Stock-Based Compensation “Fits Squarely Within” the Bankruptcy Code’s Definition of “Equity Security”

GSE Envtl., Inc. v. Sorrentino (In re GSE Envtl., Inc.), No. 16-50377 (MFW), 2016 WL 3963978 (Bankr. D. Del. July 18, 2016)

In this Opinion, Judge Walrath ruled that stock-based compensation owed to the former chief executive officer (the “Defendant”) of GSE Environmental, Inc. and GSE Holding, Inc. (the “Debtors”) under his employment agreement constitutes an “equity security”, as that term is defined under the Bankruptcy Code.  See Op. at *5; 11 U.S.C. § 101(16).

Defendant’s pre-petition employment agreement provided for monthly compensation in the amount of $186,000, payable in $100,000 of cash and $86,000 of company stock.  After the bankruptcy filing, Defendant filed a proof of claim in the amount of $260,866.67, asserting a general unsecured claim on account of unpaid stock-based compensation owed to him under the agreement.  The cash portion of his compensation had already been paid in full.  The Debtors objected to the claim, arguing that the claim was not a general unsecured claim but rather an equity security or alternatively, that it should be subordinated under section 510(b) of the Bankruptcy Code.  The Defendant asserted that his claim was proper given that his employment agreement fixed a dollar amount to his stock-based compensation rather than a number of shares.  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).  Under binding Delaware law, “[c]ommon stock received in exchange for labor constitutes a purchase and sale of a security under the [Bankruptcy] Code.”  Op. at *4.  Simply because the value of stock owed was calculated as a fixed dollar amount as opposed to a fixed number of shares, the Court held, did not change the fact that “the agreement entitled the Defendant only to company stock, not cash.”  Id. at *5.  For these reasons, the Court ruled that the Defendant’s claim constituted an equity security, not a general unsecured claim.