Adler v. Lehman Bros. Holdings Inc. (In re Lehman Bros. Holdings Inc.)
855 F.3d 459
| 2d Cir. | 2017Background
- Lehman Brothers awarded many employees restricted stock units (RSUs) as part of compensation: a conditional right to receive common stock after a five-year holding period if employment conditions were met.
- When Lehman filed Chapter 11 on Sept. 15, 2008, thousands held unvested RSUs; many filed proofs of claim seeking cash equivalents for the RSUs.
- Lehman objected, arguing the claims should be (a) subordinated under 11 U.S.C. § 510(b) because they arise from the purchase/sale of securities, and (b) disallowed as proofs of claim if RSUs are ‘‘equity securities’’ requiring proofs of interest.
- Bankruptcy and district courts sustained Lehman’s objections on both grounds; a subset of claimants appealed.
- The Second Circuit held it need not decide whether RSUs are ‘‘equity securities’’ for disallowance because some claims (e.g., breach of contract) are not duplicative of equity interests; but it affirmed subordination under § 510(b), concluding RSUs are securities, were ‘‘purchased’’ by employees in exchange for labor, and the claims arise from those purchases.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether RSU-based proofs of claim are categorically disallowed because RSUs are "equity securities" and claimants should file proofs of interest | RSU holders are equity holders and thus must assert proofs of interest, not claims | RSU holders asserted distinct breach-of-contract or restitution claims that are not duplicative of an equity interest | Court: Some claims (e.g., breach-of-contract) are analytically distinct from an equity interest and therefore are not categorically disallowed as proofs of claim |
| Whether RSU interests qualify as "securities" under the Bankruptcy Code (11 U.S.C. § 101(49)) | Claimants: RSUs are conditional rights, not the same as enumerated securities; may not fit § 101(49) examples | Lehman: RSUs bear the hallmarks of equity (dividend equivalents, voting direction, upside/downside tied to stock) and fit the residual definition | Court: RSUs are securities under the residual clause of § 101(49)(A)(xiv) because they share key characteristics of securities |
| Whether employees "purchased" RSUs within meaning of § 510(b) | Claimants: RSUs were part of employment; some argue no meaningful choice (e.g., Neuberger group) and analogize to involuntary plans (Daniel) | Lehman: Employees voluntarily accepted RSUs in lieu of cash compensation (exchange for labor); economic choices made | Court: Receipt of RSUs as a component of compensation is a ‘‘purchase’’—employees exchanged labor for equity; voluntary choice suffices; duress arguments fail |
| Whether the claims ‘‘arise from’’ the purchase/sale of a security so as to trigger mandatory subordination under § 510(b) | Claimants: Alternative-performance, restitution, or other contract-based theories make them general-creditor claims, not securities claims | Lehman: Claims would not exist but for the decision to accept compensation as RSUs; restitution/rescission or damages therefore arise from the securities transaction | Court: All asserted claims arise from the RSU purchase/relationship and must be subordinated under § 510(b); alternative-performance and restitution theories do not avoid subordination |
Key Cases Cited
- In re Enron Corp., 341 B.R. 141 (Bankr. S.D.N.Y. 2006) (applied § 510(b) to employee stock-option claims and treated options as securities purchased by employees in exchange for labor)
- ANZ Sec., Inc. v. Giddens (In re Lehman Bros. Inc.), 808 F.3d 942 (2d Cir. 2015) (Second Circuit standards for review in Lehman-related appeals)
- Rombro v. Dufrayne (In re Med Diversified, Inc.), 461 F.3d 251 (2d Cir. 2006) (broad construction of § 510(b); subordination where claimant took on shareholder risk by accepting equity)
- Motorola, Inc. v. Official Comm. of Unsecured Creditors (In re Iridium Operating LLC), 478 F.3d 452 (2d Cir. 2007) (discussion of absolute priority principle in bankruptcy)
- SeaQuest Diving, LP v. S&J Diving, Inc., 579 F.3d 411 (5th Cir. 2009) (interpreting scope of § 101(49) residual clause for securities)
- USA Capital Realty Advisors, LLC v. USA Capital Diversified Trust Deed Fund, LLC (In re USA Commercial Mortg. Co.), 377 B.R. 608 (B.A.P. 9th Cir. 2007) (equity holder may hold distinct, non-duplicative claims allowing proofs of claim)
- Yoder v. Orthomolecular Nutrition Inst., Inc., 751 F.2d 555 (2d Cir. 1985) (employee acceptance of stock options as part of compensation can constitute a purchase for securities-law purposes)
- International Brotherhood of Teamsters v. Daniel, 439 U.S. 551 (1979) (involuntary pension participation does not necessarily show an investment decision under securities laws)