On July 18, 2016, Judge Walrath issued a concise written opinion ruling upon whether an executive’s claim for unpaid stock-based compensation was an equity security or rather a general unsecured claim against the Debtors’ estate.  The opinion is styled as GSE Environmental, Inc., et al. v. Sorrentino (In re GSE Environmental, Inc., et al.), Adv. Pro. No. 16-50377 (MFW) (Bankr. D. Del. July 18, 2016).

Defendant was the Debtors interim and CEO starting July 1, 2013, with a salary of $100,000 per month in cash and $86,000 per month in stock.  By the time of Debtors’ filing, Defendant’s stock compensation had been unpaid. Accordingly, Defendant filed a general unsecured claim for the unpaid stock.  The Debtors filed a complaint asserting that the amount owed for the share-based component of the Defendant’s compensation constitutes an equity security.  Defendant disagreed, contending that the amounts owed should be characterized as a general unsecured claim.  Debtors moved for judgment on the pleadings.

The Bankruptcy Code defines “equity security” to encompass “warrants or rights . . . to purchase, sell . . . a share, security, or interest” in a corporation. 11 U.S.C. § 101(16) (A),(C). Common stock received in exchange for labor constitutes a purchase and sale of a security under the Code. Frankum v. Int’l Wireless Commc’ns Holdings, Inc. (In re Int’l Wireless Commc’ns Holdings, Inc.), 279 B.R. 463, 467 (D. Del. 2002).

The Defendant contended that the value of stock owed to him constitutes a claim because the stock component of his compensation was calculated as a fixed dollar amount rather than a fixed number of shares.  Judge Walrath disagreed, stating that “[a]lthough the quantity of stock owed to the Defendant under the amended employment agreement was based on a fixed dollar amount, the fact remains that the agreement entitled the Defendant only to company stock, not cash.”  Moreover, “the stock rights received under the amended employment agreement constitute a purchase and sale of a security because they were given in exchange for the Defendant’s labor.”

Thus, the Court found that Defendant’s stock-based compensation fits within the Code’s definition of equity security, and granted Debtors’ motion on the pleadings.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.