Last year, in a post entitled "What Makes a CEO Perk Executory and the Circuits’ Split Over the Definition of an Executory Contract," I reported on an interesting sideshow to the Conseco bankruptcy involving the rights of Conseco’s ex–high flying ex-CEO Stephen Hilbert (and his enterprising wife, Tomisue Tomlinson) to four self-dealt "split-dollar" life insurance policies worth $87 million in the aggregate. As noted in my prior post, Chicago’s Judge Robert W. Gettleman ruled that Chicago’s Bankruptcy Judge Carol W. Doyle was right in concluding that the policies were not "executory contracts" and were automatically terminated when Conseco filed for bankruptcy in December 2002. He also agreed with Judge Doyle’s conclusion that "because Conseco was not attempting to enforce a contract, its material breach of the Agreements in December 2001, when it stopped making premium payments, was of no consequence."
Last Friday, the 7th Circuit affirmed Judge Gettleman’s decision, with Indiana’s own Judge Michael S. Kanne authoring the opinion on behalf of a unanimous panel. Dick ex rel. Amended Hilbert Residence Maintenance Trust v. Conseco, Inc. (In re Conseco, Inc.), 2006 WL 2328635 (7th Cir. 8/11/06) (pdf).
In affirming the lower courts’ rulings, the 7th Circuit made two important general statements regarding executory contracts in bankruptcy. First, regarding when a contract is executory, the 7th Circuit stated:
Recognizing that the literal definition would render nearly all agreements executory, we determined that in order to effectuate Congress’s intent, § 365 should be applied only ‘to contracts where significant unperformed obligations remain on both sides.’ In other words, a contract is executory if each party is burdened with obligations which if not performed would amount to a material breach. (Citation omitted.)
Second, as to what law applies in determining whether "the remaining obligations are significant," the 7th Circuit stated that the court should look to state law (and in this case, Indiana law) for answers.
Applying these general principles to the case, the 7th Circuit concluded on de novo review that the split-dollar policy agreements were not executory, reasoning as follows: