Opinion ID: 758543
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Heading: The Authorities Cited by the Claimants

Text: 48 The several New York cases upon which claimants rely either support our conclusion or are distinguishable. In Campbell v. London & Lancashire Indemnity Co., 168 N.Y.S. 300 (N.Y.Sup. 1917), the insured under an indemnity policy, being insolvent, paid a claim with funds borrowed for that purpose from a third party, secured initially by a promissory note, and later (after the funds were used to pay the claimant) by an assignment of the insurance claim for indemnification. The court found that this arrangement satisfied the pay first provision of the policy, but added: It must be admitted that, if there had been no payment of the judgments to the judgment creditor, but the moneys were to be held by the judgment creditor to await the result of this action, such a pretended payment would be in bad faith, and would defeat plaintiff's right of recovery. Id. at 301. In Campbell, the funds were actually transferred to the claimant as a bona fide payment of the claim and the party that had been assigned the indemnity right had actually paid the claim and sustained a monetary loss in good faith. That transaction was no doubt facilitated by the permissibility of an assignment of indemnity rights under the policy. The American Club policy prohibits such assignment. 5 49 Finally, Feldman v. New York City Health & Hospitals Corp., 107 Misc.2d 145, 437 N.Y.S.2d 491, 496 (N.Y.Sup. 1981), rev'd, 84 A.D.2d 166, 445 N.Y.S.2d 555 (2d Dep't 1981), rev'd, 56 N.Y.2d 1011, 453 N.Y.S.2d 683, 439 N.E.2d 398 (1982) (adopting New York State Supreme Court opinion), a case having nothing to do with insurance, held efficacious a financial arrangement by which a tort plaintiff financed the payment by a tort defendant. The tort defendant was found 10% liable for the injury, while the third-party defendant was found 54% liable. Under the rule announced in Klinger v. Dudley, 41 N.Y.2d 362, 393 N.Y.S.2d 323, 361 N.E.2d 974 (1977), the plaintiff could not recover directly from the third-party defendant, and was in a bind because the defendant was largely insolvent and could not afford a 64% payment. The plaintiff therefore arranged for a lender to finance the defendant's payment of the 64%, and to take in return (i) an assignment of the defendant's contribution rights from the third-party defendant, (ii) a demand note from the defendant guaranteed by the plaintiff without prior recourse to the (insolvent) defendant, and (iii) 25% of any recovery from the third-party defendant as the lender's reward. Feldman, 437 N.Y.S.2d at 494. In finding that the arrangement satisfied Klinger and triggered the third-party defendant's contribution obligation, the court ruled that: (i) no disservice would be done to the limited policy behind Klinger, i.e., to avoid the defendant simply keeping the contribution funds it receives from the third-party defendant without paying the plaintiff, id. at 495; (ii) both the plaintiff and the defendant would be harmed by application of the Klinger rule in the circumstances, id. at 495-96; and (iii) the defendant's payment to the plaintiff had been financed through a bona fide loan, the proceeds of which were used to fully pay and satisfy the plaintiff's judgment, id. at 496. 50 As the Claimants in the present appeal point out, the Feldman court deemed the arrangements made between the plaintiff and the lender to be irrelevant to the bona fide nature of the loan between the defendant and the lender. We think Feldman is no help to Claimants here because the non-party lender in Feldman performed a real financial service for a real financial reward, whereas the recycling of funds by the Trustee here is an illusion; and the obstacle removed in Feldman was a doctrine (Klinger ) that was intended to protect plaintiffs but in the circumstances had backfired to that plaintiff's detriment, see id. at 497 (The Court will not permit the 'shield' of Klinger to be used as a 'sword' by a culpable third party defendant who seeks to escape a judgment against it through an inflexible construction of Klinger.); see also Reich v. Manhattan Boiler & Equip. Co., 91 N.Y.2d 772, 778, 676 N.Y.S.2d 110, 698 N.E.2d 939 (1998) (The Feldman loan agreement was sanctioned for the limited purpose of alleviating the burdens created by Klinger in the specific factual circumstances of Feldman.), whereas the obstacle faced by Claimants here is a bargained for contract clause, see Harris v. Standard Accident & Ins. Co., 297 F.2d 627, 631 (2d Cir.1961), that protects an insurer unwilling to waive it. 51 Claimants invoke New York's general policy of preventing an insurer from taking advantage of an insured's bankruptcy; but we cannot find that the recycling arrangement adopted by Prudential and the Claimants amounts to payment of the claims under New York law. Accordingly, we hold that the pay first provision of American Club's policy is not satisfied, and affirm the district court. 52