiction and control over the

insurance policies, which includes control over the Clubs. See generally,

Amchem Products, Inc. v. Windsor, 521 U.S. 591, 628-29 (1997)

(addressing the need to effect, comprehensively, a “fair and efficient

means of compensating victims of asbestos exposure”); Keene

Corporation v. Fiorelli, 14 F.3d 726, 732 (2d Cir. 1993) (chastising

(Cont'd)

Consider the following significant continuing effects upon

the rights and obligations of the Debtors, the asbestos claimants

and the Clubs, resulting from the filing and continuation of this

bankruptcy case, the confirmation of the Plan and specific

applications of the Bankruptcy Code:

(i) The Debtors have been discharged of all

obligations, including those due asbestos

claimants (11 U.S.C. § 1141; Plan Art. VIII,

contained in Rb 56, Ex. B at 19; Confirming

Order 9 7, contained in Rb 56, Ex. D at 11-

12);

(ii) |The Trust has been created as the mechanism

to deal with all claims (Plan Art. VII(A),

contained in Rb 56, Ex. B at 13-14;

Trust Agreement § 3.2, contained in

Rb 56, Ex. C at 6-7);

(iii) Continuing injunctions had persisted,

including those applicable to claimants

against the Trust, barring litigation

against the Trust until certain settlement

efforts have been undertaken (Plan Art.

VII(A)(1)(iv), contained in Rb 56 Ex. B at

14; April 18, 1990 Order, contained in

Rb 56 Ex. H; Confirming Order ¥¥ 8-9, 13(x),

contained in Rb 56 Ex. D);

(iv) “Reorganization Securities,” have become the

medium of compensation to unsecured

creditors for allowed claims, unless such claims

are the subject of insurance (11 U.S.C.

§ 1123(a)(5)(B),(G) and (J); Plan Art. V(B)(1)

and (2), contained in Rb 56 Ex. B at 11);

(Cont'd)

efforts at a mandatory class asbestos settlement, evading and in lieu of

Bankruptcy Code application and a Title 11 proceeding, i.e. “the

exclusive legal system established by Congress for debtors to seek relief”

under such circumstances).

(v) The Debtors have been re-formed for

operation post-confirmation (Plan Art. VII(B),

contained in Rb 56, Ex. B at 14-15; Disclosure

Statement Art. IV, contained in Rb 56 Ex. A

at 18-21; Trust Agreement Recitals and Art.

V, contained in Rb 56 Ex. C at 1, 14);

(vi) The P&I policies have become Trust property,

to be used in its claim allowance and

settlement functions (Plan Art. VII, contained

in Rb 56 Ex. B at 13-18; Trust Agreement

Declaration of Trust and § 2.3, contained in

Rb 56 Ex. C at 2, 6); and

(vii) The panoply of overriding Bankruptcy Code

provisions has been invoked, re-formulating

otherwise applicable law and the P&I policy

provisions so as to conform to federal

requirements (including 11 U.S.C. §§ 363(1),

365, 541(c)(1), 1123(a)(5) and 1142(a)).

Thus, the subject sui generis decision leaves “‘no doubt that

this particular post-position breach of a pre-petition contract is

core.””?! USLIV, 24a.

21. Petitioners’ cited cases are not comparable to the subject

decision in functional bankruptcy terms. Focusing on abstention issues,

see In re U.S. Brass Corp., 110 F.3d 1261, 1268-69 (7th Cir. 1997)

(primarily involving multiple pre-petition insurance coverage disputes,

though “for completeness” (seemingly as dictum) opinion recites a

narrower core standard than that of the First and Second Circuits; see

n.17, supra). Distinguishable as garden-variety contract (or contract/

tort) claims alleging at least some component of pre-petition breach/

tort, are: Diamond Mortgage Corp. of Illinois v Sugar, 913 F.2d 1233

(7th Cir. 1990) (Chapter 11 debtor sued its former lawyers alleging

pre-petition acts of malpractice); Beard v. Braunstein, 914 F.2d 434

(3d Cir. 1990) (Chapter 7 trustee’s action against the debtor’s former

tenant to collect rents owed under pre-petition leases, and allegedly

unpaid both pre and post bankruptcy petition; characterizing the action

as “a garden variety contract claim”, id. at 444, “merely for rent”, id. at

445, the Third Circuit concluded that the Trustee’s action “involving

(Cont'd)

(Cont'd

we petition contracts, allegedly breached both before and after the filing

of the petition” was non-core (id.) and expressly limited to holding the

subject facts, stating: “We are not presented with and thus do not decide

whether. . . aclaim only for the post-petition breach of a contract entered

into pre-petition [is a] core matter| ].” /d.); In re Castlerock Properties,

781 F.2d 159 (9th Cir. 1986) (state law contract claims, apparently

maturing pre-petition, asserted as counterclaims in Bankruptcy Court

by a Chapter 11 debtor against a plaintiff who, pre-petition, had

commenced a state court contract action against the debtor); Phar-Mor,

Inc. v. Coopers & Lybrand, 22 F.3d 1228 (3d Cir. 1994) (involved the

issue of whether a Chapter | 1 debtor’s Unsecured Creditors’ Committee

could intervene, pursuant to 11 U.S.C. § 1109(b), in a non-core

proceeding commenced pre-petition by the debtor against its auditors

seeking damages for fraud and malpractice); and, /n re Apex Express

Corp., 190 F.3d 624 (4th Cir. 1999) (Chapter 11 debtor’s post-petition

action against a former customer to collect penalties for fifteen pre-

petition payments allegedly paid late; held that “accounts receivable

claims against strangers to the bankruptcy proceeding . . . at least when

grounded in state law and arising pre-petition, must be treated as non-

core”, id. at 631). Distinguishable as alleging pre-petition statutory

violations are: Hays & Co. v. Merrill Lynch, Pierce, Fenner & Smith,

Inc., 885 F.2d 1149 (3d Cir. 1989) (Chapter 11 trustee’s action against

the debtor’s investment adviser alleging pre-petition violations of federal

and state securities laws, and of related contractual and fiduciary duties;

assertions included statutory and common law non-core causes of action

for those violations, as well as core causes under 11 U.S.C. § 544(b));

and Barnett v. Stern, 909 F.2d 973 (7th Cir. 1990) (RICO action

commenced pre-petition by two judgment creditors against an eventual

Chapter 7 debtor and his son, which alleged that, prior to filing for

bankruptcy, the debtor and his son had set up a sham trust in order to

conceal assets). /n re Wood, 825 F.2d 90 (Sth Cir. 1987), involved only

peripherally a Chapter 7 case and had no continuing bankruptcy

attributes (post-petition action commenced by a co-owner of a medical

clinic against his bankrupt business partner alleging that after the partner

had filed for personal bankruptcy he had wrongfully issued medical

clinic stock to himself in violation of their pre-petition business

agreement; plaintiff did not file a proof of claim in his partner’s

bankruptcy proceeding). /n re Davis, 899 F.2d 1136 (11th Cir. 1990),

raised attorneys’ fees issues under the Equal Access to Justice Act, 28

U.S.C. § 2412; compare the Second Circuit's reservation sub judice as

to the core or non-core nature of attorneys’ fees questions. USL IV, 12a.

ey SO be

Il.

THE SECOND CIRCUIT’S APPROVAL OF THE

BANKRUPTCY COURT’S REASONABLE EXERCISE

OF DISCRETION TO CENTRALIZE IN A SINGLE

PROCEEDING THE ADJUDICATION OF CORE

INSURANCE COVERAGE ISSUES HAVING ON-GOING

IMPORTANCE TO A MAJOR REORGANIZATION AND

THOUSANDS OF CURRENT AND FUTURE ASBESTOS

MASS TORT CLAIMANTS, IN THE CONTEXT OF A

MAZE OF INTERTWINED INSURANCE POLICIES

WRITTEN OVER A FORTY-YEAR PERIOD (SOME

WITH AND SOME WITHOUT ARBITRATION

CLAUSES), SENSIBLY ACCOMMODATES

STATUTORY AND HISTORICAL BANKRUPTCY

PRECEPTS AS WELL AS ARBITRATION DECISIONS

OF THIS COURT

A. The Second Circuit’s Decision Supporting, in the

Extraordinary Circumstances of this Case, Centralized

Complex Bankruptcy Litigation in Lieu of Both On-

Going Limited Litigation and Fragmented Foreign

Arbitrations, Is Consistent with Decisions of this Court

The Second Circuit’s holding in favor of centralized

adjudication of this complex matter, is summarized by that

Court, as follows:

In the instant case, the declaratory judgment

proceedings are integral to the bankruptcy court’s

ability to preserve and equitably distribute the Trust’s

assets. Furthermore, as we have previously pointed

out, the bankruptcy court is the preferable venue in

which to handle mass tort actions involving claims

against an insolvent debtor. ... The need for a

centralized proceeding is further augmented by the

complex factual scenario, involving multiple claims,

policies and insurers. The bankruptcy court was not

clearly erroneous in finding that “arbitration of the

disputes raised in the Complaint would prejudice

the Trust’s efforts to preserve the Trust as a means

to compensate claimants.” It was within the

bankruptcy court’s discretion to refuse to refer the

declaratory judgment proceedings, which it properly

found to be core, to arbitration.

USL IV, 17a (citations omitted).”

Thus, all of the important underlying facts that lead

inexorably to the core determination sub judice, support

adjudication of the Adversary Proceeding. And, “[l]ike any

statutory directive, the Arbitration Act’s mandate may be

overridden by a contrary congressional command.” Shearson/

Am. Express, Inc. v. McMahon, 482 U.S. 220, 226 (1987). The

Convention on the Recognition and Enforcement of Foreign

Arbitral Awards, 21 U.S.T. 2517, T.I.A.S. No. 6997, 330

U.N.TS. 38 (1970) (the “New York Convention”), “which

requires the recognition of agreements to arbitrate that

involve ‘subject matter capable of settlement by arbitration,’

contemplates exceptions to arbitrability grounded in domestic

law."2? Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth,

22. The Bankruptcy Court held as follows:

Clearly, the Clubs’ alleged refusal to honor prepetition

insurance policies endangers the Debtors’ ability to

resolve, by way of the Trust, the vast number of personal

injury claims filed against it because, as we have said

before, the P&I polices are the Trust's primary asset.

Without the Clubs’ good faith participation, Debtors will

be unable to implement the Plan’s procedures designed

to allocate portions of the Debtor's property to

individual claimants. Moreover, arbitration of the

disputes raised in the Complaint would prejudice the

Trust's efforts to preserve the Trust as a means to

compensate claimants. We will therefore exercise our

discretion and deny arbitration. (USL I, 118a (emphasis

added).]

23. 11 U.S.C. §§ 363(1), 365, 541(c)(1) and 1142(a) reflect a

strong bankruptcy policy which voids ipso facto clauses and encourages

(Cont'd)

Inc., 473 U.S. 614, 639 n.21 (1985) (quoted in USL IV,

13-14a).

Again, both the Court of Appeals and the Bankruptcy Court

amply cited Bankruptcy Code “chapter and verse”, as well as

the overarching unique and complex facts of this case, to well-

justify the denial of multiple fragmented arbitration. USL IV,

14-16a; USL I, 116-118a. Consider, inter alia, the empowering

provisions of 11 U.S.C. §§ 105(a)(c) and 1142(b), as well as

11 U.S.C. § 1123(a)(5) and Fed. R. Bank. P. 3020(d). Moreover,

specific statutory sections aside, the McMahon standard allows

the alternative inquiry into whether “[arbitration] inherently

conflicts with the underlying purposes” of the competing statute.

Rodriguez de Quijas v. Shearson/American Express, Inc., 490

U.S. 477, 483 (1989).*4

(Cont'd)

continued business relations with bankrupts. However, as Judge Conrad

observed:

With respect to at least one key issue raised in the Trust's

Complaint, we note that English law differs substantially

from precedent in this Circuit. Compare Firma C-Trade

SA. v. Newcastle Protection and Indemnity Assoc., 2 ALL

E.R. 705 (1990) (holding that insolvent shipowner could

not recover under P&I policies) with Liman v. American

S.S. Owners Mut. Protection and Indem. Assoc., 299 F.

Supp. 106 (S.D.N.Y.), aff'd, 417 F.2d 627 (2d Cir. 1969),

cert. denied, 397 U.S. 936, 90 S. Ct. 946, 25 L.Ed. 2d 116

(1970) (permitted insolvent shipowner to borrow funds

necessary to satisfy policy’s pay first provision). [USL /,

112-13a.]

Thus, Bankruptcy Code policy as evidenced by §§ 363(1), 365, 541(c)(1)

and 1142(a) would likely not be enforced by various foreign arbitrators

applying English law.

24. “[A] chief purpose of the bankruptcy laws is ‘to secure a

prompt and effectual administration and settlement of the estate of all

bankrupts within a limited period’... .” Katchen v. Landy, 382 U.S.

323, 328-29 (1966) (quoting the 1845 case of Ex parte Christy, 3 How.

292, 312, 11 L. Ed. 603). In furtherance of this purpose, “ ‘Congress

intended to grant comprehensive jurisdiction to the bankruptcy courts

(Cont'd)

atl

B. This Virtually Sui Generis Decision Does Not Conflict

with Decisions of Other Courts of Appeals

Petitioners would find in the Second Circuit’s arbitration

decision both a “clash” with this Court’s decisions (Petition at

15), and a “conflict” with other Circuits. Petition at 19. Neither

is the case. Arbitration, though favored, would be absolute as

posited by Petitioners. That view “clashes” with McMahon's

provision for overriding the Arbitration Act’s mandate in

appropriate circumstances. 482 U.S. at 226. And, it is the

McMahon standard to which all Circuits must adhere.

Rather than conflicting with Third Circuit cases, the

decision here at issue accommodates and respects that Circuit's

formative decision. Hays & Co. v. Merrill Lynch, 885 F.2d 1149

(3d Cir. 1989), a non-core case, is first relied upon and then

readily distinguished by the Second Circuit as not involving

fundamental bankruptcy precepts. USL /V, 15-16a. Petitioners’

announcement of conflict between the Second Circuit and the

Fifth Circuit’s Jn re National Gypsum Co,, 118 F.3d 1056 (Sth

Cir. 1997), is likewise contrived, tailing off before actually

identifying a conflict.

Petitioners advocate (Petition at 20) as follows:

The Second Circuit’s decision is also in conflict with

the Fifth Circuit, which, in Jn re National Gypsum

Co., 118 F.3d 1056, 1067 (Sth Cir. 1997), also

rejected the core/non-core distinction for existence

of a discretion, but recognized a discretion based

on the “underlying nature of the proceeding, 1.e.,

(Cont'd

so that ney might deal efficiently and expeditiously with all matters

connected with the bankruptcy estate’.”” Celotex Corp. v. Edwards, 514

U.S. 300, 308 (1995) (quoting Pacor, Inc. v. Higgins, 743 F.2d 984,

994 (3d Cir. 1984)). And, of course, the important underlying purposes

of bankruptcy law have been with us since our earliest history.

Petitioners’ seeming contention (Petition at 22-26) that bankruptcy

purposes somehow post-date a 1970 treaty adoption by Congress would

ignore history and treat basic bankruptcy law as if it developed with

the 1978 Code revision.

ES OO es

whether the proceeding derives exclusively from the

provisions of the Bankruptcy Code and, if so,

whether arbitration of the proceeding would conflict

with the purposes of the Code.”

Compare this contrived and vague assertion of “conflict”, with

the actuality of the Second Circuit’s positive reference to the

Fifth Circuit case:

Core proceedings implicate more pressing

bankruptcy concerns, but even a determination that

a proceeding is core will not automatically give the

bankruptcy court discretion to stay arbitration.

“Certainly not all core bankruptcy proceedings are

premised on provisions of the Code that ‘inherently

conflict’ with the Federal Arbitration Act; nor would

arbitration of such proceedings necessarily

jeopardize the objectives of the Bankruptcy Code.”

Insurance Co. of N.Am. v. NGC Settlement Trust &

Asbestos Claims Management Corp. (In re Nat'l

Gypsum Co.) 118 F.3d 1056, 1067 (Sth Cir. 1997).

However there are circumstances in which a

bankruptcy court may stay arbitration, and in this

case the bankruptcy court was correct that it had

discretion to do so.

USL IV, 16a (emphasis added). In fact, the Fifth Circuit held

25. Other cases cited in the Petition (at 19-21) as being in conflict

with the Second Circuit decision simply fail to implicate any bankruptcy

precept at odds with arbitration. In fact, the following cited cases are

not bankruptcy cases at all: Pritzker v. Merrill Lynch, Pierce, Fenner &

Smith, Inc., 7 F.3d 1110 (3d Cir. 1993); In re Sedco, Inc., 767 F.2d

1140 (Sth Cir. 1985); /.7:A.D. Assoc., Inc. v. Podar Bros., 636 F.2d 75

(4th Cir. 1981); C. Itoh & Co. (America) Inc. v. Jordan Int’! Co., 552

F.2d 1228 (7th Cir. 1977); and McReary Tire & Rubber Co. vy. CEAT

S.p.A., 501 F.2d 1032 (3d Cir. 1974). Moreover, In re Hart Ski Mfg.

Co., Inc., 18 B.R. 154 (Bankr. D. Minn. 1982); amended, 22 B.R. 762

(Bankr. D. Minn. 1982), aff'd, 22 B.R. 763 (D. Minn. 1982); aff'd, 711

(Cont'd)

that “the Bankruptcy Court was within its discretion to deny

[applicant’s] motion to stay under the Federal Arbitration Act.”

In re National Gypsum, 118 F.3d at 1071.

C. This Factbound and Essentially Unique Case Has Little

Utility in Articulating a General Standard Relating To

Adjudication or Arbitration.

This factbound core matter calls for a single adjudication.

There is no justification for cobbling together both on-going

limited litigation and multiple fragmented arbitrations. This is

not a simple insured-insurer dispute relating to a single or limited

number of claims, nor a dispute where claims were fully

manifested pre-petition. Rather, the matter at bar includes the

following unique and complex features:

(i) involvement of all known insurers of Trust

predecessors, covering seafarers exposed to

asbestos over a 40-year period;

(ii) application to some 18,000 pending claims

of almost 12,000 known claimants, and an

unknown and presently indiscernible number

of potential claims;

(iii) clear focus on a mass tort arising from the

long-term presence of asbestos on the

Debtors’ ships;

(Cont'd)

F.2d 845 (8th Cir. 1983) and Bender Shipbuilding & Repair Co., Inc. v.

Morgan, 28 B.R. 3 (9th Cir. B.A.P. 1983), decided before McMahon,

can’t override this Court’s McMahon standard permitting the Bankruptcy

Court to refuse in certain circumstances to enforce arbitration clauses,

and, no bankruptcy fundamental was espoused in these cases. Aasma v.

American S.S. Owners Mutual Protection and Indemnity Assoc., Inc.,

95 F.3d 400 (6th Cir. 1996) involved efforts of personal injury claimants

to sue directly under indemnity insurance contracts of the bankrupt;

the Sixth Circuit held that the claims against a foreign insurer must be

arbitrated per the policies. However, this two party dispute involved no

reorganization trust nor any overlay of the Bankruptcy Code on the

pre-petition insurance contracts.

(iv) allegations of injury which, if asbestos-

related, can only be identified generally as the

result of asbestos exposure; exact origin is not

discernable by any current scientific method;

(v) impact upon a measurable part of a nation-

wide litigation morass that includes at the

federal level pending Multi-District Litigation

(“MDL”) proceedings applicable to all federal

asbestos cases (as distinguished from the

bankruptcy claims now pending against the

Trust);

(vi) allegations that all insurers (1) refuse to settle

or commit to settle asbestos claims filed

against the Trust; and (2) participate in the

establishment of an “insurance maze” that

befuddles Trust efforts to provide cash

settlements to asbestos claimants;

(vii) allegations of linkage between and among all

P&I policies (with the Clubs having taken the

uniform position that each policy is only pro

rata answerable for a long-term seafarer’s

asbestos illness and that many policy

deductibles should be “stacked,” while the

Trust contends that all policies covering a

particular seafarer’s asbestos exposure are

jointly and severally liable); and

(viii) Trust efforts to define its coverage and

indemnification rights with respect to asbestos

claims, on an on-going basis and for the life

of the Trust.

In functional terms, the above-stated facts can be readily

marshaled to demonstrate the need for a single complex

litigation. Conversely, no benefit would result from allowing

arbitration in these special circumstances,” since:

26. None of the three cases relied upon by Petitioners (at 22) in

(Cont'd)

(1) Four foreign Clubs, of a total of eight

defendants, request arbitration; if arbitration

is granted, litigation would continue, impaired

by the loss of essential parties;

(ii) The presence of multiple decision-makers

(several arbitrators and the Bankruptcy Court)

will increase the probability of inconsistent

and incomplete results;

(iii) “Linkage” exists among all P&I policies

(either as advocated by the Clubs, based upon

their apparent “pro rata liability” theory, or

by the Trust, based upon its claim that all

applicable policies are jointly and severally

responsible to indemnify long-term seafarers’

illnesses);

(iv) The “insurance maze,” gleefully exploited

by each Club and frustrating Trust

indemnification, would be expanded by

multiple foreign arbitration proceedings;

(Cont'd)

support of their argument for the pre-eminence of a treaty, reflects the

special circumstances and fundamental bankruptcy precepts here

present. Neither /n re Sedco, supra, nor Filante, S.p.A. v. Chilewich

Int'l Corp., 789 F. Supp. 1229 (S.D.N.Y. 1992) involved any bankruptcy

facts or considerations, while Victrix S.S. Co. v. Salen Dry Cargo A.B.,

825 F.2d 709 (2d Cir. 1987) affirmed a refusal to enforce the New York

Convention in light of a foreign bankruptcy. Victrix, a creditor of the

bankrupt Swedish company, Salen, sought attachment here by moving

pursuant to the New York Convention to confirm its English arbitration

award (by default) and to enforce the British judgment. The Second

Circuit upheld the District Court’s denial of that motion, stating that

“[iJn light of Salen’s bankruptcy [the] enforcement [of the award and

judgment] would conflict with the public policy of ensuring equitable

and orderly distribution of local asseis of a foreign bankrupt.”

Id. at 714. Moreover, the Court of Appeals recognized that “a case such

as this one . . . takes on a public character by virtue of Salen’s insolvency

and the institution of the Swedish bankruptcy proceeding.” /d.

(v) Discovery is needed from the parties who

want to absent themselves from the litigation,

in order to determine the scope of indemnity

insurance coverage available to the Trust; and

(vi) The full range of the Bankruptcy Court’s

centralized control over Plan implementation

and Trust administration would be hampered,

as would the Bankruptcy Court’s ability to

coordinate its efforts in administering the

mass tort claims with the MDL.’

This easy case in which to deny arbitration is thoroughly

factbound, unique and thus not an apt basis for articulating the

general law.”

27. [AJt this time: (1) we invite the various bankruptcy

courts to coordinate with Judge Weiner concerning

identification and implementation of the means

necessary to secure their mutual objectives of fair and

efficient resolution of bankruptcy cases and asbestos

personal injury claims; (2) we request quarterly

updates from the bankruptcy courts and Judge Weiner

to the Panel identifying the procedural and substantive

progress towards reaching those objectives. . . .

In re Asbestos Bankruptcy Litigation, No. 950,61 U.S.L.W. 2408, 1992

WL 423943, at *2 (j.P.M.L. Dec. 9, 1992).

28. Petitioners’ finale, asking the Court to “ensure that the United

States complies with its obligations to the other nation signatories to

the New York Convention”, Petition at 26, invokes “the ‘international

contract’ talisman” in circumstances where arbitration would produce

an unfair burden on the Trust and conflict with the historic purposes of

bankruptcy law. Scherk v. Alberto Culver Co, 417 U.S. 506, 529 (1974)

(dissent). Consider id. at 517 n.11 (majority conceding potential

attenuation of foreign contacts).

CONCLUSION

For the reasons set forth herein, the Petition should be

denied.

Respectfully submitted,

Morris STERN

Counsel of Record

Maurice HrysHKO

STERN, DuBprow & Marcus

Attorneys for Respondent

United States Lines, Inc. and

United States Lines (S.A.) Inc.

Reorganization Trust

111 Dunnell Road

Maplewood, NJ 07040

(973) 762-3393

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.