Second Circuit Holds Lehman Bros. Restricted Stock Units Must Be Subordinated in Bankruptcy 

When Lehman Brothers went under, many of its employees were left holding restricted stock units that could have been converted to common stock 5 years after they were issued.  Lehman’s bankruptcy before the 5 years expired, however, rendered the restricted stock units worthless. So, the employees filed claims against Lehman’s bankruptcy estate to recover the face value of the stock had it been converted to common stock.  Lehman objected, and the bankruptcy court held that the claims were subordinate to Lehman’s general creditors because they arose from the purchase or sale of securities.

The Second Circuit agreed, holding that the employees’ claims had to be subordinated under 11 U.S.C. § 510(b) “because, for purpose of th[e] statute, (1) RSUs are securities, (2)
the claimants acquired them in a purchase, and (3) the claims for damages arise from those purchases or the asserted rescissions thereof.”  In light of its holding, the Second Circuit declined to reach the alternative holding of the bankruptcy court that the RSUs were “equity securities” under 11 U.S.C. § 101(16), leaving that question for another day.

The Second Circuit’s opinion can be found here.

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