Parks v. Dittmar (In re Dittmar), 618 F.3d 1199 (10th Cir. 2010)

CASE SNAPSHOT

Bankruptcy trustees argued that stock appreciation rights (SARs) – analogous to stock options – were property of bankruptcy estates under section 541 of the Bankruptcy Code, and, thus, belonged to the trustees rather than the debtors. The SARs were subject to numerous contingencies, including a skeletal agreement that was not finalized until after the debtors’ petitions were filed. The lower courts held that the debtors’ interests in the SARs were too contingent to be property of the estates. The Circuit Court overturned the lower courts, holding that even contingent agreements could be property of the bankruptcy estate under section 541, and ordered the SAR distributions to be turned over to the trustees.

FACTUAL BACKGROUND

The debtors in this case were employees subject to a skeletal collective bargaining agreement (CBA). The employer, Spirit AeroSystems, offered to create an equity participation program and to contribute SARs as part of the program, but not until certain “payment events” (e.g., an IPO) occurred. Ultimately, the SARs, which were akin to stock options, would turn out to be worth approximately $60,000 per employee after the debtors’ petitions were filed.

The pre-petition CBA contained language to the effect that the parties “agree[d] to establish” the equity participation program, but the agreement did not define which employees would be eligible employees. Some terms were described in more detail in slide presentations provided to employees. The “payment events” upon which distributions would be made were all contingencies within the control of the employer.

Shortly after the ratification of this CBA, the debtors filed their respective bankruptcy petitions over a period of roughly two months. More than one year after these bankruptcy filings, the employer memorialized the equity participation program, setting forth provisions regarding eligible employees, the SARs each eligible employee would receive, and other necessary details. One month after this, a payment event (an IPO) occurred, and the employees were paid their equity participation distributions.

The trustee sought to recover the distributions as property of the bankruptcy estates under Bankruptcy Code section 541. The Bankruptcy Court granted the debtors’ motions for summary judgment, finding that the SARs were not part of the estates because the CBA, by failing to define eligible employees, did not create an enforceable right in the distributions. The Bankruptcy Appellate Panel affirmed on different grounds, finding that whatever interests were created by the bargaining agreement were too contingent to be property of the estates. The Circuit Court reversed.

COURT ANALYSIS

The court began by noting that, for purposes of most bankruptcy matters, property interests are created and defined by state law. Under relevant Kansas law, SARs were a type of compensation, like stock options, that were generally property of bankruptcy estates under section 541 of the Bankruptcy Code. First, the Circuit Court held that the pre-petition CBA was more than a mere “agreement to agree” and that, although skeletal, CBAs were commonly held to be enforceable under federal labor laws. Finding the CBA to be ambiguous, the Circuit Court turned to extrinsic evidence, including the slide presentations and SEC filings, which clearly showed that the eventual final post-petition agreement contained the same terms as the pre-petition CBA.

Second, the Circuit Court discussed whether stock appreciation rights could be property of the estates under Section 541 of the Bankruptcy Code. The court found that the scope of section 541 is extremely broad, and an interest may be estate property even if it is contingent. Although the Circuit Court acknowledged that the stock rights were contingent on certain events (such as an IPO) occurring, it held that the mere fact that the vesting events were entirely contingent and outside the control of the debtors did not take the property outside the scope of section 541. The Circuit Court distinguished these contingencies from bonuses that were completely within the discretion of employers, and which could be withheld at the employer’s sole whim and discretion.  

A dissenting opinion helpfully summed up the Circuit Court’s ruling as setting up a dichotomy between (i) contingencies where the employer had discretion over the events that gave rise to the vesting interest (e.g., an IPO creating stock rights), where the interest would be property of the estate, and (ii) contingencies where the employer had discretion whether to give the interest at all (e.g., a purely discretionary bonus), where the interest would not be property of the estate. Holding that the contingent interests were not too remote to be property of the bankruptcy estates, the Circuit Court reversed the lower court grant of the debtors’ motions for summary judgment.

PRACTICAL CONSIDERATIONS

At the outside edges of Section 541, which defines property of the estate broadly, lie contingent interests. Depending on how remote the interest is, and what the contingencies are, courts will often struggle in deciding whether the property belongs to the estate or not. Here, the BAP’s decision was split between majority and dissenting positions, as was the Circuit Court decision. Although it appears clear that contingent property will belong to the estate if the contingency is at least partly within the control of the debtor, it is far less certain how courts will rule where the contingencies lie exclusively in a third party’s control. Here, as much as anywhere, good advocacy by experienced bankruptcy practitioners will go a long way.