Bennetti v. Oxford Restructuring Advisors LLC 2023

The Bankruptcy Court did not err in disallowing claims against debtors based on rights in an  ESOP. The ESOP, an S corporation, was only obligated to provide ESOP members with the  right to have distributions in cash. The ESOP members did not have a right to any payments  from debtors and, therefore, “could not properly assert a proof of claim against them under 11 U.S.C.S. § 101(5)(A). 29 U.S.C.S. § 1132 did not give the ESOP participants like the  employees a right to payment from debtors and did not transform them into unsecured  creditors of debtors.” Therefore, the Bankruptcy Appellate Panel affirmed the judgment of the Bankruptcy Court. 

Facts

Community Providers of Enrichment Services Inc. and subsidiaries provided  behavioral health services in California and Arizona. Community Providers of Enrichment  Services was an S corporation and established an ESOP for the benefit of its employees. A trustee and a committee, selected by Community Providers of Enrichment Services’ board of directors, operated the ESOP. 

Section 13 of the ESOP plan provided to participants as directed by the committee and read  in part that “(b) … [W]hile CPES is an S Corporation, the distribution of a Participant’s Capital  Accumulation may be made entirely in cash without granting him the right to demand  distribution in shares of CPES Stock.” Also noted was that “[p]lan termination could trigger  distribution of participants’ benefits.” 

The Chapter 11 case

In 2020, the three debtors filed Chapter 11 petitions. Later, the  Bankruptcy Court approved the sale of the debtors’ assets. The liquidation plan resulted in  100% payout to unsecured creditors and a surplus for the ESOP. 

The proofs of claim

The liquidating trustee filed two such claims. First, an unsecured claim  in the amount of $255,150 for overpayment of distributions based on the 2018 valuation was alleged to be too high. Additionally, “[t]he ESOP, on behalf of the participants, also asserts  a proof of claim for all amounts due to the ESOP related to its equity interests in the Debtor.” 

The omnibus objections

The liquidating trustee argued that the ESOP participants’ claims do not support claims against the debtors because ESOP participants had rights only against the ESOP trust, and their claims were duplicative of the trustee’s claims and lacked sufficient information.  

Participants argued the ESOP trust had an obligation to repurchase company stock  distributed to the participants and had a right to force the debtors to repurchase the stock for cash even though the provision did not relate to an S corporation. Participants argued that the termination of the ESOP triggered the repurchase obligations. “They concluded that  their rights under the Debtors’ repurchase obligations are ‘at parity’ with unsecured creditors under Arizona state law.” 

The Bankruptcy Court determined: “(1) the Debtors are S corporations, which exempts them  from the requirements of 26 U.S.C. § 409(h)(1), and (2) the ESOP Participants were never  given debt instruments of any kind.” The participants had not shown that this was a direct  obligation of the debtors. The Bankruptcy Court also found the claims to be duplicative of  those the trustee made. 

Discussion 

The ESOP participants did not have any enforceable claim against the debtors. It was not enough that the creditor had a right to payment but one that must be enforceable against  the debtors or their property. The participants argued that Community Providers of  Enrichment Services owed them a repurchase or put under the Tax Code. This requirement  was inapplicable in the case of an S corp., noting that, if an S corp. has over 100  shareholders, its status was terminated. Here, the ESOP plan provided that the debtors’ employees had no right to receive distributions in stock. The participants seemed to argue  that distributions in cash was the legal equivalent of repurchase of shares while providing no support for this “novel idea.” The participants had a right to receive cash distributions from the ESOP trust but no right to receive any cash payments from Community Providers of Enrichment Services.  

“The ESOP Participants misconstrue the ESOP Plan. Termination of the ESOP triggers  certain distribution rights, but section 19 of the ESOP Plan does not require that those  distributions be made in the form of CPES stock. The ESOP Participants are entitled to a  cash distribution, but that distribution comes from the ESOP, not the Debtors.” 

Two cases the participants cited, In re Indian Jewelers Supply Co. and In re Merrimac Paper Co., were not applicable in this case. 

The participants further argued that Arizona law provided they were on par with unsecured  creditors. “They cite Arizona Revised Statutes § 10-640(F), which provides that ‘[a] corporation’s indebtedness to a shareholder incurred by reason of a distribution made in accordance with this section is at parity with the corporation’s indebtedness to its general,  unsecured creditors.’” However, the debtors were not indebted to the ESOP participants. 

ERISA did not give the participants a right to payment from the debtors, so they were not  transformed into unsecured creditors. Also, in this case, the debtors did not owe the  participants any fiduciary duty. 

The ESOP participants’ claims were duplicative of the ESOP trustee’s claims. The  participants argued that the Bankruptcy Court erred in determining that their claims were  duplicative of the ESOP trust’s claims. The panel discerned no error. The participants provided no proofs of claim. “Therefore, the record on appeal does not permit us to compare  their claims with the ESOP Trustee’s claims.”  

“The ESOP Participants complain, in summary, that the ESOP Trustee’s claims do not  protect their rights. However, any claim recovered by the ESOP Trustee benefits the ESOP  trust, which in turn benefits the ESOP Participants. Conversely, the ESOP Participants’ strategy of sustained litigation diminishes the assets available for distribution.” 

The Bankruptcy Court did not err, and, thus, the court affirmed.