Appendix — American Steamship Owners Mutual Protection & Indemnity Ass'n v. Asbestosis, 129 S. Ct. 1983 (2009) (No. 08-719)

August Term 2007

(Argued: October 29, 2007

Decided: June 19, 2008)

Docket No. 05-5925-bk

IN RE: PRUDENTIAL LINES INC.,

Debtor.

ASBESTOSIS CLAIMANTS,

Claimants-Appellants,

—_—vV.—

AMERICAN STEAMSHIP OWNERS MUTUAL

PROTECTION AND INDEMNITY ASSOCIATION, INC.,

Appellee.

Before:

MINER, LEVAL, POOLER,

Circuit Judges.

2a

Appeal by holders of claims against the

bankruptcy estate of a shipping line from the

affirmance by the United States District Court

for the Southern District of New York (Buchwald,

J.), In re Prudential Lines, No. 05 Civ. 2810,

2005 U.S. Dist. LEXIS 20657 (S.D.N.Y. Sept. 21,

2005), of the denial by the United States

Bankruptcy Court for the Southern District of

New York (Gonzalez, J.), In re Prudential Lines,

No. 86-B-11773 (AJG) (Bankr. S.D.N.Y. Jan. 19,

2005), of a motion by the trustee and the

claimants for approval of aspects of a proposed

structure to pay claims and receive insurer’s

indemnity thereon, as against the insurer’s con-

tention that the proposed structure violates the

pay-first requirement of the indemnity policies.

Reversed and remanded.

SANFORD F. YOUNG, Law offices of

Sanford F. Young, New York, New

York (Alan Kellman, The Maritime

Asbestosis Legal Clinic, a Division

of the Jacques Admiralty Law

Firm, P.C., on the brief), for Appel-

lants.

LAWRENCE J. BOWLES, Nourse & Bowles,

LLP, New York, New York, for

Appeliee.

3a

LEVAL, Circuit Judge:

This is an appeal by numerous individual cred-

itors (the “Claimants”) of Prudential Lines, Inc.

(“Prudential”) from a ruling of the United States

District Court for the Southern District of New

York (Buchwald, J.), which affirmed the United

States Bankruptcy Court for the Southern Dis-

trict of New York (Gonzalez, J.) in denying a

motion jointly made by Claimants and Pruden-

tial’s Trustee in bankruptcy (the “Trustee”)

against Prudential’s liability insurer, the Amer-

ican Steamship Owners Mutual Protection and

Indemnity Association (the “Insurer”). The

motion sought two orders enabling the Trustee to

undertake a proposed structure for the use of

insurance indemnities to pay the claims of the

Claimants (the “Proposed Payment Structure”).

The motion primarily asked the bankruptcy court

(1) to reject the objections of the Insurer to the

Proposed Payment Structure and (2) to divect

that setoffs to which the Insurer was entitled by

virtue of unpaid premiums on four years of cov-

erage be prorated among the claims.

The Proposed Payment Structure was to

involve a series of transactions whereby the

Trustee would make a payment of a Claimant’s

claim and then submit the payment to the

Insurer for indemnification. The Trustee would

use the proceeds of the indemnity payment to pay

further ciaims, then seek further indemnifica-

tion, and repeat the process until all claims were

paid. The Insurer, which is the appellee in this

proceeding, successfully opposed Claimants’

motion in the bankruptcy court and on appeal to

4a

the district court. At issue in the two rulings

sought was whether the Proposed Payment

Structure violates (i) the terms of Prudential’s

indemnity policy with the Insurer; (11) the

Bankruptcy Plan, which was approved in 1990; or

(i111) the terms oi the Insurer’s right of setoff

relating to unpaid premiums (the “Unpaid Pre-

miums”) for certain calendar years of Pruden-

tial’s coverage by the Insurer. We find that the

reasons for which the bankruptcy and district

courts rejected the Proposed Payment Structure

are not valid. Accordingly, we reverse and remand.

BACKGROUND!

Prudential, a shipping line, went bankrupt in

1986. The Claimants in this proceeding are many

thousands of its former employees, perhaps as

many as 10,000, who suffered illness or injury in

the course of their employment, particularly

through exposure to asbestos. The total of the

Claimants’ valid claims might amount to tens of

millions of dollars.

For forty-one years (almost entirely continu-

ous), Prudential was covered by liability insur-

1 This case has a long history in the courts of this cir-

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

S.D.N.Y. 1992) (“Prudential I’); In re Prudential Lines, Inc..,

170 B.R. 222 (S.D.N.Y. 1994) (‘Prudential IT’); In re Pru-

dential Lines, Inc., 202 B.R. 13 (Bankr. S.D.N.Y. 1996)

(“Prudential IIT’); In re Prudential Lines Inc., 158 F.3d 65

(2d Cir. 1998) (“Prudential IV”). We refer to the district

court decision in this case as “Prudential V.” In re Pruden-

tial Lines, No. 05 Civ. 2810, 2005 U.S. Dist. LEXIS 20657

(S.D.N.Y. Sept. 21, 2005).

5a

ance issued by the Insurer. See Prudential II, 170

B.R. at 226. The policies, each covering one year,

were structured as indemnities, meaning that

liability claims against Prudential could not be

submitted directly to the Insurer, but were

required to be paid first by Prudential, which

may then submit to the Insurer for reimburse-

ment (minus a deductible). Prudential IV, 158

F.3d at 68.

Upon its bankruptcy, Prudential did not have

sufficient funds to pay the aggregate valid claims

of the Claimants. Prudential IV, 158 F.3d at 68-

69. Under the bankruptcy plan approved by the

bankruptcy court in 1990 (the “Plan”), “to the

extent necessary to obtain payment by... . [an]

insurer,” the Trustee was “authorized to enter

into arrangements’ whereby the Trustee would

pay claims “in cash” and would then be repaid

the amount of the deductible by the Claimant in

return for a claim against the Trust for that

amount. Bankruptcy Plan § 4.05.07(a)(i); Id. The

Trustee was authorized “alternatively [to] enter

into any lawful arrangement designed to achieve

the same purpose.” Bankruptcy Plan § 4.05.07(a)(i).

The Plan also contained a provision, which

authorized that any setoff owed by Prudential to

an insurer be shared ratably among the

Claimants and subtracted from each Claimant’s

individual recovery in much the same way as the

deductibles (that is, each Claimant, out of the

funds received in payment of his claims, would

return to the Trustee his ratable share of the

setoff and receive in exchange a claim for that

amount). Bankruptcy Plan § 4.05.07(a)(iv). In

order to have funds with which to pay claims,

6a

thus satisfying the requirement of the policies

that Prudentia! “pay first,” the Plan directed the

Trustee (i) to set aside $300,000 to be used by the

Trustee to make payments to some of the

Claimants; (ii) to submit to the Insurer for reim-

bursement; (iii) to use that reimbursement to pay

additional Claimants; and (iv) to again submit

for further reimbursement from the Insurer and

to repeat the process so that “the $300,000

[would be] available as needed on a sustaining

basis for use in funding the payment of [insur-

ance claims].” Bankruptcy Plan § 4.05.07(a)(i).

Because the aggregate claims were vastly larger

than the $300,000 set aside for this purpose, the

Plan included a provision that funds were not to

be paid out to Claimants unless “adequate assur-

ances and documentation” were received by the

Trustee that it would be reimbursed for the mon-

eys so paid out in claims. 7d. If there were money

remaining after payment of all claims, the

Trustee was to petition the bankruptcy court to

use these funds to pay on a pro-rata basis those

claims issued to Claimants in exchange for their

return of the portions of the claim payments

attributable to the deductibles and any setoff.

§ 4.05.07(a)(v).

It was of course foreseen that this cumbersome

procedure of first paying claims in small

amounts, then seeking reimbursement from the

Insurer, and then using the reimbursed funds to

pay additional claims—and repeatizg the process

hundreds, er even thousands, of times—would

take a very long time and require very consider-

able administrative effort and expense. For that

reason, the Trustee in 1993 sought to put in

ej

ia

place a different, more efficient structure,

referred to as the “Recycling Plan,” to accelerate

the process. In brief, under the Recycling Plan,

the Trustee would pay each claim and simulta-

neously receive back from the Claimants a loan

of the full amount of the payment. The Trustee

would then submit the payments to the Insurer

for indemnification and use the indemnity pay-

ments to repay the Claimants’s loans. Prudential

IV, 158 F.3d at 69-70. Under this Recycling Plan,

no money actually changed hands when the

Trustee paid on claims and received back a loan

of the proceeds.

This court sustained the Insurer’s objections to

the Recycling Plan because the Claimants

“received nothing of value from Prudential, and

Prudential sustained no true loss” in making the

payments; we found that the Recycling Plan

amounted to a “sham” with respect to Pruden-

tial’s obligation to pay first, which did not “trig-

ger[{] an indemnification obligation under New

York law.” Id. at 74.

Rebuffed by this court’s rejection of the more

speedy and efficient Recycling Plan, the Trustee

then returned to the dictates of the 1990

Bankruptcy Plan and prepared what we refer to

as the Proposed Payment Structure. The Pro-

posed Payment Structure has the following char-

acteristics: (1) Within the limits of the $300,000

retention, the Trustee pays claims of Claimants.

(Presumably, the Trustee would not pay until it

received the Insurer’s approval (or a court order)

as to the validity and amount of the particular

claim and the propriety of the payments struc-

ture.) (2) These Claimants return to the Trustee

8a

(in exchange for a deferred claim) the portion of

the payment attributable to the deductible

amount, plus their pro-rata share of any setoff.

(3) The Trustee seeks and receives indemnifica-

tion from the Insurer in the amount of the claim

payment, minus the deductible and _ the

Claimant’s ratable share of the setoff. (4) The

Trustee uses the reimbursed funds to make fur-

ther payments to Claimants. (5) The process

repeats itself until all Claimants are paid. (6)

After this process is complete, any remaining

cash will be distributed to the Claimants pro-

rata on their limited claims for recovery of the

amounts attributable to the deductible and

setoff.

The setoff envisioned by this Structure results

from the following. When Prudential went into

bankruptcy, it owed the Insurer approximately

$1.2 million in unpaid premiums and assess-

ments on four years (out of forty-one) of the policies

(the “Unpaid Premiums’). In 1992, in Prudential I,

the Insurer sought, and was granted by the

bankruptcy court, the opportunity to setoff the

Unpaid Premiums attributable to the four years

of delinquency against indemnity payments made

with respect to coverage under the fully paid

years (as well as the unpaid years). See Pruden-

tial I, 148 B.R. at 752.

In order to proceed with payments to the

Claimants under the Proposed Payment Struc-

ture, the Claimants and the Trustee filed the

motion here under review in the bankruptcy

court seeking the two rulings. Because the

Insurer had withheld any assurance that such

payments of claims would be indemnified and

9a

had argued that such a structure would violate

the requirement of the indemnity policies that

claims be paid first by Prudential before any obli-

gation would fall on the Insurer to make its

indemnity payment, the motion asked the court

to rule on the Insurer’s obligation to reimburse

the Trustee for claim payments made under this

structure. See Prudential I, 148 B.R. at 749

(“Should the [Insurer] refuse to provide indem-

nity in breach of its obligations under the poli-

cies, we [, the bankruptcy court,] have no doubt

that we possess the necessary power to provide

adequate assurance of reimbursement.”). In addi-

tion, the motion asked the court to approve the

ratable allocation of the Insurer’s $1.2 million

setoff among all of the indemnity payments to be

made on account of the Claimants’ claims. That

is, as to each indemnity payment relating to a

particular Claimant, the Insurer would deduct

that proportion of the $1.2 million setoff equal to

the proportion of that Claimant’s approved claim

to the aggregate approved claims. Thus an aver-

age of around $120 would be setoff against the

reimbursement paid on account of the claims of

approximately 10,000 claimants, and the Insurer

would recover its $1.2 million setoff piece-by-

piece as it reimbursed the Trustee for the claims

paid.

The bankruptcy court denied both parts of the

proposed motion, and the district court affirmed.

The courts gave the following closely related rea-

sons. The courts ruled that the Proposed Pay-

ment Structure was like the sham disallowed in

Prudential IV as not conforming to the “pay-first”

requirement of the indemnity policies. The pro-

10a

vision requiring the Insurer to pay the indemni-

ties before satisfaction of its setoff was found to

be tantamount to giving the Claimants a “direct

claim” against the Insurer, which is prohibited

by New York law, as explained in Prudential IV.

Finally, the courts viewed the proration of the

setoff as inconsistent with both the “pay first”

provisions of the insurance policies and the

Bankruptcy Plan. We respectfully disagree.

DISCUSSION

A. The Pay-First Provisions of the Indemnity

Policies.

Because of lack of sufficient funds, the’

bankrupt estate was not capable of paying the

aggregate claims and then submitting them to

the Insurer for indemnification. To circumvent

that problem, the Trustee and the Claimants

developed the seriatim approach set forth in the

Bankruptcy Plan and now in the Proposed Pay-

ment Structure. The Insurer contends essen-

tially, in support of the rulings below, that the

Structure does not respect the Insurer’s right to

withhold indemnity payments until the claim has

first been paid. We disagree. The Proposed Pay-

ment Structure is elaborate and cumbersome pre-

cisely because it has been designed to conform to

the Insurer’s right to pay on account of a claim

only after the insured has paid the claim.

If in another context an insured were simply to

take up one claim at a time. paying one claim,

then submitting that payment to the Insurer for

4

lla

indemnification, then paying a second claim and

subsequently submitting that payment for

indemnification, and continuing in that fashion,

there would be no conceivable argument that it

was violating the pay-first requirement of the

indemnity policy. The fact that under the Pro-

posed Payment Structure this sequence has been

planned in advance, rather than occurring hap-

hazardly, does not change the fact that the

Trustee does not submit a claim to the Insurer

until after having made payment thereon to the

Claimant.’

The main thrust of the Insurer’s argument, and

of the rulings of the courts below, is that the Pro-

posed Payment Structure, like the previously

rejected Recycling Plan, is a sham, which should

be rejected—for the same reasons as given in

Prudential IV. But that Plan was significantly

different from the present Proposed Payment

Structure.

2 ‘To the extent it is arguable that the Insurer's right

to have the claim paid first is not respected as to the portion

of his claim that each Claimant returns to the Trustee

(against a further claim), which is attributable to the policy

deductible, the Insurer has abandoned the contention

because this court rejected the same contention in Liman v.

American Steamship Owners Mutual Protection and Indem-

nity Ass'n, 299 F. Supp. 106 (S.D.N.Y. 1969), aff'd, 417 F.2d

627 (2d Cir. 1969) (per curiam), cert. denied, 397 U.S. 936

(1970), and, in Prudential JJ, 170 B.R. at 241 n.13, the dis-

trict court, citing Liman, rejected the Insurer's argument.

On the other hand, the Insurer does contend that the claims

will not have been paid prior to the demand for indemnifi-

cation to the extent that the Trustee’s payment to Claimants

will withhold that Claimant's pro-rata portion of the

Insurer's $1.2 million setoff. This contention is discussed

below.

12a

As discussed briefly above, the Recycling Plan,

which we rejected in Prudential IV, worked as

follows. Instead of paying individual claims and

waiting for repayment from the Insurer, as in the

Proposed Payment Structure, the heart of the

1998 Recycling Plan was that, simultaneous with

the receipt of payment of a claim, each claimant

would lend the rfoney received back to the

Trustee. Prudential IV, 158 F.3d at 69-70. No

cash would change hands. The Trustee would

simply issue a non-recourse note to the Claimant.

Using that procedure, the Trustee rapidly “paid”

claims exceeding $60 million, without actually

disbursing any cash, and then submitted the

aggregate amount of those assertedly paid claims

to the Insurer for reimbursement. We reasoned

in rejecting the proposal that the “[t]he only

detriment assumed by Prudential vis-a-vis each

Claimant is a wholly non-recourse debt, which in

financial terms is—and is intended to be—noth-

ing... [T]he Asbestosis Claimants received

nothing of value from Prudential, and Prudential

sustained no true loss.” Id. at 73-74. The trans-

actions were found to be a “sham” designed to

provide an appearance of having paid first, so as

to appear to comply with the cumbersome pay-

first requirement of the indemnity policies with-

out actually doing so. /d. at 74.

In concluding that our ruling in Prudential IV

bars the Proposed Payment Structure, the

bankruptcy court and the district court read far

more into that ruling than is there. The Recy-

cling Plan represented an effort to avoid the

time-consuming inefficiencies that would result

from the cumbersome process of first paying

l3a

small numbers of claims, and having to wait

before payment of further claims to receive reim-

bursement on the previously paid claims. The

device embodied in the Recycling Plan essentially

created fictional prior payments to escape the

obligation to make prior payment. Our ruling

rejecting that fiction, however, in no way implied

that the Trustee’s shortage of funds, which would

effectively prevent the Trustee from paying all

the claims without receipt of reimbursement,

would also prevent the Trustee from seeking

indemnification after making a payment and

using the funds received pursuant to that indem-

nification to pay further claims. The Proposed

Payment Structure is not subject to the criti-

cisms of Prudential IV. It is not a sham. In the

case of each paid claim, the Claimant will have

received, and the Trustee will have paid, actual

cash. Each payment under the Proposed Payment

Structure is made prior to seeking indemnifica-

tion for that payment. In the event the Insurer

were to fail, by reason of insolvency or for what-

ever reason, to pay the indemnity provided by the

insurance policies, the Trustee would have no

way to recover the cash paid out to the Claimant.

We reject the contention, on which the

bankruptcy court and the district court relied,

that our ruling in Prudential IV invalidating the

Recycling Plan similarly calls for the invalidation

of the Proposed Payment Structure.°

3 In Prudential IV, we also looked to New York law,

which governs these policies, and for very similar reasons

found that the Recycling Plan was barred because it

amounted to a forbidden “direct action” against the Insurer.

Prudential IV, 158 F.3d at 74-76. In considering New York

14a

B. The Insurer’s Right to Setoff Prudential’s

$1.2 Million in Unpaid Premiums.

The Insurer asserts that the handling under

the Proposed Payment Structure of its right of

setoff for the liability of Prudential for $1.2 mil-

lion in unpaid premiums for four years of policies

violates the terms of the indemnity policies and

the Bankruptcy Plan. The lower courts so found.

We disagree for several different reasons.

It is important to understand at the outset how

this right of setoff accrued to the Insurer as the

result of Prudential’s unpaid premiums on four

policies. Initially there was no right of setoff.

Prudential had failed to pay the required pre-

miums for policies covering four (of the forty-one)

years of coverage. For that reason, it appears the

Insurer could have rejected claims submitted

under the policies for the four unpaid years. Pru-

dential’s failure to pay its premiums, which made

the four unpaid policies voidable, however, had

law, we distinguished one leading New York case from the

Recycling Plan at issue primarily on the grounds that,

though it appears that the New York courts had blessed a

similar arrangement, we noted that “the non-party lender in

[the New York case] performed a real financial service for a

real financial reward, whereas the recycling of funds by the

[Prudential] Trustee here is an illusion.” Jd. at 76 (dis-

cussing Feldman v. New York City Health & Hosps. Corp.,

107 Misc.2d 145, 437 (N.Y. Sup. Ct. 1981), rev'd, 445

N.Y.S.2d 555 (N.Y. App. Div. 2d Dep’t 1981), rev'd, 56

N.Y.2d 1011 (N.Y. 1982)). For the same reason that the Pro-

posed Payment Structure satisfies the policies as a matter

of contract interpretation because the Trustee will be doing

exactly what the contract anticipated, so too New York law

poses no obstacle because the Trustee will be making real

payments.

15a

no effect on the other policies, which were fully

paid.

In 1992, the Insurer, presumably fearing that

the Trustee would simply present claims arising

under the thirty-seven years of fully paid poli-

cies, asked the bankruptcy court to rule that “it

is entitled to offset the 1979, 1983, 1984 and

1985 past-due premiums and assessments against

the benefits to be paid the Asbestosis Claimants

under fully paid policies for different insurance

years.” Prudential J, 148 B.R. at 750. The bank-

ruptcy court noted that it would allow the

Insurer to setoff the unpaid premiums against all

policies, including the fully paid ones, but that

the Insurer could not both use the unpaid pre-

miums to invalidate the policies for the unpaid

years and at the same time apply the debt for

unpaid premiums by setoff to indemnity pay-

ments made on fully paid policies. Thus, the

bankruptcy court indicated that, in granting the

Insurer’s motion to be allowed to setoff the

unpaid premiums against indemnity payments on

fully paid policies, it would also bar the Insurer

from relying on the nonpayment of premium asa

basis for refusing to indemnify under the unpaid

policies. Jd. at 752 (Insurer “could no longer use

nonpayment as a reason not to indemnify under

the relevant policies if coverage were trig-

gered.”).4

’ This opinion assumes because the bankruptcy court

so indicated in Prudential J that, if the Insurer were to move

for leave to set off the $1.2 million in Unpaid Premiums

against all claims, relinquishing any claim of right to reject

claims made under the unpaid years, the bankruptcy court

would grant the motion. In making this assumption, how-

16a

The Proposed Payment Structure, as noted

above, provides that when a Claimant receives

payment in cash on account of his claim, he will

return to the Trustee his pro-rata share (ratably

allocated among all the claims of the Claimants)

of the $1.2 million setoff, in return for a limited

claim to recover the Claimant’s ratable share of

any funds that may remain in the Trustee’s pos-

session after paying all the claims and receiving

the Insurer’s indemnification for those payments.

Based on the estimate of 10,000 Claimants, the

average setoff relating to each claim would be

approximately $120.

The Insurer’s principal argument concerning

the setoff is that the Insurer is entitled to setoff

the entire $1.2 million, dollar for dollar, against

all claims submitted to it before being obligated

to make any indemnity payments in cash. It adds

that because the setoff right of $1.2 million

exceeds the $300,000 retained by the Trustee,

that the Trustee can never be in a position to

make prior payments to Claimants that the

Insurer would be compelled under the policies to

indemnify in cash. We reject both arguments.

The Insurer’s argument misinterprets and dis-

torts the right accorded to it by the bankruptcy

court. The Insurer essentially sought two alter-

native forms of relief. It argued first that the

Unpaid Premiums should absolutely protect it

from any obligation to make payments under any

of the policies. Prudential I, 148 B.R. at 752-53.

In the event that relief were denied, it sought, as

ever, we in no way imply that the bankruptcy court is under

a direction to do so.

l7a

a fallback position, to be accorded the right to

setoff the Unpeid Premiums against payments on

fully paid years, @s well as unpaid years. Id. at

750. The bankruptcy court denied the first

request, which would have barred all indemnity

payments, but granted the second, id. at 753,

without specifying the manner in which the

setoff would be taken. (The already approved

Bankruptcy Plan, id. at 735, provided that the

setoff of debts owed by Prudential to an insurer

be ratably shared among the Claimants.) The

Insurer asks us to interpret the bankruptcy

court’s decision granting a broader opportunity to

setoff in a manner which would be unreasonable

for three different reasons. First, it asks that we

construe a-decision, which on its face simply

granted it a broad opportunity for setoff, as effec-

tively absolving it from any obligation to make

payments under the policies. Second, it asks us

to interpret the decision as granting exactly the

relief the bankruptcy court, in the same decision,

refused to grant. Finally, it asks us to interpret

the bankruptcy court’s decision in a manner con-

tradictory to the Bankruptcy Plan, which expressly

envisioned proration of the setoff. We believe this

is not a reasonable interpretation of the bank-

ruptcy court’s silence as to how the setoff would

be allocated. It seems most reasonable to inter-

pret the ambiguous (or incomplete) provision of

the setoff order as intending, consistent with the

Bankruptcy Plan, to allow the setoff of the Unpaid

Premiums against all policy years prorated

among all Claimants, and not to interpret it as

an absolution, parlaying the Insurer’s immunity

as to four unpaid policy years into an immunity

also covering thirty-seven fully paid years.

18a

A further defect in the Insurer’s argument is

its assumption that the excess of the $1.2 million

owed to it over the $300,000 retained by the

Trustee to pay claims makes clear that the

Trustee cannot comply with the pay-first require-

ment so as to trigger an obligation to indemnify

in cash. This assumes that the terms of the polli-

cies forbid the Trustee from using financing to

pay claims. The assumption is incorrect. Cf. Pru-

dential IV, 158 F.3d at 71 (“At oral argument, the

parties agreed that there are other available

mechanisms (albeit less efficient) for triggering

American Club’s indemnification obligations.”);

id. at 76 (distinguishing New York case autho-

rizing third-party lender as a case with a “real

financial service [provided] for a real financial

reward”); Prudential II, 170 B.R. at 242 n.14 (“As

it presents an entirely different situation, I take

no position on the permissibility of triggering

indemnification by borrowing funds from third

parties other than claimants.”); David Gray Carl-

son, The Bankruptcy Code: Indemnity, Liability,

Insolvency, 25 Cardozo L. Rev. 1951, 1963 (2004)

(arguing that our decision in Prudential IV “vir-

tually invited” the Trustee to look to a third-

party lender). Under the Proposed Payment

Structure, a small portion of the claim payment

is financed by the Claimant. If too large a portion

of the claim payment were financed by the

Claimant, the prior payment to the Claimant

might well be deemed a “sham,” as was found

under the Recycling Plan, but the same is not

true of such financing of a small portion.

A further reason for rejecting the Insurer’s

position lies in the ruling of this court in Liman

19a

vu. American Steamship Owners Mutual Protec-

tion and Indemnity Ass’n, 299 F. Supp. 106

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

1969) (per curiam), cert. denied, 397 U.S. 936

(1970). Liman involved an identical policy issued

by the same Insurer to a different shipping line.

Prudential IV, 158 F.3d at 72. At issue in that

case was a proposed structure for the prior pay-

ment of claims under which each claimant, upon

receipt of payment on his claim, would lend back

to the estate the amount of any deductible under

that policy, so that the funds of the bankrupt

estate would not be gradually diminished by the

repeated receipt of indemnifications which cov-

ered less than the full amount of the payment on

the claim. Liman, 299 F. Supp. at 108-10. In

return for lending back the amount of the

deductible, the claimant would become a “general

creditor” of the estate in the amount of the

deductible. Jd. The Insurer contended, as here,

that this feature was not compatible with the

“pay- first” provisions of the indemnity policies.

The district court in Liman rejected the argu-

ment, id. at 110, and this court affirmed. 417

F.2d 627-28 (2d Cir. 1969) (per curiam). The pay-

first provisions of the indemnity policies did not

forbid using borrowed moneys to pay the claim,

and the trustee was paying the deductible por-

tion of the claim with funds borrowed from the

claimants. Furthermore, the district court observed

that the matter should be of “no concern to the

[Insurer], since it is not required to reimburse

the estate “ for the amount of the deductible in

any event. Liman, 299 F. Supp. at 110.

20a

In accordance with the Liman ruling, in an

unappealed portion of Prudential I, the district

court found in this case that the same method for

financing payment of the deductible portion of

the payment of each Claimant’s claim did not vio-

late the Insurer’s right under its indemnity polli-

cies to have the claim paid first, before triggering

the Insurer’s indemnification obligation. 170 B.R.

at 241 n.13.

The treatment of the small amounts returned

by each Claimant to the Trustee, by reason of the

Insurer’s right of setoff, is structured almost

identically to what we approved in Liman as to

the deductible, and what was approved by the

district court in this case and was not appealed.

We find that the setoff right given to the Insurer

under these circumstances does not violate the

pay-first provision of the policies.°

As noted above, the Insurer also renews a dif-

ferent argument to the effect that Prudential’s

failure to pay the premium on four of its policies

bars Prudential (and its Trustee) from making

claims for indemnity on any policies, including

those which were fully paid. The Insurer argues

that the terms of each year’s policy required that

all policies be fully paid before the Insurer would

have an obligation to pay on any of them.

° Nor is the Insurer correct in arguing that the claim

given by the Trustee to the Claimants in exchange for their

return of proceeds attributable to the setoff is necessarily

“worthless.” If payments are made and indemnities rea-

sonably paid without giving rise to excessive and wasteful

adminis-trative expenses, the Trust should still be in pos-

session of a significant portion of the $300,000 retained at

the conclusion of the process to be used to pay those claims.

Zla

There are two sufficient reasons for rejecting

this contention. First, it was waived by the

Insurer’s failure to appeal a ruling of the bank-

ruptcy court, which rejected the argument. Sec-

ond, the contention is not borne out by the terms

of the policies.

In Prudential I, the bankruptcy court consid-

ered and rejected this argument:

The insurance policies [Insurer] issued cto

[Prudential] were separate and distinct con-

tracts. No policy language conditions indem-

nification on the payment of premiums and

assessments due under different policies.

Each policy contained its own period of cov-

erage, deductible, and policy limit. Trustee is

therefore free to choose among the paid poli-

cies for ultimate indemnification of asbestos

claims according to his determination of

which policies benefit the estate.

Prudential I, 148 B.R. at 753.

This aspect of the bankruptcy court’s decision

was not appealed. See Prudential II, 170 B.R. at

242 (this part of Prudential I not appealed to dis-

trict court). As a result, the Insurer is barred

from now raising the same contention. See, e.g.,

In re Klein Sleep Prods., Inc., 78 F.3d 18, 29 (2d

Cir. 1996) (challenge to decision of bankruptcy

court not raised before the district court consid-

ered waived).

Even if this argument were not barred by the

prior unappealed ruling, the language of the poli-

cies on which the Insurer relies does not support

its contention. The language contained in each

year’s policy was to the following effect: “[S}hould

22a

the Assured. . . become insolvent or bankrupt

. the [Insurer] shall not be liable for any,

claims whatsoever under this policy unless

within sixty (60) days. . . there are paid to the

fInsurer]. . .all premiums due... .” (empha-

sis added). The Insurer contends that the phrase

“all premiums due” must be interpreted to mean

all premiums due on any policy. But the sentence

explicitly refers to “claims under this policy.” The

policy language in question makes no mention of

other policies in effect as between the Insurer

and insured. The most natural reading of this

sentence is to mean that the Insurer shall not be

liable for claims under the policy unless all pre-

miums due under it have been paid in full.

At best the language is ambiguous. Under New

York law, ambiguity is of no help to an insurer

seeking to avoid providing coverage. See, e.g.,

Burriesci v. Paul Revere Life Ins. Co., 679

N.Y.S.2d 778, 779 (N.Y. App. Div. 4 Dep’t 1998);

see also Village of Sylvan Beach, N.Y. v. Travel-

ers Indem. Co., 55 F.3d 114, 115 (2d Cir. 1995).

The Insurer’s final argument is that the

Bankruptcy Plan itself requires that it be paid

its setoff before it must indemnify the Trustee.

We find no merit whatsoever in the argument.

There is indeed a complex, lengthy provision in

the Plan which refers to setoff and recoupment

and which employs the phrase “to the extent” or

“to the extent possible.” The provision in relevant

part is set forth in the margin.® The Insurer con-

6 “To the extent there shall be a determination that

amounts are due and owing from [Prudential] to a Club or

insurer which the Club or insurer may offset or recoup

against amounts due to [Prudential]. . . or any claimant in

23a

tends that this provision means that pro-rata dis-

tribution of the setoff among Claimants is per-

missible only to the extent the funds available to

the Trustee are greater than the total setoff. The

problem with the argument is that the provision

simply does not say what the Insurer says it

says. The argument is frivolous.

We have reviewed the various reasons given by

the bankruptcy court and the district court for

rejection of the Trustee’s motion and find them to

be erroneous. Nor do we find any valid reasons

asserted by the Insurer for rejection of the Pro-

posed Payment Structure.’

CONCLUSION

The judgment of the district court is reversed.

The case 1s remanded for proceedings in accor-

dance with this opinion.

respect of [Allowed Insurance] Claims [beyond the policy’s

deductible]... , and to the extent possible, each holder of

an affected Allowed Insured Claim shall share ratably (with

all other holders of affected Allowed Insured Claims based

on the allowed amount of each such Insured Claim) (a) a

claim against the offset [as represented by a claim against

the Trust]. . . and (b) a claim in respect of any remaining

insurance rights relating to such affected Allowed Insured

Claims and shall receive in distribution therefore, to the

extent recovered, cash from the insurer or Club equal to

such holder’s ratable share.” Bankruptcy Plan § 4.05.07(a)(iv).

‘

We of course make no ruling on the validity or

amount of any particular claim.

24a

UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF NEW YORK

05 Civ. 2810 (NRB)

September 21, 2005, Decided

September 21, 2005, Filed

In Re: PRUDENTIAL LINES, INC.,

Debtor.

For Appellants: Alan Kellman, Maritime

Asbestosis Legal Clinic, a division of The Jaques

Admiralty Law Firm, P.C., Detroit, MI; Dan

Shaked, Shaked & Posner, Esq., New York, NY.

For Appellee: Lawrence J. Bowles, Nourse &

Bowles, LLP, New York, NY.

NAOMI REICE BUCHWALD, UNITED STATES

DISTRICT JUDGE.

MEMORANDUM AND ORDER

The Maritime Asbestosis Legal Clinic (““MALC”),

on behalf of thousands of former merchant

marine employees of Prudential Lines, Inc.

(“PLI”) who have filed asbestos-related bodily

25a

injury proofs of claim (the “Asbestos Claimants”)

in PLI’s Chapter 11 bankruptcy case, appeal from

a ruling of the United States Bankruptcy Court

(Gonzalez, J.) for this District denying the

motion by the Asbestos Claimants and the con-

firmed debtor PLI’s disbursement trustee (the

“Trustee”) seeking a ruling enforcing its inter-

pretation of the set-off provision set forth in Sec-

tion 4.05.07(a)(iv) of the Second Amended Plan of

Reorganization (the “Plan”) and deeming that the

Trustee has received the necessary assurances

and documentation noted under Plan section

4.05.07(a){i) and is authorized to make payments

of Allowed Insurance Claims. In reviewing the

decision of a bankruptcy court, we “accept[] its

factual findings unless clearly erroneous but

review[] its conclusions of law de novo.” DG

Acquisition Corp. (In re DG Acquisition Corp.,

151 F.3d 75, 79 (2d Cir. 1998) (citing In re

McLean Industries, Inc., 30 F.3d 385, 387 (2d

Cir. 1994). For the reasons discussed below, the

Bankruptcy Court’s decision is affirmed.

Because this is the most recent of several opin-

ions issued in this case, we do not reiterate all

the facts and assume familiarity with them. See,

e.g., In re Prudential Lines, Inc, 148 B.R. 730

(Bankr. S.D.N.Y. 19921, aff’d in part, rev’d in

part on other grounds, 170 B.R. 222 (S.D.N.Y.

1994), aff'd, 158 F.3d 65 (2d Cir. 1998). Instead,

we note only certain facts relevant to the motion

before us appealing the decision of the Bank-

ruptcy Court. In 1986 an involuntary petition for

relief seeking to place PLI in a Chapter 11

bankruptcy proceeding was not contested. On

October 4, 1990 PLI’s Plan of Reorganization was

26a

confirmed. The Asbestos Claimants voted to

accept the Plan.

The American Steamship Owners Mutual Pro-

tection and Indemnity Association, Inc. (““Amer-

ican Club”) is a non-profit mutual indemnity

insurance association of shipowners. Each year,

the American Club’s members negotiate fully

assessable insurance policies (the “Policies”),

under which each member is assessed an amount

to cover the costs of all claims against all mem-

bers arising in each separate insurance year of

its membership. PLI, the predecessor of the PLI

Disbursement Trust, was a shipowner member of

the American Club for a number of years. When

PLI declared bankruptcy in 1986, it owed the

American Club $1,278,000 in premiums and

assessments. The American Club filed a proof of

claim which gave rise to its set-off right in that

amount. The Asbestos Claimants are not parties

to the Policies.

In the Plan, the Trust set aside $300,000 for

use in a recycling arrangement. Pursuant to the

recycling arrangement, the Trustee disbursed a

damages payment to a claimant, who then

returned the money to the Trustee as a non-

recourse loan in exchange for a claim against the

estate. The funds were then paid to the next

claimant, and so on, until the Trustee had paid

out $66 million in such claims. See In re Pru-

dential Lines, Inc, 158 F.3d at 68-70. The United

States Bankruptcy Court for the Southern Dis-

trict of New York held that the arrangement was

legitimate, and the district court reversed. Jn re

Prudential Lines, Inc, 170 B.R. at 242. The dis-

trict court concluded that the recycling arrange-

27a

ment did not satisfy the “pay first” provisions of

the payment and indemnification policies, which

“require the insured to first pay a claimant

before the insurers’ [] duty to indemnify the

insured arises,” because the proposed “payments”

did not constitute an actual loss in good faith.

170 B.R. at 239, 242. It distinguished PLI’s recy-

cling arrangement from the arrangement in

Liman v. Am. Steamship Owners Mut. Prot. and

Indem. Assns, 299 F. Super. 106 (S.D.N.Y.), aff'd

417 F.2d 627 (2d Cir. 1969) (per curiam), cert.

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

946 (1970). The Liman court approved of an

arrangement whereby the debtor’s estate paid

the claims for which it would be indemnified out

of the estate’s funds and only “financed” the

deductibles, which it was forbidden to pay

because they would be illegal preferences. Here,

however, the Trust lacked the funds to pay the

claims and sought to finance them in their

entirety, creating enormous paper losses without

any expenditure of assets, and the district court

emphasized this difference from Liman in con-

cluding that there would be no actual loss in good

faith under the recycling arrangement.

The Second Circuit affirmed, noting that it did

not “think that this sham transaction triggered

an indemnification obligation under New York

law.” In re Prudential Lines, Inc, 158 F.3d at 74.

The Second Circuit added that its holding was

“independently supported by the doctrine of New

York law that bars direct actions by claimants

against marine indemnity insurers.” Id. (citing

Ahmed v. Am. Steamship Owners Mut. Prot. &

Indem. Assn, 444 F. Supp. 569, 572 (N.D. Cal.

28a

1978)). Under the New York common law, still

applicable to marine insurance policies, “the

insured’s lack of assets to satisfy claims against

the bankrupt estate typically leaves the insured

unable [to] sustain a loss and pay the claim. This

is simply one consequence of purchasing a

marine policy of indemnity rather than a liability

policy.” Jd. at 75. The Second Circuit therefore

held that it “[would] not permit the Claimants,

who are the only parties in interest,” to evade the

bar against direct actions by claimants against

marine indemnity insurers “via an illusory trans-

action that is of no financial consequence or

interest to Prudential as the supposed insured.”

Id. at 74.

During 2004 the Trustee and Asbestos

Claimants (collectively, the “Movants”) filed a

motion seeking a ruling from the Bankruptcy

Court endorsing their interpretation of the set-off

provision set out in section 4.05.07(a)(iv) of the

Plan. Movants argued that section 4.05.07(a)(iv)

provides that the Trustee can pay holders of

allowed claims, apply the American Club’s set-off

ratably among them, and seek indemnification

from the American Club under the Policies.! The

The set-off provision reads:

Nothing in this Plan shall require Reorganized PLI

or the PLI Disbursement Trust (although the PLi

Disbursement Trust may do so subject to § 4.05.07

(a)(v)) to pay to any Club or insurer any cash or other

consideration in respect of a Claim asserted by such

Club or insurer, other than to provide such claimant,

to the extent its Claim is allowed, with a Claim in

the appropriate class under this Plan. To the extent

there shall be a determination that amounts are due

29a

Movants have not explicitly laid out the mechan-

ics of the payments under their new interpreta-

tion of the Plan, but it appears that Trustee

would (1) pay a claimant up to $300,000 toward

his claim, less a pro-rated share of the American

Club’s set-off, (2) give that claimant a claim

against the Trust for the amount of the claim

withheld as part of the set-off, and then (3) seek

indemnification from the American Club for the

cash amount paid to the claimant. With its assets

thus replenished, the Trustee would then repeat

this process several thousand times until it had

paid off all the Asbestos Claimants’ millions of

dollars in claims, spreading out the $1.2 million

in the American Club’s set-off among them rat-

ably.

The American Club opposed the motion, argu-

ing that it is entitled to apply its $1,278,000 set-

and owing from PLI to a Club or insurer which the

Club or insurer may offset or recoup against amounts

due to PLI, Reorganized PLI, the PLI Disbursement

Trust or any claimant in respect of Excess Claims

(and to the extent such amounts are not otherwise

offset pursuant to § 4.05.07(a)(i) of the Plan or oth-

erwise), and to the extent possible, each holder of an

affected Allowed Insured Claim shall share ratably

with all other holders of affected Allowed Insured

Claims based on the allowed amount of each such

Insured Claim (a) a claim against the offset or

recouped amount and shall receive in distribution

therefor an Allowed Claim in Class 5C and (b) a

claim in respect of any remaining insurance rights

relating to such affected Allowed Insured Claims and

shall receive in distribution therefore, to the extent

recovered, cash from the insurer or Club equal to

such holder’s ratable share.

Plan, 4.05.07(a)(iv).

30a

off against amounts the Trustee pays out. Under

the American Club’s view, the Trust must pay

out an amount exceeding the American Club’s

set-off before the American Club is obligated to

indemnify any claims against PLI.

On January 16, 2005, the Bankruptcy Court

denied the motion, holding that the Plan pre-

served the American Club’s “pay first” insurance

right under the Policies, that the Movants’ inter-

pretation of the Plan “would effectively result in

Claimants having a direct action against Amer-

ican Club, which the Second Circuit found

against,” and that the Trust “has not in fact

incurred a ‘loss’ such that amount to be paid by

the PLI Disbursement Trust will exceed the

American Club’s set-off amount.” Memorandum

Decision and Order, Record Item 2 (“January 19,

2005 Memorandum”), at 17. On January 26,

2005, Asbestos Claimants appealed the decision

of the Bankruptcy Court.

We concur with the reasoning of the

Bankruptcy Court. Under appellants’ proposed

pro rata scheme, as in the recycling arrangement

rejected in 1992, the Trustee would sustain no

actual loss incurred in good faith. Appellants’

reading of section 4.05.07(a)(iv) to permit pro-

rating of American Club’s set-off among the hold-

ers of all allowed insurance claims without first

requiring the Trustee to pay more than the set-

off amount to those claimants would effectively

grant the Asbestos Claimants a prohibited direct

action against the American Club. Furthermore,

the language of section 4.05.07(a)(iv) contains

important qualifying language ignored by Appel-

lants’ suggested interpretation. Holders of

3la

“Allowed Insurance Claims” are only to receive

cash “to the extent recovered” and to share pro-

rated claims “to the extent possible.” The set-off

provision is therefore consistent with the preser-

vation of the American Club’s legal rights as they

existed as of the Plan’s effective date, requiring

that the Trustee “pay first” before it can seek

indemnity from the American Club. We therefore

affirm the decision of the Bankruptcy Court.

IT 1s SO ORDERED.

Dated: New York, New York

September 21, 2005

NAOMI REICE BUCHWALD

UNITED STATES DISTRICT JUDGE

32a

NOT FOR PUBLICATION

UNITED STATES BANKRUPTCY COURT

SOUTHERN DISTRICT OF NEW YORK

Chapter 11

Case No. 86-B-11773 (AJG)

(Confirmed)

In re:

PRUDENTIAL LINES, INC.,

Debtor.

MEMORANDUM DECISION AND

ORDER DENYING PLI DISBURSEMENT

TRUSTEE’S AND CERTAIN CLAIMANTS’

JOINT MOTION TO REQUIRE PRORATION

OF CERTAIN INSURER’S SET-OFF

RIGHT AMOUNT AGAINST THE PLI

DISBURSEMENT TRUST

APPEARANCES:

JASPAN SCHLESINGER HOFFMAN LLP

Attorneys for PLI Disbursement

Trustee Lee J. DiCola

300 Garden City Plaza

Garden City, New York 11530-3324

HAROLD D. JONES, ESQ.

Of Counsel

33a

THE MARITIME ASBESTOSIS LEGAL CLINIC,

A DIVISION OF THE JAQUES

ADMIRALTY LAW FIRM, P.C.

Attorneys for Claimants

645 Griswold, Suite 1570

Detroit, Michigan 48226-4116

ALAN KELLMAN, ESQ.

Of Counsel

NOURSE & BOWLES, LLP

Attorneys for American Steamship Owners

Mutual Protection and Indemnity

Association, Inc.

One Exchange Plaza

At 55 Broadway

New York, New York 10006-3030

LAWRENCE J. BOWLES, ESq@.

Of Counsel

ARTHUR J. GONZALEZ

United States Bankruptcy Judge

The confirmed debtor Prudential Lines, Inc.’s

(“PLI”) disbursement trustee (the “PLI Dis-

bursement Trustee”) and the Maritime Asbesto-

sis Legal Clinic, on behalf of thousands of former

PLI merchant marine employees who have filed

’ asbestos-related bodily injury proofs of claim (the

“Claimants,” and collectively with the PLI Dis-

bursement Trustee, the “Movants”) in PLI’s chap-

ter 11 bankruptcy case (the “PLI Chapter 11

Case”), jointly move (the “Joint Motion”) (1) to

require that American Steamship Owners Mutual

34a

Protection and Indemnity Association, Inc.’s

(“American Club”) set-off right for its claim of

$1,270,980 against the PLI Disbursement Trust

(based upon PLI’s unpaid premiums and assess-

ments due for certain years that PLI was insured

by American Club’s marine protection and

indemnity insurance policies (the “Policies”)) be

shared ratable among the holders of all allowed

asbestos, personal injury and cargo damage

claims pursuant to section 4.05.07(a)(iv) of PLI’s

Second Amended Joint Plan of Reorganization, as

Modified (the “Plan”), which was confirmed on

October 4, 1990, and (2) to deem that the PLI

Disbursement Trustee has received the required

satisfactory assurances and documentation and

that he is authorized to make payments of

allowed insured claims as provided in the third

paragraph of Plan section 4.05.07(a)(i).! Upon

consideration of the parties’ filed pleadings and

arguments made at the July 21, 2004 hearing

regarding such joint motion, the Court denies the

relief requested.

I. Jurisdiction

The Court has jurisdiction over this contro-

versy pursuant to, among other things, subsec-

tion (c) of Article X (entitled Retention of

Jurisdiction) of the Plan, which provides that

“tlhe . . . Court shall retain jurisdiction over

the PLI Chapter 11 Case... (c) to determine

any and all controversies and disputes arising

]

Familiarity with all prior decisions, orders and facts

of record in the PLI Chapter 11 Case is presumed.

35a

under or in connection with the Plan, the PLI

Disbursement Trust Agreement, or any of the

other agreements or instruments issued pursuant

to the Plan.” Plan, Art. X, § (c).

II. Discussion

A. Movants’ Contentions

Movants note that American Club’s claim of

$1,270,980 against PLI was known and not

objected to at the time of confirmation of the

Plan and it is undisputed that American Club

has a set-off right against the PLI Disbursement

Trust for such claim. Movants assert, among

other things, that the Plan specifically addresses

how American Club’s set-off right is to be

applied. In particular, Movants maintain that

Plan section 4.05.07(a)(iv) provides that holders

of “Allowed Insured Claims,” which by definition

includes allowed asbestos, personal injury and

cargo damage claims, are to “share ratably” the

burden of the set-off. Movants note that Plan sec-

tion 4.05.07(a)(iv) states, in pertinent part, as

follows:

To the extent there shall be a determination

that amounts are due and owing from PLI to

a Cub or insurer which the Club or insurer

may offset or recoup against amounts due to

PLI, Reorganized PLI, the PLI Disbursement

Trust or any claimant in respect of Excess

Claims (and to the extent such amounts are

not otherwise offset pursuant to § 4.05.07(a)(i)

of the Plan or otherwise), and to the extent

possible, each holder of an affected Allowed

36a

Insured Claim shall share ratably (with all

other holders of affected Allowed Insured

Claims based on the allowed amount of each

such Insured Claim) (a) a claim against the

offset or recouped amount and shall receive

in distribution therefor an Allowed Claim in

Class 5C and (b) a claim in respect of any

remaining insurance rights relating to such

affected Allowed Insured Claims and shall

receive in distribution therefor, to the extent

recovered, cash from the insurer or Club

equal to such holder’s ratable share.

Plan, § 4.05.07(a)(iv) (emphasis added). Movants

emphasize that Plan section 4.05.07(a)(iv) does

not require prorating the set-off on the condition

that the PLI Disbursement Trust’s assets exceed

American Club’s set-off because prorating is not

conditional; rather, the section clearly states that

if there is an offset (that is, set-off) it is to be

prorated. Movants also contend that the Sup-

plemental Disclosure Statement to the Plan rec-

ognizes such proration. Moreover, Movants assert

that the Plan’s Definitions section provides even

further support because it defines “pro rata”’

’ Plan’s Definitions section defines “pro rata,” in per-

tinent part, as follows:

Pro Rata means, with respect to a Creditor in a Class

5A, 5C, or Assenting Class 6 and with respect toa

particular distribution under the Plan, in the same

proportion that the Allowed Claim held by such

Creditor bears to the aggregate of all Allowed Claims

of all Creditors in such class, subject to § 5.14 of the

Plan with respect to Class 5C.

Plan, Definitions.

ola

with respect to Class 5C Claims, which include

the asbestos, personal injury and cargo damage

claims. Movants clarify that the “pro rata” pro-

vision basically provides that the asbestos, per-

sonal injury and cargo damage claims will absorb

the set-off in the same proportion as their claim

bears to the aggregate value of all such claims.

In sum, based on the plain language of section

4.05.07(a)(iv) of the Plan, the Supplemental Dis-

closure Statement and the Plan’s definition of

“pro rata,” Movants assert that the set-off is to

be shared ratably and that clearly the holders of

all Allowed Insured Claims, not just one or a

handful, will hold claims against American

Club’s set-off. Movants further maintain that the

concept of ratable sharing and thus a reduction

to Class 5C Claimants was made clear to Ameri-

can Club and, therefore, the fact it did not agreed

is meaningless since the Plan was approved.

Indeed, Movants assert that American Club had

notice and opportunity to object and appeal, yet

did not do so. Additionally, Movants argue that

since provision 13 of the supplemental order con-

firming the Plan (the “Supplemental Order”) pro-

vides that the Plan is binding on “any holder of a

Claim . ” and because American Club is a

holder of a claim which provided the basis of the

set-off right, American Club is bound to the Plan

and thereby cannot chose to selectively enforce a

certain provision to the exclusion of other provi-

sions.

In addition, Movants contend that their Joint

Motion does not seek to provide the PLI Dis-

bursement Trust with greater rights than it is

entitled to and a license to avoid the “become

38a

liable to pay” and “pay first” provisions under the

Policies. Rather, the Joint Motion seeks only to

enforce the set-off rights in accordance with the

Plan.

In the alternative, Movants contend if the

Court finds that the Plan’s language is not clear,

this does not change the result because ambigu-

ous language should be construed to give effect to

all purposes of the Plan. Movants assert that one

of the Plan purposes included processing and

paying all approved claims, whereby the

$300,000 set aside in a fund was created for that

specific purpose. Movants argue that American

Club’s position that the PLI Disbursement

Trustee first use the entire $1,270,980 set-off

amount against the claims first approved, paid

and submitted for indemnification (based upon

the “pay first” provision under the Policies as

affirmed by the Second Circuit in DiCola ov.

American S.S. Owners Mut. Prot. and Indem.

Ass’n, Inc. (In re Prudential Lines, Inc.), 158 F.3d

65 (2d Cir. 1998) (hereinafter “Prudential

Lines”)) would result in (1) use of all of the set-

aside funds whereby most of the Claimants would

never be paid and thus defeat a main purpose of

the Plan, and (2) effectively the PLI Disburse-

ment Trust could no longer operate in any mean-

ingful way.

Aside from proration of American Club’s set-off

amount, Movants note that the PLI Disburse-

ment Trustee will be making payments of

approved claims by using the Court approved

mechanism as provided in the third paragraph of

39a

section 4.05.07(a)(i) of the Plan.* Movants note

that given the differences between themselves

3 Section 4.05.07(a)(i) of the Plan provides, in perti-

nent part, as follows:

The PLI Disbursement Trustee may also take other

steps as specified herein reasonably intended to

obtain the benefits of insurance and to obtain reim

bursement of defense costs in excess of the applica-

ble deductible. In particular, to the extent necessary

in and subject to the availability of funds for such

purposes and satisfactory assurances and documen-

tation as set forth below, the PLI Disbursement

Trustee is authorized to enter into arrangements

under which in substance the PLI Disbursement

Trust pays the Allowed Insured Claim in full in cash;

the holder of the Allowed Insured Claim repays in

cash the full amount of the Deductible Claim and

that the Club or other insurer reimburses the PLI

Disbursement Trust in cash for the amount of the

Excess Claim (and any previously unreimbursed

defense costs in excess of the applicable deductible

incurred in connection with liquidation of the Claim);

and the holder of the Allowed Insured Claim is given

an Allowed Claim in Class 5C in the amount of the

Deductible Claim. The PLI Disbursement Trustee

shall enter into no such arrangement and shall make

payment of no such Claim unless it obtains satis-

factory assurances and documentation that the PLI

Disbursement Trust shall promptly receive in cash

repayment and/or reimbursement of the full amount

of the Allowed Insured Claim paid by the PLI Dis-

bursement Trust such that the entire amount paid by

the PLI Disbursement Trust shall remain available

to the PLI Disbursement Trust. The PLI Disburse-

ment Trustee may alternatively enter into any law-

ful arrangement designed to achieve the same

purpose, as may be agreed upon by the holder of an

Allowed Insured Claim and the PLI Disbursement

Trustee, but in connection with such an arrangement

40a

and American Club, it is unlikely that, assuming

that the Court rules in Movants’ favor on pro-rat-

ing set-off amount, that American Club will pro-

vide the assurances and documentation called for

under the Plan and, in fact, the Plan does not

address who shall provide such assurances and

documentation. Movants content that the PLI

Disbursement Trustee will be in fuil compliance

with his duties and responsibilities in the event

he pays Allowed Insured Claims by following the

detailed approach outlined in Plan section

4.05.07(a)(i). Movants assert that in order to pro-

tect the PLI Disbursement Trustee from any

charge or allegation of not carrying out his duties

as required, there should be a finding that the

PLI Disbursement Trustee, by following the

terms of the approved Plan, is deemed to have

received the necessary assurances and docu-

mentation noted under Plan section 4.05.07(a)(i).

Movants also assert that the Claimants have

not initiated a direct action against, and do not

seek direct payment from, American Club as pro-

hibited in Prudential Lines, 158 F.3d at 74.

Rather, Movants maintain that the PLI Dis-

bursement Trustee will pay allowed claims and

seek indemnification of claims paid from Ameri-

can Club whereby no direct action or contact

may not use funds of the PLI Disbursement Trust, as

set forth below, unless adequate assurances and doc-

umentation are provided ensuring that the PLI Dis-

bursement Trust will promptly receive repayment

and/or reimbursement of all amounts paid by the PLI

Disbursement Trust.

Plan, § 4.05.07(a)(i) (emphasis added).

4la

would result between the Claimants and Ameri-

can Club.

B. American Club’s Contentions

In response, American Club first argues that

Movants deliberately misinterpret the Plan and

applicable law so as to enable the PLI Disburse-

ment Trustee to, in effect, force direct payments

by the American Club to the various Claimants

far beyond the PLI Disbursement Trust’s liabil-

ity and without the PLI Disbursement Trust hav-

ing first paid those Claimants an amount

sufficient to exceed the Club’s $1,270,980 set-off

amount. American Club notes that Movants’

baseless interpretation of the Plan would give

the PLI Disbursement Trust new contract rights

under the Policies, while eliminating existing

rights of American Club and, therefore, for this

reason alone the Joint Motion should be denied.

In support of its contention, American Club notes

that (1) Plan section 4.05.07(a)(i),* section 1.1(e)

of Article 1 of the PLI Disbursement Trust Agree-

* American Club notes that Plan section 4.05.07(a)(i)

provides, in pertinent part, as follows:

Subject to the remainder of this § 4.05.07(a) of the

Plan and the terms of the PLI Disbursement Trust

Agreement, the PLI Disbursement Trust will succeed

to all insurance rights of PLI in existence as of the

Effective Date, including any rights to indemnifica-

tion . . . or other payment in respect of any...

Claim and any other such rights PLI may have to

receive payment from. . . from any Club or other

insurer...

Plan, § 4.05.07(a)(i).

42a

ment® and the Supplemental Disclosure State-

ment® all limit PLI’s insurance rights, which

were succeeded to by the PLI Disbursement

Trust, to those existing as of the Effective Date

of the Plan, and (2) nothing in the Supplemental

Order purports to or could modify the rights of

either PLI or American Club under the Policies.

American Club further notes that the bankruptcy

court in Prudential Lines recognized that the

Plan does not alter American Club’s contractual

obligations.‘

5 American Club notes that Article 1, section 1.1(e) of

the PLI Disbursement Trust Agreement provides, in perti-

nent part, as follows:

“Insurance Rights” means any and all rights, con-

tractual or otherwise, of PLI existing as of the Effec-

tive Date under or with respect to any policy issued

by, or arrangement with, any insurer or insurance

club, insofar as the PLI Disbursement Trust may

succeed to such rights. . . all as more fully set forth

in § 4.05.07(a)(i) of the Plan... .

PLI Disbursement Trust Agreement, Art. 1, § 1.1(e).

® American Club notes that the “ upplemental Disclo-

sure Statement provides, in pertinent part, as follows:

Subject to the PLI Disbursement Trust Agreement,

the PLI Disbursement Trust will succeed to all of

PLI's insurance rights in existence as of the Effective

Date. . . including such rights to indemnification

Supplemental Disclosure Statement, at 34.

‘Specifically, American Club notes that inDiCola v.

American Steamship Owners Mutual Protection and Indem-

nification Assoc., Inc. (In re Prudential Lines, Inc.), 148 B.R.

730 (Bankr. S.D.N.Y. 1992), the bankruptcy court stated as

follows:

(footnote continued)

43a

American Club also asserts that before the PLI

Disbursement Trust can seek to be indemnified

or reimbursed from American Club, the PLI Dis-

bursement Trust is obligated to establish that it

has become liable to pay and has paid each claim

for which indemnification or reimbursement is

sought. Citing DiCola v. American S.S. Owners

Mut. Prot. and Indem. Assn, Inc. (In re Pruden-

tial Lines, Inc), 148 B.R. 730, 748-49 (Bankr.

S.D.N.Y. 1992), aff'd in part, rev’d in part on

other grounds, 170 B.R. 122, 239 (S.D.N.Y. 1994),

aff'd, 158 F.3d 65, 75 (2d Cir. 1998), American

Club notes that court decisions in the PLI Chap-

ter 11 Case have repeatedly and expressly

enforced the “shall pay” or “pay first” (or “pay-to-

be-paid”) provisions of the Policies, that is, until

the PLI Disbursement Trust pays out more than

the $1,270,980 set-off amount, the PLI Dis-

bursement Trust has no right to seek indemnifi-

cation or reimbursement from American Club. As

to the “become liable to pay” provision, American

Club also asserts, among other things, that under

Movants’ proposed pro rata scheme, the PLI

Dis»ursement Trustee would still sustain no

actual loss incurred in good faith so as to trigger

an indemnification obligation under New York

law.

Ir substance, these provisions provide that the

Trustee shall succeed to PLI’s rights in the PLI polli-

cies, but only to those rights PLI already had as of

the effective date of a valid insurance policy. .. .

Thus, we hold that the Plan does not alter Club’s

contractual obligations as they exist under the P & I

policies and applicable law.

Id. at 748.

44a

Additionally, American Club contends that

since it is undisputed that it has a confirmed

right to set-off its claim for $1,270,980 for unpaid

premiums and assessments against the PLI Dis-

bursement Trust’s claims, and because such set-

off amount far exceeds the Trust’s assets totaling

approximately $300,000 and is even less after

payment of deferred administrative expenses, the

PLI Disbursement Trust cannot pay enough to

the Claimants to overcome the set-off and,

thereby, the Joint Motion should be denied.

American Club also asserts that granting the

Joint Motion, that is, prorating American Club’s

set-off among holders of all Allowed Insured

Claims without requiring the PLI Disbursement

Trust to first pay more than the $1,270,980 to

those Claimants, would in effect be granting

those Claimants a right of direct action against

American Club, which is prohibited by the Sec-

ond Circuit’s Prudeniial Lines holding. See Pru-

dential Lines, 158 F.3d at 74.

Further, American Club argues that the Joint

Motion contravenes the actual terms of the Plan.

To place the matter in context, American Club

notes that in or about August 1990, at the time

the PLI Disbursement Trust Agreement, Sup-

plemental! Disclosure Statement and Plan were

drafted, there was uncertainty as to (1) whether

American Club could be held liable to the PLI

Disbursement Trust, at all, and (2) if so, whether

the PLI Disbursement Trust would have cash to

fund settlements in an amount sufficient to

exceed whatever amount American Club would

claim as a set-off. American Club notes that the

Supplemental Disclosure provides that “it is pos-

45a

sible that American Club’s net Claim against PLI

could exceed $200,000... .” Supplemental Dis-

closure Statement, at 36. American Club claims

that given this uncertainty, the Plan was designed

to cover both eventualities.

American Club specifically notes that the Sup-

plemental Disclosure Statement language rec-

ognized, in pertinent part, the possibility that

American Club might have no liability to the PLI

Disbursement Trust and, if so, provided that the

Claimants could then receive only Class 5C

Claims against the PLI Disbursement Trust’s

assets.* Further, American Club points out that

Plan section 4.05.07(a)(ii) recognizes the same

contingency ° and Pian section 4.05.03 makes a

similar point.

8 American Club notes that the Supplemental Disclo-

sure Statement provides, in pertinent part, as follows:

The Modified Plan, like the Original Plan, provides

that to the extent there is a determination that a

Club or other insurer is not liable for or cannot be

required to make payment in respect of Excess

Claims, the holder of the Claim shall be entitled

(unless the claimant agrees otherwise) to a Class 5C

Claim in the full amount of the Allowed Personal

Injury Claim or Allowed Cargo Damage Claim. The

holder of such a Claim will have no other right

against the PLI Disbursement Trust, Reorganized

PLI,. . . or any of the other Companies.

Supplemental Disclosure Statement, at 37.

° American Club notes that Plan section 4.05.07(a)(ii)

provides, in pertinent part, as follows:

Notwithstanding any provision of the Plan, to the

extent that there is a determination that a Club or

other insurer is not liable for or cannot be required to

make payment in respect of a potential Excess

46a

On the other hand, American Club notes that

Plan section 4.05.07(a)(iv) contemplates the pos-

sibility where the PLI Disbursement Trust’s

assets might exceed American Club’s set-off.

American Club asserts that only in such

instance, while putting aside American Club’s

other defenses, if the PLI Disbursement Trust’s

assets were sufficient to exceed American Club’s

set-off and were not “otherwise offset,” then “to

the extent possible” and “to the extent recov-

ered,” the amount of any set-off would be pro-

rated among all holders of affected Allowed

Insured Claims and, thus, avoid the situation in

which holders of some Allowed Insured Claims

would absorb the full amount of any set-off. To

simply accept Movants’ contention that, no mat-

ter what, the Claimants have to share ratably

the set-off (1) would make Plan sections 4.05.03

and 4.05.07(a)(ii) meaningless, and (2) Plan sec-

tion 4.05.07(a)(iv) would not contain any of its

presents qualifiers, that is, “to the extent such

amounts are not other offset,” “to the extent pos-

sible,” and “to the extent recovered.”

C. Analysis

A plan of reorganization is similar in nature to

a contract and is generally interpreted in accor-

Claim, the holder of such a Claim shall have. . . no

right against the PLI Disbursement Trust ...

except the right to be granted (unless such holder

agrees to acce,* a Class 5C Claim in a lesser

amount) a Class 5C Claim equal to the full amount of

the Allowed Personal Injury Claim or Allowed Cargo

Damage Claim.

Plan, § 4.05.07(a)(ii).

47a

dance with the contract law principles of the

state in which the plan of reorganization was

confirmed. See C.F. Brookside, Ltd. v. Skyview

Memorial Lawn Cemetery (In re Affordable Hous.

Dev. Corp), 175 B.R 324, 329 (B.A.P. 9th Cir.

1994) (“Like a consent decree, a chapter 11 plan

has elements of both a judgment and a contract.

Because of a plan’s likeness to a consent decree,

a chapter 11 plan should generally be interpreted

as if it were a contract. The law of the state in

which the plan was confirmed governs its inter-

pretation.”) (citations omitted); In re L & V

Realty Corp., 76 B.R. 35 (Bankr. E.D.N.Y. 1987)

(“In many respects a plan is in the nature of a

contract.”); In re UNR Industries, Inc., 1996

Bankr. LEXIS 1455, at * 6 (N.D. Ill. 1996) (“In

general, a plan of reorganization should be ana-

lyzed according to principles of state contract

law.”).

Under New York law, that is, the state in

which the Plan was confirmed, “it is axiomatic

that a contract is to be interpreted so as to give

effect to the intention of the parties as expressed

in the unequivocal language employed.” Morlee

Sales Corp. v. Mfr. Trust Co., 9 N.Y.2d 16, 19

(N.Y. 1961) (citing Green v. Doniger, 300 N.Y.

238 (N.Y. 1949); Hartigan v. Cas. Co. of America,

227 N.Y. 175 (N.Y. 1919). A court “may not by

construction add or excise terms, nor distort the

meaning of those used and thereby make a new

contract for the parties under the guise of inter-

preting the writing.” Morlee, 9 N.Y.2d at 19 (cita-

tions and quotation marks omitted). “Evidence

outside of the four corners of the document as to

what was really intended by unstated or mis-

48a

stated is generally inadmissible to add to or vary

the writing.” W.W.W. Assocs. v. Giancontiert, 566

N.E.2d 639, 642 (N.Y. 1990).

A court may consider extrinsic evidence of the

parties’ intent if the contract is ambiguous, but

“such evidence may not be used to vary or con-

tradict the language of the contract, but only to

interpret it so as to resolve the ambiguity.” Com-

puter Assocs. Int’l v. U.S. Balloon Mfr. Co., Inc.,

782 N.Y.S.2d 117,118 (noting same). In deter-

mining the existence of an ambiguity, the New

York Court of Appeals noted as follows:

Where an agreement is ambiguous is a ques-

tion of law for the courts. Ambiguity is deter-

mined by looking within the four corners of

the document, not to outside sources. An in

deciding whether an agreement is ambigu-

ous[,] courts

should examine the entire contract and

consider the relation of the parties and

the circumstances under which it was

executed. Particular words should be con-

sidered, not as if isolated from the con-

text, but in the light of the obligation as

a whole and the intention of parties as

manifested thereby. Form should not pre-

vail over substance and a sensible mean-

ing of words should be sought.

Where the document makes clear the parties’

over-all intention, courts examining isolated

provisions should then choose that con-

struction which will carry out the plain pur-

pose and object of the [agreement].

49a

Kass v. Kass, 696 N.E.2d 174, 180-81 (N.Y. 1998)

(citations and quotation marks omitted).

Plan section 4.05.07(a)(iv) provides two quali-

fiers to proration,:that is, “to the extent possible”

and “to the extent recovered.” Therefore, contrary

to Movants’ contentions, the section does not

require American Club to make payments prior

to the satisfaction of its set-off right

Further, the Court finds that such qualifiers

are not ambiguous when analyzed within the four

corners of the Plan. When reviewing the quali-

fiers in the context of the parties obligations asa

whole under the Plan, that is, not isolated under

Plan section 4.05.07(a)(iv), the Plan preserved

the Policies’ indemnity requirement that the PLI

Disbursement Trust incur a loss in good faith

prior to indemnification by American Club. Plan

section 4.05.07(a)(i) specifically provides that

“the PLI Disbursement Trust will succeed to all

insurance rights of PLI. . . in existence as of

the Effective Date, including any such rights to

indemnification ... ,” and the Plan does not

show that American Club has waived such insur-

ance rights. Thus, under the Plan, the PLI

Disbursement Trust must still satisfy, among

other things, the “shall pay” (that is, “pay-to-be-

paid” or “pay first’s provision under the Policies

requiring the PL] Disbursement Trust to incur a

loss prior to proration of American Club’s set-

off.'°

80 Even if Plan section 4.05.07(a)(iv)’s qualifying lan-

guage was deemed ambiguous and thus extrinsic evidence

were permissible, the Court would find that the Supple-

mental Disclosure Statement provides similar support of

American Club's preservation of its pay-first insurance right

50a

Indeed, this is the same conclusion reached by

the Second Circuit in Prudential Lines. In

under the Policies. In particular, the Supplemental Disclo-

sure Statement notes, in pertinent part, as follows:

Moreover, it appears the Debtor may owe monies to

the American Club in respect of unpaid assessments

and premiums and possibly other matters relating to

certain policy years. In August 1989, the American

Club filed a second amended proof of claim in the PLI

Chapter 11 Case for approximately $2.5 million. The

extent of American Club’s Claim may be disputed

and it may, in turn, owe PLI certain amounts in

refunds of premiums and for reimbursement of cer-

tain losses incurred by PLI before the Effective Date

. Under the Modified Plan, in order to try to

preserve insurance coverage, the PLI Disbursement

Trust will be authorized (to the extent permitted

under applicable law) to set[-Joff such amounts owed

to PLI against American Club’s Claim. Nevertheless,

it is possible that, after adjustment of the various

amounts owing, the American Club may have a sub-

stantial net Claim against PLI, and the American

Club has taken the position that until any net

amount owed to it by PLI is satisfied it will not make

cash payments in respect of any Claims.

[I]t is contemplated under the Modified Plan, as

under the Original Plan, that to the extent possible

consistent with applicable law monies owed to a Club

may be offset by reducing the amounts that the Club

would otherwise have to pay in respect of Excess

Claims. Thus, the Modified Plan provides that to the

extent amounts are owing from PLI to a Club which

the Club can offset or recoup against amounts due to

PLI (and to the extent the amounts are not otherwise

offset), and to the extent possible, each holder of an

affected Allowed Insured Claim will share ratably a

Class 5C Claim equal to the offset or recouped

amount (as well as a Class 5C Claim equal to the

5la

reviewing the $309,000 set aside to fund the

Plan’s recycling arrangement that could be used

for settling claims, the Second Circuit in Pru-

dential Lines agreed with the district court’s

“conclusion that the recycling arrangement did

not amount to payment under American Club’s

policy and thus failed to satisfy the policy’s pay

first provision,” Prudential Lines, 158 F.3d at 72,

and reasoned as follows:

The American Club policies require it to

“indemnify [Prudential] against any loss,

damage or expense which [Prudential] shall

become liable to pay and shall pay.” Because

the American Ciub policy mandates payment

prior to triggering the insurer’s indemnifi-

cation obligations, it is an indemnity policy.

Liman summarized New York law on what

constitutes payment under an indemnity pol-

icy. . .: “The test in New York is whether

the assured has actually in good faith sus-

tained the loss for which reimbursement is

sought, and the insurer’s obligation to indem-

nify may not be avoided because of the

assured’s insolvency.” Thus, an indemnifiable

payment entails (i) satisfaction of the claim

and (11) the absorption of some loss thereby

by the insured, (iii) both in good faith.

Deductible Claim). As a result, the cash payments

that otherwise might be obtained from the American

Club in respect of certain Excess Claims may be

reduced. The American Club has to date not agreed

to such a procedure.

Supplemental Disclosure Statement, at 36.

52a

Here, Prudential seeks to use the recycling

arrangement to finance the whole of the

claims, not the deductibles alone. This case

thus differs from Liman in the essential

respect that indemnity is sought for a loss

that the policyholder has not incurred.

Id. (quoting Liman v. American S.S. Owners Mut.

Prot. and Indem. Ass ‘n, 299 F. Supp. 106, 109

(S.D.N.Y.), aff'd per curiam, 417 F.2d 627 (2d

Cir. 1969)). |

As to Movants’ assertion that if the $300,000

set aside in the fund had to “may first” to incur a

loss, the end result would defeat the Plan’s pur-

pose of settling individual claims and effectively

render the PLI Disbursement Trust meaningless,

the Court finds that this assertion is unpersua-

sive. Plan section 4.05.07(a)(i) contemplated that

the recycling arrangement?! would be acceptable

and thereby the PLI Disbursement Trust would

be able to satisfy the loss provisions under the

i} In Prudential Lines, the Second Circuit described the

recycling arrangement as follows:

The American Club policies contain a pay first pro-

vision requiring that Prudential pay any claims prior

to seeking indemnification from American Club.

However, bankrupt Prudential lacks the funds to pay

the claims. In an effort to satisfy the Claimants and

the pay first provision, the reorganization plan set

aside $300,000 for use in a recycling arrangement:

seriatim, the Trustee disbursed a damages payment

to each Claimant, who then returned the money to

the Trustee as a non-recourse loan so that it would

be on hand to pay the next Claimant, and so on.

Prudential Lines, 158 F.3d at 67-68.

53a

Policies and thus ratably apply the set-off

amount. However, after confirmation of the Plan,

the Second Circuit in Prudential Lines addressed

the recycling arrangement under the Plan and

found that it was a “sham transaction” because it

did not “trigger an indemnification obligation

under New York law.” See Prudential Lines, 158

F.3d at 74. The Court finds that to now enable

the Claimants to use the recycling scheme as pro-

posed herein would effectively give the Claimants,

as American Club correctly points out, a direct

action against American Club, which the Second

Circuit similarly did not permit in Prudential

Lines." See id.

12 ‘The Second Circuit specifically noted as follows in

Prudential Lines regarding direct actions by Claimants

against marine indemnity insurers:

It is obvious for reasons previously stated that the

Claimants are the only parties with an interest in

the indemnification from American Club. Our hold-

ing is therefore independently supported by the doc-

trine of New York law that bars direct actions by

claimants against marine indemnity insurers.

Although New York has broadly altered this common

law rule by statute, the statute expressly preserves

application of the common law rule to marine insur-

ance contracts, such as P&I policies. “The exception

was consciously made by the New York legislature to

eliminate a perccived competitive disadvantage to

which New York’s marine insurers were placed by

the direct action statute.”

We have previously barred a suit by an insured’s

judgment creditor against a marine policy on the

ground that the suit closely resembled a direct

action. We will not permit the Claimants, who are

the only parties in interest, to evade this bar via an

illusory transaction that is of no financial conse-

54a

Ill. Conclusion

Since (1) Plan section 4.05.07(a)(i) preserved

American Club’s pertinent “pay first” insurance

right under the Policies, which is consistent with

Plan section 4.05.07(a)(iv)’s qualifiers to prora-

quence or interest to Prudential as the supposed

insured.

New York's approach to insolvent insureds under the

common law rule barring direct actions is quite cat-

egorical and firm in terms of the type of actual loss

required to trigger an indemnification obligation:

If the insured was insolvent, so that the person

injured or the estate of one killed was unable to

satisfy the judgment against him, the insurer in

effect would be released. The policy being one of

indemnity against loss suffered by the principal,

it followed that the insured having suffered no

damage, there was no loss for the insurer to

indemnify.

Thus, as the law stood under New York common law

—and as it still stands in relation to marine insur-

ance policies—the insured’s lack of assets to satisfy

claims against the bankrupt estate typically leaves

the insured unable sustain a loss and pay the claim.

This is simply one consequence of purchasing a

marine policy of indemnity rather than a liability

policy.

Prudential Lines, 158 F.3d at 74-75 (citations omitted); see

tenerally 3B-XVI BENEDICT ON ADMIRALTY § 71 (Problems

With Shipowner Reorganizations) (2004) (noting that the

financial inability to meet indemnity insurance policy

requirements, such as a “pay first” provision which requires

the shipowner to fund the judgment and seek reimburse-

ment from the marine indemnity insurer, “renders such

insurances unavailable as an asset of the bankruptcy estate

. except in ‘direct action’ states where the seamen can

directly proceed against the insurer.”) (citations omitted).

55a

tion, (2) Movants’ interpretation of the Plan

herein would effectively result in Claimants hav-

ing a direct action against American Club, which

the Second Circuit found against in Prudential

Lines, and (3) the PLI Disbursement Trust has

not in fact incurred a “loss” such that amounts to

be paid by the PLI Disbursement Trust will

exceed American Club’s set-off amount, the Court

finds that Movants have failed to demonstrate

that American Club’s applicable set-off amount

against PLI Disbursement Trust should be

shared ratably among the holders of all allowed

asbestos, personal injury and cargo damage

claims under Plan section 4.05.07(a)(iv) in a

manner that would require, absent consent, pay-

ment by American Club prior to it being obli-

gated to make such payment under the Policies.

Therefore, for the reasons set forth herein, it is

hereby:

ORDERED, that Movants’ Joint Motion is

denied in its entirety.

Dated: January 19, 2004

New York, New York

s/ Arthur J. Gonzalez

UNITED STATES BANKRUPTCY JUDGE

56a

[LETTERHEAD OF UNITED STATES COURT

OF APPEALS FOR THE SECOND CIRCUIT]

No. 05-5925-bk

Filed September 2, 2008

At a stated term of the United States Court of

Appeals for the Second Circuit, held at the

Daniei Patrick Moynihan United States Court-

house, 500 Pearl Street, in the City of New York,

on the 2nd day of September two thousand and

eight,

IN RE: PRUDENTIAL LINES, ING.,

Debtor.

ASBESTOSIS CLAIMANTS,

Claimants-Appellants,

—vV.—-

AMERICAN STEAMSHIP OWNERS MUTUAL

PROTECTION and INDEMNITY ASSOCIATION, INC.,

Appellee.

57a

ORDER

American Steamship Owners Mutual Protec-

tion and Indemntiy Association, Inc. having filed

a petition for panel rehearing, or, in the alter-

native, for rehearing en banc, and the panel that

determined the appeal having considered the

request for panel rehearing, and the active mem-

bers of the Court having considered the request

for rehearing en banc,

IT IS HEREBY ORDERED that the petition is

denied.

For the Court:

Catherine O’Hagan Wolfe, Clerk

By: FRANK PEREZ

Frank Perez, Deputy Clerk

58a

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

__ocket-Ne-_05-5925-bk

Filed June 19, 2008

At a stated Term of the United States Court of

Appeals for the Second Circuit, held at the

Daniel Patrick Moynihan United States Court-

house, 500 Pear! Street, in the City of New York,

on the 19th day of June, two thousand eight,

Before: Hon. Roger J. Miner,

Hon. Pierre N. Leval,

Hon. Rosemary S. Pooler,

Circuit Judges.

IN RE: PRUDENTIAL LINES, INC.,

Debtor.

ASBESTOSIS CLAIMANTS,

Claimants-Appellants,

—_vV.—

AMERICAN STEAMSHIP OWNERS MUTUAL

PROTECTION and INDEMNITY ASSOCIATION, INC.,

Appellee.

59a

JUDGMENT

Appeal from the United States District for the

Southern District of New York.

This cause came on to be heard on the tran-

script of record from the United States District

Court for the Southern District of New York and

was argued by counsel.

ON CONSIDERATION THEREOF, it is hereby

ORDERED, ADJUDGED and DECREED that the

judgment of the district court is REVERSED. The

case is REMANDED for proceedings in accordance

with the opinion of this court.

FOR THE COURT:

CATHERINE O’HAGAN WOLFE, Clerk

by

JOY FALLEK

Joy Fallek

Administrative Attorney

A True Copy

Catherine O’Hagan Wolfe, Clerk

by ’ MARIA RODRIGUEZ _—__|

Deputy Clerk

Mandate: September 15, 2008 MR

60a

UNITED STATES BANKRUPTCY COURT

SOUTHERN DISTRICT OF NEW YORK

In a Proceeding for a Reorganization

under Chapter 11

Case No. 86-B-11773 (HCB)

In re

PRUDENTIAL LINES, INC.,

Debtor.

EXTRACTS FROM

SECOND AMENDED JOINT PLAN

OF REORGANIZATION,

AS MODIFIED,

PROPOSED BY THE OFFICIAL COMMITTEE

OF UNSECURED CREDITORS,

COLD SPRING SHIPPING. L.P.,

AND VESSEL CHARTERS, INC.

The Official Committee of Unsecured Creditors,

Cold Spring Shipping, L.P., and Vessel Charters,

Inc. propose the following Modified Plan of

Reorganization pursuant to Sections 1121(c) and

1127 of the Bankruptcy Code.

6la

ARTICLE I

DEFINITIONS

For the purposes of this Plan, the following

terms shall have the meanings set forth below.

Unless otherwise indicated, the singular shall

include the plural and pronouns of one gender

shall include both genders.

. 2

Asbesios Claim means a Personal Injury Claim

based on exposure to asbestos.

= = =

Available Cash means, with respect to a par-

ticular entity, for any period commencing on the

first day after the date of the last calculation of

Available Cash (or, with respect to the first cal-

culation, commencing on the Modification Date)

and ending on such date as is specified in the

pertinent provision of the Plan for calculation of

Available Cash: |

The sum of (1) all cash receipts of such entity

during such period from any sources (including,

without limitation, cash received from operations

or sale of assets; net investment income; divi-

dends;: and, in the case of the PLI Disbursement

Trust, cash received in respect of the VCI Note,

the Egyptian Litigation, or any of the other

assets and powers granted or transferred to the

PLI Disbursement Trust or the PLI Disburse-

ment Trustee pursvant to § 6.04 of the Plan) as

well as, with respect to the first calculation of

Available Cash, any cash on hand at the begin-

ning of the Modification Date and (2) the aggre-

gate reduction (if any) in the amount of Reserves

62a

of the entity during such period, minus the sum

of (3) all cash disbursements during such period

by such entity (including, without limitation,

cash disbursements for operating and adminis-

trative expenses and capital expenditures and,

with respect to Reorganized PLI and the first cal-

culation of Available Cash, cash transferred to

the PLI Disbursement Trust pursuant to § 6.04 of

the Plan) and (4) the aggregate addition (if any)

in the amount of Reserves of the entity during

such period (including with respect to the first

calculation of Available Cash, the _ initial

Reserves that are established); provided, how-

ever, that Available Cash with respect to the PLI

Disbursement Trust shall not include (a) the

Insurance Preservation and Claims Liquidation

Funds or the Liman Funds (and no subtraction

from Available Cash shall be made for any such

funds expended or disbursed by the PLI Dis-

bursement Trust in accordance with the Plan), or

(b) any cash held in escrow or reserve by the PLI

Disbursement Trust for potential Allowed Late-

Filed Asbestos Claims, Disputed Claims or for

holders of Allowed Claims in respect of which

there are unclaimed distributions in accordance

with §§ 4.05.07(b), 8.02, and 6.09 of the Plan, or

otherwise for payment of Claims in Classes 1 or

2 (other than Deferred Administrative Claims or

Deferred Priority Claims) or Classes 3 or 4 (and

no subtraction from Available Casi shall be

made for any such cash paid to holders of such

Claims), and provided, further, that the calcu-

lation of Available Cash with respect to Shipco

and Reorganized PLI shall be subject to § 6.18 of

the Plan.

| 63a

* * *

Claim means any right to payment from the

Debtor, whether or not such right is reduced to

judgment, liquidated, unliquidated, fixed, con-

tingent, matured, unmatured, disputed, undis-

puted, legal, equitable, secured, or unsecured; or

any right to an equitable remedy for breach of

performance, if such breach gives rise to a right

to payment, whether or not such right to an equi-

table remedy is reduced to judgment, fixed,

contingent, matured, unmatured, disputed,

undisputed, secured, or unsecured.

Club means each of the marine protection and

indemnity mutual associations of which the

Debtor or a Predecessor Company was or is a

member in respect of a vessel owned, operated,

managed, chartered, or mortgaged by the Debtor

or a Predecessor Company.

Cold Spring means Cold Spring Shipping, L.P.,

a limited partnership organized under the laws

of Delaware.

= 2

Creditors’ Committee means the Official Com-

mittee of Unsecured creditors appointed in the

PLI Chapter 11 Case on January 28, 1987, by the

United States Trustee for the Southern District

of New York, as it may be constituted from time

to time.

= 2 @

Debtor means PLI.

Deductible Claim means (a) with respect to an

Allowed Personal Injury Claim that is an Allowed

Insured Claim, that portion of the Claim equal in

64a

amount to the lesser of (i) the deductible pro-

vided in the relevant insurance policy or Club

coverage and (ii) the Allowed Personal Injury

Claim, or (b) with respect to an Allowed Cargo

Damage Claim that is an Allowed Insured Claim,

the claimant’s ratable share of the deductible for

the voyage or voyage leg provided in the relevant

insurance policy or Club coverage as set forth in

§ 4.05.07(a)(iii) of this Plan.

e RP =

Deferred Priority Claim means a Class 2 Claim,

the holder of which is to receive distributions on

a deferred basis, after payment in full of all

Deferred Administrative Claims, from Available

Cash of the PLI Disbursement Trust as provided

in §§ 4.02 and 4.02.01 of the Plan. Subject to

§ 4.02.01 of the Plan, each Deferred Priority

Claim shall equal the entire allowed amount of

the holder’s Class 2 Claim (after taking account

of any reduction in such a Claim agreed to as

part of a Priority Claims Settlement) minus any

payments thereof (other than interest payments)

made by Reorganized PLI prior to or as of the

Modification Date.

+ & ©

Excess Claim means that portion, if any, of any

Allowed Insured Claim that exceeds the

Deductible Claim.

. eS

Insured Claims means those Personal Injury

Claims (including Allowed Late-Filed Asbestos

Claims and other Asbestos Claims) and Cargo

Damage Claims for which there is coverage under

one or more policies of marine protection and

65a

indemnity coverage or other insurance under

which the Debtor or a Predecessor Company is or

was an insured; provided, however, that Insured

Claims shall not include any Cargo Damage

Claims that are in Class 4.

Insurance Preservation and Claims Liquidation

Funds means $200,000 to be transferred by Reor-

ganized PLI to the PLI Disbursement Trust pur-

suant to § 6.04 of the Plan (plus any net income

earned by the PLI Disbursement Trust through

the investment of such funds pursuant to the PLI

Disbursement Trust Agreement), which funds the

PLI Disbursement Trust shall use for the pur-

poses and pursuant to the terms specified in

§ 4.05.07(a)(v) of the Plan.

*k* *

Liman Funds means $300,000 to be transferred

by Reorganized PLI to the PLI Disbursement

Trust pursuant to § 6.04 of the Plan, which funds

the PLI Disbursement Trust shall use for the

purposes and pursuant to the terms specified in

§ 4.05.07(a) of the Plan.

Litigation Funding Commitment means the

commitment of HBT to make advances, provide

reimbursement, or pay expenses up to an aggre-

gate of $200,000 and, in its discretion, beyond

that amount to finance the legal fees and other

charges and expenses incurred on or after the

Effective Date by or on behalf of Reorganized PLI

(to the extent that Reorganized PLI otherwise

has inadequate reserves or capital) and Cold

Spring in connection with (1) the case com-

menced in Bankruptcy Court entitled The Offi-

cial Committee of Unsecured Creditors et al. v.

66a

PSS Steamship Ce., Adv. Pro. No. 89-6430A, on

appeal and cross-appeal, 90 Civ. 1262 — 1263

(U.S. Dist. Ct. S.D.N.Y.), (2) the case commenced

in Bankruptcy Court entitled Prudential Lines.

Inc.. et al.. v. Arthur Gray. dr., et al., Adv. Pro.

No. 90-5911A, or (8) other related legal efforts;

provided, however, that if Cold Spring obtains a

monetary recovery by judgment or settlement in

respect of the case referenced in item (2) above, it

shall be responsible up to the amount of its

recovery for a ratable share of the legal fees and

expenses incurred by or on behalf of Reorganized

PLI and Cold Spring in that case (and such rat-

able share of such legal fees and expenses shall

not be subject to the Litigation Funding Com-

mitment), such ratable share to be in the same

proportion to all legal fees and expenses incurred

by or on behalf of Reorganized PLI and Cold

Spring in that case as Cold Spring’s recovery in

that case is to the recovery of Cold Spring and

Reorganized PLI combined, and provided, fur-

ther, that if following a trial in the case refer-

enced in item (2) above, judgment is entered

providing no monetary recovery to either Cold

Spring or Reorganized PLI, Cold Spring shall be

responsible for fifty percent of the legal fees and

expenses incurred by or on behalf of Reorganized

PLI and Cold Spring in that case (and this per-

centage of such legal fees and expenses shall not

be subject to the Litigation Funding Commit-

ment). Any settlement of the case referenced in

item (2) above shall be on notice to the Creditors’

Committee.

67a

PLI means Prudential Lines, Inc., a Delaware

corporation, which is the Debtor in the PLI Chap-

ter 11 Case.

PLI Chapter 11 Case means the case com-

menced in the Bankruptcy Court against PLI on

September 12, 1986, to which PLI consented on

November 4, 1986, seeking relief under Chapter

11 of the Bankruptcy Code.

PLI Disbursement Trust means the trust cre-

ated pursuant to § 6.00 of this Plan and the PLI

Disbursement Trust Agreement.

PLI Disbursement Trust Agreement means the

agreement specifying the rights and obligations

of tne PLI Disbursement Trust and the PLI Dis-

bursement Trustee, which agreement shall be

substantially in the form of Exhibit E.

PLI Disbursement Trustee means the person or

entity who will serve as trustee for the PLI Dis-

bursement Trust.

a a

Pro Rata means, with respect to a Creditor in

Class 5A, 5C, or Assenting Class 6 and with

respect to a particular distribution under the

Plan, in the same proportion that the Allowed

Claim held by such Creditor bears to the aggre-

gate of all Allowed Claims of all Creditors in

such class, subject to § 5.14 of the Plan with

respect to Class 5C. With respect to a holder of a

Deferred Administrative Claim or a holder ofa

Deferred Priority Claim and (subject to § 8.02(a)

of the Plan) with respect to a particular distri-

bution of Available Cash of the PLI Disburse-

ment Trust, Pro Rata means in the same

68a

proportion that the particular Deferred Admin-

istrative Claim or Deferred Priority Claim bears

to the aggregate of all Deferred Administrative

Claims or Deferred Priority Claims as the case

may be.

* ee §6¢

ARTICLE II

DESIGNATION OF CLASSES OF CLAIMS

AND INTEREST ,

The Allowed Claims and the Allowed Interest

are classified into the following classes:

* *& *

2.07 Class 5C. Class 5C shall consist of all

Allowed Unsecured Claims other than those in

Class 4, Class 5A, Class 5B, or Class 6.

2 2

ARTICLE III

SPECIFICATION OF CLAIMS AND

INTEREST IMPAIRED AND UNIMPAIRED

UNDER THE PLAN

3.01 Claims. Classes 1, 2, and 3 are unim-

paired under the Plan. Classes 4, 5A, 5B. 5C, and

6 are impaired under the Plan.

7: FF

69a

ARTICLE IV

TREATMENT OF CLASSES

* * &

4.05.03 Class 5C. Each holder of a Class 5C

Claim, subject to §§ 5.01, 5.15, and 6.01c of this

Plan, shall receive:

(i) its Pro Rata share of any VCI Stock Net

Sale Proceeds (or other proceeds) dis-

tributed by the VCI Stock Escrow Agent in

accordance with § 6.0lc of the Plan; and

(ii) after payment in full of all Deferred

Administrative Claims and all Deferred

Priority Claims, its Pro Rata share of a

percentage (calculated in accordance with

and subject to § 4.05.04(b) of the Plan) of

any further distributions of Available Cash

of the PLI Disbursement Trust.

In addition, subject to possible defenses to pay-

ment Clubs or other insurers may have, holders

of Insured Claims in Class 5C, including holders

of Allowed Late-Filed Asbestos Claims, may be

entitled to payment in cash of Excess Claims,

directly or indirectly, from Clubs or other insur-

ers. As set forth in § 4.05.07(a) of the Plan,

$200,000 shall be set aside by the PLI Disburse-

ment Trust in order to attempt to preserve insur-

ance rights and to provide funds for the

liquidation of Personal Injury Claims and Cargo

Damage Claims and an additional $300,000 shall

be set aside in Liman Funds. If the Bankruptcy

Court determines that additional consideration

must be afforded to holders of Class 5C Claims in

70a

order to confirm the Plan, then the Proponents

may jointly provide for such additional consid-

eration, subject to the approval of the

Bankruptcy Court. The additional consideration

may reduce the distributions to Class 5A, Cold

Spring, and/or Assenting Class 6. Any additional

consideration given to Class 5C, as provided

above, and any reduction in distributions to

Class 5A, Cold Spring and/or Assenting Class 6,

shall be subject to Bankruptcy Court approval.

* * *

4.05.04 Distributions of Available Cash of the

PLI Disbursement Trust.

ee

(b) To the extent that there is Available Cash

of the PLI Distribution Trust for distribution

after all Deferred Administrative Claims and all

Deferred Priority Claims have been paid in full,

the PLI Disbursement Trustee shall, before mak-

ing each such distribution (unless' the

Bankruptcy Court orders otherwise), provide at

least 20-days written notice of the intended dis-

tribution to the Creditors’ Committee the

Asbestos Creditors’ Committee, and all Creditors

who have requested notice pursuant to

Bankruptcy Rule 2002. Unless such a committee

or Creditor files with the Bankruptcy Court and

serves on the PLI Disbursement Trustee and all

other committees and Creditors entitled to notice

of the intended distribution, prior to the pro-

posed distribution date, a motion requesting that

a disproportionately large percentage of the dis-

tribution be allocated to Class 5C, the PLI Dis-

bursement Trustee shall allocate such Available

7la

Cash among Classes 5A, 5B, 5C and 6 based on

such class’ proportionate share of the total

amount of Allowed Claims in Classes 5A, 5B, 5C

and 6, except that Cold Spring’s proportionate -

share, subject to § 4.06 of this Plan, shall be cal-

culated taking into account the entire amount of

Allowed Claims in both Class 5B and Class 6

(with Creditors classified in Class 6 to receive no

proportionate share unless Class 6 votes for the

Plan in which case such Creditors shall obtain a

share calculated in accordance with § 4.06 of the

Plan). If such a motion is timely filed and served,

the Bankruptcy Court shall hold a hearing at the

conclusion of which it may direct that a dispro-

portionately large percentage (up to 100%) of the

distribution shall be allocated to Class 5C if nec-

essary in order to provide Class 5C with treat-

ment that is sustantially equal (after taking into

account the aggregate amount of Allowed Claims

in each such class) to that provided under the

Plan in respect of Classes 5A, 5B, and 6. To the

extent that the Bankruptcy Court does so direct,

it shall also direct that the percentage of the dis-

tribution allocated in respect of each of Classes

5A, 5B and 6 shall be proportionately reduced.

* * *

4.05.07 Treatment of Certain Claimants.

(a) Allowed Insured Claims:

(1) Subject to the remainder of this § 4.05.07(a)

of the Plan and the terms of the PLI Disburse-

ment Trust Agreement, the PLI Disbursement

Trust will succeed to all insurance rights of PLI

(but not to any insurance rights of VCI) in exis-

tence as of the Effective Date, including any such

72a

rights to indemnification, reimbursement, con-

tribution, or other payment in respect of any Per-

sonal Injury Claim or Cargo Damage Claim and

any other such rights PLI may have to receive

payment (other than payment of Hellenic Liti-

gation Proceeds with respect to which § 6.04 of

the Plan shall govern) from any Club or other

insurer (or to offset such a right to receive pay-

ment against a Claim by any such Club or other

insurer). In an effort to preserve insurance cov-

erage for the benefit of holders of Allowed Per-

sonal Injury Claims and Cargo Damage Claims,

the PLI Disbursement Trust may offset (to the

extent permitted by applicable law) any such

other right to receive payment from a Club or

other insurer against any Claim such Club or

insurer may have against PLI.

Subject to the rest of this § 4.05.07(a) of the

Plan, the PLI Disbursement Trustee shall

attempt to secure the insurance rights of PLI to

which it shall succeed. In furtherance thereof,

the PLI Disbursement Trustee is authorized to

enter into agreements with one or more Clubs or

other insurers that provide or provided insurance

to PLI or a Predecessor Company, which agree-

ments provide in substance that holders of

Allowed Insured Claims have Allowed Claims in

Class 5C for the Deductible Claim and that the

Club or other insurer shall make cash payments,

directly or indirectly, to the holder of the Allowed

Insured Claim for any Excess Claim.

The PLI Disbursement Trustee may also take

other steps as specified herein reasonably

intended to obtain the benefits of insurance and

to obtain reimbursement of defense costs in

73a

excess of the applicable deductible. In particular,

te the extent necessary in order to obtain pay-

ment by a Club or other insurer of Excess

Claims, and subject to the availability of funds

for such purpose and satisfactory assurances and

documentation as set forth below, the PLI Dis-

bursement Trustee is authorized to enter into

arrangements under which in substance the PLI

Disbursement Trust pays the Allowed Insured

Claim in full in cash; the holder of the Allowed

Insured Claim repays in cash the full amount of

the Deductible Claim and the Club or other

insurer reimburses the PLI Disbursement Trust

in cash for the full amount of the Excess Claim

(and any previously unreimbursed defense costs

in excess of the applicable deductible incurred in

connection with liquidation of the Claim); and

the holder of the Allowed Insured Claim is given

an Allowed Claim in Class 5C in the amount of

the Deductible Claim. The PLI Disbursement

Trustee shall enter into no such arrangement

and shall make payment of no such Claim unless

it obtains satisfactory assurances and documen-

tation that the PLI Disbursement Trust shall

promptly receive in cash repayment and/or reim-

bursement of the full amount of the Allowed

Insured Claim paid by the PLI Disbursement

Trust such that the entire amount paid by the

PLI Disbursement Trust shall remain available

to the PLI Disbursement Trust. The PLI Dis-

bursement Trustee may alternatively enter into

any lawful arrangement designed to achieve the

same purpose, as may be agreed upon by the

holder of an Allowed Insured Claim and the PLI

Disbursement Trustee, but in connection with

74a

such an arrangement may not use funds of the

PLI Disbursement Trust, as set forth below,

unless adequate assurances and documentation

are provided ensuring that the PLI Disbursement

Trust will promptly receive repayment and/or

reimbursement of all amounts paid by the PLI

Disbursement Trust.

In order to fund the payment of Allowed

Insured Claims pursuant to the types of arrange-

ments set forth above, the PLI Disbursement

Trust shall set aside and place in reserve

$300,000 of the monies to be transferred from

Reorganized PLI to the PLI Disbursement Trust

pursuant to §6.04 of the Plan. Such Liman

Funds shall be used solely to fund payments of

Allowed Insured Claims as provided above except

that, if such funds are not needed for this pur-

pose, the Bankruptcy Court upon proper motion

may authorize the use of such funds for other

purposes in connection with efforts to liquidate

Personal Injury Claims and Cargo Damage

Claims and to preserve insurance rights. Upon

repayment and/or reimbursement of the full

amount of an Allowed Insured Claim paid by the

PLI Disbursement Trust using Liman Funds, the

funds repaid and/or reimbursed shall be added

back to the Liman Funds such that the $300,000

is available as needed on a sustaining basis for

use in funding the payment of Allowed Insured

Claims.

(11) To the extent possible, the provisions of

this Plan are designed to preserve insurance

rights and actions which shall be determined by

a Final Order to cause a cancellation or reduction

15a

in coverage shall be deemed void ab initio.

Accordingly, any succeeding to an insurance

right by the PLI Disbursement Trust which shall

result in cancellation or reduction of coverage

shall be void ab initio, and Reorganized PLI shall

be responsible for pursuing such insurance right

to the same extent as the PLI Disbursement

Trust would have been under the Plan; provided,

however, that in such case Reorganized PLI shall

be responsible for pursuing such insurance right

only to the extent that the PLI Disbursement

Trust provides Reorganized PLI in advance with

the necessary financing to pay for all costs,

expenses, legal fees and liabilities associated

therewith. To the extent possible,’ the

Bankruptcy Court shall have continuing juris-

diction over all aspects of the efforts to preserve

insurance rights for the benefit of holders of

Allowed Insured Claims.

No Insured Claim shall be deemed discharged

hereunder to the extent, but solely to the extent,

that the survival of such Claim shall be required

in order «ec preserve an insurance right. Never-

theless, 1 2ither the survival of such Claim for

the limited purpose of preserving an insurance

right nor any other provision of this Plan shall

give the holder of such Claim any right whatso-

ever against Reorganized PLI or any of the other

Companies, or any right against the PLI Dis-

bursement Trust (or the VCI Stock Escrow) other

than the right (to the extent the Claim is allowed

and subject to § 4.05.07(a)(iv) of the Plan) to

receive a Class 5C Claim, equal to the Deductible

Claim if the Club or insurer is liable for and

makes payment in respect of any Excess Claim

76a

relating to such Insured Claim, and any recovery

from the Club or other insurer as may be

obtained in respect of any such Excess Claim.

Notwithstanding any other provision of the Plan,

to the extent that there is a determination that a

Club or other insurer is not liable for or cannot

be required to make payment in respect of a

potential Excess Claim, the holder of such a

Claim shall have no right whatsoever against

Reorganized PLI or any of t. e other companies,

and no right against the PLI Disbursement Trust

(or the VCI Stock Escrow) except the right to be

granted (unless such holder agrees to accept a

Class 5C Claim in a lesser amount) a Class 5C

Claim equal to the full amount of the Allowed

Personal Injury Claim or Allowed Cargo Damage

Claim.

(iii) Subject, to § 4.05.07(a)(v) of this Plan, the

PLI Disbursement Trustee shall attempt to liq-

uidate all unliquidated Personal Injury Claims

and Cargo Damage Claims. Since it is likely that

all Cargo Damage claims in respect of a voyage

(or possibly voyage leg) must be liquidated before

it can be determined whether such Claims exceed

the applicable deductible for that voyage or voy-

age leg, the PLI Disbursement Trustee is autho-

rized to liquidate all Cargo Damage Claims

against a voyage or voyage leg, as appropriate,

before deeming any such Cargo Damage Claim

(other than a Cargo Damage Claim in Class 4)

relating thereto an Allowed Claim. Subject to

§§ 4.05.07(a)(1i) and (iv) of the Plan, once all such

Claims for a voyage or voyage leg are liquidated,

and to the extent possible without adversely

77a

affecting insurance rights, each Allowed Cargo

Damage Claim against the voyage or voyage leg

(other than any such Allowed Cargo Damage

Claim in Class 4) shall share ratably with all

other Allowed Cargo Damage Claims (other than

any such Claims in Class 4) against the same

voyage or voyage leg based on the allowed

amount of each such Cargo Damage Claim (i) a

claim against the applicable deductible and shall

receive in distribution therefor an Allowed Claim

in Class 5C equal to such ratable share, and (11)

a claim in respect of any insurance rights relat-

ing to such Allowed Cargo Damage Claims and

shall receive in distribution therefor, to the

extent recovered, cash from the insurer or Club

equal to such ratable share.

(iv) Nothing in this Plan shall require Reorga-

nized PLI or the PLI Disbursement Trust

(although the PLI Disbursement Trust may do so

subject to § 4.05.07(a)(v)) to pay to any Club or

insurer any cash or other consideration in

respect of a Claim asserted by such Club or

insurer, other than to provide such claimant, to

the extent its Claim is allowed, with a Claim in

the appropriate class under this Plan. To the

extent there shall be a determination that

amounts are due and owing from PLI to a Club or

insurer which the Club or insurer may offset or

recoup against amounts due to PLI, Reorganized

PLI, the PLI Disbursement Trust or any claimant

in respect of Excess Claims (and to the extent

such amounts are not otherwise offset pursuant

to § 4.05.07(a)(i) of the Plan or otherwise), and to

the extent possible, each holder of an affected

78a

Allowed Insured Claim shall share ratably (with

all other holders of affected Allowed Insured

Claims based on the allowed amount of each such

Insured Claim) (a) a claim againsi the offset or

recouped amount and shall receive in distribu-

tion therefor an Allowed Claim in Class 5C and

(b) a claim in respect of any remaining insurance

rights relating to such affected Allowed Insured

Claims and shall receive in distribution therefor,

to the extent recovered, cash from the insurer or

Club equal to such holder’s ratable share.

(v) Upon the Modification Date or as soon

thereafter as practicable, Reorganized PLI shall

transfer to the PLI Disbursement Trust

$200,000. The PLI Disbursement Trust shall

invest and maintain such Insurance Preservation

and Claims Liquidation Funds separate from all

other assets of the PLI Disbursement Trust and

shall use such funds solely in efforts to liquidate

Personal Injury Claims and Cargo Damage

Claims and to preserve insurance rights for

Allowed Insured Claims as provided in this Sec-

tion of the Plan. Tue PLI Disbursement Trustee

shall be precluded from using any funds of the

PLI Disbursement Trust other than Insurance

Preservation and Claims Liquidation Funds in

such efforts, except that the PLI Disbursement

Trustee may use the Liman Funds for the pur-

poses and subject to the conditions set forth in

§ 4.05.07(a)(i) of the Plan.

The PLI Disbursement Trustee shall be autho-

rized to consult with lawyers or other profes-

sionals, as well as with the Creditors’ Committee

and the Asbestos Creditors’ Committee, con-

79a

cerning the most prudent, efficient, and produc-

tive ways to liquidate Personal Injury Claims

and Cargo Damage Claims and to attempt to pre-

serve insurance rights and concerning the fairest

allocation of expenditures by the PLI Disburse-

ment Trust for these purposes in light of the var-

ious different Personal Injury Claims and Cargo

Damage Claims and the extent of Insurance

Preservation and Claims Liquidation Funds

available to the PLI Disbursement Trust. Subject

to the availability of Insurance Preservation and

Claims Liquidation Funds, such expenditures

may include, but are not necessarily limited to,

fees of attorneys and other professionals with

whom the PLI Disbursement Trustee consults

concerning the resolution of Insured Claims and

efforts to preserve insurance rights; the legal

fees and other costs incurred in liquidating Per-

sonal Injury Claims and Cargo Damage claims

and in pursuing litigation against a Club or other

insurer which the PLI Disbursement Trust may

initiate in an effort to preserve insurance rights

as set forth in § 4.505.07(a)(vi) of the Plan;

expenses incurred in obtaining and reviewing

insurance policies of the Debtor or Predecessor

Companies; or any cash payments that the PLI

Disbursement Trust may determine to make toa

Club or other insurer in respect of a Claim it may

have against PLI in order to attempt to preserve

insurance rights. Subject to § 4.05.07(a)(vi) of the

Plan, and any Final Order issued by the

Bankruptcy Court, the PLI Disbursement

Trustee shall have discretion to determine such

uses of Insurance Preservation and Claims Liq-

uidation Funds that are appropriate.

80a

To the extent that the PLI Disbursement

Trustee is able to preserve insurance rights in

respect of Excess Claims and to liquidate all Per-

sonal Injury Claims (including Allowed Late-

Filed Asbestos Claims) and Cargo Damage

Claims without expending all Insurance Preser-

vation and Claims Liquidation Funds or all

Liman Funds, the PLI Disbursement Trustee

shall petition the Bankruptcy Court (on notice to

the Creditors’ Committee, the Asbestos Creditors’

Committee, and Creditors who have requested

notice under Bankruptcy Rule 2002) for author-

ity to distribute such excess funds (subject to

§§ 5.01 and 5.15 of the Plan) on a Pro Rata basis

to holders of Allowed Claims in Class 5C.

(vi) To the extent necessary to preserve insur-

ance rights and to obtain payment in respect of

Excess Claims by a Club or other insurer, the

PLI Disbursement Trust is authorized and

directed to file a declaratory judgment action or

other appropriate action against such Club or

other insurer unless such an action cannot be

maintained consistent with settled law. Subject

to the entry of any necessary court orders and to

the extent not prohibited by applicable law, the

Asbestos Creditors’ Committee or any holder of a

Class 5C Claim shall be authorized to intervene

in such an action. The PLI Disbursement Trust

shall support the intervention of the Asbestos

Creditors’ Committee or any holder of a Class 5C

Claim desiring to intervene and shall otherwise

cooperate to the extent possible with such com-

mittee or holder in the prosecution of any such

action. Except to the extent the Bankruptcy

8la

Court may authorize the use of the Liman Funds

in such an effort, the PLI Disbursement Trust

may not use proceeds other than the Insurance

Preservation and Claims Liquidation Funds in

connection with the prosecution of such an

action.

ARTICLE VI

MEANS OF EXECUTION

The Plan is to be implemented in a manner

consistent with the provisions of Section 1123 of

the Bankruptcy Code. The Plan contemplates

that the following will occur within the time

specified:

6.00 Creation of the PLI Disbursement Trust.

Upon the Modification Date or as soon thereafter

as practicable, the PLI Disbursement Trust shall

be established. Subject to the rest of this Section

of the Plan, the PLI Disbursement Trust shall

continue to exist so long as (i) there are sources

of potential Available Cash for the PLI Dis-

bursement Trust, (ii) there remain unclaimed

distributions, Disputed Claims, or funds held for

potential Allowed Late-Filed Asbestos Claims

that preclude distributions from the PLI Dis-

bursement Trust to Creditors, or (iii) the PLI

Disbursement Trust continues to hold Insurance

Preservation and Claims Liquidation Funds, but

in no event shall it exist for more than 20 years..

At such time as it appears that none of these con-

ditions continues to exist or that there is insuf-

ficient cash to pay for the liabilities and costs of

82a

the PLI Disbursement Trust, the Creditors’ Com-

mittee or the PLI Disbursement Trustee may

seek Bankruptcy Court authorization to termi-

nate the PLI Disbursement Trust and to disburse

any remaining assets (beyond those needed to

cover the liabilities and costs of the PLI Dis-

bursement Trust) to those Creditors entitled to

receive such assets in accordance with the Plan

or as may otherwise be authorized by the

Bankruptcy Court.

The PLI Disbursement Trust shall be distinct

from Reorganized PLI, which shall have no lia-

bility whatsoever for any obligations of the PLI

Disbursement Trust created pursuant to the Plan

or otherwise. To the extent that after the Modi-

fication Date Reorganized PLI incurs, or is billed

for, any expense or liability in respect of a Claim

in the PLI Chapter 11 Case (including legal fees

incurred in connection with the defense of such

Claim but not including any such fees or other

expenses incurred in the preparation and litiga-

tion by Reorganized PLI of an objection it deter-

mines to file to a Claim) or in respect of any

event or occurrence arising before the Effective

Date, such expense or liability shall be an

expense or liability of the PLI Disbursement

Trust which shall hold Reorganized PLI harmless

therefor and for all other liabilities and obliga-

tions of the PLI Disbursement Trust. The PLI

Disbursement Trust shall be a distinct taxable

entity which shall be liable for any federal, state

or local taxes (including income taxes) related to

or arising from its assets or activities except to

the extent income is distributed or otherwise tax-

able to the beneficiaries of the trust. No other

83a

entity or individual shall be liable for such taxes.

Notwithstanding the above, nothing in this Plan,

the PLI Disbursement Trust Agreement, or the

Amended PLI Charter shall be deemed to pro-

hibit Reorganized PLI from voluntarily agreeing

to pay (or to loan to the PLi Disbursement Trust

the funds needed to pay) any obligation of the

PLI Disbursement Trust (or from purchasing any

Claim against the trust, including any Deferred

Priority Claim) where, in the judgment of the

board of directors of Reorganized PLI, such

action would be in the best interests of Reorga-

nized PLI.

ARTICLE X

RETENTION OF JURISDICTION

The Bankruptcy Court shall retain jurisdiction

over the PLI Chapter 11 Case for the following

purposes:

(a) to determine any and all objections to the

allowance of Claims and Interests and to esti-

mate the aggregate amount of Allowed Claims in

Class 5C (including Allowed Late-Filed Asbestos

Claims) to the extent permitted by § 5.14 of the

Plan, Section 502(c) of the Bankruptcy Code, and

28 U.S.C. § 157;

(b) to determine any and all applications for

allowance of compensation and reimbursement of

expenses;

(c) to determine any and all controversies and

disputes arising under or in connection with the

84a

Plan, the PLI Disbursement Trust Agreement, or

any of the other agreements or instruments

issued pursuant to the Plan;

(d) to hear and determine any applications or

adversary proceedings or contested matters,

including proceedings then pending or thereafter

brought to recover or avoid preferences or fraud-

ulent conveyances or actions brought against per-

sons who were officers or directors of PLI or VCI

at any time before the Effective Date;

(e) to determine and fix all Claims arising from

the rejection of any executory contract or lease;

(f) to enforce the provisions of the Plan;

(g) to hear any application to modify the Plan

in accordance with Bankruptcy Code Section

1127, or to correct any defect, cure any omission,

or reconcile any inconsistency in the Plan, Orig-

inal Disclosure Statement, Amended Disclosure

Statement, Confirmation Order, Modification

Order, the PLI Disbursement Trust Agreement or

any of the other agreements or instruments

issued pursuant to the Plan as may be necessary

to carry out the purposes of the Plan;

(h) to resolve disputes concerning Insured

Claims and disputes with Clubs or other insurers

to the extent permitted by law; and

85a

(1) to determine such other matters as may be

provided for in the Confirmation Order or the

Modification Order.

Respectfully submitted,

OFFICIAL COMMITTEE OF UNSECURED

CREDITORS

By: /s/ Albert Franco. its Chairman

COLD SPRING SHIPPING, L.P.

By: /s/ Cold Spring Shipping. Inc.,

its General Partner

VESSEL CHARTERS, INC.

By: /s/ Mark M. Feldman. its President

Se <= =

Dated: August 17, 1990

86a

UNITED STATES BANKRUPTCY COURT

SOUTHERN DISTRICT OF NEW YORK

In a Proceeding for a Reorganization

under Chapter 11

Case No. 86-B-11773 (HCB)

In re

PRUDENTIAL LINES, INC.,

Debtor.

EXTRACTS FROM

SUPPLEMENTAL DISCLOSURE

STATEMENT ACCOMPANYING SECOND

AMENDED JOINT PLAN OF REORGANIZATION,

AS MODIFIED, PROPOSED BY THE OFFICIAL

COMMITTEE OF UNSECURED CREDITORS,

COLD SPRING SHIPPING, L.P., AND

VESSEL CHARTERS, INC.

The Official Committee of Unsecured Creditors

(the “Creditors’ Committee”), Cold Spring Ship-

ping, LP. (“Cold Spring”), and Vessel Charters,

Inc. (““VCI”) provide this Supplemental Disclosure

Statement in connection with certain modifica-

87a

tions proposed by the Creditors’ Committee, Cold

Spring, and VCI (collectively, the “Proponents”)

to the Second Amended Joint Plan of Reorgani-

zation, dated as of October 2, 1989 (the “Original

Plan”).

The Bankruptcy Court has approved this Sup-

plemental Disclosure Statement as containing

information sufficient to enable affected Credi-

tors to make an informed judgment about the

proposed modifications. However, the Bank-

ruptcy Court has made no determination as to

the merits of the proposed modifications. The

Bankruptcy Court has scheduled a hearing to

consider confirmation of the Original Plan as

modified (the “Modified Plan”) on September 26,

1990, at 2:00 P.M. in Room 601 of the Old United

States Customs House, 1 Bowling Green, New

York, New York.

A copy of the Modified Plan is enclosed here-

with. The Supplemental Disclosure Statement

contains summaries of certain provisions of the

Modified Plan that were not included in the Orig-

inal Plan or that have been modified and of

related documents (some of which are in draft

form and may be adjusted prior to the Modifica-

tion Date). However, the summaries are qualified

to the extent that they do not set forth the com-

plete text of the Modified Plan and related doc-

uments. YOU ARE THEREFORE URGED,

BEFORE VOTING ON THE MODIFIED PLAN,

TO READ THE MODIFIED PLAN AND THE

ATTACHED DOCUMENTS IN THEIR

ENTIRETY. Pursuant to Bankruptcy Court

order, the Proponents have attached to the Dis-

closure Statement and the Modified Plan as sent

88a

to Creditors drafts of certain important related

documents, such as the Amended PLI Charter

and the Amended VCI Charter, and have agreed

to make available drafts of other documents,

such as the various notes, mortgages, and secu-

rity agreements to be issued in connection with

the Modified Plan. A list of the documents that

are available upon request is attached hereto as

Exhibit 1. Creditors who wish to review the

drafts of these documents may do so by writing to

Wilmer, Cutler & Pickering, 2445 M Street,

N.W., Washington, D.C. 20037, Attention,

Patrick T. Connors.

Unless otherwise noted, capitalized terms used

in this Supplemental Disclosure Statement have

the meaning set forth in the Modified Plan.

= * &

BACKGROUND

The Creditors’ Committee and Cold Spring

were the proponents of the Original Plan. By

Order dated October 3, 1989, the Bankruptcy

Court approved a disclosure statement as con-

taining adequate information concerning the

Original Plan (the “Original Disclosure State-

ment”). Thereafter, copies of the Original Dis-

closure Statement, the Original Plan, and a

ballot were mailed to Creditors. Following accep-

tance of the Original Plan by those classes of

Creditors that were impaired, the Bankruptcy

Court confirmed the Original Plan by Order

dated December 15, 1989 (the “Confirmation

89a

Order”).' The Original Plan became effective on

December 21, 1989. As contemplated, new man-

agement assumed control of PLI and a company

affiliated with Philip J. Shapiro, Polaris Shining,

Inc. (“Polaris”), assumed operating responsibility

in connection with PLI’s subsidiary, VCI, which

owns three vessels (the Santa Adela, the Santa

Juana, and the Santa Victoria) on charter to the

United States Military Sealift Command

(“MSC”).

In preparing the Original Plan, the Creditors’

Committee and Cold Spring relied extensively on

information provided by former management of the

Debtor, including financial data concerning the

Debtor and VCI. Projections through 1995 prepared

by the Debtor indicated that, if the three VCI ves-

sels remained on charter and subject to certain

other assumptions, VCI would likely generate suf-

ficient cash flow to cover its operating costs, to pay

$400,000 per year to the NYSA-ILA Pension Trust

Fund (the “Fund”) in settlement of the Fund’s

“withdrawal liability” claim against VCI (for a dis-

cussion of that claim, see pages M-76—M-77 of the

Original Disclosure Statement), and to provide a

source of cash flow for priority and unsecured Cred-

itors of the Debtor. The Creditors’ Committee and

| The Original Plan as confirmed contained certain

modifications and additions made to the version sent to

Creditors with the Original Disclosure Statement; these

changes related principally to Class 5C and were largely

requested by counsel for many of the asbestos claimants. A

copy of the Original Plan as amended and confirmed is

attached to'the Confirmation Order and is available for

inspection through the Clerk’s office at the Bankruptcy

Court and by request of the Proponents.

90a

Cold Spring structured the Original Plan on the

basis of these projections.

The principal reasons for the proposed modifi-

cations to the Original Plan relate to (1) the

actual financial condition of VCI as of the Effec-

tive Date as compared with the financial condi-

tion the Creditors’ Committee and Cold Spring

anticipated based on information provided by for-

mer management of PLI and VCI, and (2) the

operating projections for VCI provided by former

management which appear to have beat unreal-

istic. The adverse developments at VCI include

the following:

* 2

These developments have led to significant

cash shortfalls at VCI. In January 1990, PLI

made two interest-bearing loans to VCI totaling

$350,000 (the “PLI Initial Loans”). Despite these

loans, VCI was unable in March 1990 to make

two substantial scheduled payments: another

$200,000 payment to the Fund and a payment of

approximately $175,000 in respect of both Title

XI debt (the “Santa Victoria Title XI Debt”) and

a loan from Marad (the “Marad Loan”) secured by

mortgages on the Santa Victoria.

* * *

OUTLINE OF PRINCIPAL ELEMENTS OF

THE PROPOSED RESTRUCTURING

The following is a brief outline, subject to

potential exceptions, of certain of the principal

elements of the proposed restructuring contem-

plated by the Modified Plan. It is not meant to be

Sla

an exhaustive description of the restructuring

and is not a substitute for a careful review of the

entire Supplemental Disclosure Statement, the

Modified Plan, and all accompanying documents.

The withdrawal liability claim of the Fund

will be subject to a settlement under

which (among other things) VCI will make

one additional cash payment of $250,000

and will issue convertible voting preferred

stock to the Fund that will have certain

preferred dividend and redemption rights

and entitle the Fund to a liquidation pref-

erence in the event of the dissolution of

VCI. VCI will not have to make further

cash payments to the Fund pursuant to

the Withdrawal Liabilitv Stipulation.

A newly-formed, wholly-owned subsidiary

of PLI, “Shipco”, will purchase two of the

VCI vessels, the Santa Adela and the

Santa Juana, for (among other considera-

tion and in connection with all the other

transactions contemplated under the Mod-

ified Plan) $2.5.million and forgiveness of

the PLI Initial Loans. VCI will use the

$2.5 million to make the $250,000 pay-

ment to the Fund; to repay principal and

interest on the $552,000 Cold Spring First

Loan, the $350,000 PLI Second Loan, and

the $300,000 Cold Spring Second Loan; to

prepay the existing first mortgages on the

Santa Adela and the Santa Juana; to help

fund the payment of charter hire for the

Charter Vessels (see below); and possibly

further to reduce payables and to provide

92a

working capital. Shipco will obtain the

$2.5 million from a loan to be made by a

newly-formed partnership, HBT, L.P.

(“HBT”). This loan will be secured by

mortgages on the two vessels that will be

acquired by Shipco, by a PLI guarantee,

by a second priority lien on all PLI assets,

and by a security interest in the special

account created by Shipco for the charter

payment made by VCI pursuant to the

Shipco-VCI Charter Parties.

Shipco will “bareboat charter” each of the

Santa Adela and the Santa Juana back to

VCI for a period coextensive with the MSC

Contract for the vessel Including any

option period to extend the MSC Contract

if exercised by MSC and to the extent the

vessel remains on charter to MSC

throughout the option period), charging

for both vessels combined a total of

$500,000 in charter hire for the primary

term of the MSC Contracts for the two

Charter Vessels and providing for quiet

enjoyment for MSC with respect to use of

each vessel during the term of the MSC

Contract for that vessel. The bareboat

charter agreements will allow VCI, if (and

only if) it satisfies certain conditions (sce

pages 10-11 below), to renew the bareboat

charters at market rates at the conclusion

of the MSC Contracts.

To facilitate distributions to Creditors, a

PLI Disbursement Trust will be created.

93a

VCI will issue a note in the amount of $5

million, payable from Available Cash of

VCI, to the PLI Disbursement Trust. The

note will be secured by a mortgage on the

vessel that will still be owned by VCI, the

Santa Victoria, junior to the existing

mortgages on that vessel.

HBT will make a $500,000 loan to Reor-

ganized PLI, repayment of which will be

guaranteed by Shipco and will be secured

by a third priority lien on all PLI assets,

and by a second mortgage on the two ves-

sels acquired by Shipco. Subject to certain

limits and conditions, HBT will also com-

mit to advance funds, secured by a first

lien on all PLI assets, a Shipco guarantee,

and a second mortgage on the two vessels

acquired by Shipco, for various expenses

that have been incurred since the Effec-

tive Date and that likely will be incurred

after the Modification Date, including

expenses in connection with preparation

of the plan modifications, corporate and

administrative expenses of Reorganized

PLI and Shipco, and legal fees and other

expenses in regard to pending litigation.

- +

All of the common stock in VCI currently

owned by Reorganized PLI will be can-

celled as of the Modification Date. 50,000

shares of VCI Common Stock will be

issued to a VCI Stock Escrow Agent for

the benefit of holders of Allowed Claims in

94a

Class 5C. Following expiration or term1i-

nation of the latter of the MSC Contracts

for the Santa Adela and the Santa Juana,

the VCI Stock Escrow Agent will attempt

to sell the 50,000 shares and (after the

Inter-Class Proportionate Distribution

Date), to distribute any VCI Stock Net

Sale Proceeds to holders of Allowed

Claims in Class 5C.

& fF

4. The Plan Financing Loan: Under the Origi-

nal Plan, Cold Spring was to make a $500,000

Ican to PLI to help fund that plan. Under the

Modified Plan, HBT will make the $500,000 loan,

the proceeds of which will be available for Reor-

ganized PLI to use to make payments of Class 1

and Class 2 Claims (other than Deferred Admin-

istrative Claims and Deferred Priority Claims or

other priority claims paid on a deferred basis)

and Class 3 and Class 4 Claims and to reduce

payables incurred since the Effective Date

(including legal fees advanced by Cold Spring).

To the extent not used for these purposes, the

loan proceeds will be part of the funds available

for Reorganized PLI to transfer to the PLI Dis-

bursement Trust.

The $500,000 loan will be evidenced by a

promissory note (the “Plan Financing Note”) in

the principal amount of $500,000 to be given by

Reorganized PLI to HBT. The Plan Financing

Note will be due and payable on the earlier of

December 31, 1994 or the date when the Shipco

Note becomes due and payable, except that the

note shall be subject to acceleration under cer-

95a

tain conditions (including, but not limited to, a

default in an amount in excess of $10,000 by

Reorganized PLI or Shipco on any of their other

debt or other payment obligations). The Plan

Financing Note will bear interest at the rate of

15% per annum. It will be senior in priority of

payment to all other obligations of Reorganized

PLI other than Reorganized PLI’s obligations in

respect of the New Commitments. After repay-

ment of all funds (plus interest thereon) provided

by HBT pursuant to these commitments, Reor-

ganized PLI will be required on March 31 of each

year starting in 1991 (and will have the right at

all times) to use all Available Cash of Reorga-

nized PLI to pay accrued interest and thereafter

to redeem as much of the Plan Financing Note as

is possible. The Plan Financing Note will be fully

guaranteed by Shipco and will be secured by a

second mortgage on the Charter Vessels and by a

third priority lien on all existing and subse-

quently acquired assets of Reorganized PLI,

including its stock in Newco and Shipco, other

than the Transferred Assets.

5. The New Commitments: In addition to mak-

ing the Charter Vessels Mortgage Loan and the

Plan Financing Loan, HBT will also commit, sub-

ject to certain limits and conditions, to provide

funding by way of loans for various expenses in

connection with the preparation and implemen-

tation of the Modified Plan, general corporate

and administrative matters, and ongoing litiga-

tion. HBT will thus commit to provide funds up

to an aggregate of (1) $400,000 (to the extent

that Reorganized PL] otherwise has inadequate

96a

reserves or capital) to finance the legal fees and

other expenses incurred by Reorganized PLI or

VCI, or on their behalf by Cold Spring, in con-

nection with the negotiation, preparation and

distribution of the Fund Settlement, the Modified

Plan and Amended Disclosure Statement and

related documents (the “Modified Plan Funding

Expenses Commitment”), (2) $250,000, to the

extent that Reorganized PLI or Shipco otherwise

has inadequate reserves or capital, for general

administrative and corporate expenses incurred

by or on behalf of Reorganized PLI and Shipco on

or after the Effective Data (“Reorganized

PLI/Shipco General Corporate and Administra-

tive Expenses Commitment”); and (3) $200,000

for legal fees and other charges incurred by or on

behalf of Reorganized PLI (to the extent that

Reorganized PLI otherwise has inadequate

reserves or capital) or Cold Spring on or after the

Effective Date in connection with two litigation

matters and other potential related legal efforts

(“Litigation Funding Commitment”). HBT will

have discretion to advance funds in excess of the

dollar limits specified above in respect of these

commitments.

“e FR fF

6. The PLI Disbursement Trust: The Modified

Plan provides for Reorganized PLI to transfer

certain assets to the PLI Disbursement Trust

which will assume all obligations for distribu-

tions to Creditors following the Modification Date

(except for certain distributions in respect of

stock in PLI and VCI to be made from the Reor-

ganized PLI Shares Trust and VC] Stock

97a

Escrow). THE PLI |DISBURSEMENT TRUST

WILL BE DISTINCT FROM REORGANIZED

PLI, WHICH WILL HAVE NO LIABILITY FOR

ANY OBLIGATIONS OF THE PLI DISBURSE-

MENT TRUST. The rights and obligations of the

PLI Disbursement Trust and the PLI Disburse-

ment Trustee are set forth in the Modified Plan

and in a trust agreement that will be substan-

tially in the form of the draft contained at

Exhibit E to the Modified Plan. CREDITORS

ARE URGED TO READ THE PERTINENT SEC-

TIONS OF THE MODIFIED PLAN AND THE

DRAFT OF THE PLI DISBURSEMENT TRUST

AGREEMENT CAREFULLY.

Under the Original Plan, Reorganized PLI was

to administer the distribution of cash payments

in respect of Claims in Classes 1 - 4 and to issue

“Reorganized PLI Notes” to Unsecured Creditors

(other than those in Class 4). After the Effective

Date Reorganized PLI began to make cash pay-

ments in respect of certain priority and Class 4

Claims, but stopped when VCI’s financial prob-

lems became clear. For the same reason and

because the Claims resolution process had not

been completed with respect to the affected

classes, Reorganized PLI distributed no Reorga-

nized PLI Notes. NO SUCH NOTES WILL BE

ISSUED PURSUANT. TO THE MODIFIED

PLAN.

Under the Modified Plan, it is expected that

payment on certain Class 1 and Class 2 Claims

will be deferred in whole or part with the agree-

ment of the Creditors. Other than in respect of

these Claims, Reorganized PLI will attempt to

complete by the Modification Date, to the extent

98a

possible, the payment of Allowed Claims in Class

1, Class 2, Class 3 and Class 4. To the extent,

however, that this process is not completed by

the Modification Date — because a Claim is dis-

puted or has not yet been allowed by Final Order,

because an attempted payment is returned as

unclaimed, or for any other reason — the PLI

Disbursement Trust will assume all responsibil-

ity to make payment of these Claims after the

Modification Date, and Reorganized PLI will

have no further liability therefor.

The PLI Disbursement Trust will also assume

all liability with respect to Deferred Adminis-

trative Claims and Deferred Priority Claims.

The PLI Disbursement Trust will be funded as

follows: As noted above, the VCI Note will be

payable to the PLI Disbursement Trust. In addi-

tion, after making payments to Creditors in

Classes 1-4 to the extent set forth above and

after probably making certain other payments,®

Reorganized PLI will transfer on the Modifica-

tion Date to the PLI Disbursement Trust all

excess cash it then has on hand including any

unused proceeds derived from (1) the $500,000

Plan Financing-Loan from HBT, (2) VCI’s repay-

ment of the PLI Second Loan, and (3) two orders

to show cause that the Bankruptcy Court issued

8 As previously discussed, it is expected that on the

Modification Date Reorganized PLI will use some of the cash

available to it (including possibly some of the proceeds from

the $500,000 Plan Financing Loan, the repayment of the PLI

Second Loan, and the Aruba Litigation Proceeds and the

Hellenic Litigation Proceeds), to make payment of amounts

owed to Cold Spring for legal fees chargeable to PLI that

Cold Spring has advanced.

99a

at Reorganized PLI’s request since the Effective

Date (the “Aruba Litigation Proceeds” and the

“Hellenic Litigation Proceeds”). Reorganized PLI

will also transfer to the PLI Disbursement Trust

_all rights it has to receive any payments in

respect of the Egyptian Litigation.’ In addition,

upon the Modification Date, the PLI Disburse-

ment Trustee will be deemed the representative

of the estate for purposes of pursuing (in the PLI

Disbursement Trustee’s discretion, see pages 38-

39 below), and will be vested with all powers to

pursue, any preference, fraudulent conveyance or

other actions the estate may have for recovery of

transfers pursuant to Sections 547, 548, and 549

of the Bankruptcy Code, other than any such

actions against “insiders” (as that term is defined

in the Bankruptcy Code) of the Debtor or an affil-

iate thereof including former management of PLI

and VCI; any recovery the PLI Disbursement

9 The Modified Plan provides that the PLI Disburse-

ment Trustee may authorize counsel to prosecute the Egyp-

tian Litigation only on a contingency fee basis, unless the

Bankruptcy Court enters a Final Order to the contrary. The

counsel prosecuting the Egyptian Litigation is currently

handling the Amon matter on a contingency fee basis and

has agreed as part of the overall arrangement with such

counsel and subject to Bankruptcy Court approval to also

handle the Nile Soap matter on such a basis (with respect to

the period after June 1988). See pages 26-27 below. As dis-

cussed below, Reorganized PLI has filed an application for

authority to pay such counsel certain fees it asserts it is

owed for the period through June 1988, including fees in

respect of the Nile Soap matter.

100a

Trustee might obtain in such an action will be an

_asset of the PLI Disbursement Trust.’°

Using these sources of funds, and after paying

expenses and liabilities of the PLI Disbursement

Trust (and, if necessary, expenses of the Reor-

ganized PLI Preferred Shaves Trust and VCI

Stock Escrow as discussed below) and reserving

certain amounts as discussed below, the PLI Dis-

bursement Trustee will make distributions of

Available Cash of the PLI Disbursement Trust to

PLI Creditors. The trustee will make such dis-

tributions, first, to holders of Deferred Admin-

istrative Claims until such Claims have been

paid in full, thereafter to holders of Deferred Pri-

ority Claims until such Claims have been paid in

full, and finally, to the extent of any remaining

Available Cash and subject to possible adjust-

ment as discussed below, to Cold Spring and to

holders of Ailowed Claims in Classes 5A, 5C,

and, if it votes for the Plan, Class 6 (“Assenting

Class 6”).

Distributions of Available Cash will be made

(unless the Bankruptcy Court orders otherwise)

as soon as practicable after the PLI Disburse-

ment Trust receives a payment in respect of the

VCI Note or a recovery in respect of the Egyptian

Litigation or a claim under Sections 547, 548, or

549 of the Bankruptcy Code that the PLI Dis-

bursement Trustee may determine to bring which

results in’Available Cash, with Available Cash

calculated as of the date the PLI Disbursement

Reorganized PLI will retain no right, title or claim to

the assets (or any income derived therefrom) of the PLI Dis-

bursement Trust and will have no reversionary interest in

any of these assets.

10

10la

Trust receives the distribution producing the

Available Cash to be distributed, except that dis-

tributions of Available Cash to Cold Spring and

to holders of Allowed Claims in Classes 5A, 5C

and Assenting Class 6 will not commence until

all Disputed Claims in Classes 5A, 5B and

Assenting Class 6 are resolved and the aggregate

amount of Allowed Claims in Class 5C has been

estimated by the Bankruptcy Court. See pages

37-38 below. The proportionate interest of Cold

Spring and holders of Allowed Claims in Classes

5A, 5C and Assenting Class 6 in distributions of

Available Cash of the PLI Disbursement Trust

(after payment in full of all Deferred Adminis-

trative Claims and all Deferred Priority Claims),

and yossible adjustments to those interests, are

discussed at pages 32-33 below.

In addition to its responsibilities to make dis-

tributions of Available Cash, the PLI Disburse-

ment Trustee will be responsible for various

matters relating to efforts to preserve insurance

rights for the benefit of Insured Claims and the

resolution of Disputea Claims. See pages 34-37

below. Subject to the provisions discussed below

and the terms of the PLI Disbursement Trust

Agreement, the PLI Disbursement Trust will con-

tinue to exist so long as there are sources of

potential Available Cash of the PLI Disburse-

ment Trust, there sue unclaimed distributions,

Disputed Claims, or funds held for possible addi-

tional Allowed Late-Filed Asbestos Claims that

preclude distributions to Creditors, or there

remain funds for use to liquidate Personai Injury

and Cargo Damage Claims and to preserve insur-

ance rights (“Insurance Preservation and Claims

102a

Resolution Funds”). When none of these condi-

tions continues to exist or when it appears that

the PLI Disbursement Trust has insufficient cash

to pay for the liabilities and costs of the PLI Dis-

bursement Trust, Bankruptcy Court authoriza-

tion may be sought to terminate the PLI

Disbursement Trust and to disburse any remain-

ing assets thereof (beyond those needed to cover

the liabilities and costs of the PLI Disbursement

Trust) to those Creditors entitled to receive such

~ assets under the Modified Plan or as may other-

wise be authorized by the Bankruptcy Court. In

no event shall the PLI Disbursement Trust con-

tinue to exist for more than 20 years.

The PLI Disbursement Trust will hold Reor-

ganized PLI harmless in respect of all liabilities

the PLI Disbursement Trust assumes under the

Modified Plan. Similarly, to the extent that Reor-

ganized PLI may have any liabilities in connec-

tion with any of the assets or powers transferred

or granted to the PLI Disbursement Trust (or

with respect to, or that would be covered by, the

insurance rights to which the trust will succeed),

Reorganized PLI will be discharged with respect

thereto and such liabilities will become liabilities

of the PLI Disbursement Trust which will hold

Reorganized PLI harmless in respect thereof. The

PLI Disbursement Trust will also hold PLI harm-

less and assume all liability for any expense or

liability Reorganized PLI incurs or is billed for

after the Modification Date in respect of a Claim

in the PLI Chapter 11 Case or in respect of any

event or occurrence arising before the Effective

Date (other than costs in connection with the

103a

preparation and litigation of any objections Reor-

ganized PLI may determine to file to a Claim).

The PLI Disbursement Trustee will maintain

separately and not include in Available Cash of

the PLI Disbursement Trust for distribution to

Creditors funds for payment of Class 1 or Class 2

Claims (other than Deferred Administrative

Claims and Deferred Priority Claims) and Class

3 or Class 4 Claims that have not been paid by

Reorganized PLI by the Modification Date,

including (1) any Disputed Claim that if Allowed

will be in Class 1, 2, 3 or 4 (see pages 38-40

below) or (2) any Claim in those Classes, pay-

ment of which Reorganized PLI could not com-

plete by the Modification Date because of the

return of an attempted payment or because a

payment proved undeliverable to the holder. In

fact, several payments to Class 4 Creditors that

Reorganized PLI attempted to make after the

Effective Date were returned apparently because

the address shown on the proof of claim filed by

the Creditor apparently is no longer correct."

11 ~The Modified Plan generally provides that any

unclaimed or undeliverable distribution by Reorganized PLI

or the PLI Disbursemert Trust (including distributions of

Available Cash to Cold Spring and to Creditors in Classes

5A, 5B, and Assenting Class 6) will be held by the PLI Dis-

bursement Trust for the benefit of the Creditor for whom the

distribution was intended (unless otherwise ordered by the

Bankruptcy Court) until the fifth anniversary date of entry

of the Modification Order or the first anniversary of the

attempted distribution, whichever is later. Such a distri-

bution will be made to the Creditor upon presentation by the

Creditor of proper proof of its entitlement thereto. Similarly,

any unclaimed or undeliverable shares of stock or proceeds

thereof plus any net income earned thereon (after sub-

104a

The PLI Disbursement Trustee will also main-

tain separately and not include in the calculation

of Available Cash $200,000 of the funds to be

transferred by Reorganized PLI as of the Modi-

fication Date. As discussed more fully below, the

$200,000 will be available to the PLI Disburse-

ment Trustee for use in efforts to liquidate Per-

sonal Injury and Cargo Damage Claims and to

preserve insurance rights. See also page 35 below

concerning possible use of additional funds of the

tracting for funds needed to cover fees, costs and expenses

of the Reorganized PLI Shares Trust or VCI Stock Escrow as

provided in the Plan and the Reorganized PLI Shares Trust

Agreement and the VCI Stock Escrow Agreement) held by

the Reorganized PLI Preferred Shares Trustee or the VCI

Stock Escrow Agent shall be maintained for the benefit of

the Creditor for whom they were intended (unless the

Bankruptcy Court orders otherwise) until the later of one

year after the attempted distribution or five years after

entry of the Modification Order, pending presentation by the

Creditor of proper proof of its entitlement thereto.

Attempted payments on or prior to the Modification Date by

Reorganized PLI of Class 1, 2, 3 or 4 Claims that remain

unclaimed or undeliverable after the fifth anniversary of the

date of entry of the Modification Order (or such other date

as the Bankruptcy Court orders) shall be included in the

next calculation of Available Cash of the PLI Disbursement

Trust for distribution to Creditors pursuant to the Modified

Plan. The Modified Plan generally provides that other

attempted distributions that remain unclaimed or undeliv-

erable after the relevant cutoff date will be distributed by

the PLI Disbursement Trustee (or the Reorganized PLI

Shares Trustee or the VCI Stock Escrow Agent, as appro-

priate) on a Pro Rata basis (excluding th> Claims for which

distributions remain unclaimed or undeliverable) in accor-

dance with the terms of the Modified Plan to the remaining

identifiable holders of Allowed Claims in the appropriate

class.

105a

trust to fund payments of Allowed Insured

Claims.

The PLI Disbursement Trustee will be required

to furnish quarterly reports (or at such other fre-

quency as the Bankruptcy Court may require) to

the Bankruptcy Court, the Creditors’ Committee,

and the Asbestos Creditors’ Committee (if in

existence). These reports will describe steps

taken to implement the Modified Plan. Creditors

wishing to obtain copies of such report may do so

through the Bankruptcy Court.

The general expenses and liabilities of the PLI

Disbursement Trust, including the compensation

of the PLI Disbursement Trustee, will be paid

from the PLI Disbursement Trust and will be

deducted in calculating Available Cash thereof.

The PLI Disbursement Trustee may also main-

tain a reasonable working capital reserve and

reserve in respect of its liabilities, which reserve

will also be subtracted in calculating Available

Cash of the PLI Disbursement Trust. The PLI

Disbursement Trustee will be required to obtain

Bankruptcy Court authorization before he can

use funds of the PLI Disbursement Trust that

would otherwise be available for distribution to

Creditors to retain counsel, accountants or others

to assist him in matters relating to administra-

tion of the PLI Disbursement Trust (except that

the PLI Disbursement Trustee will be able, with-

out obtaining Bankruptcy Court approval, to use

Insurance Preservation and Claims Resolution

Proceeds in efforts to preserve insurance cover-

age and to liquidate Personal Injury Claims and

Cargo Damage Claims).

106a

The PLI Disbursement Trustee as of the Mod-

ification Date will be Lee J. DiCola. Mr. DiCola,

who has served in similar positions in reorganti-

zation proceedings involving UNIMET Corpora-

tion and its subsidiary, ESMET Inc, and The

Gibbons-Grable Company, will receive annual

compensation of $107,000 plus reimbursement

for such expenses as may be approved by the

Bankruptcy Court. The annual compensation will

cover the cost of any office space used by Mr.

DiCola and Mr. DiCola’s services as VCI Stock

Escrow Agent (see below), and will be subject to

reduction in the event that Mr. DiCola is not also

simultaneously serving as an officer and director

of VCI. After the expiation or termination of the

latter of the two MSC Contracts for the Charter

Vessels to expire or terminate, the Creditors’

Committee will be authorized to review the

annual compensation in light of the remaining

work to be performed by the PLI Disbursement

Trustee and to petition the Bankruptcy Court for

a reduction in the PLI Disbursement Trustee’s

compensation.

Mr. DiCola will also be the initial VCI Stock

Escrow Agent. As part of his obligations as VCI

Stock Escrow Agent, it is contemplated that Mr.

DiCola will become an officer and director of VCI

on or as soon.as practicable after the Modifica-

tion Date. —

The interest of Creditors in the PLI Disburse-

ment Trust will be subject to limitations on

transferability. As more fully set forth in the PLI

Disbursement Trust Agreement, no transfers will

be allowed except by will, intestate succession or

operation of law.

107a

CLASSIFICATION OF CLAIMS AND

DISTRIBUTIONS TO CREDITORS

The only significant change in classification of

Creditors under the Modified Plan is that Class

I consists solely of holders of Allowed Adminis-

trative Claims and Class 2 consists of holders of

all other Allowed Claims entitled to priority

under Sections 507(a)(2) — (7) of the Bankruptcy

Code. Distributions will be substantially as pro-

vided in the Original Plan except as previously

discussed and as discussed below. The Modified

Plan will continue to provide for no distribution

to the holder of the Allowed Interest.

oe & ©

Classes 5A, 5B, 5C, and 6: The classification of

Creditors under the Modified Plan in Classes 5A,

5B, 5C and 6 will be essentially the same as

under the Original Plan. Based on additional

information the Proponents have obtained since

the Effective Date, and because of uncertainties

concerning the amount at which various Claims

including Personal Injury Claims and Cargo

Damage Claims will be liquidated (and the

extent to which limited resources are likely to be

used to pursue objections to Claims), the Propo-

nents can provide no assurance of the overall

amount of Allowed Claims in these Classes in

combination or of any particular Creditor’s pro-

portionate interest in these Classes. It is possible

that the total amount of Allowed Claims in

Classes 5A, 5B, 5C and 6 will substantially

108a

exceed prior estimates. The PLI Disbursement

Trustee, the Reorganized PLI Shares Trustee,

and the VCI Stock Escrow Agent shall be respon-

sible for making distributions and taking actions

with respect to these classes after the Modifica-

tion Date, and neither Reorganized PLI nor any

of the other Companies shall have any liability to

any, Creditor with respect to any Claim in any

such class after the Modification Date.

The following chart briefly summarizes the dis-

tributions, subject to certain exceptions, under

the Modified Plan to be made to or for the bene-

fit of holders of Allowed Claims in Classes 5A,

5B, 5C and 6.

Class Distribution

5A (1) interest in 55,000 Reorganized

PLI Preferred Shares (Class A) to be

issued on or as soon as practicable

after the Modification Date to the

Reorganized PLI Shares Trustee

(subject to reduction if Class 6 votes

for the Modified Plan and Class 6

Creditors are “old and cold”); and (2)

percentage of any distributions of

Available Cash of the PLI Disburse-

ment Trust after payment in full of

all Deferred Administrative Claims

and Deferred Priority Claims. The

percentage of any distributions as

described in (2) above to be accorded

to Class 5A shall reflect the ratio of

all Allowed Claims in Class 5A to all

Allowed Claims in Classes 5A, 5B, 5C

and 6, except that the Bankruptcy

Cold

Spring

(5B)

5C

109a

Court may require a reduction in or

complete elimination of such per-

centage (and an increase in the per-

centage of such distributions for

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