Badami v. Sears (In Re AFY, Inc.), 461 B.R. 541

AFY, Inc. and Sears entered into a 1996 split-dollar agreement granting Sears a life ins. policy owned by Sears but collateralized for AFY’s premiums; AFY paid all premiums.
Policy lists Sears's wife as beneficiary; the agreement states AFY has no ownership right in the policy.
Sears collaterally assigned the policy to AFY and issued demand notes for premiums per the agreement.
Upon Sears's death, AFY would be repaid premium amounts with the remainder to the beneficiary; termination provisions allow AFY to seek ownership transfer if premiums are not repaid.
AFY paid $172,500 in premiums (1996–2009); IRS 7702 limits caused a $3,916.27 refund to Sears; refunds affected AFY’s anticipated equity in the policy.
AFY filed bankruptcy; Badami, the AFY trustee, sued Sears and RiverSource seeking the policy’s cash value to reimburse AFY for premiums; the bankruptcy court ruled in AFY’s favor, which the panel reversed.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether the bankruptcy court had jurisdiction to decide final order	Sears argues lack of jurisdiction post-Stern	Badami treats core proceedings as within jurisdiction	Bankruptcy court has constitutional core-jurisdiction to decide final order
Whether AFY has contractual or equitable entitlement to cash value	Badami seeks policy cash value for AFY’s premium payments	Sears contends no ownership/right in policy, only unsecured claim	AFY not contractually or equitably entitled to cash value; remedy is unsecured claim
Whether split-dollar agreement was executory	Agreement remained executory for both parties	Agreement terminated prior to conversion, not executory	Agreement was terminated July 27, 2010; not subject to §365 unless otherwise; not executory at conversion
If executory, whether rejection caused abandonment of policy	Rejection could transfer ownership to AFY	Rejection breaches contract; does not automatically abandon policy	Rejection does not automatically abandon policy; termination controls
Whether Badami is entitled to equitable relief or to the cash value	Badami seeks equity to obtain policy or value	Equity limited; damages or claims available instead	Badami not entitled to equitable relief or cash value; remedies are claims in bankruptcy

Cameron v. Pfaff, 966 F.2d 414 (8th Cir.1992) (definition of executory contract; performance remaining on both sides)
Jenson v. Continental Fin. Corp., 591 F.2d 477 (8th Cir.1979) (executory contract concept in credit finance context)
Newman Grill Systems, LLC v. Ducane Gas Grills, Inc., 320 B.R. 324 (Bankr.D.S.C.2004) (rejection as breach; no automatic abandonment of property)
American Federation of Labor v. Watson, 327 U.S. 582 (1946) (equitable relief within traditional boundaries of equity)
U.S. Bank Nat'l Ass'n v. United Air Lines, Inc., 438 F.3d 720 (7th Cir.2006) (equity in breach of contract generally unavailable; money damages favored)
Stern v. Marshall, 131 S. Ct. 2594 (2011) (narrow ruling on bankruptcy judges' authority; core proceedings)
Mitsubishi Int'l Corp. v. Cardinal Textile Sales, Inc., 14 F.3d 1507 (11th Cir.1994) (equitable relief constraints in certain contracts)