(CN) – Lehman Brothers creditors are entitled to recover from the collapsed financial giant’s bankruptcy estate ahead of former Lehman employees in possession of now-worthless restricted stock units, the Second Circuit ruled Thursday.
Lehman Brothers filed for bankruptcy in September 2008, in the largest bankruptcy in U.S. history. The firm was the first and largest casualty of the 2008 financial crisis, and its unprecedented meltdown sent shockwaves through global markets, pushing the U.S. Treasury Department to bail out other firms pushed to the brink of solvency after years of bad bets that the U.S. housing bubble would never end.
In its bankruptcy filing, Lehman Brothers declared it owes $155 billion to its top two creditors: $138 billion to Citibank, and $17 billion to the Bank of New York. It owes billions more to other creditors.
At the time of the collapse, thousands of its employees held restricted stock units, or RSUs, awards that gave them a contingent right to own Lehman Brothers stock at the end of a five-year holding period. The company’s bankruptcy rendered the units worthless.
On Thursday, the Second Circuit ruled that these employees’ claims for the face value of the units must be subordinated to the claims of Lehman’s general creditors.
“These RSUs bear many of the hallmark characteristics of a security. Like many security holders, the RSU holders had limited voting rights and received any declared dividends in the form of additional RSUs,” Judge Robert Sack wrote for a three-judge panel. “And of most significance, they had the same risk and benefit expectations as shareholders because the value of their RSUs was tied to the value of Lehman Brothersʹ common stock.”
The court found that the employees can be considered to have “purchased” the units by voluntarily choosing to receive them as part of their compensation package.
Therefore, the employees must bear the cost of Lehman Brothers’ collapse and the stock’s accompanying loss of value, the panel ruled.
“We 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,” Sack said. “Once they received RSUs, their only right vis-à-vis Lehman Brothers was for the delivery of stock at the conclusion of the five-year holding period, assuming the specified employment-related conditions were met.”