Prudential Lines Inc., In re

• Court: U.S. Court of Appeals — Second Circuit
• Writing for the Court: JACOBS; LAY; Haight
• Citation: Prudential Lines Inc., In re, 158 F.3d 65 (2nd Cir. 1998)
• Decision Date: 05 October 1998
• Docket Number: 97-5053,Docket Nos. 97-5045
• Parties: In re: PRUDENTIAL LINES INC., Debtor. Lee J. DICOLA, Trustee of the PLI Disbursement Trust, Plaintiff, Asbestosis Claimants Represented by the Maritime Asbestosis Legal Clinic, Intervenors-Plaintiffs-Appellants-Cross-Appellees, v. AMERICAN STEAMSHIP OWNERS MUTUAL PROTECTION AND INDEMNITY ASSOCIATION, INC., Defendant-Appellee-Cross-Appellant.

Page 65

158 F.3d 65

1999 A.M.C. 609

In re: PRUDENTIAL LINES INC., Debtor Lee J. DICOLA, Trustee of the PLI Disbursement Trust, Plaintiff Asbestosis Claimants Represented by the Maritime Asbestosis Legal Clinic Intervenors-Plaintiffs-Appellants-Cross-Appellees, v. AMERICAN STEAMSHIP OWNERS MUTUAL PROTECTION AND INDEMNITY ASSOCIATION, INC., Defendant-Appellee-Cross-Appellant.

Docket Nos. 97-5045, 97-5053.

United States Court of Appeals Second Circuit.

Argued Feb. 12, 1998.

Decided Oct. 5, 1998.

Alan Kellman, Detroit, MI (Leonard C. Jaques, The Maritime Asbestosis Legal Clinic, on the brief), for Intervenors-Plaintiffs-Appellants-Cross-Appellees.

Richard H. Brown, Jr., New York, NY (Kirlin, Campbell & Keating, James M. Maloney, Christy & Viener, on the brief), for Defendant-Appellee-Cross-Appellant.

Before: VAN GRAAFEILAND, JACOBS and LAY, ^* Circuit Judges.

JACOBS, Circuit Judge:

The Trustee of a shipping line in bankruptcy, Prudential Lines, Inc., sued Prudential's insurer, American Steamship Owners Mutual Protection and Indemnity Association ("American Club"), seeking declaratory relief clarifying American Club's indemnity obligations for asbestos-related bodily injury claims asserted against Prudential; the asbestosis claimants (the "Claimants") intervened. The issues contested on this appeal arise under the pay first provision; the deductible provision; and the clauses governing indemnity and other insurance.

The Pay First Provision. The American Club policies contain a pay first provision 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. The United States Bankruptcy Court for the Southern District of New York (Conrad, J.) found that this arrangement satisfied the pay first provision. See In re Prudential Lines, Inc., 148 B.R. 730, 750 (Bankr.S.D.N.Y.1992) ("Prudential I "). The district court reversed on the ground that the loan arrangement resulted in no monetary loss to the insured and was a sham. See In re Prudential Lines, Inc., 170 B.R. 222, 242 (S.D.N.Y.1994) ("Prudential II "). The Claimants appeal this ruling.

The Deductible Provision. The American Club policies require the policyholder to pay one deductible "per occurrence." The bankruptcy court held that all asbestos-related bodily injury claims resulting from exposure to asbestos aboard one ship arose from a single occurrence--the presence of asbestos aboard the ship during the policy period--so that a single deductible satisfies the deductible provision with respect to all of those claims. See Prudential I, 148 B.R. at 747; In re Prudential Lines, Inc., 202 B.R. 13, 24 (Bankr.S.D.N.Y.1996) (Gonzalez, B.J.) ("Prudential III "). The district court reversed, holding that the parties in their course of dealing had attached a practical construction to the deductible provision under which each asbestos bodily injury claim is subject to one deductible. See In re Prudential Lines, Inc., 209 B.R. 621, 626 (S.D.N.Y.1997) ("Prudential IV "). The Claimants appeal this ruling.

The Indemnity and Other Insurance Clauses. American Club argues that when more than one of its policies is triggered by a single loss, the policyholder is entitled to no more than a fractional recovery under each policy. The bankruptcy court held that once triggered by injury-in-fact, each policy was liable for all damages resulting from asbestos exposure, and liability would not be allocated among all triggered policies (although allocation through a contribution action might be permissible). See Prudential I, 148 B.R. at 744-45. The district court affirmed. See Prudential II, 170 B.R. at 235. American Club cross-appeals from this ruling.

As to each issue, we affirm the judgment of the district court.

BACKGROUND

American Club is a nonprofit mutual insurance association of shipowners that writes protection and indemnity ("P & I") insurance for its shipowner members. Prudential was a member of American Club and a policyholder from 1940 to 1970 and from 1975 to 1986. In early 1986, Prudential filed a bankruptcy petition under Chapter 11.

Over the past 15 years, approximately 5,000 Claimants have alleged that they suffered asbestos-related bodily injuries by exposure to asbestos while working aboard Prudential's ships, and have sought damages from Prudential for negligence under the Jones Act, 46 U.S.C. § 688 et seq., and for unseaworthiness under the general maritime law.

Each P & I contract is written for a one-year policy period, and provides in the indemnity clause (in pertinent part) that American Club will

indemnify the assured against any loss, damage or expense which the assured shall become liable to pay and shall pay by reason of the fact that the assured is the owner (or operator, ... as the case may be) of the insured vessel and which shall result from the following liabilities[,] risks[,] events[,] occurrences and expenditures:

(1) Liability for ... personal injury to, or illness of any person....

(emphasis added). The import of the emphasized wording is that Prudential must first pay any claims or judgments against it before obtaining indemnification from American Club. The lack of sufficient funds on hand at the time of Prudential's bankruptcy made outright payment of the claims impossible, so Prudential and its Trustee took the following measures.

The Second Amended Joint Plan of Reorganization (the "Plan"), confirmed in 1990, creates a Prudential Disbursement Trust to resolve asbestos-related claims and to enforce the trust's interests against Prudential's insurers. Section 4.05.07 of the Plan sets aside $300,000 to be used by the Trustee to engage in certain loan arrangements for the replenishment of deductibles:

[T]he [Prudential] Disbursement Trustee is authorized to enter into arrangements under which in substance the [Prudential] 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 [Prudential] Disbursement Trust in cash for the full amount of the Excess 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 ... 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 ... Trustee, but ... may not use funds of the ... Trust ... unless adequate assurances and documentation are provided ensuring that the ... Trust will promptly receive repayment and/or reimbursement of all amounts paid by the ... Trust.

(emphasis added).

In December 1990, the Prudential Trustee commenced this suit against American Club, seeking a declaration of Prudential's rights under the American Club policies; the Claimants intervened. The bankruptcy court determined that the action was a core proceeding. Prudential I, 148 B.R. at 735. In December 1992, in response to cross-motions for summary judgment, the bankruptcy court decided the deductible and allocation issues. American Club appealed those decisions to the district court.

In March 1993, the Prudential Trustee and the Claimants agreed inter se to a Stipulation and Settlement Agreement determining Prudential's liability to the Claimants and authorizing an arrangement for recycling Prudential's $300,000 cash fund as required to satisfy the claims. Under this arrangement, the Trustee would pay Claimant A in cash from the $300,000 set aside under the Plan, and Claimant A immediately would loan the funds back to the bankrupt estate via a non-recourse loan. The replenished fund would then be used to compensate Claimant B, and so on. ¹

The bankruptcy court "so ordered" the Stipulation and Settlement Agreement on March 9, 1993, and the Trustee recycled the $300,000 over and over until the Trustee owed $13 million to the Claimants on non-recourse loans. On August 4, 1993, the bankruptcy court ordered American Club to indemnify Prudential for the $13 million. The wheels continued turning, and on September 27, 1993, the bankruptcy court entered a partial judgment requiring that American Club indemnify Prudential for $66.16 million in such claims. American Club appealed those orders. (The bankruptcy court did not permit American Club to conduct discovery as to the reasonableness of these settlements, or actually determine for itself whether the settlements with the Claimants were reasonable. See infra note 2.)

On July 29, 1994, the district court (i) reversed the bankruptcy court, holding that the recycling did not satisfy the pay first provision of American Club's policy; (ii) reversed the bankruptcy court's determination on the deductible issue, holding that the term "occurrence," as used in relation to the policy deductible, was ambiguous, and remanding to the bankruptcy court to determine whether extrinsic evidence of practical construction supplied meaning to that term; and (iii) affirmed the bankruptcy court on the allocation issue. American Club then appealed the deductible and allocation issues to this Court, claiming that these issues were ripe for appeal. In addition, the Claimants moved for an interlocutory appeal of the pay first issue pursuant to 28 U.S.C. § 1292(b).

On December 6, 1994--before the appeal was heard in this Court--the bankruptcy court issued an order vacating the Stipulation and Settlement Agreement in light of the district court's rejection of the recycling arrangement.

On June 26, 1995, we...