Gene Kohut v. United Healthcare Ins. Co.

NOT RECOMMENDED FOR PUBLICATION
File Name: 17a0415n.06

No. 16-2324

UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT

In re: LSC LIQUIDATION, INC., ) FILED
) Jul 18, 2017
Debtor. ) DEBORAH S. HUNT, Clerk
_________________________________________ )
)
GENE R. KOHUT, )
ON APPEAL FROM THE UNITED
)
STATES BANKRUPTCY COURT
Appellant, )
FOR THE EASTERN DISTRICT
)
OF MICHIGAN
v. )
)
OPINION
UNITED HEALTHCARE INSURANCE )
COMPANY, )
)
Appellee. )

BEFORE: SUHRHEINRICH, BATCHELDER, and STRANCH, Circuit Judges.

JANE B. STRANCH, Circuit Judge. In this bankruptcy action, assets of a debtor

company were sold to a buyer. The buyer retained many of the debtor’s employees, who were

covered by health insurance policies provided by United Healthcare, the appellee. As part of an

effort to recover premium payments, the liquidating trustee—appellant here—challenges the

assignment of contracts governing those health insurance policies. The question before us is

whether those contracts were assigned to the buyer under 11 U.S.C. § 365. Based on our

precedent, the bankruptcy court did not abuse its discretion in amending a sale order to include

the policies. We therefore affirm the order of the bankruptcy court.
 No. 16-2324, Kohut v. United Healthcare Insurance Company

I. BACKGROUND

A. Factual History

In 2014, Lee Steel Corporation, the Debtor here, and United Healthcare entered into

contracts for United to provide health insurance to Lee Steel’s employees.1 On April 13, 2015,

Lee Steel2 filed for chapter 11 bankruptcy relief. A creditors’ committee (Committee) was

established to advocate for the interests of unsecured creditors. United requested to receive

notice in the bankruptcy case. Lee Steel filed a proposal to establish bidding procedures to sell

its assets, including a facility in Wyoming, Michigan. United received notice under 11 U.S.C.

§ 365 that its health insurance policies with Lee Steel were eligible to be assumed and assigned.

On July 31, 2015, Lee Steel filed a motion to sell substantially all of its assets to the highest

bidder, specifying that the buyer would likely hire certain employees and that “many executory

contracts will be assumed” under 11 U.S.C. § 365. Attached to the motion was a Sale

Agreement in the form of a proposed order. On August 12, the bankruptcy court entered an

Order in the form proposed, granting the motion authorizing the sale of debtor’s Wyoming,

Michigan, facility to the buyer, Union Partners I, LLC. The Order incorporated the Sale

Agreement that had been submitted by the parties, adding only a few paragraphs that are not

relevant here. Paragraph 22 of the Sale Agreement and Order specified that the Sale Agreement

could be “modified . . . by agreement of [Lee Steel] and [Union Partners], without further action

or order of the Court; provided . . . any such . . . modification . . . is not material and substantially

conforms to, and effectuates, the Sale Agreement,” and authorized the court to approve material

1
The factual basis is found in the designated bankruptcy record filed in the district court, (R. 3), which consists of
portions of the bankruptcy court record that the parties designated as relevant to this appeal.
2
Lee Steel Corporation, now known as LSC Liquidation, Inc., was joined in the bankruptcy petition by affiliates
Taylor Industrial Properties, L.L.C. and 4L Ventures, LLC. Because Lee Steel was the relevant actor for most of the
events described here, we refer to the debtors collectively as “Lee Steel.”

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modifications upon motion. (R. 3, PageID 41-42, 70) (emphasis omitted) Lee Steel and Union

Partners closed on the sale of the Wyoming facility on September 18.

On September 29, 2015, Union Partners sent United a letter informing United of a name

change—Union Partners had created Lee Steel Holdings LLC to operate the Wyoming facility—

and a new tax identification number for the healthcare policies. United processed the changes,

but did not recognize that the letter was a result of the bankruptcy sale. On November 24, the

bankruptcy court confirmed Lee Steel’s liquidation plan. The liquidation plan rejected all

executory contracts that had not been assumed or assigned; the healthcare insurance policies

were not listed as contracts that had been assumed or assigned.

United had previously asked Union Partners whether the health insurance policies would

be assumed and assigned, but had not received a definitive response. United therefore informed

Lee Steel’s counsel that United would “cease providing insurance coverage under the group

health insurance policies . . . as of 12/1/15.” On November 30, 2015, Union Partners contacted

United after receiving notice of the termination of health insurance coverage for employees at the

Wyoming facility. Union Partners informed United that Union Partners intended for the health

policies to be assumed and assigned as part of the bankruptcy sale so coverage could continue.

In accordance with the policies, Union Partners continued to pay premiums and United continued

to provide healthcare insurance. On December 3, Lee Steel, United, and Union Partners entered

into a letter agreement stating that all of the parties agreed that the health insurance policies had

been assumed by the debtor and assigned to the buyer at the closing on September 18, 2015. The

parties regarded the inclusion of the policies as falling under Paragraph 22 of the Sale Agreement

and Order that allowed non-material modifications without court action.

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No. 16-2324, Kohut v. United Healthcare Insurance Company

On December 15, 2015, the Committee sent United a demand letter seeking $211,813 in

allegedly preferential transfers under 11 U.S.C. § 547—the amount Lee Steel had paid to United

as premiums in the months before the bankruptcy petition was filed. The Committee had

previously sent a demand letter on November 25, 2015, but the first letter was sent to a lockbox

for payments and never made it to the appropriate department of United. On January 14, 2016,

the Committee filed an adversary proceeding against United seeking recovery of the pre-petition

payments. The adversary proceeding is currently stayed pending the outcome of this appeal

because pre-petition payments are generally not recoverable under 11 U.S.C. § 547 if the policy

contracts were assumed and assigned under § 365. See In re Superior Toy & Mfg. Co., Inc., 78

F.3d 1169, 1174 (7th Cir. 1996) (stating “Section 547 and § 365 are mutually exclusive avenues

for a trustee.”).

B. Procedural History

On February 26, 2016, United filed in the bankruptcy court a motion to amend the Sale

Order to clarify that the health insurance policies were assumed and assigned with the sale of the

Wyoming facility. The Committee objected. The bankruptcy court granted the motion under

Rule 60(a) and 60(b) of the Federal Rules of Civil Procedure, finding that the parties had

intended for the policies to be assumed and assigned and that amending the Order would “make

the judgment or record speak the truth.”

The liquidating trustee (Trustee), who is now vested with all claims and causes of action

of the Committee, appealed the bankruptcy court’s decision to the district court. The district

court affirmed on the grounds that the bankruptcy court did not abuse its discretion in granting

the motion under Rule 60(a). The Trustee subsequently appealed to this court.

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No. 16-2324, Kohut v. United Healthcare Insurance Company

II. ANALYSIS

A. Jurisdiction and Standard of Review

This court has jurisdiction under 28 U.S.C. § 158(d)(1) over appeals of final orders from

district courts that have reviewed bankruptcy court decisions. We review the decision of the

bankruptcy court “rather than the intermediate decision of the district court.” Lowenbraun v.

Canary (In re Lowenbraun), 453 F.3d 314, 319 (6th Cir. 2006). Generally, findings of fact are

reviewed for clear error and conclusions of law are reviewed de novo. Id. We review the grant

of relief under Rule 60 for abuse of discretion. Pruzinsky v. Gianetti (In re Walter), 282 F.3d

434, 440 (6th Cir. 2002). An abuse of discretion occurs when a court “commits a clear error of

judgment, such as applying the incorrect legal standard, misapplying the correct legal standard,

or relying upon clearly erroneous findings of fact.” Yeschick v. Mineta, 675 F.3d 622, 628 (6th

Cir. 2012) (quoting Auletta v. Ortino (In re Ferro Corp. Derivative Litig.), 511 F.3d 611, 623

(6th Cir. 2008)).

B. Relief under Rule 60(a)

Rule 60(a) allows a court to “correct a clerical mistake or a mistake arising from

oversight or omission whenever one is found in a judgment, order, or other part of the record.”

Fed. R. Civ. P. 60(a). The rule is applicable in bankruptcy proceedings through Bankruptcy Rule

9024. “Rule 60(a) applies to errors of transcription, copying, or calculation, and not to a

fundamental failure of discovery or notification.” Olle v. Henry & Wright Corp., 910 F.2d 357,

363 (6th Cir. 1990) (quoting Bershad v. McDonough, 469 F.2d 1333, 1336 (7th Cir. 1972)).

“The need to consider evidence outside the record is some indication that the error involved is

not merely clerical.” Id. Rule 60(a) is not the appropriate avenue for relief when “substantial

rights of the parties are involved and there was no mere clerical mistake or oversight by the

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court.” Olle, 910 F.2d at 364. “Clerical mistakes include those made by judges as well as

ministerial employees.” In re Walter, 282 F.3d at 440.

In the Walter case, a bankruptcy court was asked to clarify whether a party retained a

right that, by the terms of a previous order, had been released. Id. at 437-38. The transcript of

the previous motion hearing made clear that the bankruptcy court had intended to excise the

language releasing the right, but had overlooked a second paragraph. Id. We held that Rule

60(a) was the appropriate avenue for relief because the bankruptcy court had intended to remove

the language, but had made an oversight that the Rule 60(a) order corrected. Id. at 442.

Here, the errors and oversights were not clerical mistakes made by judges or ministerial

employees. Instead, the parties and their counsel failed to make the Sale Agreement accurately

reflect their intention to include the health insurance policies as contracts that were assumed and

assigned in the sale. Unlike in Walter, the bankruptcy court here is not asked to correct its own

error—its Sale Order approved the Sale Agreement just as the court intended to do at the time—

but is instead asked to correct a substantive error made by the parties. Modification under Rule

60(a) is therefore not appropriate here.

C. Relief under Rule 60(b)

Rule 60(b) authorizes courts to provide relief from a final judgment, order, or proceeding.

Fed. R. Civ. P. 60(b).3 A court may provide relief for enumerated reasons, including “mistake,

inadvertence, surprise, or excusable neglect.” Fed. R. Civ. P. 60(b)(1). A motion based on these

reasons “must be made within a reasonable time . . . no more than a year after the entry of the

judgment or order or the date of the proceeding.” Fed. R. Civ. P. 60(c)(1). Courts can also

3
The Trustee argues that United is not “a party or its legal representative” that has standing to properly bring a Rule
60(b) motion. However, this is an issue of statutory—not constitutional—standing. As such, the argument was
forfeited because the Trustee failed to raise it below. See Bilyeu v. Morgan Stanley Long Term Disability Plan, 683
F.3d 1083, 1090 (9th Cir. 2012) (finding a statutory standing argument waived because it was not raised before the
district court).

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No. 16-2324, Kohut v. United Healthcare Insurance Company

provide relief for “any other reason that justifies relief.” Fed. R. Civ. P. 60(b)(6). Motions based

on the catchall (b)(6) clause do not face a specific timing limitation, see Fed. R. Civ. P. 60(c)(1),

but must be filed within a reasonable time, Olle, 910 F.2d at 365.

Relief under Rule 60(b)(6) is only appropriate “in exceptional or extraordinary

circumstances which are not addressed by the first five numbered clauses of the Rule.” Id.

(quoting Hopper v. Euclid Manor Nursing Home, Inc., 867 F.2d 291, 294 (6th Cir. 1989)). In

Olle, an auctioneer erroneously reported to a bankruptcy trustee that a completed sale did not

include the good will and trade name of the debtor. Id. at 360. Approximately two years after

the auction, the buyer—who in fact had purchased the good will and trade name in the sale—

filed a motion under Rule 60 to amend the sale order. Id. Olle held that the catchall reason in

clause (b)(6) is mutually exclusive from the grounds in clause (b)(1)—mistake, inadvertence,

surprise, and excusable neglect. Id. at 366. And the error in Olle was based on an “error in

reporting,” id. at 363, which seems to fit into the first clause, but relief under that clause was

blocked by the one-year limitation, Fed. R. Civ. P. 60(c)(1). We remanded to the district court to

determine whether the motion to correct was “within the proper purview of Rule 60(b)(6) and

was filed within a ‘reasonable time.’” Id. at 366.

Courts consider three factors when determining whether to grant relief under Rule

60(b)(1): “(1) culpability—that is, whether the neglect was excusable; (2) any prejudice to the

opposing party; and (3) whether the party holds a meritorious underlying claim or defense.”

Yeschick, 675 F.3d at 628 (quoting Flynn v. People’s Choice Home Loans, Inc., 440 F. App’x

452, 457-58 (6th Cir. 2011)). We have suggested that an attorney error would fit within the

ambit of Rule 60(b)(1). In re Walter, 282 F.3d at 440 (disagreeing with the district court’s

assessment that “the problem here was simply a matter of attorney error, such that Rule 60(b)(1)

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No. 16-2324, Kohut v. United Healthcare Insurance Company

applied,” and instead finding a “mistake of counsel and the bankruptcy court’s own oversight” to

justify relief under Rule 60(a)).

In this case, the bankruptcy court found that a mistake was made when the healthcare

policies were not included in the Sale Agreement and Order as contracts that had been assumed

and assigned to the buyer. The Rule 60(b)(1) motion was filed less than a year after entry of the

Sale Order, so Olle’s analysis of Rule 60(b)(6) is inapplicable. The bankruptcy court applied

Rule 60(b)(1), examined its categories for relief, and made findings to cover—though not

explicitly referencing—the factors employed in Yeschick. It noted that: neglect was excusable

because the parties were all “operating on the assumption that there was going to be a contract in

place” even though “the case was in flux,” and any subsequent modification could be completed

under Paragraph 22 of the Sale Agreement and Order; the Trustee did not suffer prejudice

because he would not have had standing to object to the assumption and assignment of the

contracts in the Sale Agreement and Order; and, “all the affected parties have acted in reliance

on the assumption of the contract” that allowed for employees to receive continuous healthcare

coverage.

The Trustee argues that the bankruptcy court abused its discretion because relief under

Rule 60(b) is binary: a court can either vacate an order or it can leave the order in place. He

points to the language of the rule: “the court may relieve a party or its legal representative from a

final judgment, order, or proceeding,” Fed. R. Civ. P. 60(b), and claims that a court can only

relieve a party by vacating an order. But the rule does not use the word “vacate,” and instead

“gives the district court a grand reservoir [of] equitable power to do justice in a particular case.”

Radack v. Norwegian Am. Line Agency, Inc., 318 F.2d 538, 542 (2d Cir. 1963) (quoting Moore’s

Fed. Practice 308 (1st ed. 1950)). Consequently, “the rule should be liberally construed when

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substantial justice will thus be served.” Id. We have implied that modifying an order can be an

appropriate form of relief under Rule 60(b) when the motion is brought within the one-year

limitation period. In re Walter, 282 F.3d at 440; Olle, 910 F.2d at 365-66. The bankruptcy court

found this case to be appropriate for modification of the Sale Agreement and Order under Rule

60(b), and we agree.

The Trustee also argues that language in Charter Township of Muskegon v. City of

Muskegon suggests affirmative relief is not available under Rule 60. 303 F.3d 755, 762 (6th Cir.

2002) (“The jurisdiction available for a Rule 60 proceeding will not suffice for anything more

than relief from the judgment, because Rule 60 does not authorize a court to grant any

affirmative relief.”) (quoting Moore’s Fed. Practice § 60.61 (3d ed. 1997)). But the court in

Muskegon was discussing the extent of jurisdiction available under Rule 60, not placing a limit

on the equitable powers of the court. Id. at 762-63. This is evidenced by our discussion of Rule

60 generally. The authority of the bankruptcy court to modify the Sale Agreement and Order

under Rule 60(b)(1) is also supported by the universal recognition that a court may modify an

order under Rule 60(a) when appropriate. See In re Walter, 282 F.3d at 440. The bankruptcy

court’s action was not an abuse of discretion.

III. CONCLUSION

The bankruptcy court did not abuse its discretion in modifying its Order under Rule 60(b)

to clarify that health insurance policies were assumed and assigned in the sale. Modification

under Rule 60(b)(1) was appropriate because the motion was filed within one year of entry of the

Sale Order being modified and the court properly exercised its discretion to make the amendment

after weighing the relevant factors. Accordingly, we affirm the order of the bankruptcy court.

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