United States District Court, S.D. New York
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For Stephen Lucas, Lead Plaintiff: Nicholas Ian Porritt, LEAD ATTORNEY, Levi & Korsinsky LLP (DC), Washington, DC.
For Charles Silsby, Individually and On Behalf of All Others Similarly Situated, Plaintiff: Nicholas Ian Porritt, LEAD ATTORNEY, Levi & Korsinsky LLP (DC), Washington, DC; Richard William Gonnello, LEAD ATTORNEY, PRO HAC VICE, Emily C. Komlossy, Francis Paul McConville, Faruqi & Faruqi, LLP, New York, NY.
For Carl C. Icahn, Defendant: Herbert Beigel, LEAD ATTORNEY, Herbert Beigel & Associates, LLC, Tucson, AZ; Robert R. Viducich, Law Office of Robert R. Viducich, New York, NY.
For Dynegy Inc., Robert C. Flexon, Clint Freeland, Defendants: Douglas P. Baumstein, Glenn Kurtz, LEAD ATTORNEYS, White & Case LLP (NY), New York, NY.
For Kevin T. Howell, Thomas W. Elward, E. Hunter Harrison, Michael J. Embler, Vincent J. Intrieri, Samuel Mersamer, Defendants: Glenn Kurtz, LEAD ATTORNEY, White & Case LLP (NY), New York, NY.
OPINION AND ORDER
John G. Koeltl, United States District Judge.
This is an alleged securities fraud action brought on behalf of a proposed class of investors in Dynegy, Inc. (" Dynegy" ). The lead plaintiff, Stephen Lucas, brings a consolidated putative class action suit on behalf of individuals who purchased securities of Dynegy between July 10, 2011 and March 9, 2012 (the " Class Period" ). The plaintiffs allege that various defendants made material omissions in connection with Dynegy's attempt to restructure its assets in 2011. The plaintiffs allege that the asserted omissions violate Section 10(b) of the Securities Exchange Act of 1934 (the " Exchange Act" ), 15 U.S.C. § 78j(b), and Rule 10b-5, promulgated thereunder, 17 C.F.R. 240.10b-5. The plaintiffs also allege that various Dynegy officers, directors, and shareholders are liable as control persons under Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a).
The defendants move to dismiss the Amended Class Action Complaint for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). This Court has jurisdiction over the alleged Securities Exchange Act violations pursuant to 15 U.S.C. § 78aa, and 28 U.S.C. § 1331. For the reasons explained below, the defendants' motion to dismiss is granted and the current complaint is dismissed.
In deciding a motion to dismiss pursuant to Rule 12(b)(6), the allegations in the complaint are accepted as true, and all reasonable inferences must be drawn in the plaintiffs' favor. McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 191 (2d Cir. 2007). The Court's function on a motion to dismiss is " not to weigh the evidence that might be presented at a trial but merely to determine whether the complaint itself is legally sufficient." Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985). A complaint should not be dismissed if the plaintiffs have stated " enough facts to state a claim to relief that is plausible on its face."
Bell A. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). " A claim has facial plausibility when the plaintiff[s] plead factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). While factual allegations should be construed in the light most favorable to the plaintiffs, " the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions."
A claim under Section 10(b) of the Securities Exchange Act sounds in fraud and must meet the pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure
and of the Private Securities Litigation Reform Act of 1995 (" PSLRA" ), 15 U.S.C. § 78u-4(b). Rule 9(b) requires that the complaint " (1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent." ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 99 (2d Cir. 2007). The PSLRA similarly requires that the complaint " specify each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading," and it adds the requirement that " if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1); ATSI, 493 F.3d at 99; see also City of Roseville Emps.' Ret. Sys. v. Energysolutions, Inc., 814 F.Supp.2d 395, 401 (S.D.N.Y. 2011).
When presented with a motion to dismiss pursuant to Rule 12(b)(6), the Court may consider documents that are referenced in the complaint, documents that the plaintiffs relied on in bringing suit and that are either in the plaintiffs' possession or that the plaintiffs knew of when bringing suit, or matters of which judicial notice may be taken. See Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2000). The Court can take judicial notice of public disclosure documents that must be filed with the Securities and Exchange Commission (" SEC" ) and documents that both " bear on the adequacy" of SEC disclosures and are " public disclosure documents required by law." Kramer v. Time Warner, Inc., 937 F.2d 767, 773-74 (2d Cir. 1991); see also In re Bank of Am. AIG Disclosure Sec. Litig., 980 F.Supp.2d 564, 2013 WL 5878814, at *1-2 (S.D.N.Y. Nov. 1, 2013).
The following facts are undisputed or accepted as true for purposes of the defendants' motion to dismiss. Dynegy is a publicly traded company and the third largest independent power producer in the United States. (Amended Class Action Complaint (" Am. Compl." ) ¶ 3.) Dynegy Holdings, Inc. (" Dynegy Holdings" ) is a direct and wholly-owned Dynegy subsidiary that, until September 1, 2011, owned all of Dynegy's operations. (Am. Compl. ¶ ¶ 4, 29.)
In 2010, Dynegy began experiencing severe financial difficulties. In October of that year, Dynegy disclosed that its " substantial leverage and forecasted negative free cash flow [were creating] a very challenging liquidity position over time" and that " [a]bsent significant improvements in BOTH commodity and financial/capital markets, operating as a stand-alone company [would involve] substantial risk to Dynegy stockholders." (Am. Compl. ¶ 34 (second alteration in original).) In its 2010 Annual Report, Dynegy disclosed that it and Dynegy Holdings had suffered net losses of $234 million and $242 million, respectively, in fiscal year 2010. (Am. Compl. ¶ 33.) The 2010 Annual Report stated that Dynegy's substantial debts might preclude it from servicing its financial obligations and also included a going-concern qualification from Dynegy's auditors, who expressed doubt about Dynegy's ability to continue as a going concern. (Am. Compl. ¶ 33.)
In response to its financial difficulties, Dynegy created a Financial Restructuring Committee (" FRC" ) composed of several of Dynegy's directors. (Am. Compl. ¶ ¶ 26, 41.) The FRC's purpose was to conduct " a comprehensive review of Dynegy's various
restructuring alternatives, including, . . . possible changes to the capital structure of Dynegy." (Declaration of Douglas Baumstein (" Baumstein Decl." ), Ex. 1 at 18; see also Am. Compl. ¶ 41.) By May 15, 2011, the FRC had " devised a multi-step plan to reorganize Dynegy's business segments and reorganize and restructure its debts." (Am. Compl. ¶ 43.) Dynegy's Board of Directors considered the FRC's restructuring plan at a meeting on May 18, 2011, and continued discussing the plan at subsequent meetings on June 15, 2011, June 28, 2011, and August 4, 2011. (Am. Compl. ¶ 43.)
On July 10, 2011, Dynegy issued a press release announcing that it would refinance its senior secured credit lines by the end of July, 2011. (Am. Compl. ¶ 62.) Dynegy described the refinancing as " the initial step in the Company's operating and financial restructuring," and represented that the refinancing was intended to " provide a solid foundation for Dynegy to begin addressing the financial challenges that have been magnified by an environment of low commodity prices." (Am. Compl. ¶ 62.) Dynegy also represented that " [t]he new financings, accompanied by the modification of the Company's asset ownership structure," would, among other things, " improve Dynegy's financial condition." (Am. Compl. ¶ 62.) Dynegy also stated that the FRC and the Board of Directors would " continue to work with [Dynegy's] advisors in connection with additional potential debt restructuring activities, which may include direct or indirect transfers of equity interests of [Dynegy Holdings] . . . and/or further reorganizations of [Dynegy] and/or various of its subsidiaries." (Am. Compl. ¶ 63.) In public disclosures filed with the SEC on July 11, 2011, Dynegy further disclosed that it might, after the refinancing was complete, " engage in transactions that increase the likelihood of [the Company's] estate or creditors challenging the [refinancing]." (Baumstein Decl., Ex. 2, Executive Summary (" Exec. Summ." ) at 6.)
To facilitate its refinancing efforts, Dynegy attempted to reorganize its most valuable assets into " ring-fenced" silos, that is, into entities that would be protected from creditors in the event that Dynegy Holdings declared bankruptcy. (Am. Compl. ¶ 44.) This restructuring effort, (the " First Step Restructuring" ), required transferring ownership of the Company's coal-powered facilities from Dynegy Holdings to Dynegy Coal Holdco, LLC (" CoalCo" ) and transferring ownership of the Company's gas-powered facilities from Dynegy Holdings to Dynegy Gas Holdco, LLC (" GasCo" ). (Am. Compl. ¶ 44.) Dynegy Holdings would retain indirect ownership of both new entities through a newly incorporated holding company called Dynegy Gas Investments, LLC (" Dynegy Investments" ). (Am. Compl. ¶ 44.)
On July 22, 2011, various creditors attempted to enjoin Dynegy's First Step Restructuring in the Delaware Court of Chancery. (Am. Compl. ¶ 66.) The plaintiff-creditors asserted claims for breach of contract and fraudulent transfer in the Delaware action. (Am. Compl. ¶ 66.) The court denied the creditors' application to enjoin the restructuring, and Dynegy completed the First Step Restructuring on August 5, 2011. (Am. Compl. ¶ 69; Baumstein Decl., Ex. 3 at 13.)
Dynegy disclosed the First Step Restructuring in its August 2011 Quarterly Report to the Securities and Exchange Commission (" SEC" ). (Am. Compl. ¶ 72.) The Quarterly Report described each transaction involved in the First Step Restructuring and stated:
The August 2011 reorganization represents [Dynegy's] first step in addressing [Dynegy's] liquidity concerns. Over the next eighteen months . .., [Dynegy] may participate in additional debt restructuring activities, which may include direct or indirect transfers of [Dynegy's] subsidiaries' equity interests . . . and/or further reorganizations of [Dynegy's] subsidiaries as well as other similar initiatives.
(Am. Compl. ¶ 72.)
On September 1, 2011, Dynegy executed the next step in its restructuring, acquiring CoalCo from Dynegy Investments in exchange for an illiquid unsecured financial instrument called an undertaking (the " undertaking" ). (Am. Compl. ¶ 51.) According to Dynegy, CoalCo had a fair value of approximately $1.25 billion, and Dynegy represented that it provided " [t]his value . . . to [Dynegy Investments] through . . . the issuance of an undertaking to make proportionate payments at the times that Dynegy Holdings is obligated to make payments of principal and interest" under $1.1 billion of notes due in 2019, and $175 million of notes due in 2026. (Am. Compl. ¶ 77.) The undertaking thus required that Dynegy make a stream of designated payments on debt held by Dynegy Holdings without requiring that Dynegy assume any of the debt held by Dynegy Holdings. (See Declaration of Nicholas Porritt (" Porritt Decl." ), Ex. A at 7.)
After Dynegy and Dynegy Investments completed their exchange, Dynegy Investments assigned the undertaking to Dynegy Holdings in exchange for a $1.25 billion promissory note. (Am. Compl. ¶ 52.) In connection with the assignment, the undertaking was amended to reduce Dynegy's payment obligations under the undertaking in the event that Dynegy acquired or retired any of the debt held by Dynegy Holdings. (Am. Compl. ¶ ¶ 52-53.) However, Dynegy ultimately declined to " relieve Dynegy Holdings of any debt." (Porritt Decl., Ex. A at 7.)
Dynegy announced the transactions executed in connection with the transfer of CoalCo (the " CoalCo transfer" ) on September 2, 2011 and disclosed the relevant documents to the SEC on September 8, 2011. (Am. Compl. ¶ 77; Baumstein Decl., Ex. 4 at 3-4.) In additional disclosures to the SEC, made on September 15, 2011, Dynegy stated that " [i]t is possible that [Dynegy's] creditors and/or other parties may seek to assert a variety of claims against Dynegy . . . challenging some or all of the transactions . . . under state or federal law for, among other things, breach of contract, [and] fraudulent transfer or preference . . . ." (Baumstein Decl., Ex. 5, Exhibit 99.2 at 3.) Dynegy also described the potential remedies that might be awarded to litigants who prevailed on claims that the CoalCo transfer was unlawful, including disgorgement and the transfer of CoalCo back to Dynegy Investments. (Baumstein Decl., Ex. 5, Exhibit 99.2 at 3.) Dynegy cautioned that " no assurance [could] be provided that any such litigation would be resolved in [Dynegy's] favor." (Baumstein Decl., Ex. 5, Exhibit 99.2 at 3.)
On November 7, 2011, Dynegy Holdings filed a voluntary petition for bankruptcy under Chapter 11 of the Bankruptcy Code. (Am. Compl. ¶ 59.) The bankruptcy court subsequently granted a motion to appoint a Chapter 11 examiner for purposes of reviewing the restructuring transactions in which Dynegy Holdings was involved, and confirmed Susheel Kirpalani as the Bankruptcy Examiner on January 12, 2012. (Am. Compl. ¶ 60.) Kirpalani issued his
report on March 9, 2012, finding that Dynegy had, through its restructuring, intended to " delay and hinder" its creditors. (Am. Compl. ¶ 84.) Assuming insolvency--and noting that although the Examiner viewed the assumption as reasonable, " many of the conclusions reached [in the report] would be different if Dynegy Holdings were, in fact, solvent[,]" (Porritt Decl., Ex. A at 14)--Kirpalani stated that the CoalCo transfer was an actual and constructive fraudulent conveyance. (Am. Compl. ¶ 84.) However, the Examiner found that there was no intent to defraud or affirmatively deceive creditors under the Bankruptcy Code because Dynegy set out the actual facts of the relevant transactions in its public filings. (Porritt Decl., Ex. A at 123-24.)
Dynegy vigorously objected to the Examiner's Report, pointing out, among other things, that the effect of the undertaking was to require Dynegy to make principal and interest payments on debt of Dynegy Holdings that Dynegy Holdings would otherwise be required to make, and that the satisfaction of antecedent debt constitutes reasonably equivalent value based on the face amount of the debt. (Baumstein Decl., Ex. 7 at 49-50.) Kirpalani's conclusions were never litigated in the bankruptcy action because Dynegy Holdings reached a settlement with its creditors. (See Am. Compl. ¶ 86.) On the day that Kirpalani issued his report, shares of Dynegy's common stock fell 35%. (Am. Compl. ¶ 85.)
The plaintiffs have not sued Dynegy or Dynegy Holdings in this action. Instead, the plaintiffs have sued several individual defendants. Defendant Robert Flexon is the President and CEO of Dynegy and a Director of both Dynegy and Dynegy Holdings. (Am. Compl. ¶ 18.) Defendant Clint Freeland is an Executive Vice President and the Chief Financial Officer of Dynegy. (Am. Compl. ¶ 19.) Defendant Kevin Holwell is an Executive Vice President and the Chief Operating Officer of Dynegy. (Am. Compl. ¶ 20.) Defendants Thomas Elward, Michael Embler, Vincent Intrieri, and Samuel Merksamer were Directors of Dynegy at all times during the Class Period. (Am. Compl. ¶ ¶ 21, 23-25.) Defendant E. Hunter Harrison also served as a Director of Dynegy, but for only a portion of the ...