Lehman Bros. Inc. v. James W. Giddens, for the Sipa Liquidation of Lehman Bros. Inc. (In re Lehman Bros. Inc.)
| Decision Date | 15 June 2020 |
| Docket Number | Adv. Pro. No. 19-01368 (SCC),Case No. 08-01420 (SCC) SIPA |
| Citation | 617 B.R. 231 |
| Parties | IN RE: LEHMAN BROTHERS INC. The Lehman Brothers Inc. Deferred Compensation Defense Steering Committee as Attorney in Fact for those Specified, Plaintiffs, v. James W. Giddens, as Trustee for the SIPA Liquidation of Lehman Brothers Inc., Defendant. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
SCAROLA ZUBATOV SCHAFFZIN PLLC, 1700 Broadway, 41st Floor, New York, New York 10019, Richard J.J. Scarola, Esq., Alexander Zubatov, Esq., Of Counsel, Attorneys for The Lehman Brothers Inc. Deferred Compensation Defense Steering Committee as Attorney-in-Fact for Those Specified
HUGHES HUBBARD & REED LLP, One Battery Park Plaza, New York, New York 10004-1482, Nicolas Swerdloff, Esq., Gregory C. Farrell, Esq., Of Counsel, Attorneys for James W. Giddens, Trustee for the SIPA Liquidation of Lehman Brothers Inc.
Before the Court is the Motion to Dismiss Adversary Proceeding , dated November 6, 2019 ("Motion to Dismiss") (Doc. No. 5)1 filed by the defendant, James W. Giddens, as Trustee for the liquidation of Lehman Brothers Inc. ("Trustee" or "Defendant") under the Securities Investor Protection Act of 1970 ("SIPA"), and the Cross Motion for Summary Judgment and Opposition to Motion to Dismiss , dated December 23, 2019 ("Motion for Summary Judgment") (Doc. No. 10) filed by the plaintiff, the Lehman Brothers Inc. Deferred Compensation Defense Steering Committee as Attorney-in-Fact for Those Specified ("ESEP Committee" or "Plaintiff"). 2
A hearing was held on both motions on February 19, 2020, and the matter was taken under advisement.
Before diving into the legal issues presented by the Motion to Dismiss and the Motion for Summary Judgment, the Court believes it would be useful to describe in simple terms the history of the ESEP Committee's actions in the SIPA proceeding of Lehman Brothers Inc. ("LBI") over the last decade. With the goal of recovering approximately $270 million of deferred compensation directed to an unfunded "top hat" plan prepetition by the claimants who comprise the ESEP Committee (collectively, the "Claimants") and in an effort to recover such deferred compensation at a higher claim priority in the SIPA proceeding than that to which the Claimants would be legally entitled, the ESEP Committee has filed multiple motions in this Court, has failed to prevail on each motion, and has appealed each and every time it has not prevailed. Over the past six years, the ESEP Committee's litigation has garnered multiple decisions from this Court, from three District Court judges, and from two panels of judges on the United States Court of Appeals for the Second Circuit. Judges from all three courts have determined that the ESEP Agreements (as defined below) to which each of the Claimants is a party provide that the right to payment of the ESEP deferred compensation is subordinated to the claims of general unsecured creditors of the LBI estate.
Now, for the first time since the Claimants filed their claims against LBI over a decade ago, the ESEP Committee asserts a new and novel argument that is entirely at odds with every argument it has heretofore asserted: that section 541(b)(7) of the Bankruptcy Code excludes the ESEP deferred compensation from property of the LBI estate. The Complaint (as defined below) filed by the ESEP Committee in the instant Adversary Proceeding and its Motion for Summary Judgment are entirely without merit. It is time for this litigation odyssey to end. Simply put, enough is enough.
Even accepting as true all assertions set forth in the Complaint and drawing all reasonable inferences in the ESEP Committee's favor, the Court concludes that ESEP Committee has failed to state a claim upon which relief can be granted. For the reasons set forth herein, the Trustee's Motion to Dismiss is granted and the ESEP Committee's Motion for Summary Judgment is denied. The Court's decision follows.
The question before the Court is twofold. First, the Claimants seek a determination that ESEP funds that are part of the LBI estate are, in fact, not property of the estate, but property of the Claimants. As statutory support for their assertion in this regard, the Claimants cite to section 541(b)(7) of the Bankruptcy Code, which excludes from property of the estate funds that are either "withheld by an employer from the wages of employees for payment as contribution" or "received by an employer from employees for payment as contributions" to "an employee benefit plan that is subject to title I" of the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001 et seq. ("ERISA"). Second, the Court must consider whether, even if Claimants' argument were to prevail, they are barred from bringing this proceeding due to the running of the applicable statute of limitations or by the equitable doctrine of laches.
In order to address the matters before the Court, it is necessary to review the lengthy history of the litigation between the Claimants and the Trustee.
The Claimants are certain former highly compensated executives and select employees who participated in a voluntary deferred compensation plan during the period of their employment by LBI and its predecessors, as applicable, prior to the commencement of LBI's SIPA proceeding on September 19, 2008. The deferred compensation plan, known as the Executive and Select Employee Plan (the "ESEP"), is governed by certain contracts (the "ESEP Agreements").3
The ESEP is what is known as a "top hat" plan, and as such, is exempt from many of the protections of ERISA.4 The ESEP is an unfunded plan. The amounts directed by Claimants to the plan were, by agreement, not set aside in trust for the Claimants' sole benefit or kept separate from the assets of LBI. Instead, the ESEP Agreements specifically required that the amounts of compensation voluntarily deferred by Claimants be part of the capital of LBI and available to the creditors of LBI. The ESEP Agreements expressly state:
The amounts credited to the deferred compensation account hereunder shall be dealt with in all respects as capital of [LBI], shall be subject to the risks of the business, and may be deposited in an account or accounts in [LBI]'s name in any bank or trust company.
(ESEP Agreements § 9(i).) Under the ESEP Agreements, the Claimants deferred compensation in exchange for a contractual right to receive future payments based on the deferred amounts. In so doing, Claimants were allowed to defer income tax that would otherwise be owed for the deferred amounts, and they received a guaranteed compound interest rate of approximately eleven percent, which accrued on a tax-deferred basis. (Id. § 2.)
This Court has previously found and determined that under the ESEP Agreements, Claimants' rights to payment are subordinate to the claims of general creditors of LBI. See Giddens v. 344 Individuals (In re Lehman Bros. Inc.) , 574 B.R. 52 (Bankr. S.D.N.Y. 2017), aff'd , No. 17 Civ. 6246 (AT), 2018 WL 10454936 (S.D.N.Y. Sept. 26, 2018), aff'd sub nom. , 792 F. App'x 16 (2d Cir. 2019). Section 9(d) of the ESEP Agreements provides that each of the Claimants:
irrevocably agrees that the obligations of [LBI] hereunder with respect to the payment of the amounts credited to [Claimant's] deferred compensation account are and shall be subordinate in right of payment and subject to the prior payment or provision for payment in full of all claims of all other present and future creditors of [LBI] whose claims are not similarly subordinated ....
(Id. § 9(d).) Likewise, each of the Claimants agreed that in the event of a SIPA liquidation of LBI, the Claimant:
shall not be entitled to participate or share, ratably or otherwise, in the distribution of the assets of [LBI] until all claims of all other present and future creditors of [LBI], whose claims are senior to claims arising under [the ESEP Agreements], have been fully satisfied or provision has been made therefor.
(Id. ) Each Claimant also agreed that any payments made to him or her under the ESEP Agreements were "unsecured subordinated obligations of [LBI] only," and that he or she is "only a general subordinated creditor of [LBI] in that respect." (Id. § 5(d).)
On September 19, 2008 (the "Filing Date"), the liquidation of LBI under SIPA was commenced, and the Trustee was appointed. On November 7, 2008, the Court entered an order establishing a claims bar date of June 1, 2009. (Bankr. Doc. No. 241.)
Each of the Claimants filed timely claims against LBI (the "Claims"). The large majority of the Claims asserted that they were secured based on, among other things, section 541(b)(7). (See, e.g. , Proof of Claim No. 7001872, Bankr. Doc. No. 14131, Ex. D.)
On November 15, 2012, the Court approved procedures for the Trustee to file omnibus objections to proofs of claim. (Bankr. Doc. No. 5441). Between July 19, 2013 and January 28, 2014, the Trustee filed omnibus objections to the Claims, seeking an order subordinating such claims to all general creditor claims of LBI (Bankr. Doc. Nos. 6847, 6865, 6866, 7264, 7388, 8153, collectively, the "Omnibus Objections.")
Certain of the Claimants opposed the Omnibus Objections on procedural grounds, asserting that the relief sought required an adversary proceeding. On February 6, 2014, the Trustee filed a motion to convert the Omnibus Objections to a consolidated adversary proceeding. (Bankr. Doc. No. 8196.) Claimants opposed the motion, arguing that the Trustee was required to file a summons and complaint. (Bankr. Doc. Nos. 8280, 8282.) After a hearing held on February 27, 2014, this Court entered an order (Bankr. Doc. No. 8576) overruling Claimants' objection and granting the motion to...
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