In re McLean Industries, Inc.

Citation121 BR 704
Decision Date28 November 1990
Docket NumberBankruptcy No. 86-B-12238 (HCB) through 86-B-12241 (HCB).
PartiesIn re McLEAN INDUSTRIES, INC., et al., Debtors.
CourtUnited States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

Stern, Dubrow & Marcus, P.C. by Jo Anne C. Adlerstein, Maplewood, N.J., for U.S. Lines, Inc. & U.S. Lines (S.A.), Inc. Reorganization Trust.

Tabak & Mellusi by Jacob Shisha, New York City, for Agostine A. Charles.

DECISION AND ORDER

HOWARD C. BUSCHMAN, III, Bankruptcy Judge.

Before the Court is a motion by Agostine A. Charles1 to lift the automatic stay to proceed with a personal injury lawsuit against United States Lines, Inc. & United States Lines (S.A.), Inc. Reorganization Trust (the "Trust"). By the same motion, Charles seeks to amend his claim from $90,000 to $400,000. The Trust objects to the motion and the amendment.

I

Prior to filing for bankruptcy, U.S. Lines, Inc. ("U.S. Lines") and U.S. Lines (S.A.), Inc. ("U.S. Lines SA") operated one of the world's largest container lines and cargo shipping companies. On November 24, 1986, U.S. Lines filed a petition for reorganization under Chapter 11, see 11 U.S.C. § 1101 et seq., (the "Code") along with three related companies, McLean Industries, Inc., ("McLean") a holding company with six subsidiaries, First Colony Farms, Inc., a McLean subsidiary owning all the shares of U.S. Lines., and U.S. Lines SA, a direct McLean subsidiary.2 Pursuant to an amended plan of reorganization confirmed as modified on February 6, 1990, (the "Plan"), the Trust was established to liquidate claims and make distributions to claimants. In pertinent part, the Plan, recognizing the general nature of U.S. Lines' insurance coverage, divided personal injury claims into two parts: 1) that portion under $100,000 to be satisfied by issuance of stock in Janus Industries Inc., the renamed reorganized debtor, ("Janus"); and 2) the excess payable in applicable insurance recoveries.

A

For the most part, the facts underlying this claim are not in dispute. Charles was a veteran sailor in the merchant marine; he joined the service of the SS AMERICAN RESOLUTE, a vessel owned by U.S. Lines, on May 24, 1985. Sometime during his maiden voyage, Charles slipped on the deck of the ship's recreation room and struck his head on a television set. As a result of the fall, the vision in his left eye was impaired. After the voyage ended on July 12, 1985, Charles attended a medical clinic where physicians determined he suffered a detached retina. Charles underwent surgery to correct the detached retina on August 5, 1985. He was deemed fit for duty and returned to work on January 21, 1986. The eye deteriorated during the voyage and, after the journey ended on June 27, 1986, Charles underwent a second operation to correct the detached retina. Despite the second surgery, Charles was rendered unfit for duty in the merchant marine.

Charles timely filed a proof of claim with the bankruptcy court listing $90,000 as the amount owed as a result of the damage to his eyesight from the slip and fall (the "Original Claim").3 On August 30, 1990, Charles filed a second claim for $400,000 for damage to his vision resulting from the same injury (the "Amended Claim"). Charles did not seek leave of this Court to amend the Original Claim. See Bishop v. United States (In re Leonard), 112 B.R. 67, 71, 20 Bankr.Ct.Dec. (CRR) 561 (Bankr. D.Conn.1990) (need leave of court to amend); See also United States v. Kolstad (In re Kolstad), 101 B.R. 492, 494 (Bankr.S. D.Tex.1989) (amendments are not automatic); In re W.T. Grant Co., 53 B.R. 417, 420 (Bankr.S.D.N.Y.1985) (same). Instead, Charles filed a motion on September 13, 1990 seeking to lift the automatic stay allowing him to prosecute the personal injury claim in district court as required by 28 U.S.C. § 157(b)(5).4 The Trust subsequently offered to settle the Original Claim for $90,000 worth of Janus stock as provided in the Plan. Charles rejected the settlement offer insisting that any settlement be paid in cash. The Trust responded with a letter objection to Charles' motion to lift the stay. On October 25, 1990, U.S. Lines and the Trust recast their initial opposition to Charles' motion to lift the stay as an objection to Charles' amendment of the Original Claim.5

B

The Trust presents the following arguments for denying Charles' amendment of his Original Claim. Allowing Charles to amend and continue to prosecute a claim which has been allowed6 works undue prejudice to the estate and undermines the Trust's interest in efficient administration and finality of claims. Specifically, permitting Charles to amend would send a signal to other claimants to amend their claims in the hope of reaching insurance proceeds; thereby opening the floodgates and creating an administrative nightmare for the Trust. Since the deductible is paid in Janus stock, each claimant who amends her claim to meet the deductible further dilutes the value of the Janus stock. Moreover, a claimant must assert a claim beyond the Trust's $100,000 deductible in order to tap insurance proceeds. Thus, a flood of amendments would significantly multiply litigation defense costs.

Second, the Trust contends that Charles' vision has been worsening for some time and the only reason for the delay in filing an amendment was strategic. Charles currently has pending an in rem action against the SS AMERICAN RESOLUTE premised on the same slip and fall as the Original Claim (the "In Rem Action").7 Consequently, there is no reason to permit the amendment since Charles is free to recover the full $400,000 in the In Rem Action. Moreover, the Trust alleges Charles is simply attempting to consolidate the In Rem Action against the SS AMERICAN RESOLUTE with an in personam action against U.S. Lines itself and thereby obtain a jury trial for both actions.

In reply, Charles submits that the amendment should be allowed to accurately reflect and compensate for the loss of all vision in his left eye as opposed to simply reduced vision in the eye. Further, Charles sees no harm befalling the estate. Under a "Liman Agreement",8 the estate will not bear the cost of any award beyond $100,000. As to the tactical maneuvering objection, Charles responds that a negligence claim cannot be maintained in the In Rem Action; such actions recognize only claims for unseaworthiness or a Jones Act9 violation. As a result, the in personam action against the Debtor must be allowed to proceed in order to compensate Charles for the damage to his eye resulting from any breach of the Debtor's duty of care.

II

It is well-settled that the decision to permit an amendment of a proof of claim rests within the sound discretion of the bankruptcy judge. Associated Container Transportation (Australia) Ltd. v. Black & Geddes, Inc. (In re Black & Geddes, Inc.), 58 B.R. 547, 553 (S.D.N.Y.1983); Futuronics Corp. v. Sycamore Indus., Inc., (In re Futuronics Corp.), 23 B.R. 281, 283 (S.D.N.Y.1982). Courts are not without guidance in this area, however. The leading case in this circuit on the amendment of claims, In re G.L. Miller & Co., 45 F.2d 115, (2d Cir.1930), held that allowance of a subsequent claim turns on whether the subsequent claim may be fairly characterized as an amendment of a timely filed claim or in substance a new claim. The subsequent claim is an amendment if it:

1) corrects a defect of form in the original claim;
2) describes the original claim with greater particularity; or
3) pleads a new theory of recovery on the facts set forth in the original claim.

Id. at 116. The amendment, however, cannot be used to create a new claim: the court in Miller explicitly rejected an attempt to "use an `amendment' as a device for filing after the statutory period a claim based upon a cause of action of which no notice whatever had been given the trustee by anything previously filed." Id. The focus of this test, therefore, is whether the initial claim provided the trustee or debtor-in-possession with reasonable notice of the later claim. Cases decided under the Code in this circuit expressly following Miller include: In re Kulick, 85 B.R. 680, 681 (E.D.N.Y.1988); Fisher v. Outlet Co. (In re Denby Stores, Inc.), 86 B.R. 768, 775 (Bankr.S.D.N.Y.1988); In re W.T. Grant Co., 53 B.R. 417, 420 (Bankr.S.D.N.Y 1985).

Over the years, the test has been reformulated and subject to significant lower court gloss. It has evolved into essentially a two-part test. The first prong is the Miller test: the court must determine that the proposed amended claim is reasonably related to a timely filed claim and not a veiled attempt to file a new claim. See Black & Geddes, 58 B.R. at 553; Bishop v. United States (In re Leonard), 112 B.R. 67, 71, 20 Bankr.Ct.Dec. (CRR) 561 (Bankr. D.Conn.1990). See also United States v. International Horizons, Inc. (In re Int'l Horizons, Inc.), 751 F.2d 1213, 1216, 12 Collier Bankr.Cas.2d (MB) 91, 12 Bankr.Ct. Dec. (CRR) 1022, Bankr.L.Rep. (CCH) ¶ 70,245 (11th Cir.1985). The second prong is an equitable analysis: granting the amendment must be fair and impose no undue hardship on a party. See, Black & Geddes, 58 B.R. at 553; Leonard, 112 B.R. at 71. When balancing the equities, important factors include:

1) undue prejudice to opposing party, see Futuronics Corp. v. Sycamore Indus., Inc., (In re Futuronics Corp.), 23 B.R. 281, 283 (S.D.N.Y.1982);
2) bad faith or dilatory behavior on part of the claimant, see In re Hertz, 38 B.R. 215, 218, 10 Collier Bankr.Cas.2d (MB) 316 (Bankr.S.D.N.Y.1984);
3) whether other creditors would receive a windfall were the amendment not allowed, see In re Saxe, 14 B.R. 161, 165 (Bankr.S.D.N.Y.1981);
4) whether other claimants might be harmed or prejudiced, see Black & Geddes at 553;
5) the justification for the inability to file the amended claim at the time the original claim was filed, see Black & Geddes, 58 B.R. at 553.

Put briefly, if an amendment does not seek recovery on any new or different claim, amendment will be liberally...

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