13-2581 In re: Dynegy, Inc., UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

_______________

August Term, 2013

(Argued: April 24, 2014 Decided: October 31, 2014)

Docket No. 13‐2581

_______________

IN RE: DYNEGY, INC., Debtor.

STEPHEN LUCAS, Appellant, –v.–

DYNEGY INC., Appellee. _______________

B e f o r e:

WALKER and HALL, Circuit Judges, and MURTHA,* District Judge.

_______________

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

_________________ * Judge J. Garvan Murtha, of the United States District Court for the District of Vermont, sitting by designation.

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. ________________

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 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.

2

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,

, 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

The district court has since granted the defendants= motion to dismiss, see Silsby v. Icahn, No. 12 Civ. 1

2307 (JGK),

(S.D.N.Y. Apr. 30, 2014), and the plaintiffs have appealed. 3 stake in the entity that would emerge from the bankruptcy of Dynegy.2

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,

, 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.

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.

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.

The release also precluded litigation against the non‐debtor third parties.

On July 9, 2012, the bankruptcy court held a hearing on Dynegy Inc.=s

bankruptcy petition. Dynegy,

, 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

The reorganization plan required the merger or combination of Dynegy Inc. and Dynegy Holdings to 2

form the surviving entity. Dynegy Inc. officially filed for bankruptcy on July 6, 2012.

4 Dynegy’s disclosure statement and form of notice to the non‐voting class. The

bankruptcy court did not require Dynegy to distribute the Plan to holders of a claim or

interest in the “Non‐Voting Classes,” some of whom are members of the putative

securities class. But, the bankruptcy court did require Dynegy to individually notify

holders as of July 2, 2012 of claims and interest in Non‐Voting Classes of their status.

This notice of Non‐Voting Class status included an explanation of the third‐party

release. The court also required Dynegy to publish a Confirmation Hearing Notice in

The New York Times and The Wall Street Journal. This notice explained the Plan

included a binding release of non‐debtor third parties from liability unless a party opted

out. The bankruptcy court did not, however, require individual notice to members of

the putative class who had sold all of their shares of Dynegy prior to July 2, 2012.

On July 13, 2012, the district court appointed appellant Stephen Lucas as lead

plaintiff in Silsby v. Icahn, the securities class action litigation. Dynegy,

, 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.

The district court denied this request.

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.

He also

submitted an objection to the Plan on behalf of himself and the putative class.

5 The bankruptcy court confirmed the Plan on September 10, 2012, subject to

hearing Lucas’ objection. J.A. 242. The bankruptcy court delayed ruling on his

objection in order to allow settlement negotiations. J.A. 255. The parties, however, did

not reach a settlement, and during a hearing on October 1, 2012, the bankruptcy court

overruled Lucas’ objection, holding he lacked standing both in his individual capacity,

J.A. 444, and on behalf of the putative class, J.A. 422. The bankruptcy court found:

(1) Lucas could not object to the release on his own behalf because he had personally

opted out (and thus, the release did not affect his rights, and he could not appeal); and

(2) Lucas could neither opt out of the release nor object to the Plan on behalf of the

putative class because he lacked the authority to represent the class outside of the

separate securities litigation in the district court. The bankruptcy court determined in

order to represent the class in bankruptcy court, Lucas was required to follow class

action procedures under the Federal Rules of Bankruptcy Procedure. The bankruptcy

court stated Lucas “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.” J.A. 455.

The bankruptcy court refused to “permit [Lucas] to contravene the federal rules, and to

operate as though his class were certified without a Court having made that

determination.” J.A. 455. Ruling on the merits of Lucas’ objections to the Plan’s

6 confirmation, the bankruptcy court determined the release was consensual because the

affected parties received notice and did not opt out. J.A. 458.

Lucas appealed to the district court on his behalf as well as on behalf of the

putative class. Dynegy,

, 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 to 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.,

(2d Cir. 2004). We review legal conclusions

de novo and factual findings for clear error.

; see also In re Charter Commc’ns,

Inc.,

(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

7 arguments and hold Lucas does not have standing to represent the putative securities

class in the bankruptcy proceeding.

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.,

, 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,

(2013); see

also Califano v. Yamasaki,

, 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.,

, 1471‐72 (6th Cir. 1989)

(internal quotation marks and citations omitted). Second, to the extent Lucas has

8 fiduciary obligations as lead plaintiff in the securities litigation, those obligations do not

“confer on him the status of a class representative in the bankruptcy proceeding for a

class that has never been designated.” Dynegy,

, at *8. Third, the

Lead Plaintiff Order unambiguously restricted Lucas to representation of the class in the

securities litigation only. It “appoint[ed] Lucas as Lead Plaintiff to represent the

interests of the class in the Action.” J.A. 203 (emphasis added). The “Action” referred

to “the above‐ captioned action,” Silsby v. Icahn, the securities litigation in district court,

not Dynegy’s Chapter 11 proceedings in bankruptcy court.

And fourth, the

district court specifically rejected Lucas’ attempt to broaden the Lead Plaintiff Order to

cover proceedings in the bankruptcy court. Dynegy,

, at *4.

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 Federal Rule of Bankruptcy Procedure 9014

requesting class representative status.

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,

(4th Cir. 2012). In a

contested matter, the party seeking to rely on Rule 23 must file a motion under Rule

9 9014. See

(“Rule 9014 also authorizes the bankruptcy court, on motion, to make

‘one or more of the other rules in Part VII’ [Adversary Proceedings] applicable to

contested matters, which includes Rule 7023 [Class Proceedings].” (quoting Fed. R.

Bankr. P. 9014(c))); In re Ephedra Prod. Liab. Litig.,

(S.D.N.Y. 2005) (“Rule 23

may be invoked against the debtor only if the bankruptcy court first makes a

discretionary ruling under Rule 9014 to apply Rule 23 to the proof of claim.”). Thus, in

a “contested matter,” absent a successful motion under Rule 9014 requesting class

representative status under Rule 7023, Rule 23 cannot be invoked in bankruptcy

proceedings.

A contested matter is defined as “the litigation to resolve” an “actual dispute,

other than an adversary proceeding, before the bankruptcy court.” Fed. R. Bankr. P.

9014 advisory committee’s notes (1983). Lucas argues there was not a “contested

matter” before the bankruptcy court because “by simply objecting to the Plan and

seeking to opt‐out of the [r]elease, [he] sought only to preserve the rights of the class

members,” Appellant’s Reply Br. 9, not to seek relief from the bankruptcy court,

Appellant’s Br. 20. “All disputes in bankruptcy,” however, “are either adversary

proceedings or contested matters.” In re Am. Reserve Corp.,

(7th Cir.

1988) (citing Daniel R. Cowans, 1 Bankruptcy Law and Practice 189 (1986)). An

adversary proceeding must fall within one of the ten categories defined in Bankruptcy

10 Rule 7001. The proceeding here does not fit within any of those categories; therefore it

must be a contested matter. Even aside from this rule, we have no doubt that Lucas’

objection to the Plan plainly constitutes a “contested matter.” See Fed. R. Bankr. P.

3020(b)(1) (“An objection to confirmation is governed by Rule 9014.”); Fed. R. Bankr. P.

9014 advisory committee’s notes; 9 Collier on Bankruptcy ¶ 9014.01 (Alan N. Resnick &

Henry J. Somme eds., 16th ed.).

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,

(“[C]ounsel for the class claimants bear primary responsibility . . . by not affirmatively

moving under Rule 9014(c) for class 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,

, at *7.3

3 Lucas argues requiring him to make a motion under Rule 9014 for class representative status would have been “impractical and absurd” given that discovery in the securities litigation was stayed and a responsive pleading was not yet filed. Appellant’s Br. at 24‐25. We see no reason why events in the securities litigation would affect his ability to initiate class action proceedings in the bankruptcy court. Lucas knew

11 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,

(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.

.

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.”

(footnote omitted). More recently, in

Genesis Healthcare Corp. v. Symczyk,

(2013), the Supreme Court stated

“Roper’s holding turned on a specific factual finding that the plaintiffs’ [sic] possessed a

continuing personal economic stake in the litigation, even after the defendants’ offer of

judgment.”

. Here, Lucas’ economic stake remains the same, regardless of

early on in the bankruptcy proceedings (at least as early as July 6, 2012) that he objected to the opt‐out procedures. Nothing stopped him from making a Rule 9014 motion when he became lead plaintiff in the securities litigation on July 13, 2012, or at a minimum on August 20, 2012, when the district court denied his request to expand the Lead Plaintiff Order to allow him to represent the putative class in the bankruptcy proceedings. Cf. In re Ephedra,

(“From the moment the Chapter 11 petition was filed, Cirak and the other class claimants had the right to move for class certification by virtue of

(b), which provides: ‘A party in interest, including . . . a creditor, . . . may raise and may appear and be heard on any issue in a case under this chapter.’”).

12 whether he is allowed to opt out on behalf of the putative securities class because he

personally opted out of the release. This case also does not involve class certification.

See

(“Roper’s dictum was tethered to the unique significance of certification

decisions in class‐action proceedings.”). This also is not a case in which the defendant

in a class action “picked off” the lead plaintiffs without settling the rest of the class’s

claims in an effort to frustrate the objectives of the class action. See Roper,

. Nothing in Roper leads us to conclude Lucas has standing in the bankruptcy

proceedings.

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,

, 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]here was no

evidence presented . . . to indicate that [putative members] did not leave this class at will.

13 Rather, the evidence [has] shown that all known equity holders were provided with

notice and an opportunity to be heard and chose not to do so.” J.A. 449. Given that

Lucas fails to set forth a clear allegiance between his interest and that of unknown

parties or any evidence that they may be incapable of asserting their own rights, his

claim does not merit an exemption from the rule. Thus, we see no reason to depart

from the “valuable prudential limitation” of the Third Party Standing Doctrine. Kane,

843 F.2d at 643; see id. at 644 (“The prudential concerns limiting third‐party standing are

particularly relevant in the bankruptcy context.”).

In conclusion, Lucas’ status as lead plaintiff 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 opted 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.

14