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.




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               Review of an order of a district court issued in its capacity as an appellate

court is plenary. In re Manville Forest Prods. Corp., 

, 1388 (2d Cir. 1990).

The factual determinations and legal conclusions of the bankruptcy court are thus

reviewed independently by this Court. 

courtʹs findings of fact are

reviewed for clear error, and its conclusions of law are reviewed de novo. 

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, 

, 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.
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              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, 

, 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., 

, 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, 

, 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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