Badami v. Sears (In re AFY, Inc.)
- Citation:
- United States Bankruptcy Panel for the Eighth Circuit, No. 11-6065
- Tag(s):
-
- Ruling:
- The BAP held that the dispute involving the parties' respective claims regarding the life insurance policy in question was a core proceeding under 28 U.S.C. 157(b)(2), and that the bankruptcy court had constitutional jurisdiction to determine the matter, and rejected the claim of AFY, Inc. that it was contractually and equitably entitled to receive the cash value of the policy owned by the company's former president although the premiums had been paid by the company.
- Procedural context:
- Prior to the conversion of AFY, Inc.'s ("AFY") chapter 11 case to chapter 7, the chapter 11 trustee filed an adversary complaint against Robert Sears ("Sears"), who was also a chapter 11 debtor-in-possession, asserting an ownership interest in a life insurance policy, requesting to recover the cash value of the policy, claiming an equitable interest in the policy, and requesting the court to void Sears' interest in the policy. Sears appealed the decision of the bankruptcy court holding that AFY was contractually and equitably entitled to receive the cash value of the policy.
- Facts:
- Prior to Sears' and AFY's bankruptcies, Sears served as AFY's president. Sears and AFY entered into a split dollar agreement defining their contractual relationship in a life insurance policy naming Sears as the insured. The agreement called for a policy owned by Sears and required AFY to pay all of the premiums. Upon issuance of the policy Sears, the agreement also required Sears to collaterally assign the policy to AFY. The agreement also requried Sears to sign demand note in favor of AFY in the amount of premium payments paid by AFY. There were three ways the agreement could be terminated: 1) if Sears ended his employment; 2) if either provides written notice to the other; and 3) if AHY attempted to impair or defeat Sears' interest in the policy. In the event the agreement is terminated, Sears had 30 days to repay AFY all premiums in exchange for a complete release of the collateral assignment and all indebtedness. Sears never collaterally assigned the policy or signed demand notes in favor of AFY. AFY paid premiums over a fourteen year period before the bankruptcies were filed.
Sears first brought a motion to dismiss the complaint of the AFY chapter 11 trustee arguing that the bankruptcy court did not possess the jurisdiciton and constitutional authority to enter final judgment based on the U.S. Supreme Court's decision in Stern v. Marshall. The BAP agreed with the bankruptcy court's denial of Sears' motion, finding that the court had constitutional authority under a number of the examples listed in 28 U.S.C. 157(b)(2) to determine the case. The section at issue in Stern, Sec. 157(b)(2)(C), was not implicated here and the balance of authority granted to bankruptcy judges by Congress in Sec. 157(b)(2) is constitutional.
As to the parties' respective contractual rights to the insurance policy, the BAP observed that while the split dollar agreement provided AFY with a contractual right to receive a security interest in the policy and demand notes for premium paid, no such interest or notes were given by Sears. Sears was in default. Thus, the legal remedy available to AFY's chapter 11 trustee was an unsecured claim in Sears' banktuptcy estate. With respect to the executory nature of the agreement, the BAP observed that at the time of the two bankruptcy filings, performance by both parties remained and, therefore, the agreement was executory and both parties had until confirmation of their respective plans to assume or reject the agreement. Subsequently, however, the trustee terminated the agreement before AFY's case was converted to chapter. In addition, the court found that Sears' employment with AFY had ended "long ago" and that the trustee's adversary complaint served as written notice of intent to end the agreement and thereby was an attempt to impair or defeat Sears' interest in the policy. Once the agreement was terminated, it was no longer executory or subect to the provisions of Sec. 365. The court further held that AFY's trustee was not entitled to the cash value of the policy. Because Sears was in bankruptcy, the court stated that the trustee had a claim for damages for Sears' failure to provide the interest in the policy (the right to payment) or a claim for an interest in the policy (right to an equitable remedy for breach of performance). Finally, the court held that AFY's trustee did not have an equitable right to the insurance policy itself. Money damages or the collection of a debt, the court observed, does not invoke equitable jurisdiction. If Sears was not in bankruptcy, the trustee could have sought to enforce the agreement to require Sears to grant AFY a security interest in the policy or he could have sought money damages. The court concluded that the trustee has those same rights now, execpt they are in the form of a claim in Sears' bankruptcy estate.
- Judge(s):
- Kressel, Schermer, and Venters
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