In re Lehman Bros. Holdings Inc.

• Decision Date: 03 November 2014
• Docket Number: Case No. 08–13555 SCC
• Citation: 519 B.R. 47
• Parties: In re Lehman Brothers Holdings Inc., et al., Debtors
• Court: U.S. Bankruptcy Court — Southern District of New York

519 B.R. 47

In re Lehman Brothers Holdings Inc., et al., Debtors

Case No. 08–13555 SCC

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

Signed November 3, 2014

Weil, Gotshal & Manges LLP, 767 Fifth Avenue, New York, NY 10153, By: Ralph I. Miller, Esq., Robert J. Lemons, Esq., Denise Alvarez, Esq., Teresa C. Brady, Esq., Attorneys for Lehman Brothers Holdings Inc.

Stamell & Schager, LLP, One Liberty Plaza, 23rd Floor, New York, NY 10006, By: Richard J. Schager, Jr., Esq., Andrew R. Goldenberg, Esq., Law Offices of Lisa M. Solomon, One Grand Central Place, 305 Madison Avenue, Suite 4700, New York, NY 10165, By: Lisa M. Solomon, Esq., Rich Michaelson Magaliff Moser LLP, 340 Madison Avenue, 19th Floor, New York, NY 10173, By: Howard P. Magaliff, Esq., Robert N. Michaelson, Esq., Law Office of A. James Boyajian, 355 S. Grand Avenue, Suite 2450, Los Angeles, CA 90071, By: A. James Boyajian, Esq., Attorneys for Compensation Claimants.

Day Pitney LLP, One Jefferson Road, Parsippany, NJ 07054, By: Margarita Y. Ginzburg, Attorneys for Fabio Liotti.

Kaplan Landau LLP, 1065 Avenue of the Americas, 27th Floor, New York, NY 10018, By: Eugene Neal Kaplan, Julien & Schlesinger, P.C., 207 East 94th Street, Suite 303, New York, NY 10128, By: Michael Schlesinger, Attorneys for Neuberger Berman Claimants.

Andrea T. Jao, Pro Se.

Alexandre Catalo Maia, Pro Se.

Paul Shotton, Pro Se.

Chapter 11

MEMORANDUM DECISION SUSTAINING OMNIBUS OBJECTIONS TO CLAIMS

SHELLEY C. CHAPMAN, UNITED STATES BANKRUPTCY JUDGE

Even six years later, it is difficult to forget the media images from the days in late September 2008 of Lehman Brothers employees walking out of its gleaming corporate headquarters at 745 Seventh Avenue with their professional lives reduced to a few belongings in cardboard boxes. Thousands of former Lehman employees were affected by the bankruptcy filing of one of the largest investment banks in the United States; many were devastated. The omnibus claims objections currently before the Court concern more than 200 of these former employees, all of whom, as a component of their compensation, received either restricted stock units or contingent stock awards. These awards gave employees a contingent right to own Lehman common stock, which would be issued five years after the grant of the applicable award upon the fulfillment of certain employment-related conditions. The employee-claimants rely on various legal theories but, at bottom, all seek the same outcome—for their filed proofs of claim to be allowed in a cash amount equivalent to the amount of their respective stock awards.

Lehman submits that the claims, all of which arise from the voluntary exchange of labor for the right to receive stock, should be classified as equity under the confirmed Modified Third Amended Joint Chapter 11 Plan of Lehman Brothers Holdings Inc. and it Affiliated Debtors. [ECF No. 23023 Ex. A.] According to Lehman, (i) section 510(b) of the Bankruptcy Code mandates that the claims have the same priority as Lehman common equity; and (ii) the stock awards fall within the definition of “equity security” under section 101(16) of the Bankruptcy Code. Lehman argues that the claimants have failed to meet their burden to prove by a preponderance of the evidence that their claims should be allowed.

After careful consideration of the evidence submitted by both sides, including argument and live testimony presented at a three-day evidentiary hearing, the Court has concluded that the claimants here have failed to meet the burden imposed on them to prove that their claims should be allowed as filed. Accordingly, the objections are sustained.

Procedural History

Under a long-established equity award program, Lehman employees were compensated for their services in both cash and equity. See Stip.¹ ¶¶ 2, 5. Part of the equity component of employee compensation was comprised of restricted stock units and contingent stock awards (collectively, the “RSU”s).² RSUs gave the recipient a contingent right to own LBHI common stock, which would be issued five years after the grant upon the fulfillment of certain employment-related conditions. Stip. ¶¶ 3, 5, 7. As of September 15, 2008, the date on which Lehman Brothers Holdings Inc. (“LBHI”) commenced its chapter 11 case, hundreds of employees were holding RSUs that had been granted to them for services performed from 2003 through 2008; due to the five-year hold period, those RSUs had not yet led to the issuance of common stock. Stip. ¶ 5. Many of those employees filed proofs of claim (each, an “RSU Claim,” and collectively, the “RSU Claims”) in the Lehman chapter 11 cases seeking payment in cash of the amounts allocated in their respective employment records to RSUs.

LBHI and certain of its affiliated debtors filed fourteen omnibus objections (the “Omnibus Objections”)³ seeking to reclassify 3,279 RSU Claims as equity and subordinating them to general unsecured claims. In a series of orders entered throughout 2011, Judge Peck⁴ granted the requested relief and reclassified as equity RSU Claims asserting a total of $2.46 billion.⁵ Certain holders of RSU Claims (collectively, the “RSU Claimants”) opposed the omnibus objection relevant to their respective claims, and, on March 28, 2011 and December 15, 2011, LBHI filed omnibus replies in connection with the contested RSU Claims. See Omnibus Reply to Responses to Debtors' Seventy–Third Omnibus Objection to Claims (To Reclassify Proofs of Claim as Equity Interests) [ECF No. 15406]; Omnibus Reply to Responses to Debtors' One Hundred Eighteenth, One Hundred Thirtieth, One Hundred Thirty–First, One Hundred Thirty–Third, One Hundred Thirty–Fourth, One Hundred Thirty–Fifth, One Hundred Seventy–Sixth, and Two Hundred and (sic) Seventh Omnibus Objections to Claim (To Reclassify Proofs of Claim as Equity Interests) [ECF No. 23470].

On December 21, 2011, Judge Peck held a hearing on nine separate omnibus claims objections to RSU Claims.⁶ At the hearing, Judge Peck walked through the “thoughtful” reasoning set forth in In re Enron, in which the Court ruled that “claims for damages that arise from the ownership of employee stock options ... should be subordinated pursuant to section 510(b).” In re Enron Corp., et al., 341 B.R. 141, 144 (Bankr.S.D.N.Y.2006). Judge Peck instructed claimants to explain “what it is about [each claim] that takes it outside of the reasoning [set forth in Enron ] that I've reviewed and that I intend to follow.” 12/21/11 Tr. at 58:15–59:16.

The Court heard several hours of argument, much of it from RSU Claimants alleging that there were distinguishing characteristics among the different “subclasses” of claims. During the course of the hearing, the Court acknowledged that there were “some questions as to what the facts actually are.” 12/21/11 Tr. at 104:5–105:11. Accordingly, at the conclusion of the hearing, the Court (i) directed LBHI to file a supplemental annotated omnibus reply to the RSU Claimants' opposition to the claims objections,⁷ and (ii) directed all parties to develop a factual record in order to afford each of the RSU Claimants an opportunity to distinguish Enron and to demonstrate the unique nature of each of the RSU Claims and why a particular RSU Claim should not be classified as equity. 12/22/11 Tr. 127:7–128:21. Additional briefing by the RSU Claimants followed.

On August 27, 2012, the Court entered an Order Establishing Discovery Procedures in Connection With Omnibus Objections to Reclassify Proofs of Claim as Equity Interests [ECF No. 30421] (as amended, the “Discovery Procedures Order”).⁸ Pursuant to the Discovery Procedures Order, the parties engaged in a discovery process that spanned more than a year and resulted in the execution of the Stipulation. The RSU Claimants who participated in discovery in this matter include (i) RSU Claimants who retained counsel (the “Compensation Claimants”), (ii) RSU Claimants who became employees of Lehman as a result of the acquisition of Neuberger Berman by LBHI⁹ and who retained separate counsel (the “Neuberger Berman Claimants”), and (iii) RSU Claimants who chose to participate in these proceedings pro se (collectively, the Pro Se Participants).¹⁰

The Court conducted a three-day evidentiary hearing (the “Hearing”) on April 1, 2, and 3, 2014. The Court heard live testimony from six witnesses and oral argument from counsel and two Pro Se Participants.¹¹ Upon the Court's instruction, the parties agreed upon the entry of 51 exhibits into the record and submitted post-trial briefs in accordance with an agreed schedule.¹² See Proposed Findings of Fact and Conclusions of Law Submitted by Compensation Claimants in Opposition to Debtors' Fourteen Omnibus Objections Seeking to Reclassify Compensation Claims as Equity or Alternatively to Subordinate Claims Pursuant to Section 510(b) of the Bankruptcy Code dated June 6, 2014 [ECF No. 44951]; Neuberger Berman Claimants' Proposed Findings of Fact and Conclusions of Law dated June 6, 2014 [ECF No. 44567]; Letter from Andrea T. Jao dated June 6, 2014 [ECF No. 44705]; Debtors' Proposed Findings of Fact and Conclusions of Law [ECF No. 45026]; Debtors' Reply to RSU Claimants' Proposed Findings of Fact and Conclusions of Law [ECF No. 45025]; Letter from Eugene Neal Kaplan on behalf of Neuberger Berman Claimants dated July 9, 2014 [ECF No. 45093]; Letter from Richard J. Schager on behalf of Compensation Claimants dated July 22, 2014 [ECF No. 45333].

Legal Standard

A properly-filed proof of claim comprises “prima facie evidence of the validity and amount of the claim,” Fed. R. Bankr.P. 3001(f), and is “deemed allowed, unless a party in interest ... objects.” 11 U.S.C. § 502(a). An objecting party “bears the initial burden of production and must provide evidence showing the claim is legally insufficient” under 11 U.S.C. § 502. In re Arcapita Bank B.S.C.(c), 508 B.R. 814, 817 (S.D.N.Y.2014) (citation omitted). Once the objecting party has met its initial burden, it is up to the claimant to “prove by a...