"Puellae ignavae in ludo dormiunt."

Translation: The lazy girls sleep in school.

[LeoForrest]

How much you wanna be its Livia and Corrina sleeping?

[gcd]

Can "in ludo" modify "girls" as an adjective as well as "dormiunt" as an adverb? If so, how does on distinguish between the two meanings?

[noxnoxnox]

(To be pedantic, in ludo is a prepositional phrase, not an adjective or an adverb.) Yes, it can have an adjectival usage (limiting a noun) or adverbial usage (limiting a verb). The two usages would be distinguished by word order in some cases, or just by context.