Participants in Bankrupt Company’s ESOP Can’t Offload Shares

A federal district court found that, although the confirmed reorganization plan for the company was ambiguous as to whether ESOP participants could sell shares, a bankruptcy court was correct in determining they can’t.

Chief Judge Joseph H. McKinley, Jr. of the U.S. District Court for the Western District of Kentucky affirmed a bankruptcy court’s decision that participants in the employee stock ownership plan (ESOP) of bankrupt Conco, Inc. cannot sell their shares until January 1, 2019.

After filing for bankruptcy, Conco came up with a reorganization plan that was confirmed by the bankruptcy court which stated in part: “On the Effective Date, holders of equity securities in the Debtor shall retain their interests as in existence immediately prior to the Effective Date. Between Confirmation and the Effective Date, the ESOP shall be amended to provide that the Debtor may not contribute money or any other property to the ESOP, nor repurchase any employee-owned equity securities through December 31, 2018, to the extent allowed by applicable law.”

Several times during and after bankruptcy proceedings, Conco’s competitor, Delfasco, attempted to purchase Conco, but its attempts were rejected. The ESOP participants filed an action in the bankruptcy court saying the confirmed reorganization plan only prohibited Conco from repurchasing ESOP securities, but did not prohibit a third-party from doing so.

McKinley noted that the confirmed plan does not appear to address explicitly the issue of whether the ESOP-owned equity Interests in Conco may be sold or otherwise transferred before January 1, 2019, to a party other than the Conco. But he agreed that the bankruptcy court, under Kentucky law, appropriately considered the circumstances surrounding the reorganization plan, as well as the subject matter of the plan, the objects to be accomplished, and the conduct of the parties, in addition to the plan’s language, when finding all considerations evidenced an intent for the equity Interests not to be sold until after December 31, 2018.

“Since the Confirmed Plan is either ambiguous or silent as to this issue, the Bankruptcy Court was reasonable in its reliance on the evidence expressly or impliedly relied upon in its opinion, and the Court gives significant deference to the Bankruptcy Court’s decision, Appellants have not met ‘the extremely difficult burden of demonstrating on appeal that the bankruptcy court incorrectly interpreted its own prior language or intent,’” McKinley wrote in his opinion.

The court’s opinion is here.