Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.
By Daniel Gill
July 8 — Two former Lehman Brothers traders lost their bids to collect bonuses — for one, more than $83 million — from the Lehman Bros. bankruptcy estate after being paid those bonuses by Barclays Capital ( In re Lehman Bros., 2016 BL 217634, S.D.N.Y., No. 15 CIV. 8903 (LGS), 7/6/16 ).
Barclays employed the traders at the same time it acquired much of Lehman Bros' financial assets.
Judge Lorna G. Schofield of the U.S. District Court for the Southern District of New York on July 6 filed an opinion affirming the bankruptcy court's findings that Jonathan Hoffman and Wayne Judkins had already been paid their full bonuses and that their claims for the same amounts filed in the Lehman Bros. bankruptcy case was an attempt to get paid the same money twice.
The district court reversed a portion of the bankruptcy court's earlier ruling which held that Hoffman could still seek about $7.7 million in the bankruptcy case. The court said that amount had also been paid by Barclays, and it instructed the bankruptcy court to enter an order disallowing Hoffman's $83 million bankruptcy claim in its entirety.
Hoffman, a “proprietary trader” at Lehman Brothers, Inc. (LBI) since 1994, was “extremely successful,” generating billions of dollars for Lehman over the years through trading “interest rate products,” the court said.
Just one day after LBI's parent company Lehman Brothers Holdings Inc. famously filed one of the largest business bankruptcies in history on Sept. 15, 2008, the Lehman Bros. companies entered into an asset purchase agreement with Barclays for the sale of most of “Lehman's North American capital markets and investment banking assets.” As part of that agreement, which was approved by the bankruptcy court less than a week later, Barclays committed to offer employment to LBI's employees “who worked in the acquired business,” the court said.
Under the asset purchase agreement, LBI's former employees to be hired by Barclays were called “transferred employees,” and the agreement provided that Barclays would pay each transferred employee his or her annual bonus as previously agreed with LBI. This arrangement was separate and apart from any agreement for future compensation. Hoffman, for example, was to receive an additional $100 million from Barclays for his services during 2008 to 2010.
James W. Giddens, the trustee for the liquidation trust of LBI and the party who objected to Hoffman's and Judkins' claims in the LBI bankruptcy, said in his brief to the court that a “key part of this historic sale [to Barclays] was that LBI contracted for Barclays to offer employment to LBI's employees and to pay them bonuses for their performance at LBI.”
The trustee explained why this provision in the asset purchase agreement was a win for all parties involved: the employees retained jobs in a time of tremendous uncertainty and got to keep their promised bonuses as yet unpaid; Barclays was ensured it had the services of employees “integral to the business it had acquired”; and LBI — and all its creditors — were relieved of the substantial financial burden of compensating the employees for their earned but unpaid bonuses.
The bankruptcy court agreed: “A key component of Barclays' obligations to these transferred employees was the payment of bonus compensation on account of their prior employment by Lehman.”
For his part, Hoffman argued that he was not a “transferred employee,” and that any pay structure he worked out with Barclays was part of a separate negotiation. He argued that because he did not explicitly accept a “blast email” offer from Barclays to LBI's employees, he was not a “transferred employee” under the purchase agreement. In response to this argument, the bankruptcy court said, “This is pure nonsense.”
The bankruptcy court conducted a three day hearing, considering testimony and documentary evidence, and did not clearly err when it decided that Hoffman was a transferred employee, the court said. This evidence included a number of audio recordings of conversations with Barclays leadership that Hoffman surreptitiously recorded.
The negotiations were clearly designed to ensure that Hoffman recover the very large bonuses he had earned prior to Lehman's bankruptcy filing. “Hoffman's primary concern in these negotiations [with Barclays] was securing the approximately $83 million bonus he was owed by LBI,” the court said.
“It strains credulity to argue, as Hoffman does here, that the $83 million that Barclays agreed to pay in extra compensation was a mere signing bonus or motivational tool, and that the amount only coincidentally matched the amount that Hoffman was owed by LBI,” the court said.
Although Hoffman's new agreement with Barclays provided for him to be paid the $83 pre-bankruptcy LBI bonus as well as additional compensation of at least $100 million, Hoffman still filed a claim in the LBI bankruptcy case for $83 million. Barclays was surprised when it heard of the claim, the court said.
Giddens, the trustee, filed an objection to Hoffman's claim (and the claim of Judkins for an $800,000 bonus), and the bankruptcy court sustained the objection. The bankruptcy court disallowed the claims except for about $7.7 million, which was owed to Hoffman for services rendered in the prior year, but which hadn't been paid because it was a “clawback,” held by the company in case the trader failed to turn a profit in the following year.
Hoffman and Judkins appealed, and the trustee cross-appealed, arguing that the $7.7 million clawback amount should also be disallowed, since it had been paid by Barclays along with the rest of Hoffman's bonus.
The court said that Lehman had delegated its duty to pay the bonuses to Barclays as part of the asset purchase agreement. Hoffman and Judkins argued that they were not bound by this agreement because it was not an assumption of LBI's contract, and they did not agree to this delegation of duty. But the court said their agreement — or lack of it — was of no consequence.
Even though it was not an assumption of LBI's employment contracts, Barclays' promise to pay was not ineffective, the court said. “It simply means that LBI retains liability to Transferred Employees if their 2008 fiscal year bonuses are not paid.” The bankruptcy court found that the bonuses were paid, and the district court agreed.
It is a “common-sense precept of contract law,” the court said, that “if a third party negotiates with an obligee to pay the debt of an obligor, and the obligee accepts that payment, the obligor's debt is discharged. The obligee ... is not entitled to double performance on the same contract.”
The court agreed with the bankruptcy court that Hoffman negotiated with Barclays for payment of his LBI bonus and that the company paid him that amount. Accordingly, the court directed that the entire $83 million claim, including the $7.7 million clawback, be disallowed.
The court similarly found that the bankruptcy court did not err in finding that Judkins was paid everything he had been promised, so that his claim in LBI's bankruptcy must also be disallowed.
The appellant assignee for Hoffman was represented by Douglas P. Baumstein, White & Case LLP, New York and Thomas M Mullaney, New York. Gregory L. Reid, Reid Rodriguez & Rouse, LLP, represented Judkins.
The trustee was represented by Gregory C. Farrell, Hughes Hubbard & Reed LLP, New York.
To contact the reporter on this story: Daniel Gill in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Jay Horowitz at email@example.com
Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)