GSE Environmental – Equity is Equity, Even when Owed.

In a 5 page decision signed July 18, 2016, Judge Walrath of the Delaware Bankruptcy Court ruled on a Motion for Judgment on the pleadings that undelivered stock options, are not debt, but are instead equity. Judge Walrath’s opinion is available here (the “Opinion”).  This decision was made in the GSE Environmental case, Adversary No. 16-50377 (MFW).

The Debtors’ interim president and chief executive officer filed a proof of claim seeking $260,866.67 from the unpaid stock-based portion of his compensation.  The Debtor’s filed a complaint seeking a declaration that the claim was not debt or, in the alternative, to subordinate the claim.

The Defendant argued that the value of stock owed constituted a claim because the stock component of his compensation was calculated as a fixed dollar amount rather than a fixed number of shares. Opinion at *4-5.  Judge Walrath held that although the quantity of stock owed was based on a fixed dollar amount, the agreement entitled the Defendant only to company stock, not cash.  Opinion at *5.  By definition, this is an equity claim.

As was the case in prior opinions granting a motion to dismiss a preference complaint, the plaintiff’s request to allow an amended complaint to be filed was granted.  Considering that most of the plaintiffs handling preference litigation have filed hundreds of prior preference cases, I wonder if a time will come when the Court will begin to require mass-filing preference plaintiffs to pay the litigation costs of the defendants.

This was a straightforward decision, as evidenced by the length of the adversary docket – in only 25 docket entries, the Court determined the case was ready for a decision.  At the end of the day, it’s hard to argue for equity to be anything other than equity – particularly in a court of equity.

John Bird practices with the law firm Fox Rothschild LLP in Wilmington, Delaware. You can reach John at 302-622-4263, or [email protected].