Badami v. Sears (In re AFY, Inc.)

• Citation: 52 Employee Benefits Cas. 2123,461 B.R. 541,55 Bankr.Ct.Dec. 268
• Decision Date: 13 January 2012
• Docket Number: BAP No. 11–6065.
• Parties: In re AFY, INC., also known as Ainsworth Feed Yards Company, Inc., Debtor.Joseph H. Badami, Plaintiff–Appellee v. Robert A. Sears, Defendant–AppellantRiverSource Life Insurance Policy, Defendant–Appellee.
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Eighth Circuit

461 B.R. 541

52 Employee Benefits Cas. 2123

55 Bankr.Ct.Dec. 268

In re AFY, INC., also known as Ainsworth Feed Yards Company, Inc., Debtor.Joseph H. Badami, Plaintiff–Appellee

v.Robert A. Sears, Defendant–AppellantRiverSource Life Insurance Policy, Defendant–Appellee.

BAP No. 11–6065.

United States Bankruptcy Appellate Panel of the Eighth Circuit.

Submitted: Nov. 30, 2011.Decided: Jan. 13, 2012.

West Codenotes

Recognized as Unconstitutional

28 U.S.C.A. § 157(b)(2)(C)

Jerry L. Strasheim, Omaha, NE, for Appellant.

James A. Overcash, Lincoln, NE, for Appellee.

Before KRESSEL, Chief Judge, SCHERMER and VENTERS, Bankruptcy Judges.

KRESSEL, Chief Judge.

Robert A. Sears appeals from the September 6, 2011 bankruptcy court order finding that the bankruptcy estate of AFY, Inc., a/k/a Ainsworth Feed Yards Company, Inc., is contractually and equitably entitled to receive the cash value of a life insurance policy, owned by Sears and paid for by AFY, to reimburse AFY for policy premiums paid. On appeal Sears argues that the bankruptcy court lacked jurisdiction, that his agreement with AFY was an executory contract, which was rejected, resulting in an abandonment of the policy which reverted to Sears's estate, and that the bankruptcy court erred in concluding the AFY estate has an equitable interest in the insurance policy. We reverse.

BACKGROUND

Prior to Sears's and AFY's bankruptcies, Sears served as AFY's president. On September 27, 1996, 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 calls for a policy owned by Sears with a face value of $350,000 and provides Sears the ability to select the beneficiary. The agreement specifically states, “it is the express intention of the parties that this Agreement be construed so that the CORPORATION has absolutely no right of ownership in the policy.” AFY was required to pay all of the premiums. At all relevant times, the beneficiary of the policy has been Sears's wife, Diana Sears.

The agreement provides that upon issuance of the policy Sears shall collaterally assign the policy to AFY. Further, the agreement requires Sears to sign demand notes in favor of AFY in the amount of the premium payments paid by AFY.

In the event of Sears's death, the agreement requires repayment to AFY of all amounts paid in premiums, with the remainder of the death benefit paid to the designated beneficiary. All forms necessary to ensure that AFY is repaid first are to be filed “upon Sears's death.” ¹

The agreement provides three different ways it can be terminated: 1) if Sears ends his employment with AFY, 2) if either party provides written notice to the other and 3) if AFY attempts to impair or defeat Sears's interest in the policy. In the event the agreement is terminated, Sears has 30 days to repay AFY all premium amounts in exchange for a complete release of the collateral assignment and all indebtedness. Failure to repay the premiums within the 30–day period coupled with a request by AFY to transfer ownership requires Sears to transfer ownership of the insurance policy to AFY. Sears signed the agreement in his capacity as an employee of AFY and as the president of AFY.

The life insurance policy was issued by the IDS Life Insurance Company ² and was received by Sears on the same day the split dollar agreement was signed: September 27, 1996. Sears did not collaterally assign the policy or sign any demand notes in favor of AFY.

Between 1996 and 2009, AFY made 15 premium payments. The first payment accompanying the policy application in 1996 was $10,000. In each subsequent year, payments totaling $12,500 were made annually.

After the 2009 payment, the insurance company sent a letter to Sears indicating that the payment combined with the total premiums paid to date exceeded the Internal Revenue Code § 7702 ³ limits, necessitating a refund of $3,916.27. The letter further illustrated the annual premiums going forward would be adjusted down to $11,546.05. The refund check of $3,916.27 issued on September 28, 2009 was made out to Sears and was cashed on September 29, 2009.

In total, AFY paid $172,500 in premiums over 14 years, of which $3,916.27 was refunded to Sears. AFY's last payment was on September 17, 2009.

Sears filed a chapter 11 petition on February 2, 2010. Sears is the debtor-in-possession in his case. In Sears's Schedule B, the Ameriprise ⁴ Life policy, valued at $136,669,⁵ is listed as one of his personal property assets. In Schedule C, Sears elected to choose his exemptions under 11 U.S.C. § 522(b)(3) allowing him to claim exemptions according to Nebraska state law. Under Neb.Rev.Stat. § 44–371 Sears claimed an exemption of “$10,000 or other maximum” ⁶ with a total value listed on Schedule C of $136,669.

AFY filed a chapter 11 petition on March 25, 2010. Similar to Sears's petition, AFY's Schedule B lists the Ameriprise life insurance policy as an asset valued at $136,669. Sears signed AFY's chapter 11 petition as the president of AFY. Neither AFY nor Sears lists the split dollar agreement as an executory contract in Schedule G, or any schedule for that matter.

On May 6, 2010, Joseph H. Badami was appointed as the chapter 11 trustee in AFY's case. He filed an adversary complaint against Sears and the insurance company on June 14, 2010, asserting an ownership interest in the insurance policy and requesting to recover the cash value of the policy. An amended complaint was filed on July 27, 2010, correctly naming the insurance company, claiming an equitable interest in the policy, requesting the court to void Sears's interest in the policy, and asking for payment of the value of the policy from RiverSource. AFY's case was converted to chapter 7 on September 2, 2010. Badami was appointed the chapter 7 trustee.

After a trial, the bankruptcy court ruled that AFY's bankruptcy estate is contractually and equitably entitled to receive the cash value of the life insurance policy to reimburse AFY for amounts paid for premiums. For the reasons that follow, we reverse.

JURISDICTION

We have jurisdiction over this appeal from the final order of the bankruptcy court. See 28 U.S.C. § 158(b).

STANDARD OF REVIEW

We review the bankruptcy court's factual findings for clear error and its conclusions of law de novo. Moon v. Anderson (In re Hixon), 317 B.R. 771, 773 (8th Cir. BAP 2004) (citing Fed. R. Bankr.P. 8013). A finding of fact will only be reversed if the evidence leaves the reviewing court with a definite and firm conviction that a clear error was committed. Id. (citing Wintz v. American Freightways, Inc. (In re Wintz Cos.), 230 B.R. 840, 844 (8th Cir. BAP 1999)). A grant of an equitable remedy is reviewed for an abuse of discretion. General Motors Corp. v. Harry Browns's LLC, 563 F.3d 312, 316 (8th Cir.2009). An abuse of discretion occurs when the bankruptcy court failed to consider an important factor, gives weight to an irrelevant or improper factor, or commits a clear error of judgment in weighing those factors. Id.

DISCUSSION

The bankruptcy court found the split dollar agreement provided that Sears would repay the entire amount of all premiums paid by AFY and if he did not repay the amounts he would execute any documents required to transfer the policy to AFY. Building upon these findings, the bankruptcy court ruled that AFY is contractually and equitably entitled to receive the cash value of the policy.

1. The bankruptcy court possesses the jurisdiction and constitutional authority to enter final judgment.

Shortly before trial, Sears filed a motion to dismiss the plaintiff's complaint. Because it is short, we quote the motion in its entirety:

Comes now Defendant Robert A. Sears and moves this Court to dismiss this adversary proceeding at Plaintiff's costs for lack of subject matter jurisdiction. Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011).

Badami objected to the motion, pointing out that the bankruptcy court clearly had jurisdiction and nothing in Stern v. Marshall holds or even suggests otherwise. Badami construed the motion to raise the issue of whether or not the adversary proceeding was a core proceeding and as a challenge to the bankruptcy judge's authority to enter a final order determining the proceeding. The bankruptcy court similarly construed the motion and held that the adversary proceeding was a core proceeding and that it was constitutional for it to hear and determine it.

On appeal, Sears, almost as if he did not read Badami's response or the court's order, renews his argument that the bankruptcy court lacks subject matter jurisdiction based on Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011).

Sears's argument represents a basic misunderstanding of both bankruptcy jurisdiction and the Supreme Court's opinion in Stern v. Marshall. In 28 U.S.C. § 1334, Congress has vested the district courts with jurisdiction over bankruptcy cases, civil proceedings arising under the Bankruptcy Code or arising in or related to bankruptcy cases. Sears raises no question regarding whether this adversary proceeding falls within that jurisdictional grant nor does he make any constitutional challenge to that grant.

While the bankruptcy court typically functions as a separate court, for jurisdictional purposes, it is not a court apart from the district court. The term “bankruptcy court” is the title Congress has bestowed on the bankruptcy judges in a particular district. 28 U.S.C. § 151. Bankruptcy judges are judicial officers of the district court and “may exercise the authority conferred under this chapter with respect to any action, suit, or proceeding....” Id. It is the scope of the authority granted by Congress to bankruptcy judges that was the issue in Stern v. Marshall.

Congress has allowed district courts to refer bankruptcy cases and proceedings to the bankruptcy judges in its district. 28 U.S.C. § 157(a). The United...