Dick Ex Rel. Hilbert Residence Maintenance Trust v. Conseco, Inc. , 458 F.3d 573 ( 2006 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 05-4352
ROLLIN DICK, as Trustee of the Amended
Hilbert Residence Maintenance Trust and
as Trustee of the Stephen C. and Tomisue
Hilbert Irrevocable Trust,
Claimant/Appellant,
v.
CONSECO, INC.,
Debtor/Appellee.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 05 C 3170—Robert W. Gettleman, Judge.
____________
ARGUED APRIL 13, 2006—DECIDED AUGUST 11, 2006
____________
Before COFFEY, KANNE, and WILLIAMS, Circuit Judges.
KANNE, Circuit Judge. Conseco, Inc. and two of its senior
officers entered into certain employee benefit agreements.
Shortly thereafter, both officers’ employment with Conseco
ended, and Conseco subsequently went bankrupt. At issue
is whether Conseco’s obligations under certain of these
agreements continued for the benefit of one of these former
employees after Conseco’s bankruptcy. The bankruptcy
court did not think so and granted summary judgment in
favor of Conseco. The district court agreed, and for the
following reasons, we affirm.
2 No. 05-4352
I. HISTORY
Stephen Hilbert and Rollin Dick were the CEO and CFO,
respectively, of Conseco. In the years prior to Conseco’s
2002 bankruptcy filing, they received hundreds of millions
of dollars from Conseco in the form of salary, loan guaran-
tees, and various other ostensible forms of compensation. In
late 1998, Hilbert and Dick entered into so-called Split-
Dollar Agreements (the “Agreements”) with Conseco. The
subject matter of each Agreement was one life insurance
policy, in which either Hilbert or Dick (or their spouses) was
the insured. Under the Agreements, Conseco would
be responsible for remitting the premium payments to the
insurance companies, with a small contribution to be
made by Hilbert and Dick. There were five Agreements in
all, with four benefitting Hilbert and the fifth benefitting
Dick. At issue here are the four Agreements in which
Hilbert was the insured and Dick was named as trustee.
On December 8, 1998, Hilbert asked Conseco’s compensa-
tion committee for formal authorization of the Agreements.
At that meeting, Hilbert noted that due to Conseco’s
previous encouragement of senior executives to purchase
large amounts of company stock, the death of a senior
executive could inflict a liquidity crisis upon the estate and
require the expedited sale of Conseco stock without regard
to existing market conditions. The life insurance, Hilbert
explained, would alleviate this potential cash crunch. The
committee authorized Conseco to enter into the Agree-
ments.
There were three parties to each Agreement: Conseco, the
“Employee” (Hilbert), and the “Owner” of the insurance
policy. The four policies were owned by two irrevocable
trusts created by Hilbert in which Dick was the trustee (the
“Trusts”). Neither Hilbert nor Dick were beneficiaries of the
Trusts. The policy amounts for three of the policies was $25
million each, and $12.5 million for the fourth, for a total
death benefit of $87.5 million.
No. 05-4352 3
Under the Agreements, Conseco agreed to pay virtually
all of the annual premiums for each insurance policy.
Conseco’s stated motivation was to reflect that “the Em-
ployee is also an officer and director of the corporation and
has contributed significantly to its success. The Corporation
desires to continue to retain the services of the Employee.”
The Agreements required Conseco to determine the
precise allocation of premium payments between Conseco
and Hilbert, calculated to ensure favorable tax treatment to
Hilbert. Hilbert or one of the Trusts was to forward
Hilbert’s portion to Conseco, which, in turn, was to remit
the full premium payments to the insurers.
Hilbert was the sole insured person under the $12.5
million policy. The other polices were “second-to-die”
polices, in which the death benefit did not pay until after
the deaths of both Hilbert and his wife. When the death
benefit payments were to be paid, Conseco had the “unqual-
ified right” to recover the amount of premium payments it
had made. The policies’ owners (the Trusts) were entitled to
the remaining balance, if any. In addition, Conseco obtained
a collateral assignment for each insurance policy to secure
this reimbursement.
The Agreements specified two events which would
terminate the Agreements before the death benefits came
due: bankruptcy of Conseco, or Hilbert’s share of the annual
premium was not paid and Conseco elected not to cover the
shortfall. In either case, the Trusts had the option to
purchase the policies from Conseco within 60 days of the
termination event by reimbursing Conseco for its premium
payments. Such a purchase had the added effect of releas-
ing Conseco’s collateral assignment. If the 60-day period
lapsed, Conseco had the option of becoming the owner of the
policies or enforcing its security interest by surrendering
the policies for cash. If Conseco elected to surrender the
policies, it could take reimbursement from the proceeds
with any residual to be remitted to the Trusts.
4 No. 05-4352
The parties operated under the Agreements from 1998
until December 2001. Hilbert and Dick’s employment with
Conseco ended in April 2000, the circumstances of which
are not before us. Conseco stopped paying the premiums on
Hilbert’s policies beginning with the December 2001
payment. The policies did not lapse as a result of the
nonpayment; at some point the Trusts converted them to
paid-in-full policies with lower death benefits.
On December 17, 2002, Conseco filed its petition for
bankruptcy. On February 19, 2003, the Trusts filed proofs
of claim against Conseco alleging that Conseco breached the
Agreements. On September 9, 2003, the bankruptcy court
entered an order confirming Conseco’s plan of reorganiza-
tion, and the plan became effective the following day. In
September 2004, Conseco informed the Trusts of its intent
to exercise its early termination rights, to which the Trusts
responded that they would sue Conseco for breach of
contract and conversion should Conseco attempt to do so.
On April 13, 2005, the bankruptcy court granted summary
judgment in favor of Conseco. The district court affirmed,
and the Trusts appeal.
II. ANALYSIS
“In a second appeal from a bankruptcy court’s decision,
we apply the same standard of review as did the district
court,” which in the case of the bankruptcy court’s grant of
summary judgment, is de novo. Frierdich v. Mottaz, 294
F.3d 864, 867 (7th Cir. 2002) (citing In re Marrs-Winn Co.,
103 F.3d 584, 589 (7th Cir. 1996)). The standards of Rule 56
of the Federal Rules of Civil Procedure apply to summary
judgment in bankruptcy proceedings. Fed. R. Bankr. P.
7056; In re Colonial Discount Corp., 807 F.2d 594, 596 (7th
Cir. 1986). Summary judgment should not be granted
unless there is no genuine issue of material fact and the
moving party is entitled to judgment as a matter of law.
No. 05-4352 5
Fed. R. Civ. P. 56(c). We review the bankruptcy court’s
factual findings for clear error and its legal conclusions
de novo. Dye v. United States, 360 F.3d 744, 747 (7th Cir.
2004) (citations omitted).
Conseco argues that the filing of its bankruptcy peti-
tion triggered the early termination provision of the
contract. Early termination provisions are commonly
invalidated by 11 U.S.C. § 365(e)(1) of the Bankruptcy Code,
which provides:
[N]otwithstanding a provision in an executory con-
tract or unexpired lease, or in applicable law, an
executory contract or unexpired lease of the debtor
may not be terminated or modified, and any right
or obligation under such contract or lease may not
be terminated or modified, at any time after the
commencement of the case solely because of a
provision in such contract or lease that is condi-
tioned on—
...
(B) . . . the commencement of a case under this title.
Section 365 applies only to executory contracts; therefore,
if the Agreements were not executory contracts on Decem-
ber 17, 2002, then the filing of Conseco’s bankruptcy
petition on that date will have ended its obligations by
virtue of the early termination clause. Although the Bank-
ruptcy Code does not define “executory contract,” we have
held an executory contract for § 365 purposes “is a contract
on which performance remains due to some extent on both
sides.” In re Streets & Beard Farm P’ship, 882 F.2d 233, 235
(7th Cir. 1989) (citing S. Rep. No. 95-989 at 58 (1978) and
H.R. Rep. No. 95-595 at 347 (1977), reprinted in 1978
U.S.C.C.A.N. 5787, 5844 and 5963, 6303, respectively); see
NLRB v. Bildisco & Bildisco, 465 U.S. 513, 523 n.6 (1984)
(citing same to define “executory contract” for 11 U.S.C.
§ 365(a)). Recognizing that the literal definition would
render nearly all agreements executory, we determined that
6 No. 05-4352
in order to effectuate Congress’s intent, § 365 should be
applied only “to contracts where significant unperformed
obligations remain on both sides.” Streets & Beard Farm
P’ship, 882 F.2d at 235 (emphasis added) (citing Vern
Countryman, Executory Contracts in Bankruptcy: Part I, 57
Minn. L. Rev. 439, 460 (1974)); cf. Gouveia v. Tazbir, 37
F.3d 295, 298-99 (7th Cir. 1994) (citation omitted) (holding
restrictive covenant giving ongoing right of present enjoy-
ment of real property did not amount to an executory
contract subject to § 365). In other words, a contract is
executory if each party is burdened with obligations which
if not performed would amount to a material breach. See
Streets & Beard Farm P’ship, 882 F.2d at 235; In re Colum-
bia Gas Sys. Inc., 50 F.3d 233, 239 (3d Cir. 1995) (“[U]nless
both parties have unperformed obligations that would
constitute a material breach if not performed, the contract
is not executory under § 365.”).
Because there is no dispute that the Agreements are
governed by Indiana law, whether the remaining obliga-
tions are significant, i.e., whether all parties could have
materially breached the Agreements when Conseco filed
its petition, is a question of Indiana contract law, which
we review de novo. See Bourke v. Dunn & Bradstreet Corp.,
159 F.3d 1032, 1036 (7th Cir. 1998) (citations omitted);
Streets & Beard Farm P’Ship, 882 F.2d at 235 (concluding
debtor to be equitable property owner under Illinois law).
To determine whether the failure to perform a contractual
duty amounts to a material breach, Indiana has adopted the
view of the Restatement (Second) of Contracts, which
considers several factors:
(a) the extent to which the injured party will be
deprived of the benefit which he reasonably ex-
pected;
(b) the extent to which the injured party can be
adequately compensated for the part of that benefit
of which he will be deprived;
No. 05-4352 7
(c) the extent to which the party failing to perform
or to offer to perform will suffer forfeiture;
(d) the likelihood that the party failing to perform
or to offer to perform will cure his failure, taking
account of all the circumstances including any
reasonable assurances;
(e) the extent to which the behavior of the party
failing to perform or to offer to perform comports
with standards of good faith and fair dealing.1
Frazier v. Mellowitz, 804 N.E.2d 796, 803-04 (Ind. Ct. App.
2004) (quoting Restatement (Second) of Contracts § 241
(1981)).
We need only to consider Hilbert’s contractual duties to
conclude that the Agreements were not executory contracts
when Conseco filed its petition for bankruptcy. Hilbert’s
primary obligation under the Agreements was to continue
working for Conseco.2 In each of the Agreements, Hilbert
was referred to as the “Employee” who “is also an officer
and director of the Corporation and has contributed signifi-
cantly to its success.” Conseco recited that it “desires to
continue to retain the services of the Employee, and
accordingly, the Corporation is willing to pay a portion of
the premiums due on the Policy as an additional employ-
ment benefit.” However, by the time Conseco filed for
bankruptcy, Hilbert was no longer in Conseco’s employ.
Hilbert’s only remaining obligation under the Agreements
was to remit timely his share of the life insurance premi-
1
Because we are analyzing the effect of a hypothetical failure to
perform, good faith is irrelevant.
2
If Hilbert’s employment obligations were not considered to be
part of the bargain, then it is likely that the formation of the
Agreements would have failed for lack of consideration, which
would be no help to the Trusts here.
8 No. 05-4352
ums to Conseco, and it is the significance of this duty
we evaluate.
If Hilbert stopped paying his life insurance premiums
(and the Trusts likewise failed to make payments in
Hilbert’s stead), there would have been no discernible
detriment to Conseco. The Agreements did not impose
a duty upon Conseco to continue to make payments in full
while covering Hilbert’s shortfalls. In fact, Hilbert’s nonpay-
ment was the other termination event under the Agree-
ments, and in that event, Conseco would have had the
option to discontinue its own performance. Moreover,
Conseco’s security interest was effective regardless of
whether the policies were prematurely surrendered for cash
or ultimately a death benefit was paid.
Therefore, if Hilbert had ceased performance of the
Agreements, Conseco’s contractual remedies gave it the
choice of seeking immediate reimbursement or remitting
the full premium amounts and be repaid upon Hilbert’s
death. Although both options—particularly early ter-
mination—posed a likelihood that the payout would have
been insufficient to make Conseco whole for premiums it
did pay, the Agreements did not entitle Conseco to any
other source of recovery.3 Because Conseco would have
suffered no actionable damages should Hilbert fail to
perform, it would not have been entitled to sue him for
material breach.
Therefore, Hilbert could not have materially breached the
Agreements by discontinuing his performance.4 It follows
3
We note Hilbert’s 60-day option in the event of early termina-
tion required him first to repay Conseco in the entirety. Although
it is possible Conseco could be satisfied by Hilbert in this manner,
it does not provide a basis for a lawsuit by Conseco.
4
We need not consider what impact Hilbert’s nonperformance
(continued...)
No. 05-4352 9
that the Agreements were not executory contracts when
Conseco filed for bankruptcy. Because there would be not
even a scintilla of injury to another contracting party, the
issue whether Hilbert had any interests subject to forfeiture
is irrelevant. We conclude that § 365 does not impede the
operation of the Agreements’ termination clauses, which
were invoked by Conseco’s petition for bankruptcy. The
Trusts present several alternative arguments.
First, the Trusts claim that Conseco waived its rights
upon termination by failing to exercise them in a reasonable
time. The Trusts claim Conseco’s notice in September 2004
of its intent to exercise its termination rights amounted to
a two-year period of silence, giving rise to a factual issue of
reasonableness.
Because the Agreements did not impose a deadline upon
Conseco to exercise its termination rights, Indiana law
requires Conseco to have acted within a reasonable time,
which is determined by considering “the subject matter of
the contract, the circumstances attending performance of
the contract, and the situation of the parties to the con-
tract.” Harrison v. Thomas, 761 N.E.2d 816, 819 (Ind. 2002)
(citing Epperly v. Johnson, 734 N.E.2d 1066, 1072 (Ind. Ct.
App. 2000)).
The contracts terminated on December 17, 2002, the date
Conseco filed for bankruptcy. Under the Agreements,
Hilbert or the Trusts first had 60 days to exercise their
option to buy out Conseco’s security interest before
Conseco’s termination rights accrued on February 17, 2003.
However, neither Hilbert nor the Trusts pursued this
remedy. Rather, the Trusts initiated this litigation against
Conseco on February 19, 2003, a mere two days after
4
(...continued)
would have had on the Trusts because a precondition of injury
to the Trusts would be their own failure to cover for Hilbert.
10 No. 05-4352
Conseco’s termination rights had ripened. The Trusts have
continuously asserted that the Agreements did not termi-
nate, i.e., that Conseco had no termination rights at all.
Conseco’s inactivity during the litigation was reasonable.
The existence of Conseco’s termination rights was the focus
of this litigation and exercising them likely would have
resulted in more claims filed by the Trusts. In addition, the
Trusts do not point to any harm they have suffered in the
interim. Rather than two years, the only time which
conceivably could count against Conseco is the two-day
period preceding this litigation, and we must take into
account that the Agreements did not state or imply that
time was of the essence. With no basis to conclude other-
wise, Conseco did not waive its termination rights.
Second, the Trusts maintain that Conseco could not
exercise its early termination rights because it had
breached the Agreements by discontinuing the insurance
payments a year before filing for bankruptcy. The Trusts
argue this alleged breach reduced the paid balances of the
insurance policies from what they would have been had
Conseco continued making payments. But the Agreements
contain no terms which would negate Conseco’s security
interests in the policies in the event of a material breach by
Conseco. Indeed, the security agreements explicitly state
that Conseco’s rights in the collateral could only be extin-
guished if the Trusts fully repaid all their liabilities to
Conseco.
There is no indication in the record, nor do the Trusts
assert, that the cash surrender value of the policies was
sufficient to reimburse Conseco for the payments it had
made. So whatever impact Conseco’s nonpayment had upon
the policies, Conseco’s reimbursement rights were not
disturbed, nor could they have been satisfied. Therefore,
even if Conseco breached the Agreements by discontinuing
the payments, the Trusts have not shown they would be
entitled to any damages as a result.
No. 05-4352 11
Finally, the Trusts argue that there remain factual
disputes regarding many topics (most of which we have
discussed), including whether the Agreements were execu-
tory; whether Conseco waived its right to be reimbursed;
whether Conseco was first to materially breach
the agreements; whether Conseco waived its early termina-
tion rights; and whether the Trusts should continue to hold
the policies.
Without more, merely fashioning as factual issues what
are actually questions of law cannot forestall summary
judgment. At most, these questions involve so-called
ultimate facts, such as reasonableness. However, there is no
dispute as to the underlying occurrences, and resolving the
predicate legal issues leaves no room for reasonable dis-
agreement.
III. CONCLUSION
For the foregoing reasons, the decision of the district
court is AFFIRMED.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—8-11-06