Opposition Brief — National Union Fire Insurance Co. v. VP Buildings, Inc., (2010) (No. 711)

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r _ OFFICE

IN THE IOFFICE of THE CLA ¢

Supreme Court of the United States

BRST:

NATIONAL UNION FIRE INSURANCE

COMPANY OF PITTSBURGH, PA,

Petitioner,

v.

VP BUILDINGS, INC.

Respondent.

On PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES Court OF APPEALS FOR THE Sixty Circuit

BRIEF IN OPPOSITION

FRANKLIN CIACCIO

Counsel of Record

KAREN MEARA

CARTER LEDYARD & MILBURN LLP

2 Wall Street

New York, NY 10005

(212) 238-8864

ciaccio@clm.com

Counsel for Respondent

February 2, 2011

234543 ce

COUNSEL PRESS

(800) 274 3321 + (800) 359 6859

A

d

QUESTION PRESENTED

The United States Bankruptcy Code, 11 U.S.C. §§

503(b)(1)(A) and 507(a), provides that claims for costs

and expenses incurred during the administration of a

bankruptcy case, denominated as administrative expense

claims, may be eligible for priority of payment.

Petitioner, National Union Fire Insurance Company

of Pittsburgh, Pa. provided VP Buildings, Inc., a debtor in

possession, together with its affiliated debtor companies,

insurance coverage for workers’ compensation risks

attendant to the operation of debtor’s business during the

bankruptcy administrative period.

The terms of such coverage provided that Petitioner

administer, adjust and pay workers’ compensation claims

for injuries that occurred during the coverage period,

whether such claims were made during or after such

period. VP Buildings, Ine. was obligated to reimburse

Petitioner for the deductible portion of such payments

after Petitioner advanced such payments to claimants.

The narrow issue presented by this case is whether

Petitioner may, notwithstanding the terms of the insurance

contracts making VP Buildings, Ine.’s reimbursement

obligation contingent on Petitioner’s payment obligation,

force VP Buildings, Inc. to immediately pay, as an

administrative expense, estimated future deductibles that

Petitioner had not yet paid as of the termination of VP

Buildings, Inc.’s bankruptcy estate and may never pay.

a2

CORPORATE DISCLOSURE STATEMENT

VP Buildings, Inc. has been dissolved. VP Buildings,

Ine. Distribution Trust, its successor in interest, has no

parent corporation and no publicly owned corporation

owns ten percent or more of the stock of VP Buildings,

Inc. Distribution Trust.

Li2

TABLE OF CONTENTS

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CORPORATE DISCLOSURE STATEMENT ... il

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TABLE OF CITED AUTHORITIES ........... iV

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REASONS FOR DENYING THE PETITION... 7

A. The Decision Below Does Not Conflict with

the Decisions of Other Courts of Appeals

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B. The Decision Below Does Not Conflict

with a Prior Precedent of this Court ...... 19

C. The Decision Below Does Not Involve

a Question of Exceptional Importance

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TABLE OF CITED AUTHORITIES

Page

CASES

Advanced Telecomm. Network, Inc. v.

Allen (In re Advanced Telecomm

Network, Inc.),

400 F060 4320 (11th Cir. 2007) ..... 2... 2.02 2se 11

Alabama Surface Mining Comm'n v.

N.P. Mining Co. (In re N.P. Mining Co.),

963 F.2d 1449 (11th Cir. 1992) .... 2... 2. c eee 14, 23

American Nat'l Bank and Trust Co. of Chicago

as Trustee for Illinois Land Trust v.

Harcros Chemicals, Inc.,

1997 WL 281295 (N.D. Ill. May 20, 1997) ...... 13

CIT Comme'ns Fin. Corp. v.

Midway Airlines Corp. (In re Midway

Airlines Corp.),

406 F.3d 229 (4th Cir. 2005)... 1.2.2... ccc eee eee 16

Cramer v. Mammoth Mart, Inc. (In re

Mammoth Mart, Inc.),

ae ©. Gee Clee Cat. FUG) 4 ww ccc ccc csenss 9

Cumberland Farms, Inc. v.

Florida Dep't of Envtl. Protection,

ope bce ae Ay } 14

In re HNRC Dissolution Co.,

343 B.R. 839 (Bankr. E.D.Ky. 2006)........... 31

v

Cited Authorities

Juniper Dev. Group v. Kahn (In re

Hemingway Transp., Inc.),

OOS F.20 Did Cleat Car Be vc ese ce ceesee.. 12,13

Lemelle v. Universal Manufacturing Corp.,

18 F.3d 1268 (5th Cir. 1994) .................. 15

Potter v. CNA Ins. Cos.

(In re MEI Diversified, Inc.),

106 F.3d 829 (Sth Cir. 1997) ................. 10, 11

Reading Co. v. Brown,

Sok U2. Gan Co ce eee ccc ees passim

Supplee v. Bethlehem Steel Corp.

(In re Bethlehem Steel Corp.),

479 F.3d IGT CG Cab, Beh aie cee scccccees. 15

Texas v. Lowe (In re H.L.S. Energy Co.),

151 F.3d 434 (Gti CRP Be sec eee neceeeees. 14

Total Minatome Corp. v.

Jack/Wade Drilling, Inc.

(In re Jack/Wade Drilling, Inc.),

258 F.3d 385 (5th Cir. 2001)... 2.2... cece. 15

Trustees of the Amalgamated Insurance Fund v.

McFarlin’s, Inc.,

7189 F.2d D6 GG Cir, TR eo cee ctc cs cccecsss 15

v2

Cited Authorities

Page

Zurich Am. Ins. Co. v.

Lexington Coal Co., LLC

(Un re HNRC Dissolution Co.),

536 F.3d 683 (6th Cir. 2008). .......... ..... passim

Zurich Am. Ins. Co. v.

Lexington Coal Co., LLC

Un re HNRC Dissolution Co.),

371 B.R. 210 (E.D.Ky. 2007). ............... passim

Zurich Am. Ins. Co. v.

Lexington Coal Co.,

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1

STATEMENT

This is a dispute about a contract and whether a

Bankruptcy Court may alter its terms to rescue a creditor

from its own miscalculations. For many years, Petitioner,

a sophisticated nationally recognized insurer, provided, in

arms-length business transactions, workers’ compensation

insurance coverage to LTV Corporation (“LTV”), together

with certain of its subsidiaries and affiliates, including VP

Buildings, Inc. (“VP Buildings”). These arrangements

were renewed immediately after LTV, together with its

subsidiaries and affiliates, including VP Buildings, filed

voluntary petitions for relief under chapter 11, of title

11, of the Bankruptcy Code (the “Code”) on December

29, 2000 (VP Buildings, together with four other LTV

subsidiaries, are hereinafter collectively referred to as

the “VP Debtors”).'

The parties agree that, like most entities operating

in bankruptcy, VP Debtors was required to secure

workers’ compensation insurance. Pet. 2. The terms of

the workers’ compensation insurance coverage provided

by Petitioner to VP Debtors was reflected in various

insurance policies issued by Petitioner (the “Policies”.

Payment of the coverage provided under the Policies

was governed by the terms of a payment agreement

(the “Payment Agreement”) to which a Schedule of

Policies and Payments (the “Schedule”) was appended.’

1. VP Buildings was liquidated pursuant to the First

Amended Joint Plan of Liquidation for VP Buildings, Inc., Its

Subsidiary Debtors and Certain of Its Debtor Affiliates (the

“Plan”).

2. See Appendix to Brief of Appellant, National Union Fire

Insurance Co. of Pittsburgh Pa., On Appeal from the United States

Bankruptcy Court for the Northern District of Ohio, (“Pet. Dist.

App.”) at A171-81, A45-48.

2

The Payment Agreement provided, among other things,

for the advance by Petitioner of the deductible portion

of any loss for which VP Debtors was liable under the

Policies, and the concomitant obligation of VP Debtors to

reimburse Petitioner for such advances (“Deductible Loss

Reimbursements”). Pet. Dist. App. A173, A47.

The services performed by Petitioner under the terms

of the Policies and the Payment Agreement were, thus,

two-fold. First, Petitioner must pay claimants damages,

benefits or indemnity for which it is obligated under the

terms of the Policies; second, Petitioner must advance

on behalf of VP Debtors the deductible portion of any

payments it makes to claimants under the terms of the

Payment Agreement. Pet. Dist. App. A171-181, A45-47.

The foregoing insurance arrangements, consisting

of both the provision of insurance coverage under the

Policies and the advance of deductible payments under the

Payment Agreement, is long recognized in the insurance

industry and customarily referred to under different

names i.e. a “Large Risk Rating Plan” or “Deductible

Reimbursement Program” (the “Program”).

In the Schedule appended to the Payment Agreement,

an Estimated Payment Obligation? of VP Debtors was

established. The Payment Agreement, in conjunction

with the Schedule, provided the Billing Method pursuant

to which various premium and other payments were to

be made by VP Debtors, together with the due dates

3. Capitalized terms used and not otherwise defined herein

shall have the meanings ascribed to them in the Payment

Agreement.

3

for such payments. Under the Payment Agreement,

Petitioner reported on a monthly basis to VP Debtors the

Loss Deductibles paid under the Policies and billed VP

Debtors at its address reflected in the Schedule. In the

case of Loss payments that exceeded the stated Sizable

Loss Payment Amount, VP Debtors was required to pay

the bill issued by Petitioner within ten days of its receipt.

Pet. Dist. App. A46-47, A175.

The Schedule further contained a Security Plan which

set forth the amount of collateral that Petitioner required

VP Debtors to provide, in the form of letters of credit

($41,612,572), cash escrows and obligation bonds (surety).

Id. at 47-48. This, in addition to the up-front premium

of approximately $967,131, together with deposits and

installment deposits, was required of VP Debtors under

the terms of the Program. Thus, VP Debtors bore the

substantial cost associated with not only the up-front

premium, but also the purchase of the letters of credit and

other forms of collateral required of it as well.

The amount of the up-front premium, letters of credit,

installment deposits, obligation bonds (surety) and other

forms of collateral required to be posted by VP Debtors

was based upon actuarial assumptions developed by

Petitioner, and might be further adjusted, at the unilatera.

discretion of Petitioner, depending upon the state of VI

Debtors’ financial condition at any point in time. Pet. Dist.

App. A177-78.

The posted collateral was intended to cover Losses,

i.e. damages, benefits or indemnity for which Petitioner

became obligated under the terms of the Policies to pay to

claimants, including Deductible Loss Reimbyrsements, i.e.

4

the pertion of any Losses and Ailocated Loss Adjustment

Expense that Petitioner advanced on VP Debtors’ behalf

under the Policies. Pet. Dist. App. A173.

Petitioner was under no illusions at the time it

entered into the Payment Agreement that VP Debtors,

as a debtor-in-possession in an ongoing bankruptcy,

had, as an operating company, anything but a short

life expectancy, and knew or should have known that

workers’ compensation claims would extend well beyond

the lifespan of VP Debtors itself. In these circumstances,

the insurance premiums required by Petitioner and the

collateral posted by VP Debtors were intended to cover

all such Losses of Petitioner, including Deductible Loss

Reimbursements under the Program.

In September 2003, shortly before the Plan was

confirmed, Petitioner, apparently realizing it had

miscalculated its collateral needs, submitted a claim for

administrative expense priority. Pet. 8. The administrative

claim included claims for Deductible Loss Reimbursement

amounts that Petitioner had not yet advanced to injured

workers for a variety of reasons, including that, in many

cases, injuries had been incurred but not reported and,

therefore, such claims might never be reported or paid.

Thus, Petitioner’s self-styled request for “reimbursement”

was in reality a request for an acceleration of the Payment

Agreement, contrary to its terms, and, based on actuarial

estimates, of amounts that might or might not be due

in the future. Furthermore, the disputed claims for

“reimbursement” were for estimated payments that, if

ever made, would not be made until after the termination

of the VP Debtors’ bankruptcy estate. See, e¢.g., Pet. 10.

5

In the event Petitioner deemed itself undersecured,

it not only could have demanded additional collateral, it

could have actively participated in the Plan confirmation

process and negotiated post-confirmation payments or

the establishment of some form of escrow arrangement

through incorporation of such requirement in the terms

of the Plan. Nothing in the record indicates that National

Union participated in the Plan confirmation process or,

in faet, contributed anything to the formulation of the

Plan. Instead, Petitioner elected to file a proof of claim

and subsequently absent itself from the bankruptcy

proceedings. Had Petitioner taken upon itself to defend

its own interests, some alternative mechanism to

that provided in the Payment Agreement might have

supplemented the payment and collateral requirements

provided thereunder to cover any incurred but not

reported losses of Petitioner in the future.

Instead, Petitioner relied on the administrative

expense process to solve its shortfall. The Code provides

that creditors who extend goods and services to debtors in

bankruptcy for the “actual, necessary costs and expenses

of preserving [their] estate” are entitled to administrative

priority, or in other words, to be paid ahead of unsecured

creditors. 11 U.S.C. §§ 503(b)(1)(A), 507(a). VP Debtors

filed an objection to those portions of Petitioner’s claim

for “reimbursement” that were for amounts Petitioner had

not yet advanced and would not advance until after the

termination of the VP Debtors’ bankruptcy estate, if ever.

Pursuant to an Order of the United States Bankruptcy

Court for the Northern District of Ohio (the “Bankruptcy

Court”), certain matters were referred to arbitration,

including, zxter alia, the amount of Petitioner’s claim

6

attributable to the post-petition period, and whether

Petitioner was entitled to apply the proceeds of the letters

of credit VP Debtors had supplied to such amounts. Pet.

Dist. App. 414-415. The arbitrators determined that, the

proceeds from the letters of credit which Petitioner had

previously drawn down in reimbursement for its Losses

were to be applied toward payment of its claims. However,

this, in addition to the up-front premium and additional

deposits previously paid by VP Debtors to Petitioner under

the governing terms of the Payment Agreement, still was

not sufficient to cover all of Petitioner’s purported Losses.

Petitioner asserts that the panel of arbitrators projected

unreimbursed post-petition Losses of $2,494,498 with

respect to the workers’ compensation insurance issued to

LTV and affiliates for Policy Year 2001, of which the pro

rata share attributable to VP Debtors is 2pproximately

$993,769. Pet. 8-9. The Bankruptcy Court then considered

whether this amount, which includes estimated future

Deductible Loss Reimbursements, qualified as an

administrative expense pursuant to the Bankruptcy Code.

The Bankruptey Court, District Court and the

Sixth Circuit all declined Petitioner’s invitation to use

administrative priority as a means of rescuing it from

its own failure to protect its interests. Nevertheless,

Petitioner asks this Court to intervene.

The narrow issue presented by this case is whether

Petitioner may force VP Debtors to immediately

reimburse, as an administrative expense, estimated

Loss Deductibles that Petitioner had not yet paid as

of the termination of VP Debtors’ bankruptcy estate,

and may never pay, notwithstanding that VP Debtors’

reimbursement obligation is contingent on Petitioner’s

prior payment obligation.

7

REASONS FOR DENYING THE PETITION

A Petition for Certiorari should be denied where

the decision below does not conflict with the decisions

of other Courts of Appeals. Petitioner cites three cases

in support of its assertions that various Courts of

Appeals, in opposition to the Sixth Circuit, have held

that administrative claims need not be liquidated and

instead have held unliquidated amounts may properly

constitute an administrative expense. However, not one

of these cases involves Deductible Loss Reimbursements

or analogous contractual provisions under an insurance

contract requiring a bankruptcy court to unilaterally

rewrite the very terms upon which the contract is based,

turning the obligations of the respective parties “on their

heads.” In the instant case, Petitioner seeks to relieve

itself of its own failure to take sufficient collateral] to

cover Deductible Losses based upon its own inaccurate

actuarial assumptions and asks this Court to require VP

Debtors to advance Petitioner funds to which it may never

be contractually entitled and at VP Debtors’ unsecured

creditors’ expense.

A Petition for Certiorari should be denied where the

decision below does not conflict with a prior precedent

of this Court. Petitioner asserts that the decision below

conflicts with this Court’s decision in Reading, a case

clearly distinguishable from the case at bar. Reading Co.

v. Brown, 391 U.S. 471 (1968). Damages incurred by the

petitioner in Reading for which it sought administrative

priority were entirely post-petition, not post-confirmation.

As to the requirement that costs and expenses were

required to be “actual,” the complete destruction of a

building in Reading could be nothing other than “actual.”

8

In the instant case, Losses alleged by Petitioner involve

workers’ compensation claims based entirely upon

actuarial assumptions both as to pre-confirmation known

claims, as well as to incurred but not reported losses. The

latter are unknown and may never be reported or paid.

A Petition for Certiorari should be denied where the

decision below does not involve a question of exceptional

importance. The decision below involves a very narrow

question of law which Petitioner attempts to couch as

a dispute involving a legal principle with far-reaching

implications in order to cloak the true intention of

Petitioner to rewrite the terms of a contract which, in

this instance, has worked to Petitioner’s disadvantage due

to its own missteps. Second, the decision has only rarely

been the topic of litigation and, third, to the extent courts

have entertained the arguments advanced by Petitioner,

each and every court has rejected them.

A. The Decision Below Does Not Conflict with the

Decisions of Other Courts of Appeals

Petitioner asserts that the decision below “conflicts

with the decisions of other courts of appeals.” Pet. 18.

That statement is at best, a gross exaggeration, and

at worst, completely inaccurate. Other than the Sixth

Circuit, no other courts of appeals have considered the

precise question confronted here, namely, whether a

bankruptey court may or should rewrite the terms of a

payment agreement by granting administrative priority

to estimated future Deductible Reimbursements that are

not due at the time the priority claim is made and may

never come due.

9

After a lengthy buildup in which Petitioner cites

circuit cases for principles that are not disputed by VP

Debtors,‘ Petitioner cites only three cases in support of

its assertions that “[s]ection 503(b) does not require that,

in order to be ‘actual,’ the administrative claim must

be ‘liquidated’” and that “{o]ther courts of appeals. . .

have concluded that unliquidated amounts can properly

constitute an administrative expense.” Pet. 21. Not one of

the three cases relied on involves estimated deductible loss

reimbursements or analogous claims i.e. claims that ask

the bankruptcy court to rewrite the terms of a contract.

Instead, the supposedly relevant cases involve insurance

premiums due and owing pursuant to a policy at the time

administrative priority was requested, estimated future

claims for environmental cleanup costs under a federal

environmental statute, and whether estimated liabilities

should be considered for purposes of interpreting New

Jersey’s fraudulent transfer statute (a case that does

not even mention § 503(b) but is offered as an allegedly

analogous ease). Pet. 21-22.

In further support of Petitioner’s unfounded assertion

that estimated future Deductible Reimbursements may

be granted priority as “actual, necessary costs and

expenses,” Pet. 18, Petitioner focuses on the definition of

“elaim,” 11 U.S.C. § 101(5), a definition that has absolutely

no bearing on whether any particular “claim” is entitled

to administrative priority treatment under 11 U.S.C.

§ 503(b). Pet. 21.

4. See, e.g., Pet. 18-19 (citing Cramer v. Mammoth Mart,

Inc. (In re Mammoth Mart, Inc.), 536 F.2d 950 (1st Cir. 1976) for

the proposition that to be an “‘actual, necessary’ administrative

expense, a debt must (1) arise from a transaction with the

bankruptcy estate, and (2) directly and substantially benefit the

estate.”).

10

Finally, Petitioner asserts that the decisions below

conflict with the decisions of other circuits because they

allegedly focused on whether “costs” benefited the estate

rather than on whether the “consideration supporting the

claimant’s right to payment” benefited the estate, and on

when an expense was billed rather than on when a “service

[was] rendered.” Pet. 22-23. For the reasons discussed

below, Petitioner’s arguments are without merit.

The three cases relied on by Petitioner in support of

the notion that “unliquidated” expenses should be granted

administrative priority are materially distinguishable

from the case at bar and i.e. lend Petitioner no aid. In

the most factually analogous case, the Eighth Circuit

considered whether to grant administrative priority

for post-petition workers’ compensation premiums

that were recalculated post-confirmation pursuant to a

retrospective rating policy. Potter v. CNA Ins. Cos. (In

re MEI Diversified, Inc.), 106 F.3d 829 (8th Cir. 1997).

Under the policy, the insured and insurer agreed that the

insurer would, at regular intervals, recalculate premiums

due based on actual loss experience, which “resulted in a

premium refund or an additional premium assessment.”

Id. at 831.

Less than a year after the insured’s plan was

confirmed, and before the bar date for submission of

administrative claims, the insurer, pursuant to the policy,

recalculated the premium for both pre- and post-petition

periods, and then asserted administrative priority for that

portion of the recalculated premium due for the coverage

received during the post-petition, pre-confirmation period.

Id. Both the Bankruptcy Court and the District court

granted priority, and the Eighth Circuit affirmed.

11

This outcome is entirely consistent with the outcomes

below in the case at bar; to the extent National Union

sought administrative priority for amounts to which it was

contractually entitled at the time it submitted its priority

request, VP Debtors raised no objection. Unlike the claim

in MEI Diversified, however, the disputed claim here is not

for amounts that were actually due pursuant to the terms

of the Payment Agreement. The disputed claim is for an

estimate of amounts that may or may not become due in

the future, and that indisputably were not contractually

due from Respondent at the time Petitioner submitted its

request. In contrast, the insurer in MEI Diversified did

not ask the court to rewrite the terms of its contract with

the insured and grant administrative priority to an amount

projected to be due under the contract -- it only asked the

court to grant administrative priority to amounts actually

due under its contract attributable to the post-petition,

preconfirmation period. MEI Diversified lends Petitioner

no support for its contention that other courts of appeals

have routinely recognized the type of administrative claim

sought here as an “actual” expense.

The second case relied on by Petitioner provides

even less support for its argument, as this supposedly

analogous case does not involve an administrative

priority claim or anything remotely analogous to such

a claim. In Advanced Telecomm. Network, Inc. v.

Allen, a Chapter 11 debtor sought to recover certain

pre-petition transfers as fraudulent under New Jersey

law. Advanced Telecomm. Network, Inc. v. Allen (In re

Advanced Telecomm Network, Inc.), 490 F. 3d 1325 (11th

Cir. 2007). The case turned on whether the debtor was

“insolvent” at the time the transfers were made as that

term is defined under New Jersey’s fraudulent transfer

12

statute. /d. at 1332 (interpreting N.J. Stat. Ann. §25:2-

27.a). The Eleventh Circuit held that the bankruptcy court

erred in making its insolvency determination because

it failed to estimate the value of certain outstanding

litigation liabilities and thereby overvalued the company.

Id. While this case certainly establishes that estimates

must be used when assessing the value of a company for

purposes of determining whether a pre-petition transfer

was fraudulent under New Jersey law, it says absolutely

nothing about whether estimated future contractual

obligations are appropriately deemed “actual” and

“necessary” administrative expenses under § 503(b)(1)(A)

of the Bankruptcy Code.

Finally, Petitioner relies on /n re Hemingway Transp.

Inc., a case involving a CERCLA?’ claim by an entity that

purchased contaminated land from a bankruptcy estate

and was then subject to an enforcement action by the EPA.

Juniper Dev. Group v. Kahn (In re Hemingway Transp.,

Inc.), 993 F.2d 915 (st Cir. 1993). The purchaser sought

administrative priority for current and future costs of

cleanup, but the trustee objected that the purchaser’s

claim was contingent pursuant to 11 U.S.C. § 502(e), a

section of the Code that applies when more than one

debtor may have a right to a claim. The court remanded

the case for a determination by the bankruptcy court as to

whether the purchaser was entitled to any of the defenses

under CERCLA, a determination that was essential for

establishing whether the trustee’s objections pursuant to

§ 502(e) were applicable.

5. The Comprehensive Environmental Response,

Compensation, and Liability Act, Codified at 42 U.S.C. §§ 9601

et seq.

13

The vast majority of the court’s discussion focused on

the purposes and interpretations of § 502(e) in the context

of CERCLA claims, a provision that has no bearing on this

case. Administrative expense priority pursuant to § 503(b)

received barely a passing mention, let alone any discussion

of why estimated future claims might be deemed “actual”

expenses. However, National Union latches onto the

court’s speculative statement, made without elaboration or

authority, that if § 502(e) does not apply, then the Petitioner

would be entitled to administrative priority for estimated

“past and future response costs.” Jd at 934.

Petitioner’s reliance on this hypothetical dicta is

misplaced. Even if the court had explained or offered

authority for its contention that “estimates” of future

CERCLA remediation costs are entitled to administrative

priority, expenses incurred under CERCLA bear no

relation to expenses incurred under the terms of a freely

negotiated contract such as the Payment Agreement in the

instant case. The purchaser’s claim in /n re Hemingway

is entirely consistent with the structure and purpose of

the CERCLA statute, “which entitles plaintiffs to recover

their past and future environmental response costs.”

American Nat'l Bank and Trust Co. of Chicago as Trustee

for Illinois Land Trust v. Harcros Chemicals, Inc.,1997

WL 281295 (N.D. Ill. May 20, 1997) (citing 42 U.S.C. §

9613(f)). By contrast, here Petitioner seeks revision of the

terms of a contract that it agreed to with full knowledge

of VP Debtors’ financially precarious situation, and that

provided it with the means of protecting itself through the

adjustment of collateral requirements, which for unknown

reasons, it failed to exercise.

14

Now, Petitioner, in effect, asks this Court to remedy

its collateral miscalculation by unilaterally rewriting the

Payment Agreement to advance Petitioner money to which

it may never be contractually entitled, at the expense of

the unsecured creditors. While it is well established that

unsecured creditors generally cannot recover before costs

associated with compliance with environmental laws are

satisfied, see, e.g., Texas v. Lowe (In re H.L.S. Energy

Co.), 151 F.3d 434 (5th Cir. 1998) (cost of plugging debtor’s

unused oil wells as required by state environmental law

was entitled to administrative priority as actual and

necessary expense of the estate); Cumberland Farms,

Inc. v. Florida Dep’t of Envii. Protection, 116 F.3d 16

(1st Cir. 1997) (penalties stemming from failure to comply

with state environmental laws post-petition were entitled

to administrative priority); Alabama Surface Mining

Comm'n v. N.P. Mining Co. (In re N.P. Mining Co.), 963

F.2d 1449 (11th Cir. 1992) (same), Petitioner has pointed

to no cases establishing that such a rule should apply to

insurers that miscalculate their collateral requirements.

Inits effort to persuade the Court that projected claims

not yet contractually due are “actual” for purposes of §

503(b) and, therefore, entitled to administrative priority,

Petitioner cites § 101(5), which defines the term “claim”

for purposes of the Bankruptcy Code. Petitioner implies

that because a “claim” includes any “right to payment”

whether “liquidated” or “unliquidated,” the administrative

priority provisions of the Code “do{}] not require that,

in order to be ‘actual,’ the administrative expense claim

must be ‘liquidated.” Pet. 21. However, Petitioner offers no

authority for its insinuation that the terms of § 101(5) have

any bearing on whether a particular claim meets the tests

for administrative expense priority under § 503(b). In fact,

there is ample authority for the opposite.

15

“Claim” is intended to have a broad meaning, as it is

the vehicle through which any and all creditors that have

had dealings with a debtor in bankruptcy seek a right to

payment. See, e.g., Lemelle v. Universal Manufacturing

Corp., 18 F.3d 1268, 1275 (5" Cir. 1994). However, as many

of the cases cited by Petitioner make clear, administrative

priority is to be narrowly construed. See, e.g. Supplee v.

Bethlehem Steel Corp (In re Bethlehem Steel Corp.), 479

F.3d 167, 172 (2d Cir. 2007) (“‘[blecause the presumption

in bankruptcy cases is that the debtor’s limited resources

will be equally distributed among his creditors, statutory

priorities are narrowly construed,” quoting Trustees of

the Amalgamated Insurance Fund v. McFarlin’s, Inc.,

789 F.2d 98, 100 (2d Cir.1986)). As the court in Jn re Jack/

Wade Drilling noted, the question in an administrative

priority case is not “whether [the creditor] deserves to

get paid,” (i.e. whether the creditor has a “claim”) “but

whether [the creditor] deserves to get paid at the expense

of [the Debtor’s] existing unsecured creditors.” Total

Minatome Corp. v. Jack/Wade Drilling, Inc. In re Jack/

Wade Drilling, Inc.), 258 F.3d 385, 389 (5th Cir. 2001). In

sum, administrative priority expenses are a small subset

of bankruptcy claims and, therefore, the Code’s definition

of the term “claim” is in no way determinative of whether

a particular “claim” is entitled to administrative priority

and, specifically, of whether an unliquidated expense is

“actual” for purposes of § 503(b)(1)(A).

In furtherance of its effort to create the perception

of a circuit split, Petitioner, with heavy reliance on Judge

Cook’s concurrence, argues that the decisions below

were flawed because they focused on whether “costs”

incurred post-confirmation could have benefited the

estate rather than on whether the services provided by

Petitioner benefited the estate. Petitioner asserts that

16

other courts of appeals have “‘focus[ed] not on when a

creditor bills the debtor for its services, but on either:

1) when the debtor obligates itself to pay or 2) when the

service is rendered.” Pet. 22 (citing Cook, J. concurring).

Petitioner then concludes summarily that its claimed

expenses qualify as an administrative expense under

either standard. However, this characterization of the

issues, and the conclusions Petitioner draws from it, are

flawed. The courts below were not mislead, as Judge

Cook was, by a mistaken focus on “costs,” which “cannot

be necessary to or benefit anyone” Pet. 23 (citing Cook,

J. concurring). Rather, they properly focused on when

supporting the claimant’s right to payment was both

supplied to and beneficial to the debtor in possession” as

Petitioner urges. Pet. 23 (quoting C/T Comme’ns Fin.

Corp. v. Midway Airlines Corp. (In re Midway Airlines

Corp.), 406 F.3d 229 (4th Cir. 2005)).

Each of the courts below properly noted that Petitioner

had failed to provide all of the services or consideration

that would entitle it to payment. For example, the Sixth

Circuit Panel held that “National Union’s claim will

not be ‘actual’ until it has made a payment and seeks

reimbursement from the insured ... .” Pet. App. 9a-10a

(emphasis added). The discrepancy in the outcome urged by

Petitioner and that reached in the courts below stems not

from the application of two different standards, but from

an application of one undisputed standard to two different

sets of facts. It is only through an oversimplification and

distortion of the facts that Petitioner is logically able to

reach a result contrary to that reached by the courts below

and by the courts in Zurich Am. Ins Co v. Lexington Coal:

Co., the only case “addressing the same question” Pet. 4,

17

as the matter at bar. Zurich Am. Ins. Co. v. Lexington

Coal Co. (In re HNRC Dissolution Co.) 536 F.3d 683 (6th

Cir. 2008) (affirming the district court’s “well reasoned

and comprehensive” opinion holding that estimated post-

confirmation Deductible Loss Reimbursements were not

entitled to administrative priority).

Petitioner would have this Court believe, as Judge

Cook apparently did, that its sole obligation under the

Program was to provide insurance in calendar year 2001,

and that act alone was “consideration supporting the

claimant’s right to payment.” See, e.g., Pet. 16 (stating

that Petitioner “supplied vital insurance coverage”).

However, as the Program spells out, the terms were more

complicated than that. Most importantly, VP Debtors’

obligation to pay Deductible Loss Reimbursements to

Petitioner was contingent on Petitioner first fulfilling

its contractual obligation under the Policies to advance

deductibles to claimants on behalf of VP Debtors. The

Schedule laid out VP Debtors’ payment obligation: “On

a Monthly basis, [Petitioner] will report to [VP Debtors]

the amounts of Loss and ALAE® that [Petitioners] have

paid under the Policies. [VP Debtors] must subsequently

pay [Petitioners] as described below.” Pet. Dist. App. A47.

In other words, pursuant to the Program, Petitioner

promised to do more than provide insurance coverage

during the Policy Year; it promised to advance VP Debtors’

deductible obligations to injured workers and then to

seek reimbursement for those deductibles. Respondent’s

6. “Loss and ALAE” refer to two different components of the

deductibles that VP Debtors was obligated to reimburse under

the Program.

18

obligation to reimburse Petitioner was contingent on

Petitioner’s performance of these obligations. The prices

agreed to by Petitioner and Respondent took into account

this extension of credit. Clearly, such an arrangement

entails risk for both parties, but the Payment Agreement

made significant provision for Petitioner to protect itself. It

was entitled to and did secure collateral from VP Debtors

and affiliates, and it retained the right to unilaterally

adjust the collateral to reduce its exposure to the extent

the insured’s financial situation deteriorated.

In sum, the consideration supporting Petitioner’s

right to Deductible Loss Reimbursement was not only the

provision of insurance under the Policies, but Petitioner’s

payment of VP Debtors’ share of claims submitted by

workers injured during the Policy Year. It is undisputed

that at the time Petitioner sought administrative priority,

it had no contractual entitlement to the claims VP Debtors

disputes, because Petitioner had not yet advanced the

Deductible Losses to injured workers. In fact, much of

its claim was based on actuarial estimates, that by their

very nature are speculative and may never materialize.

The courts below found it determinative that Petitioner

had not yet rendered the services that would entitle it to

payment under the governing agreements. For example,

as the Bankruptcy Court stated, “National Union seeks

payment of claims that have not yet arisen pursuant to

the terms of its agreement with VP Debtors, because

National Union itself has not paid the claims.” Pet. App.

42a (emphasis added).

Thus, while Petitioner and Judge Cook would have

this court believe that the decisions below reached the

wrong conclusion by focusing on when costs were incurred

19

or even “billed” (which, incidentally, is a matter entirely

within the control of Petitioner), Respondent counters

that the decisions below properly focused on whether

Petitioner had provided the services that would entitle it

to payment. While Petitioner carried out its obligation to

provide insurance during the policy year, at the time it

sought administrative priority for the disputed claims it

had not carried out its obligation to advance Deductible

payments on VP Debtors’ behalf. Having failed to carry

out that portion of its contractual obligations that would

have entitled it to Deductible Loss Reimbursement,

Petitioner failed to submit an “actual” claim, as the courts

below properly recognized.

In sum, there is no circuit split on the specific issue in

the instant case, no circuit split on the general standards

to be applied, and no error in the decisions of the courts

below. The Petition should be denied.

B. The Decision Below Does Not Conflict with a Prior

Precedent of this Court

Petitioner asserts that the decision below conflicts

with a prior precedent of the United States Supreme

Court. The sole decision cited by Petitioner in support of

this proposition is Reading Company v. Brown, 391 U.S.

471 (1968), a case in which the bankruptcy court appointed

a receiver to conduct the debtor’s business of leasing a

building. The building was totally destroyed by fire, as

were several neighboring buildings, including one owned

by Reading Company, the primary claimant in that case.

The Reading decision, rendered almost a half century

ago, implicates section 64(a), of chapter XI, of the former

20

Bankruptcy Act, 11 U.S.C. § 104(a)(1), the predecessor to

§ 503(b) of the present Bankruptcy Code, the principal

section of the Code which governs the matter at issue

in the case at bar. Petitioner, by extensive reference to

case law in support of the proposition that the decision

in Reading survived enactment of the Bankruptcy

Code, appears at great pains to persuade this Court

that Reading retains continued viability. See, e.g., Pet.

26-28. VP Debtors does not take issue with the views

expressed in Reading, or to its continued viability, aged

as that case may be, but VP Debtors does take issue

with its applicability to the matters presently at issue.

Accordingly, VP Debtors asserts that Reading fails to

serve as appropriate precedent for the matters addressed

in this case and that Petitioner is mistaken in its view that

the decision of the Sixth Circuit Court of Appeals below

conflicts with prior precedent of this Court.

It is noted, in this regard, that all the cases cited by

Petitioner in support of the proposition that Reading

survived enactment of the current Bankruptcy Code, see

Pet. 26-29, may be further distinguished from the case

at bar in that they involve costs and expenses incurred

by the debtors therein post-petition during the continued

operation of their respective businesses. No such case

involves costs and expenses sustained by the debtors

post-confirmation after the operation of their respective

businesses ceased and they were no longer acting as

debtors-in-possession.

At the outset, Reading involved circumstances totally

distinguishable from those presented in the instant case.

Damages incurred by the petitioner in Reading for which

it sought administrative expense priority were entirely

21

post-petition, not post-confirmation. As a result, the

Reading Court had no need to and, therefore, did not

address whether post-confirmation costs and expenses

could be “actual” and “necessary” for the preservation

of a debtor’s estate at a time when the debtor no longer

operated a business or, for that matter, continued to

exist. As to the requirement under § 64(a), that costs

and expenses were required to be “actual,” the complete

destruction of a claimant’s building in Reading could

be nothing other than “actual.” Such costs were easily

determinable by contemporaneous replacement costs

and valuation methods and were stated to the penny

($559,730.83). Reading, 391 U.S. at 473. In the case

at bar, Losses alleged by Petitioner involve workers’

compensation claims in amounts that are based entirely

upon actuarial assumptions both as to pre-confirmation

known claims, as well as to incurred but not reported

losses. The latter, by their very nature, are unknown

and may, in fact, never be reported o° paid. They are

typically long-term, extending well into the future and (if

insurance related settlements are to serve as precedent)

often subject to further adjustment.

Instead of addressing in a meaningful manner the

issue of “actual” and “necessary” expenses found in §

64(a) of the Bankruptcy Act, the Reading Court elected

to address that which it viewed as the decisive, statutory

objective of the Bankruptcy Act, that of “fairness to

all persons having claims against an insolvent.” Pet. 25

(citing Reading, 391 U.S. at 477). However, it can hardly

be said that “fairness” in one set of cireumstances

constitutes “fairness” under an entirely disparate set. of

circumstances.

22

Petitioner appears to argue, for it is not expressly

stated, that were the post-confirmation claims of

Petitioner not accorded administrative priority, the

“decisive, statutory objective” which the Court in Reading

sought to achieve would be undermined. In that event, we

are informed, Petitioner “caught in a dilemma not of its

own making” will be placed at a disadvantage imposed

by VP Debtors attempting to escape its own financial

dilemma. Pet. 25-26 (citing Reading, 391 U.S. at 477, 483).

This is patently not the case. In fact, Petitioner made its

own bed and now seeks not to he in it.

The assertions of Petitioner to the contrary, from

the perspective of “fairness to all persons having claims

against an insolvent” which the Court in Reading sought

to assuage, this is not an attempt by VP Debtors to escape

from its own financial dilemma and to unfairly place the

burden of its losses upon the shoulders of National Union.

Reading, 391 F.2d at 477. The shortfall of Petitioner for

any losses it may suffer are attributable solely to its own

miscalculated actuarial assumptions, together with its

subsequent ineptitude in defense of its own interests.

This, notwithstanding its contractual ability to adjust that

collateral required to be posted by VP Buildings under

the Payment Agreement and to affirmatively protect its

own interests in the bankruptcy process.

By this Petition, National Union now seeks to

unburden itself of its own miscalculation by seeking

administrative expense priority for such shortfall.

Providing Petitioner administrative expense priority for

post-confirmation losses would ultimately reduce those

VP Debtors’ assets otherwise available for distribution

to its unsecured creditors. In such event, the principle

23

of “fairness” espoused by the Reading Court would be

clearly compromised and allow Petitioner to “escape [its]

dilemma at the risk of imposing it on others .. . .” /d. at

482-83.

Petitioner views its claim for unpaid Deductible Loss

Reimbursements as the relevant “actual” and “necessary”

costs that should be eligible for administrative expense

priority under § 503(b) of the Code. Its premise is that

applicable state laws require a debtor to maintain workers’

compensation insurance in order to operate in bankruptcy

as a debtor-in-possession. Petitioner states, “when a

trustee or debtor in possession operates a bankruptcy

estate, compliance with state law should be considered an

administrative expense.” Pet.31 (citing N.P. Mining, 963

F.2d at 1458) (emphasis added).

VP Debtors agrees that state laws generally require

that a debtor maintain workers’ compensation insurance in

order to operate in bankruptcy as a debtor-in-possession.

However, the Reading Court, as reflected in the cases the

Court cites for such proposition, was clearly referring

to claims arising post-petition during the time that the

debtor is operating a business as debtor-in-possession,

not post-confirmation when a debtor is, for all intents

and purposes, non-operational and moribund. Any

distributions to which creditors are entitled are resolved

by confirmation and those expenses necessary to produce

such distribution have been incurred pre-confirmation;

expenses incurred post-confirmation cannot, by definition,

be for the benefit of a debtor’s estate. See, e.g. HNRC,

371 B.R. at 231-23 (citing cases for the proposition that

“expenses arising post-confirmation fail to satisfy the

requirements for administrative priority under § 503 for

24

the simple, yet inescapable reality that there is no estate

to preserve or benefit.” Jd. at 231).

VP Debtors acknowledges the Reading Court

interpreted the cost of insurance against claims arising

during a bankruptcy arrangement to be “an administrative

expense potentially payable in full.” Reading, 391 U.S.

at 483 (emphasis added). Petitioner quoted the opinion of

the Reading decision in its Brief:

The Court reasoned, “[ijt is of course obvious

that proper insurance premiums must be given

priority, else insurance could not be obtained;

and if a receiver or debtor in possession is to

be encouraged to obtain insurance in adequate

amounts, the claims against which insurance

is obtained should be potentially payable in

full.”

Pet. 26 (emphasis added).

The limited reference by the Reading Court to

“premiums,” as in most of the cases cited by Petitioner

in the context of the “cost” or “expense” of insurance,

reflect the customary terms of an insurance policy, not

the financial payment arrangements presented by the

Payment Agreement. Reference by the Reading Court to

the ability of a debtor to obtain insurance which “should be

potentially payable in full” is perfectly apt in the instant

circumstances. The Deductible Loss Reimbursements

for which provision is made in the Payment Agreement

are, in fact, “potentially payable in full.” That is the

purpose of the contractual requirement for the payment

of “premiums” thereunder, as well as the requirements

25

for additional cash deposits or the adjustment of required

collateral in the event, among other things, of a change in

the debtor’s financial position.

Lastly, Petitioner claims that VP Debtors would keep

the benefit, but avoid the burden, of the insurance that

Petitioner supplied; that Petitioner will be “obligated

to pay benefits to employees injured in 2001, but with

no way to obtain the very reimbursement from the VP

Debtors that the VP Debtors agreed to pay.” Pet. 31.

This is a retrospective view, analogous to “looking over

one’s shoulder,” resigned to the fact that one can no

longer recover that which was once obtainable if only the

appropriate action had been taken in a timely manner.

Petitioner could have potentially recovered an amount that

would have yielded it the equivalent of “reimbursement

in full,” as it was empowered to do so by the terms of the

Payment Agreement. In fact, Petitioner was empowered

to take any number of actions which could have obviated

the financial strait in which it now alleges it finds itself.

The Payment Agreement is replete with financial

preconditions imposed upon VP Debtors to ensure that

sufficient funds remain accessible or otherwise available

to Petitioner in satisfaction of VP Debtors’ obligations.

VP Debtors is required to pay a Deposit, including a

Claims Payment Deposit, Installments, together with

Additional Payments, in amounts and by the dates set

forth in Schedules appended to the Payment Agreement.

Pet. Dist. App. A46-47. VP Debtors is further required

to deliver Collateral acceptable in form and amount to

Petitioner to secure VP Debtors’ obligations under the

Payment Agreement. Jd. at A47-48.

26

Pursuant to the terms of the Payment Agreement, VP

Debtors grants to Petitioner a continuing first-priority

security interest and right of offset with respect to all

premiums, surcharges, dividends, cash, accounts, or

funds that are payable to VP Debtors and that currently

or in the future come into the possession of VP Debtors

in connection with its obligation under the Payment

Agreement. Jd. at A177. Any letters of credit that serve

as collateral must be clean, unconditional, irrevocable and

evergreen. ld.

The collateral supplied by VP Debtors to Petitioner to

ensure the obligations of VP Debtors under the Payment

Agreement is subject to annual review by Petitioner, and

such further review and revision as Petitioner “deems

reasonably necessary,” including at any time upon the

occurrence of any one of numerous events, e.g.:

the failure or violation [by VP Debtors] of

any financial covenants or tests, or minimum

financial rating (if any) specified in the Schedule,

or

any material! adverse change in the financial

condition of [VP Debtors], [its] subsidiaries

or affiliates taken or in combination, or any

other entity on which [Petitioner] may rely for

security or guarantee.

Id.

In other words, Petitioner retained numerous means

at its disposal to “obtain the very reimbursement from the

27

VP Debtors that the VP Debtors agreed to pay.” If any

party bore the burden of loss, the terms of the Payment

Agreement laid that burden squarely upon the VP

Debtors. The loss suffered by Petitioner had nothing to do

with the actions of the VP Debtors. The loss sustained by

Petitioner was due singularly to its failure to take sufficient

steps to protect itself from the inevitable termination of

VP Debtors’ estate. Had Petitioner demanded additional

collateral or ensured that the Plan provided for recovery of

monies post-confirmation in reimbursement for payments

it would have to make in the future, Petitioner would not

have suffered the shortfall it now alleges.

C. The Decision Below Does Not Involve a Questions

of Exceptional Importance

The decision below does not involve a question of

exceptional importance. First, the decision involves a

very narrow question of law. Second, this alleged “vitally

important question of bankruptcy law” has only rarely been

the topic of litigation, strongly suggesting that Petitioner's

concerns about “gravely negative consequences for chapter

11 reorganizations” are overblown, to say the least. Pet.

5, 32. Finally, to the extent courts have entertained the

arguments advanced by Petitioner, each and every court

has rejected them. The only sympathetic judicial reaction

such views have received is that expressed in a Sixth

Circuit concurrence by Judge Cook, joined by Judge

White, who misconstrued the issues.

The narrow issue before this Court is whether

Petitioner may force VP Debtors to immediately pay, as

an administrative expense, estimated future Deductibles

that Petitioner failed to pay as of the termination of VP

28

Debtors’ bankruptcy estate and, in fact, may never pay,

notwithstanding that the terms of the Policies and the

Payment Agreement make VP Debtors’ reimbursement

obligation contingent on Petitioner’s prior payment

obligation. As recognized by the District Court in HNRC,

the only case on record addressing the same “very narrow

issue,” the question is “whether [ ] prospective deductible

obligations should receive administrative expense

treatment.” HNRC, 371 B.R. at 223.

Nevertheless, Petitioner has sought to couch the

legal principle at issue as one with far-reaching legal

implications. In facet, the legal principle at issue may

involve no greater consequence than the interpretation

to be given the terms of a relatively uncomplicated

Payment Agreement between the contracting parties.

Post-confirmation costs and expenses for which Petitioner

seeks administrative expense priority are basically

Deductible Loss Reimbursements which, as defined

under the terms of the Payment Agreement, consist of

the portion of any claims that Petitioner pays and which

VP Debtors is obligated to reimburse. This includes

any amount that Petitioner has advanced on behalf

of VP Debtors for self-insured Deductibles under the

Policies listed on the Schedule appended to the Payment

Agreement. This is a simple, forthright, contractual

obligation that “reimbursement” by VP Debtors follows

“payment” by Petitioner, not the other way around.

Despite the straightforward terms of the parties’ Payment

Agreement, and Petitioner’s capacity to control the terms

of any future such agreements it enters, Petitioner would

have this Court believe that its immediate intervention is

required to prevent “grave consequences.”

29

For evidence that Petitioner’s fears are overblown,

one need look no further than to the fact that very few

courts have ever been asked to address the issue at bar.

As recently as 2007, the District Court in HNRAC noted in

its “comprehensive and well- reasoned opinion,” HNRC

536 F.3d at 684, that the test for administrative priority

is “facially silent - as is the case law [ ]- as to prospective

expenses arising post-confirmation that stem from a

contractual arrangement entered into by the debtor-in-

possession during bankruptcy.” 371 B.R. 210 (E.D. Ken.,

2007) (emphasis added). The parties and the courts in that

case all agreed it was a matter of first impression. See,

e.g., 1d. at 228. Petitioner has not identified any post-2007

cases involving post-confirmation claims arising from

a pre-confirmation contract other than the decisions in

HNRC and the case at bar, nor is VP Debtors aware of any.

In other words, the federal courts have only very rarely

been asked to address this issue, strongly suggesting that

insurers and debtors have been able to reach mutually

satisfactory arrangements without judicial intervention.

It may be justly inferred that in the multitude of

bankruptcy cases in which, as Petitioner points out,

insurance costs and expenses are a legal prerequisite to

the operation of the business of a debtor-in-possession,

such costs and expenses must have been adequately

addressed through insurance coverages obtained by some

other means.

Yet Petitioner argues (Judges Cook and White having

taken note, in their “concurring” decision in the Sixth

Circuit decision below) that the decision in HNRC will

“spell an end to the availability of extended payment terms

for insurance in the bankruptcy setting,” that ““no insurer

30

will be willing to provide insurance to a bankrupt debtor

on extended payment terms,” and that this will hurt

“cash-strapped debtors seeking to reorganize, because

insisting on full, up-front payment would create an up-

front drain on the debtor’s scarce resources ... .” Pet.

32-33 (in part, quoting Cook, J., concurring). The fact that

the record in the instant case does not reflect one shred of

evidence supporting Petitioner’s position has not deterred

Petitioner from making the same argument in each court

in which this case has been heard. In point of fact, VP

Debtors has obtained anecdotal evidence to the contrary.

The Sixth Circuit decision in HNRC was delivered

on August 13, 2008, and, since that date, numerous

bankruptcies have come and gone, and no other court

has had need to address the issue which Petitioner has

continued to present in the same “calamitous” context.

Debters have continued to receive debtor-in-possession

financing sufficient to “pay in full” their insurance costs and

expenses in order to operate their respective businesses

in accordance with state laws. Many have continued to

post collateral similar to that posted by Petitioner under

the Payment Agreement or have entered alternative

escrow arrangements within the parameters established

by various plans of reorganization or liquidation. See, e.g.,

HNRC, 371 B.R. at 235 (noting that the insurer’s claim

in that case stemmed from a failure of collateral, and

that “there is nothing to suggest that future parties will

not continue to negotiate collateralization of deductible

risks,” and possibly require “even greater collateralization

....). During this time frame, insurers have participated

in bankruptcy proceedings for the purpose of ensuring

that plans of reorganization and liquidation provide

adequate protection for the payment of insurance losses

31

in full. The only “consequence” the decision below is

likely to have is to encourage insurers to be more prudent

in the formation and administration of their payment

agreements with debtors in bankruptcy.

Petitioner’. protests to the contrary notwithstanding,

the few courts that have considered the proposition upon

which the case presented by Petitioner is predicated

have all rejected it. Specifically, the decisions rendered in

HNRC and in the case at bar in two Bankruptcy Courts,

two District Courts, and on no less than three separate

occasions in the Sixth Cireuit Court of Appeals, have

all held that prospective deductible obligations are not

entitled to administrative priority.’ Notwithstanding this

less than outstanding lineage, Petitioner requests that

this Court yet again address the very same issue which,

on a prior occasion, it determined not to address, having

denied a Petition for a Writ of Certiorari on the question

of whether nost-confirmation costs and expenses of an

insurer are entitled to administrative expense priority

under § 503(b) of the Code. Zurich Am. Ins. Co. v.

Lexington Coal Co., 129 S.Ct. 2866 (2009).

Having failed to persuade the courts below that other

cases serve aS adequate precedent for the proposition

that post-confirmation costs and expenses of an insurer

are eligible for administrative expense priority under

the Code, Petitioner now chooses to “hang its hat” on the

somewhat tenuous arguments presented by Judge Cook

7. Inre HNRC Dissolution Co., 343 B.R. 839 (Bankr. E.D.Ky.

2006); Zurich Am. Ins. Co. v. Lexington Coal Co. (In re HNRC

Dissolution Co.), 371 B.R. 210 (E.D.Ky. 2007), aff'd, 536 F.3d 683

(6th Cir. 2008); Pet. la-49a.

32

who, in a “concurring” opinion in the Sixth Circuit decision

below, considered herself bound by the prior Sixth Circuit

decision in HNRC, but, nevertheless, recommended that

such decision be reviewed (and, inferentially, overturned),

a recommendation thereafter rejected by the sitting

judges of the Sixth Circuit. Pet. App. 13a-18a.

Judge Cook unfortunately misconstrued the issues

at hand in a decision that became entangled in matters

related to the timing of “billing,” notwithstanding that

“billing” seemed not at all an issue that the courts below

felt compelled to address. Judge Cook stated, at various

points in her “concurring” opinion, for example, that:

...lother courts of appeals’] focus not on when

a creditor bills the debtor for its services, but

on either: 1) when the debtor obligates itself to

pay or 2) when the service is rendered.

Pet. App. 15a. (emphasis added);

Petitioner adopts this analysis:

The decision below, left standing, will have

gravely negative consequences for chapter 11

reorganizations. It creates a loophole allowing

a debtor in bankruptcy to avoid paying for

necessary insurance purchased during the

course of its bankruptcy proceeding by the

simple expedient of confirming its plan before a

creditor submits its bill or otherwise liquidates

its clair.

Pet. 32 (emphasis added).

33

There can be no question in the instant case that

VP Debtors manipulated either its filing in bankruptcy

(the insurance arrangements between Petitioner and

VP Debtors were renewed and the Policies issued after

VP Debtors filed in bankruptcy, see, e.g., Pet. 7) or

the effectuation of Plan confirmation before Petitioner

submitted its bill as Petitioner suggests. As reflected

in the discussion of the billing requirements under

the Payment Agreement in VP Debtors’ Statement at

the beginning of this Brief, “billing” by Petitioner was

undertaken on a monthly basis and payment thereof by

VP Debtors was due within a fixed time frame thereafter.

As to liquidation of Petitioner’s claims, as in the case

of any insurer, adjustment and liquidation of claims

is invariably under the control of the insurer, rather

than the insured. It is truly implausible for anyone at

all familiar with insurance company procedures, not to

mention the bankruptcy process, to argue that a debtor

may time confirmation of its reorganization plan around

the anticipated billing of insurance. Interestingly, all this

concern has little, if any, significance for the issues at hand.

What is of significance is not when bills are rendered, it

is when claims are paid. Under the terms of the Payment

Agreement, reimbursement follows payment, not the other

way around.

Petitioner is mistaken in its leap of logic that this is a

matter of exceptional importance which this Court once

again needs to address. No Circuit Court, other than

the Sixth Circuit Court of Appeals, has expressed the

slightest interest in the issue presented since the Supreme

Court last denied certiorari in HNRC.

Certiorari is unwarranted.

34

CONCLUSION

For the foregoing reasons, the petition for a writ of

certiorari should be denied.

Respectfully submitted,

FRANKLIN CIACCIO

Counsel of Record

KAREN MEARA

CARTER LEDYARD & MiLBurRN LLP

2 Wall Street

New York, NY 10005

(212) 238-8864

ciaccio@clm.com

Counsel for Respondent

Dated: February 2, 2011