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					JOHN WORRALL et al.,                                   8        IN THE DISTRICT COURT
Plaintiffs,

VS.                                                    §        OF TRAVIS COUNTY, TEXAS
                                                       §
PEDERNALES ELECTRIC                                    §
COOPERATIVE, INC., et a].,                             §
Defendants.                                            8        353rdJUDICIAL DISTRICT

                                  SETTLEMENT AGREEMENT

           Plaintiffs John Worrall, Glenn Van Shellenbeck, and Linda G. Evans ("Plaintiffs"),

individually, and on behalf of all members of the Settlement Class by and through their

undersigned attorneys, and subject to court approval, enter into the following Settlement

Agreement, with the Settling Defendants, as defined below:

                                                RECITALS

      A.         Plaintiffs are each PEC members and have been members at all relevant times;

      B.         Pedernales Electric Cooperative, Inc. ("PEC"), is and was, at all relevant times, an

electric cooperative cooperation duly organized under the laws of the State of Texas and

operating without profit to its members, with offices throughout central Texas and its

headquarters in Johnson City, Blanco County, Texas;

      C.         On May 16, 2007, Lee Beck Lawrence, individually and on behalf of all others

similarly situated, filed suit in Travis County District Court, 353rd Judicial District, Cause No.

D- 1-GN-07-001434 (the "Lawrence action"), against PEC, et al. (together, Defendants Fuelberg,

Dahrnann, Burnett, Price, Harmon, Felps, Smith, Cloud, Adair, Kennedy, Ramage, Linebarga,

Armstrong, Tenorio, Allen, Nunnally, Ruff, Reed, and Shaffer, are referred to as the "Individual

Defendants;" the Individual Defendants and Defendant PEC will be referred to collectively as

"Defendants"), requesting declaratory relief pursuant to the Uniform Declaratory Judgments Act

and alleging that Defendants breached their fiduciary duties, were negligent andlor grossly
                                             1
negligent, and breached contractual duties with regard to Defendants' actions and omissions

relating to issues concerning compensation, benefits, and other expenditures; the investment in

and acquisition of Envision; and PEC's policies regarding the retirement of member patronage

capital. Lawrence sought certification of a class of all current and former members of the PEC;

    D.         On June 14, 2007, Defendants filed their Original Answer in the Lawrence

Action;

    E.         On June 15, 2007, Defendants filed their Motion to Dismiss, Motion for

Sanctions, and Special Exceptions;

    F.         In Plaintiffs' First Amended Petition in Cause No. D-1-GN-07-001434, filed on

June 15, 2007, Lee Beck Lawrence was dropped as a named plaintiff and was replaced by John

Worrall, Glenn Van Shellenbeck, Joseph R. Krier, and Linda G. Evans;

    G.         On June 21,2007, Defendants filed their Motion to Memorialize Dismissal;

   H.         On June 22, 2007, Plaintiffs filed their Motion for Leave to Substitute Proposed

Class Representatives or Alternatively to Strike First Amended Petition;

   I.         On June 29, 2007, Plaintiffs filed their Motion to Strike July 6, 2007 Hearing on

Defendants' Motion to Memorialize Dismissal andfor for a Continuance of the Hearing;

   J.         On July 5, 2007, a hearing was held on Plaintiffs' Motion to Strike the July 6,

2007 hearing on Defendants' Motion to Memorialize Dismissal. The District Court granted

Plaintiffs' motion and continued the hearing on the Motion to Memorialize Dismissal until the

week of July 16,2007;

   K.         On July 18, 2007, Plaintiffs filed an Original Petition against PEC and the

Individual Defendants, which was virtually identical in form and substance to the Lawrence

Action, in a new lawsuit styled John Worrall, individually and as representative of all others
similarly situated; et al, v. PEC, et al.; Cause No. D-1-GN-07-002234, in the 353rd District

Court of Travis County, Texas (the "Settled Action");

   L.          On July 19, 2007, a hearing was held on Defendants' Motion to Memorialize

Dismissal. The District Court entered an order granting Defendants' motion and dismissing the

Lawrence Action;

   M.          On July 24,2007, Defendants filed their Motion to Dismiss for Lack of Standing

and their Motion for Protective Order in the Settled Action (and each of the following events

took place in the Settled Action unless otherwise specified);

   N.          On July 24, 2007, Plaintiffs filed Plaintiffs' Motion for Discovery Control Order;

   0.          On July 26, 2007, Plaintiffs filed Plaintiffs' Response to Motion for Protective

Order;

   P.          On July 26,2007, Defendants filed their Special Exceptions;

   Q-          On July 27,2007, the court heard Plaintiffs' Motion for Discovery Control Order;

   R.          On August 1,2007, Defendants filed their Original Answer;

   S.          On August 2,2007, the District Court entered a Discovery Control Order;

   T.          On August 15,2007, Defendants filed their Supplemental Special Exceptions;

   U.          On August 20, 2007, Plaintiffs filed Plaintiffs' Response to Defendants' Special

Exceptions, and Plaintiffs' Response to Defendants' Motion to Dismiss;

   V.          On August 20, 2007, the court heard Defendants' Motion to Dismiss, Defendants'

Motion for Protective Order, and Defendants' Special Exceptions. The court denied Defendants'

Motion for Protective Order and took Defendants' Motion to Dismiss and Special Exceptions

under advisement;

   W.          On September 25-27,2007, PEC held nine Member Forums throughout its service

area;

                                                3
    X.            On October 10,2007, the Court entered a Protective Order;

    Y.            On October 10, 2007, the Court entered an order denying Defendants' Motion to

Dismiss;

    2.            On October 25, 2007, Defendants filed their Motion to Reconsider Motion for

Protective Order;

    AA.         On October 26,2007, the Court denied Defendants' Motion to Reconsider Motion

for Protective Order;

    BB.         On October 26, 2007, Plaintiffs filed their Motion to Compel Defendants'

responses to Plaintiffs' Requests for Production;

    CC.        On October 30, 2007, the Court entered its Order on Defendants' Special

Exceptions in which it ordered Plaintiffs to replead certain claims and file an amended petition

within 14 days;

    DD.        On October 31, 2007, Defendants filed Defendants' Response to Plaintiffs'

Motion to Compel and Motion for Sanctions for Frivolous Motion;

    EE.        On November 7, 2007, Plaintiffs secured the deposition testimony of W.W.

"Bud" Bumett;

   FF.         On November 8, 2007, Plaintiffs secured the deposition testimony of Bennie

Fuelberg;

   GG.         On November 9, 2007, PEC's Board of Directors approved revisions to PEC's

bylaws adding the right for members to nominate candidates for open Board positions by petition

and removed language from the bylaws establishing a contract between members and the

PEC,eliminating the Coordinator position, authorized Bennie Fuelberg's compensation to be

made public, and authorized the retirement of capital credits through 1976 on a 30-year rotation;
    HH.           On November 9, 2007, W.W. Burnett relinquished his position as a paid

employee of the PEC;

    n.            On November 12, 2007, Defendants secured the deposition testimony of John

Worrall;

    JJ.           On November 13, 2007, Defendants secured the deposition testimony of Linda

Evans;

    KK.           On November 13, 2007, Plaintiffs filed Plaintiffs' Motion for Protective Order

and Assertion of Privileges with respect to Defendants' Notice of intention to Take the Oral

Deposition of Lee Beck Lawrence;

    LL.           On November 13, 2007, Plaintiffs filed Plaintiffs' First Amended Original

Petition;

    MM.           On November 13, 2007, PEC announced plans for W.W. Burnett to retire as

president and director and for Bennie Fuelberg to retire as general manager.          PEC also

announced it would file its 2006 IRS Form 990 for tax exempt organizations and post the return

on its website;

   NN.            On November 14, 2007, Defendants secured the deposition testimony of Lee

Beck Lawrence;

   00.            On November 19, 2007, Defendants filed Defendants' Motion for Summary

Judgment on Limitations. This motion remains pending;

   PP.            On November 20, 2007, Plaintiffs filed Plaintiffsy Motion to Exempt

"Confidential" Material Obtained in Discovery from the Protective Order. This motion remains

pending;
    QQ-        On November 21, 2007, Defendants filed Advisory Directors' Motion for

Summary Judgment and Individual Defendants' Motion for Summary Judgment Based on Lack

of Duty to Plaintiffs. These motions remain pending;

    RR.        On November 26, 2007, a hearing was held on the status of document production

from Defendants at the request of Plaintiffs;

    SS.        On November 27, 2007, Defendants secured the deposition testimony of Glenn

Van Shellenbeck;

    'IT.       On November 28, 2007, Defendants agreed to de-designate the confidentiality of

portions of W.W. Burnett's deposition testimony;

    W.         In November and December 2007, Defendants produced in excess of 23,000

pages of documents requested by Plaintiffs;

   VV.         On November 28, 2007, Defendants filed Defendants' Motion for Partial

Summary Judgment on Standing. This motion remains pending;

   WW.        On November 30, 2007, Plaintiffs filed Plaintiffs' Motion to Exempt Deposition

Testimony. This motion remains pending;

   XX.        On December 3, 2007, Plaintiffs secured the deposition testimony of Libby

Linebarger;

   YY.        On December 4, 2007, Defendants agreed to de-designate the confidentiality of

portions of Bennie Fuelberg's deposition testimony;

   ZZ.        On December 5, 2007, Plaintiffs secured the deposition testimony of O.C.

Harmon;

   AAA.       On December 5,2007, Plaintiffs filed Plaintiffs' Supplemental Motion to Exempt

Deposition Testimony. This motion remains pending;

   BBB.       On December 5,2007, Plaintiffs filed their Second Motion to Compel;

                                                6
    CCC.        On December 5, 2007, Defendants filed a Motion to Quash Subpoena for

 Deposition of Defendant Fuelberg;

    DDD.        On December 7, 2007, Plaintiffs filed Plaintiffs' Motion to Exempt the

Deposition Testimony of O.C. Harmon. This motion remains pending;

    EEE.        On December 7, 2007, Defendants filed Defendants' Response to Plaintiffs'

Motion to Exempt Deposition Testimony and Plaintiffs' Supplemental Motion to Exempt

Deposition Testimony;

    FFF.        On December 10, 2007, Defendants filed Defendants' Response to Plaintiffs'

Second Motion to Compel;

    GGG.       On December 10, 2007, the Court heard Plaintiffs' Motion to Compel and to de-

designate testimony and documents;

    HHH.       On December 11, 2007, Defendants filed Defendants' Motion for Partial

Summary Judgment Based on Lack of Contractual Damages to Plaintiffs (relating to alleged

excessive compensation and acquisition of Envision). This motion remains pending;

   111.        On December 13, 2007, Defendants secured the deposition testimony of Joe

Krier;

   JJJ.        On December 14, 2007, Defendants filed Defendants' Motion to Compel

Plaintiffs' Responses to Interrogatories;

   KKK.        On December 14,2007, Defendants filed a Motion to Quash Notice and Subpoena

to take the Oral Deposition of a Corporate Witness of KPMG and Subpoena Duces Tecum;

   LLL.        On December 14, 2007, Plaintiffs secured the deposition testimony of Eddie

Dauterive;

   MMM.        On December 18, 2007, Defendants filed a Motion to Limit Pre-Certification

Communications;

                                             7
    NNN.          On December 18, 2007, Plaintiffs secured the deposition testimony of Renee

Oelshleger;

    000.         On December 19,2007, the Court entered an order granting Plaintiffs' Motion to

Compel Defendants' responses to certain requests for production;

    PPP.         On December 19, 2007, W M G LLP filed its Motion of Third-Party Witness

KPMG LLP for Protective Order and Objections to Plaintiffs' Subpoena;

    QQQ.         On December 20, 2007, Defendants filed Defendants' Motion for Partial

Summary Judgment on Plaintiffs' Breach of Contract Claim Relating to Patronage Capital. This

motion remains pending;

    RRR.         On December 21, 2007, Defendants filed Defendants' Motion for De-

Designation. This motion remains pending;

   SSS.          On December 21, 2007, Plaintiffs secured the additional deposition testimony of

Bennie Fuelberg;

   TIT.          On December 26, 2007, Defendants filed Defendants' Motion to Dismiss for

Failure to Comply with the Court's Order on Special Exceptions. This motion remains pending;

   UITU.         On December 27, 2007, Defendants filed an Amended Motion to Quash Notice

and Subpoena to Take the Oral Deposition of a Corporate Representative of KPMG and

Subpoena Duces Tecurn;

   WV.           On January 2, 2008, Plaintiffs filed Plaintiffs' Motion to Modify Discovery

Control Order;

   WWW.          On January 2,2008, Defendants withdrew their Motion to Limit Pre-Certification

Communications;

   XXX.          On January 3, 2008, the PEC announced it had selected Juan Garza to replace

Bennie Fuelberg as general manager;
    YYY.       In January 2008, the PEC board voted not to allow a state audit as explained in a

 letter to members and decided to hire a reputable private fum to conduct a financial and

management investigation;

    ZZZ.       On January 7, 2008, the Court ordered documents to be produced by KPMG and

abated all discovery in the Settled Action to facilitate settlement discussions;

    AAAA.      On January 8, 2008, Defendant Bennie Fuelberg announced his retirement as

General Manager of PEC.          Because of this early retirement, Fuelberg did not receive

approximately $600,000 of his deferred compensation package;

    BBBB.      On January 10, 2008, the District Court entered an order suspending all pending

discovery and filing deadlines as well as all scheduled hearings to allow for settlement

negotiations until January 29, 2008;

    CCCC.      On January 11,2008, PEC's Board of Directors hired Juan Garza to be General

Manager starting February 11,2008;

    DDDD.      On January 18,2008, W.W. Burnett resigned from the PEC Board of Directors;

    EEEE.      On January 21, 2008, PEC's Board of Directors approved revisions to PEC's

bylaws to eliminate the Nominating Committee and proxies for director elections;

   FFFF.       On January 21, 2008, PEC's Board of Directors passed a resolution to retain

Scott, Douglass & McConnico, LLP, to represent the hdividual Defendants;

   GGGG. On January 24,2008, the District Court entered an order extending the settlement
period until February 29,2008;

   HHHH.      On January 25, 2008, the Individual Defendants filed their Motion to Substitute

Counsel;

    11
   11.        On January 29, 2007, Lieutenant Governor David Dewhurst called for interim

Senate committee hearings to study electric cooperatives;

                                                 9
    JJJJ.       On February 6, 2008, the District Court entered an order granting Individual

Defendants' Motion to Substitute Counsel;

    KKKK.       On February 18, 2008, PEC's Board of Directors authorized the director position

vacated by W.W. Bumett to be filled by election at PEC's annual meeting and suspended the

relevant bylaw provision;

    LLLL.       On February 28, 2008, the District Court entered an order indefinitely extending

settlement period;

    MMMM. On March 10, 2008, after engaging in good faith discussions and arm's-length

negotiations with regard to the possible settlement of the Settled Action, Plaintiffs, individually,

and on behalf of all members of the Settlement Class; and, the Settling Defendants (collectively,

the ''Settling Parties") reached a binding agreement including the negotiation and execution of

this Settlement Agreement as approved by the Court;

    NNNN.      On March 27, 2007, the first hearing by the Senate committee investigating

electric cooperatives was held. PEC's new general manager, Juan Garza, and four board

members of PEC testified at the hearing;

    0000.      Plaintiffs' Counsel has conducted discovery and investigation during the

prosecution of the Settled Action. This discovery and investigation has included, inter alia, (i)

inspection of over twenty-three thousand pages of documents produced by Defendants in

response to requests served by Plaintiffs' Counsel; (ii) depositions of Messrs. Fuelberg, Burnett,

Harmon, Vollmer and Dauterive as well as Ms. Linebarger and Ms. Oelscheleger; (iii)

consultations with experts; (iv) review of PEC's public filings, annual reports, and other public

statements; and (v) research of the applicable law with respect to the claims asserted in the

actions and the potential defenses thereto;
     PPPP.      The Settling Parties recognize the substantial time and expense that would be

incurred by M h e r litigation in this matter and the uncertainties inherent in any such litigation;

     QQQQ.      The Settling Parties have concluded that their interests would be best served by a

settlement of the Settled Action;

     RRRR.      The Settling Defendants deny all allegations of wrongdoing, fault, liability or

damage to Plaintiffs and the putative class, deny that they engaged in any wrongdoing, deny that

they committed any violation of law, deny that they acted improperly in any way, believe that

they acted properly at all times, but wish to settle the Settled Action on the terms and conditions

stated herein in order to eliminate the burden and expense of fbrther litigation, and to put the

Released Claims to rest, without in any way acknowledging any wrongdoing, fault, liability or

damage to Plaintiffs and the Settlement Class; and

     SSSS.      The Settling Parties and their counsel have considered: (i) the facts developed

during Plaintiffs' investigation of this matter; (ii) the attendant risks of litigation and the

uncertainty of the outcome if the Settled Action were to be litigated; (iii) that the corporate

governance reforms already instituted by PEC's Board of Directors since the filing of this

litigation provide a substantial benefit to the Settlement Class; and (iv) that, under the

circumstances, the terms and conditions of the Settlement are fair, reasonable, and adequate, and

that it is in the best interests of the Settling Parties and members of the Settlement Class to settle

the Settled Action as set forth below.

         NOW, THEREFORE, IT IS STIPULATED AND AGREED, subject to court

approval, by Plaintiffs and the Settling Defendants, as follows:

1.       DEFTNITIONS

         As used in this Settlement Agreement, the following terms have the meanings specified

below:

                                                 11
        1.I.    "Settling Defendants" means Pedernales Electric Cooperative, Inc., Bennie

Fuelberg, Will Dahmann, W.W. Burnett, E.B. Price, O.C. Harmon, R.B. Felps, Val Smith, and

Vi Cloud.

        1.2     "Dismissed Defendants" means Barry Adair, Rusty Allen, Ola Armstrong, Stuart

Nunnally, Robert A. Reed, Jr., Duwan L. Ruff, Barbara Shaffer, Blas Tenorio, Kenneth W.

Kennedy, Lamont Ramage, and Libby A. Linebarger.

        1.3.    "Effective Date" means March 10,2008.

        1.4.    "Fiduciary Duty" or "Fiduciary Duties" means any legal duties imposed by Texas,

federal, or other statute or code or under common law, including but not limited to any: duties of

obedience, duties of loyalty, duties of due care, duties of good faith, duties of candor, duties to

refrain from self-dealing, duties to act with integrity of the strictest kind, duties of fair and/or

honest dealing, or duties of full disclosure.

        1.5.   "Final" means 45 days after the judgment if no post-judgment motions are filed,

105 days after the judgment if post-judgment motions are filed but no notice of appeal is filed, or

the date on which the Judgment becomes enforceable after the final disposition of any appeal.

        1.6.   "Judgment" means the judgment to be rendered by the Court, substantially in the

form of the attached Exhibit A.

        1.7.   "Plaintiffs' Released Claims" means and includes: any and all claims, causes of

action, allegations, demands, damages, rights, suits, injunctions, liabilities, or matters and issues

of any kind or nature whatsoever, whether known or unknown, contingent or absolute, suspected

or unsuspected, disclosed or undisclosed, matured or unmatured, against the Settling Defendants

and/or any of the Released Persons, that have been, could have been, or in the future can or

might be asserted in the Settled Action or in any court, tribunal or proceeding based upon,

relating to, arising out of, connected to, or subsumed within any claims, facts, allegations,

                                                 12
transactions, events, occurrences, acts, disclosures, statements, omissions or failures to act that

have been alleged or asserted by Plaintiffs individually andlor as representatives of the

Settlement Class in the Settled Action, including but not limited to: claims for negligence, gross

negligence, recklessness, breach of Fiduciary Duty, fraud, misl-epresentation, mismanagement,

waste of corporate assets, tortious interference, conspiracy, aiding and abetting, breach of

contract, or violations of any state or federal statute, code, rule or regulation.

        1.8.    "PEC's Released Claims" means and includes: any and all claims, causes of

action, allegations, demands, damages, rights, suits, injunctions, liabilities, or matters and issues

of any kind or nature whatsoever, whether known or unknown, contingent or absolute, suspected

or unsuspected, disclosed or undisclosed, matured or unmatured, against any or all of the

Released Persons, that have been, could have been, or in the kture can or might be asserted in

the Settled Action or in any court, tribunal or proceeding based upon, relating to, arising out of,

connected to, or subsumed within any claims, facts, allegations, transactions, events,

occurrences, acts, disclosures, statements, omissions or failures to act that have been alleged or

asserted in the Settled Action by Defendant PEC or on PEC's behalf in a derivative action

(including without limitation any and all derivative claims asserted in Plaintiffs' pleading as

amended per Section 2.2(a) below) including but not limited to claims for negligence, gross

negligence, recklessness, breach of Fiduciary Duty, fraud, misrepresentation, mismanagement,

waste of corporate assets, tortious interference, conspiracy, aiding and abetting, breach of

contract, or violations of any state or federal statute, code, rule or regulation.

        1.9.   "Defendants' Released Claims" means and includes: any and all claims, causes of

action, allegations, demands, damages, rights, suits, injunctions, liabilities, or matters and issues

of any kind or nature whatsoever, whether known or unknown, contingent or absolute, suspected

or unsuspected, disclosed or undisclosed, matured or unmatured that have been, could have been,

                                                  13
or in the future can or might be asserted in the Settled Action or in any court, tribunal or

proceeding by Defendants against Plaintiffs or any of the Released Persons based upon, relating

to, arising out of, connected to, or subsumed within any claims, facts, allegations, transactions,

events, occurrences, acts, disclosures, statements, omissions or failures to act that have been

alleged or asserted in the Settled Action.

        1.10. "Released Claims," include but are not limited to, any claims, causes of action,

allegations, demands, damages, rights, suits, injunctions, liabilities, or matters and issues of any

kind or nature whatsoever, whether known or unknown, contingent or absolute, suspected or

unsuspected, disclosed or undisclosed, matured or unrnatured that have been, could have been, or

in the future can or might be asserted by any Released Person in the Settled Action or in any

court, tribunal or proceeding based upon, relating to, arising out of, connected to, or subsumed

within allegations that have been asserted in the Settled Action concerning: (1) the operation,

administration and management of PEC; (2) the accounting for and the treatment, management,

investment and disposition of Patronage Capital; (3) the compensation and/or expenses of past or

present Directors, Advisory Directors, Advisory Directors-at-Large and Senior Management,

officers, executive officers, managers, or employees of the PEC; (4) the over-sight of Directors,

Advisory Directors, Advisory Directors-at-Large and Senior Management, officers, executive

officers, managers, or employees' compensation andlor expenses including but not limited to:

meals, travel, hotels, training and entertainment; (5) the decision to invest in Envision Software

Corporation; (6) the maintenance and reporting of financial information, accounting reports and

financial reports of the PEC; (7) the violation of the Electric Cooperative Corporation Act

("ECCA") or other statute, code, rule or regulation, PEC's Articles of Incorporation, bylaws, or

resolutions; and, (8) the failure to establish information or reporting systems designed to provide

the Directors, Advisory Directors, Advisory Directors-at-Large and senior management timely

                                                14
and accurate information sufficient to allow management and the board, each within its scope, to

reach informed judgments concerning both the Cooperative's compliance with the law and

business performance. Released Claims do not include actions or inactions by any Settling Party

after the date of the Judgment.

        1 .I 1. This Settlement Agreement shall not be construed to waive or release any claims,

whether known or unknown or accrued or unaccrued, for any PEC-related rights or benefits to

which any past or present PEC Director, Advisory Director, Advisory Director-at-Large, Senior

Management, officer, executive officer, manager, or employee would otherwise be entitled under

the ECCA, PEC's Articles of Incorporation, bylaws, resolutions, or any oral or written

agreement with PEC. This Paragraph, however, shall not create such rights or benefits, nor shall

it revive rights or benefits that have been waived or released separately and independently of this

Settlement Agreement. Nothing in this Settlement Agreement shall waive or release any claims

by PEC against Plaintiffs or any past or present PEC member for payment for electricity or other

services provided by PEC in the scope and course of its business, nor shall it release any claim

by a member of the Settlement Class unrelated to facts, allegations, or subject matter asserted in

the Settled Action.

       1.12. The Released Persons do not waive or release any rights in respect to the

enforcement of this Settlement Agreement and such persons may bring suit to enforce the terms

of this Settlement Agreement.

       1.13. "Released Persons" means and includes each named Plaintiff individually and as

representatives of the Settlement Class; each member of the Settlement Class; each Settling

Defendant, each Dismissed Defendant; Ms. Jeanell Davis; all past or present PEC Directors,

Advisory Directors, Advisory Directors-at-Large, Senior Management, officers, executive

officers, managers, or employees; and each of the Settling Defendants' agents, representatives,

                                               15
attorneys, insurers, excess insurers, or PEC's related or alliliated entities, including, but not

limited to, Kimble Electric Cooperative, Inc., the Kimble Advisory Board, Envision Software

Corporation and Texas Skies, Inc,, or any trust of which they are the settler or which is for their

benefit. The Settling Parties recognize and agree that the releases contained herein are intended

for the benefit of all PEC's past or present Directors, Advisory Directors, Advisory Directors-at-

Large, Senior Management, officers, executive officers, managers, or employees without regard

to whether such individual is a named defendant in the Settled Action. The Settling Parties

further recognize and agree that any Settling Defendant, Dismissed Defendant or any past or

present PEC Director, Advisory Director, Advisory Director-at-Large, Senior Management,

officer, executive officer, manager, or employee who is not a party to this Settlement Agreement

is an intended third party beneficiary to this Settlement Agreement and is entitled to enforce this

Settlement Agreement as filly as if they were a party hereto.

        1.14. "Settled Action" means all of the claims, causes of action, allegations, demands,

or rights set forth in, relating to, or arising out of the lawsuit filed by John Worrall, Glenn Van

Shellenbeck, Joseph R. Krier, and Linda G. Evans on July 18, 2007, in Travis County District

Court, 353rd Judicial District, Cause No. D-1-GN-07-002234.

        1.15. "Settlement Class" means a non-opt out class for settlement purposes of all

persons or entities that have been members of the PEC at any time between May 16, 2007, and

the first date on which notice of this Settlement Agreement is issued to members of the

Settlement Class, including any and all of their respective successors-in-interest, predecessors,

representatives, trustees, executors, administrators, heirs, assigns, or transferees, immediate and

remote, and any person or entity acting for or on behalf of, or claiming under, any of them, and

each of them. Excluded from the Settlement Class are Plaintiffs' counsel, members of their
immediate families and lawyers and staff at their law firms; Defendants and members of their

immediate families; and cities, municipalities, and state and federal governmental entities.

2.       TERMS OF SETTLEMENT AGREEMENT

         2.1.    The above recitals and definitions are incorporated as fully operative provisions

of this Agreement a s though l l l y set forth herein.

         2.2.    The Settling Parties agree that the mutual releases set forth herein as well as the

following agreements constitute good and sufficient consideration for the release of the Released

Claims against the Released Persons:

                 (a)    Plaintiffs shall amend their live pleading such that all direct claims

asserted by Plaintiffs are alternatively asserted as derivative claims brought by Plaintiffs on

behalf of PEC;

                 (b)    Pursuant to Texas Rule of Civil Procedure 42(b)(2), the action shall

proceed for the purpose of settlement as a non-opt-out class action on behalf of the Settlement

Class;

                 (c)    PEC will provide a notice of the settlement approved by the Court to the

Settlement Class via mail, one-time publication in newspapers of general circulation within its

service territory, and through a posting on the PEC website;

                (d)     Commencing in 2008, PEC will retire twenty-three million dollars

($23,000,000) in patronage capital by bill credits to then-current members over a period of five

(5) years, or as soon thereafter as feasible subject to any restrictions imposed by any lending

institutions as those restrictions are reflected in any agreements to which PEC is a party and the

maintenance of PEC's financial integrity. The retirements will be in the form of credits to then-

current members' electric service bills. PEC will endeavor to retire an average of four million

six hundred thousand dollars ($4,600,000) a year during the 5 year period, but cannot guarantee

                                                  17
that it will be able to do so. If PEC is unable to retire the full $23,000,000 during the 5 year

period, the program will be extended until the full $23,000,000 is retired, The retirement

program will proceed as follows: PEC will select target days after the fact and will show a credit

on members' billing statements for that month in the amount of the retail value of the service for

that target day. The amount of the credit will also be a retirement of the capital account

associated with each meter receiving a credit. Members who do not have capital accounts in

amounts sufficient to cover the full bill credit, will not receive the full credit. Those members

will be eligible to participate in the program in future years, to the extent they have then had

capital credits allocated to them. Similarly, current members who do have capital accounts will

only be eligible to participate in the program so long as they remain members and continue to

have a capital account balance. n i s retirement program shall occur and be paid prior to any

other retirement of patronage capital. PEC shall provide a report annually to the Court setting

forth the status of the payments under this provision and the Court shall retain jurisdiction of this

case for the purpose of monitoring class relief required by this Settlement Agreement;

               (e)     On or before June 30, 2008, unless the Judgment does not become Final,

PEC and its insurer, in proportions agreed upon by them, shall pay in cash or other good funds to

the Plaintiffs' counsel any award by the Court of costs, including Plaintiffs' and Class attorneys'

fees, compensation to the named plaintiffs, nontaxable costs, court costs, and reimbursement of

reasonable out-of-pocket expenses up to but not exceeding an aggregate of four million dollars

($4,000,000). If the Judgment has not become Final as of June 30, 2008, the portion of this

payment to be made by PEC payment is due five (5) days after the Judgment becomes Final and

the portion of this payment to be made by PEC's insurer shall be paid no later than fourteen (14)

days after the Judgment becomes Final. No past or present Directors, Advisory Directors,

Advisory Directors-at-Large, Senior Management, officers, executive officers, manageTs, or

                                                 18
employees of PEC shall have any responsibility, obligation, or liability in respect to the payment,

in whole or in part, of any such award;

                (0     All Parties and counsel agree to support the terms of this Settlement

Agreement, cooperate to consummate it, and not to disparage one another;

                (g)    In further pursuit of good corporate governance, an independent internal

investigation of the PEC will be performed by Navigant Consulting, at PEC's expense,

essentially following the Navigant proposal that was submitted to PEC on February 17, 2008

("Navigant Investigation"). Notwithstanding anything in the Navigant proposal to the contrary,

its investigation shall cover the period of time covering ten (10) years prior to December 31,

2007, with the emphasis on the most recent five (5) years.

       2.3.    Failing approval by this Court of each of the terms of this Settlement Agreement,

the Settlement Agreement shall be null and void and of no force and effect and the Settling

Parties shall be restored to their respective positions in the Actions as of January 7, 2008. In

such event, (i) the existence of this Settlement Agreement, its contents, and the negotiations

leading to it (a) shall have no further force and effect with respect to the Settling Parties, and (b)

shall not be admissible in evidence, nor referred to for any purpose, in the Settled Action or in

any other litigation or proceeding, (ii) any judgment or order entered by any court in accordance

with the terms of this Settlement Agreement shall be treated as vacated, ntlnc pro tunc, and (iii)

Plaintiffs and Plaintiffs' counsel shall immediately return all amounts paid to them per Section

2.2(e), above. Defendants reserve the right to oppose certification of any class in future

proceedings in such event and further reserve all other rights and defenses that Defendants raised

or could have raised had the Settlement Agreement not been entered into by the Settling Parties,

including, without limitation, challenging the satisfaction of any and all conditions precedent to
any derivative claims and the assertion of any and all procedural or substantive rights or

defenses to such claims whether arising under statute or common law.

3,      RELEASE

        3.1.   Upon the Effective Date, each of the Settling Parties agrees:

               (a)     Plaintiffs in the Settled Action and each member of the Settlement Class

shall be deemed to have, and in accordance with this Settlement Agreement and by operation of

the Judgment shall have, fully, finally, and forever released, relinquished and discharged all

Released Claims as described in Paragraphs 1.7 and 1.10.

               (b)     Defendant PEC in the Settled Action shall be deemed to have, and in

accordance with this Settlement Agreement and by operation of the Judgment shall have, fully,

and finally, and forever released, relinquished and discharged all Released Claims as described

in Paragraphs 1.8 and 1.10.

               (c)     The Settling Defendants in the Settled Action shall be deemed to have,

and in accordance with this Settlement Agreement and by operation of the Judgment shall have,

fully, and finally, and forever released, relinquished and discharged all Released Claims as

described in Paragraphs 1.9 to 1.1 1.

               (d)     The Settling Parties agree that the Navigant Review shall not revive any

Released Claims released pursuant to this Settlement Agreement.

               (e)    The Settling Parties agree that the releases set forth in this Settlement

Agreement are and shall be construed as a covenant by the releasing party not to sue or institute

any legal, equitable, or administrative proceedings against a Released Persons in respect to any

of the Released Claims, and that this covenant is made for the benefit of and is enforceable by

such Released Persons.
 4.     MISCELLANEOUS PROVISIONS

        4.1.    This Settlement Agreement shall be governed by and construed in accordance

with the laws of the State of Texas, without regard to conflict of law principles. The Settling

Parties agree that any dispute arising out of or relating in any way to this Settlement Agreement

shall be determined by the Court entering the Judgment and shall not be litigated or otherwise

pursued in any other forum or venue.

        4.2.   This Settlement Agreement constitutes the entire agreement among the Parties

with respect to its subject matter and supersedes any prior agreement or understanding not in this

Settlement Agreement. This Settlement Agreement may only be modified or amended by a

writing, signed by all of the Parties hereto, that refers specifically to this Settlement Agreement.

There are no collateral or oral agreements between the Parties that are not stated herein.

       4.3.    The provisions contained in this Settlement Agreement shall not be deemed a

presumption, concession, or admission by any Released Person of any fault, liability or

wrongdoing as to any facts or claims that have been or might be alleged or asserted in the Settled

Actions, or any other action or proceeding that has been, will be, or could be brought, and shall

not be interpreted, construed, deemed, invoked, offered, or received in evidence or otherwise

used by any person in the Settled Action, or in any other action or proceeding, whether civil,

criminal or administrative, for any purpose other than as provided expressly herein.

       4.4.    The Settling Parties and their attorneys agree to cooperate fully with one another

in seeking court approval of this Settlement Agreement, and to use their best efforts to effect, as

promptly as practicable, the consummation of this Settlement Agreement and the entry of a final

judgment.

       4.5.    Each of the attorneys executing this Settlement Agreement on behalf of one or

more parties warrants and represents that he or she has been duly authorized and empowered to

                                               21
execute this Settlement Agreement on behalf of each such party and bind his or her clients

thereto.

        4.6.   The Parties intend the Settlement to be a final and complete resolution of all

disputes between them with respect to the Settled Action. The Settlement compromises claims

which are contested and shall not be deemed an admission by any Party as to the merits of any

claim or defense. The Parties agree that the Settlement was negotiated in good faith and at arm's

length, and reflects settlements that were reached voluntarily after consultation with competent

legal counsel. The Parties reserve their right to rebut, in a manner that such party determines to

be appropriate, any contention made in any public forum that the Settled Action was brought or

defended in bad faith, without a reasonable basis, or that otherwise questions the integrity of the

Parties in respect to the Settlement Agreement or the Settled Action.

       4.7.    Neither this Settlement Agreement nor the fact of settlement, nor any act

performed or document executed pursuant to or in fiutherance of this Settlement Agreement or

the settlement: (a) is or may be deemed to be or may be used as an admission of, or evidence of,

the validity or lack thereof of any Released Claim, or of any wrongdoing or liability of the

Released Persons or the propriety or lack thereof of class certification; or (b) is or may be

deemed to be or may be used as an admission of, or evidence of, any fault or omission of any of

the Released Persons in any civil, criminal or administrative proceeding in any court,

administrative agency or other tribunal.      The Released Persons may file this Settlement

Agreement or the Judgment in any action that may be brought against them in order to support a

defense or counterclaim based on principles of res judicata, collateral estoppel, release, good

faith settlement, waiver, accord and satisfaction, judgment bar or reduction or any theory of

claim preclusion or issue preclusion, or in support of any other defense in any civil, criminal,

administrative, or other proceeding. If any Released Claims are asserted against any Released
Person in any court prior to final court approval of the Settlement, the Settling Parties shall use

their best efforts to effect a withdrawal or dismissal of the claims.

        4.8.    Each of the Settling Parties acknowledges and agrees that he, she or it has not

relied upon any representations made by, or any alleged non-disclosures of, any other party in

connection with entering into this Settlement Agreement, except those representations expressly

stated herein, and hereby disclaims any reliance on any such alleged representations or non-

disclosures. Except as otherwise provided herein, each Settling Party shall bear his, her or its

own costs.

        4.9.    This Settlement Agreement may be executed in one or more counterparts. All

executed counterparts and each of them shall be deemed to be one and the same instrument.

Facsimile signatures are deemed as original.

        4.10. This Settlement Agreement shall be binding upon, and inure to the benefit of, the

successors and assigns of the parties hereto.

        4.11. The Court shall retain jurisdiction with respect to implementation and

enforcement of the terms of this Settlement Agreement, and all parties hereto submit to the

jurisdiction of the Court for purposes of implementing and enforcing the Settlement embodied in

this Settlement Agreement.

        4.12. All Settling Parties participated in the drafting of this Settlement Agreement. All

Settling Parties agree that no party is to be considered the sole drafter of this Settlement

Agreement and that no drafts of this Settlement Agreement shall be considered or construed to

reflect the intent of any Settling Party.

       4.13. If one or more provisions of this Settlement Agreement is deemed unenforceable,

then the remainder shall be enforced as though such portion(s) had not been included, unless to

do so would cause this Settlement Agreement to fail of its essential purposes.

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         rN WITNESS WHEREOF, the parties hereto have caused this Settlement Agreement to
 be executed, by their duly authorized attorneys, on the dates reflected, effective the Effective

 Date.



         EXECUTED BY:


                   0&
 SIGNED this the -dayof&,2008
                                                    William Ucard, for Plaintiffs


 SIGNED this the        day of         ,2008
                                                    David C. Duggins, for Pedemales Electric
                                                    Cooperative, Inc.


 SIGNED this the -day of               , 2008
                                                    Stephen E. McConnico, for the Individual
                                                    Defendants
        I N WITNESS WHEREOF, the parties hereto have caused h s Settlement Agreement to

be executed, by their duly authorized attorneys, on the dates reflected, effective the Effective

Date.



        EXECUTED BY:



SIGNED this the -day of               ,2008
                                                   William Ikard, for Plaintiffs


SIGNED this the        day of   @12008                                                 .
                                                                                       .




                                                    Cooperative, Inc.


SIGNED this the -day of               ,2008
                                                    Stephen E. McConnico, for the Individual
                                                    Defendants
        IN WITNESS WHEREOF, the parties hereto have caused this Settlement Agreement to

be executed, by their duly authorized attorneys, on the dates reflected, effective the Effective

Date.



        EXECUTED BY:



SIGNED this the       day of          ,2008
                                                   William Ikard, for Plaintiffs


SIGNED this the -day ,o
                      f                2008
                                                   David C. Duggins, for Pedernales Electric
                                                   Cooperative, Inc.


SIGNED this the %day of        kri\   ,2008
                                                   Stephen E. McConnico, for the Individual
                                                   Defendants
JOHN WORRALL et al.,                                9         IN THE DISTRICT COURT
Plaintiffs,                                         6
                                                    6
vs.                                                 §         TRAVIS COUNTY, TEXAS
                                                    §
PEDERNALES ELECTRIC                                 8
COOPERATIVE, INC., et al.,                          6
Defendants.                                         6          353rdJUDICIAL DISTRICT

                                     FINAL JUDGMENT

       Pursuant to the Settlement Agreement dated                , 2008, the Order Provisionally

Approving Settlement signed herein on                   2008, and the Order Approving Notice and

Scheduling Hearing signed herein on             , 2008, a hearing was held before this Court on
           2008, due and proper notice having been given in accordance with this Court's

orders; the respective parties having appeared by their attorneys of record; the Court having

heard and considered the submission and evidence presented in support of the proposed

settlement (the "Settlement") and any opposition thereto; the attorneys for the parties having

been heard, an opportunity to be heard having been given to all other persons requesting to be

heard in accordance with the notice; the Court having determined that notice of the Settlement to

the "Settlement Class" (as hereinafter defined.) and notice of the Settlement to Pedernales

Electric Cooperative, Inc.'s potentially affected members pursuant to the Court's order was

proper, adequate and sufficient; the Court having determined that the Settlement is fair,

reasonable, adequate, and in the best interest of PEC; the Court having considered, among other

matters, the benefits of the proposed Settlement to the Settlement Class and the risks,

complexity, expense and probable duration of further litigation; and the entire matter of the

proposed settlement having been heard and considered by the Court; it is hereby ORDERED,

ADJUDGED AND DECREED that:
        1.         h respect to the Settlement Class, notice of the Settlement has been given to the
 Settlement Class pursuant to and in the manner directed by the Order Approving Notice, proof of

the mailing and publication of the Notice has been filed and entered into evidence herein, and

full opportunity to be heard has been offered to all parties, including the Settlement Class. The

form and manner of the Notice are hereby determined to have been reasonable under the

circumstances and to have hlly complied with the requirements of all applicable law and to have

constituted due and sufficient notice to all persons entitled thereto, and it is further determined

that all members of the Settlement Class are bound by this Final Judgment.

        2.     The Court finds that the requirements of Texas Rule of Civil Procedure 42 have

been satisfied. Accordingly, pursuant to Texas Rule of Civil Procedure 42:

               a.        the Court specifically finds that (i) the Settlement Class is so numerous

that joinder of all members is impracticable, (ii) there are questions of law and fact common to

the Settlement Class, (iii) the claims of Plaintiffs John Worrall, Glenn Van Shellenbeck and

Linda G. Evans are typical of the claims of the Settlement Class, and (iv) Plaintiffs Worrall, Van

Shellenbeck and Evans will fairly and adequately protect the interests of the Settlement Class;

               b.        the Court finds that final injunctive or corresponding declaratory relief is

appropriate because the parties opposing the Settlement Class acted or refused to act on grounds

generally applicable to the Settlement Class;

               c.        the Court finds that Plaintiffs Worrall, Van Shellenbeck and Evans and

Plaintiffs' counsel, Ikard & Wynne LLP and Baker 62 McKenzie LLP, have adequately

represented the interests of the Settlement Class with respect to this action and the claims

asserted herein;
                d.     the Court finds that the Plaintiffs' claims for injunctive and declaratory

relief predominate over all other claims for relief;

                e.     the Court finds that the Settlement Class shares the significant common

trait of a preexisting and continuing legal relationship with Pedernales Electric Cooperative, Inc.,

that in substance the injuries sought to be remedied are injuries to the Settlement Class as a

group as opposed to individual injuries, that the Settlement Class is homogenous and cohesive to

an extent that exceeds predominance and superiority standards, that members of the Settlement

Class have been provided with reasonable and adequate notice and the opportunity to object to

the settlement, and, accordingly, that due process considerations have been satisfied and the

Settlement Class may be certified as a non-opt out class under Texas Rule of Civil Procedure

42@)(2);
               f.      this action is hereby certified pursuant to Texas Rule of Civil Procedure

42@)(2), for purposes of settlement only, as a class action on behalf of a non-opt out class

("Settlement Class") consisting of all members of Pedernales Electric Cooperative, Inc., at any

time from May 16,2007 to                ,2008, including any and all of their respective successors

in interests, predecessors, representatives, trustees, executors, administrators, heirs, assigns, or

transferees; as defined with particularity in Plaintiffs' Second Amended Original Petition on file

in this cause; and,

               g.      Plaintiffs Worrall, Van Shellenbeck and Evans are hereby certified as

representatives of the Settlement Class and their counsel, Ikard & Wynne LLP and Baker &

McKenzie LLP, are hereby certified as Class Counsel.

       3.      The Court finds and concludes that the Settlement is fair, reasonable and adequate

and in the best interests of the Settlement Class, and hereby approves the Settlement and all
transactions preliminary or incident thereto. The Court finds and declares that the benefits

associated with the corporate governance, electoral, and policy reforms instituted during the

pendency of this suit and because of this suit or that will be instituted as a result of the

Settlement Agreement are applicable to and will be enjoyed by all members of the Settlement

Class. The parties to the Settlement Agreement, which is attached hereto and incorporated

herein, are hereby authorized and directed to comply with and to consummate the Settlement

Agreement in accordance with its terms and provisions. The Court further enjoins Defendant,

Pedemales Electric Cooperative, Inc., to hire Navigant Consulting, Inc., to conduct a

comprehensive review of management and financial affairs as set forth in the Settlement

Agreement.

       4.      In respect to the settlement of all claims that were or could have been asserted by

Pedemales Electric Cooperative, Inc., or on its behalf in a derivative action as set forth in the

Settlement Agreement:

               a.     the Court finds that notice of the Settlement has been given to Pedernales

Electric Cooperative, Inc.'s members, both by mailing to the Settlement Class and by

publication. The Court finds that such notice was given pursuant to and in the manner directed

by the Order Approving Notice, proof of the mailing and publication of the Notice has been filed

and entered into evidence herein, and full opportunity to be heard has been offered to all parties,

including any members affected by the derivative settlement. The form and manner of the

Notice are hereby determined to have been reasonable under the circumstances and to have fully

complied with the requirements of all applicable law and to have constituted due and sufficient

notice to all persons entitled thereto, and it is W e r determined that Pedernales Electric

Cooperative, Inc., and its members are bound by this Final Judgment;
                  b.   the Court finds that the determination to allow settlement of the derivative

claims was made by an affirmative vote of a majority of a committee of duly authorized

independent and disinterested directors at a meeting at which interested directors or other

interested persons were not present;

                 c.    the Court finds that the disinterested directors were truly independent and

acted in good faith after reasonable investigation and in the best interest of Pedernales Electric

Cooperative, Inc., when determining to allow settlement of the derivative claims;

                 d.    the Court finds that the disinterested directors, in the exercise of their

sound independent business judgment, found that the Settlement was fair, reasonable, adequate,

and in the best interest of Pedernales Electric Cooperative, Inc,;

                 e.    the Court finds that there is no evidence of fraud, collusion, or willful

misconduct in respect to the determination to settle, rather, the Court finds that the Settlement

was the result of arm's length negotiations, after extensive discovery and briefing on the merits,

and based on intelligent evaluation of the lawsuit by the parties and their counsel;

                 f     the Court finds that the lawsuit was a contributing factor to several

beneficial changes to Pedernales Electric Cooperative, Inc,, and that Pedemales Electric

Cooperative, Inc. has taken steps to prevent the acts or omissions complained of fiom occurring

in the future;

                 g.    the Court finds that the Settlement allows Pedernales Electric Cooperative,

Inc.'s management to return their focus to operating and managing the company, and avoids the

continued threatened impairment of Pedemales Electric Cooperative, Inc.'s goodwill;

                 h.    the Court finds that the conclusion by the disinterested directors that any

possible benefit to Pedernales Electric Cooperative, Inc. fiom pursuing any remaining claims that
were or could have been alleged risked being offset by the additional expenses relating not only

to litigation, but to the continued distraction of management and employees, is based on a

reasonable, intelligent, and prudent evaluation of the case;

               i.       the Court finds that derivative litigation is notoriously difficult and

unpredictable and that settlement of such actions are favored;

               j.       the Court finds, that considering the risks and expense of continued

litigation in comparison with the likelihood of success on the merits, the Settlement substantially

benefits Pedernales Electric Cooperative, Inc., and its members;

               k.       the Court finds and concludes that the Settlement is fair, adequate,

reasonable, and in the best interest of the Pedernales Electric Cooperative, Inc., and hereby

approves the Settlement as set forth in the Settlement Agreement and all transactions preliminary

and incident thereto.

       5.      In the event the terms of this Judgment are vacated, or materially modified on

appeal, this Judgment (except this Paragraph) shall be null and void, the Settlement Agreement

shall be deemed terminated and the parties shall return to their positions as provided for in the

Settlement Agreement.

       6.      Class Representatives, each member of the Settlement Class, Pedernales Electric

Cooperative, Inc., and each individual Defendant shall be deemed to have, and by operation of

this Judgment shall have, finally, fully, and forever released and discharged all Released Claims

a d s t the Released Persons as set forth in Paragraph 3 of the Settlement Agreement, including

claims that named plaintiffs and each of the Settlement Class Members do not know or suspect to

exist at the time of the release, which if known, might have affected such party's decision to

enter into the Settlement Agreement.
        7.     Pursuant to Rule 42@)     - (i) the Court awards the Plaintiffs and the Settlement
Class, attorneys' fees, expenses, and Plaintiffs' bonuses in the amount of $4,000,000 as provided

in the Court's order dated           2008. Liability for and payment of such attorneys' fees,

expenses, and Plaintiffs' bonuses shall be as set forth in Paragraph 2.2(e) of the Settlement

Agreement.

        8.     All relief requested by any party not hereinabove granted is hereby denied and

judgment is hereby rendered that such claims are dismissed with prejudice and that the Party(ies)

asserting claims for such relief take nothing on such claims. This is a final judgment, disposing

of all claims of all parties, and is subject to appeal. Costs of court are assessed against the party

incurring same.

       SIGNED this the -day of A 2008.



                                              John K.Dietz, Judge Presiding

				
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Description: Settlement Agreement Pec document sample