paul r. glassman (state bar no. 76536) fred neufeld (state ... file1 2 3 4 5 6 7 8 9 10 11 12 13 14...

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CARLSON & RAUTH LAWYER S

SAN TA MO N IC A

PAUL R. GLASSMAN (State Bar No. 76536) FRED NEUFELD (State Bar No. 150759) MARIANNE S. MORTIMER (State Bar No. 296193) STRADLING YOCCA CARLSON & RAUTH, P.C. 100 Wilshire Blvd., 4th Floor Santa Monica, CA 90401 Telephone: (424) 214-7000 Facsimile: (424) 214-7010 E-mail: [email protected]

[email protected] [email protected]

GARY D. SAENZ (State Bar No. 79539) OFFICE OF THE CITY ATTORNEY 300 N. “D” STREET, Sixth Floor San Bernardino, CA 92418 Telephone: (909) 384-5355 Facsimile: (909) 384-5238 E-mail: [email protected]

Attorneys for City of San Bernardino

UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA

RIVERSIDE DIVISION

In re

CITY OF SAN BERNARDINO, CALIFORNIA,

Debtor.

Case No. 6:12-bk-28006-MJ

Chapter 9

CITY OF SAN BERNARDINO’S: (A) OPPOSITION TO MOTION TO COMPEL ASSUMPTION OR REJECTION OF BICEP AGREEMENTS; AND (B) RESPONSE TO BICEP’S OBJECTION TO CONFIRMATION OF THIRD AMENDED PLAN

Hearing: Date: October 14, 2016 Time: 10:00 a.m. Place: Courtroom 301 3420 Twelfth Street Riverside, CA 92501-3819

Case 6:12-bk-28006-MJ Doc 1964 Filed 09/26/16 Entered 09/26/16 22:51:48 Desc Main Document of 59

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TABLE OF CONTENTS

Page I. INTRODUCTION AND SUMMARY OF ARGUMENT ..................................................1

II. FACTUAL BACKGROUND ..............................................................................................5

A. The MOCs, June 2006 to the Present .......................................................................5

B. The Relevant Terms of the MOCs ...........................................................................6

1. The Coverage Provision (Sections 1 and 2) .................................................6

2. Defense and Settlement (Section 3) .............................................................7

3. Self-Insured Retention and Limit of Liability (Section 4) ...........................7

4. Conditions (Section 7) .................................................................................7

5. Duties and Defaults (Section 7.3) ..............................................................10

C. The 2014 and 2016 Audits, the BICEP Notice and the City Response .................10

III. THE CITY IS NOT OBLIGATED TO ASSUME OR REJECT THE MOCS BECAUSE THEY ARE NOT EXECUTORY CONTRACTS; RATHER THEY ARE ASSETS OF CITY AND ENFORCEABLE AGAINST BICEP .............................13

A. The MOCs are Not Executory Contracts ..............................................................13

B. The MOCs are Assets of the City and BICEP’s Obligations Thereunder are Enforceable ................................................21

C. Conditions Precedent in the MOCs do not Render the MOCs Executory ............22

D. BICEP is Obligated to Pay Claims Over the SIR Threshold ................................24

E. Whether the MOCs are Insurance Contracts is Irrelevant ....................................33

IV. THE CITY COULD READILY ASSUME THE MOCs ..................................................38

A. The Default Provision of the MOCs .....................................................................41

B. BICEP’s Allegation That the City is not in Compliance With the Requirements is Contradicted by BICEP’s Own 2014 and 2016 Audits ..............41

1. The 2014 Audit Shows Substantial Compliance .......................................41

2. The 2016 Audit Shows Substantial Compliance .......................................42

3. BICEP’S August 25, 2016 Email Contradicts Its Audits .........................43

V. THE COURT SHOULD NOT GRANT BICEP A WINDFALL ......................................44

VI. CONCLUSION ..................................................................................................................45


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TABLE OF AUTHORITIES

Page(s) CASES

Admiral Ins. Co. v. FF Acquisition Corp. (In re FF Acquisition Corp.), 422 B.R. 64 (Bankr. N.D. Miss 2009) .........................................................................16, 29, 30

Admiral Ins. Co. v. Grace Indus., 341 B.R. 399 (Bankr. E.D.N.Y. 2006), aff’d 409 B.R. 275 (E.D.N.Y. 2009) ................. passim

In re Alameda Invs., LLC, 2013 Bankr. LEXIS 2564 (Bankr. C.D. Cal. June 25, 2013) .................................................21

Albany Ins. Co. v. Bengal Marine, Inc., 857 F.2d 250 (5th Cir. 1988) ....................................................................................................29

Am. Safety Indemnity Co. v. Vanderveer Estates Holding, LLC (In re Vanderveer Estates Holding, LLC), 328 B.R. 18 (Bankr. E.D.N.Y. 2005), aff’d (E.D.N.Y. Oct. 3, 2006) .............................. passim

Argonaut Ins. Co. v. Ames Dep’t Stores, Inc. (In re Ames Dep’t Stores), 1995 U.S. Dist. Lexis 6704 (S.D.N.Y. May 17, 1995) ......................................................15, 16

Beloit Liquidating Trust vs. United Ins. Co., 287 B.R. 904 (N.D. Ill. 2002) ................................................................................19, 20, 35, 36

Children’s Hosp. & Health Ctr. v. Belshe, 188 F.3d 1090, 1096 (9th Cir. 1999) ......................................................................................34

Commercial Union Ins. Co. v. Texscan Corp. (In re Texscan Corp.), 976 F.2d 1269 (9th Cir. 1992) ......................................................................................... passim

Diamond Z Trailer, Inc. v. JZ L.L.C. (In re JZ L.L.C.), 371 B.R. 412 (9th Cir. BAP 2007)...........................................................................................21

Enterprise Energy Corp. v. United States (In re Columbia Gas Sys.), 50 F.3d 233 (3d Cir. 1995).................................................................................................21, 23

In re Corporacion de Servicios Medicos Hospitalarios de Fajardo 805 F.2d 440 (1st Cir. 1986) ...................................................................................................40

In re Grayhall Resources Inc., 63 B.R. 382 (Bankr. D. Colo. 1986) .................................................................................39, 40

In re Evelyn Byrnes, Inc., 32 B.R. 825 (Bankr. S.D.N.Y. 1983) ) ....................................................................................40


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In re Exide Techs., 607 F.3d 957 (3d Cir. 2010)...............................................................................................14, 20

Firearms Import and Export Corp. v. United Capitol Ins. Co. (In re FireaRms Import & Export Corp.), 131 B.R. 1009 (Bankr. S.D. Fl. 1991) ............................................................................. passim

Gencor Indus. Inc.v. CMI Terex Corp. (In re Gencor Indus. Inc.), 298 B.R. 902 (Bankr. M.D. Fl. 2003) .....................................................................................21

Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205 (1979) .................................................................................................................36

Gulf Underwriters Ins. Co. v. Burris, 674 F.3d 999 (8th Cir. 2012) .......................................................................................15, 16, 28

Hanover Ins. Co. v. Carroll, 241 Cal. App. 2d 558 (1966) ...................................................................................................22

Hal Roach Studios, Inc. v. Qintex Entm’t (In re Qintex Entm’t), 950 F.2d 1492 (9th Cir. 1991) ................................................................................................21

In re Federal Press Co., 104 B.R. 56 (Bankr. N.D. Ind. 1989) ...........................................................................16, 19, 29

In re Greater Kansas City Trans. Inc., 71 B.R. 865 (Bankr. Ks. 1987) ................................................................................................17

In re Greektown Holdings, L.L.C., 2009 Bankr. LEXIS 1231 (Bankr. E.D. Mich. May 13, 2009) .........................................38, 39

In re Natco Industries, Inc., 54 B.R. 436 (Bankr. S.D.N.Y. 1985) ................................................................................39, 40

In re OES Envt’l, Inc., 319 B.R. 266 (Bankr. M.D. Fl. 2004) ......................................................................................30

In re Sudbury, 153 B.R. 776 (Bankr. N.D. Oh. 1993) ............................................................................. passim

Ins. Co. of the State of Penn. v. Associated Int’l Ins. Co., 922 F.2d 516 (9th Cir. 1990) ...................................................................................................22

Karz v. Dep’t of Prof’l and Vocational Standards, 11 Cal. App. 2d 554 (1936) ...............................................................................................14, 20

In re Keck, Mahin & Cate, 241 B.R. 583 (Bankr. N.D. Ill. 1999) ...............................................................................32, 33


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Lewis Brothers Bakeries Inc. v. Interstate Brands Corp. (In re Interstate Bakeries Corp.). 751 F.3d 955 (8th Cir. 2014) ............................................................................................14, 20

Marcus & Millichap Inc. v. Munple, Ltd (In re Munple), 868 F.2d 1129 (9th Cir. 1989) ..................................................................................................23

Nw. Title Sec. Co. v. Flack, 6 Cal. App. 3d 134 (1970) .......................................................................................................22

Olah v. Baird (In re Baird), 567 F.3d 1207 (10th Cir. 2009) ....................................................................................15, 16, 19

Phillips v. Noetic Splty. Ins. Co., 919 F. Supp. 2d 1089 (S.D. Cal. 2013) ..................................................................20, 26, 27, 31

Pinnacle Pines Comm’ty Assoc. v. Everest National Ins. Co., 2014 U.S. Dist. LEXIS 65011 (D. Ariz. May 9, 2014) .....................................................16, 29

Platt Pacific Inc. v. Andelson, 862 P.2d 158 (Ca. 1993) ..........................................................................................................23

Rice v. Downs, 248 Cal. App. 4th 175 (Cal. App. 2016) ..................................................................................30

Robinson v. Shell Oil, 519 U.S. 337 (1997) ................................................................................................................34

Sturgill v. Beach at Mason Ltd., 2015 U.S. Dist. Lexis 142490 (S.D. Oh. October 20, 2015) .............................................16, 29

United States v. Daas, 198 F.3d 1167 (9th Cir. 1999)) ...............................................................................................34

Weeks v. Crow, 113 Cal. App. 3d 350 (Cal. App. 1980) ...................................................................................30

Wilson v. Comm'r, 705 F.3d 980 (9th Cir. 2013) ...................................................................................................34

Vogt-Nem, Inc. v. M/V Tramper, 263 F. Supp. 2d 1226 (N.D. Cal. 2002) .....................................................................................1

Zacadia Fin. v. Fiduciary Trust Int’l of Cal., 2014 Cal. App. LEXIS 103 (Cal. App. Jan. 8, 2014) ..............................................................38

Zamos v. Zamos (In re Zamos), 2006 Bankr. LEXIS 4789 (B.A.P. 9th Cir. Mar. 30, 2006) ....................................................31

Zeig v. Mass. Bonding & Ins. Co., 23 F.2d 665 (2d Cir. 1928) ......................................................................................................33


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Zurich Am. Ins. Co. v. Int'l Fibercom, Inc. (In re Int'l Fibercom, Inc.), 503 F.3d 933 (9th Cir. 2007) ........................................................................................... passim

STATUTES

11 U.S.C. § 362 ................................................................................................................................3

11 U.S.C. § 365 ...................................................................................................................... passim

11 U.S.C. § 922 ................................................................................................................................3

Cal. Civil Code § 1641...................................................................................................................30

Cal. Government Code § 990.....................................................................................................9, 34

Cal. Insurance Code § 11580 .............................................................................................22, 35, 36

OTHER AUTHORITIES

Black’s Law Dictionary (10th ed. 2014) ........................................................................................36

Vern Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn. L. Rev. 439 (1973) ...................................................................................................21

Richard A. Lord, Williston on Contracts (4th ed. 2000) ...............................................................14


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TO THE HONORABLE MEREDITH A. JURY, UNITED STATE BANKRUPTCY JUDGE, AND ALL PARTIES IN INTEREST:

I. INTRODUCTION AND SUMMARY OF ARGUMENT

Since at least 2006, the City has purchased personal injury liability coverage from BICEP

for claims over $1 million pursuant to eleven annual Memorandums of Liability Coverage (the

“MOCs”).1 The current MOC covers claims against the City that occur during the coverage

period of July 1, 2016 through June 30, 2017. Over the past six years of annual contracts (July

2010 through June 2016), the City paid BICEP more than $3.8 million in premium payments for

the liability coverage. And for all of that time, the City has been a member in good standing of

BICEP, fulfilled its obligations to BICEP while never making a claim against the BICEP

reserves or the reinsurance, and the City was never given a notice that it was in default under any

of the MOCs, until August 1, 2016, when BICEP sent the City a purported notice of “default”

(the “BICEP Notice”). Soon thereafter BICEP filed its motion to compel assumption or rejection

of the MOCs (the “Motion”), and then filed an objection to confirmation of the City’s Third

Amended Plan for the Adjustment of Debts (“Plan”) in which BICEP argues that, in light of the

purported defaults, the City cannot assume any of the 11 MOCs (the “Objection”). In sum,

BICEP asks this Court to find that it has no liability for coverage for the period stretching back to

July 1, 2006, a multi-million dollar windfall for BICEP at the expense of the City and the

litigants. BICEP is excused from paying claims, it argues, and gets to keep the premiums.

BICEP’s requested relief should be denied.

The Motion should be denied because the MOCs are not executory. It is well established

that for a contract to be executory, obligations must remain on both parties and the non-

performance of such obligations must relieve the other party from performance. Having paid the

premiums, the City has no further unperformed material obligations the non-performance of

1 During those 11 years, there have been two forms of the MOCs. One form covered 2006 through 2014 contracts, and the other is the current form covering the past few years. Motion, 2:17-24; 4:5-11. The forms are substantially similar on all of the relevant provisions. All references to provisions of the MOCs refer to the 2014 MOC attached as Exhibit 3 to BICEP’s motion to compel.


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which would relieve BICEP from performance. The absence of material unperformed obligations

does not mean that the City’s continuing obligations under the MOCs are not important to the

City or to BICEP. It simply means that even if the City fails to perform its remaining obligations

under the MOCs, BICEP may be entitled to a remedy of damages but it is not entitled to the

remedy of being excused from performance.

In other words, the City substantially performed its obligations under the MOCs upon

payment of the premiums. This conclusion is supported by the plain language of the MOCs and

is deeply rooted in the caselaw analyzing contracts of this type, where one person assumes

liability for claims on behalf of another in certain circumstances. The City’s substantial

performance yields two results: first, the MOCs are not executory and second BICEP is obligated

to perform even if the City does not comply with its additional obligations under the MOCs to

BICEP’s satisfaction. BICEP seeks to disavow the contractual terms and related caselaw but, as

explained, it cannot.

Moreover, even if, arguendo, fully paid-up annual contracts of liability coverage

extending back 11 years are executory today and subject to the Section 3652

assumption/rejection requirements (which most certainly they are not), the City could readily

assume the MOCs because the City has never been in default under any of the MOCs, and is not

now in default. The default section of the MOCs provide, at Section 10.1: “No MEMBER that

substantially complies with the Requirements (as defined below) may be found in default.”

(emphasis added). Thus, not one, several or even multiple failures of noncompliance constitute a

default. Only the City’s failure to substantially comply with the Requirements could constitute a

default, and even that is not enough to be in default under the MOCs. Rather, Section 10.3 of the

MOCs requires that in the event the City has received a non-compliance notice from BICEP, the

City is required to furnish a written response outlining a program of corrective action. Section

10.5 of the MOCs further provides that only failure to cure substantial noncompliance pursuant

to Sections 10.1 through 10.4 constitutes default. As discussed below, after the City received the

2 Unless otherwise indicated all “Section” reference are to title 11 of the U.S. Code, the Bankruptcy Code.


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BICEP Notice, a notice of non-compliance, on August 1, 2016, the City timely responded with a

27 page letter (the “City Response Letter”) showing that it was in substantial compliance with

the Requirements. In that letter, the City proposed certain corrective actions which the City has

already implemented in accordance with Sections 10.3 and 10.5 of the Requirements. See Exhibit

3. Accordingly, there has been no default within Section 10.5 of the Requirements.

The City invites the Court to review the BICEP Notice and the City Response Letter. The

Court will see that the sum and substance of BICEP’s allegations are entirely conclusory and

without any factual support whatsoever. As set forth in detail in the City Response Letter, BICEP

relies on an audit conducted earlier this year for support for its notice of non-compliance, but the

audit only identified three insufficiencies which the City is promptly rectifying. See Exhibit 3.

The bulk of BICEP’s multi-page list of defaults are either restatements of the Requirements or

have to do with BICEP’s allegation that the City has not been “working the litigation case files”

since it filed the chapter 9 case. As BICEP is aware, the lawsuits against the City are stayed

under Sections 362 and 922, as is the commencement of new lawsuits. Nevertheless, as

explained in the City Response Letter, notwithstanding the stay, the City Attorneys and outside

counsel have been “working the files” by tracking notices of claims that have been received, and

most significantly, settling cases, including with parties that had initially objected to

confirmation of the Plan, and the City will report on those successes in connection with the

confirmation hearing. Otherwise, given the automatic stay and the City’s expectation that many

matters will be reactivated in the context of the ADR Procedures after confirmation of the Plan,

it is astonishing that BICEP would assume that the City’s reporting to BICEP would be as

abundant during the chapter 9 case as it was before. BICEP’s misguided perception that the City

was not reporting, when in truth there was little to report, is all that BICEP has to hang its hat on

regarding the City’s purported failure of compliance. BICEP would like to make a mountain out

of a molehill, and cause a complete forfeiture of the City’s contracted-for rights, but it cannot.

The City has been in substantial compliance with the Requirements during the entirety of the

chapter 9 case, and there is no default to cure.


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Finally, it is especially ironic, and noteworthy, that at the very same time BICEP was

preparing its BICEP Notice of noncompliance, its Motion, and its Objection on the basis that the

MOCs cannot be assumed, BICEP sold the City a new MOC for the period July 1, 2016 through

June 30, 2017, which the City fully paid for. It is impossible for BICEP to reconcile those facts

and still argue that the City can neither enforce the MOCs nor assume them. If the City truly was

in default under the MOCs such that it cannot enforce or assume the contracts, BICEP would not

be selling the City a new MOC for another year. It simply cannot be that BICEP was inducing

the City to enter into a new annual MOC, knowing that it, BICEP, was preparing pleadings that

argue that the City cannot assume and enforce the very MOC BICEP was selling. BICEP’s

actions thoroughly undermine its legal arguments that the City is in default and cannot enforce or

assume the MOCs (and that the only option is rejection of the MOCs, including presumably the

new one), and BICEP should be estopped from making those arguments.

Given that the City is not in default under the MOCs, should the City be compelled to

assume, the City need not show adequate assurance of future performance. Nevertheless, that is a

showing the City could readily make. The City has never failed to pay the premiums to BICEP,

even in the tight cash-flow years immediately before and after the August 1, 2012 petition date.

No further showing is required.

The BICEP Notice which complains in conclusory fashion about wrongs that have

already been or will be resolved, the Motion which seeks to compel assumption or rejection of a

non-executory contract, and the Objection which objects to the assumption of a contract the City

has not moved to assume, are all motivated by BICEP’s concern that it will be prejudiced if the

City satisfies its self-insured retention tranche of coverage under the MOCs pursuant to the Plan.

BICEP is correct that if the City is ever subject to an allowed claim that exceeds the $1 million

Self-Insured Retention (the “SIR”), the City intends to pay the SIR portion of the allowed claim

as a Class 13 General Unsecured Claim under the Plan, with that SIR portion of the allowed

claim receiving the same 1% distribution as other Class 13 General Unsecured Claims. However,

the Plan does not relieve the City of its obligation to defend claims, the City continues to

aggressively settle claims (and defend them where required), the City has reserved some funds to


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pay claims, and the City has proposed ADR procedures to minimize costs attendant to defending

claims—all of which disproves BICEP’s argument that it will be prejudiced by the City’s Plan.

As demonstrated below, payment of the SIR under the Plan is consistent with the language of the

MOCs and applicable law.

In sum, the MOCs are not executory, but if they are the City can readily assume them and

can satisfy the SIR through the Plan. BICEP’s legal arguments, taken to their logical conclusion,

would confer a multi-million dollar windfall upon BICEP and deny the City and litigants the

benefits of the MOCs, a result contrary to the plain language of the MOCs and Section 365.

BICEP’s Motion should be denied and its Objection should be overruled.

II. FACTUAL BACKGROUND

A. The MOCs, June 2006 to the Present

Each year since at least 2006, through and including the current contract covering July 1,

2016 through June 30, 2017, the City has obtained liability coverage from BICEP. See Motion,

2:18-24. BICEP agrees that there are multiple contracts, one for each year, since July 1, 2006.3

Motion, 1:19-21; 4:4-11. The contracts generally provide that BICEP coverage is available when

a claim against the City exceeds $1 million.4

The City has consistently paid its premiums, without exception for 11 years. Tran. Dec., ¶

6. During the past 6 years of coverage alone, the city paid more than $3.8 million in premiums.

Id.

3 At page 2 of the Motion, BICEP includes a chart of the relevant policies, relevant because they pertain to the actual and potential claims against the City set for in Exhibit 6A to the Plan Appendix. The chart includes all the policies between BICEP and the City, except the most recent one, executed on for the 2016-2017 coverage period. Including this most recent MOC, there are a total of 11 contracts. 4 BICEP’s coverage also includes reimbursement for defense costs when the judgment plus defense costs goes over the $1 Million SIR. Exhibit 3 to the Motion (2014 MOC), 2:27. The description herein of the terms of the MOCs is for summary description purposes, and any conflict between the summary descriptions and the MOCs themselves are controlled by the terms of the MOCs and applicable law.


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B. The Relevant Terms of the MOCs

1. The Coverage Provision (Preamble and Section 1)

The essence of the MOCs is found in the Preamble and Section 1, which provide as

follows:

In consideration of the MEMBER’s payment of the premium, BICEP and the MEMBER agree as follows:

SECTION 1 -- COVERAGES

BICEP will pay those sums on behalf of the COVERED PARTY for COVERED ULTIMATE NET LOSS that the COVERED PARTY becomes legally obligated to pay as DAMAGES . . . caused by an OCCURRENCE . . .

BICEP will pay DEFENSE COSTS incurred within the COVERED ULTIMATE NET LOSS.

Exhibit 3 to the Motion (2014 MOC), 1:9-1:21.

2. Definitions (Section 2)5

The definitions necessary to establish the bounds of the Coverage Provision are listed in

Section 2 of the MOC. In particular, COVERED PARTY means, inter alia, the MEMBER. Id. at

2:9. The MEMBER is the City. Id. at, 4:47-49; Exhibit 4 to the Motion (2014 Declaration Page).

COVERED ULTIMATE NET LOSS is “an amount by which ULTIMATE NET LOSS exceeds the SELF-INSURED RETENTION, but not exceeding the LIMIT OF LIABILTY, and which this MEMORANDUM covers.

Exhibit 3 to the Motion (2014 MOC), 2:30-32. The concept of Covered Ultimate Net Loss

encompasses the agreement that not all loss experienced by the City is compensable under the

MOCs. Only the amount which is Ultimate Net Loss less the SIR is compensable, up to the Limit

of Liability, which is $10 million. See also Exhibit 4 to the Motion (2014 Declaration Page).

ULTIMATE NET LOSS is the “sums for which the MEMBER is liable as DAMAGES either by adjudication or by compromise after making proper deduction for all recoveries and salvages and includes DEFENSE COSTS.”

Exhibit 3 to the Motion (2014 MOC), 6:21-23. Finally,

SELF-INSURED RETENTION is “the amount stated in Item 5 of the Declarations that the MEMBER must pay for each OCCURRENCE for judgments, settlements and DEFENSE COSTS . . .”

5 All capitalized terms in this document not defined herein have the meaning ascribed to such terms in Section 2 of the MOC. Exhibit 3 to the Motion (2014 MOC), 1:30-6:26.


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Id. at 6:12-14. The parties agree that Item 5 of the Declaration shows $1 million.

Putting these terms together, under the Preamble and Coverage Provision, in

consideration of the City’s payment of its premium obligations, BICEP agreed to pay those sums

on behalf of the City for damages, including defense costs, above $1 million but less than $10

million that the City becomes legally obligated to pay.

3. Defense and Settlement (Section 3)

Section 3.2 of the MOCs provides,

After the amount of the SELF-INSURED RETENTION has been exhausted by payment of judgments, settlements and DEFENSE COSTS, BICEP shall reimburse the COVERED PARTY for any further DEFENSE COSTS within the LIMIT OF LIABILITY even if the allegations against the COVERED PARTY are groundless, false or fraudulent.

Id. at 6:38-41. The import of this section is discussed in Section III.D infra.

Section 3.4 provides that the City will not settle a claim in an amount over $1 million

without BICEP’s consent. Id. at 6:49-50. This provision protects BICEP from the concern that

the City will carelessly settle claims for over $ 1 million since the City will not be required to

pay such settled amounts in full under the Plan. Section 3.5 provides, conversely, that BICEP

cannot settle a claim without the City’s consent, but if the City refuses settlement, BICEP’s

liability may be limited. Id. at 7:2-4.

4. Self-Insured Retention and Limit of Liability (Section 4)

Section 4 of the MOCs, has only two subparagraphs. The first provides,

BICEP’s liability to a COVERED PARTY as the result of any one OCCURRENCE is only the COVERED ULTIMATE NET LOSS.

Id. at 7:21-22. The second provides that where there is a continuous or repeated exposure the SIR

and limit of liability of the first applicable coverage period shall apply. Id. at 7:24-27. This

section is perhaps most notable for what it omits—a statement that the SIR is a condition

precedent to coverage.

5. Conditions (Section 7)

Section 7 begins with the statement that,

The following are conditions precedent to coverage under this Memorandum:


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Id. at 12:13. What follows is a list of twenty provisions. Id. at 12:10. The very first condition is

that the Member shall pay the Deposit Premium and any further premium that is required. Id. at

12:15. It is beyond dispute that this condition has been satisfied. Tran. Decl., ¶ 6.

Other conditions in this section are less clearly conditional. For example, the provision

that the MOCs are governed by California law is in Section 7.16. Exhibit 3 to the Motion (2014

MOC), 15:4-7. Also the provisions governing third party beneficiaries (7.9), assignment (7.11),

severability (7.14), and other provision sometimes contained in the “Miscellaneous” category at

the end of an agreement. Id. at 13:41-14:40.

a. Bankruptcy, Insolvency, and the Self-Insured Retention

Of particular relevance, Section 7 contains a number of provisions that bear on the

determination of executoriness and the payment of claims below the SIR.

Section 7.5, entitled Bankruptcy or Insolvency, provides, in the first sentence

Bankruptcy or insolvency of the COVERED PARTY shall not relieve BICEP of any of its obligations hereunder.

Id. at 13:13-16. (the “Bankruptcy Clause”): The second sentence of Section 7.5 provides,

Nor shall the bankruptcy or insolvency of the COVERED PARTY increase BICEP’s obligations hereunder.

Id. at 13:6-7 (the “First No Drop-Down Provision”). In addition, Section 7.12, entitled the “Drop

down exclusion” provides

BICEP’s LIMIT OF LIABILITY shall not be increased for any reason, including, but not limited to, the refusal or inability of the COVERED PARTY to pay the SELF-INSURED RETENTION . . . .

Id. at 14:21-24 (the “Second No Drop-Down Provision”).

Taken together, the Bankruptcy Clause and the two No Drop-Down Provisions set forth

BICEP’s obligations in the event of the City’s bankruptcy or insolvency. In the event of the

City’s bankruptcy or insolvency, under the Bankruptcy Clause, BICEP is not relieved of

performance, notwithstanding the City’s inability to pay claims within the SIR or the failure of

any obligation, but BICEP is not required to satisfy claims within the first $1 million or to pay

that portion of claim in an amount above $10 million, the Limit of Liability per occurrence. In


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sum, BICEP’s liability remains unchanged in the event of bankruptcy or insolvency—it is liable

for claims between $1 million and $10 million.

BICEP suggests that payment of the SIR is a condition precedent to BICEP’s

performance and/or a material obligation the non-performance of which would relieve BICEP of

performance. But these provisions governing BICEP’s obligations in a City bankruptcy

undermine this argument. If the SIR was a condition precedent to performance or if the SIR was

a material obligation the non-performance of which would relieve BICEP of performance,

BICEP would have no liability in bankruptcy and the “no drop-down” provisions would be

unnecessary. In other word’s BICEP’s argument that its liability in bankruptcy is zero, conflicts

with the provisions of the MOCs saying that BICEP’s liability in bankruptcy is the same as

outside of bankruptcy, between $1 and $10 million.

b. Interpretation

BICEP argues that the MOCs are not “insurance contracts” and thus cases interpreting

contractual terms that are identical or virtually identical to the MOCs are irrelevant—the MOCs

must be evaluated sui generis. For support, BICEP cites to Section 990.8 of the California

Government Code, discussed herein. See Motion, 3:8-9. In addition, BICEP likely would point to

Section 7.15, entitled Interpretation, which provides,

a. This MEMORANDUM does not provide insurance so that the rule that all ambiguities must be construed against an insurer does not apply. This MEMORANDUM shall be construed according to the principles of contract law, giving full effect to the intent of the MEMBERS and BICEP’s Board of Directors in adopting it.

b. This MEMORANDUM shall be interpreted without regard to the drafter. Its terms and intent, with respect to the rights and obligations of any COVERED PARTY or BICEP, shall be interpreted and construed on the express assumption that the MEMBERS and BICEP participated equally in its drafting.

Exhibit 3 to the Motion (2014 MOC), 14:42-15:2.

As set forth below, whether BICEP is an insurance contract is a red herring. The express

agreement of the parties as reflected in the MOCs is sufficient to establish that the MOCs are not

executory because the consideration has been paid, see supra Section II.B.1, and that BICEP is

obligated to pay claims over the SIR however the City satisfies the first $1 million of claims, see

supra Section II.B.5.a. That the cases come to the same conclusion is no coincidence, and


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BICEP’s attempt to distinguish them on this basis is of no moment. The language of the contract

voluntarily supplies and incorporates the relevant statutes that BICEP seeks to disclaim. The

MOCs can be interpreted by their terms without any statutory input, but the result may not be

what BICEP would like.

c. Duties, Requirements and Defaults (Section 7.3 and Exhibit A to 2014 MOC)

Still in Section 7, Conditions, Section 7.3 lists six duties in the nature of notice and

cooperation with BICEP to limit BICEP’s exposure. Exhibit 3 to the Motion (2014 MOC),

12:32-13:5. Section 7.3 refers to the LIABILITY RISK MANAGEMENT REQUIREMENTS

(the “Requirements”). Id. at 12:32-13:5. The Requirements are attached as Exhibit A to the

MOCs. Id. at 4:43-45; (Exhibit A to the MOC) pp. 16-21.

Among other things, the Requirements impose duties upon the City (which BICEP terms

conditions, Motion, 4:16-20) similar to other contracts of indemnity: to maintain records, Exhibit

3 to the Motion (2014 MOC), 17:5-29; manage defense costs, id. at 17:31-18:5; and notify

BICEP of potential claims, id. at 18:7-30.

Section 10 of the Requirements establishes the procedures that BICEP must follow in the

event of non-compliance or to establish a default:

10.1 No MEMBER that substantially complies with these Requirements may be found in default.

10.2 BICEP shall furnish the MEMBER with written notification of the MEMBER’s failure to comply with these Requirements.

10.3 the MEMBER shall furnish a written response outlining a program for corrective action, or showing that is has substantially complies with these Requirements, within thirty (30) days of receipt of BICEP’s notification.

10.4 If BICEP approves corrective action, the MEMBER shall implement the approved program within sixty (60) days of notice of such approval.

10.5 Failure to cure noncompliance pursuant to section 10.1 through 10.4 shall constitute an event of default in accordance with the Liability Program.

10.6 The MEMBER may appeal any notice of default to the BICEP Board of Directors.

The Requirements establish a detailed multi-step procedure before a default can occur under the

MOCs. There must first be a notice of non-compliance, Exhibit 3 to the Motion (Exhibit A to the


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MOC Section 10.2), p. 21, then a response from the Member, id. at Section 10.3, and only if the

response is insufficient or a proposed corrective action is not taken sixty (60) days from when the

corrective action is approved, then an default can occur. Id. at Section 10.5). Moreover,

substantial compliance is a complete defense to an alleged default. Id. at Section 10.1. Finally,

the determination of default is not final and can be appealed to the BICEP Board of Directors. Id.

at Section 10.6. Although BICEP alleges that there has been a default in the BICEP Notice, no

default can occur without the satisfaction of the procedures of Section 10, and the procedures

have not been satisfied. Accordingly, no default has occurred.

C. The 2014 and 2016 Audits, the BICEP Notice and the City Response Letter

For the past 11 years, BICEP raised few concerns about the City’s compliance with the

MOCs. BICEP audited the City in 2014. Exhibit 2B (2014 Audit).6 The 2014 Audit found that

the City was in compliance with almost all the Requirements. Id. BICEP gave the City no notices

of non-compliance or the need for corrective action. Id. The City had numerous written and oral

communications with BICEP’s representatives and Carl Warren & Company (“Carl Warren”)

since the beginning of 2016. During the midst of these numerous communications, BICEP never

once said that the City was in default. See Exhibit 3 (City Response Letter); Tran Decl., ¶ 11.

In March 2016, BICEP conducted its 2016 audit. Exhibit 4 (2016 Audit). On April 12,

2016, the City received the 2016 Audit. See Exhibit 5A to the Motion (2016 Audit Cover Letter),

p. 1.7 The 2016 Audit concludes that the City has complied with all but a few Requirements. See

Exhibit 4. In accordance with the 2016 Audit and Section 10.2 of the Requirements, the City is in

substantial compliance with the Requirements and thus cannot be in default.

6 The 2014 Audit and 2016 Audit were filed under seal, pursuant to this Court’s Order dated September 21, 2016, and they are referred to as Exhibit 2B and 4, respectively. 7 BICEP relies on Exhibits 5A and 5B to the Motion, the BICEP Notice and the August 25, 2016 email, for proof of the existence of non-monetary defaults. Exhibits 5A and 5B to the Motion are pieces of correspondence between counsel to BICEP and counsel to the City. As such, these statements are hearsay and are not admissible for the truth of the matter asserted (namely, the existence of defaults).


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Nevertheless, for the first time, by the BICEP Notice, BICEP alleged a default. Exhibit

5A to the Motion, p. 1. In its rush to create a default for purposes of Section 365, BICEP

bypassed the detailed multi-step procedure for determining a default under the MOCs set forth in

Section 10 of the Requirements. Under the Requirements, first, BICEP must notify a Member

that it has not complied with the Requirements. Exhibit 3 to the Motion (Exhibit A to the MOC,

Section 10.2), p. 21. Then, the Member has the opportunity to respond. Exhibit 3 to the Motion

(Exhibit A to the MOC, Section 10.2), p. 21. Then, BICEP must determine whether any proposed

corrective action is sufficient. Id. at Section 10.3. Then, the Member must implement the

corrective action within sixty days. Id. at Section 10.4. A Member may only be found in default

after it responds to a notice of non-compliance and after its response is determined insufficient.

Id. at Section 10.5. Moreover, the non-compliance must be significant, as substantial compliance

is a complete defense. Id. at Section 10.1. By calling a default in its initial notice, BICEP put the

cart before the horse.

Furthermore, in the absence of any factual support for a notice of non-compliance, let

alone a default, the BICEP Notice is devoid of substance. The allegations in the BICEP Notice

consist of nothing more than conclusory repetitions of the Requirements’ provisions. BICEP

does not raise any material issues or identify any circumstance falling below the level of

substantial compliance expressly agreed as sufficient in Section 10.1 of the Requirements.

On August 4, 2016, in light of the deficits in the BICEP Notice, the City asked BICEP to

provide the specificity which the utterly conclusory BICEP Notice lacked.8 Three weeks later, on

August 25, 2016, the City received an email from BICEP which did not provide the requested

specificity, but instead claimed that the City failed to adequately “work” stayed claims. Exhibit

5B to the Motion (August 25, 2016 Email), pp. 1-2. It is not necessary or appropriate for a

bankrupt City to “work” stayed claims. The City did everything necessary to meet the

8 On August 4, 2016, the City sought clarification from BICEP regarding the unsupported, conclusory allegations in its notice. (A copy of the August 4, 2016 email to BICEP from the City, along with the City’s follow-up email and BICEP’s initial response to it, is Exhibit 1.)


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Requirements given that every single case file was stayed. BICEP’s intimation that stayed claims

should be “worked” like active litigation is nonsensical.

Finally, even if the City failed to comply in some non-material respect, pursuant to the

Requirements, non-compliance may be cured with a plan for “corrective action.” Exhibit 3 to the

Motion (Exhibit A to the MOC, Section 10.4), p. 21. Although the City is in substantial

compliance, the City has already put into place a plan that addresses all alleged deficiencies

identified in the 2016 Audit whether or not they have any merit. The City’s plan includes as its

key component the retention of Carl Warren to correct all alleged deficiencies, inter alia. See

Exhibit 3 (City Response Letter). Carl Warren is BICEP’s Claims Adjusting Firm. See also Tran

Decl., ¶ 8; Exhibit 6. Since January 2014 Carl Warren has acted as the City’s Third Party

Administrator (“TPA”), and now Carl Warren is also providing additional services including

ensuring past and on-going compliance with BICEP Requirements. On a going forward basis,

Carl Warren will be handling the City’s BICEP Requirements with assistance from and oversight

by the City. Tran. Decl., ¶ 12. Thus, the City is in substantial compliance and even if it was not

(and it is) its “corrective action” plan cures any lack of compliance.

The City’s detailed refutation of the existence of any non-compliance is contained in the

City Response Letter. Examples of that refutation are included in the City’s legal argument that

the City is not in default. See infra Section IV.

III. THE CITY IS NOT OBLIGATED TO ASSUME OR REJECT THE MOCS BECAUSE THEY ARE NOT EXECUTORY CONTRACTS; RATHER THEY ARE ASSETS OF CITY AND ENFORCEABLE AGAINST BICEP

A. The MOCs are Not Executory Contracts.

A debtor, including a municipal debtor, may assume or reject the duties of an executory

contract subject to court approval. 11 U.S.C. §§ 365 and 901. In the Ninth Circuit, to determine

whether a contract is executory the court must (i) evaluate the obligations of both parties and

determine whether they are material obligations and (ii) determine whether on the date the

petition was filed either party’s failure to perform its remaining obligations would give rise to a

material breach and excuse performance.” Commercial Union Ins. Co. v. Texscan Corp. (In re

Texscan Corp.), 976 F.2d 1269, 1272 (9th Cir. 1992) (citations omitted).


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Whether an obligation is so material that its non-performance would relieve the

counterparty from performance is determined under state law. Under California law, applicable

to these contracts, only a material breach would excuse the non-breaching party of performance

(instead of just damages). A breach is material if it goes “to the root of the consideration.” Karz

v. Dep’t of Prof’l and Vocational Standards, 11 Cal. App. 2d 554, 557 (1936) (citation omitted)

(breach of covenant subordinate and incidental to main purpose of contract does not constitute

breach of the entire contract). By contrast, a breach is not material if either party has

substantially performed its side of the bargain, such that the party’s failure to perform further

would not excuse performance by the other party. Texscan, 976 F.2d at 1272 (citation omitted);

Lewis Brothers Bakeries Inc. v. Interstate Brands Corp. (In re Interstate Bakeries Corp.). 751

F.3d 955 (8th Cir. 2014) (“Substantial performance is the antithesis of material breach.”)

(quoting 15 Richard A. Lord, Williston on Contracts § 44:55 (4th ed. 2000)). Where there has

been at least partial performance, the court should compare the performed obligations with the

unperformed obligations, to determine whether the unperformed obligations “are so far

unperformed” that their non-performance would give rise to a material breach. Interstate

Bakeries, 751 F.3d at 962. If the unperformed obligations do not outweigh the performance

tendered and benefits already received by the counterparty, the contract is substantially

performed. Id. at 964 (citing In re Exide Techs., 607 F.3d 957 (3d Cir. 2010)).

The City substantially performed its obligations under the MOCs by paying its

premium. In re Sudbury, 153 B.R. 776 (Bankr. N.D. Oh. 1993) (the debtor’s duties to cooperate

“are of a different character than bargained for consideration” because “an insurance company

does not bargain for the Debtor's cooperation in handling claims. It bargains for premiums.”). If

this conclusion is not sufficiently obvious on its face, the Preamble and Section 1 of the MOCs

provides additional support. The Preamble and Section 1 of the MOCs form a single sentence

which reads, in pertinent part, “in consideration of the Member’s payment of the premium,

BICEP and the Member agree as follows: BICEP will pay those sums on behalf of the Covered

Party for Covered Ultimate Net Loss that the Covered Party becomes legally obligated to pay.”

The consideration to BICEP for its performance under the MOCs is the payment of


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Premium. The premium has been paid, thus consideration has been tendered. The City may have

other obligations under the MOCs, and the failure of performance of those obligations may

entitled BICEP to damages — but none of that alters the fact that the City is already entitled to

full performance from BICEP. Because the City is entitled to full performance from BICEP, the

MOCs are not executory.

Virtually every court in the country to consider the issue has ruled that where one party

provides liability coverage to another, the only basis to find such a contract executory is the non-

payment of premium. See In re Firearms Imp. and Exp. Corp., 131 B.R. 1009 (Bankr. S.D. Fla.

1991). Once the premium is paid, the party that has paid the premium has substantially

performed and the contract is no longer executory. Gulf Underwriters Ins. Co. v. Burris, 674

F.3d 999, 1005 (8th Cir. 2012) (“every court in the country to consider a related issue has ruled

that insurance policies for which the policy periods have expired and the premium has been paid

are not executory contracts, despite continuing obligations on the part of the insured.” (emphasis

added)); Admiral Ins. Co. v. Grace Indus., 341 B.R. 399, 403 (Bankr. E.D.N.Y. 2006) (“the

debtor’s payment of the initial policy premium constitutes substantial compliance with its

contractual obligations.”) (emphasis added) aff’d 409 B.R. 275 (E.D.N.Y. 2009); In re Sudbury,

153 B.R. 776 (Bankr. N.D. Oh. 1993) (contract not executory because among other things

debtor’s failure to cooperate on a particular claim would not excuse the counterparty’s

performance in respect of other claims); Argonaut Ins. Co. v. Ames Dep’t Stores, Inc. (In re

Ames Dep’t Stores), 1995 U.S. Dist. Lexis 6704, at *8, 1995 WL 311764 (S.D.N.Y. May 17,

1995) (courts have consistently held that contracts where policy period has expired are not

executory regardless of any continuing obligations). As the court held in Olah v. Baird (In re

Baird), 567 F.3d 1207, 1212 (10th Cir. 2009),

Once the debtor has paid his premium for the policy period, he has then performed in such a way that he can no longer fall so far short of complete performance that it would entitle [the counterparty] not to defend him. The obligations that remain are best considered ministerial and certainly not as significant as [the counterparty’s] continuing obligation to defend Dr. Baird. Even if the insured party were to fail to cooperate in breach of his contractual commitment, this would not excuse the insurer from performing entirely on the contract.


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In case after case, like in the instant dispute with BICEP, the non-debtor argues that

notwithstanding the payment of the premium, its contract should be executory because of some

proffered continuing obligations, and in each case, the court rejects the proffered continuing

obligations as changing the result. For example, courts have rejected arguments that the

following continuing obligations render contracts executory notwithstanding the payment of

premiums:

(i) payment of self-insured retention: Gulf Underwriters, supra, 422 B.R. at 67

(Bankr. N.D. Miss. 2009); Firearms Imp., supra, 131 B.R. 1009; Grace Indus., 341 B.R. at 403;

Sturgill v. Beach at Mason Ltd., 2015 U.S. Dist. Lexis 142490, at *11, 2015 WL 6163787 (S.D.

Oh. October 20, 2015); Pinnacle Pines Comm’ty Assoc. v. Everest Nat’l Ins. Co., 2014 U.S. Dist.

LEXIS 65011 (D. Ariz. May 9, 2014);

(ii) notice to the insurer: Firearms Imp., supra, 131 B.R. 1009 (occurrence policy);

In re Sudbury, 153 B.R. 776 (Bankr. N.D. Oh. 1993);

(iii) cooperation with the defense of claims: Olah v. Baird (In re Baird), 567 F.3d

1207 (10th Cir. 2009); Firearms Imp., 131 B.R. 1009 Sudbury, supra, 153 B.R. 776;

(iv) payment of retrospective premiums: Zurich Am. Ins. Co. v. Int’l Fibercom, Inc.

(In re Int’l Fibercom, Inc.), 503 F.3d 933 (9th Cir. 2007); Texscan, supra, 976 F.2d 1269;

Firearms Imp., supra, 131 B.R. 1009; Sudbury, supra, 153 B.R. 776;

(v) defense of claims: Am. Safety Indemnity Co. v. Vanderveer Estates Holding, LLC

(In re Vanderveer Estates Holding, LLC), 328 B.R. 18, 26 (Bankr. E.D.N.Y. 2005) (debtor’s

obligation to defend causes of action within its self-insured retention does not render contract

executory), aff’d 2006 U.S. Dist. LEXIS 101425, 2006 WL 2850612 (E.D.N.Y. Sept. 27, 2006)

(E.D.N.Y. Sept. 27, 2006); Ames Dep’t Stores, 1995 U.S. Dist. Lexis 6704, 1995 WL 311764

(insurance policies executed pre-petition and expired prior to confirmation are not executory

regardless of insured’s continuing obligation to defend); Admiral Ins. Co. v. Grace Indus., 341

B.R. 399, 403 (Bankr. E.D.N.Y. 2006), aff’d 409 B.R. 275 (E.D.N.Y. 2009); In re Federal Press

Co., 104 B.R. 56 (Bankr. N.D. Ind. 1989) (insurance contracts not executory); In re Greater

Kansas City Transit Inc., 71 B.R. 865 (Bankr. Kan. 1987) (same);


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(vi) establishment of collateral account: Zurich, supra, 503 F.3d 933.

One of the leading cases addressing the executoriness of contracts such as the MOCs,

where one party provides liability coverage to another, is Texscan, decided by the Ninth Circuit

Court of Appeals. Texscan, 976 F.2d 1269. In Texscan, the debtor, Texscan, entered into a

retrospective insurance premium contract with Commercial Union Insurance Company, CUIC.

The contract was for a three-year term from January 1, 1983 through January 1, 1986. Under the

contract, CUIC estimated an annual premium, and Texscan paid the premium in installments.

Each year, the losses were computed and analyzed to determine the actual premium for the

adjustment period. If the estimated premium was too high, the overpaid premium would be

refunded to Texscan. If the estimated premium was too low, Texscan was required to make an

additional payment to CUIC. Texscan filed for protection under chapter 11 on November 22,

1985, five weeks before the terms of the insurance contract was set to expire. CUIC continued to

service claims that arose through January 1, 1986, and continued the claims adjustment process,

which revealed a premium deficit of $80,212 owed to CUIC. One month before Texscan’s

confirmation hearing, CUIC appeared in the bankruptcy case. Ultimately, CUIC moved for

payment of retrospective premiums either as an executory contract binding on the reorganized

debtor or as administrative expenses. Texscan moved to reject the insurance policy, which relief

the court denied as untimely. Texscan appealed and the Bankruptcy Appellate Panel reversed.

CUIC then appealed to Ninth Circuit, which affirmed. The Ninth Circuit clarified the question

before it as follows: This case is not about the non-payment of estimated premiums; CUIC does not argue that Texscan failed to pay the estimated premiums. Instead, we must determine whether the parties’ remaining obligations, i.e. Texscan’s duty to pay any underpaid premiums and CUIC’s duty to provide the final five weeks of coverage following bankruptcy, process claims and refund any overpayment of premiums, are so far unperformed that the failure of either party to complete performance would constitute a material breach and excuse performance, such that the contract was executory at the time of bankruptcy.

Texscan, 976 F.2d at 1272. The court quickly recognized that reciprocal obligations remained

upon both parties. Texscan had the obligation to pay for the final five weeks of coverage and

CUIC had the obligation to adjust claims. Id. Next, the court determined whether the obligations

were so far unperformed that the failure of either party to complete performance would constitute


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a material breach excusing performance of the other. The court concluded that the contract was

not executory. Under Arizona law, “Every policy of insurance . . . shall . . . be deemed to contain

the following provisions: . . . That the insolvency or bankruptcy of the employer and discharge

therein shall not relieve the insurance carrier from payment of compensation. Id. at 1273.9 The

court interpreted that language to mean that, despite Texscan’s inability to pay retrospective

premiums due to insolvency, CUIC could not be excused from performance. Because CUIC

would not be relieved of performance by Texscan’s breach, the court found that the contract was

not executory.

In 2007, in Zurich, the Ninth Circuit Court of Appeals had occasion to revisit the

question of what makes a liability coverage contract executory. In Zurich, the debtor, IFCI, had a

worker’s compensation policy with Zurich American Insurance Co. (“Zurich”). The policy was

set to renew two weeks after the petition date, and Zurich expressed its intent not to renew the

policy. Under the policy, IFCI was required IFCI to pay a $100,000 deductible on any claim and

to set aside $500,000 in collateral to secure its reimbursement obligations to Zurich. The policy

contained the following provision: “[IFCI’s] default or the bankruptcy or insolvency of you or

your estate will not relieve us [Zurich] of our duties under this insurance after an injury

occurred.” 503 F.3d at 937; see also infra n. 9. IFCI negotiated with Zurich to extend the policy

for two months while IFCI conducted a sale process. In exchange for two months’ of coverage,

IFCI agreed to assume the policy, pay a $300,000 premium, put $750,000 into a segregated

account and grant Zurich a lien on additional collateral to secure Zurich’s entitlement to

reimbursement. The court approved the assumption. Ultimately, the case was converted to

chapter 7. Zurich filed a motion requesting release of the additional collateral. By the time that

motion was filed, Zurich was owed nearly $2 million (exceeding the collateral by over $1

million). The chapter 7 trustee filed a motion to clarify or partially vacate the bankruptcy court’s

order approving the assumption. The bankruptcy court granted the trustee’s motion, concluding

9 The comparable provision in the MOCs provides: “Bankruptcy or insolvency of the COVERED PARTY shall not relieve BICEP of any of its obligations hereunder.” Exhibit 3 to the Motion (2014 MOC), 13:13-16.


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that the policy was not executory at the petition date and thus could not have been assumed

under Section 365. The Ninth Circuit affirmed.

The Ninth Circuit’s analysis begins with the contractual provision quoted above. The

court held that under this provision, “if IFCI failed to pay its premiums or failed to reimburse

Zurich for its deductibles, Zurich would be contractually and legally obligated to continue

performing under the contract . . . despite IFCI’s breach. Therefore, the . . . policy in this case is

clearly not executory under Texscan.” Zurich, 503 F.3d at 942 (emphasis added). Zurich

attempted to distinguish Texscan by arguing, inter alia, that the renewal of the policy required

IFCI to undertake additional material obligations, such as the payment of additional premium,

establishment of the additional collateral account and reimbursement of deductible. The court

found that none of these obligations rendered the contract executory. Id.

While the agreements at issue each have their own particular terms and conditions, they

all follow a similar structure. Like in Texscan, Zurich, Olah, Admiral, Vanderveer, Firearms

Import, FF Acquisition, and Federal Press, under the MOCs the City makes a premium payment

in exchange for which BICEP promises liability coverage. BICEP’s liability is limited to an

amount above the SIR, and its risk is mitigated by ongoing notification, defense, cooperation,

and risk management obligations. In the event of bankruptcy, BICEP is not relieved of

performance, nor is it required to expand its liabilities. Like in Texscan, Zurich, Olah, Admiral,

Vanderveer, Firearms Imp., FF Acquisition, Grace, and Federal Press, supra, and virtually all

the decisions looking at this issue, by paying its premiums, the City has substantially performed

its obligations under the MOCs and rendered the MOCs not executory for purposes of Section

365.

Moreover, like in Texscan and Zurich and the numerous other cases cited above, the

MOCs contain a “bankruptcy clause.” The MOCs provide “Bankruptcy or insolvency of the

[City] shall not relieve BICEP of any of its obligations hereunder.” Courts interpreting this

language, or some variation, have found its purpose obvious: to prevent the counterparty from

being excused from performance if the insured fails to comply due to its bankruptcy. See

Sudbury, 153 B.R. 776. In Texscan, the bankruptcy clause (incorporated from the Arizona


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statute) meant that the insurer’s obligation to pay claims was not conditioned on payment of

retrospective premiums. Texscan, 976 F.2d at 1273. In Sudbury, the court reached the same

result on the language of the contract alone. 153 B.R. at 779. In Zurich, it meant that if IFCI

failed to pay premiums or reimburse Zurich for deductibles, Zurich would be contractually and

legally obligated to continue covering claims, despite IFCI’s breach. 503 F.3d at 942. In Beloit, it

meant that “defendant has agreed that plaintiff’s bankruptcy will not relieve defendant of its

obligations under the policies. Implicit in this agreement is the understanding that failure to pay

retrospective premiums due to the plaintiff’s bankruptcy would not excuse defendant from

paying claims.” Beloit Liquidating Trust vs. United Ins. Co., 287 B.R. 904, 906 (N.D. Ill. 2002).

In Phillips, it negated the insurer’s argument that the payment of a self-insured retention was a

condition precedent to its performance. 919 F. Supp. 2d 1089, 1098 (S.D. Cal. 2013). So too

here. By including the Bankruptcy Clause the parties agreed that BICEP would continue to be

bound notwithstanding a bankruptcy. Under the caselaw, a bankruptcy clause will prevent an

insurer from being relieved from performance even in the face of default, so long as the premium

has been paid.

As discussed below in greater detail, it is of no consequence that the cases supporting the

proposition that the MOCs are not executory interpret insurance contracts, while the MOCs are

not insurance contracts. That the City has substantially performed its obligations by paying its

premiums is plainly obvious on the basis of the ancient principle of substantial performance. See

Karz, Exide and Lewis Bros., supra. Moreover, once the City is in bankruptcy, that BICEP is not

relieved of performance is also plainly obvious on the basis of the explicit language of the

parties’ agreement. Finally, BICEP agreed to language in a contract that has a well-established

meaning in the law. It would be absurd to include a provision that has a well-developed meaning

in the law and then argue that the parties intended the language to have a different meaning. If

BICEP intended a different result, it should have negotiated for one. Notably, where BICEP

wanted to avoid a well-established legal rule, BICEP so specified. For example, “This

Memorandum does not provide insurance so that the rule that all ambiguities must be construed

against an insurer does not apply.” Exhibit 3 to the Motion (2014 MOC), 15:8-11.


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It is beyond reasonable dispute that the Bankruptcy Clause in the MOCs is analogous, if

not identical, to the bankruptcy clauses in these cases. These cases should be persuasive, if not

controlling, and the result should be the same as in each of the cases. BICEP’s Motion should be

denied.

B. The MOCs are Assets of the City and BICEP’s Obligations Thereunder are Enforceable.

Since the MOCs are not executory contracts, the City need not assume the contracts to

get the benefit thereof. “Contracts that are not executory do not need to be assumed in order to

remain in effect.” Diamond Z Trailer, Inc. v. JZ L.L.C. (In re JZ L.L.C.), 371 B.R. 412, 425

(B.A.P. 9th Cir. 2007). As Professor Countryman explained, where the bankrupt has performed

but the non-bankrupt has not, the bankrupt’s claim to further performance under such a contract

is an asset of the debtor. Vern Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn.

L. Rev. 439, 458 (1973); Enterprise Energy Corp. v. United States (In re Columbia Gas Sys.), 50

F.3d 233, 239 (3d Cir. 1995) (Where a debtor has performed, the performance owed by the non-

bankrupt is an asset of the debtor and should be analyzed as such, not as an executory contract.);

Hal Roach Studios, Inc. v. Qintex Entm’t (In re Qintex Entm’t), 950 F.2d 1492, 1497 (9th Cir.

1991) (substantially performed contract was not executory and could be sold under Section 363

of the Bankruptcy Code); In re Alameda Invs., LLC, 2013 Bankr. LEXIS 2564 (Bankr. C.D. Cal.

June 25, 2013) (because contract is not executory, Section 365 does not apply) aff’d Phoenix,

LLC v. Alameda Liquidating Trust (In re Alameda Invs., LLC), 2014 Bankr. LEXIS 851 (B.A.P.

9th Cir. Mar. 5, 2014); Gencor Indus. Inc.v. CMI Terex Corp. (In re Gencor Indus. Inc.), 298

B.R. 902, 913 (Bankr. M.D. Fl. 2003) (where contract is not executory neither assumption nor

rejection is possible; the terms of the contract remain in effect).

So too here. The City’s rights under the MOCs are assets that the City has fully paid for.

The City should be entitled to realize that value and BICEP, having received full payment,

should not be excused from paying claims above the SIR.

In the absence of assumption or rejection, the MOCs continue, and there is no prejudice

to BICEP whatsoever. While in many cases the non-debtor insurer complains of the prospect of


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the having to defend claims below the SIR amount, here the City, not BICEP, is defending the

claims, at full cost to the City. The Plan does not relieve the City of those substantial defense

costs. Moreover, the City has been settling claims, at its own expense, with no contribution from

BICEP. Identifying that the MOCs are not executory contracts merely maintains the status quo,

preserves the City’s bargained-for asset for the benefit of the City and its creditors and protects

BICEP from liabilities it did not contract to pay. By contrast, to relieve BICEP of its contractual

duties in this case would be inconsistent with the express language of the contract and the

Bankruptcy Code, (see e.g. Vanderveer, 328 B.R. at 27 (requiring self-insured retention to be

paid in full would be contrary to the policy of equal distribution among creditors of the same

priorty), and would confer a windfall on BICEP at the expense of all other parties in interest.

Such result in favor of BICEP, neither mandated nor supported by the contracts or the

Bankruptcy Code, should not be countenanced by this Court.

C. Conditions Precedent in the MOCs do not Render the MOCs Executory.

BICEP argues that the MOCs are executory because they contain conditions. But courts

have held that the non-occurrence of a condition precedent, such as notice, does not relieve the

other party from performance without an additional showing of prejudice. Insurance Co. of the

State of Penn. v. Associated Int’l Ins. Co., 922 F.2d 516, 524 (9th Cir. 1990) (“[E]ven if the

notice provision is made a condition precedent to the liability of the insurer, the insurer must still

prove prejudice in order to avoid liability based upon the insured’s breach of the notice

requirement. . . . California [has a] strong public policy against ‘technical forfeitures.’”)

(emphasis added); Hanover Ins. Co. v. Carroll, 241 Cal. App. 2d 558, 565 (1966) (finding that

“failure to give, or delay in giving, the required notice is not fatal to recovery under the policy,

unless the insurer has been prejudiced by such failure or delay . . . even though compliance with

the notice provisions is made a condition of the policy or specified as a condition precedent to

the liability of the insurer”) (emphasis added); Northwestern Title Sec. Co. v. Flack, 6 Cal.

App. 3d 134, 141 (1970) (summarizing California law “(1) that breach by an insured of a

cooperation or notice clause may not be asserted by an insurer unless the insurer was


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substantially prejudiced thereby; (2) that prejudice is not presumed as a matter of law from such

breach; [and] (3) that the burden of proving prejudicial breach is on the insurer.”).

The single case BICEP cites in support of the proposition that a contract can be rendered

executory by the existence of a condition precedent, Platt Pacific Inc. v. Andelson, 6 Cal. 4th 307

(1993), is inapposite. In Platt, the Supreme Court of California held that by failing to file a

demand for arbitration within the time specified in the contract, the plaintiffs waived their right

to arbitrate. The decision has nothing to do with executoriness, breach, material breach or any of

the issues raised by BICEP.

By contrast, a number of courts, including Marcus & Millichap Inc. v. Munple, Ltd (In re

Munple), 868 F.2d 1129 (9th Cir. 1989), cited by BICEP in presenting the Countryman definition

of executoriness, have rejected the proposition that the existence of a condition precedent morphs

a non-executory contract into an executory one. In holding that the contract at issue was not

executory, the Ninth Circuit rejected the argument that a condition precedent rendered an

agreement executory. The Ninth Circuit explained that the argument that the contract was

executory “confuses performance obligations and conditions precedent” because the condition

precedent “imposed no further obligations on M&M, nonperformance of which would have

excused Munple from paying the commission.” Id. at 1130-31.

While the failure of a condition and a material breach may relieve the counterparty from

performance, only an obligation, the non-occurrence of which would constitute material breach,

is relevant to the executory analysis under the Countryman definition. See Columbia Gas Sys., 50

F.3d at 244 (settlement agreement not executory notwithstanding failure of certain conditions

precedent); Vanderveer, 328 B.R. at 22, 26 (Bankr. E.D.N.Y. 2005) (where policy provides “the

fulfillment of the [self-insured retention obligation] under this Endorsement is a condition

precedent to the performance of [the insurer’s] obligations under the policy” court held “it is not

disputed that the Debtor paid the insurance premium to the [insurer] in full; therefore, the

Insurance Policy is not executory, and has not been (and could not be) assumed by the Debtor.”);

Sudbury, 153 B.R. at 777 (Bankr. N.D. Ohio 1993) (where policy provides notice and

cooperation provisions “must be satisfied” or the Insurer may not be obligated to pay an


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otherwise covered claim, court held contract not executory). Because the existence of a condition

precedent does not evidence a continuing obligation the non-performance of which would excuse

BICEP from performance, the MOCs are not executory.

Moreover, even if BICEP were to change its position and argue that the provisions of

Section 7 of the MOCs are legal duties, not conditions, the result does not change. As set forth

above, the Requirements, while undoubtedly significant, are of the kind analyzed by the courts in

the cases cited in Section III.A, supra. Courts nearly universally hold that the non-performance

of a notification, cooperation, defense or retention provision does not constitute a material breach

that excuses the counterparty from performance, and thus does not render an agreement such as

the MOCs executory.

D. BICEP is Obligated to Pay Claims Over the SIR.

BICEP argues that that the City has an obligation to pay the SIR that is “a non-monetary

obligation that the City must perform before it seeks coverage, in the form of reimbursement to

the City or benefits paid on the City’s behalf by BICEP.” Motion, 8:3-5. BICEP implies that

payment of the SIR is a condition precedent to BICEP’s performance under the MOCs or a

material obligation the non-performance of which excuses BICEP from performance. See id. at

8:3-9:5, 13:15-14:6. BICEP is not correct. The SIR is neither a condition precedent nor a

material obligation the non-performance of which is a material breach that excuses BICEP’s

performance. The SIR is the amount over which BICEP is liable for claims. It is a threshold over

which BICEP must pay claims.

1. BICEP is Obligated to Perform Because the City has Substantially Performed

As discussed in Section III.A, supra, upon payment of its premium obligations, the City

substantially performed its obligations under the MOCs. As a result, the City is entitled to

performance from BICEP. No non-performance will relieve BICEP of its obligation to perform.

The consequences of this fact and its inevitable conclusion are two-fold. First, because the

MOCs are not executory they cannot be assumed or rejected under Section 365. Second, because

the City has substantially performed its obligations under the MOC, the City is entitled to


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BICEP’s performance, whether or not the City has remaining obligations under the MOCs and

whether or not those obligations are performed to BICEP’s satisfaction. In re Firearms Imp. And

Exp. Corp. 131 B.R. 1009, 1014 (Bankr. S.D. Fla. 1991) (most material and substantial

performance rendered by payment of premium and non-debtor obligated to perform even if here

was a further material breach by the debtor; the non-debtor retains a claim for damages); Admiral

Ins. Co. v. Grace Indus. (In re Grace Indus.), 341 B.R. 399, 402 (Bankr. E.D.N.Y. 2006)

(“insured’s failure to perform those continuing obligations does not excuse the insurer from

being required to perform, but gives rise to an unsecured claim by the insurer for any damages

incurred by reason of the debtor’s breach of the policy.”).

2. BICEP is Obligated to Pay Claims over the Threshold Notwithstanding Payment of the SIR under the MOCs

Perhaps most significantly omitted from BICEP’s argument is the effect of the

Bankruptcy Clause and the No Drop-Down Provisions. The Bankruptcy Clause is unambiguous

and reflects the parties’ express agreement that if the City becomes unable to perform due to

bankruptcy or insolvency, BICEP is still obligated to perform. The Bankruptcy Clause plainly

states that the bankruptcy of the City “shall not relieve BICEP of any of its obligations

hereunder.” The use of the term “any” in “any of its obligations hereunder” must logically

include the obligation to pay the Covered Ultimate Net Loss above the amount of the SIR.

Moreover, that the Bankruptcy Clause is immediately followed by the First No Drop-

Down Provisions is significant. The provisions, appearing together as one paragraph, should be

read together. The parties plainly agreed that in the event of the City’s insolvency, BICEP would

still be obligated to perform its obligations under the MOCs, but BICEP would not be required to

“drop-down” to pay claims or reimburse expenses that fall below the $1 million threshold. This

conclusion is further reinforced by the Second No Drop-Down Provision which expressly

recognizes the possibility that the SIR may not be satisfied due to the City’s insolvency or

bankruptcy, and protects BICEP from liability for amounts above the $10 million per occurrence

cap called the Limit of Liability, if the City cannot pay the SIR. There is no other logical way

to read those three provisions (the Bankruptcy Clause and the two No Drop-Down


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Provisions) other than they include an express recognition that the City may not be able to

pay the SIR due to bankruptcy, but that such failure to pay the SIR does not excuse BICEP

from liability for the amounts above $1 million and below $10 million.

Where there is a self-insured retention and a bankruptcy clause, courts consistently find

that the bankruptcy clause reflects the parties’ expressed intent that the counterparty be bound to

perform, regardless of whether the insured satisfies its self-insured retention. Where the

agreement contains a drop-down provision, the drop-down provision further emphasizes that the

parties addressed their relative obligations in the case of insolvency, such that the insured would

still get the benefit of its coverage, but not be required to pay the retention, but the insurer would

not be required to satisfy an obligation below the retention threshold.

For example, in Phillips v. Noetic Splty. Ins. Co., 919 F. Supp. 2d 1089 (S.D. Cal. 2013),

the policy contained the following three provisions virtually identical to the provisions of the

MOCs. First, the policy contained an SIR provision that stated that the insurer would pay those

sums in excess of the self-insured retention that the insured becomes obligated to pay. Next, the

policy contained a bankruptcy clause that provided, “the bankruptcy or insolvency of the insured

or of the insured’s estate will not relieve us of our obligations under this policy.” Finally, the

policy contained a “no drop-down” clause that provided that the insured’s “bankruptcy,

insolvency or inability to pay the self-insured retention will not increase our obligations under

this policy.” Id. at 1097. The insurer argued that it was not responsible to pay a judgment

because the SIR had not been paid.

Notably, the court found that the policy did not state that payment of the SIR was a

condition precedent to coverage. See id. at 1098; see also infra Section III.D.3. As such, the

court determined it was “prohibited from enforcing language absent from the terms of the

policy.” Id. In addition, the court held that the bankruptcy clause expressly negated the

suggestion that non-payment of the SIR is a condition precedent to performance. Id.

“Defendant’s policy does not include [a condition precedent]. To the contrary, Defendant’s

policy expressly states that the insolvency of the insured will not relieve the insurer of their

obligations under the policy.” Id. Finally, the court held that no drop-down provision supported


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the conclusion that the insurer has an immediate duty to indemnify the insured regardless of the

status of the SIR, in an amount over the SIR, because if the insurer did not incur an obligation

until payment of the SIR, the language regarding an increase in obligation would be

unnecessary. Id. The court concluded that the payment of the SIR was therefore not a condition

precedent to coverage.

Other cases are in accord. In Admiral Ins. Co. v. Grace Indus., 341 B.R. 399, 403 (Bankr.

E.D.N.Y. 2006), aff’d 409 B.R. 275 (E.D.N.Y. 2009), the policy issued by Admiral included the

same three provisions found in the MOCs. First, the Admiral policy contained a retained limit,

there $50K. Second, the Admiral policy contained a bankruptcy clause that provided

“bankruptcy or insolvency of the insured or of the insured’s estate will not relieve us of our

obligations under this Coverage Part.” Third, the Admiral policy contained a “no drop-down”

provision, which provided, “Your bankruptcy, insolvency or inability to pay the ‘retained limit’

shall not increase our obligations under this policy.” Admiral commenced an adversary

proceeding seeking declaratory relief that Admiral had no duty to defend actions against Grace

until the self-insured retention was exhausted. The bankruptcy court rejected this argument

finding that, by operation of the bankruptcy clause, the debtor’s failure to pay the self-insured

retention does not relieve Admiral of its obligations to pay claims under the policy. 341 B.R. at

403. The court rejected Admiral’s argument that compelling Admiral to pay claims

notwithstanding the failure to pay the SIR would compel Admiral to defend claims below the

retention, in violation of the “no drop-down” provision. The court held:

Contrary to Admiral’s argument, this conclusion does not violate the term of the self-insured retention endorsement . . . Admiral will not be required to pay the first $50,000 of any costs or recovery on a claim covered by the Policy. Its obligations will be exactly what they would be in the absence of Grace’s bankruptcy – to pay claims to the extent of the policy limits, and to the extent the claims exceed the amount of the self-insured retention.

Id. at 403-44. In affirming the bankruptcy court, the District Court held that

Admiral’s election to assume costs within Grace’s $50,000 SIR is not the equivalent to a declaration that Admiral is obligated to do so. It is only obligated to do what it is contracted to do and that obligation is not relieved by Grace’s bankruptcy because section 365 makes it clear that even in the absence of an applicable statutory provision. . .the


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failure of a bankrupt insured to fund a self-insured retention does not relieve the insurer of the obligation to claims under the policy.

409 B.R. at 280 (internal citations omitted). “In fact, allowing an insured to fund a SIR in the

face of a Chapter 11 plan would be contrary to fundamental principles of bankruptcy law, which

requires the same treatment of creditors having the same priority.” Id.

In Gulf Underwriters Ins. Co. v. Burris, 674 F.3d 999, 1005 (8th Cir. 2012), the

applicable policy contained an SIR provision and express language directed to avoid the result

mandated by the great-weight of the caselaw on this point. To wit, the policy provided,

The Self-Insured Retention obligation to this contract shall be considered to be an executory contract under all circumstances and payments on this obligation shall be paid by the insured. Failure to make the payment entitles the insurer to terminate the contractual obligation between the parties as a failure of the Self-Insured Retention endorsement is a material breach to the entire contract. In the event of a bankruptcy filing, the contract is deemed executory as under 11 U.S.C. 365, and the payments of the Self-insured Retention shall be made on a monthly basis and treated as an administrative expense under 11 U.S.C. 507(a)(1).

674 F.3d at 1002. The bankruptcy court held that, because the policy expressly provided that the

insurer’s inability to comply with the SIR was “a material breach as to the entire contract” the

policy provided no coverage. But the Eight Circuit reversed. Unlike the MOCs and the policy in

Admiral, the Gulf Underwriters policy did not contain a bankruptcy clause. Nevertheless, the

policy contained a similar provision, that “[a]ll the terms of this policy . . . apply irrespective of

the application of the Self-Insured Retention.” The Eighth Circuit held, that it was [b]eyond

question that the ‘terms of this policy’ included the coverage provided by the policy. Id. at 1003.

Thus, while the amount of coverage set forth in the policy declarations is affected by the amount of the Self-Insured Retention, the coverage of third-party liability claims continues to be defined exclusively by the provisions of the policy’s Commercial General Liability Coverage Form.”

Id. (emphasis in original). Further, the significant body of caselaw finding that insurance

contracts are not executory “confirm[s] that the paragraph in the SIR calling it an executory

contract was an attempt (likely futile) to improve Gulf’s position in asserting claims for the pre-

petition obligations of bankrupt insureds.” Id. at 1003-04.


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In Pinnacle Pines Comm’ty Assoc. v. Everest National Ins. Co., 2014 U.S. Dist. LEXIS

65011, 2014 WL 1875166 (D. Az. May 9, 2014), plaintiffs obtained an award against an

insolvent debtor that held two insurance policies. The insurers argued that they were not liable to

plaintiffs because the insured was unable to pay the self-insured retention. The court held that in

the absence of state statute or policy, the court was bound to interpret the policies using the

“ordinary common sense meaning of the policy language.” The initial policy provided “the

bankruptcy of insolvency of you or your estate will not relieve us of our obligations under this

policy.” Id. at *13. The court found that this provision “specifically provide[s] that the

insolvency of [the insured] does not relieve [the insurer] of its insurance obligation . . . [and]

[g]iven the language of the bankruptcy provision, the [c]ourt concludes that the bankruptcy of

[the insured] and [the insured’s] resulting inability to pay the SIR do not absolve [the insurer]

from its responsibility to provide insurance coverage.” Id. at *13, *15; see also Vanderveer, 328

B.R. 18 (same); Sturgill, 2015 U.S. Dist. Lexis 142490, at *11 (insurer’s claim that it is absolved

from liability as a result of the insured’s failure to satisfy a self-insured retention rejected where

policy provides “bankruptcy or insolvency of the insured or of the insured’s estate will not

relieve us of our obligations under the policy” because insurer’s interpretation would “nullify

that provision”); Albany Ins. Co. v. Bengal Marine, Inc., 857 F.2d 250, 255 (5th Cir. 1988)

(under Louisiana law, the court agreed “with the district court that [the insurer] should not be

allowed to escape its obligations under the insurance policy simply because its insured is in

bankruptcy.”); Firearms Imp., 131 B.R. at 1014 (failure to pay the SIR does not render contract

executory, at best insurer has claim against the estate for damages); In re Federal Press Co., 104

B.R. 56, 60-61 (Bankr. N.D. Ind. 1989) (“[T]he provisions regarding the insured’s retained limit

do not purport to excuse [the insurer] from its obligations in the [the insured] fails to pay the

retained limit . . . .”).

Importantly, courts have held that the provider of liability coverage is obligated to

perform notwithstanding the non-payment of the SIR, even in the absence of a bankruptcy

clause. See e.g. Admiral Ins. Co. v. FF Acquisition Corp. (In re FF Acquisition Corp.), 422 B.R.

64, 67 (Bankr. N.D. Miss 2009) (where policy contained a $100,000 self-insured retention and a


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no drop-down clause, but no bankruptcy clause, “[b]ankruptcy courts have consistently held that

the failure of a bankruptcy insured to fund an SIR will not excuse the insurer’s performance

under the contract.”); In re OES Envt’l, Inc., 319 B.R. 266, 269 (Bankr. M.D. Fl. 2004) (where

policy contained a $50,000 self-insured retention, insurer obligated to defend and indemnify

debtor for portion of judgment or settlement over the SIR irrespective of the debtor’s inability to

pay the claimed retention amount).

3. The SIR is Not a Condition Precedent to BICEP’s Performance

BICEP is obligated to pay claims over $1 million whether or not the City satisfies the

SIR. The MOCs do not establish that the SIR must be paid as a condition precedent to BICEP’s

performance. The standard for the interpretation of a contract in California is well-established.

“The court should attempt to give effect to the parties’ intentions, in light of the usual and

ordinary meaning of the contractual language and the circumstances under which the agreement

was made.” Weeks v. Crow, 113 Cal. App. 3d 350, 353 (Cal. App. 1980). “The whole of a

contract is to be taken together, so as to give effect to every part, if reasonably practicable, each

clause helping to interpret the other.” Cal. Civ. Code § 1641. “A court must view the language in

light of the instrument as a whole and not use a ‘disjointed, single-paragraph, strict construction

approach.’” Rice v. Downs, 248 Cal. App. 4th 175, 185-86 (Cal. App. 2016). An interpretation

that leaves part of a contract as surplusage is to be avoided. Id.

BICEP cites to three provisions of the MOCs to support its contention that payment of

the SIR is a condition precedent to its performance. Motion, 8:1-9:5. The first and third

provisions that BICEP cites lack any language of conditionality. The first provision is merely the

definition of the SIR. Exhibit 3 to Motion (2014 MOC), 6:12-13. The SIR is defined as an

“amount” that the City “must pay for each OCCURRENCE.” BICEP emphasizes “must” pay.

But the word “must” only creates at most an obligation—it does not express conditionality.10 The

third provision provides that for any one occurrence, BICEP will pay those sums on behalf of the

10 BICEP argues that the non-payment of the SIR, or the payment of the SIR under the Plan, is a non-monetary obligation. BICEP does not explain what effect such characterization—as a non-monetary obligation—is intended to have. To the extent not addressed herein, the City reserves the right to respond upon further clarification.


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City for Covered Ultimate Net Loss and that BICEP’s liability is only the Covered Ultimate Net

Loss. Motion, 8:23-26 (emphasis BICEP’s). None of these provisions establishes the express

conditionality required to impose a condition precedent. Courts have refused to impose a

condition in the absence of expressly conditional language. See Grace Indus., 341 B.R. at 403;

see also Vogt-Nem, Inc. v. M/V Tramper, 263 F. Supp. 2d 1226 (N.D. Cal. 2002) (the clause “any

dispute ... will be settled first amicably, but in case of disagreement it will be submitted to the

competent court in Rotterdam” was not a condition precedent to the enforceability of the choice

of law provision, because the clause did not “contain terms usually associated with conditions

precedent, such as ‘if,’ ‘on condition that’ or ‘provided.’”); Zamos v. Zamos (In re Zamos), 2006

Bankr. LEXIS 4789, at *23-*24, 2006 WL 6811037 (B.A.P. 9th Cir. Mar. 30, 2006) (noting that

as “a general rule, contract language is construed as a condition concurrent, and not as a

condition precedent, unless there are words of express condition precedent” (e.g., “if,”

“provided,” and “on condition that”), and finding the settlement agreement’s use of the phrase

“provided that all payments required to be made . . . were made” created a condition precedent to

husband being relieved of his alimony payment obligations); Phillips v. Noetic Splty. Ins. Co.,

919 F. Supp. 2d 1089, 1098 (S.D. Cal. 2013) (finding that because defendant’s insurance policy

did “not state payment of the SIR is a condition precedent to coverage . . . th[e] Court [wa]s

prohibited from enforcing language absent from the terms of the policy.”), aff’d 300 Fed. Appx.

451, 2008 U.S. App. LEXIS 3379 (9th Cir. 2008); Vanderveer, 328 B.R. at 26 (where policy

contains bankruptcy clause and provides that “fulfillment of the obligations under this

Endorsement [to pay the SIR] is a condition precedent to the performance of the [the insurer’s]

obligations under the policy,” failure of the debtor to perform continuing obligations, including

payment of self-insured retention, does not excuse insurer from performance, even in the absence

of an applicable statute.).

The second provision that BICEP argues supports its condition precedent interpretation is

at Section 3.2 of the MOCs, and provides:

After the amount of the SELF-INSURED RETENTION has been exhausted by payment of judgments, settlements and DEFENSE COSTS, BICEP shall reimburse the City for any further DEFENSE COSTS within the LIMIT OF LIABILITY . . . .


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Motion, 8:19-20 (citing Exhibit 3 to the Motion (2014 MOC), 6:38-40 and Exhibit 2 to the

Motion (2006 MOC), 6:43-45. BICEP’s use of the ellipses eliminates the words underlined

below:

After the amount of the SELF-INSURED RETENTION has been exhausted by payment of judgments, settlements and DEFENSE COSTS, BICEP shall reimburse the City for any further DEFENSE COSTS within the LIMIT OF LIABILITY even if the allegations against the COVERED PARTY are groundless, false or fraudulent.

Exhibit 3 to the Motion (2014 MOC), 6:38-41. Without the missing words, the provision states

that after the payment of the SIR, BICEP will reimburse the City for further Defense Costs

within the Limit of Liability. This term of the MOCs is already established by the Coverage

Provision, Section 1, “BICEP will pay any DEFENSE COSTS incurred within the COVERED

ULTIMATE NET LOSS.” See supra Section II.B.1. BICEP’s reading of Section 3.2 makes it

entirely duplicative of Section 1.

With the missing words, the meaning of Section 3.2 becomes clear. The plain language of

this provision ensures that BICEP reimburses the City for defense costs even if BICEP believes

that the claims against the City are of little legal merit. Far from limiting BICEP’s liability, it

clarifies and expands BICEP’s liability, denying BICEP a basis to limit coverage. Where

BICEP’s reading of Section 3.2 renders Section 3.2 superfluous, the City’s reading accords

Section 3.2 a purpose, to clarify and expand upon BICEP’s obligations established elsewhere in

the agreement. Accordingly, BICEP’s reading must be rejected. The three provisions BICEP

calls conditions are not conditions at all.

Finally, under the MOCS, BICEP is obligated to pay when the City is faced with an

allowed claim that attains the SIR threshold, not when the City pays the claim. However, even if

arguendo, the MOCs required payment of the SIR as a condition to BICEP’s performance, the

City will satisfy the SIR portion of the allowed claim in accordance with the Plan, the same way

it will pay other monetary obligations of the City under the Plan. In In re Keck, Mahin & Cate,

241 B.R. 583 (Bankr. N.D. Ill. 1999), the debtor law firm had a $1 million SIR under its

malpractice policy. The insurer complained that the debtor’s plan impermissibly required the

insurer to provide indemnification notwithstanding the debtor’s failure to satisfy the SIR. The


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policy did not define the method by which the SIR was to be paid, which in turn led to

ambiguity. The court resolved the issue in favor of the debtor and its plan by holding that the SIR

portion of the claim would be satisfied by treating the portion of the allowed claim under the SIR

amount as a general unsecured claim and pursuant to the term of the Keck plan.

The SIRs are to be satisfied in exactly the same way as every other unsecured claim

against the Debtor. The policy condition to [the insurer’s] liability that the Debtor “pay”

costs and amounts due on the claim “as they become due” up to the amount of the SIR

will be satisfied under the Plan. An obligation to pay is satisfied when something of value

is given and accepted in full discharge of that obligation. See Black’s Law Dictionary

1150 (7th ed. 1999). That is what the Plan provides.”

Id. at 241 B.R. at 596.11 Here, like in Keck, the MOCs do not require payment of the SIR in cash

in full. To the extent that the MOCs require payment of the SIR, and they do not, satisfaction

under the Plan is sufficient.

As demonstrated above, the plain language of the MOCs is virtually identical to the

language of the agreements before the courts cited above. The inescapable conclusion is that

BICEP is not relieved of performance notwithstanding the City’s inability to pay the SIR in full.

For all the reasons stated above, the MOCs are not executory and BICEP’s Motion should be

denied.

E. Whether the MOCs are Insurance Contracts is Irrelevant.

BICEP states that the MOCs do not provide insurance, shall be construed according to

principles of contract law and without regard to the drafter, and shall be governed and construed

according to the laws of the State of California. Motion, 9:19-26. BICEP does not tie these

11 See also Zeig v. Mass. Bonding & Ins. Co., 23 F.2d 665 (2d Cir. 1928). In Zeig, the policy in dispute provided reinsurance, and the issue was whether a certain threshold payment of claims in full in cash by the insured was required before the reinsurance kicked in. The policy provided that the threshold amount must be “exhausted in the payment of claims to the full amount of the expressed limits.” In ruling in favor of the insured, the Second Circuit explained: “There is no need of interpreting the word ‘payment’ as only relating to payment in cash. It often is used as meaning the satisfaction of a claim by compromise, or in other ways.” Id. at 666. Thus, the insured was given credit in the full amount of the claim, even if the claim was satisfied and discharged in less than the full amount. The Court noted that to hold otherwise would cause “delay, promote litigation, and prevent an adjustment of disputes which is both convenient and commendable.” Id.


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statements to its argument, other than to say that such terms are express conditions precedent to

coverage under the MOCs. As set forth above, BICEP’s condition precedent argument must fail

as a matter of black letter law.

Although not raised in their Motion, BICEP likely intends to argue that the cases in

which courts have found that insurance contracts are not executory once the premium has been

paid or that the insurer is required to perform regardless of the payment of the SIR are inapposite

because those cases are based on insurance contracts and the MOCs are not insurance contracts.

This argument must also fail.

In making such argument, BICEP presumably will rely on California Government Code

Section 990.8 for its contention that the MOCs are not insurance contracts. California

Government Code Section 990.8 provides, “The pooling of self-insured claims or losses among

entities as authorized in subdivision (a) of Section 990.4 shall not be considered insurance nor be

subject to regulation under the Insurance Code.”

The “first step in interpreting a statute is to determine whether the language at issue has a

plain and unambiguous meaning with regard to the particular dispute in the case.” Wilson v.

Comm’r, 705 F.3d 980, 987-88 (9th Cir. 2013) (citing Robinson v. Shell Oil, 519 U.S. 337, 340

(1997). This often requires “examin[ing] not only the specific provision at issue, but also the

structure of the statute as a whole, including its object and policy.” Id. (citing Children’s Hosp.

& Health Ctr. v. Belshe, 188 F.3d 1090, 1096 (9th Cir. 1999)). If the plain meaning of the statute

is unambiguous, that meaning controls. If the statutory language is ambiguous, then we consult

legislative history. Id. (citing United States v. Daas, 198 F.3d 1167, 1174 (9th Cir. 1999)).

The plain meaning of Section 990.8 is that joint pooling arrangements are not insurance

or otherwise subject to regulation under the Insurance Code. The purpose of the statute is to

make clear that the joint pooling arrangements are not governed by the Insurance Code.

However, none of the cases the City has cited herein were decided under the California Insurance


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Code and virtually none of the cases even mentions it.12 This simply provides no basis on which

to distinguish the caselaw.

Moreover, many courts have found liability coverage contracts to be substantially

performed and non-executory on the basis of the terms of the contract alone, without relying on

the state insurance code law. For example, in Beloit Liquidating Trust vs. United Ins. Co., 287

B.R. 904, 905 (N.D. Ill. 2002), the insurer sought to deny coverage on a claim arguing that the

insurance contract was executory but not assumed under the insured’s chapter 11 plan, and thus

rejected. Id. at 905. In support of its argument that the insurance policy was executory, the

insurer pointed to the insured’s continuing obligation to pay retrospective premiums. The policy

contained a bankruptcy clause which provided, “bankruptcy or insolvency of the insured or of

the insured’s estate shall not relieve the [insurer] of any of its obligations hereunder.” Id. The

court found:

In the Bankruptcy Clause defendant has agreed that plaintiff’s bankruptcy will not relieve defendant of its obligations under the policies. Implicit in this agreement is the understanding that failure to pay retrospective premiums due to the plaintiff’s bankruptcy would not excuse defendant from paying claims arising from occurrences during the pre-petition policy coverage.”

The court further found that,

[s]ince the payment of retrospective premiums is the only obligation remaining on plaintiff and since the failure to pay these premiums would not excuse defendant’s performance (and therefore would not constitute material breach) the contract is not executory.

12 California Insurance Code 11580 provides in relevant part that a policy providing coverage for personal injury claims shall not be issued or delivered to any person in this state unless it contains the following provisions:

(1) A provision that the insolvency or bankruptcy of the insured will not release the insurer from the payment of damages for injury sustained or loss occasioned during the life of such policy.

(2) A provision that whenever judgment is secured against the insured or the executor or administrator of a deceased insured in an action based upon bodily injury, death, or property damage, then an action may be brought against the insurer on the policy and subject to its terms and limitations, by such judgment creditor to recover on the judgment.


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Id. at 906 (parenthesis in original). The court concluded that, “[b]ecause the insurance policies at

issue are not executory contracts, plaintiff was not required to assume them in order [to] obligate

defendant to pay for losses resulting from occurrences during the policy periods.” Id.

Similarly, in Am. Safety Indemnity Co. v. Vanderveer Estates Holding, LLC (In re

Vanderveer Estates Holding, LLC), 328 B.R. 18, 26 (Bankr. E.D.N.Y. 2005), the insurance

policy contained a bankruptcy clause, and the court rejected the insurer’s argument that it would

not be required to cover claims if the debtor did not first satisfy the self-insured retention in the

policy. The court held:

To the contrary, caselaw interpreting section 365 of the Bankruptcy Code makes it clear that even in the absence of an applicable statutory provision such as [the applicable Illinois provision], the failure of a bankruptcy insured to fund a self-insured retention does not relieve the insurer of the obligation to pay claims under the policy. This is so because where (as in this case) an insured debtor has paid the policy premium in full, the insurance policy is not an executory contract for purposes of section 365 of the Bankruptcy Code, even where the debtor has continuing obligations, such as the payment of a self-insured retention, a deductible, or a premium. Failure of the debtor to perform these continuing obligations does not excuse the insurer from performance under the contract, but gives rise to an unsecured claim by the insurer for any damages incurred by reason of the debtor’s breach of the policy.

328 B.R. at 25. The Vanderveer court made its determination of executoriness on the principles

underlying Section 365 and the terms of the policy before the court. The court expressly rejected

the argument that the result is statute-dependent and held that the result would be the same with

or without an applicable law.

Finally, although BICEP recites its incantation that the MOCs are not insurance contracts,

the difference between the MOCs and “insurance contracts” is hard to ascertain. The Supreme

Court has recognized that the “primary elements of an insurance contract are the spreading and

underwriting of a policyholder’s risk.” Group Life & Health Ins. Co. v. Royal Drug Co., 440

U.S. 205, 2011 (1979). This is exactly the function of the MOCs, as acknowledged by BICEP

through its Motion. Motion, 8:8-16; see also Black’s Law Dictionary 814 (10th ed. 2014)

(defining “insurance” as “[a] contract by which one party (the insurer) undertakes to indemnify

another party (the insured) against risk of loss, damage, or liability arising from the occurrence

of some specified contingency”).


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Indeed, the language of the MOCs themselves sometimes refers to the MOCs as

insurance. For example, in paragraph 20 of the MOCs, entitled Additional Covered Party, the

coverage provided by the MOCs is referred to as “this insurance.” Exhibit 3 to the Motion (2014

MOC), 15:24-50. Similarly in paragraph 20.d., the coverage provided to the City by the MOCs is

referred to as “this insurance.” Id. at 15:50. Certain ancillary documents attached to each MOC

also refer to the liability coverage as insurance. The Annual Premium Endorsement is entitled

“BICEP EXCESS LIABILITY INSURANCE” (emphasis added). See Appendix of Exhibits

filed with City’s Disclosure Statement (Dkt. 1882), at 39. Also attached to each MOC is a

BICEP “SUMMARY OF INSURANCE COVERAGE FOR CITY OF SAN BERNARDINO”

See Tran Decl., at ¶ 7 (emphasis added); Exhibit 5. The Great American policy to which BICEP

is a signatory, also defines the BICEP MOCs as insurance policies as follows:

The term “Policies” means policies of insurance and binders of insurance and

certificates of insurance that were in force at the inception of, and those policies of

insurance and binders of insurance attaching with new or renewal policy periods during

the “Term of this Agreement” that were issued to REINSURED’s insured members

covering General Liability or Automobile Liability issued by REINSURED and that were

underwritten in all material respects in accordance with REINSURED’s underwriting

guidelines and that were issued on forms, which guidelines and forms were submitted to

Great American for underwriting acceptability and development of Great American’s

premium in connection with Great American’s underwriting of this Agreement.

Appendix of Exhibits, at 79 (emphasis added). In that definition of Policies, the City is referred

to as the insured member. Id. And, of course, the MOCs use the term self-insured retention

throughout, and as the cases cited herein demonstrate, the term is an insurance industry term

used to refer to the amount of any liability the insurer will not pay for.

Other than its talismanic refrain that the MOCs are not insurance contracts, BICEP has

never advanced an argument on why that should matter to the interpretation of these contracts.

Instead, BICEP makes the same arguments to avoid liability as the insurers in the cases cited

herein—that payment of the SIR is a condition precedent to performance and the insurer is not

obligated to pay unless the SIR is satisfied, that the insurer’s obligation to defend increases the

insurer’s obligation in violation of the “drop-down” provision, that the insurance agreements are


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executory contracts and the insurer is not liable unless the contracts are assumed. The cases

interpret virtually identical provisions in response to virtually identical arguments, and yield

virtually identical results. BICEP may not like the holdings, but it cannot distinguish the cases.

The only distinction between the cases cited in this brief and the City’s contracts with

BICEP is that, here, the City has always paid its premiums, is not disclaiming the obligation to

defend the claims, and is not liquidating. The City has taken no position that requires BICEP to

pay or do anything more than they would pay or do if the City were not in bankruptcy.

Nevertheless, just like all the cases cited herein, the provider of the liability coverage is seeking a

windfall, based upon arguments that have uniformly been rejected by bankruptcy, district and

appellate federal courts for over 30 years. Windfalls are discouraged under California law.

Zacadia Fin. v. Fiduciary Trust Int’l of Cal., 2014 Cal. App. LEXIS 103, at *35, 2014 WL

69618 (Cal. App. Jan. 8, 2014) (denying lender’s demand to accelerate a loan where the asserted

breaches were not material, and allowing acceleration of loan would have conferred an improper

windfall on lender by allowing it to keep $12 million profit without having to wait to earn it).

IV. THE CITY COULD READILY ASSUME THE MOCs

As set forth above, the MOCs are not executory contracts and the City is not required

either to assume or reject the contracts to get the benefit of the coverage the City paid for. But,

even if the Court determined that the MOCs are executory, these contracts are readily assumable.

Section 365(a) of the Bankruptcy Code provides in relevant part that the City may

assume any executory contract. Section 365(b) further provides that if there has been a default in

the executory contract, then in order to assume the contract, the City must (a) cure or provide

adequate assurance that it will promptly cure, such default; (b) compensate, or provide adequate

assurance that the City will promptly compensate the non-debtor counterparty, and (c) provide

adequate assurance of future performance under such contract.

BICEP has the initial burden of showing defaults and that those defaults have been

properly noticed. See In re Greektown Holdings, L.L.C., 2009 Bankr. LEXIS 1231, at *11-*12,

2009 WL 1653461 (Bankr. E.D. Mich. May 13, 2009) (finding that city failed to carry its burden

of showing debtor defaulted under contract it sought to assume where city failed to provide


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written default notice as explicitly required under the contract). If the proof does not establish

any default in an executory contract or unexpired lease, the elements of § 365(b)(1) are not

required to be proven by the debtor. In re Natco Industries, Inc., 54 B.R. 436, 440-441 (Bankr.

S.D.N.Y. 1985); Greektown, 2009 Bankr. LEXIS 1231, at *9 (debtor not in default for Section

365(b) purposes because proper default notice had not been given at the time assumption motion

was filed). If defaults are established by the proof, then the burden shifts back to the debtor to

provide satisfactory proof that the defaults have either been cured or will be promptly cured and

that there would be adequate assurance of future performance.

BICEP argues that the MOCs are not assumable due to litany of contrived defaults. The

City disputes that it is in default, and it has responded to the BICEP Notice in accordance with

the timeline agreed by the parties. As set forth in the City Response Letter, BICEP’s assertions in

the BICEP Notice are transparent attempts to manufacture defaults. Exhibit 3. The MOCs

expressly provide that substantial compliance with the provisions of the MOCs precludes

default. It is beyond reasonable dispute that the City is in substantial compliance. In the absence

of defaults, BICEP is not entitled to any additional showing under 365(b)(1).

Indeed, courts have overruled objections to assumption where the facts show that the

objecting party has manufactured previously unnoticed defaults in an effort to gain an unfair

advantage through the bankruptcy process. For example, in In re Grayhall Resources Inc., 63

B.R. 382, 383 (Bankr. D. Colo. 1986), the debtor sought to assume a valuable mining lease

entered into by a predecessor in interest of the debtor, to which assumption the lessor objected.

The debtor failed to pay a single quarterly royalty payment that was due right before it filed its

petition. The lessor gave notice of the failure and of its election to terminate. The nonpayment of

the single royalty was the only specified event of default. Within thirty days of the notice of

default the debtor filed its chapter 11 proceeding, thereby staying the termination of the lease.

The debtor sought to assume the lease. In its objection, the lessor “raised a series of purported

defaults which had not previously been asserted.” Id. at 384. The debtor cured its one missed

royalty payment with a check brought to the hearing. The court then considered the litany of

purported defaults (e.g., failure to pay taxes, failure to expend funds on development, failure to


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provide notice to lessor to “gather free gold” maps of drilling activities and the other reports

called for under the lease, cutting timber without right to do so, operating in violation of

applicable laws, etc.). After much consideration and discussion of the legislative history of

365(b)(1)(C), the court found either that each default did not exist or that it had been cured, and

approved the assumption. The court concluded that lessor was merely trying to find a way to take

back its valuable mining lease from the debtor, who could not reorganize without it. Id. at 390-

91. Because BICEP cannot establish the existence of any defaults, BICEP is not entitled to any

additional showing under 365(b)(1). Moreover, to the extent there were any instances of

noncompliance with the Requirements, the City has cured them. See Exhibit 3 (City Response

Letter).

The City has also demonstrated its ability to perform going forward.13 In the past ten

years, the City has always paid the premium on each contract on time. Under the Plan, the City

has proposed ADR Procedures to expedite resolution of litigation claims against the City and

minimize the costs therefrom to the extent possible. Courts often accept a debtor’s past payment

and/or performance history, coupled with its proposed plan, as evidence of a debtor’s ability to

perform going forward. See e.g. In re Natco Industries, Inc., 54 B.R. 436, 440-441 (Bankr.

S.D.N.Y. 1985) (finding debtors had furnished adequate assurance of future performance under

leases where, among other things, debtors’ history of paying rent was virtually flawless); In re

Corporacion de Servicios Medicos Hospitalarios de Fajardo, 805 F.2d 440, 448 (1st Cir. 1986)

(affirming order allowing debtor hospital to assume a valuable hospital administration contract

with the Dept. of Health over the objection of the Department, because most of the defaults had

been cured postpetition). In Fajardo, in finding for the debtor on adequate assurance, the First

Circuit thought it was significant that just before the bankruptcy filing, the debtor was issued a

new hospital operating license by the same entity that was arguing the debtor could not show

adequate assurance of future performance of the license. Id. Here, BICEP entered into a new

13 The meaning of adequate assurance is a factual determination Congress entrusted to the finder of fact and does not mandate literal compliance with every term of the contract. See In re Evelyn Byrnes, Inc., 32 B.R. 825, 829 (Bankr. S.D.N.Y. 1983).


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MOC with the City that went effective just 90 days ago, and BICEP accepted payment in full

Tran Decl., at ¶ 5. BICEP’s actions are consistent with it being adequately assured of

performance.

A. The Default Provision of the MOCs.

The MOC, Exhibit A, Section 10 is entitled Default.

Section 10.1 states that: “No MEMBER that substantially complies with these

Requirements may be found in default.” Exhibit 3 to the Motion (emphasis added).

Section 10.2 states that “BICEP shall furnish the MEMBER with written notification of

the MEMBER’s failure to comply with these Requirements.

Section 10.3 states that “[t]he MEMBER shall furnish a written response outlining a

program for corrective action, or showing that it has substantially complied with these

Requirements, within thirty (30) days of receipt of BICEP’s notification.” Exhibit 3 to the

Motion. (Per BICEP’s agreement, the response date was extended from August 31, 2016 to

September 14, 2016 to allow the City time to address BICEP’s August 25, 2016 Email. Motion,

11:8-11.)

Section 10.4 states that “[i]f BICEP approves corrective action, the MEMBER shall

implement the approved program within sixty (60) days of notice of such approval.”

Section 10.5 states that “[f]ailure to cure noncompliance pursuant to sections 10.1

through 10.4 shall constitute an event of fault in accordance with the LIABILITY PROGRAM.”

Exhibit 3 to the Motion (Exhibit A, MOC, Section 10), p. 21.

B. BICEP’s Allegation That the City is not in Compliance With the Requirements is Contradicted by BICEP’s Own 2014 and 2016 Audits.

1. The 2014 Audit Shows Substantial Compliance

In February 2014, BICEP performed an audit, in which it concluded that the City was in

compliance with almost every Requirement. Exhibit 2B (2014 Audit). BICEP did not allege

default. Exhibit 2B (2014 Audit).


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2. The 2016 Audit Shows Substantial Compliance

The 2016 Audit did not make a single recommendation and contained few criticisms.

Rather, the 2016 Audit states: “As far as the reserving of claims, they are not in compliance with

the MOC as outlined in Section 11 of this report. The same goes for indexing claimants to

ascertain if they have had any other claims.” In the audit itself, the auditor indicates that because

of the alleged reservation issue, there is also no current ledger of payments to outside counsel.

Exhibit 4 (2016 Audit), p. 3. Thus, the auditor concluded that the City was complying with the

MOC except for alleged non-compliance with three sub-sections of the Requirements.

Section 10.1 states that “No MEMBER that substantially complies with these

Requirements may be found in default.” Without question, the auditor’s finding that the City was

in compliance, except with respect to three sub-sections, show the City’s substantial compliance.

Moreover, the auditor’s allegations of non-compliance are incorrect—indisputably, the City at

least substantially complied with the sections at issue and the Requirements contain numerous

sections. Moreover, the City has engaged Carl Warren, inter alia, to address the few specific

default allegations.

BICEP’s handling of the 2016 Audit shows that the BICEP Notice is a subterfuge. Only

three claims audited in 2016 were not a part of the 2014 Audit, and the same auditor prepared the

two audits. In all, there are only three references in the audits to any non-compliance, even

though the 2016 Audit reviewed claims more severely. BICEP’s purpose regarding the 2016

Audit becomes clear when the auditor states that the “[t]he question I have been asked [by

BICEP] is the City complying with the MOC.” Exhibit 5A to the Motion (2016 Audit Cover

Letter), p. 1. In 2014, the audit was not conducted for that purpose. See Exhibit 2B (2014

Audit).14 The auditor then states, in part, that: While in 2014 the auditor did not criticize the City

14 Moreover, the same facts are characterized differently. In 2014, the auditor states that “[d]ue to the fact that the City has filed for bankruptcy protection, I will not be providing my usual comments on the Program Evaluation, Scope of Audit or Recommendations since basically nothing has happened on the claims since my last audit. Unfortunately, none of the objectives of the audit were met.” Exhibit 2A (2014 Audit Cover Letter), p. 1. In 2016, the same auditor states that “I will not be providing my usual comments on the Program Evaluation, Scope of Audit or Recommendations since basically nothing has happened on the claims since my last audit.


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for failing to investigate stayed claims, in 2016 the auditor did so. See Exhibit 5A to the Motion

(2016 Audit Cover Letter), p. 1; Exhibit 2B (2014 Audit); Exhibit 4 (2016 Audit). The

consequences of those audits have been strikingly dissimilar. In 2014, BICEP did not allege

default. Exhibit 2B (2014 Audit).

3. BICEP’S August 25, 2016 Email Contradicts Its Audits.

After receiving the BICEP Notice, the City asked BICEP to provide the specificity that

the BICEP Notice lacked. Instead of providing the requested specificity, the August 25, 2016

Email makes the wholesale and inaccurate allegation that all claim files are not complying with

numerous Requirements because a “former” City employee was dilatory and because all claims

files were put on hold. Exhibit 5B. The allegations regarding Steve Dokken are incorrect. Mr.

Dokken was never terminated and he never was the City’s Risk Manager. He was hired by the

City as a Safety Officer and is now working for the Public Works Departments as the

Regulatory Compliance Analyst. He worked briefly on claim files and did not have a job

performance decline. Tran. Decl., ¶ 9.

The August 25, 2016 Email introduces BICEP’s fictional constructs—the Gap Period in

Work and Work Hold. See Exhibit 5B to the Motion. These terms are never referenced in the

2014 and 2016 audits and do not support BICEP’s allegations. BICEP’s core, unarticulated

premise is that the City should have treated its “case files,” all of which were stayed, as though

they were not stayed but fails to explain why this was necessary or appropriate. BICEP waited

four years after the City declared bankruptcy to allege that it should be “working” stayed “case

files.” The slow down in claims activity from the end of 2012 through January 1, 2014 was a

consequence of the bankruptcy. Staffing was reduced and cases were automatically stayed,

which explains the slowdown.

Unfortunately, none of the objectives of the audit were met.” Exhibit 5A to the Motion (2016 Audit Cover Letter), p. 1. In 2016, the auditor revised the 2014 cover letter and deleted the language that nothing has happened “due to the fact that the City has filed for bankruptcy protection.” Thus, deleting the salient fact (the chapter 9 bankruptcy) and concomitant staying of all litigation claims which explains why the claim files required a small amount of work. Moreover, the 2014 audit acknowledges the distinct lack of activity but is not critical whereas in 2016 the lack of activity (due to a stay of claims) is now negative.


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With regard to the so-called Work Hold, there was no “work hold.” In January 2014, the

City hired Carl Warren as its TPA and it never implemented a work hold. Tran. Decl., ¶ 8.

Although the City is in substantial compliance with the BICEP requirements, it

implemented a program for “corrective action” to resolve the BICEP notice. The City’s program

for “corrective action” is set forth in detail in the City Response Letter. See Exhibit 3. In

response to the audits: (1) Carl Warren will put all claims (whether or not reported to BICEP)

through an index review to the extent that this has not been done already; (2) reserves will be

modified with respect to the five claims identified in the 2016 Audit and reserves will be

modified to include posting expenses to each claim file to the extent this has not been done

already; and (3) the current ledger of payments will be updated for each claim file to the extent

this has not been done already. Tran Decl., ¶ 12; Exhibit 6. Thus, the City will correct every

alleged specific deficiency set out in the audits.

As part of its plan for “corrective action,” the City once again invited BICEP to provide

examples of specific deficiencies, which the City will address. Exhibit 3 (City Response Letter).

BICEP has not responded to the City Response Letter. Kincaid Decl., ¶ 3.

Thus, all of the evidence points to the City’s substantial compliance with the MOCs.

Moreover, the City has proposed corrective actions to improve its compliance. Therefore, the

City cannot be in default under the MOC because, according to the MOCs, “[n]o MEMBER that

substantially complies with these Requirements may be found in default.” Therefore, even if the

last 11 years of MOCs are still executory contracts (which they clearly are not), nothing

prevents the City from assuming the MOCs.

V. THE COURT SHOULD NOT GRANT BICEP A WINDFALL

By its Plan, the City is not asking BICEP to step into the City’s shoes and pay judgments

and defense costs where the aggregate sum does not exceed the $1 million SIR. The City has

been paying its defense costs and settlement amounts both before and during the City’s chapter 9

case, and the City paid numerous judgments before the chapter 9 case, all without any financial

assistance from BICEP. And all the while, both before and during the bankruptcy case, the City

paid all of the premiums on each of the 11 MOCs, totaling several million dollars.


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Nothing in the City’s Plan asks BICEP to do anything different, or expands BICEP’s

liability to the City or the litigants. Nothing in the Plan forces BICEP to pay a single dollar that it

would not pay were the City not in bankruptcy—BICEP would still have to pay judgments and

defense costs in excess of $1 million per claim.

By its Motion to compel assumption, and its argument that the City cannot assume the

MOCs, BICEP insists that the only outcome is rejection of the last 11 years of MOCs, including

the MOC the City just purchased for FY 2016/17, thereby eliminating the City’s liability

coverage for the period July 2006 through July 2017, eleven years of coverage. And the entire

basis for this radical outcome, letting BICEP off the hook and keeping the windfall of premium

payments, is that the City did not “work the files” during the last four years, files that could not

be “worked” in any event because very little, if anything, was happening in the litigation due to

the automatic stay. BICEP has not cited a single instance where it has been damaged by the

alleged failure to work the files, or that it is now lacking any information, or that the City’s

corrective actions will not be sufficient.

It would be a gross inequity of substantial magnitude if BICEP succeeded in magically

converting a few instances of alleged slow compliance into a failure of substantial compliance,

and turning that into a basis for eliminating 11 years of insurance coverage.

VI. CONCLUSION

For all of the foregoing reasons, the Court should deny BICEP’s Motion and overrule

BICEP’s Objection to confirmation of the Plan. Dated: September 26, 2016 STRADLING YOCCA CARLSON & RAUTH, P.C.

By: /s/ Paul R. Glassman

Paul R. Glassman Fred Neufeld

Attorneys for the City of San Bernardino, California


This form is mandatory. It has been approved for use by the United States Bankruptcy Court for the Central District of California.

August 3112 F 9013-3.1.PROOF.SERVICE DOCSSM/3030425v1/200430-0003

PROOF OF SERVICE OF DOCUMENT I am over the age of 18 and not a party to this bankruptcy case or adversary proceeding. My business address is:

100 Wilshire Blvd., 4th Floor, Santa Monica, CA 90401.

A true and correct copy of the foregoing document entitled CITY OF SAN BERNARDINO’S: (A) OPPOSITION TO MOTION TO COMPEL ASSUMPTION OR REJECTION OF BICEP AGREEMENTS; AND (B) RESPONSE TO BICEP’S OBJECTION TO CONFIRMATION OF THIRD AMENDED PLAN will be served or was served (a) on the judge in chambers in the form and manner required by LBR 5005-2(d); and (b) in the manner stated below: 1. TO BE SERVED BY THE COURT VIA NOTICE OF ELECTRONIC FILING (NEF): Pursuant to controlling General Orders and LBR, the foregoing document will be served by the court via NEF and hyperlink to the document. On September 26, 2016, I checked the CM/ECF docket for this bankruptcy case or adversary proceeding and determined that the following persons are on the Electronic Mail Notice List to receive NEF transmission at the email addresses stated below:

The United States trustee will be served electronically by the court to: United States Trustee (RS) [email protected] ATTORNEYS FOR DEBTOR Paul R. Glassman [email protected] Fred Neufeld [email protected] Laura L. Buchanan [email protected]

ATTORNEYS FOR BICEP Franklin C Adams [email protected], [email protected];[email protected] Cathy Ta [email protected], [email protected];[email protected] Franklin C Adams on behalf of Creditor San Bernardino Associated Governments [email protected], [email protected];[email protected] Franklin C Adams on behalf of Creditor San Bernardino Local Agency Formation Commission [email protected], [email protected];[email protected]; Franklin C Adams on behalf of Big Independent Cities Excess Pool Joint Powers Authority ("BICEP") [email protected], [email protected];[email protected]; Andrew K Alper on behalf of Interested Party Courtesy NEF [email protected], [email protected];[email protected] Christian U Anyiam on behalf of Claimant Gustavo Arzola [email protected], [email protected] Thomas V Askounis on behalf of Interested Party Courtesy NEF [email protected] Marjorie Barrios on behalf of Raymond Newberry, Patricia Mendoza, Maria Aboytia, Juana Pulido, Jesus Pulido, Jonathan Pulido, Richard Gonzalez Lozada, Melinda McNeal, Bertha Lozada, Mildred Lytwynec, Nicholas Lytwynec, Gloria Basua, and Others Similarly Situated [email protected], [email protected] Marjorie Barrios on behalf of The Estate of Fernando Melgoza [email protected], [email protected] Julie A Belezzuoli on behalf of Defendant California Department of Finance [email protected], [email protected]




Julie A Belezzuoli on behalf of Defendant Office of State Controller, State of California [email protected], [email protected] Julie A Belezzuoli on behalf of Defendant Ana J Matosantos [email protected], [email protected] Julie A Belezzuoli on behalf of Defendant John Chiang [email protected], [email protected] Anthony Bisconti on behalf of Creditor Certain Retired Employees of the City of San Bernardino [email protected], [email protected] Joseph N Bolander on behalf of Creditor Edward Andrade [email protected], [email protected] Jeffrey E Bjork on behalf of Interested Party Courtesy NEF [email protected] Michael D Boutell on behalf of Creditor Comerica Bank [email protected] J Scott Bovitz on behalf of Creditor U.S. TelePacific Corp. [email protected] John A Boyd on behalf of Interested Party Thompson & Colegate LLP [email protected] Jeffrey W Broker on behalf of Creditor The Glen Aire Mobilehome Park Corporation [email protected] Laura L Buchanan on behalf of Debtor City of San Bernardino, California [email protected] Michael J Bujold on behalf of U.S. Trustee United States Trustee (RS) [email protected] Christopher Celentino on behalf of Party Erste Europaische Pfandbrief- und Kommunalkreditbank Aktiengesellschaft in Luxemburg S.A. [email protected], [email protected] Lisa W Chao on behalf of California Infrastructure and Economic Development Bank [email protected] Shirley Cho on behalf of Interested Party National Public Finance Guarantee Corp. [email protected] Carol Chow on behalf of Interested Parties CMB INFRASTRUCTURE INVESTMENT GROUP III, LP, CMB INFRASTRUCTURE INVESTMENT GROUP V, LP AND CMB INFRASTRUCTURE INVESTMENT GROUP VI-C, LP [email protected] Alicia Clough on behalf of Defendant California Department of Finance [email protected], [email protected];[email protected];[email protected] Alicia Clough on behalf of Defendant Office of State Controller, State of California [email protected], [email protected];[email protected];[email protected]




Alicia Clough on behalf of Defendant State of California [email protected], [email protected];[email protected];[email protected] Alicia Clough on behalf of Defendant Ana J Matosantos [email protected], [email protected];[email protected];[email protected] Alicia Clough on behalf of Defendant John Chiang [email protected], [email protected];[email protected];[email protected] Marc S Cohen on behalf of Defendant California Department of Finance [email protected], [email protected];[email protected];[email protected] Marc S Cohen on behalf of Defendant Office of State Controller, State of California [email protected], [email protected];[email protected];[email protected] Marc S Cohen on behalf of Defendant State of California [email protected], [email protected];[email protected];[email protected] Marc S Cohen on behalf of Defendant Ana J Matosantos [email protected], [email protected];[email protected];[email protected] Marc S Cohen on behalf of Defendant John Chiang [email protected], [email protected];[email protected];[email protected] Christopher J Cox on behalf of Interested Party National Public Finance Guarantee Corp. [email protected], [email protected] Christina M Craige on behalf of Interested Party Courtesy NEF [email protected] Alex Darcy on behalf of Creditor Marquette Bank [email protected], [email protected] Susan S Davis on behalf of Interested Party Courtesy NEF [email protected] Robert H Dewberry on behalf of Creditor Allison Mechanical, Inc. [email protected] Donn A Dimichele on behalf of Debtor City of San Bernardino [email protected], [email protected] Todd J Dressel on behalf of Creditor Pinnacle Public Finance, Inc. [email protected], [email protected] Warren M Ellis on behalf of Claimant Jesus Castaneda [email protected], [email protected] Scott Ewing on behalf of Interested Party Rust Consulting/Omni Bankruptcy [email protected], [email protected];[email protected] John A Farmer on behalf of Creditor County of San Bernardino, California [email protected] John C Feely on behalf of Claimant Broadway Capital LLC [email protected], [email protected]




Lazaro E Fernandez on behalf of Creditor Lori Tillery, Michael Wade, Michael Anthony Rey, Terrel Markham, et al., Attornwy fo J.A. et al., Cedric may Sr., et al., Sheryl Jackson [email protected], [email protected];[email protected];[email protected] M Douglas Flahaut on behalf of Interested Party Wells Fargo Bank, N.A. [email protected] Duane R Folke on behalf of Creditor Paul Triplett [email protected] Dale K Galipo on behalf of Attorney Dale K Galipo [email protected], [email protected];[email protected];[email protected] Dale K Galipo on behalf of Michael Wade, Michael Anthony Rey, Terrel Markham, et al., Attornwy fo J.A. et al., Cedric may Sr., et al., Sheryl Jackson [email protected], [email protected];[email protected];[email protected] Victoria C Geary on behalf of Defendant California State Board Of Equalization [email protected] Victoria C Geary on behalf of Defendant Cynthia Bridges [email protected] Paul R. Glassman on behalf of Debtor City of San Bernardino, California [email protected] Paul R. Glassman on behalf of Plaintiff City of San Bernardino, California [email protected] Richard H Golubow on behalf of Glen Aire Mobilehome Park Corporation, Pacific Palms Mobilehome Park Corporation, Friendly Village Mobilehome Park Corporation, Orangewood Mobilehome Park Corporation and Affordable Community Living Corporation fka California Mobilehome Park Corporation fka San Bernardino Mobilehome Park Corporation [email protected], [email protected];[email protected]; [email protected] David M Goodrich on behalf of Creditor San Bernardino City Professional Firefighters Local 891 [email protected], [email protected], [email protected], [email protected] Morton J Grabel on behalf of Claimant Lorrie Pauly [email protected], [email protected] Christian Graham on behalf of Creditor Miramontes Const. Co., Inc. [email protected] Everett L Green on behalf of U.S. Trustee United States Trustee (RS) [email protected] Asa S Hami on behalf of Creditor San Bernardino City Professional Firefighters Local 891 [email protected], [email protected];[email protected];[email protected] James A Hayes on behalf of Interested Party Courtesy NEF [email protected] Eric M Heller on behalf of Interested Party Internal Revenue Service [email protected]




Richard P Herman on behalf of Creditor Javier Banuelos [email protected] Jeffery D Hermann on behalf of Creditor and Defendant County of San Bernardino, California [email protected] Whitman L Holt on behalf of Interested Party Courtesy NEF [email protected] Michelle C Hribar on behalf of Interested Party San Bernardino Public Employees Association [email protected], [email protected] Steven J. Katzman on behalf of Creditor Certain Retired Employees of the City of San Bernardino [email protected], [email protected] Steven J. Katzman on behalf of Official Committee Of Retired Employees [email protected], [email protected] Jane Kespradit on behalf of Interested Party Courtesy NEF [email protected], [email protected] Mette H Kurth on behalf of Interested Party Courtesy NEF [email protected];[email protected] Sandra W Lavigna on behalf of Interested Party U. S. Securities and Exchange Commission [email protected] Ashlee N Lin on behalf of Interested Party Ambac Assurance Company [email protected] Michael B Lubic on behalf of Interested Party California Public Employees' Retirement System [email protected], [email protected] Michael C Maddux on behalf of Creditor Asinia Johnson [email protected], [email protected] Vincent J Marriott on behalf of Erste Europäische Pfandbriefund Kommunalkreditbank AG in Luxemburg [email protected] Vincent J Marriott on behalf of Erste Europäische Pfandbriefund Kommunalkreditbank AG in Luxemburg [email protected], [email protected] David J McCarty on behalf of Interested Party David J. McCarty [email protected], [email protected] Reed M Mercado on behalf of Interested Party M. Reed Mercado [email protected] Dawn A Messick on behalf of Interested Party Courtesy NEF [email protected], [email protected] Fred Neufeld on behalf of Debtor City of San Bernardino, California [email protected] Aron M Oliner on behalf of Interested Party San Bernardino Police Officers Association [email protected]




Scott H Olson on behalf of Creditor Kohl's Department Stores, Inc. [email protected], [email protected],[email protected], [email protected] Allan S Ono on behalf of Interested Party Courtesy NEF [email protected], [email protected] James F Penman [former City Attorney of the City of San Bernardino] Mark D Potter on behalf of Creditor Creditor Timothy Crowley [email protected], [email protected];[email protected] Dean G Rallis, Jr on behalf of Interested Party Courtesy NEF [email protected];[email protected]; [email protected];[email protected]; [email protected] Manoj D Ramia on behalf of Creditor California Public Employees' Retirement System [email protected], [email protected] Jason E Rios on behalf of Creditor California Public Employees' Retirement System [email protected], [email protected] Esperanza Rojo on behalf of Interested Party Rust Consulting/Omni Bankruptcy [email protected], [email protected] Kenneth N Russak on behalf of Interested Party Courtesy NEF [email protected], [email protected];[email protected] Timothy M Ryan on behalf of Claimant The Bank of New York Mellon FKA The Bank of New York, as Trustee for the certificate holders of the CWABS, INC. Asset-Backed Certificates, Series 2006-26 [email protected], [email protected] Timothy M Ryan on behalf of Claimant The Bank of New York Mellon FKA The Bank of New York, as Trustee for the certificate holders of the CWABS, INC. Asset-Backed Certificates, Series 2006-18 [email protected], [email protected] Vicki I Sarmiento on behalf of Claimants X.J.G., as minor by and through guardian ad litem Angelina Saenz, C.A. as minor Gonzalez by and through guardian ad litem Rosalsela Avalos, Brunilda Gonzalez, Angelina Cesar, Zochilt Gutierrez, Sasha Gonzalez [email protected], [email protected] Mark C Schnitzer on behalf of Attorney Mark C. Schnitzer [email protected], [email protected] John R Setlich on behalf of Claimant Francisca Zina Gomez John R Setlich [email protected] Diane S Shaw on behalf of Interested Party Courtesy NEF [email protected] Ariella T Simonds on behalf of Interested Party Courtesy NEF [email protected] Jason D Strabo on behalf of Creditor U.S. Bank National Association, not individually, but as Indenture Trustee [email protected], [email protected] Cathy Ta on behalf of Big Independent Cities Excess Pool Joint Powers Authority ("BICEP") [email protected], [email protected];[email protected] Mohammad Tehrani on behalf of U.S. Trustee United States Trustee (RS)




[email protected] David A Tilem on behalf of Creditor Rovinski Renter [email protected], [email protected];[email protected]; [email protected];[email protected];[email protected]; [email protected] Sheila Totorp on behalf of Creditor Landmark American Insurance Company [email protected], [email protected] Benjamin R Trachtman on behalf of Interested Party Courtesy NEF [email protected], [email protected] Matthew J Troy on behalf of Creditor United States of America [email protected] United States Trustee (RS) [email protected] Anne A Uyeda on behalf of Interested Party Courtesy NEF [email protected] Annie Verdries on behalf of Interested Party Courtesy NEF [email protected], [email protected] Brian D Wesley on behalf of Interested Party Courtesy NEF [email protected] Arnold H Wuhrman on behalf of Creditor Serenity Legal Services, P.C. [email protected] Clarisse Young on behalf of Interested Party Courtesy NEF [email protected], [email protected]

Service information continued on attached page 2. SERVED BY UNITED STATES MAIL: On September 26, 2016, I served [or will serve] the following persons and/or entities at the last known addresses in this bankruptcy case or adversary proceeding by placing a true and correct copy thereof in a sealed envelope in the United States mail, first class, postage prepaid, and addressed as follows. Listing the judge here constitutes a declaration that mailing to the judge will be completed no later than 24 hours after the document is filed.

UNITED STATES TRUSTEE Office of The United States Trustee 3801 University Ave Suite 720 Riverside, CA 92501

Service information continued on attached page 3. SERVED BY PERSONAL DELIVERY, OVERNIGHT MAIL, FACSIMILE TRANSMISSION OR EMAIL (state method for each person or entity served): Pursuant to F.R.Civ.P. 5 and/or controlling LBR, on September 26, 2016, I served the following persons and/or entities by personal delivery, overnight mail service, or (for those who consented in writing to such service method), by facsimile transmission and/or email as follows. Listing the judge here constitutes a declaration that personal delivery on, or overnight mail to, the judge will be completed no later than 24 hours after the document is filed.




PRESIDING JUDGE’S COPY Honorable Meredith A. Jury (Personal Delivery) U.S. Bankruptcy Court 3420 Twelfth Street, Suite 325 Riverside, CA 92501-3819 Delivered on September 27, 2016 ATTORNEYS FOR UNITED PACIFIC RAILROAD COMPANY (Via Email) Mary Ann Kilgore [email protected] Jennie L. Anderson [email protected]

Service information continued on attached page

I declare under penalty of perjury under the laws of the United States that the foregoing is true and correct.

September 26, 2016 Christine Pesis /s/ Christine Pesis Date Printed Name Signature


paul r. glassman (state bar no. 76536) fred neufeld (state ... file1 2 3 4 5 6 7 8 9 10 11 12 13 14...

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