Hilbert defeated on life policies: Conseco had purchased $87.5M in coverage in '98

May 2, 2005

Seven years ago, Conseco Inc. purchased $87.5 million in life insurance coverage for company founder Stephen Hilbert and his wife, a move that seemed to assure vast wealth would pass on to the Hilbert family after their deaths.

But in a new ruling, Chicago bankruptcy Judge Carol Doyle said Conseco's obligation to provide coverage terminated when the company filed for Chapter 11 protection in December 2002.

As a result, she ruled, Hilbert family trusts, which had filed millions of dollars in claims in bankruptcy court, are entitled to nothing.

"Conseco views this as a significant legal victory," said Scott McMillin, a partner with the Chicago law firm Kirkland & Ellis, which is representing the company.

David Kleiman, an attorney with the Indianapolis firm Dann Pecar Newman & Kleiman representing Hilbert, said the executive will appeal the April 13 decision to U.S. District Court in Chicago.

In court papers, attorneys for the Hilbert trusts had argued that Conseco breached its agreement with Hilbert when it stopped paying premiums in 2001, a year before the bankruptcy, wiping out its right to enforce language in the pact stating it terminated upon bankruptcy.

Further, they argued Hilbert's damages should have been considered an unsecured claim in the bankruptcy case. Holders of unsecured claims recouped about 25 cents on the dollar, paid in new Conseco stock, when the company emerged from bankruptcy court in September 2003.

Judge Doyle's ruling represents another blow to Hilbert, 59, who is appealing a Hamilton County judge's October ruling that he owes $70 million in interest on loans he took out in the mid-1990s to buy Conseco stock that ended up worthless.

Hilbert has raised a range of legal arguments he believes should extricate him from having to repay that interest or the $162 million in principal, which Conseco is trying to collect through separate litigation in Chicago.

According to court records, Conseco in 1998 bought $87.5 million in life insurance coverage for Hilbert and $10 million for his top lieutenant, Chief Financial Officer Rollin Dick.

Until recently, Dick, 73, had been alongside Hilbert fighting with Conseco for damages. But Dick withdrew his claim in March as part of a confidential settlement resolving his liability for nearly $100 million he borrowed in connection with Conseco stock purchases.

The life insurance dispute involves socalled split-dollar policies, a type of coverage that grew popular in corporate America in the second half of the 20th century but now is viewed as an overly lavish perk by many compensation experts.

The policies derive their name from the fact that, on paper, the company and executive split the benefits. Typically, the company pays nearly 100 percent of the premiums, which grow tax-free over decades into mountains of cash. The company is supposed to be reimbursed, without interest, from the death benefits paid under the policy.

According to court records, Conseco paid $900,000 a year for the Hilbert policies. One, for $12.5 million, covered only Hilbert. Three others, for $25 million each, were second-to-die policies, paying out only after the death of both Hilbert and his wife, Tomisue.

Proceeds from second-to-die policies are typically used to pay estate taxes, avoiding the need for heirs to launch a fire sale of assets to meet those expenses, according to financial planners.

In a memo he submitted to a board committee in 1998, Hilbert said purchasing the policies would be good for the executives covered but also good for the company, eliminating the risk that heirs would depress the stock price by dumping shares.

"Conseco has encouraged its executives to acquire and hold a significant position in Conseco stock," according to Hilbert's memo, which Conseco filed as an exhibit in the insurance dispute.

"While this policy has served Conseco and its executives very well, it causes some concern because the estate of a deceased executive could experience a liquidity crisis. Estate taxes due at death could force the estate to sell massive amounts of Conseco stock-perhaps in the face of a weak market."
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