In Re Lehman Brothers ( 2021 )

19-3245, 20-3757
In re Lehman Brothers
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 COURT=S 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 “SUMMARY ORDER”). A PARTY CITING TO 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 10th day of September, two thousand twenty-one.
PRESENT:
BARRINGTON D. PARKER,
GERARD E. LYNCH,
JOSEPH F. BIANCO,
Circuit Judges.
_____________________________________
In re: Lehman Brothers Holdings Inc., Lehman
Brothers Inc.,
Debtors,
344 Individuals, Identified in the Notices of
Appearances at Bankruptcy Court ECF Dkt. Nos.
8234, 8905 & 9459,
Appellants,
v. 19-3245
James W. Giddens, as Trustee for the SIPA
Liquidation of Lehman Brothers, Inc.,
Trustee-Appellee.
_____________________________________
James W. Giddens, as Trustee for the SIPA
Liquidation of Lehman Brothers Inc.,
Petitioner-Appellee,
v. 20-3757
The Lehman Brothers Inc. Deferred Compensation
Defense Steering Committee, As Attorney In Fact
For Those Specified Herein,
Respondent-Appellant.
_____________________________________
FOR APPELLANTS: RICHARD J.J. SCAROLA (Alexander Zubatov, on
the brief), Scarola Zubatov Schaffzin PLLC,
New York, NY.
FOR APPELLEE: JAMES C. FITZPATRICK (Carl W. Mills, Karen M.
Chau, on the brief), Hughes Hubbard & Reed
LLP, New York, NY.
Appeals from an order and judgment of the United States District Court for the Southern
District of New York (Paul G. Gardephe, J.) affirming an order of the United States Bankruptcy
Court for the Southern District of New York (Shelley C. Chapman, B.J.), and from a separate order
of the United States Bankruptcy Court for the Southern District of New York (Shelley C.
Chapman, B.J.).
UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED, AND
DECREED that the September 30, 2019 order and judgment of the district court and the June 15,
2020 order of the bankruptcy court are AFFIRMED.
These two tandem appeals, which have been consolidated for decision, arise out of the
liquidation of Lehman Brothers Holdings Inc. and Lehman Brothers Inc. (together, “LBI”).
2
Appellants 1 are former employees of Shearson Lehman Brothers Inc. (“Shearson”), a predecessor
of LBI. Shearson established a deferred compensation plan—the Executive and Select
Employees Plan (“ESEP”)—in 1985, under which Appellants agreed to defer certain amounts of
their earned income in exchange for tax benefits and a favorable interest rate. Appellants elected
to participate in the ESEP by signing individual agreements with Shearson (the “ESEP
Agreements”). 2 After LBI commenced the underlying liquidation proceedings, Appellants filed
proofs of claim asserting secured status and seeking recovery of their deferred compensation under
the ESEP Agreements.
Appellants first appeal from a September 30, 2019 order and judgment of the United States
District Court for the Southern District of New York (Paul G. Gardephe, J.) affirming a November
12, 2015 order of the United States Bankruptcy Court for the Southern District of New York
(Shelley C. Chapman, B.J.), which granted the motion by Appellee, trustee for the LBI bankruptcy
James W. Giddens (the “Trustee”), to reclassify Appellants’ claims from secured to unsecured
(hereinafter, the “Reclassification Appeal”). Appellants separately appeal from the June 15, 2020
order of the United States Bankruptcy Court for the Southern District of New York (Shelley C.
Chapman, B.J.) granting the Trustee’s motion to dismiss Appellants’ complaint, which sought a
declaratory judgment that their deferred compensation is excluded from LBI’s bankruptcy estate
by operation of 11 U.S.C. § 541(b)(7)(A)(i)(I), (B)(i)(I) (hereinafter, the “Section 541(b)(7)
1
Although Appellants in these two appeals are named differently, they represent the interests of the same
LBI creditors and we therefore refer to them together as “Appellants” for purposes of this summary order.
2
The parties do not dispute that the sample ESEP Agreement submitted in the joint appendices in both
appeals is representative of all ESEP Agreements signed by Appellants.
3
Appeal”). 3 We assume the parties’ familiarity with the underlying facts, procedural history, and
issues on appeal, which we reference only as necessary to explain our decision to affirm.
I. The Reclassification Appeal
Appellants first assert that the bankruptcy court erred in granting the Trustee’s motion to
reclassify their claims as unsecured. We disagree.
Where, as here, a district court conducts appellate review of a bankruptcy court’s decision
in the first instance, “we engage in plenary, or de novo, review of the district court decision” and
“then apply the same standard of review employed by the district court to the decision of the
bankruptcy court.” In re Anderson, 884 F.3d 382, 387 (2d Cir. 2018). Thus, “we review the
bankruptcy court’s findings of fact for clear error and its legal determinations de novo.” Id.The bankruptcy court plainly did not err in reclassifying Appellants’ claims as unsecured.
Under Section 5(d) of the ESEP Agreements, “[t]he payments to be made” thereunder are
“unsecured subordinated obligations of [the] Employer only, and [the] Employee is only a general
subordinated creditor.” Joint App’x I at 54 (emphasis added). 4 Accordingly, the plain language
of the ESEP Agreements makes clear that Appellants have only unsecured claims to the deferred
compensation they seek. 5 Indeed, a prior panel of this Court has similarly concluded that this
3
With respect to the Section 541(b)(7) Appeal, we granted the Trustee’s request for leave to appeal
directly to this Court from the bankruptcy court’s June 15, 2020 order. In addition, we note that the
bankruptcy court denied Appellants’ motion for summary judgment as moot in its June 15, 2020 order, but
Appellants do not challenge that decision on appeal.
4
In this summary order, citations to Joint Appendix I are to the joint appendix filed in the Reclassification
Appeal and citations to Joint Appendix II are to the joint appendix filed in the Section 541(b)(7) Appeal.
5
Our conclusion is further supported by Section 9(d) of the ESEP Agreements, which provides that “in
the event of [Shearson’s] insolvency[] . . . [Appellants] 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
4
exact ESEP Agreement provision is binding on Appellants and therefore affirmed an earlier order
of the bankruptcy court, which determined that Appellants’ “claims are subordinated to the claims
of LBI’s general unsecured creditors.” In re Lehman Brothers Holdings Inc., 792 F. App’x 16,
18–19 (2d Cir. 2019). 6
In sum, we discern no error in the bankruptcy court’s decision to reclassify Appellants’
claims as unsecured.
II. The Section 541(b)(7) Appeal
On October 7, 2019, Appellants filed a complaint in bankruptcy court initiating adversary
proceedings against the Trustee. In particular, Appellants sought a declaratory judgment that,
under 11 U.S.C. § 541(b)(7)(A)(i)(I), (B)(i)(I), “the amounts of the deferred compensation pension
accruals in connection with the ESEP . . . for each [Appellant] through the time of LBI’s
bankruptcy are not the property of the LBI bankruptcy estate,” and requested that their deferred
compensation “be turned over to [them].” Joint App’x II at 12. The Trustee moved to dismiss
Appellants’ complaint for failure to state a claim upon which relief can be granted pursuant to
Federal Rule of Civil Procedure 12(b)(6) (applicable to this adversary proceeding through Federal
Rule of Bankruptcy Procedure 7012(b)). On June 15, 2020, the bankruptcy court granted the
Trustee’s motion to dismiss, concluding that Appellants’ complaint: (1) was time-barred by the
four-year statute of limitations set forth in 28 U.S.C. § 1658(a); (2) was barred under the doctrine
creditors of Shearson, whose claims are senior to claims arising under this agreement, have been fully
satisfied.” Joint App’x I at 63.
6
We note the incongruity of Appellants’ continued efforts to maintain their status as secured creditors of
LBI, notwithstanding our prior conclusion that their claims are subordinate to the claims of LBI’s general
unsecured creditors.
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of laches; and (3) failed to state a claim on the merits because Section 541(b)(7) does not operate
to exclude Appellants’ deferred compensation from LBI’s bankruptcy estate.
On appeal, Appellants contend that the bankruptcy court erred with respect to each of the
three grounds upon which it based its decision to grant the Trustee’s motion to dismiss. Turning
first to the bankruptcy court’s non-merits-based holdings, we need not address whether 28 U.S.C.
§ 1658(a) applies here because, even assuming that there is no statute of limitations for a
Section 541(b)(7) claim (as Appellants contend), we conclude that Appellants’ complaint is barred
by the equitable defense of laches. 7
“Laches is a defense developed by courts of equity to protect defendants against
unreasonable, prejudicial delay in commencing suit.” SCA Hygiene Prods. Aktiebolag v. First
Quality Baby Prods., LLC, 137 S. Ct. 954, 960 (2017) (internal quotation marks omitted). “The
elements of a traditional laches defense are: (1) lack of diligence by the party against whom the
defense is asserted, and (2) prejudice to the party asserting the defense.” Fed. Ins. Co. v. United
States, 882 F.3d 348, 365 (2d Cir. 2018) (internal quotation marks omitted); accord Hizam v.
Kerry, 747 F.3d 102, 110–11 (2d Cir. 2014). The party asserting laches bears the burden of
establishing the defense. See Merrill Lynch Inv. Managers v. Optibase, Ltd., 337 F.3d 125, 132
(2d Cir. 2003).
As an initial matter, Appellants argue that the bankruptcy court improperly decided the
laches defense at the motion to dismiss stage. We recognize that the fact-intensive application of
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The parties disagree as to the proper standard of review we should apply to the laches issue.
Specifically, Appellants urge us to review the bankruptcy court’s laches determination de novo, and the
Trustee argues that our review here is for abuse of discretion. We need not resolve this dispute, however,
because Appellants’ challenge fails under the more-exacting de novo standard.
6
this equitable doctrine often requires consideration of categories of extrinsic evidence that are
outside the proper confines of a motion to dismiss pursuant to Rule 12(b)(6), and that it also may
benefit from discovery to adequately develop the record. However, in cases where all of the
material facts pertaining to the laches issue can be properly considered on a motion to dismiss, and
where discovery is unnecessary to allow for full and fair consideration of the issue in a particular
case, there is no legal barrier to resolution of the affirmative defense under Rule 12(b)(6). See,
e.g., Zuckerman v. Metro. Museum of Art, 928 F.3d 186, 193–95 (2d Cir. 2019) (concluding that
a plaintiff’s claims were barred by laches at the motion to dismiss stage).
That is precisely the situation here. The bankruptcy court properly took judicial notice of
the vast volumes of court filings in the LBI liquidation proceeding in assessing both Appellants’
degree of diligence and the level of prejudice to the Trustee resulting from their delay. See Kaplan
v. Lebanese Canadian Bank, SAL, 999 F.3d 842, 854 (2d Cir. 2021) (noting that, at the motion to
dismiss stage, courts may consider “matters of which a court may take judicial notice” (internal
quotation marks omitted)); Int’l Star Class Yacht Racing Ass’n v. Tommy Hilfiger U.S.A., LLC,
146 F.3d 66, 70 (2d Cir. 1998) (“A court may take judicial notice of a document filed in another
court[,] not for the truth of the matters asserted in the other litigation, but rather to establish the
fact of such litigation and related filings.” (internal quotation marks omitted)). Appellants fail to
point to any evidence that the bankruptcy court improperly considered under Rule 12(b)(6).
Moreover, for reasons discussed below, no additional discovery was necessary and no extrinsic
evidence needed further development before the laches issue could be decided under the
circumstances here. Therefore, we find no error in the resolution of this affirmative defense on a
7
motion to dismiss in this particular case and conclude that the bankruptcy court correctly
determined that Appellants’ complaint was barred by laches under the applicable standard.
First, as the bankruptcy court found, Appellants exhibited a remarkable lack of diligence
in raising their argument that Section 541(b)(7) excludes their deferred compensation from LBI’s
bankruptcy estate. Although Appellants referenced Section 541(b)(7) in their proofs of claim in
2009 and in their opposition to the Trustee’s motion to reclassify their claims as unsecured, they
did so with the goal of demonstrating that their claims were both within the LBI bankruptcy estate
and secured. When they filed their complaint initiating this adversary proceeding in 2019,
however, they adjusted their strategy and began to argue for the first time that Section 541(b)(7)
excludes their property from the bankruptcy estate and that it is therefore theirs (and not property
of LBI). Appellants did not make this argument when the Trustee objected to their claims from
July 2013 to January 2014, nor when the Trustee sought to subordinate their claims beginning in
February 2014, nor when the Trustee sought to reclassify their claims as unsecured beginning in
September 2015. In other words, Appellants waited until October 2019 to raise this new
Section 541(b)(7)-based argument, a delay of over at least five and a half years from the time when
the Trustee first challenged their claims.
Second, we also agree with the bankruptcy court that Appellants’ clear lack of diligence in
asserting the argument that their deferred compensation is excluded from LBI’s bankruptcy estate
pursuant to Section 541(b)(7) prejudiced the Trustee. More specifically, Appellants’ delay in
filing their complaint forced the Trustee to engage in unnecessarily protracted and undoubtedly
8
costly additional and piecemeal litigation for many years. 8 Moreover, the Trustee (not to mention
LBI’s other creditors) has been further prejudiced insofar as this case is prolonging the underlying
bankruptcy. Although Appellants contend that there are additional matters preventing the closure
of the LBI bankruptcy estate, the fact remains that this case—involving issues that could have been
litigated years ago had Appellants raised their new Section 541(b)(7) argument sooner—continues
to take up LBI estate resources and prevents the Trustee and the bankruptcy court from fully
attending to the remaining outstanding matters in their ongoing effort to resolve a bankruptcy
proceeding that has lasted for over a decade.
In sum, we have little trouble in concluding that Appellants “ha[ve] inexcusably slept on
[their] rights so as to make a decree against the [Trustee] unfair” because of the resulting prejudice.
Merrill Lynch Inv. Managers, 337 F.3d at 132 (quoting Prudential Lines, Inc. v. Exxon Corp., 704
F.2d 59, 65 (2d Cir. 1983)). Accordingly, the bankruptcy court properly determined that
Appellants’ complaint was barred by laches.
Having determined that Appellants’ complaint is barred by laches, we need not—and do
not—address the bankruptcy court’s holding on the merits that 11 U.S.C. § 541(b)(7)(A)(i)(I),
(B)(i)(I) does not exclude Appellants’ deferred compensation from the LBI bankruptcy estate.
8
To the extent Appellants argue that the Trustee chose to avoid litigating the new Section 541(b)(7)
argument, we disagree. Appellants point to no support for the assertion that the burden was on the Trustee
to discern the nuances of their (apparently evolving) argument and challenge it.
9
* * *
We have considered all of Appellants’ remaining arguments and find them to be without
merit. For the foregoing reasons, the September 30, 2019 order and judgment of the district court
and the June 15, 2020 order of the bankruptcy court are AFFIRMED.
FOR THE COURT:
Catherine O’Hagan Wolfe, Clerk of Court
10