Ex-Lehman Bros. Workers Lose $300M Deferred Pay Battle

Employee Benefits News examines legal developments that impact the employee benefits and executive compensation employers provide, including federal and state legislation, rules from federal...

By Jacklyn Wille

Claims for deferred compensation by more than 300 former Lehman Brothers employees aren’t entitled to priority over claims of other creditors, a federal bankruptcy judge ruled July 13 ( Giddens v. 344 Individuals (In re Lehman Bros.) , 2017 BL 242784, Bankr. S.D.N.Y., No. 08-01420 (SCC), 7/13/17 ).

The employees—who collectively seek between $250 million and $300 million in deferred pay under a 1985 plan established by Shearson Lehman Brothers Inc.—won’t be paid before Lehman’s general creditors, because the Shearson plan specified that any benefit payments were “unsecured subordinated obligations,” the judge said. The employees said Lehman couldn’t enforce the plan’s subordination provision against them because the plan was created by Shearson and not Lehman, but the judge disagreed, saying that Lehman was a “continuation” of Shearson.

The judge also chided the employees for basing this argument “solely on citations to Wikipedia.”

Lehman’s 2008 bankruptcy filing was the largest in U.S. history, and legal battles related to the bankruptcy remain pending. In May, a federal appeals court also denied preferential treatment to a group of Lehman employees whose restricted stock units became worthless in the bankruptcy filing.

Here, the judge’s opinion was based largely on her conclusion that Shearson and Lehman were the “same legal entity,” notwithstanding any corporate name changes that occurred over the years. Moreover, the subrogation provision would still apply even if Lehman were only a “successor” to Shearson, because it is “hornbook law that a ‘successor’ steps into the shoes of its predecessors with all the rights and obligations that entail,” the judge said.

The judge said Lehman’s alleged breaches of the plan didn’t render the subordination clause inapplicable, as the employees had argued.

Judge Shelley C. Chapman of the U.S. Bankruptcy Court for the Southern District of New York wrote the decision.

Hughes Hubbard & Reed LLP represents the bankruptcy trustee. Scarola Malone & Zubatov LLP represents the employees.

To contact the reporter on this story: Jacklyn Wille in Washington at jwille@bna.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bna.com

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