IN RE DYNEGY INC., Debtor.
DYNEGY INC., Appellee. STEPHEN LUCAS, Appellant,
OPINION AND ORDER
JOHN G. KOELTL, District Judge.
The appellant, Stephen Lucas, appeals from an Order of the United States Bankruptcy Court for the Southern District of New York (Morris, C.J.), dated October 4, 2012, overruling the appellant's preserved objection to confirmation of the Joint Chapter 11 Plan of Reorganization (the "Plan") for Dynegy Inc. and Dynegy Holdings LLC (collectively "Dynegy" or "Debtors"). The Order was based on a decision of the Bankruptcy Court announced at the hearing on the appellant's objection on October 1, 2012.
The Plan contains a release of claims against non-debtor third parties, including the Debtors' former directors and officers. The Plan provides that individuals may opt-out of the release. The appellant is the lead plaintiff in a separate putative securities class action against several former directors and officers of Dynegy Inc. that are among those purportedly released by the Plan. That class has not yet been certified. The appellant argued to the Bankruptcy Court that the release was impermissible and also sought to opt-out of the release on behalf of himself and on behalf of the putative class in the securities litigation. The Bankruptcy Court overruled the appellant's objection. The Bankruptcy Court concluded that the appellant did not have standing to object to the release individually because he had opted out, and did not have standing to object or opt-out on behalf of the putative class because he did not represent the class outside the confines of the putative securities class action. The Bankruptcy Court held that, in any event, the non-debtor third party releases were permissible consensual third party releases because the affected parties had failed to opt-out despite notice. The appellant now challenges those conclusions. For the reasons explained below, the appeal is dismissed.
On November 7, 2011, Dynegy Holdings LLC and certain of its indirect subsidiaries filed a voluntary petition for relief under chapter 11 of the United States Bankruptcy Code. (Ex. 3 at 1.) In December 2011, the Bankruptcy Court authorized the appointment of an independent examiner to investigate allegations of fraud and fraudulent transfers between Dynegy Holdings LLC, Dynegy Inc., and other subsidiaries. (Ex. 2.) The examiner reached the conclusion that the Debtors' boards of directors breached their fiduciary duties by approving and carrying out fraudulent transfers between Dynegy Inc. and certain of its subsidiaries. (Ex. 3 at 1-4.) In or about May 2012, the Debtors and certain major stakeholders reached an agreement settling claims stemming from the investigation. (Ex. 7.) Under the settlement agreement, shareholders of Dynegy Inc. as of July 2, 2012,  received one percent of the equity in the entity that would emerge from the bankruptcy of Dynegy Inc. as well as certain warrants. (Hr'g Tr. 3-4, May 21, 2013.)
On or about March 28, 2012, Charles Silsby filed a securities class action complaint in this Court against Dynegy Inc. and several individual defendants. (See Ex. 4 ("Compl.").) The complaint named as individual defendants Dynegy Inc.'s alleged controlling shareholder, Carl C. Icahn, the President, Chief Executive Officer, and Director, Robert C. Flexon, and the Executive Vice President and Chief Financial Officer, Clint C. Freeland. (See Compl. ¶¶ 1-2, 10-15.)
The Complaint alleges that Dynegy Inc., Flexon, and Freeland violated section 10(b) of the Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, by disseminating false and misleading information and failing to disclose material facts with respect to Dynegy's financial performance and prospects. (Compl. ¶¶ 44, 48.) The Complaint also alleges a claim against all of the individual defendants under section 20(a) of the Exchange Act for controlling the primary violator, Dynegy Inc. (Compl. ¶¶ 53-60.) The putative class includes investors who purchased or otherwise acquired Dynegy Inc. common stock on the New York Stock Exchange between September 2, 2011, and March 9, 2012. (Compl. ¶ 1.)
On July 6, 2012, Dynegy Inc. filed a voluntary petition for relief under chapter 11 of the United States Bankruptcy Code. (Ex. 14 at ¶ 1.) On July 7, 2012, this Court entered an order in the putative securities class action that stayed the securities litigation as to Dynegy Inc. pursuant to 11 U.S.C. § 362(a). See Stay Order, Silsby v. Icahn, No. 12 Civ. 2307 (S.D.N.Y. July 7, 2012). The securities litigation was not stayed against the individual defendants. See id. On July 9, the Bankruptcy Court held a hearing on Dynegy Inc.'s bankruptcy petition. (Ex. 18.) At the hearing, an attorney appeared on behalf of Charles Silsby, the named plaintiff in the putative securities class action. (Ex. 18 at 9-10, 52-61.) The attorney raised several arguments respecting notice to the members of the putative class. (Ex. 18 at 52-61.)
On July 10, 2012, the Bankruptcy Court approved the disclosure statement in the Dynegy Inc. action. See Disclosure Statement Order, In re Dynegy Inc., No. 12-36728 (Bankr. S.D.N.Y. July 10, 2012) (approving disclosure statement, solicitation and voting procedures, and scheduling the plan confirmation process). The Disclosure Statement Order provided that the proponents of the Plan were "not required to distribute or serve copies of the Plan, Ballots, Confirmation Hearing Notice, [Dynegy Inc.] Stakeholder Notice, [Dynegy Inc.] Provisional Ballot, Disclosure Statement Order or Disclosure Statement to any holder of a claim or interest in the Non-Voting Classes." Id. at 9. The "Non-Voting Classes" included Dynegy Inc. shareholders, some of whom are members of the putative securities class. Id. at 4, ¶ F. The Disclosure Statement Order further provided that "Notice of Non-Voting Status shall be distributed to holders, as of [July 2, 2012], of Claims and interests in the Non-Voting Classes...." Id. at 7, 10.
The Disclosure Statement Order required that the "Confirmation Hearing Notice" be published in the national editions of The New York Times and The Wall Street Journal on or before July 13, 2012. Id. at 19. The Confirmation Hearing Notice explained that the Plan included third party releases that would be binding unless a party opted-out. See id. Ex. D ¶ 9.
On July 12, the Debtors filed the Plan, the Disclosure Statement, and Solicitation Materials. (Ex. 19 at Ex. 1 ("Plan").) The Plan includes a release provision (the "Release") that releases from liability non-debtor third parties who are defendants in the putative securities class action. Specifically, section 8.20 of the Plan provides in relevant part:
Subject to the occurrence of the Effective Date, for good and valuable consideration, any holder of a Claim or Equity Interest that is impaired or unimpaired under the Plan shall be presumed conclusively to have released the Released Parties from any Cause of Action based on the same subject matter as such Claim against or Equity Interest in the Surviving Entity....
(Plan § 8.20.) The "Released Parties" are defined by the Plan to include:
(a) [Dynegy Holdings], Dynegy [Inc.], the Surviving Entity, and each of their Affiliates, ... (j) the present and former directors, officers, managers, equity holders, agents, successors, assigns, attorneys, accountants, consultants, investment bankers, bankruptcy and restructuring advisors, financial advisors, ... and (k) any Person claimed to be liable derivatively through any of the foregoing.
(Plan Ex. A at ¶ 138.) The parties agree that the individual defendants in the securities litigation are ...