APPEALS FROM THE UNITED STATES BANKRUPTCY APPELLATE PANEL (B.A.P. Nos. 08-002-KS, 08-003-KS, 08-004-KS, 08-005-KS, 08-006-KS, 08-007-KS, 08-008-KS, 08-009-KS).
The opinion of the court was delivered by: Kelly, Circuit Judge.
Before KELLY, HOLLOWAY, and LUCERO, Circuit Judges.
The Appellants, bankruptcy trustees ("Trustees"), appeal from the judgment of the bankruptcy appellate panel ("BAP"). The BAP determined that Appellees and debtors' ("Debtors") stock appreciation rights were not part of Debtors' bankruptcy estates under 11 U.S.C. § 541. A divided BAP panel affirmed the bankruptcy court's grant of summary judgment to Debtors, applying different reasoning. Our jurisdiction arises under 28 U.S.C. § 158(d)(1), and we reverse.
Debtors are former employees of the Boeing Company who became employees of Spirit AeroSystems, Inc. on June 17, 2005, when Spirit acquired Boeing's Wichita plant. In re Lowe, 380 B.R. 251, 252 (Bankr. D. Kan. 2007). At the time of the sale, Debtors' unions ratified substantially similar collective bargaining agreements ("the CBA") with Spirit. In re Dittmar, 410 B.R. 71, 74 n.7 (B.A.P. 10th Cir. 2009). During negotiations, Spirit proposed a 10% wage cut for union-represented employees. Lowe, 380 B.R. at 254. As an inducement, Spirit also offered to establish an equity participation program ("EPP") for union-represented employees and to contribute stock appreciation rights ("SARs") to the program if certain "payment events" occurred. Id. These SARs would expire in fifteen years if no payment event occurred. 1 Aplt. App. 159. The final CBA contained language that "[t]he parties agree to establish an [EPP]" for "participating employees." Lowe, 380 B.R. at 254. (emphasis added). The CBA did not provide a detailed description of the EPP and did not define the term "participating employees." Id. at 257. Prior to voting on the CBA, the union members attended a slide presentation discussing the EPP. Id. at 254. The slides indicated that participants would be awarded options (approximately 1,000 options per employee); an option was a right to share in Payment Event profits on one share of stock. 1 Aplt. App. 140, 147. The value of the option would be determined upon a Payment Event with a participant ultimately receiving proceeds less the exercise price of the option. 1 Aplt. App. 142, 145 ("Following a Payment Event, cash or stock will be distributed automatically. The amount you receive will be net of the exercise price of the Option."). The slides further noted that "[w]e do not know when a Payment Event will take place, but [the company] is using a five-year period in their planning. The company . . . will want a Payment Event as soon as . . . the conditions are right for an optimal valuation." 1 Aplt. App. 152. The unions ratified the CBA on June 17, 2005. Lowe, 380 B.R. at 254.
Shortly after ratification of the CBA, Debtors filed their respective bankruptcy petitions over roughly a two-month period between August and October 2005. Dittmar, 410 B.R. at 80. On October 27, 2006, over one year after the bankruptcy filings, Spirit memorialized the EPP in a document. Lowe, 380 B.R. at 255. The full plan document defined which employees were eligible to participate in the EPP, as well as the SARs each eligible employee would receive under the EPP. Id. One month later, on November 27, 2006, a payment event (an IPO) occurred. Id. Ultimately, the SARs were worth $61,440 per employee. Id. Participating employees received $34,556 in cash around December 6, 2006, and 1,034 shares of Spirit Class A common stock around March 15, 2007. Id. at 255-56.
Trustees then filed motions to compel turnover of the distributions received from the SARs as property of the bankruptcy estate pursuant to 11 U.S.C. § 541. After a hearing, the bankruptcy court entered an interim order denying turnover. Dittmar, 410 B.R. at 80. After discovery, various trustees and debtors moved for summary judgment on the turnover motions. The bankruptcy court granted Debtors' motion for summary judgment and denied Trustees' motion, finding the distributions were not property of the bankruptcy estate. Lowe, 380 B.R. at 257-58. The bankruptcy court, relying on Kansas law, held that the CBA did not grant Debtors an enforceable right in the distributions because it did not clearly define which employees would have rights under the EPP. Id. at 257. The court noted that "participating employees" was not defined until the post-petition creation of the EPP. Id. The bankruptcy court concluded the right to the distributions was not part of the estate because Debtors did not have a contingent future interest until the EPP was created. Id. at 257-58.
A split panel of the BAP affirmed the bankruptcy court's judgment but utilized different reasoning. The panel majority determined that the bankruptcy court erred in "(1) relying upon Kansas contract law to interpret the CBA, (2) finding the CBA unambiguous, and (3) limiting its analysis to the plain language of the CBA." Dittmar, 410 B.R. at 79. However, the majority held that the Debtors did not have an interest in the distributions until the payment event occurred. Id. Until this time, Debtors had only a "hope, anticipation, or expectation" in the SARs because those distributions "were entirely dependent upon the economic decisions of Spirit." Id. at 77. According to the majority, because Spirit had "discretion" over whether the payment event would occur, Debtors had no pre-petition interest in the distributions. Id. at 78. The dissenting member of the panel would have denied summary judgment and remanded for an evidentiary hearing on various issues. Id. at 95.
On appeal from a BAP decision, we review matters of law de novo and the bankruptcy court's factual findings for clear error. Melnor, Inc. v. Corey, 583 F.3d 1249, 1251 (10th Cir. 2009). "[W]e treat the BAP as a subordinate appellate tribunal whose rulings are not entitled to any deference (although they certainly may be persuasive)." Mathai v. Warren, 512 F.3d 1241, 1248 (10th Cir. 2008).
"For purposes of most bankruptcy proceedings, property interests are created and defined by state law. Once that state law determination is made, however, we must still look to federal bankruptcy law to resolve the extent to which that interest is property of the estate" under § 541. Parks v. FIA Card Servs., N.A., 550 F.3d 1251, 1255 (10th Cir. 2008) (citations and quotations omitted); 11 U.S.C. § 541(a)(1).
We first consider whether and to what extent Debtors have an interest in the SARs under Kansas law. Butner v. United States, 440 U.S. 48, 55 (1979); see, e.g., Williamson v. Hall, No. KS-08-088, 2009 WL 4456542, at *8 (B.A.P. 10th Cir. Dec. 4, 2009) (holding that "pay on death" accounts were not part of the bankruptcy estate under § 541 because, under Kansas law, debtor had no property interest in the accounts until the death of the owner). We then consider whether that interest existed before Debtors filed their bankruptcy petitions. Finally, we turn to whether the SARs are property of the bankruptcy estate under § 541.
A. Nature of Debtors' Interest
The parties do not address whether the distribution rights at issue would be considered a property interest under Kansas law, although Trustees generally note that Kansas law recognizes that contingent interests are property interests. Aplt. Br. 25; see also In re Allen Bros. Truck Lines, Inc., 329 F.2d 735, 737 (10th Cir. 1964). Our research has not uncovered any Kansas cases with similar facts. As a result, we must predict how the Kansas Supreme Court would rule. See, e.g., Boehme v. U.S. Postal Serv., 343 F.3d 1260, 1264 (10th Cir. 2003). To this end, "we are free to consider all resources available, including decisions of [Kansas] courts, other state courts and federal courts, in addition to the general weight and trend of authority." Id. (internal quotation marks and citation omitted).
Stock appreciation rights are a type of compensation that "give the holder the right to a cash payment or stock in an amount representing the difference between the market price and the fixed or strike price specified on the face of the SAR." Scholastic, Inc. v. Harris, 259 F.3d 73, 78 (2d Cir. 2001) (citing Searls v. Glasser, 64 F.3d 1061, 1064-65 (7th Cir. 1995)); see also FASB Accounting Standards Codification, Glossary, "Stock Appreciation Right" (2010). The SARs at issue in this case vested upon an IPO (or other payment event), and the distribution was the difference between the net offering price per share of the IPO and $10 (plus an incremental amount for each year). 1 Aplt. App. 159; see also Spirit Aerosystems Annual Report 2006 at 105 ("Upon the closing date of the IPO, all rights to receive stock were considered vested.").
Debtors' interest in the SARs is similar to an employee's interest in a stock option plan. See, e.g., In re Carlton, 309 B.R. 67, 69-71 (Bankr. S.D. Fla. 2004). Employees with stock options own contractual rights to purchase stock in the future that are subject to certain limitations of use and to the possibility of defeasance by later events. Id. at 72. Such postponed enjoyment does not disqualify these interests as property. Id. The Carlton court held that "[t]he fact that some of the Options had not accrued and were not exercisable as of the [bankruptcy] petition date, but whose exercise was contingent on the Debtor's continued post-petition employment, is of no consequence to the issue of ownership of the Options on the petition date." Id. That the EPP required a payment event as condition precedent does not alter this analysis. See, e.g., Capital Health Management Group v. Hartley, 689 S.E.2d 107, 109 (Ga. Ct. App. 2009) (describing a SARs agreement where payment was contingent on the sale of company stock).
Once Debtors satisfied the condition for being participating employees (completing ninety days of employment for the new company), they were eligible to participate in the EPP. These employees held contingent property rights. While the value of the SARs before any payment event occurred may have been de minimis, that does not mean that Debtors did not have a property interest in the SARs. The ...