In Re: Continental Airlines

• Decision Date: 13 September 1999
• Docket Number: No. 98-5509,98-5509
• Citation: 203 F.3d 203
• Parties: (3rd Cir. 2000) IN RE: CONTINENTAL AIRLINES and CONTINENTAL AIRLINES HOLDINGS, INC., Debtors M. BARNETT GILLMAN; ALAN FREBERG; FRANK DEBORA; STUART E. WECHSLER; ANDREW D. FRIEDMAN; WECHSLER SKIRNICK HARWOOD HALEBIAN & FEFFER; ZACHARY ALAN STARR; GOODKIND LABATON & RUDOFF v. CONTINENTAL AIRLINES; CONTINENTAL AIR HOLDINGS, INC. THOMAS E. ROSS, Trustee M. Barnett Gillman, Alan Freberg, Frank Debora <A HREF="#fr1-*" name="fn1-*">* Frank Sachs and <A HREF="#fr1-*" name="fn1-*">* Lloyd Pressel Co., Inc. Appellants Argued:
• Court: U.S. Court of Appeals — Third Circuit

Page 203

203 F.3d 203 (3rd Cir. 2000)

IN RE: CONTINENTAL AIRLINES and CONTINENTAL AIRLINES HOLDINGS, INC., Debtors

M. BARNETT GILLMAN; ALAN FREBERG; FRANK DEBORA; STUART E. WECHSLER; ANDREW D. FRIEDMAN; WECHSLER SKIRNICK HARWOOD HALEBIAN & FEFFER; ZACHARY ALAN STARR; GOODKIND LABATON & RUDOFF v. CONTINENTAL AIRLINES; CONTINENTAL AIR HOLDINGS, INC.

THOMAS E. ROSS, Trustee

M. Barnett Gillman, Alan Freberg, Frank Debora ^*Frank Sachs and ^*Lloyd Pressel Co., Inc. Appellants

No. 98-5509

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

Argued: September 13, 1999

Decided February 1, 2000

On Appeal from the United States District Court for the District of Delaware (D.C. Civil No. 93-cv-00319) (District Judge: The Honorable Joseph J. Farnan, Jr.) [Copyrighted Material Omitted]

Andrew D. Friedman, Esq. [ARGUED] Wechsler, Harwood, Halebian & Feffer 488 Madison Avenue New York, NY 10022 Counsel for Appellants

Robert S. Brady, Esq. [ARGUED] Laura D. Jones, Esq. Young, Conaway, Stargatt & Taylor P. O. Box 391 Rodney Square North, 11th Floor Wilmington, DE 19899-0391 Counsel for Appellee

Before: GREENBERG, SCIRICA, and RENDELL, Circuit Judges

OPINION OF THE COURT

RENDELL, Circuit Judge:

In this bankruptcy-related appeal, we consider the validity of a provision in Continental Airlines' plan of reorganization that released and permanently enjoined shareholder lawsuits against certain of Continental Airlines' present and former directors and officers who were not themselves in bankruptcy. The Bankruptcy Court made no specific findings regarding its jurisdiction, substantive legal authority, or factual basis to justify this provision. The District Court nonetheless upheld the provision. We will reject Continental Airlines' contention that claim preclusion and the doctrine of equitable mootness prevent us from considering the merits of this appeal. We will reverse the District Court's order approving the validity of this provision, which is legally and factually insupportable.

I.

Appellants are plaintiffs in several securities fraud class action lawsuits brought against directors and officers of Continental Airlines Holdings, Inc. Plaintiffs' class actions allege that the D&O defendants caused Continental Airlines Holdings to issue false and misleading statements of material facts in violation of, inter alia, section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5, and common law. On December 3, 1990, Continental Holdings and affiliated entities ("Continental Debtors") filed petitions for relief under chapter 11 of the Bankruptcy Code in the District of Delaware.¹

The nature of this appeal requires that we provide a detailed summary of the chain of events in the bankruptcy case. The Continental Debtors brought an adversary proceeding on January 17, 1991 to prevent Plaintiffs' class actions against the non-debtor D&O defendants from interfering with the Continental Debtors' reorganization process. The Bankruptcy Court temporarily enjoined Plaintiffs' pursuit of their class actions on February 2, 1991. That order was affirmed on appeal on June 28, 1993. See In re Continental Airlines, 177 B.R. 475 (D. Del. 1993). The District Court decision noted that the injunction could have been more narrowly crafted to permit some portion of Plaintiffs' class actions to continue, but Plaintiffs did not avail themselves of the opportunity to participate in the drafting of the Bankruptcy Court order. Id. at 482. Plaintiffs' class actions remained pending, but inactive, during the reorganization proceedings.

On December 1, 1992, the Bankruptcy Court approved a settlement between the Continental Debtors, their D&Os, and D&O liability insurers. See Supp. App. B33, B43. Under this Tripartite Settlement, "The Debtors, Insureds and the Insurers will provide releases to each other." Supp. App. 36. The Continental Debtors released "any and all claims, demands, and causes of action of any kind . . . against the present or former officers or directors of the Continental Debtors . . . which arose prior to the date of this settlement and release." Supp. App. B47. The D&O liability insurers were released from "any and all demands, claims, and causes of action . . . that they or any of them had, now have, or may have against the Insurers" in exchange for providing $5 million to the Continental Debtors to settle the Continental Debtors' claims and potential claims against their D&Os. Supp. App. B57 B58. In turn, the D&Os released their claims against the Continental Debtors. Supp. App. 63-64. The Tripartite Settlement was binding "upon the signatories hereto and all other insured persons and entities under the Policies, and their respective successors, assigns, heirs, and estates." Supp. App. B60. This Tripartite Settlement makes no reference to Plaintiffs' class actions, and Plaintiffs did not object to the settlement or appeal the order approving the settlement.

The Continental Debtors later filed a plan of reorganization, amended several times, which contained a provision releasing and permanently enjoining a broader range of claims, including Plaintiffs' class actions against the non-debtor D&O defendants:

12.4 Release of Certain Claims and Actions

(a) On the Effective Date, in order to further the rehabilitation of the Debtors, any and all claims and causes of action, now existing or hereafter arising, against any present or former officer or director of any of the Debtors or any of the Debtors' professional advisors arising out of or related to such Person's actions or omissions to act in his or her capacity as an officer or director of the Debtors or as a member of any committee, or as a fiduciary of any pension or employee benefit plan, or as such an advisor, relating to the Debtors at any time through the Confirmation Date, are irrevocably waived, released and relinquished, and each of the Debtors, its Creditors, and Equity Holders and all other persons is enjoined from asserting any such claim or cause of action in any court or forum. . . .

(b)(ii) Various claims, including the Stockhol der Actions, also have been asserted or threatened against certain present or former directors of the Debtors including claims arising out of intercompany transactions that occurred and decisions that were made prior to December 3, 1990 . . . The Debtors have maintained a directors and officers liability insurance policy and the insurer under such policy, following approval by the Bankruptcy Court on December 1, 1992, paid $5 million in final settlement in final settlement of all claims (excepting only the L/S Claims). The Confirmation Order shall . . . . provide that all Persons shall thenceforth be permanently enjoined, stayed and restrained from pursuing or prosecuting any such actions against any person so released.

Joint App. A247 A248 (emphasis added). According to the Continental Debtors, subsection (b)(ii) applies to Plaintiffs because their actions fall within the definition of "stockholder actions" under S 1.168 of the plan. See Brief for Appellees at 11, n4.

Plaintiffs filed detailed objections to section 12.4 on at least five occasions. Plaintiffs in the consolidated class actions filed objections on December 30, 1992 and February 17, 1993. Joint App. A354, A505. Plaintiffs in the Gillman class action filed objections on December 30, 1992 and February 17, 1993. Joint App. A373, A523. Plaintiffs also filed a letter brief reply on April 12, 1993. Joint App. A467. In these objections, Plaintiffs complained that the plan impermissibly "purports to release all claims held by the Class against certain third party non-debtors who are not before this court. . . . The releases will not be voluntary. . . . The plan seeks to effectively discharge obligations of non-debtors over the objections of creditors." Joint App. A511-A512. In response to Plaintiffs' objections, the Continental Debtors stated that Plaintiffs' objection:

[R]elates only to Section 12(b)(ii) of the Plan . . . Section 12(b)(ii) is entirely historical in nature and refers only to certain already-settled derivative litigation which was property of the Debtors' estates. All of the litigation referred to in Section 12.4(b)(ii) and in Objection No. 6 was settled under a settlement agreement approved by this Court pursuant to Bankruptcy Rule 9019 on December 1, 1992. These objectors did not object to this Court's order approving that settlement, nor did they appeal therefrom. The order has long since become final and the settlement payment of $5 million has been made. These objectors have slept on their right to object to the Settlement; their complaint about the proposed Order is moot.

Joint App. A484.

The Bankruptcy Court overruled Plaintiffs' objections to the Continental Debtors' disclosure statement because no one was present to prosecute them. See Supp. App. B364 B365.² Plaintiffs' objections to the Continental Debtors' plan of reorganization itself were not addressed at the plan confirmation hearing. Plaintiffs' counsel did not respond when the Bankruptcy Court announced Plaintiffs' opportunity to present their objections, matters no. 24 and 25, at the plan confirmation hearing on April 7, 1993. See Third Supp. App. B1625 (Bankruptcy Court calling Freberg and Gillman objections, with no response, and continuing onward). In Plaintiffs' April 9, 1993 letter-brief reply, Plaintiffs notified the Bankruptcy Court and the Continental Debtors that "Class Plaintiffs submit this letter brief reply to the Debtors' brief in support of the Plan because they may not be able to personally attend the confirmation hearing on the date and time that the Class Plaintiffs' objections are called for oral argument." Joint App. A467, [fn1.] The Bankruptcy Court approved Continental Debtors' plan of reorganization on April 16, 1993. Plaintiffs filed an appeal on June 28, 1993 seeking a reversal of the order confirming the Continental Debtors' plan. Plaintiffs did not seek a stay of...