In re Enron Corp.

• Decision Date: 02 May 2006
• Docket Number: No. 01-16034 (AJG).,01-16034 (AJG).
• Parties: In re ENRON CORP., et al., Reorganized Debtors.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

Page 141

341 B.R. 141

In re ENRON CORP., et al., Reorganized Debtors.

No. 01-16034 (AJG).

United States Bankruptcy Court, S.D. New York.

May 2, 2006.

COPYRIGHT MATERIAL OMITTED

Weil, Gotshal & Manges LLP, Martin J. Bienenstock, Brian S. Rosen, Martin A. Sosland, Melanie Gray, of Counsel, New York, NY, for Reorganized Debtors.

James A. Armogida, Houston, TX, Pro Se.

Edward J. Billings, Pro Se.

Jerry K. Castleman, Pro Se.

Manuel A. Garcia, Pro Se.

David L. Johnson, Pro Se.

Thomas C. McBarron, Pro Se.

Dorothy L. McCoppin, Houston, TX, Pro Se.

Lee H. Sheldon, Pro Se.

William J. Travers, Pro Se.

OPINION REGARDING EMPLOYEE CLAIMS RELATED TO OWNERSHIP OF STOCK OPTIONS, AND GRANTING 13TH, 19TH, AND 22ND OMNIBUS OBJECTIONS TO PROOFS OF CLAIM

ARTHUR J. GONZALEZ, Bankruptcy Judge.

I. Introduction

Before the Court are Enron Corp.'s ("Debtor" or "Enron") 13th, 19th, and 22nd Omnibus Objections to Proofs of Claim (collectively, the "Objections"), filed on August 25, 2003, November 7, 2003, and December 2, 2003, respectively. The Court has previously ruled on a substantial majority of the objected to claims and will now address those remaining claims related to employee stock options (collectively, the "Stock Option Claims").¹ The Stock Option Claims were filed by a number of former employees of the Debtor (the "Stock Option Claimants" or "Claimants") and assert a right to payment for damages in connection with unexercised stock options the Claimants received during the course of their employment.²

The Stock Option Claims collectively present shared issues of law despite any factual differences. The Debtor argues that the Stock Option Claims should be subordinated pursuant to 11 U.S.C. § 510(b) as claims "for damages arising from the purchase or sale of ... a security." As subordination would effectively preclude recovery, the Stock Option Claimants unsurprisingly reject this assertion. Though, in reaching its conclusion, the Court will address the Stock Option Claims in discrete sets, there is an essential question of first impression that the Court must resolve: namely, whether claims for damages related to employee stock options are subject to subordination under section 510(b). Having reviewed the parties' pleadings, the statutory text, and the relevant case law, the Court finds that claims for damages that arise from the ownership of employee stock options — as such claims and options are presented here — should be subordinated pursuant to section 510(b).³

II. Jurisdiction

This Court has jurisdiction pursuant to 28 U.S.C. § 1334 and under the July 10, 1984 "Standing Order of Referral of Cases to Bankruptcy Judges" of the United States District Court for the Southern District of New York (Ward, Acting C.J.). This is a "core" proceeding pursuant to 28 U.S.C. § 157(b)(2)(B). This Court has postconfirmation jurisdiction under paragraph 60 of this Court's Order Confirming Supplemental Modified Fifth Amended Joint Plan of Affiliated Debtors Pursuant to Chapter 11 of the United States Bankruptcy Code, and Related Relief (the "Plan"), dated July 15, 2004. Hospital and University Property Damage Claimants v. Johns-Manville Corp. (In re Johns-Manville Corp.), 7 F.3d 32, 34 (2nd Cir.1993).

III. Background

The history of the Debtor's financial decline is familiar to all involved and need not be related in detail here. Briefly, on December 2, 2001 (the "Petition Date"), the Debtor and certain of its affiliated debtor entities filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code ("Bankruptcy Code"). Prior to this date, reports of financial manipulation and irregular accounting practices had prompted a rapid and precipitous tumble in the price of the Debtor's stock, which in turn revealed additional financial liabilities, further depressing the share price. The sheer magnitude of the decline was as significant as it was rapid. From a high of roughly $90 on August 23, 2000, Enron stock was valued at only $.40 per share on the December 3, 2001, the first business day following Enron's bankruptcy filing. In particular, over a period of barely three and a half months, the share price of Enron stock dropped from $40 at the beginning of October 2001 to less than $1 by December 1, 2001. On January 15, 2001, Enron's stock was delisted by the New York Stock Exchange.

Unsurprisingly, investors suffered severe losses as a result of Enron's rapid descent into bankruptcy. As was well publicized at the time, among these injured investors were thousands of former Enron employees, most of whom were heavily invested in Enron stock as part of their retirement, savings, and compensation plans. Countless news stories have chronicled the plight of these former employees, and it is impossible not to sympathize and empathize with them. Many, likely the vast majority, of these former employees lost not just their livelihood, but also often a significant portion of their financial worth and their anticipated financial stability through their retirement years.

The former Enron employees, as with other investors, have pursued a range of remedial actions in an attempt to salvage something from the demise of Enron. In particular, class action litigation has been pursued in a number of jurisdictions on behalf of former employees. The largest of these was the Tittle litigation. Tittle, et al v. Enron Corp., et al (In re Enron Corp Securities and ERISA), No. H 01-3913 (S.D. Tex. filed Jan. 2, 2004) (Harmon, J.) (consolidated Enron securities litigation including the related cases Newby et al v. Enron et al and The Regents of the University of California, et al v. Kenneth Lay, et al). In Tittle, a class of former employees sued under the Employee Retirement Income Security Act ("ERISA"), alleging that the Debtor breached its fiduciary duty by failing to provide employees with critical investment information concerning the Debtor's financial condition and by encouraging employees to invest in the Debtor's stock. Similarly, the Official Employment-Related Issues Committee ("ERIC") and groups such as the AFL-CIO and the National Rainbow/PUSH Coalition pursued litigation in this Court on behalf of former Enron employees for additional severance payments and benefits. See Order of Final Approval, Approving Settlement of Severance Claims of Similarly Situated Claimants, Docket No. 6148 (August 28, 2002).

In addition to these class-action suits, roughly 7,000 proofs of claim have been filed in this Court by former employees, ranging from claims for back wages to claims for discontinued benefits and bonuses. The Stock Option Claimants are here seeking to recoup damages suffered in connection with the ownership of employee stock options.

Employee stock options were a component of Enron's compensation programs. Whether as bonuses or as part of employment agreements, stock options were frequently issued to employees in order to encourage higher quality work and to grant employees an equity stake in the company. Like most other employee stock options, Enron's stock options granted employees the right to purchase a specified number of shares at a specified future time (the vesting point). Once the option vested, the employee could then exercise the option and sell the purchased stock, capturing the difference between the option price and the current trading price, exercise the option and retain the stock, or retain the option to exercise at a later time, presumably after the trading price had increased. Employees could not, however, transfer the stock options themselves or sell the options on the open market.

Stock options are not free from risk. If the trading price is less than the option price, the stock option is practically valueless, which is particularly true here since the option could not be traded or exchanged. This was the situation faced by the Stock Option Claimants during and after the fall in the share price of Enron stock. As the share price declined, so did the likelihood that the Claimants would exercise their options. With the disclosure of financial irregularities and, ultimately, the bankruptcy filing, the stock options became for all intents and purposes worthless. The Claimants have therefore filed proofs of claim in this Court for the loss of value of their unexercised options. The Claimants allege that the losses they suffered were the result of the Debtor's fraudulent acts and seek relief on that basis.

The Court should also note that, as part of its efforts to continue operating following the filing of its petition for bankruptcy, the Debtor devised the Enron Corp. Key Employee Retention, Liquidation Incentive and Severance Plan (the "KERP Plan") in order to retain employees regarded as integral to its operations, as well as to resolve potential claims by those employees. See Order Approving and Authorizing Key Employee Retention Program, Docket No. 3587 (May 8, 2002). In return for a lumpsum bonus payment, employees selected for the KERP Plan agreed to release certain claims they may have held against the Debtor. Two of the Stock Option Claimants, James Armogida and Jerry Castleman, claims # 1580801 and # 1738201, respectively, (the "KERP Claimants" and the "KERP Claims"), participated in the KERP Plan and signed the accompanying release form (the "KERP Release").⁴

IV. Discussion

A. Issues Presented

In the Objections, the Debtor argues first, that the KERP Claims should be disallowed as released, and second that any remaining Stock Option Claims should be subordinated to the level of common stock interests pursuant to section 510(b) of the Bankruptcy Code. In the filed responses, the Stock Option Claimants deny both these contentions and respond that the Stock Option Claims are for damages flowing from the Debtor's fraudulent acts and should be allowed on that basis.

B. Pro Se Claimants

Each of the Stock Option Claimants is proceeding before the Court pro se. The Court...