Some 100 former Lehman Brothers Holdings Inc. workers urged the Second Circuit on Wednesday to reverse a bankruptcy court's decision to treat what they call $200 million in improperly withheld salary as low-priority equity claims, but a three-judge panel did not appear keen to undo the finding.
Three subgroups of former Lehman workers told U.S. Circuit Judges Dennis Jacobs, Robert D. Sack and Susan L. Carney that the so-called restricted stock units given to them should be treated as higher-priority cash claims for unpaid salary because their pay was deferred to acquire the units under employment contracts with the fallen investment giant.
But in 2014, U.S. Bankruptcy Judge Shelley C. Chapman said the RSUs bear the telltale hallmarks of equity, which traditionally goes to the back of the line in bankruptcy. U.S. District Judge Richard Sullivan agreed in March, upholding Judge Chapman.
"The RSUs at issue here clearly constitute 'securities' for subordination purposes," Judge Sullivan wrote.
Lehman counsel Ralph I. Miller of Weil Gotshal & Manges LLP urged the panel not to upset the lower courts, which made their findings after extensive litigation. Subordination of equity is “the whole bankruptcy system,” he said.
“These people have stock. It just so happens that they can't sell their stock,” Miller said. “[They] are getting exactly what they bargained for.”
Counsel for the largest subgroup of claimants, Richard J. Schager of Stamell & Schager LLP, said it was an error to treat the RSUs purely as stock, since the workers had no choice but to accept them as part of their compensation plans.
“What we're talking about is compensation that Lehman declared but never paid,” Schager said.
That drew a note of measured skepticism from Judge Jacobs, who earlier noted the contractual nature of the RSUs, the fact that Lehman disclaimed any “cash obligation” arising from them and the fact that the claimants chose to work for the once high-flying investment bank in anticipation of compensation that could outstrip a regular paycheck.
“The RSUs did have characteristics that resembled equity,” Judge Jacobs said.
A small subgroup of claimants who came to Lehman from Neuberger Berman in a 2003 merger argued that they never had any choice but to accept the RSUs.
Their counsel, Deborah E. Lans of Cohen Clair Lans Greifer Thorpe & Rottenstreich LLP, said they were different from the others who accepted the RSUs when joining Lehman voluntarily.
“They made no investment decisions at any point along the way,” Lans said.
But Judge Carney didn't seem particularly troubled by that wrinkle, noting that even the Neuberger subgroup had been in line to benefit from the “substantial upside” the RSUs represented prior to Lehman's 2008 plunge into bankruptcy.
“They had that upside. Now they have this downside. Why isn't that an investment decision?” she said.
“That's not an investment decision. That's a decision about employment,” Lans replied.
The former Lehman workers are represented by Richard J. Schager of Stamell & Schager LLP, Deborah E. Lans of Cohen Clair Lans Greifer Thorpe & Rottenstreich LLP and Lisa M. Solomon.
Lehman is represented by Ralph I. Miller of Weil Gotshal & Manges LLP.
The case is In re: Lehman Brothers Holdings Inc., case number 16-1296, in the U.S. Court of Appeals for the Second Circuit.
--Editing by Kelly Duncan.
