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In re Dynegy, Inc.

United States Court of Appeals, Second Circuit

October 31, 2014

IN RE: DYNEGY, INC., Debtor. STEPHEN LUCAS, Appellant,
v.
DYNEGY INC., Appellee

Argued: April 24, 2014.

Appeal from an order entered by the United States District Court for the Southern District of New York (Koeltl, J.), dismissing a bankruptcy appeal. The district court concluded appellant lacked standing to opt out of or object to the joint reorganization plan of appellee and its subsidiary on behalf of a putative class in a separate securities class action against appellee. Because appellant had opted out in his individual capacity, the district court also found he was not affected by the bankruptcy court's order and thus lacked standing to pursue his personal objection to the plan on appeal. We affirm.

NICHOLAS I. PORRITT and STEVEN J. PURCELL, Levi & Korsinsky LLP, New York, NY, for Appellant.

J. CHRISTOPHER SHORE and JULIA M. WINTERS, White & Case LLP, New York, NY, for Appellee.

Before: WALKER and HALL, Circuit Judges, and MURTHA,[*] District Judge.

OPINION

Page 1065

MURTHA, J.

Appeal from an order entered by the United States District Court for the Southern District of New York (Koeltl, J.), dismissing a bankruptcy appeal. The district court concluded appellant lacked standing to opt out of or object to the joint reorganization plan of appellee and its subsidiary on behalf of a putative class in a separate securities class action against appellee. Because appellant had opted out in his

Page 1066

individual capacity, the district court also found he was not affected by the bankruptcy court's order and thus lacked standing to pursue his personal objection to the plan on appeal. We affirm.

I. Background

In November 2011, Dynegy Holdings LLC, a subsidiary of Dynegy Inc., filed a voluntary Chapter 11 petition in the U.S. Bankruptcy Court for the Southern District of New York (Morris, J.). Dynegy Inc.'s only asset was ownership of 100% of the equity of Dynegy Holdings. In March 2012, Charles Silsby filed a securities class action complaint against Dynegy Inc. and three individual defendants, two executives of the company and its alleged controlling shareholder, Carl C. Icahn, in the U.S. District Court for the Southern District of New York (Koeltl, J.). Lucas v. Dynegy, Inc. (In re Dynegy, Inc.), No. 12 Civ. 8908, 2013 WL 2413482, at *1 (S.D.N.Y. June 4, 2013). The complaint alleged dissemination of false and misleading information and failure to disclose material facts about Dynegy Inc.'s financial performance and prospects in violation of sections 10(b) and 20(a) of the Securities Exchange Act of 1934. [1]  Id. at *2. The putative (i.e., not yet certified) class included investors who acquired Dynegy Inc. common stock between September 2, 2011 and March 9, 2012. Id. In May 2012, Dynegy Inc. and its subsidiaries, including Dynegy Holdings, (collectively, " Dynegy" ), and certain major stakeholders reached an agreement settling claims stemming from allegations of fraudulent transfers between Dynegy Inc., Dynegy Holdings, and other subsidiaries. Id. at *1. Under the settlement agreement, the major stakeholders received an equity stake in the entity that would emerge from the bankruptcy of Dynegy.[2] Id. None of the members of the putative class in the securities litigation were parties to the settlement.

Dynegy Inc. followed its subsidiary into Chapter 11 reorganization. Dynegy, 2013 WL 2413482, at *2. This prompted an automatic stay of the securities class action in the district court as to Dynegy Inc. but not the three individual defendants. Id. The reorganization plan (the " Plan" ) contained a binding release of non-debtor third parties--including the three individual defendants in the securities class action--from liability unless a party opted out. Id. at *2-3. Because the release did not cover intentional fraud, willful misconduct, gross negligence, or criminal conduct, only the class action's section 20(a) claim but not their 10(b) claim came within the scope of the release. Id. The release also precluded litigation against the non-debtor third parties. Id.

On July 9, 2012, the bankruptcy court held a hearing on Dynegy Inc.'s bankruptcy petition. Dynegy, 2013 WL 2413482, at *2. At the hearing, an attorney for Charles Silsby, the named plaintiff in the securities litigation, argued there was inadequate notice to certain shareholders of the putative class regarding the third-party release and the opt-out mechanism. The bankruptcy court, however, approved Dynegy's disclosure statement and form of notice to the ...


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