Adler v. Lehman Bros. Holdings Inc. (In re Lehman Bros. Holdings Inc.)
| Decision Date | 04 May 2017 |
| Docket Number | 16-1306-bk,16-1365-bk,16-1361-bk,August Term, 2016,16-1363-bk,Docket Nos. 16-1296-bk,16-1304-bk,16-1367-bk,16-1360-bk |
| Citation | 855 F.3d 459 |
| Parties | IN RE: LEHMAN BROTHERS HOLDINGS INC., Debtor. Jennifer Adler, Ian Anderson, Jennifer Becker, Craig Benson, Paola Biraschi, Karen Brewer, William Broadbent, David Brooks, Guillemette Callies, Patrick Cremin, Michael Collier, Joseph D'Amadeo, John Dmuchowski, Nestor De Jesus, Steven Engel, Louise Goldberg, Michael Gran, Anshuman Goyal, Adrian Graves, Sandra Hahn–Colbert, Gregg Hawes, Nicholas Howard, Julian Iragorri, Harriet Chan King, Karen Krieger, Tal Lev Ari, Yeruchim Levilev, Sarah Lewis, Patricia Luken, Lawrence McCarthy, Michael McCully, Paul Shotton, Steven Schwab, Colin S.A. Welch, Pierluigi Volini, Ian Neville, Sandy Fleischman Richman, Jeffrey Wecker, Norman Siegel, Thomas O'Sullivan, Peter Ward, Timothy Wilkinson, Milan Veleba, Andrea Sullivan, Hugh McGee, Judith Winchester, Ross Shapiro, Stephen Snelling, Brian Seward, Margaret Smith, Alvaro Santodomingo, Helmut Olivier, (Estate of ) Michael Mullen, Jack Rivkin, Barry Porter, Gregg Somma, Christiane Schuster, Michael Petrucelli, Martin Patterson, Fabio Liotti, Mary Langevin, Amit K. Sarkar, Darian J. Cohen, Lars P. Jacobson, Christian E. Stevens, Andrew Wideman, Madelyn Antoncic, Michele Bareggi, Riccardo Banchetti, Timothy A. Burke, Nachiketa Das, Philippe Dufournier, Brian Gross, Peter Hornick, Andrea Jao, Michael Lawsky, Alexandre Catalao Maia, Nikki Marshall, Richard Noble, Anke Parr, Vincent Primiano, Giancarlo Saronne, Johathan Sebiri, Charles Spero, Harshad Shah, Gordon Sweely, Rocco F. Andriola, Morgan Lawrence, Nicole Lawrence, Marvin C. Schwartz, Stephanie Stiefel, Richard J. Glasebrook, II, Judith Ann Kenney, Richard Nackerson, Henry Ramallo, Christian Reynolds, David I. Weiner, Richard Levine, Seth Finkel, Claimants–Appellants, Virgilio Casuple, Donald Boughrum, Brian Monahan, Roger Saks, Claimants, v. Lehman Brothers Holdings Inc., Debtor–Appellee. |
| Court | U.S. Court of Appeals — Second Circuit |
Richard J. Schager, Jr. (Andrew R. Goldenberg, on the briefs), Stamell & Schager, LLP, New York, NY, for the Claimant–Appellants Jennifer Adler, Ian Anderson, Jennifer Becker, Craig Benson, Paola Biraschi, Karen Brewer, William Broadbent, David Brooks, Guillemette Callies, Patrick Cremin, Michael Collier, Joseph D'Amadeo, John Dmuchowski, Nestor De Jesus, Steven Engel, Louise Goldberg, Michael Gran, Anshuman Goyal, Adrian Graves, Sandra Hahn–Colbert, Gregg Hawes, Nicholas Howard, Julian Iragorri, Harriet Chan King, Karen Krieger, Tal Lev Ari, Yeruchim Levilev, Sarah Lewis, Patricia Luken, Lawrence McCarthy, Michael McCully, Paul Shotton, Steven Schwab, Colin S.A. Welch, Pierluigi Volini, Ian Neville, Sandy Fleischman Richman, Jeffrey Wecker, Norman Siegel, Thomas O'Sullivan, Peter Ward, Timothy Wilkinson, Milan Veleba, Andrea Sullivan, Hugh McGee, Judith Winchester, Ross Shapiro, Stephen Snelling, Brian Seward, Margaret Smith, Alvaro Santodomingo, Helmut Olivier, (Estate of) Michael Mullen, Jack Rivkin, Barry Porter, Gregg Somma, Christiane Schuster, Michael Petrucelli, Martin Patterson, Fabio Liotti, and Mary Langevin.
Lisa M. Solomon , Law Offices of Lisa M. Solomon, New York, NY, for the Claimants–Appellants Madelyn Antoncic, Michele Bareggi, Riccardo Banchetti, Timothy A. Burke, Nachiketa Das, Philippe Dufournier, Brian Gross, Peter Hornick, Andrea Jao, Michael Lawsky, Alexandre Catalao Maia, Nikki Marshall, Richard Noble, Anke Parr, Vincent Primiano, Giancarlo Saronne, Johathan Sebiri, Charles Spero, Harshad Shah, Gordon Sweely, Rocco F. Andriola, Amit K. Sarkar, Darian J. Cohen, Lars P. Jacobson, Christian E. Stevens, and Andrew Wideman.
Deborah E. Lans , Cohen Clair Lans Greifer Thorpe & Rottenstreich LLP, New York, NY (Eugene Neal Kaplan, Kaplan Landau, LLP, New York, NY, on the briefs), for the Claimants–Appellants Marvin C. Schwartz, Stephanie Stiefel, Richard J. Glasebrook, II, Judith Ann Kenney, Richard Nackerson, Henry Ramallo, Christian Reynolds, David I. Weiner, Richard Levine, and Seth Finkel.
Ralph I. Miller , Weil, Gotshal & Manges LLP, New York, NY, for Debtor–Appellee Lehman Brothers Holdings Inc.
Before: Jacobs, Sack, and Carney, Circuit Judges.
It is not uncommon for corporate employers to compensate their high–ranking employees not only with cash, but also with equity in the corporation. Such arrangements align the employees' financial incentives with those of the company: If the company succeeds financially, so too do its stake–holding employees; but if the company falters—even to and beyond the point of bankruptcy—its employees bear some of the loss. Prior to its bankruptcy filing, Lehman Brothers Holdings Inc. ("Lehman Brothers") adopted this approach, compensating many of its employees in part with restricted stock units ("RSUs"), which gave them a contingent right to own Lehman Brothers common stock at the conclusion of a five-year holding period. The holder of an RSU had risk and return expectations similar to those of a shareholder; he or she would ultimately benefit from any increase in the stock price or suffer from any decline.
When Lehman Brothers filed for Chapter 11 bankruptcy on September 15, 2008—the largest bankruptcy filing in United States history1 —thousands of its employees were holding RSUs that had been awarded over the preceding five years, but that had not yet vested and had therefore apparently been rendered worthless by the bankruptcy filing. Many of these employees filed proofs of claim in the Chapter 11 proceeding seeking cash payments in the amounts of and as substitutes for compensation they had been paid in RSUs. Lehman Brothers filed omnibus objections to the claims, and the United States Bankruptcy Court for the Southern District of New York (James M. Peck, Judge ) sustained these objections on two alternative grounds. First, it concluded that because the claims arise from the purchase or sale of securities, they must be subordinated to the claims of general creditors pursuant to section 510(b) of the Bankruptcy Code, 11 U.S.C. § 510(b). Second, the court decided that because an RSU is an "equity security," 11 U.S.C. § 101(16), the employees' claims were disallowed insofar as the claimants, as equity security holders, may assert only proofs of interest, not proofs of claim. The United States District Court for the Southern District of New York (Richard J. Sullivan, Judge ) affirmed on both grounds.
We note at the outset that we need not determine whether an RSU is an "equity security" pursuant to 11 U.S.C. § 101(16), because, even if it is, RSU holders are not barred from asserting proofs of claim—such as the breach-of-contract claims asserted here—inasmuch as at least some of their claims are not duplicative of proofs of interest. We conclude, however, that Lehman Brothers' omnibus objections must nonetheless be sustained on the alternative ground that, pursuant to section 510(b), the claims must be subordinated to the claims of general creditors because, for purpose of this statute, (1) RSUs are securities, (2) the claimants acquired them in a purchase, and (3) the claims for damages arise from those purchases or the asserted rescissions thereof.
Lehman Brothers paid many of its employees a portion of their compensation in RSUs,2 equity awards that gave each of the recipient employees a contingent right to own Lehman Brothers common stock five years after issuance of each RSU so long as certain employment-related conditions were met. When Lehman Brothers filed for Chapter 11 bankruptcy on September 15, 2008, many of its employees were holding RSUs that had not yet vested. They filed proofs of claim in the bankruptcy proceedings for cash payments equivalent to the amounts they had received in RSUs.
The RSUs were awarded in accordance with Lehman Brothers' Equity Award Program (the "Program"), which was administered by Lehman Brothers' Board of Directors' Compensation and Benefits Committee (the "Committee"). The Program's purpose was to give Lehman Brothers' employees (1) a financial stake in the company that aligned their interests with those of the company, and (2) a financial incentive to remain with the company until the RSUs matured.
In accordance with those goals, the Program gave Lehman Brothers discretion to pay some of its employees a portion of their compensation in equity-based awards, including RSUs.3 "At [Lehman Brothers'] option, a portion of [an employee's] total compensation ... may be payable in the form of conditional equity awards ( [RSUs], stock options, or other equity awards) pursuant to the [Program]." Joint App'x ("JA") at 7 ¶ 2. And where Lehman Brothers had employment contracts with its employees, those contracts stated that "[a]t the Firm's discretion, a portion of [the employees'] total ... compensation ... will be [or may be] payable in conditional equity awards ( [RSUs] and/or other equity awards) pursuant to the [Program]." Id . In practice, RSUs were awarded near the end of each year to some employees. These RSU holders were entitled to Lehman Brothers common stock at the conclusion of a five-year holding period, assuming they met certain employment-related conditions. Employees whose RSUs vested at the end of the five-year holding period could dispose of their shares of common stock as they saw fit.
The Program was governed by the terms of various documents, including the Employee Incentive Plan (the "Plan"). Section 8(b) of the Plan provides in pertinent part that Lehman Brothers' RSU obligation is limited to delivery of the stock, and does not include payment of cash:
With respect to any [RSUs] granted under the Plan, the obligations of the Company or any Subsidiary are limited solely to the delivery of shares of Common Stock on the date when such shares of Common Stock are due to be delivered under each Agreement, and in no event shall the Company or any...
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Judgment Claim And Lien Securing It Were Properly Subordinated Under Section 510(b) Of The Bankruptcy Code
...quotation marks omitted). The Second Circuit applied a slightly different formulation of the test in In re Lehman Bros. Holdings Inc., 855 F.3d 459, 472-78 (2d Cir. 2017), where it examined whether: (i) the claimant owns a security; (ii) the claimant acquired the security by means of a purc......