IN RE: DYNEGY, INC., Dеbtor. STEPHEN LUCAS, Appellant, v. DYNEGY INC., Appellee.
Docket No. 13-2581
United States Court of Appeals for the Second Circuit
Decided: October 31, 2014
Argued: April 24, 2014
WALKER and HALL, Circuit Judges, and MURTHA, District Judge.
August Term, 2013. Judge J. Garvan Murtha, of the United States District Court for the District of Vermont, sitting by designation.
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.
MURTHA, J.
Appeal from an order entered by the United Statеs 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. Bеcause 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.
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 Distriсt 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 Mаy 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
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 mеchanism. The bankruptcy court, however, approved
On July 13, 2012, the district court appointed appellant Stephen Lucas as lead plaintiff in Silsby v. Icahn, the securities class action litigation. Dynegy, 2013 WL 2413482, at *4. On August 20, 2012, Lucas requested the district court expand the Lead Plaintiff Order to allow him to represent the putative class in Dynegy‘s bankruptcy proceedings. Id. The district court denied this request. Id.
On August 24, 2012, Lucas opted out of the release in the bankruptcy court on his behalf as well as on behalf of the putative class in the securities litigation. Id. He also submitted an objection to the Plan on behalf of himself and the putative class. Id.
Lucas appealed to the district court on his behalf as well as on behalf of the putative class. Dynegy, 2013 WL 2413482, at *5. The district court agreed Lucas “lack[ed] standing to opt out of or object to the [r]elease on behalf of the putative class and tо object to the [r]elease individually.” Id. at *10. Accordingly, it did not reach the merits of Lucas’ objections and dismissed his appeal. This appeal followed.
II. Discussion
A. Standard of Review
Our review of the district and bankruptcy court decisions is plenary. In re Halstead Energy Corp., 367 F.3d 110, 113 (2d Cir. 2004). We review legal conclusions de novo and factual findings for clear error. Id. at 114; see also In re Charter Commc‘ns, Inc., 691 F.3d 476, 483 (2d Cir. 2012).
B. Standing to Represent the Putative Class in Bankruptcy Court
Lucas argues his status as lead plaintiff in the securities litigation gives him standing to opt out of or object to the release on behalf of the putative class in the bankruptcy proceeding. Lucas also argues he was not required to seek class action status in the bankruptcy court to assert such standing. We disagree with both of these
In general, a plaintiff lacks standing to assert the rights or interests of third parties (the “Third Party Standing Doctrine“). Kane v. Johns-Manville Corp., 843 F.2d 636, 643 (2d Cir. 1988) (citing cases). Ordinarily, a party that seeks “an exception to the usual rule that litigation is conducted by and on behalf of the individual named parties only,” does so via a class action. Comcast Corp. v. Behrend, 133 S. Ct. 1426, 1432 (2013); see also Califano v. Yamasaki, 442 U.S. 682, 700-01 (1979). But here, Lucas failed to move for class action status in the bankruptcy court. Lucas, notwithstanding his failure to move, claims he has standing to represent the putative securities class in the bankruptcy proceeding.
Lucas contends that the Lead Plaintiff Order in the civil proceeding “authorize[d] [him] to act to prevent collateral attacks upon the claims of the [p]utative [c]lass through the bankruptcy proceeding.” Appellant‘s Br. 21. See also J.A. 444. We disagree—the Lead Plaintiff Order provided no such authorization. First, “[i]t is well-settled that consent to being a member or the representative of a class in one piece of litigation is not tantamount to a blanket consent to any litigation the class counsel may wish to pursue.” Reid v. White Motor Corp., 886 F.2d 1462, 1471-72 (6th Cir. 1989) (internal quotation marks and citations omitted). Second, to the extеnt Lucas has
Lucas also argues he could not procedurally move for class action status in the bankruptcy proceeding because the proceeding was not a “contested matter.” Again we disagree. The proceeding was a “contested matter,” and therefore Lucas was required to make a motion under
Class actions apply in bankruptcy proceedings in two ways: (1) either automatically in “adversary proceedings;” or (2) at the discretion of the bankruptcy court in “contested matters.” See Gentry v. Siegel, 668 F.3d 83, 88 (4th Cir. 2012). In a contested matter, the party seeking to rely on Rule 23 must file a motion under Rule
A contested matter is defined as “the litigation to resolve” an “actual dispute, other than an adversary proceeding, before the bankruptcy court.”
Because the bankruptcy proceeding was a contested matter, Lucas, to have standing to opt out or object on behalf of the putative securities class, was required to request class representative status under Rule 9014. See In re Ephedra, 329 B.R. at 5 (“[C]ounsel for the class claimants bear primary responsibility . . . by not affirmatively moving under Rule 9014(c) for clаss certification.“). Lucas did not follow these procedures and thus cannot assert a right to represent a class. His failure to initiate class proceedings in compliance with the proper bankruptcy procedures, despite having had more than two months to comply with the rules, “rendered [Lucas] unable to represent a class that had never been designated by the Bankruptcy Court, much less assume the role of representative of such an undesignated class.” Dynegy, 2013 WL 2413482, at *7.3
In addition, Lucas cannot assert standing on behalf of the putative securities class in the bankruptcy proceeding because he personally opted out of the release, preserving his own section 20(a) claims. Relying on Deposit Guaranty National Bank v. Roper, 445 U.S. 326 (1980), Lucas argues he can still assert standing even if his interest is arguably moot. Roper, however, is inapposite. In Roper, the Supreme Court considered whether a named plaintiff in a class action could appeal the denial of class certification after the named plaintiff‘s individual claims became moot. Id. at 327. The Court held the “District Court‘s entry of judgment in favor of named plaintiffs over their objections did not moot their private case or controversy, and that respondents’ individual interest in the litigation -- as distinguished from whatever may be their representative responsibilities to the putative class -- is sufficient to permit their appeal of the adverse certification ruling.” Id. at 340 (footnote omitted). More recently, in Genesis Healthcare Corp. v. Symczyk, 133 S. Ct. 1523 (2013), the Supreme Court stated ”Roper‘s holding turned on a specific factual finding that the plaintiffs’ [sic] possessed a continuing personal economiс stake in the litigation, even after the defendants’ offer of judgment.” Id. at 1532. Here, Lucas’ economic stake remains the same, regardless of
Finally, Lucas claims the prudential limitation of the Third Party Standing Doctrine would not be “subvert[ed]” or “contravene[d]” if he were granted standing to represent the putative securities class in the bankruptcy litigation. It is true under some “special circumstances,” for example when a “litigant‘s interests are closely allied with those of the third parties” or “third parties are unable to assert their own rights,” a plaintiff may assert third-party claims. Kane, 843 F.2d at 643-44 (citing Singleton v. Wulff, 428 U.S. 106, 115-18 (1976)). The circumstances presented in this case, however, are incompatible with these exemptions. The bankruptcy court found no evidence suggesting “that any class member . . . who has not opted out [of the third-party releases in the Plan] now wishes to do so.” J.A. 448. The court further stated, “[t]hеre was no evidence presented . . . to indicate that [putative members] did not leave this class at will.
In conclusion, Lucas’ status as lead рlaintiff of the putative class in the district court securities litigation did not automatically extend to the bankruptcy proceedings. In order to have opted out or objected on behalf of the class, Lucas first must have sought the application of Rule 23 in bankruptcy court. Because he did not, Lucas represented no one but himself. Furthermore, since he оpted out of the release in his individual capacity, Lucas lacks standing to appeal the order confirming the Plan.
III. Conclusion
For the foregoing reasons, the district court‘s order dismissing Lucas’ appeal is AFFIRMED.