Stock "Block" Hinders ESOP Trustee

December 16, 2002 ( - United Airlines ESOP trustee State Street Bank & Trust wants a bankruptcy court to rethink its decision to limit sales of the company's stock.

Last week the bankruptcy court backed a request from United’s parent UAL to prevent large stock holders – those with approximately 2.5 million shares or more – from selling or transferring their holdings (see  UAL Gets Court Order Halting Stock Sales ).   The company said the move is necessary to help preserve current operating losses, which it can use to avoid current and future tax liabilities.   A change in ownership could complicate the use of the carryforwards.   The court order barring the sales will be in effect until a December 30 hearing determines its suitability.

“Best” Interests

State Street said that it must be allowed to continue selling UAL stock in order to comply with ERISA’s (the Employee Retirement Income Security Act of 1974) requirement that trustees of qualified plans act in the best interests of plan participants and their beneficiaries.  

In court papers, State Street said it holds equity securities in United Airlines that, upon conversion, will be equal to 32.5 million common shares, according to Dow Jones.   Those papers also note that, based on State Street’s analysis and advice of advisers, if the stock could be sold immediately, the trust would realize $37 million. However, if State Street isn’t permitted to sell the shares, there is great risk they will lose all of their value.  

Alternative Actions

In its motion, State Street said it wants the court to exempt it from the sale restrictions, or provide a bond, letter of credit, or other cash equivalent totaling $37 million that would be used to compensate employees participating in the employee stock ownership plan (ESOP).

State Street also said that the bankruptcy court lacked the proper jurisdiction to stop the sale of UAL stock currently held in the stock option plan because the stock isn’t an asset of the bankrupt company.