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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 2009

## Text

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

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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).

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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,

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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

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(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

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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.

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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 Allo

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386020_0852%3A2. Public record. Not legal advice.