2009 Chapter 11 Recent Developments (Part I)

bankruptcy court to provide that the setoffs to which the Insurer was entitled (in the amount of $1.2 million) due to unpaid premiums during four of the forty-one years of coverage be prorated among the claims. The liability insurance under which Prudential operated was one of indemnity: Prudential first had to pay the Claimants and then seek reimbursement (minus the deductible) from the Insurer. Because Prudential did not have enough money when it filed for bankruptcy to pay all of the Claimants, the plan of reorganization set forth a scheme by which the $300,000 was set aside to be paid out to the Claimants incrementally with the Trustee being reimbursed by the Insurer for whatever payments had been made. To speed up the cumbersome process, the Trustee came up with the Proposed Payment Structure, in which a similar method was used to pay claims but in which the Trustee would borrow, in return for a claim against the Trust, from the paid Claimants the portion of the claim that was paid that is attributed to the deductible amount as well as the setoff amount that each Claimant owes. The Trustee then seeks indemnification from the Insurer. The Insurer objected to the Proposed Payment Structure on two grounds - which the bankruptcy court and the district court upheld - (i) the payment provisions of the Proposed Payment Structure violated the pay-first requirements of the insurance contracts and (ii) the Trustee had to pay the entire setoff amount before the Insurer was required to indemnify the Trustee for any paid claims.

Issues:

(1)

Whether the Proposed Payment Plan violated the pay-first portions of the indemnity insurance contracts by financing a portion of the claims that were paid.

(2)

Whether the Trustee had to pay the entire $1.2 million setoff prior to being indemnified or whether the setoff could be paid by deducting (prorata) amounts the Insurer was to repay the Trustee for claims that were paid.

Rules:

(1)

The insurance contracts do not restrict the Trustee's ability to finance the amounts required to pay the Claimants and, therefore, the Proposed Payment Structure does not violate the pay-first provision of the insurance contracts.

(2)

Under New York law, any ambiguity in an insurance policy is to be read against the insurer.

Holding: Reversed and remanded.

Reasoning:

(1)

"Each payment under the Proposed Payment Structure is made prior to seeking indemnification for that payment. In the event the Insurer were to fail... to pay the indemnity provided by the insurance policies, the Trustee would have no way to recover the cash paid out to the Claimant." Additionally, there was nothing in the insurance contracts preventing the Trustee from financing the ability to repay the Claimants.

(2)

The bankruptcy court originally allowed the setoff so long as the Insurer was precluded from arguing that, based on the lack of premiums being paid during those four years, the Insurer was not on the hook for the remaining 37 years. That order was never appealed. Additionally, the most reasonable way to read the Plan is by allowing the setoff to be prorated among all the Claimants. And, lastly, the language of the policies is not such that the Insurer can require the entire $1.2 million to be paid prior to indemnifying the Trustee.

Newby v. Enron Corp., et. al., 542 F.3d 463 (5th Cir. 2008)

Facts: In late 2001, the Houston law firm of Fleming & Associates (the "Fleming Firm") filed a number of securities-related lawsuits in Texas state courts and requested relief that had already been granted in federal district court as part of the Enron Multidistrict Litigation ("MDL"). As a result of requesting relief that had already been granted, the district court enjoined the Fleming Firm from filing any Enron-related actions without leave of the court (the "February 15, 2002 Injunction"). In