On August 7, 2026, Bankruptcy Judge Kyu Y. Paek held that approximately $17.56 million held in Sleep Number’s deferred compensation trust is property of the estate, and directed the trustee to transfer the remaining trust assets to the debtors. The money had been set aside years earlier to pay deferred compensation to a select group of management or highly compensated employees. Under the decision it is general estate property, available to satisfy claims across the unsecured creditor body rather than reserved for Plan participants.

The decision came in a case that has moved quickly. Sleep Number filed in the Southern District of New York on June 12, 2026, pursued a sale of the company as a going concern on an expedited schedule, and obtained approval of a sale to the winning bidder, SNBR, Inc., for $701,800,000 on July 21, 2026. The deferred compensation motion was filed while that sale process was running, and it drew a single objection, from a former employee appearing pro se who is owed roughly $107,000.

For Plan participants, the practical consequence is a deadline rather than a distribution. The decision expressly preserves the right of every participant to file a general unsecured claim, and the bar date is September 10, 2026. The decision directs debtors’ counsel to upload the proposed order previously docketed at ECF Doc. # 479, with revisions noting entry of the Memorandum Decision, so the transfer proceeds under that conforming order.

Sleep Number Corporation was a retail mattress company that assembled and sold adjustable “smart” beds directly to customers. The debtors filed petitions for relief under Chapter 11 on June 12, 2026 in the Bankruptcy Court for the Southern District of New York, and the cases are jointly administered under Case No. 26-11399 (KYP). Davis Polk & Wardwell LLP serves as counsel to the debtors.

The deferred compensation program at issue predates the filing by more than a decade. Sleep Number sponsored the Sleep Number Executive Deferral Plan to provide deferred compensation to a select group of management or highly compensated employees. The Plan was designed as an unfunded arrangement that complies with section 409A of the Internal Revenue Code and qualifies for the exemptions in sections 201, 301, and 401 of ERISA. On September 3, 2013, the company entered into a Non-Qualified Deferred Compensation Trust Agreement for Select Comfort with Charles Schwab Bank as trustee, and the deferred compensation was held in the resulting Executive Investment Plan Trust.

The Memorandum Decision does not catalog the operational or macroeconomic pressures that led Sleep Number to file. What it does describe is the shape of the case, and that shape explains why the trust funds mattered. The debtors filed with the goal of selling the company as a going concern on an expedited schedule, and the docket reflects that pace. Bid procedures were approved on July 2, 2026, twenty days after the petition date, and the court approved the sale on July 21, 2026, less than six weeks after the filing.

A case run at that speed puts the composition of the estates in front of the court early. The board provided written notice of insolvency to the trustee ten days into the case, the debtors moved for turnover of the trust funds on July 5, 2026, and the motion states that the trustee and the Official Committee of Unsecured Creditors support the relief. One objection was filed, by a Plan participant.

The outcome here follows from the structure rather than from anything particular to this case. A top hat plan paired with a rabbi trust exchanges protection from the employer’s creditors for tax deferral, and that exchange is fixed when the employee elects to participate.

A top hat plan is defined in ERISA as a plan that is unfunded and maintained by an employer primarily to provide deferred compensation for a select group of management or highly compensated employees, 29 U.S.C. § 1051(2). Top hat plans remain subject to ERISA’s administrative and enforcement provisions but are exempt from its vesting, participation, fiduciary responsibility, and funding requirements. The rationale, as the decision notes, is that management and highly compensated employees have sufficient bargaining power to negotiate favorable deferred compensation plans and are capable of taking the attendant risks into account. The tax treatment follows the same premise. The participant is not taxed until actual receipt because the participant may never receive the money if the company becomes insolvent.

Unfunded status is the load-bearing element. As the Third Circuit put it in Accardi v. IT Litigation Trust (In re IT Group, Inc.), 448 F.3d 661, 665 (3d Cir. 2006), the assets used to pay the deferred compensation are the general assets of the employer and are subject to the claims of the employer’s creditors. A rabbi trust is the workaround that lets an employer segregate cash without losing that status. The assets go into a trust, they can be used only to pay deferred compensation, and a change of control cannot claw them back. The condition is that the trust funds remain subject to the claims of the employer’s creditors in the event of insolvency or bankruptcy.

That last line is the whole case. The security a rabbi trust provides is security against the employer changing its mind, not security against the employer running out of money.

Two features of the Sleep Number documents pointed in opposite directions, and the court had to decide which controlled. The trust was irrevocable by Sleep Number, and the funds were segregated from other company assets. Those are the features that make a rabbi trust feel like protection. Everything else in the documents pointed the other way.

A bankruptcy filing was an event of insolvency under the Trust Agreement, so the entire insolvency architecture switched on automatically at the petition date. The board’s written notice of insolvency ten days later completed the sequence, and section 3(a) gave the trustee a clean path to comply with a turnover direction without exposure. That drafting is why the trustee supported the motion rather than resisting it.

The sole objection came from a former Sleep Number employee and Plan participant appearing pro se, owed roughly $107,000 in deferred compensation. The objection did not challenge the trust documents on their terms. It raised fairness and disclosure.

He could not reach his own deferred compensation before the filing because he had elected a five year post-employment distribution schedule. He stated that he would not have participated in the Executive Deferral Plan had he fully understood that the compensation would be inaccessible for years and exposed to the claims of Sleep Number’s creditors. He argued that transferring the trust funds to the estates for the benefit of creditors is “fundamentally inequitable,” and he asked the court either to deny the motion or to impose additional protections preserving participants’ contractual and legal rights.

The relative scale is worth noting. The trust funds represent approximately 2.5 percent of the approved sale price, and the objector’s claim represents approximately six tenths of one percent of the trust funds.

The court reached the result in three moves, each resting on settled authority.

Start with the breadth of the estate

The filing of a petition creates an estate comprised of all legal or equitable interests of the debtor in property, wherever located and by whomever held, under 11 U.S.C. § 541(a)(1). The scope of property under that section is broad, as the Supreme Court held in United States v. Whiting Pools, Inc., 462 U.S. 198, 204-05 (1983). Custody by a third party trustee does not remove property from the estate if the debtor holds the interest.

Establish that top hat assets belong to the employer

Because top hat plans are unfunded, distributions on account of those plans are paid using the employer’s general assets and are subject to claims of the employer’s creditors, per IT Group, 448 F.3d at 665. The court paired that with Lehman Brothers Inc. Deferred Compensation Defendants Steering Committee v. Giddens (In re Lehman Brothers Inc.), 617 B.R. 231, 240 (Bankr. S.D.N.Y. 2020), aff’d, 2021 WL 4127075 (2d Cir. Sept. 10, 2021), which states that because top hat plans are exempt from the funding requirements of title I of ERISA, the assets of a top hat plan are part of the general assets of the employer.

Confirm that the rabbi trust changed nothing

Creating the Deferred Compensation Trust did not alter the fact that the funds remaining in it belonged to Sleep Number. The court quoted its own prior explanation in In re WorldCom, Inc., 364 B.R. 538, 543 (Bankr. S.D.N.Y. 2007): the Internal Revenue Code requires that all trust assets be property of the employer and therefore subject to the claims of the employer’s creditors, and it is only the act of distribution that conveys assets held in a grantor trust from the grantor to the grantee. Sleep Number’s trust is a grantor trust of which Sleep Number is the grantor, so participants held only a limited interest until distribution, and distribution never occurred.

Notice what the analysis did not require. The decision reaches its result without any avoidance theory and without questioning the validity of the trust. The feature that made the deferral work for tax purposes, employer ownership of the trust assets, is the same feature that placed those assets in the estate.

The court did not dismiss the fairness argument. It agreed with the premise and rejected the remedy, which is the more instructive outcome.

The decision states sympathy for the objector and for other Sleep Number employees who expected to receive deferred compensation payments, then places that expectation alongside every other disappointed expectation in the case. Commercial landlords, vendors, and suppliers all expected full payment of amounts owed to them, and all of them will likely receive a fraction of what they are owed from the estates. Against that backdrop, the court held that it is unable to give preferential treatment to one set of unsecured creditors over another based solely on equitable principles.

The same reasoning answers the alternative request for additional protections for Plan participants. Protections that improve one group of general unsecured creditors relative to the rest operate as priority, and priority is a function of the Bankruptcy Code rather than of the relative sympathy a claim attracts.

The decision is careful to mark its own limits, and the limits are the only actionable part of it for participants.

The ruling has no effect on the objector’s right, or the right of any other Plan participant, to file a general unsecured claim in the cases. The deadline is September 10, 2026 under the order establishing deadlines and procedures for filing proofs of claim, entered at ECF Doc. # 473. The court noted that the case specific website maintained by the claims agent is informative as to the filing of proofs of claim, and directed the clerk’s office to mail a copy of the Memorandum Decision to the objector.

Recovery on those claims will depend on the ultimate distribution in the cases, which the decision does not address. What the decision fixes is the participants’ position in the priority scheme.

Nothing in this decision breaks new doctrinal ground. Its value is in how cleanly it lays out a sequence that recurs in every case where a top hat plan meets an insolvent employer, and in what the sequence tells you about where to spend your attention.

For debtors’ counsel, the turnover motion is a document exercise before it is a litigation exercise. The provisions that carried this motion were drafted in 2013: no ownership interest, parity with general unsecured creditors, availability on insolvency, a payment stop, and an express indemnity for the trustee delivering property at a court’s direction. Read the trust agreement first. If those provisions are present, the motion is largely written, and the trustee is likely to support it rather than oppose it.

For creditors’ committees, a rabbi trust is worth identifying early. The funds sit with a third party institution rather than in the debtors’ operating accounts, and recovering them here required an affirmative motion rather than a claim objection.

For participants and the counsel who advise them, the exposure is fixed at election rather than at insolvency. The objector elected a five year post-employment distribution schedule, which is why the funds were still in the trust at the petition date, and his objection states that he would not have participated had he fully understood that the compensation would be inaccessible for years and subject to creditors’ claims. That is a disclosure and advice question, and the decision indicates it is not one a bankruptcy court can resolve through the priority scheme.