In the case In re Lehman Brothers Holdings Inc., 855 F.3d 459 (2d Cir. 2017), the U.S. Court of Appeals for the Second Circuit affirmed a district court order subordinating the claims of former Lehman Brothers employees for undelivered equity-based compensation to those of the defunct bank’s general creditors. The court determined the compensation benefits were securities that had been purchased by the former employees when they agreed to receive them in exchange for their labor and the asserted damages arose from those purchases, requiring the claims’ subordination under the Bankruptcy Code. The decision is important to employees and employers weighing the value of hybrid compensation packages and creditors seeking to safeguard their priority position among bankruptcy claimants.

In Lehman, claimants received, as part of their compensation package, restricted stock units (RSUs) that gave them a contingent right to own Lehman common stock at the conclusion of a five-year holding period. However, RSUs that remained unvested when Lehman filed for bankruptcy became effectively worthless, leading affected employees holding these RSUs to feel shortchanged. Seeking relief, claimants filed proofs of claim in Lehman’s bankruptcy proceeding for cash payments equivalent to the amounts previously paid to them in RSUs. Lehman in turn filed omnibus objections to the claims on the grounds that, as the claims arose from the purchase or sale of securities, 11 U.S.C. § 510(b) required that they be subordinated to the claims of Lehman’s general creditors.