In Re: Dynegy Inc.
Filing
17
OPINION AND ORDER: The Court has considered all of the arguments of the parties. To the extent not specifically addressed above, the remaining arguments are either moot or without merit. For the reasons explained above, the appeal is dismissed. (Signed by Judge John G. Koeltl on 6/4/2013) (djc)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
────────────────────────────────────
IN RE DYNEGY INC.,
Debtor.
12 Civ. 8908 (JGK)
OPINION AND ORDER
STEPHEN LUCAS,
Appellant,
- against –
DYNEGY INC.,
Appellee.
────────────────────────────────────
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.
release.
The Plan provides that individuals may opt-out of the
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.
certified.
That class has not yet been
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 appellant’s objection.
The Bankruptcy Court overruled
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.
those conclusions.
The appellant now challenges
For the reasons explained below, the appeal
is dismissed.
I.
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.
at 1.) 1
(Ex. 3
In December 2011, the Bankruptcy Court authorized the
1
Unless otherwise indicated, all parenthetical citations are to
the Record on Appeal provided by the parties.
2
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.
7.)
(Ex.
Under the settlement agreement, shareholders of Dynegy Inc.
as of July 2, 2012, 2 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.) 3
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
2
While the appellant stated that the cutoff date for the
Settlement Agreement was July 12, 2012, the appellee indicated
that the cutoff date was July 2, 2012. (Tr. 20.) The exact
date is not relevant to this appeal.
3
Neither the appellant nor any members of the putative class
were parties to the settlement agreement. Moreover, former
shareholders that are members of the putative securities class
were not provided for in the settlement agreement.
3
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
4
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 . . . .”
4
Id. at 7, 10. 4
The Notice of Non-Voting Status explained that the Plan
contained releases of third party non-debtors and that a party
could opt-out of the releases. See Dynegy Inc. Disclosure
Statement Order, Ex. C. However, any members of the putative
5
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.
(“Plan”).)
(Ex. 19 at Ex. 1
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,
class that were former shareholders of Dynegy Inc. and sold all
shares prior to July 2, 2012 were not provided individual notice
of “Non-Voting Status.” (Tr. 33-34)
6
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
within the scope of the Release.
The Release has two relevant exceptions.
First, it does
not cover “intentional fraud, willful misconduct, gross
negligence, or criminal conduct as determined by a Final Order
. . . .”
(Plan § 8.20.)
The parties agree that the appellant’s
claim under section 10(b) of the Exchange Act is a claim that is
not within the scope of the Release.
Therefore, only the
section 20(a) claim is possibly within the purview of the
Release.
Second, the Release does not apply to “any holder of a
Claim or Equity Interest . . . that elects to ‘opt out’ of such
releases by making such election on its timely submitted ballot
(to the extent it receives a ballot) or in a written notice
submitted to the Solicitation Agent on or before the Plan
Objection Deadline.”
(Plan § 8.20.)
In addition to the Release, section 15.25 of the Plan
contains an injunction that precludes litigation against nondebtor third parties.
(Plan § 15.25.)
Section 15.25 provides:
[E]xcept as otherwise provided herein, all Persons who
have been, are, or may be holders of Claims against or
7
Equity Interests in the Surviving Entity shall be
permanently enjoined from taking any of the following
actions against . . . any of [the Debtors’] current or
former respective members, equity holders, directors,
managers,
officers,
employees,
agents,
and
professionals, . . .:
(i) commencing, conducting or continuing in any
manner, directly or indirectly, any suit, action or
other proceeding of any kind (including, without
limitation, all suits, actions and proceedings that
are pending as of the Effective Date, which must be
withdrawn or dismissed with prejudice) . . . .
(Plan § 15.25.)
On July 13, 2012, the appellant was appointed lead
plaintiff in the securities litigation and Levi & Korsinky LLP
was appointed lead counsel pursuant to the Private Securities
Litigation Reform Act of 1995 (the “PSLRA”), 15 U.S.C. § 78u4(a)(3)(B) and § 77z-1(a)(3)(B).
Order”).).
(See Ex. 20 (“Lead Plaintiff
The Lead Plaintiff Order appointed the appellant as
lead plaintiff in the “Action,” defined as “the above captioned
action,” Silsby v. Icahn.
(Lead Plaintiff Order ¶ 1.)
The
securities litigation is at a preliminary stage and no class has
been certified.
On August 20, 2012, lead counsel submitted a letter to this
Court requesting that the Lead Plaintiff Order be modified to
clarify that the lead plaintiff had the authority to opt-out of
the Release on behalf of the class.
Lead counsel explained that
“[a]lthough we maintain that the authority granted to us as Lead
Counsel in the July 13 Order is sufficient, further
8
clarification is requested . . . .”
(Ex. 25 at 1.)
As
“clarification,” lead counsel requested that the Court amend the
Lead Plaintiff Order to provide that lead counsel was the
representative of the class:
[I]n the Action and in the pending Chapter 11
bankruptcy
proceedings
of
Dynegy,
Inc.
.
.
.
including, without limitation, to oppose any nondebtor releases (including releases of the defendants
in this Action) sought by Dynegy, Inc. under its
Chapter 11 plan of reorganization or otherwise, and to
‘opt out’ on behalf of the class of any release or
related injunctive provisions set forth in a Chapter
11 plan or otherwise.
(Ex. 25 at 2 (emphasis added).)
application was denied.
On July 23, 2012, the
(Ex. 27 at 3.) 5
On August 2, 2012, the Debtors filed Notice with the
Bankruptcy Court that the Confirmation Hearing Notice had been
published in both The New York Times and The Wall Street
Journal.
(Exs. 22, 23.)
On August 24, 2012, the appellant
timely submitted an opt-out election to the Bankruptcy Court on
behalf of himself and on behalf of the putative class he
represents in the securities litigation.
(Ex. 28.)
The
appellant also submitted a timely objection to confirmation of
the Plan on behalf of himself and on behalf of the putative
securities class.
(See Ex. 29 (“Lucas Objection”).)
5
The
The application was denied by Judge Nathan sitting as the Part
I judge. (Ex. 27 at 3.)
9
appellant argued in the objection that the Release was
impermissible.
(Lucas Objection ¶ 22.)
The Bankruptcy Court held the confirmation hearing on
September 5, 2012.
(Ex. 40.)
Prior to the confirmation
hearing, Dynegy and the appellant agreed to defer consideration
of the Lucas Objection in order to allow confirmation to proceed
and to allow time for settlement negotiations.
19.)
(Ex. 40 at 18-
On September 10, 2012, the Plan was confirmed subject to a
full reservation of rights with respect to the Lucas Objection.
(See Ex. 41 (“Confirmation Order”) ¶ 55.)
After settlement
negotiations were unsuccessful, the Bankruptcy Court held a
hearing concerning the Lucas Objection on October 1, 2012.
(See
Ex. 47 (“Obj. Hr’g”).)
After listening to the parties’ arguments, the Bankruptcy
Court overruled the Lucas Objection.
The Bankruptcy Court held
that it had subject matter jurisdiction to grant the Release
because the Release affects the res of the bankruptcy estate.
(Obj. Hr’g at 180-81.)
The Court held that the lead plaintiff
lacked standing on his own behalf and on behalf of the class.
The Court explained that the lead plaintiff lacked standing on
his own behalf to object to the Release because he had timely
opted out of the Release and therefore a decision whether the
Release was permissible would not affect his rights.
at 182-83.)
(Obj. Hr’g
The Court held that the lead plaintiff lacked
10
standing to opt-out of or object to the Release on behalf of the
class because he had no authority to represent the putative
securities class outside of the securities litigation.
Hr’g at 183-88, 189-94.)
(Obj.
Despite the standing deficiencies, the
Bankruptcy Court reached the merits of the objection and found
that the Release was permissible based on implied consent,
because the affected parties had received notice but had not
opted-out of the Release.
(Obj. Hr’g at 195-97.)
On October 4,
2012, the Bankruptcy Court entered a written order confirming
its ruling at the hearing and overruling the appellant’s
objection to the Plan.
(Ex. 48.)
On October 12, 2012, the lead
plaintiff filed a notice of appeal from the October 4 order of
the Bankruptcy Court on behalf of himself and on behalf of the
putative securities class.
See Notice of Appeal, In re Dynegy
Inc., No. 12-36728 (Bankr. S.D.N.Y. Oct. 12, 2012).
II.
A.
When reviewing a decision of the Bankruptcy Court, this
Court reviews the Bankruptcy Court’s conclusions of law de novo
but accepts its findings of fact unless they are clearly
erroneous.
See Fed. R. Bankr. P. 8013; In re Halstead Energy
Corp., 367 F.3d 110, 114 (2d Cir. 2004).
11
B.
The initial question is whether the appellant’s status as
lead plaintiff in the putative securities class action provided
him with standing to opt-out of the Release or to object to the
Release on behalf of the putative securities class in the
Bankruptcy Court.
As the appellant correctly notes, if he had
standing to opt-out of the Release on behalf of the putative
class, the rest of the issues are essentially moot, because the
Release would be inapplicable to the putative class in the
securities litigation.
The appellant argues that the Lead
Plaintiff Order and his status as lead plaintiff in the
securities class action provided him with standing in the
Bankruptcy Court to opt-out and to object to the Release on
behalf of the putative class.
The appellee argues that the
Bankruptcy Court was correct when it concluded that neither the
Lead Plaintiff Order nor the appellant’s obligation to the
putative class conferred standing on the appellant to represent
the putative class in the Bankruptcy Court.
Because the
appellant failed to move for the application of the class action
rule before the Bankruptcy Court, the appellant lacked standing
to opt-out of or to object to the Release on behalf of the
putative securities class.
“The plaintiff generally must assert his own legal rights
and interest, and cannot rest his claim to relief on the legal
12
rights or interests of third parties.”
Warth v. Seldin, 422
U.S. 490, 499 (1975) (citations omitted); see also Moose Lodge
No. 197 v. Irvis, 407 U.S. 163, 166 (1972) (“[A plaintiff] has
standing to seek redress for injuries done to him, but may not
seek redress for injuries done to others.”) (citations omitted).
“The prudential concerns limiting third-party standing are
particularly relevant in the bankruptcy context.”
Kane v.
Johns-Manville Corp., 843 F.2d 636, 644 (2d Cir. 1988).
As the
Court of Appeals for the Second Circuit explained in Kane:
Though this limitation is not dictated by the Article
III case or controversy requirement, the third-party
standing doctrine has been considered a valuable
prudential limitation, self-imposed by the federal
courts . . . . [T]he Supreme Court articulated two
important policies justifying such a limitation:
“first, the courts should not adjudicate [third-party]
rights unnecessarily, and it may be that in fact the
holders of those rights either do not wish to assert
them, or will be able to enjoy them regardless of
whether the in-court litigant is successful or not.
Second, third parties themselves usually will be the
best proponents of their own rights.”
Id. at 643 (quoting Singleton v. Wulff, 428 U.S. 106, 113-14
(1976)).
Rule 23 of the Federal Rules of Civil Procedure governs
class actions in federal civil cases.
The class action is “an
exception to the usual rule that litigation is conducted by and
on behalf of the individual named parties only.”
Comcast Corp.
v. Behrend, 133 S. Ct. 1426, 1432 (2013) (quoting Califano v.
Yamasaki, 442 U.S. 682, 700-701 (1979)).
13
“The Rule 23 class
action device is an exception to the limits on third-party
standing.”
Adams v. Luxottica U.S. Holdings Corp., No. SA Civ.
07 1465, 2009 WL 7401970, at *2 (C.D. Cal. July 24, 2009)
(citing Califano, 442 U.S. at 700-01).
Rule 23 applies in bankruptcy proceedings, either
automatically or at the discretion of the Bankruptcy Court.
“All disputes in bankruptcy are either adversary proceedings or
contested matters.”
In re American Reserve Corp., 840 F.2d 487,
488 (7th Cir. 1988) (citing Daniel R. Cowans, 1 Bankruptcy Law
and Practice 189 (1986)).
Rule 7023 of the Federal Rules of
Bankruptcy Procedure (“Bankruptcy Rules”) provides that Rule 23
of the Federal Rules of Civil Procedure “applies in adversary
proceedings.”
Fed. R. Bankr. P. 7023.
Bankruptcy Rule 9014
provides that in “a contested matter” the court “may at any
stage in a particular matter direct that one or more of the
other rules in Part VII [which includes Rule 7023] shall apply.”
Fed. R. Bankr. P. 9014(c); see also In re Charter Co., 876 F.2d
866, 873 (11th Cir. 1989) (“Rule 23 may be invoked . . . in an
adversary proceeding and in a contested matter.
Pursuant to the
terms of Bankruptcy Rule 7023, Rule 23 applies in any adversary
proceeding.
Also, under Bankruptcy Rule 9014, the bankruptcy
judge may at his discretion apply Bankruptcy Rule 7023, and by
extension Rule 23, in a contested matter.”).
14
At the discretion of the Bankruptcy Court, Rule 23 may be
invoked in the context of an objection to the confirmation of a
chapter 11 plan.
The objection to the confirmation of a chapter
11 plan is a “contested matter.”
See Fed. R. Bankr. P.
3020(b)(1) (“An objection to confirmation is governed by Rule
9014.”); Bear Tooth Mountain Holdings Ltd. P’ship v. ML Manager
LLC (“In re Mortgs. Ltd.”), No. 2:08 bk 07465 RJH, 2013 WL
1336830, at *4 n.12 (Bankr. D. Ariz. Mar. 28, 2013) (“Pursuant
to [Rule] 3020(b) . . . and 9014, confirmation of plans and
hearings on objections to confirmation are contested
matters . . . .”); In re Farrell, 38 B.R. 654, 655 (Bankr. W.D.
Mo. 1984). 6
plan.
This case involves an objection to a chapter 11
Therefore, Bankruptcy Rule 9014 provided the Bankruptcy
Court with discretion to decide whether to apply Bankruptcy Rule
7023 and with it the latter’s inclusion of Rule 23.
In re
Ephedra Prods. Liab. Litig., 329 B.R. 1, 5 (S.D.N.Y. 2005); see
also In re Am. Reserve Corp., 840 F.2d at 488 (“Rule 23 may
apply . . . at the bankruptcy judge’s discretion.”).
6
Although neither party cites a single case in which a class
action has been used in the context of a class-wide objection to
confirmation or class-wide opt-out of a third party release,
neither party has argued that it would have been outside the
Bankruptcy Court’s discretion to apply Bankruptcy Rule 7023 to
this action. The Bankruptcy Court indicated that the appellant
never petitioned the Court to use Bankruptcy Rule 7023. (Obj.
Hr’g at 193-94.)
15
The appellant’s failure to seek the application of a class
action rendered him 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.
Therefore, he could not opt out of the Release or object to it
on behalf of a class.
“The right to proceed as a class [in
Bankruptcy Court] . . . is not automatic.”
In re Woodward &
Lathrop Holdings, 205 B.R. 365, 369 (Bankr. S.D.N.Y. 1997).
“The burden is on the claimant to obtain application of Rule
7023 and also to satisfy the requirements of Rule 23 itself.”
In re Computer Learning Ctrs., Inc., 344 B.R. 79, 85 (Bankr.
E.D. Va. 2006); see also In re Craft, 321 B.R. 189, 198-99
(Bankr. N.D. Tex. 2005).
Rule 23 requires that a class action
determination must be made at “an early practicable time.”
Fed.
R. Civ. P. 23(c)(1)(A); see In re Woodward & Lathrop Holdings,
205 B.R. at 369-70; In re Bicoastal Corp., 133 B.R. 252, 255-56
(Bankr. M.D. Fla. 1991).
The appellant’s counsel has been aware
of the bankruptcy proceedings since at least the hearing before
the Bankruptcy Court that counsel attended on July 9, 2012.
(Obj. Hr’g at 189, 193.)
However, as the Bankruptcy Court
explained, the appellant “utterly failed to move under Rule 9014
to make Rule 23 applicable in this bankruptcy case, despite
having more than two months to do so” and “attempted to sidestep
the federal rules, and act with authority that he has not yet
16
been granted.”
(Obj. Hr’g at 193-94.)
Therefore, because the
appellant never attempted to initiate class proceedings in the
Bankruptcy Court, the appellant represented no one but himself
before the Bankruptcy Court.
The appellant argues that the Lead Plaintiff Order in the
putative securities litigation was sufficient to authorize
standing in the separate bankruptcy proceeding.
However, the
Lead Plaintiff Order expressly limited the appellant’s authority
to the “above captioned action,” the securities litigation.
(Lead Plaintiff Order ¶ 1.)
The appellant attempted to broaden
the Order to cover the proceedings in the Bankruptcy Court but
that application was denied.
The express terms of the Lead
Plaintiff Order did not provide the appellant with standing in
the Bankruptcy Court.
Moreover, the designation of the appellant as “lead
plaintiff” in the putative securities class action would not
bind the Bankruptcy Court to allow the appellant to represent
the same putative class in the Bankruptcy Court.
The
designation of class status in a bankruptcy case raises distinct
issues from other litigation.
at 198-99.
See, e.g., In re Craft, 321 B.R.
Even when a class action has been certified in a
related district court proceeding, the bankruptcy court may
decline to permit a class action in Bankruptcy Court by refusing
to make Bankruptcy Rule 7023 applicable.
17
See Reid v. White
Motor Corp., 886 F.2d 1462, 1470-71 (6th Cir. 1989); In re
Zenith Labs. Inc., 104 B.R. 659, 664 (Bankr. D.N.J. 1989).
In
Reid, the Court of Appeals for the Sixth Circuit affirmed the
bankruptcy court’s denial of a class proof of claim filed by an
attorney, despite the attorney being authorized to represent the
class and having obtained certification of the class in a
district court proceeding prior to bankruptcy, because the
attorney, among other things, failed to petition timely the
bankruptcy court to apply Bankruptcy Rule 7023.
Reid, 886 F.2d
at 1470-71; see also In re Zenith Labs. Inc., 104 B.R. at 664
(“Clearly, there are compelling reasons for certifying the
shareholder class as I concluded when I certified the class
[prior to bankruptcy].
However, there may be other factors in
the bankruptcy proceeding that make class certification there
less compelling and . . . a different result might be
appropriate.”)).
Therefore, even had the appellant been the
lead plaintiff of a certified class action in the district
court, he still would have had to move for the application of
Bankruptcy Rule 7023 in the Bankruptcy Court in order to
represent the putative securities class in that forum.
His
failure to move for the invocation of Rule 7023 results in his
lack of standing to represent the class in the bankruptcy
proceeding.
18
The appellant, relying on a number of cases which explain
that a lead plaintiff has fiduciary obligations to a putative
class, argues that his fiduciary responsibilities give rise to
standing in the bankruptcy proceeding.
See, e.g., Schick v.
Berg, No. 03 Civ. 5513, 2004 WL 856298, at *4-5 (S.D.N.Y. Apr.
20, 2004); In re Oxford Health Plans, Inc. Secs. Litig., 182
F.R.D. 42, 46-47 (S.D.N.Y. 1998); Rothman v. Gould, 52 F.R.D.
494, 496 (S.D.N.Y. 1971).
However, those cases are distinct
from the circumstances here.
None involved a lead plaintiff in
one putative class action that was invoking his fiduciary
obligations to represent the putative class in a separate
proceeding, especially not a bankruptcy proceeding that required
the invocation of Bankruptcy Rule 9014.
The appellant’s
fiduciary obligations to the putative class in the securities
litigation do not confer on him the status of a class
representative in the bankruptcy proceeding for a class that has
never been designated.
At most his fiduciary responsibilities
might have caused him to make a class action motion in the
bankruptcy proceeding, a motion he never made.
The appellant failed to make a motion to apply Rule 23 in
the Bankruptcy Court and the Lead Plaintiff Order did not extend
to the bankruptcy proceeding.
The appellant cites no case that
would allow him to exercise authority before the Bankruptcy
Court that he had not been granted in that proceeding.
19
Therefore, for all practical purposes, the appellant is a lone
plaintiff attempting to exercise the rights of nonparties by
attempting to opt out of or object to the Release on their
behalf.
Such action runs afoul of the prohibition against third
party standing.
The Bankruptcy Court concluded correctly that
the appellant lacked standing to opt-out of or object to the
Release on behalf of the putative class.
C.
Although the appellant lacked standing to opt-out of or
object to the Release on behalf of the putative class, the
question remains whether the appellant had standing to object to
the Release on his own behalf.
The Bankruptcy Court concluded
that the appellant did not have standing on his own behalf
because he opted-out of the Release.
The appellant argues that
because he is the lead plaintiff for the putative securities
class action, he has standing to object to the Release even
though he opted out in his individual capacity.
Because the
appellant has opted out of the Release and therefore is
unaffected by a determination whether the Release is valid, he
lacks standing to pursue the objection on appeal.
“[I]n order to have standing to appeal from a bankruptcy
court ruling, an appellant must be ‘a person aggrieved’ — a
person ‘directly and adversely affected pecuniarily’ by the
20
challenged order of the bankruptcy court.”
Dish Network Corp.
v. DBSD N. Am., Inc. (“In re DBSD N. Am., Inc.”), 634 F.3d 79,
89 (2d Cir. 2010) (quoting Int’l Trade Admin. v. Rensselaer
Polytechnic Inst., 936 F.2d 744, 747 (2d Cir. 1991)).
“An
appellant . . . must show not only ‘injury in fact’ under
Article III but also that the injury is ‘direct[]’ and
‘financial.’
1988)).
Id. (quoting Kane, 843 F.2d at 642 & n.2 (2d Cir.
The appellant opted out of the Release.
Therefore,
regardless of a judicial determination of the validity of the
Release, the appellant may continue with his claims against the
defendants in the securities litigation.
Because the appellant
opted out of the Release and may pursue his claims, he was not
directly affected in any pecuniary way by the order of the
Bankruptcy Court that the Release was valid, and he lacks
standing to appeal the order of the Bankruptcy Court.
The appellant argues that because he is the designated lead
plaintiff of the putative securities class, he may continue to
object to the Release in the Bankruptcy Court on behalf of the
putative securities class even after his individual claims have
been preserved by his opt-out of the Release.
However, the
cases the appellant relies upon are distinguishable.
See
Deposit Guar. Nat’l Bank v. Roper, 445 U.S. 326, 329-32, 340
(1980); Pitts v. Terrible Herbst, Inc., 653 F.3d 1081, 1089 (9th
Cir. 2011).
Both cases dealt with whether a named plaintiff in
21
a purported class action could move for class certification,
Pitts, 653 F.3d at 1089, or appeal the denial of class
certification, Roper, 445 U.S. at 340, after the named
plaintiff’s individual claims arguably became moot.
Recently,
the Supreme Court indicated that the rule in Roper is limited to
the unique situation of class certification.
Genesis Healthcare
Corp. v. Symczyk, 133 S. Ct. 1523, 1532 (2013).
This case does
not involve class certification because, unlike Pitts and Roper,
the appellant was not the named plaintiff of a class action
before the Bankruptcy Court.
The appellant never attempted to
invoke Rule 23 in the Bankruptcy Court and therefore was not
representing anyone at the time he opted-out of the Release.
The cases the appellant relies upon, which discuss the
consequences of the mooting of a named plaintiff’s claims in a
Rule 23 class action, are not relevant to this case because
there was no named plaintiff in a Rule 23 class before the
Bankruptcy Court.
Moreover, in Symczyk, the Court limited
Roper’s holding to situations in which a named plaintiff still
had an “ongoing, personal economic stake in the substantive
controversy.”
Id.
In this case, it is clear that the appellant
has no remaining economic stake in objecting to the Release,
because he is not bound by its terms and his individual claims
may proceed in this Court regardless of the validity of the
Release.
22
The appellant is attempting to use his status as lead
plaintiff in the securities litigation to have his cake and eat
it too — to opt out of the Release personally but also to
challenge its validity in the separate bankruptcy proceeding.
There is no authority supporting this position and it is at odds
with standing doctrine.
The appellant lacks standing to opt out
of or object to the Release on behalf of the putative class and
to object to the Release individually. 7
CONCLUSION
The Court has considered all of the arguments of the
parties.
To the extent not specifically addressed above, the
remaining arguments are either moot or without merit.
For the
reasons explained above, the appeal is dismissed.
SO ORDERED.
Dated:
New York, New York
June 4, 2013
____________/s/______________
John G. Koeltl
United States District Judge
7
Because the appellant lacks standing, it is unnecessary to
reach the remaining arguments including equitable mootness and
the challenge to the Release on the merits. See Steel Co. v.
Citizens for a Better Env’t, 523 U.S. 83, 109-10 (1998) (holding
that courts lack jurisdiction to address merits of a claim where
party raising the claim is found to lack standing to maintain
suit).
23
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