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Lehman Brothers employees whose restricted stock units became worthless in the company’s 2008 bankruptcy filing can’t leapfrog ahead of other creditors in the ongoing bankruptcy proceedings, a federal appeals court ruled ( In re: Lehman Bros. Holdings Inc. , 2017 BL 148791, 2d Cir., No. 16-1296-bk, 5/4/17 ).
The restricted stock units—shares of Lehman Brothers that the employees were scheduled to receive after a five-year holding period—qualified as securities they acquired in a purchase, the U.S. Court of Appeals for the Second Circuit held on May 4. As a result, the employees’ claims in bankruptcy must be subordinated to the claims of general creditors, the court ruled, following the reasoning set forth in a 2006 decision involving Enron Corp.'s bankruptcy.
Lehman Brothers’ 2008 bankruptcy filing was the largest in U.S. history. This dispute involves the stock compensation of about 100 employees who asked the bankruptcy court for cash payments reflecting the face value of their restricted stock units. In ruling against the employees, the Second Circuit emphasized that restricted stock units won’t always be treated as securities in bankruptcy proceedings, because the inquiry is “likely to be fact-intensive.”
The ruling is an application of bankruptcy law’s “absolute priority rule,” in which creditors are paid ahead of shareholders in the distribution of a corporation’s assets. In this case, the Lehman restricted stock units qualified as securities—which were due to be paid after creditor claims—because holders of the units had the same “risk and benefit expectations as shareholders,” the court said. Further, unit holders had limited voting rights and received dividends in the form of additional units, the Second Circuit said.
Moreover, the units were acquired by purchase—as required by the absolute priority rule—because the Lehman employees agreed to receive them in exchange for their labor and in lieu of cash, the court said.
The decision affirms a 2016 ruling by a federal judge in New York.
Senior Judge Robert D. Sack wrote the opinion, which was joined by Judges Dennis Jacobs and Susan L. Carney.
The employees were represented by Stamell & Schager LLP, Law Offices of Lisa M. Solomon, Cohen Clair Lans Greifer Thorpe & Rottenstreich LLP and Kaplan Landau LLP. Lehman was represented by Weil Gotshal & Manges LLP.
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