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The Security National Bank of Sioux City, IA v. Vera T. Welte Testamentary Trust

Summarizing by Amir Shachmurove


Case Type:
Case Status:
CC-22-1156-FSG and CC-22-1157-FSG (9th Circuit, Jun 02,2023) Not Published
Participants in an ESOP plan established by an S corporation have claims against the plan, not against the corporation itself. As a result, the plan participants' claims were disallowed,
Procedural context:
Participants in an employee stock ownership plan (ESOP) appealed the bankruptcy court's order that disallowed the participants' claims in the plan sponsor/debtor's bankruptcy case.
Community Providers of Enrichment Servces, Inc. (CPES), nka CPESCA Liquidating, Inc., Novelles Developmental Services, Inc., nka NDS Liquidating, Inc., and CPES California, Inc., nka CPESCA Liquidating, Inc., provided behavioral health services in California and Arizona, The latter two were wholly owned subsidiaries of CPES. CPES created an employee stock ownership plan (ESOP) for the employees of CPES and the subsidiaries. The ESOP was governed by a plan and an employee ownership trust agreement (the ESOP Agreement). The trust is operated by a trust and a committee, both of which are selected by CPES' directors. CPES was an S corporation for income tax purposes. This limited CPES to fewer than 100 stockholders. Accordingly, the ESOP could make distributions only in cash. The ESOP plan stated that, upon termination of the plan, the accounts of all employees would be fully vested. The debtors filed chapter 11 petitions in 2020. The bankruptcy court later approved a sale of the companies' assets and a joint plan for the liquidation, which would be supervised by a Liquidating Trustee. The liquidation plan called for a 100% payout to unsecured creditors and a surplus for the ESOP. Several ESOP participants filed proofs of claim, and the ESOP trustee filed two proofs of claim. The first asserted an unsecured claim of $255,150, for amounts due to the ESOP because the 2018 stock value had been inflated, resulting in larger payouts to ESOP participants and leaving fewer assets than the plan should have had. In the second claim, the ESOP trustee asserted that the ESOP held 100% of CPES's shares and was entitled to the distribution regarding CPES's equity. The Liquidating Trustee objected to the ESOP participants' proofs of claim. The Liquidating Trustee argued that the participants only had claims against the ESOP, not the estate. Consequently, the participants' claims duplicated the ESOP trustee's claims. The participants argue that the ESOP plan documents gave each of them claims against the estate and that their claims, under Arizona law, were "at parity" with the claims of unsecured creditors. The bankruptcy court confirmed the objection and ruled that the ESOP participants had no right to force the purchase of the participants' imputed equity interests because CPES was an S corporation. The bankruptcy court summarized its holding by stating that the ESOP plan participants did not have the equivalent of a put option because the stock was held in the ESOP trust. Thus, the debtors had no direct obligation to the participants.
FARIS, SPRAKER, and GAN, Bankruptcy Judges

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