Hilbert v. Conseco Services, L.L.C., 29A02-0410-CV-895.

• Decision Date: 08 November 2005
• Docket Number: No. 29A02-0410-CV-895.,29A02-0410-CV-895.
• Parties: Stephen C. HILBERT; the Thomas C. Hilbert Irrevocable Trust; the Thomas C. Hilbert Irrevocable Trust II; the Stephen C. Hilbert and Stephen C. Hilbert August 1998 Trust; the Todd S. Hilbert Irrevocable Trust; the Christopher L. Myers Irrevocable Trust; and the Heather Dawn Hilbert Irrevocable Trust, Appellants-Defendants, v. CONSECO SERVICES, L.L.C., Appellee-Plaintiff.
• Court: Indiana Supreme Court

836 N.E.2d 1001 Stephen C. HILBERT; the Thomas C. Hilbert Irrevocable Trust; the Thomas C. Hilbert Irrevocable Trust II; the Stephen C. Hilbert and Stephen C. Hilbert August 1998 Trust; the Todd S. Hilbert Irrevocable Trust; the Christopher L. Myers Irrevocable Trust; and the Heather Dawn Hilbert Irrevocable Trust, Appellants-Defendants,
v.
CONSECO SERVICES, L.L.C., Appellee-Plaintiff. No. 29A02-0410-CV-895. Court of Appeals of Indiana. November 8, 2005.

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Daniel P. Byron, Karl L. Mulvaney, Phillip J. Fowler, Bingham McHale LLP, Indianapolis, for Appellants.

Ryan L. Leitch, William P. Means, Jaime L. Meyer, Riley Bennett & Egloff, LLP, Indianapolis, Scott A. McMillin, Kirkland & Ellis LLP, Chicago, for Appellee.

OPINION

DARDEN, Judge.

STATEMENT OF THE CASE

Stephen C. Hilbert ("Hilbert"), individually, and as trustee for the Thomas C. Hilbert Irrevocable Trust, the Thomas C. Hilbert Irrevocable Trust II, the Stephen C. Hilbert Trust, the Todd S. Hilbert Irrevocable Trust, the Christopher L. Myers Irrevocable Trust, and Heather Dawn Hilbert Irrevocable Trust (collectively, "the

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Hilbert Trusts"), and other defendants¹ appeal the trial court's order granting partial summary judgment to Conseco Services, LLC ("Services") on its complaint against Hilbert, the Hilbert Trusts, and the other defendants.²

We affirm.

ISSUES

1. Whether the trial court erred in granting summary judgment because there was a genuine issue of material fact as to Hilbert's liability based on the "change of control" provision in the early stock purchase plans.

2. Whether the trial court erred in granting summary judgment because there was a genuine issue of material fact as to Hilbert's entitlement to equal treatment pursuant to terms of a certain agreement.

3. Whether the trial court's grant of summary judgment must be reversed because Hilbert is not barred from asserting Regulation U as a defense to liability.

FACTS

In 1979, Hilbert and a partner co-founded Conseco, Inc. ("Conseco").³ In 1995, with Conseco as its holding company, Services was created as a wholly owned subsidiary to provide administrative services to Conseco.

On March 12, 1996, Conseco's Board of Directors held a special meeting. As Chief Executive Officer of Conseco and Chairman of its Board of Directors, Hilbert explained to the Board that

the meeting had been called primarily to consider a proposal. . . to establish a plan under which management and Board members could purchase shares of Conseco common stock at current market price with payment for the shares being deferred over several years. . . .

(App.447). Hilbert discussed "management's recommendation" for such a plan, and the Board then unanimously passed the resolution to

adopt a stock purchase plan for participation by its Directors and Senior executive officers under which the participants will be eligible to purchase in open market transactions shares of the Company's common stock with the proceeds of guaranteed financing arranged by the Company.

(App.447, 448).

The initial terms and conditions of the stock plan were set forth in the April 1996 "Conseco, Inc. Director, Executive and

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Senior Officer Stock Purchase Plan." ("1996 Plan"). (App.391). An "amended and restated" plan of August 1997 ("1997 Plan") "completely supersede[d] and replace[d]" the 1996 Plan. (App.399, 406). In July of 1998, the 1997 Plan was "amended and restated" as the "Director, Officer and Key Employee Stock Purchase Plan" ("1998 Plan"), which "completely supersede[d] and restate[d]" the 1997 Plan. (App.418, 426). A "1999 Director and Executive Officer Stock Purchase Plan" was effective September 2, 1999 ("1999 Plan").⁴ (App.428). Thereafter, on November 2, 1999, the 1998 Plan was "amended and restated." ("1998 Amended Plan"), and the 1999 Plan was "amended and restated" ("1999 Amended Plan") as well (collectively, "the D & O Plans"). (App.418, 437).

Pursuant to the program established by these D & O Plans, certain banks loaned money to the authorized participants, which included their affiliated trusts; the participants used the money borrowed from these banks to purchase Conseco stock in the open market; and the participants executed promissory notes in favor of the banks for the funds borrowed ("the Principal Notes") and pledged the stock purchased through the program as collateral for the loans. As additional collateral, Conseco guaranteed the participants' obligations on the Principal Notes to the banks. Conseco's guarantees to the banks also contained a "negative pledge" restricting Conseco's ability to grant security interests in its assets. (App.1556). The Hilbert Trusts elected to participate in the D & O Plans, borrowing nearly $162 million through the years 1996, 1997, 1998, and 1999 from the banks to purchase approximately 5.8 million shares of Conseco stock.

The banks charged interest on the loans made to the Hilbert Trusts. However, consistent with the D & O Plans, participants could elect to have Services advance to them the funds to cover the interest and fees charged by the banks on the Principal Notes. The Hilbert Trusts elected to have Services make these payments, and promissory notes were executed in favor of Services to repay the interest advanced on behalf of the Trusts.

In April of 2000, Hilbert and Conseco decided to terminate Hilbert's employment with the company. On April 28, 2000, Conseco accepted Hilbert's resignation as President and CEO. The parties entered into a written agreement ("Termination Agreement") under which Hilbert was to serve as a consultant "during a three year term," i.e., until April 28, 2003. (App.453).

On November 22, 2000, the outstanding promissory notes between the Hilbert Trusts and Services were refinanced.⁵ New promissory notes that "supersede[d] and replace[d] all of the currently outstanding promissory notes" were executed in favor of Services ("Services Notes") for the funds Services had already advanced and would advance in the future to pay interest and fees on the bank loans. (App.96, 100, 104, 108, 112, 116). Pursuant to the Services Notes, the Hilbert Trusts unconditionally promised to pay the amounts that had been advanced or would be advanced in the future by Services to the banks. Also on November 20, 2000, Hilbert executed a series of unconditional guarantees ("the Guarantees") in favor of Services wherein he personally guaranteed payment of all liabilities incurred by the Hilbert Trusts, including the liabilities of the Hilbert Trusts under the Services

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Notes. The maturity date for the Services Notes was February 28, 2001.

On April 3, 2001, Hilbert signed a letter agreement ("the Letter Agreement") in which he agreed to make three payments totaling $17 million⁶ to the banks towards the Hilbert Trusts' obligations and to provide Conseco with a mortgage on the Hilberts' Carmel mansion as collateral. In exchange, Services would forgo immediate collection on the Services Notes and would continue to advance funds to cover the interest and fees on the Principal Notes.

On October 16, 2001, Hilbert — as trustee of the Amended Hilbert Residence Trust — also executed a mortgage granting Services a security interest in Hilbert's mansion ("the Mortgage"). Consistent with the terms of the Letter Agreement, the Mortgage "secure[d] performance" of the obligations of the Hilbert Trusts pursuant to the terms of the Services Notes. According to the Mortgage's default terms, upon failure to comply with the terms of the Letter Agreement, "the entire indebtedness shall, at the option of the Mortgagee, immediately become due and payable. . . ." (App.244).

Hilbert made the first two payments ($1 million and $6 million, respectively) as required by the Letter Agreement. However, Hilbert did not make the $10 million payment due in April of 2003.

On October 20, 2003, Services filed a six-count complaint against Hilbert, the Hilbert Trusts, and the other defendants. The complaint included counts asserting (1) a claim for breach of the Service Notes; (2) a claim for breach of the Letter Agreement; and (3) a claim for an order of foreclosure on the Mortgage. Submitted with the complaint were the Services Notes; calculations of the amounts due and owing as of June 30, 2003 on each note; the Guarantees; the Letter Agreement; and the Mortgage (which had been recorded).

On December 4, 2003, Services filed a motion for partial summary judgment on these three counts. Designated evidence in support of Services' motion included the Services Notes; the Guarantees; the Letter Agreement; the Mortgage; and an affidavit by John Kline, senior vice president and chief accounting officer of Services. Services argued that pursuant to the terms of the Services Notes, the Letter Agreement, and the Mortgage, it was entitled to judgment as a matter of law against the Hilbert Trusts; that pursuant to the terms of the Guarantees, it was entitled to judgment as a matter of law against Hilbert; and that pursuant to the terms of the Mortgage, it was entitled to a judgment of foreclosure on Hilbert's mansion.

On December 17, 2003, Hilbert filed an answer of general denial and asserting various affirmative defenses: (1) that the loans from the banks were illegal under a Federal Reserve System regulation known as "Regulation U," and that this illegality excused the obligations of the Services Notes; (2) that a "change of control" provision in the D & O Plans required Conseco to repurchase the stock purchased; (3) that pursuant to the terms of the Termination Agreement, Conseco was required to forgive much of the Hilbert Trusts' debts; and (4) that Conseco fraudulently induced Hilbert and the Hilbert Trusts to execute the Services Notes and Guarantees.

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Hilbert sought and was granted six months to conduct discovery and to file a responsive brief. On June 25, 2004, Hilbert filed his response to Services' motion for partial summary judgment. The...