18‐3188‐bk
In re: Lehman Bros. Holdings Inc., et al.
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 COURTʹS 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 ʺSUMMARY ORDERʺ). 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 1st day of November, two thousand nineteen.
PRESENT: JON O. NEWMAN,
DENNY CHIN,
JOSEPH F. BIANCO,
Circuit Judges.
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IN RE: LEHMAN BROTHERS HOLDINGS INC.,
LEHMAN BROTHERS INC.,
Debtors,
344 INDIVIDUALS, IDENTIFIED IN THE NOTICES
OF APPEARANCES OF ECF DKT NOS. 8234, 8905
& 9459,
Appellants,
v. 18‐3188‐bk
JAMES W. GIDDENS, AS TRUSTEE FOR THE SIPA
LIQUIDATION OF LEHMAN BROTHERS INC.,
Trustee‐Appellee.
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FOR PLAINTIFFS‐APPELLANTS: RICHARD J.J. SCAROLA (Alexander Zubatov,
on the brief), Scarola Zubatov Schaffzin PLLC,
New York, New York.
FOR DEFENDANT‐APPELLEE: JAMES C. FITZPATRICK (Karen M. Chau, on
the brief), Hughes Hubbard & Reed LLP, New
York, New York.
Appeal from the United States District Court for the Southern District of
New York (Torres, J.).
UPON DUE CONSIDERATION, IT IS HEREBY ORDERED,
ADJUDGED, AND DECREED that the judgment of the district court is AFFIRMED.
Plaintiffs‐appellants (ʺPlaintiffsʺ), former employees of Shearson Lehman
Brothers Inc. (ʺShearsonʺ) and current creditors of Lehman Brothers Inc. (ʺLBIʺ), appeal
from a September 27, 2018 judgment of the district court (Torres, J.) affirming an order
of the bankruptcy court (Chapman, B.J.) holding that Plaintiffsʹ claims are subordinated
to the claims of LBIʹs general unsecured creditors. In a memorandum decision entered
July 13, 2017, the bankruptcy court granted summary judgment to defendant‐appellee
James W. Giddens, trustee for the Securities Investor Protection Act (ʺSIPAʺ)
Liquidation of Lehman Brothers Inc. (the ʺTrusteeʺ), and denied Plaintiffsʹ cross‐motion
for summary judgment. The district court affirmed and explained its reasoning in an
opinion entered September 26, 2018. We assume the partiesʹ familiarity with the
underlying facts, procedural history, and issues on appeal.
2
Review of an order of a district court issued in its capacity as an appellate
court is plenary. In re Manville Forest Prods. Corp., 896 F.2d 1384, 1388 (2d Cir. 1990).
The factual determinations and legal conclusions of the bankruptcy court are thus
reviewed independently by this Court. Id. The bankruptcy courtʹs findings of fact are
reviewed for clear error, and its conclusions of law are reviewed de novo. Id. We review
de novo a grant or denial of summary judgment, viewing the record in the light most
favorable to the party against whom summary judgment was sought. See Flores v.
United States, 885 F.3d 119, 122 (2d Cir. 2018) (per curiam).
In 1985, Shearson established an employee‐funded deferred compensation
pension plan, the Executive and Select Employees Deferred Compensation Plan (the
ʺESEPʺ). Plaintiffs voluntarily entered into the ESEP, signing individual agreements
with Shearson (the ʺESEP Agreementsʺ).1 Plaintiffs agreed to defer portions of their
compensation in return for certain tax benefits and a favorable interest rate.
Section 5(d) recognized that payments under the ESEP were subordinated
obligations:
The payments to be made by Shearson to Employee
hereunder are unsecured subordinated obligations of
Employer only, and Employee is only a general
subordinated creditor of Shearson in that respect.
J. Appʹx at 193.
1 The parties provide one exemplar ESEP Agreement, J. Appʹx at 189‐206, and agree that
the Agreements signed by all Plaintiffs follow the model.
3
Section 9 detailed the subordination provisions, with 9(d) discussing the
implications of liquidation pursuant to SIPA:
Employee irrevocably agrees that the obligations of Shearson
hereunder with respect to the payment of amounts credited
to his deferred compensation account are and shall be
subordinate in right of payment and subject to the prior
payment or provision for payment in full of all claims of all
other present and future creditors of Shearson whose claims
are not similarly subordinated . . . . In the event of . . .
liquidation pursuant to [SIPA] . . . the Employee shall not be
entitled to participate or share, ratably or otherwise, in the
distribution of the assets of Shearson until all claims of all
other present and future creditors of Shearson, whose claims
are senior to claims arising under this agreement, have been
fully satisfied or provision has been made therefor.
J. Appʹx at 201‐02.
Finally, Section 11 provided that the ESEP Agreements were binding on
successors and assigns:
This agreement shall be binding upon Employee and
Employeeʹs heirs and legal representatives and upon
Shearson and Shearsonʹs successors and assigns.
J. Appʹx at 206.
In 2009, after LBI commenced these liquidation proceedings in the
bankruptcy court, Plaintiffs submitted claims for deferred compensation under the
ESEP Agreements. After many years of litigation, the bankruptcy court granted
summary judgment to the Trustee, ruling, based on the provisions of the ESEP
Agreements, that Plaintiffsʹ claims are subordinated to the claims of LBIʹs general
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unsecured creditors. For substantially the reasons set forth by the bankruptcy court and
the district court in their respective decisions, we agree. We add only the following.
As set forth in the above‐quoted provisions, the ESEP Agreements clearly
and unambiguously provide for subordination. Plaintiffsʹ arguments that they are not
bound by the subordination provisions are unpersuasive.
First, Plaintiffsʹ argument that the subordination provisions apply only to
Shearson and not to LBI fails, because LBI clearly is a continuation of Shearson. Indeed,
Plaintiffs submitted their claims for deferred compensation in the LBI liquidation
proceedings. While Shearson underwent a series of name changes, it was never
dissolved as a corporation. Moreover, even assuming LBI is a ʺsuccessorʺ to Shearson,
Section 11 unambiguously provides that ʺ[t]his agreement shall be binding upon . . .
Shearson and Shearsonʹs successors and assigns.ʺ J. Appʹx at 206. The subordination
provisions accordingly apply whether LBI is a continuation of or successor to Shearson.
Second, while Plaintiffs are correct as a general matter that a material
breach excuses performance by the other party to a contract, see Natʹl Union Fire Ins. Co.
of Pittsburgh, Pa. v. Turtur, 892 F.2d 199, 204 (2d Cir. 1989), the Trustee is not seeking to
compel performance but rather only to correctly classify Plaintiffsʹ claims in the SIPA
liquidation. See In re Stirling Homex Corp., 579 F.2d 206, 211 (2d Cir. 1978) (noting that
the ʺclassification of claims is simply a method of recognizing difference in rights of
creditors which calls for difference in treatmentʺ (internal quotation marks omitted)).
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Further, even if LBI did materially breach the contract, this would not transform
Plaintiffsʹ subordinated claims into unsubordinated claims. Accordingly, Plaintiffsʹ
argument that LBI breached the ESEP Agreements, thereby rendering the subordination
provisions unenforceable, fails.
Finally, even assuming arguendo that the ESEP Agreements are rejected
executory contracts, ʺrejection merely frees the estate from the obligation to perform; it
does not make the contract disappear.ʺ In re Lavigne, 114 F.3d 379, 386‐87 (2d Cir. 1997)
(alteration omitted and internal quotation marks omitted). Rejection would not, then,
affect the subordination provisions or render Plaintiffsʹ subordinated claims
unsubordinated.
* * *
We have considered Plaintiffsʹ remaining arguments and conclude they
are without merit. For the foregoing reasons, we AFFIRM the judgment of the district
court.
FOR THE COURT:
Catherine OʹHagan Wolfe, Clerk
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