ESOP Repurchase Obligations in Bankruptcy

An employee stock ownership plan (an “ESOP”) is a type of employee benefit plan regulated by the Internal Revenue Code (the “Code”) and the Employee Retirement Income Security Act of 1974 (“ERISA”). Employees who are ESOP participants are in many ways treated similarly to shareholders of their company. This applies to bankruptcy as well, which means that ESOP participants are effectively “last in line” and usually get nothing if the company is liquidated. However, recent case law suggests that this treatment may not apply to repurchase obligations toward former employees. Repurchase obligations may be treated as debt, which may give an ESOP participant higher priority in bankruptcy putting them next in line after the senior secured lender. In this podcast, Lavelle Law attorney Roman Perchyts answers questions about ESOPs and bankruptcy and addresses concerns that banks may have regarding the priority of repurchasing obligations in bankruptcy.