In a win for Hughes Hubbard's Lehman
team, a federal appeals court affirmed two lower court decisions holding that a
Financial Industry Regulatory Authority (FINRA) arbitration was inappropriate in
a core bankruptcy proceeding that would affect the rights of tens of thousands
of estate creditors.
On Oct. 6, the U.S. Court of Appeals for the Second
Circuit ruled that U.S. Bankruptcy Judge Shelley Chapman correctly denied a
motion to compel arbitration filed by 341 claimants in the Lehman Brothers Inc.
(LBI) SIPA liquidation.
"Based on our independent review of the record
and the relevant case law, we conclude that the bankruptcy court did not abuse
its discretion in denying plaintiffs' motion to compel arbitration," the panel
The plaintiffs participated in an Executive and Select Employees
Deferred Compensation Plan (ESEP) with LBI, then known as Shearson Lehman
Brothers Inc., from 1985 to 1988. After the commencement of LBI's SIPA
proceeding in September 2008, the plaintiffs filed claims under the ESEP, and
Trustee Jim Giddens objected based on the agreement's subordination provision,
which states that their deferred compensation payments are subordinate to "all
claims of all other present and future creditors of Shearson whose claims are
not similarly subordinated."
Plaintiffs claimed that sending their
dispute to arbitration would not impact the rights of other creditors. But HHR
disagreed, stating that creditors are still actively receiving distributions and
arguing that the relative priority of claims is a central bankruptcy issue that
directly implicates the rights of other creditors. Judge Chapman denied the
arbitration motion in August 2014. U.S. District Judge Edgardo Ramos upheld the
decision a year later.
On appeal to the Second Circuit, plaintiffs
argued that FINRA arbitrators should decide their level of priority because the
subordination dispute was "narrow, unique and grounded in state law and federal
However, the appeals panel held that Judge Chapman
correctly found that the dispute was a "core" bankruptcy proceeding and did not
abuse her discretion by finding that compelling arbitration would seriously
jeopardize the objectives of the U.S. Bankruptcy Code.
court considered the conflicting policies of the Federal Arbitration Act and the
Bankruptcy Code, made a particularized inquiry into the nature of the claims and
the facts of LBI's bankruptcy, and found that an underlying purpose of the
Bankruptcy Code would be jeopardized by enforcing an arbitration clause in this
case," the panel wrote.
Jim Kobak and Chris Kiplok lead the team
representing Giddens. Jim Fitzpatrick argued the appeal on Sept. 27. Karen Chau,
Marlena Frantzides and Thom Sisson also represented Giddens in this particular