16‐3666
Acerra, Anagnostopoulos, et al. v. Giddens (In Re: Lehman Bros. Inc.)
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A
SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY
FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT=S LOCAL RULE 32.1.1.
WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST
CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION
ASUMMARY ORDER@). A PARTY CITING A SUMMARY ORDER MUST SERVE A COPY OF IT ON
ANY PARTY NOT REPRESENTED BY COUNSEL.
At a stated term of the United States Court of Appeals for the Second
Circuit, held at the Thurgood Marshall United States Courthouse, 40 Foley
Square, in the City of New York, on the 25th day of January, two thousand
eighteen.
PRESENT: DENNIS JACOBS,
PETER W. HALL,
CHRISTOPHER F. DRONEY,
Circuit Judges.
‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐X
IN RE: LEHMAN BROTHERS INC.,
Debtor,
‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐
PAUL ACERRA, MARIA
ANAGNOSTOPOULOS, CRAIG O. BENSON,
PAOLA BIRASCHI, DAVID BROOKS,
STEVEN CHRISTIE, NEIL DUBROW,
MICHAEL THOMAS ENGLE, DANA FELLER,
GREGORY FELLER, ROBERTO FRAZAO,
1
PAUL GASPARRO, KENNETH KOLLAR,
PETER KOLLYDAS, CRAIG KORNETT,
KAREN KREIGER, ANTOINETTE LA BELLE,
JOHN LAURINO, ROBERT LAZARUS, JOHN
D. MARZONIE, MICHAEL MCCULLY, SARA
MINSTERIS, BRIDGET OʹCONNOR,
RICHARD PETERS, MICHAEL PETRUCELLI,
JOHN QUATTROCCHI, BLAYNE ROSS,
CHARLES RUDNICK, PATRICIA SALLES,
GREGG SOMMA, NANCY STANTON,
WENDY UVINO, MICHAEL WHANG,
KATHLEEN ANN WOJCIK, LUIGI
ZEPPETELLI,
Claimants‐Appellants,
‐v.‐ 16‐3666
JAMES W. GIDDENS, as Trustee for the SIPA
Liquidation of Lehman Brothers Inc.,
Appellee,
‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐X
FOR CLAIMANTS‐APPELLANTS: RICHARD J. SCHAGER, JR.
(Andrew R. Goldenberg, on the
brief), Stamell & Schager, LLP; New
York, NY.
FOR APPELLEE: JASON C. BENTON (James B.
Kobak, Jr., Christopher K. Kiplok,
Karen M. Chau, on the brief),
Hughes Hubbard & Reed LLP; New
York, NY.
Appeal from a judgment of the United States District Court for the
Southern District of New York (Torres, J.).
2
UPON DUE CONSIDERATION, IT IS HEREBY ORDERED,
ADJUDGED AND DECREED that the judgment of the district court is
AFFIRMED.
Appellants appeal from the judgment of the United States District Court
for the Southern District of New York (Torres, J.), which affirmed the order of the
Bankruptcy Court for the Southern District of New York (Chapman, J.)
sustaining the omnibus objections filed by the Trustee appointed for the
liquidation of Lehman Brothers Inc. (“LBI”). We assume the parties’ familiarity
with the underlying facts, the procedural history, and the issues presented for
review.
Appellants, former employees of LBI, received part of their compensation
in cash and part in equity in the form of restricted stock units (“RSUs”). The
RSUs converted into common stock in LBI’s parent company, Lehman Brothers
Holdings, Inc. (“LBHI”), after a five‐year holding period, subject to the
satisfaction of certain employment‐related conditions. When LBI entered into
liquidation pursuant to the Securities Investor Protection Act of 1970, 15 U.S.C. §
78aaa et seq. (“SIPA”), many employees held RSUs for which the holding period
had not yet elapsed; LBI also owed RSUs that had not yet been granted to certain
commission‐based employees. Appellants now seek cash payments from LBI as
creditors for the amounts in RSUs they held (the “Equity Award Claims”) and
for the amounts in RSUs that LBI owed them on the bankruptcy filing date (the
“Accrued Equity Claims”).
A district court has appellate jurisdiction over a bankruptcy court decision.
See 28 U.S.C. § 158(a). “Review of an order of a district court issued in its
capacity as an appellate court is plenary.” In re DeTrano, 326 F.3d 319, 321 (2d
Cir. 2003) (citation omitted). “[W]e review the bankruptcy court decision
independently, accepting its factual findings unless clearly erroneous but
reviewing its conclusions of law de novo.” Ball v. A.O. Smith Corp., 451 F.3d 66,
69 (2d Cir. 2006) (citation and internal quotation marks omitted).
Section 510(b) of the Bankruptcy Code provides:
3
For the purpose of distribution under this title, a claim arising from
rescission of a purchase or sale of a security of the debtor or of an
affiliate of the debtor, [or] damages arising from the purchase or sale
of such a security, . . . shall be subordinated to all claims or interests
that are senior to or equal the claim or interest represented by such
security, except that if such security is common stock, such claim has
the same priority as common stock.
11 U.S.C. § 510(b). Section 510(b) thus implements the absolute priority rule,
which gives creditors priority over shareholders in the event of liquidation. See
In re Lehman Bros. Holdings Inc., 855 F.3d 459, 470 (2d Cir. 2017) (“In re LBHI”).
LBHI filed for Chapter 11 bankruptcy on September 15, 2008, and LBI was
ordered into liquidation pursuant to SIPA on September 19, 2008. In the separate
LBHI proceeding, certain former employees (some of whom are claimants in this
appeal) filed proofs of claim seeking recovery in the form of cash payments for
compensation that had been paid them in RSUs. We held in that appeal that the
claimants’ RSU‐based claims should be subordinated to the claims of general
creditors because, pursuant to Section 510(b), RSUs are securities, the claimants
acquired them in a purchase, and the claims based on ownership of the RSUs are
for damages arising from that purchase. In re LBHI, 855 F.3d at 465. Here, the
Appellants’ Equity Award Claims are identical to the claims asserted in the LBHI
proceeding for cash payments based on the ownership of RSUs. In re LBHI is
therefore dispositive regarding the application of Section 510(b) to the Equity
Award Claims, which we conclude are subject to mandatory subordination to the
claims of general creditors.
Appellants argue that the Accrued Equity Claims, which are not based on
RSUs but rather the right to receive RSUs, are distinguishable and should not be
subordinated because the RSUs were not granted at the time of the filing of the
bankruptcy petition. Section 510(b) requires subordination if a claimant “took on
the risk and return expectations of a shareholder, rather than a creditor.”
Rombro v. Dufrayne (In re Med Diversified, Inc.), 461 F.3d 251, 256 (2d Cir.
2006). This policy rationale applies “even if there is no actual sale or purchase
because even before they receive any stock or extend a line of credit, investors
and creditors have different expectations.” Id. at 258 (citation and internal
4
quotation marks omitted) (alteration omitted). Accordingly, subordination
under Section 510(b) likewise extends to claims for the failure to issue securities if
the claimant took on the risks and rewards of an equity investor. Id.; see also In
re MF Global Holdings, Ltd., No. 11‐15059 (MG), 2014 WL 3882363, *5‐6 (Bankr.
S.D.N.Y. Aug. 6, 2014) (holding that Section 510(b) extends to a claim for a bonus
that would have been paid in RSUs), In re Enron Corp., 341 B.R. 141, 162‐63
(Bankr. S.D.N.Y. 2006) (holding that claims alleging the failure to deliver
purchased “phantom” stock should be subordinated pursuant to Section 510(b)).
The bankruptcy court found in the LBHI proceeding that “at all relevant
times, the RSU Claimants understood that they would be compensated both with
cash and with rights to become holders of LBHI common stock. They had a
bargaining position and a choice as to whether or not to accept and continue
employment at Lehman.” In re Lehman Bros. Holdings Inc., 519 B.R. 47, 61
(Bankr. S.D.N.Y. 2014).1 Accordingly, we held in In re LBHI that the claimants
took on the risk and return expectations of a shareholder by agreeing to be paid a
portion of their compensation in the form of RSUs, a type of security that is tied
to the value of the company’s common stock. 855 F.3d at 481. The fact that
certain commission‐based employees in the instant LBI proceeding had not yet
received the RSUs to which they were entitled when LBI filed for bankruptcy is
legally insignificant: the record shows that the Appellants “bargained not for
cash but to become a stockholder” and that they therefore “became bound by the
choice [they] made to trade the relative safety of cash compensation for the
upside potential of shareholder status.” In re Med Diversified, Inc., 461 F.3d at
256. Because the Appellants assumed the reward and risk expectations of
shareholders when they agreed to receive compensation in the form of RSUs, the
Accrued Equity Claims must also be subordinated.
Finally, Appellants argue that they have a claim for cash against LBI
because LBI did not properly novate or assign its RSU‐based compensation
obligations to LBHI. But the RSU‐program documents evidence that the
Appellants never had a right to cash compensation in lieu of the RSUs: “With
respect to any [RSUs] granted under the Plan, the obligations of the Company or
1 During a legal sufficiency hearing for Appellants’ claims, Judge Chapman held
that her LBHI decision also applies to the instant LBI proceeding with respect to
claims for RSUs and the failure to issue RSUs. App’x 273‐74 (65:25‐66:4).
5
any Subsidiary are limited solely to the delivery of shares of Common Stock . . .
and in no event shall the Company or any Subsidiary become obligated to pay
cash in respect of such obligation . . .” See App’x 512 § 8(b)). An argument that
claims for cash for issued RSUs are exempt from Section 510(b) was expressly
rejected in In re LBHI: “[W]e conclude that the claimants cannot assert claims
arising from anything other than the purchase of RSUs because they have
already been paid the compensation they were due in the form of RSUs and, as a
result, have no right to any other mode of performance.” 855 F.3d at 479.
Similarly, here, Appellants have rights only to the delivery of LBHI stock after
the five‐year holding period and the satisfaction of certain employment‐related
conditions. Accordingly, the contract‐based novation and assignment arguments
that Appellants assert do not allow them to avoid subordination of their claims
pursuant to Section 510(b).
We have considered Appellants’ remaining arguments and conclude that
they are without any merit. The judgment of the district court is AFFIRMED.
FOR THE COURT:
CATHERINE O’HAGAN WOLFE, CLERK
6