Back in the early to mid-1990’s, while Conseco’s profligate CEO, Steve Hilbert, was on his way to becoming America’s highest paid CEO (with a whopping $277 million between 1991 and 1996), Hilbert was (forever?) smitten with the lovely 25 year old Indy stripper Tomisue Tomlinson as she jumped out of a cake at his stepson’s bachelor party.
Unlike Hilbert’s five previous marriages, this one has survived the test of time (and loss of money). Conseco’s bankruptcy appears to have joined them at the hip (or maybe the prepetition asset transfer to Tomisue did), as evidenced by a recently decided case in Conseco’s post-confirmation bankruptcy saga, here involving the rights of the Hilberts’ “irrevocable trusts” to four “split-dollar” life insurance agreements established in 1998. In re Conseco, 2005 WL 2737507 (N.D. Ill., 10/18/05).
Under these self-dealt policies, Conseco agreed to pay annual premiums owing under the policies (worth between $12.5 million and $25 million each). The Hilberts were also required to pay a portion of the policy premiums (presumably the minimum required to maximize tax benefits). If the Hilberts failed to pay their portion, the trusts could pay on their behalf. The Court noted that the Agreements had early termination provisions if Conseco went bankrupt, or if the Hilberts or their trusts failed to pay Conseco a share of the premiums. Upon termination, the trusts could repurchase the policy from Conseco by reimbursing Conseco for premium payments made. If, within 60 days, the trusts did not exercise this repurchase option, Conseco could either become the owner of the policy or surrender the policies and get its premium payments back.
In December 2001, Conseco stopped making payments on the insurance policies, believing the Hilberts owed Conseco millions of dollars in defaulted D&O loans. Apparently, after Conseco stopped making payments, the trusts responded by converting the policies into paid-up policies with lower death benefits so that no further payments were due under the insurance policies.
One year later, Conseco filed for bankruptcy, and on September 10, 2003, it’s reorganization plan went effective. Notably, neither the Hilberts nor their trusts exercised their option to purchase the policies from Conseco within 60 days of the bankruptcy filing, but rather filed claims against Conseco in the bankruptcy case seeking damages for alleged breach of the Agreements. (Perhaps they were thrown off by the ipso facto clauses in the Agreements that provided for termination in the event of bankruptcy, which every bankruptcy lawyer knows will not alone terminate an executory contract.)
The trusts asserted in their proofs of claims that Conseco’s bankruptcy filing did not terminate the Agreements. Conseco objected to the claims, smartly asserting that the Agreements were not executory, and thus were terminated because neither the Hilberts nor the trusts exercised their option to purchase the policies from Conseco within 60 days of the bankruptcy filing (the ipso facto clause notwithstanding). In September 2004, Conseco’s attorneys advised the trusts that the Agreements were terminated and that Conseco intended to enforce its rights to recoup the premium payments made. Counsel for the trusts responded that the trust “would consider your taking of the cash value of the policies not only to be an additional breach of the [Agreements], but also to be conversion as well.”
The Bankruptcy Court, however, disagreed with the trust counsel’s assessment, holding that the Agreements were not “executory contracts” under Bankruptcy Code section 365, and thus were automatically terminated when Conseco filed for bankruptcy in December 2002. The Bankruptcy Court also found 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.”
The District Court, reviewing the bankruptcy court’s rulings and conclusions of law de novo, ruled that the bankruptcy court correctly adopted the “Countryman definition” of an exectuory contract as one in which “the obligation of both the bankruptcy and the other party are so far unperformed that the failure of either to complete performance would constitute a material breach excusing performance by the other.” (Citing Vern Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn L. Rev. 439, 460 (1973)). The District Court also concurred with the Bankruptcy Court’s logical extension of the Countryman definition in concluding that “if any of the parties’ duties is deemed immaterial, then the contract is deemed not executory.”
As regards whether a contract is “executory,” the District Court noted the split in the circuits between the majority Countryman “material breach” test and the minority “functional test” (with the Seventh Circuit following the Countryman definition), stating as follows:

Continue Reading What Makes a CEO Perk Executory and the Circuits’ Split Over the Definition of an Executory Contract