Zurich American Insurance Company v. International Fibercom, Inc.

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
In re: INTERNATIONAL FIBERCOM, 
INC., Debtor.
ZURICH AMERICAN INSURANCE No. 05-16358
COMPANY,
Appellant,  D.C. No.
CV-04-02100-DGC
v.
OPINION
INTERNATIONAL FIBERCOM, INC., an
Arizona corporation; MAUREEN
GAUGHAN,
Appellees.

Appeal from the United States District Court
for the District of Arizona
David G. Campbell, District Judge, Presiding
Argued and Submitted
July 11, 2007—San Francisco, California
Filed September 12, 2007
Before: Procter Hug, Jr., Pamela Ann Rymer, and
Raymond C. Fisher, Circuit Judges.
Opinion by Judge Hug
12337
12340 IN RE: INTERNATIONAL FIBERCOM
COUNSEL
Karen Lee Turner, Eckert Seamans Cherin & Mellott, LLC,
Philadelphia, Pennsylvania, for the appellant.
Steven J. Brown, Steve Brown & Associates, LLC, Phoenix,
Arizona, for the appellees.
OPINION
HUG, Circuit Judge:
This case presents the question of whether a bankruptcy
court may limit a prior order where the prior order granted
relief not permitted by the Bankruptcy Code. Here, the bank-
ruptcy court issued an order approving the assumption of a
workers’ compensation insurance policy under § 365 of the
Bankruptcy Code, 11 U.S.C. § 365. The bankruptcy court
later concluded that the assumption order violated § 365
because it allowed the assumption of a non-executory con-
tract. Relying on Federal Rule of Civil Procedure 60(b)(6),
applied to bankruptcy proceedings by Federal Rule of Bank-
ruptcy Procedure 9024, the bankruptcy court interpreted the
assumption order to comply with § 365. We hold that the
bankruptcy court properly relied upon Federal Rule of Civil
IN RE: INTERNATIONAL FIBERCOM 12341
Procedure 60(b)(6) in limiting its prior order to ensure that the
order complied with the Bankruptcy Code. Accordingly, we
affirm.
I.
International FiberCom, Inc. (“IFCI” or “Debtor”) filed for
bankruptcy under Chapter 11 of the Bankruptcy Code1 on
February 13, 2002. At that time, IFCI had a workers’ compen-
sation insurance policy with Zurich American Insurance Co.
(“Zurich”), but the policy was set to expire on February 28,
2002. Weeks earlier, Zurich expressed its intent not to renew
the policy upon expiration. Applicable non-bankruptcy laws
required IFCI to maintain workers’ compensation insurance in
order to continue operating. Consequently, IFCI needed to
replace Zurich’s policy in order to continue operating until it
could sell its business as a going concern. Although IFCI
attempted to find another insurer prior to the petition date, it
was unable to do so because other insurance companies had
no interest in doing business with an ailing telecommunica-
tions company whose financial weakness was known through-
out the industry. As a result, IFCI requested that Zurich renew
the policy and eventually negotiated an extension of the pol-
icy until IFCI could sell its business.
Under IFCI’s original workers’ compensation insurance
policy with Zurich, IFCI paid an annual premium of
$927,952, which had already been paid before the petition
date. The policy also required IFCI to pay a $100,000 deduct-
ible on any workers’ compensation claim paid by Zurich. In
addition, IFCI set aside $500,000 in “initial collateral” to
secure its reimbursement obligations in case of default.
As required by Arizona law2 and similar state statutes, the
original workers’ compensation insurance policy contained
1
11 U.S.C. §§ 101-1330.
2
IFCI was incorporated in Arizona.
12342 IN RE: INTERNATIONAL FIBERCOM
the following provision: “Your [IFCI’s] default or the bank-
ruptcy or insolvency of you or your estate will not relieve us
[Zurich] of our duties under this insurance after an injury
occurs.”
IFCI and Zurich eventually agreed to assume the policy
pursuant to § 365 of the Bankruptcy Code, effectively extend-
ing the policy from February 28 to July 1, 2002. In consider-
ation, IFCI agreed to pay an additional $294,523 premium for
the 9-week extension. IFCI also agreed to provide an addi-
tional $750,000 in “additional collateral” to secure its obliga-
tion to reimburse Zurich for deductibles arising under the
assumed policy. Zurich would have a first priority lien on the
additional collateral. If the initial collateral and additional col-
lateral were insufficient to provide full reimbursement of the
deductible amounts due to Zurich, Zurich would be entitled to
an administrative claim under 11 U.S.C. § 507(a)(1). IFCI and
Zurich also agreed to a brief extension of the original policy
until March 14 so that the bankruptcy court could approve
IFCI’s request to assume the policy.
II.
IFCI filed a motion for entry of an order approving assump-
tion of the policy on March 8, 2002.3 In its assumption
motion, IFCI requested the bankruptcy court’s approval of the
assumption of its workers’ compensation insurance policy, as
required by § 365(a). At the same time, IFCI also filed a
motion for an emergency hearing on the assumption motion.
Notice of the assumption motion and motion for emergency
hearing was served on counsel for the Official Committee of
Unsecured Creditors (“Creditors Committee”), which the U.S.
Trustee appointed approximately two weeks before the
assumption motion was filed. Notice was also served on the
U.S. Trustee and three creditors. The bankruptcy court ini-
3
At that time, IFCI was the debtor-in-possession and was authorized to
continue operating its business pursuant to 11 U.S.C. §§ 1107-08.
IN RE: INTERNATIONAL FIBERCOM 12343
tially scheduled the emergency hearing for March 13, 2002,
but, because no objections to the assumption motion were
filed, the bankruptcy court did not hold a hearing.
On March 14, 2002, the bankruptcy court issued an order
granting IFCI’s request for approval of the assumption of the
workers’ compensation insurance policy. The bankruptcy
court’s assumption order approved the terms and conditions
presented in IFCI’s assumption motion and extended the pol-
icy through July 1, 2002.4 The assumption order also required
IFCI to “immediately establish a segregated account . . . and
deposit into such account the sum of $750,000.” The bank-
ruptcy court further provided Zurich a first priority lien on the
funds in the additional collateral account for the purpose of
securing Zurich’s entitlement to reimbursement for disburse-
ments made to workers’ compensation claimants up to the
deductible amount provided for under the policy.
IFCI never in fact established the additional collateral
account after the bankruptcy court issued the assumption
order. Not only did IFCI fail to set aside the additional collat-
eral, IFCI also failed to pay deductibles due to Zurich under
the policy. In response, Zurich filed motions for allowance of
administrative expense and relief from the automatic stay in
October 2002. Discovery and briefing on the motions contin-
ued until the bankruptcy court granted IFCI’s motion to con-
vert its bankruptcy petition from Chapter 11 to Chapter 7 on
August 25, 2003. At that time, the bankruptcy court appointed
Maureen Gaughan as Trustee for IFCI’s estate. Shortly there-
after, the bankruptcy court vacated the scheduling order and
the motions were never decided.
Zurich later filed a motion for summary judgment on
March 24, 2004, in which it requested release of the addi-
tional collateral in order to cover IFCI’s unpaid reimburse-
4
IFCI sold its assets in April 2002, rendering the remaining portion of
the extension period null.
12344 IN RE: INTERNATIONAL FIBERCOM
ment obligations. By the time Zurich filed its summary
judgment motion, deductibles accrued under the initial and
extended terms of the policy amounted to nearly $2 million,
exceeding the total of both the initial collateral of $500,000
and the $750,000 in additional collateral. In its summary
judgment motion, Zurich requested that the bankruptcy court
order IFCI to establish the additional collateral account out of
the proceeds of the sale of its assets (i.e., the assets of the
estate) and then permit Zurich to exercise its rights to the
funds in the account. Importantly, Zurich did not reveal in its
summary judgment motion that virtually all of the claims for
which it sought reimbursement arose from injuries that
occurred prior to the petition date.
Opposing Zurich’s motion for summary judgment, the
Trustee filed a motion to clarify or partially vacate the bank-
ruptcy court’s assumption order, pursuant to Federal Rule of
Civil Procedure 60(b)(6) and Federal Rule of Bankruptcy Pro-
cedure 9024, on May 6, 2004. According to the Trustee,
Zurich was not entitled to have any of the deductibles result-
ing from injuries that arose prior to the petition date reim-
bursed as administrative expenses because the policy was not
an executory contract and, therefore, could not be assumed
pursuant to § 365. The only legally permissible effect of the
assumption order, according to the Trustee, was to approve an
extension of the policy and authorize payment of post-petition
claims as secured administrative expenses.
According to Zurich’s own data, only about 15 of the
nearly 200 individual workers’ compensation claims for
which Zurich seeks reimbursement arose from injuries that
occurred after the petition date. Those 15 claims add up to
only approximately $59,000 of the nearly $2 million sought
by Zurich. If the Trustee were ordered to pay Zurich $750,000
out of IFCI’s estate, nearly half of the estate’s total assets
would be removed, thus adversely affecting other creditors.
As a result, the Trustee requested that the bankruptcy court
either “clarify” ambiguous language in the assumption order
IN RE: INTERNATIONAL FIBERCOM 12345
to limit the assumption order to post-petition claims or par-
tially vacate the assumption order.
The bankruptcy court issued an order on July 26, 2004, in
which it granted the Trustee’s motion to clarify the assump-
tion order. See Zurich Am. Ins. Co. v. Int’l FiberCom, Inc. (In
re Int’l FiberCom, Inc.), 311 B.R. 862 (Bankr. D. Ariz. 2004).
In that order, the bankruptcy court concluded that the policy
was not an executory contract and, consequently, could not be
assumed under § 365. Id. at 866. The bankruptcy court further
found that IFCI’s assumption motion failed to comply with
the notice and conspicuousness requirements of the bank-
ruptcy court’s General Order 82. Id. at 866-67. For those rea-
sons, the bankruptcy court interpreted its prior assumption
order “so that it does not do violence to the [Bankruptcy]
Code’s priority scheme, and General Order 82.” Id. at 868. In
doing so, the bankruptcy court pointed to ambiguous language
in the assumption order regarding which claims were covered
by the extended policy.
The Order merely provides that Zurich “is hereby
granted a first priority lien on the funds on deposit
in the [additional collateral] Account, for the purpose
of securing Zurich’s entitlement to reimbursement
for disbursements made to workers compensation
claimants up to the deductible amount provided for
under the WC Insurance Policy.” This does not make
clear whether the security is only for claims arising
during the extended, postpetition period of the pol-
icy, or whether it also secures claims that arose pre-
petition.
Id. Because IFCI stated in its assumption motion that it was
current on its reimbursement obligations to Zurich, the bank-
ruptcy court found that “the parties believed, and the Court
would have been justified in concluding, that there were no
prepetition obligations to be secured.” Id. Therefore, the
bankruptcy court interpreted the assumption order “to secure
12346 IN RE: INTERNATIONAL FIBERCOM
only those deductible reimbursement obligations that pertain
to claims that accrued postpetition, i.e., with respect to work-
ers whose injury occurred on or after February 13, 2002.” Id.
at 869. As a result of the bankruptcy court’s order, only the
approximately $59,000 in claims stemming from post-petition
injuries would be secured administrative expense claims.5 The
rest of the claims would be unsecured claims.6
After the bankruptcy court issued its order clarifying the
assumption order, Zurich moved pursuant to Federal Rule of
Civil Procedure 59(a) to alter or amend the order, for rehear-
ing, and for a full evidentiary hearing. The bankruptcy court
denied that motion. Zurich then appealed the bankruptcy
court’s clarification of the assumption order and denial of an
evidentiary hearing to the district court, which affirmed the
bankruptcy court’s decision on June 16, 2005. Zurich timely
appealed the district court’s affirmance to this court.
III.
We review a bankruptcy court’s grant of a motion for relief
from an order under Federal Rule of Civil Procedure 60(b) for
an abuse of discretion. See Casey v. Albertson’s Inc., 362 F.3d
1254, 1257 (9th Cir. 2004); Hammer v. Drago (In re Ham-
mer), 940 F.2d 524, 525 (9th Cir. 1991). A court’s decision
whether to hold an evidentiary hearing is also reviewed for an
abuse of discretion. See Murphy v. Schneider Nat’l, Inc., 362
F.3d 1133, 1139 (9th Cir. 2004); Defenders of Wildlife v. Ber-
nal, 204 F.3d 920, 928-29 (9th Cir. 2000). In an appeal from
5
See 11 U.S.C. § 503(b)(1)(A)(i) (defining “administrative expenses” as
“the actual, necessary costs and expenses of preserving the estate includ-
ing . . . wages, salaries, and commissions for services rendered after the
commencement of the case”) (emphasis added). The Trustee concedes that
Zurich’s post-petition claims deserve administrative expense status.
6
See Christian Life Ctr. Litig. Def. Comm. v. Silva (In re Christian Life
Ctr.), 821 F.2d 1370, 1373-74 (9th Cir. 1987) (“Claims that arise from a
creditor’s pre-petition services to the debtor are not entitled to administra-
tive expense treatment.”).
IN RE: INTERNATIONAL FIBERCOM 12347
a bankruptcy court, we review the bankruptcy court’s decision
independently, without deference to the district court. See
Suncrest Healthcare Ctr. v. Omega Healthcare Investors, Inc.
(In re Raintree Healthcare Corp.), 431 F.3d 685, 687 (9th
Cir. 2005). The bankruptcy court’s conclusions of law,
including its interpretation of the Bankruptcy Code, are
reviewed de novo and its factual findings are reviewed for
clear error. Salazar v. McDonald (In re Salazar), 430 F.3d
992, 994 (9th Cir. 2005).
IV.
At issue in this appeal is whether a bankruptcy court may
grant relief from a prior order under Federal Rule of Civil
Procedure 60(b)(6) due to legal error and procedural viola-
tions. Rule 60(b), incorporated to bankruptcy proceedings by
Federal Rule of Bankruptcy Procedure 9024, provides in per-
tinent part:
On motion and upon such terms as are just, the court
may relieve a party or a party’s legal representative
from a final judgment, order, or proceeding for the
following reasons: (1) mistake, inadvertence, sur-
prise, or excusable neglect; . . . (4) the judgment is
void; . . . or (6) any other reason justifying relief
from the operation of the judgment. The motion shall
be made within a reasonable time, and for reasons
(1), (2), and (3) not more than one year after the
judgment, order, or proceeding was entered or taken.
. . . This rule does not limit the power of a court to
entertain an independent action to relieve a party
from a judgment, order, or proceeding, . . . or to set
aside a judgment for fraud upon the court.
Fed R. Civ. P. 60(b). Rule 60(b) compliments the discretion-
ary power that bankruptcy courts have as courts of equity “to
reconsider, modify or vacate their previous orders so long as
no intervening rights have become vested in reliance on the
12348 IN RE: INTERNATIONAL FIBERCOM
orders.” Meyer v. Lenox (In re Lenox), 902 F.2d 737, 740 (9th
Cir. 1990) (citing Chinichian v. Campolongo (In re
Chinichian), 784 F.2d 1440, 1443 (9th Cir. 1986); Taylor v.
Lake (In re CADA Invs., Inc.), 664 F.2d 1158, 1161 (9th Cir.
1981)). That equitable power is established by § 105(a) of the
Bankruptcy Code, which provides that a bankruptcy court
may, “sua sponte, tak[e] any action or mak[e] any determina-
tion necessary or appropriate to enforce or implement court
orders or rules, or to prevent an abuse of process.” 11 U.S.C.
§ 105(a); see also In re Superior Toy & Mfg. Co., 78 F.3d
1169, 1175 (7th Cir. 1996) (“In addition to the court’s discre-
tionary power, trustees may seek relief pursuant to Federal
Rule of Civil Procedure 60(b).”).
[1] In limiting its prior order, the bankruptcy court pointed
to legal error as the basis for its clarification of the assump-
tion order. The catch-all provision of Rule 60(b)(6) provides
that a bankruptcy court may relieve a party from an order for
“any other reason justifying relief from the operation of the
judgment.” Fed. R. Civ. P. 60(b)(6). And “errors of law are
cognizable under Rule 60(b).”7 Liberty Mut. Ins. Co. v.
EEOC, 691 F.2d 438, 441 (9th Cir. 1982).
7
Zurich contends that legal error is cognizable under Rule 60(b)(1)
(mistake), not Rule 60(b)(6), and is therefore subject to the one-year time
limitation. Yet the case Zurich cites, Liberty Mutual Insurance Co. v.
EEOC, 691 F.2d 438 (9th Cir. 1982), does not actually support that propo-
sition. In that case, this court stated: “The law in this circuit is that errors
of law are cognizable under Rule 60(b).” Id. at 441. The court then went
on to analyze a district court’s reconsideration of its award of costs under
Rule 60(b)(1). Id. The court’s reliance on subsection 1 instead of subsec-
tion 6 in that case was appropriate because the district court mistakenly
issued an order that conflicted with a decision of this court in the same
case. That is, in that case the district court made a mistake under the law
of the case doctrine. See id. at 440. But here, the assumption motion
involved far more than a mere mistake. Rather, the relief granted by the
assumption order constituted a statutory violation. Furthermore, unlike
Liberty Mutual, this case also involves procedural violations that affected
the outcome of the proceeding and gave rise to the legal error.
IN RE: INTERNATIONAL FIBERCOM 12349
[2] We have stated in the past that Rule 60(b)(6) should be
“liberally applied,” Hammer, 940 F.2d at 525, “to accomplish
justice.” Yanow v. Weyerhaeuser S.S. Co., 274 F.2d 274, 284
(9th Cir. 1959) (quoting Klapprott v. United States, 335 U.S.
601, 615 (1949)). At the same time, “[j]udgments are not
often set aside under Rule 60(b)(6).” Latshaw v. Trainer
Wortham & Co., 452 F.3d 1097, 1103 (9th Cir. 2006). Rather,
Rule 60(b)(6) should be “ ‘used sparingly as an equitable rem-
edy to prevent manifest injustice’ and ‘is to be utilized only
where extraordinary circumstances prevented a party from
taking timely action to prevent or correct an erroneous judg-
ment.’ ” United States v. Washington, 394 F.3d 1152, 1157
(9th Cir. 2005) (quoting United States v. Alpine Land & Res-
ervoir Co., 984 F.2d 1047, 1049 (9th Cir. 1993)). Accord-
ingly, a party who moves for such relief “must demonstrate
both injury and circumstances beyond his control that pre-
vented him from proceeding with . . . the action in a proper
fashion.” Community Dental Servs. v. Tani, 282 F.3d 1164,
1168 (9th Cir. 2002).
[3] The bankruptcy court correctly found that extraordinary
circumstances justified reconsidering the assumption order
because the order erroneously granted assumption of a non-
assumable contract, thereby violating § 365 of the Bankruptcy
Code. Under § 365, a debtor may assume the obligations of
any executory contract, subject to the bankruptcy court’s
approval. 11 U.S.C. § 365(a). A contract is executory, and
therefore assumable under § 365, only if one party’s failure to
perform its obligation would excuse the other party’s perfor-
mance. Commercial Union Ins. Co. v. Texscan Corp. (In re
Texscan Corp.), 976 F.2d 1269, 1272 (9th Cir. 1992); Pac.
Express, Inc. v. Teknekron Infoswitch Corp. (In re Pac.
Express, Inc.), 780 F.2d 1482, 1487 (9th Cir. 1986) (quoting
Vern Countryman, Executory Contracts in Bankruptcy: Part
I, 57 Minn. L. Rev. 439, 460 (1973)). In Texscan, we held that
a workers’ compensation insurance policy was not executory
under § 365 because, pursuant to Arizona law, the insurance
company was required to continue processing claims despite
12350 IN RE: INTERNATIONAL FIBERCOM
the debtor’s bankruptcy petition. Texscan, 976 F.2d at 1273
(quoting Ariz. Rev. Stat. § 23-963). Even if the debtor in Tex-
scan failed to pay its premiums or otherwise breached the
contract, the insurance company would be obligated to con-
tinue covering workers’ compensation claims that arose prior
to the policy’s expiration. Id.
[4] The workers’ compensation insurance policy between
Zurich and IFCI contained a provision based on the same Ari-
zona statute involved in Texscan. Specifically, the policy con-
tained the following qualification: “Your default or the
bankruptcy or insolvency of you or your estate will not relieve
us of our duties under this insurance after an injury occurs.”
That provision was mandated by Arizona Revised Statute
§ 23-963(4).8 Consequently, if IFCI failed to pay its premiums
or failed to reimburse Zurich for deductibles, Zurich would be
contractually and legally obligated to continue performing
under the contract by covering workers’ compensation claims,
despite IFCI’s breach. Therefore, the workers’ compensation
insurance policy in this case is clearly not executory under
Texscan. The bankruptcy court thus correctly concluded that
its assumption order granted relief inconsistent with § 365.
[5] Zurich’s arguments to the contrary are unpersuasive.
First, Zurich attempts to distinguish Texscan on the ground
8
Section 23-963 provides, in relevant part:
Every policy of insurance covering the liability of the employer
for workers’ compensation . . . shall cover the entire liability of
the employer to his employees covered by the policy or contract,
and be deemed to contain the following provisions:
...
4. That the insolvency or bankruptcy of the employer and his
discharge therein shall not relieve the insurance carrier or work-
ers’ compensation pool from payment of compensation for inju-
ries or death sustained by an employee during the life of the
policy or contract.
Ariz. Rev. Stat. § 23-963.
IN RE: INTERNATIONAL FIBERCOM 12351
that the case involved a policy that had already expired prior
to the petition date, whereas the policy in this case was still
in effect at the time of the bankruptcy petition but would have
expired if not for the assumption order. Zurich fails to explain
why that distinction is meaningful. A policy’s pending expira-
tion does not transform it from non-executory to executory,
and Zurich provides no reason to believe that the expiration
date is relevant to whether a contract is assumable under
§ 365. Second, Zurich attempts to distinguish this case from
Texscan by arguing that “renewal of the policy required both
Debtor and Zurich to undertake additional material obliga-
tions, none of which had yet been performed and which were
therefore executory.” Zurich does not state which material
obligations in particular made the renewal of the policy exec-
utory. Presumably, such obligations would include IFCI’s
payment of the additional premium, establishment of the addi-
tional collateral account, and reimbursement of deductibles.
The facts of this case demonstrate, however, that those mate-
rial obligations did not render the policy executory. After all,
IFCI failed to establish the additional collateral account, but
Zurich does not contend that IFCI’s failure would have
excused its performance. Additionally, Zurich continued to
pay workers’ compensation claims and advance IFCI’s
deductibles, as it was contractually and legally required to do,
even after IFCI stopped reimbursing Zurich. Thus, the policy
was not executory despite those additional obligations.
Finally, Zurich argues that the Arizona statute does not render
the policy non-executory because the statute allows an insurer
to refuse to cover claims from injuries arising after the insured
files for bankruptcy. According to Zurich, filing for bank-
ruptcy would excuse the insurer’s performance going forward,
such that claims arising from injuries that occur after the peti-
tion date would not be covered by the policy. The text of the
statute does not support Zurich’s argument. In fact, the statute
states that “bankruptcy of the employer . . . shall not relieve
the insurance carrier . . . from payment of compensation for
12352 IN RE: INTERNATIONAL FIBERCOM
injuries or death sustained by an employee during the life of
the policy.” Ariz. Rev. Stat. § 23-963(4) (emphasis added). As
such, the language of the statute expressly prohibits such post-
petition termination of coverage. Similarly, nothing in our
opinion in Texscan supports such a reading of the statute.
Even the text of the policy in this case does not support
Zurich’s interpretation. Therefore, we reject Zurich’s attempt
to characterize its workers’ compensation insurance policy
with IFCI as executory. Because the workers’ compensation
insurance policy was non-executory and, therefore, non-
assumable under § 365, there was no legal basis on which
Zurich could obtain a lien on IFCI’s post-petition assets to
secure pre-petition claims arising under the policy.
[6] In addition to requesting relief not permitted by the
Bankruptcy Code, IFCI’s assumption motion also violated the
bankruptcy court’s notice and conspicuousness requirements.
General Order 82 requires that any “first day motion” must
“conspicuously state” in the first or second paragraph whether
the bankruptcy court’s approval would result in: “1. Granting
a prepetition creditor a lien or security interest in postpetition
assets in which the creditor would not otherwise have a secur-
ity interest by virtue of its prepetition security agreement and
applicable law . . . (sometimes known as ‘cross-
collateralization’).” General Order 82 also provides that such
relief will not be granted unless an official creditors commit-
tee has had sufficient time to organize, engage professionals,
and investigate the requested relief. A “first day motion” is
defined as “any motion for which an accelerated hearing is
sought within the first 30 days after the filing of a Chapter 11
petition.” Zurich does not dispute that IFCI’s assumption
motion was filed within the first 30 days and was accompa-
nied by a motion for an emergency hearing. Consequently, the
district court correctly found that General Order 82 applied on
its face to the assumption motion.
Nevertheless, Zurich argues that General Order 82 does not
apply to any assumption motion whatsoever. General Order
IN RE: INTERNATIONAL FIBERCOM 12353
82 applies only to a lien on post-petition assets that “the credi-
tor would not otherwise have . . . by virtue of its prepetition
security agreement and applicable law.” (Emphasis added.)
According to Zurich, its lien on the additional collateral was
created by virtue of applicable law when the contract was
assumed under § 365. Zurich’s argument is misguided for two
reasons. First, General Order 82 uses “and” as a connector,
not “or.” For General Order 82 not to apply, the original, pre-
petition workers’ compensation insurance policy would also
have to grant Zurich a lien on IFCI’s post-petition assets. It
doesn’t. Second, even if § 365 constitutes the “applicable
law” referred to in General Order 82, § 365 does not grant
Zurich a lien on the additional collateral because the workers’
compensation insurance policy was non-executory and non-
assumable. Therefore, contrary to Zurich’s assertions, General
Order 82 applied to the assumption motion.
[7] The assumption motion failed to comply with General
Order 82 because the motion was granted before the Creditors
Committee’s professionals had sufficient time to review it.9
More importantly, at no point did the motion state that the
requested relief would result in cross-collateralization. The
motion did state that Zurich would have a first priority lien on
the additional collateral, but it also stated that IFCI was cur-
rent on its reimbursement obligations to Zurich. Conse-
quently, the motion facially appears to request a lien on the
additional collateral only for workers’ compensation claims
arising post-petition. Both the bankruptcy court and the dis-
trict court found that statement misled the bankruptcy court
into believing that IFCI had satisfied all of its pre-petition
obligations to Zurich and, as a result, that no pre-petition
claims would be elevated to post-petition secured claims.10 In
fact, the bankruptcy court went so far as to state that
9
The Creditors Committee was appointed on February 21, 2002, and its
employment of counsel was approved on February 27, just nine days
before IFCI moved to assume the policy.
10
Zurich responds by pointing out that IFCI’s reimbursement obliga-
tions were paid quarterly, and that IFCI had paid all of its obligations for
that particular quarter. Again, Zurich misses the point. The assumption
motion failed to state that the effect of the bankruptcy court’s approval
would be to create a cross-collateralization, and Zurich does not dispute
that fact.
12354 IN RE: INTERNATIONAL FIBERCOM
“[c]learly, . . . if it had been brought to the Court’s attention
that the contract was not executory and that the effect of
granting the Debtor’s motion would be to secure the Debtor’s
prepetition obligation to reimburse Zurich for the deductibles
incurred on claims arising prepetition, . . . this Court would
not have granted the motion.” Int’l FiberCom, 311 B.R. at
866. Thus, not only did the assumption motion fail to comply
with General Order 82, but that failure affected the outcome
of the proceeding. As a result, the bankruptcy court properly
clarified the assumption order under Rule 60(b)(6) so that it
would comply with General Order 82.
Zurich argues that the Trustee, as IFCI’s successor in inter-
est, is not legally permitted to challenge the actions of IFCI
as the debtor-in-possession.11 In general, “[a]s the successor in
interest, the trustee is bound by all authorized acts of the
debtor in possession.” Nicholas v. United States, 384 U.S.
678, 693 n.27 (1966). The purpose for such a rule, as cor-
rectly highlighted by Zurich, is that “[c]reditors must be able
to deal freely with debtors-in-possession, within the confines
of the bankruptcy laws, without fear of retribution or reversal
at the hands of a later appointed trustee.” Armstrong v. Nor-
west Bank, 964 F.2d 797, 801 (8th Cir. 1992). Zurich’s argu-
ment misses the mark, however, because it implies that a
11
Zurich relies heavily on Jonas v. U.S. Small Bus. Admin. (In re South-
land Supply, Inc.), 657 F.2d 1076 (9th Cir. 1981), and In re Teligent, Inc.,
306 B.R. 752 (Bankr. S.D.N.Y. 2004). Both cases are distinguishable. In
Southland Supply, we found that a trustee could not object to a lien on cer-
tain lawsuit proceeds granted earlier by the debtor-in-possession. 657 F.2d
at 1080. Importantly, we also found that the debtor-in-possession in South-
land Supply had the authority to grant such a lien pursuant to state law.
Id. In this case, the debtor-in-possession did not have the authority to
assume a non-executory contract. Teligent involved an employee medical
insurance policy that was assumed by the debtor-in-possession, and the
court in Teligent relied on equitable estoppel to hold that a trustee was
barred from arguing that the bankruptcy court erred in entering the
assumption order. 306 B.R. at 759-60. But the trustee in Teligent did not
argue that the contract was non-executory and therefore erroneously
assumed.
IN RE: INTERNATIONAL FIBERCOM 12355
trustee is bound by the earlier actions of a debtor-in-
possession even if those actions are inconsistent with the
Bankruptcy Code. But a trustee may challenge a debtor-in-
possession’s actions in extraordinary circumstances, such as
where a debtor-in-possession acted outside the confines of the
bankruptcy laws. See Superior toy, 78 F.3d at 1175. Where,
as here, the bankruptcy court unknowingly approved an
assumption order that unlawfully assumed a non-executory
contract, the trustee may seek relief pursuant to Rule 60(b).
See id.
Zurich also asserts that the bankruptcy court could not alter,
amend, or reinterpret the assumption order once Zurich had
detrimentally relied. In Lenox, we held that, in the absence of
“vested” rights, bankruptcy courts have broad discretion
under Rule 60(b) to revisit past orders. Lenox, 902 F.3d at
739-40. In this case, there was no detrimental reliance
because, absent the extension, Zurich was still required to pay
claims even if IFCI stopped performing. Zurich’s suggestion
that it extended the policy only because the assumption order
secured IFCI’s pre-petition claims is misplaced; the extension
had no impact on Zurich’s prior rights or obligations under
the policy. What the assumption order, as interpreted by the
bankruptcy court, did do was provide security for claims that
arose after the extension. Zurich was under no obligation to
extend the policy and it was entitled to seek guarantees for
doing so. But Zurich was not entitled to cut in line in front of
other unsecured creditors. While the bankruptcy court’s clari-
fication prevented Zurich from doing this, it did not interfere
with any vested rights.
[8] Because the assumption order granted relief not permit-
ted by the Bankruptcy Code and IFCI’s assumption motion
violated the bankruptcy court’s notice and conspicuousness
requirements, there were sufficient grounds for clarifying the
assumption order pursuant to the catch-all provision of Rule
60(b)(6).12 Aside from Rule 60(b)(6), the bankruptcy court
12
In affirming the bankruptcy court, the district court also found that the
procedural failures amounted to a violation of the creditors’ due process
12356 IN RE: INTERNATIONAL FIBERCOM
also had the discretionary power to reconsider its order. See
11 U.S.C. § 105(a); see also Lenox, 902 F.2d at 739-40.
Therefore, the bankruptcy court did not abuse its discretion.
V.
Zurich further objects to the bankruptcy court’s clarifica-
tion of the assumption order by arguing that the two-year gap
between the original order and the Trustee’s motion violated
the timeliness requirement of Rule 60(b). Rule 60(b) requires
that reconsideration under the catch-all provision be requested
“within a reasonable time.” Fed. R. Civ. P. 60(b). What quali-
fies as a reasonable time “ ‘depends on the facts of each
case.’ ” United States v. Wyle (In re Pac. Far East Lines,
Inc.), 889 F.2d 242, 249 (9th Cir. 1989) (quoting United
States v. Holtzman, 762 F.2d 720, 725 (9th Cir. 1985)). The
relevant facts may include the length and circumstances of the
delay and the possibility of prejudice to the opposing party.
Id.; Holtzman, 762 F.2d at 725. Thus, relief under Rule 60(b)
should only be granted where the moving party is able to
demonstrate “that circumstances beyond its control prevented
timely action to protect its interests.” Alpine Land & Reser-
voir, 984 F.2d at 1049.
[9] In this case, the Trustee’s two-year delay in seeking
clarification of the assumption order is justified by extraordi-
nary circumstances. In fact, the delay resulted from Zurich’s
own conduct. Zurich’s massive pre-petition claims were not
disclosed in the assumption motion or the assumption order,
and in fact did not become known to the bankruptcy court,
Trustee, or most of the creditors until after Zurich filed its
rights. For that reason, the district court held that clarification of the
assumption order was necessary pursuant to Rule 60(b)(4). Because we
find that Rule 60(b)(6) provided a sufficient and proper basis for clarifying
the assumption order, we decline to comment on the district court’s due
process analysis.
IN RE: INTERNATIONAL FIBERCOM 12357
motion for summary judgment. In fact, Zurich did not even
reveal the extent of its pre-petition claims in its summary
judgment motion. Rather, the Trustee learned on its own that
almost all of Zurich’s claims against IFCI’s post-petition
assets arose from pre-petition injuries. Having discovered this
previously undisclosed information, the Trustee then timely
sought reconsideration of the assumption order. Therefore,
even a two-year delay should not preclude the bankruptcy
court’s reconsideration of the assumption order under Rule
60(b)(6). See, e.g., Holtzman, 762 F.2d at 725 (holding that a
five-year delay was not unreasonable); Washington v. Pen-
well, 700 F.2d 570, 572-73 (9th Cir. 1983) (holding that a
four-year delay was not unreasonable); Clarke v. Burkle, 570
F.2d 824, 831-32 (9th Cir. 1978) (holding that a six-year
delay was not unreasonable).
Furthermore, the bankruptcy court properly found that
Zurich was not prejudiced by the delay. Zurich claims it was
prejudiced because it relied on the assumption order in
extending the workers’ compensation insurance policy and
assuming liabilities it otherwise would not have. The bank-
ruptcy court correctly pointed out, however, that Zurich
received a premium of almost $300,000 for a two-month
extension of the policy, and that the assumption order, as clar-
ified, secured all of Zurich’s post-petition reimbursement
claims. According to the bankruptcy court, “Zurich profited
from the extension and undertook virtually no risk.” Int’l
FiberCom, 311 B.R. at 867. Indeed, Zurich was placed “in a
far better position than it would have been in had the Order
never been entered.” Id. at 868. The bankruptcy court’s fac-
tual findings are not clearly erroneous. With respect to
Zurich’s pre-petition reimbursement claims, Zurich fails to
demonstrate any detrimental reliance for the reasons already
explained. As a result, Zurich was not prejudiced by the two-
year delay in this case, so the timeliness requirement of Rule
60(b) is satisfied.
12358 IN RE: INTERNATIONAL FIBERCOM
VI.
Zurich also appeals the bankruptcy court’s denial of its
motion for a full evidentiary hearing. In support of its Rule
59(a) motion to alter or amend the order, Zurich proffered
additional documentary evidence, which it supplemented with
oral argument at a preliminary hearing. Under Rule 59(a),
made applicable to bankruptcy proceedings by Federal Rule
of Bankruptcy Procedure 9023, a court has the discretion to
reopen a judgment if one has been entered, take additional
testimony, amend findings of fact and conclusions of law, or
make new findings and conclusions. See Fed R. Civ. P. 59(a);
Defenders of Wildlife, 204 F.3d at 928-29. Zurich sought to
introduce evidence to rebut what it considered “unsupported
conclusions” upon which it felt the bankruptcy court based its
reconsideration of the assumption order. In particular, Zurich
wanted to introduce evidence demonstrating that the Creditors
Committee and the U.S. Trustee were aware of IFCI’s out-
standing pre-petition obligations to Zurich, that counsel for
the Creditors Committee had sufficient time to review IFCI’s
assumption motion, that Zurich played no role in the proce-
dural deficiencies in IFCI’s assumption motion, that Zurich
undertook risk in extending the policy, and that Zurich had
not “slept on its rights” regarding IFCI’s failure to establish
the additional collateral account.
[10] The bankruptcy court did not abuse its discretion in
denying Zurich’s request for a full evidentiary hearing. There
was adequate factual basis for the bankruptcy court’s deci-
sion. IFCI’s assumption motion facially failed to comply with
General Order 82. In this regard, the motion speaks for itself.
No further evidence is required. Furthermore, whether the
workers’ compensation insurance policy is an executory con-
tract is a legal issue that can be determined based on the facts
already in the record. Additional evidentiary support is unnec-
essary. Therefore, the evidence Zurich sought to admit would
have been irrelevant or superfluous. Moreover, Zurich actu-
ally did submit evidence relevant to the bankruptcy court’s
IN RE: INTERNATIONAL FIBERCOM 12359
decision. For example, Zurich submitted its own statement of
facts in support of its summary judgment motion, along with
exhibits. Also, when Zurich filed its motion to alter or amend,
it submitted substantial additional factual support pertinent to
the bankruptcy court’s findings. Zurich fails to explain what
more it would have offered during a hearing that it had not
already submitted to the bankruptcy court. Thus, the bank-
ruptcy court properly exercised its discretion in denying
Zurich’s request for a full evidentiary hearing.
VII.
We conclude that the bankruptcy court did not abuse its
discretion in reconsidering and clarifying its prior order. The
assumption order granted relief not permitted by the Bank-
ruptcy Code, and the motion on which the order was based
violated the bankruptcy court’s notice and conspicuousness
requirements. Reconsideration was therefore proper under
Federal Rule of Civil Procedure 60(b)(6). A full evidentiary
hearing was unnecessary because the bankruptcy court had
ample factual basis for its conclusions.
AFFIRMED.