Source: https://fhnylaw.com/state-court-applies-pslra-automatic-stay-to-1933-act-class-action-creating-a-split-within-the-commercial-division/
Timestamp: 2019-08-24 18:50:28
Document Index: 285998799

Matched Legal Cases: ['§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 2201']

On August 6, 2017, Justice Andrew Borrok of the Supreme Court, New York County, Commercial Division, decided In re Everquote, Inc. Securities Litigation, 2019 N.Y. Slip Op. 29242 (Sup. Ct., N.Y. County Aug. 6, 2019) (here), in which he held that the automatic stay of discovery required by the Private Securities Litigation Reform Act of 1995 (the “Reform Act” or “PSLRA”), 15 U.S.C. § 77z-1(b)(1), applies in state court as well as in federal court. In doing so, Justice Borrok split with Justice Saliann Scarpulla of the Commercial Division who twice held to the contrary. See In re PPDAI Group Securities Litigation, 2019 WL 2751278 (Sup. Ct., N.Y. County, July 1, 2019), and In re Dentsply Sirona, Inc. Shareholders Litigation, 2019 N.Y. Slip Op. 32297(U), 2019 WL 3526142 (Sup. Ct., N.Y. County, Aug. 2, 2019) (here).
In PPDAI, Justice Scarpulla held that “[a]pplication of the federal PSLRA automatic discovery stay would undermine Cyan’s holding that ‘33 Act cases may be heard in state courts.” PPDAI, 2019 WL 2751278, at *7, citing Cyan, Inc. v. Beaver County Empl. Retirement Fund, 138 S.Ct. 1061, 1078 (2018). “Accordingly,” said Justice Scarpulla, “I am persuaded that the PSLRA automatic stay is not applicable to an action brought in New York State court.” Id.
This Blog wrote about PPDAI here.
[Ed. Note: On July 12, 2019, the defendants in PPDAI filed a notice of appeal of Justice Scarpulla’s decision.]
In Dentsply Sirona, Justice Scarpulla denied a motion to stay a parallel litigation under the Securities Act of 1933 (“Securities Act” or “1933 Act”), holding that the PSLRA did not apply to state court actions. Slip Op. at *14 (“As I recently held (on a motion to stay based on the PSLRA), to hold that the PSLRA automatic stay applies to state court actions would undermine Cyan’s holding that ‘33 Act cases can proceed in state courts. Thus, the PSLRA’s automatic discovery stay is not applicable to state court actions.”) (footnote and citation omitted).
EverQuote arose in connection with the company’s June 28, 2018 initial public offering (“IPO”) of its common stock. On February 15, 2019 and February 26, 2019, plaintiffs filed lawsuits in Supreme Court, New York County, under the Securities Act, claiming that defendants made false and misleading statements in the registration statement and prospectus filed in connection with the IPO.
Following the consolidation of the actions in May 2019, and the filing of an amended complaint in June 2019, plaintiffs commenced discovery proceedings. Defendants objected to the demands, arguing that discovery was stayed pursuant to the PSLRA.
By order to show cause, defendants moved, pursuant to the PSLRA’s automatic stay of discovery provision, to stay discovery pending adjudication of their motion to dismiss.
After discussing the origin and outcome of Cyan, Justice Borrok concluded that “[t]he heart of the issue before this court [did] not center around 15 USC § 77v (a) and 15 USC § 77p (b) or otherwise involve the jurisdictional question addressed” by the United States Supreme Court. Slip Op. at *5. “Cyan therefore does not control the outcome of the issue presented by the instant motion.” Id.
[Ed. Note: On March 20, 2018, the United States Supreme Court decided Cyan, in which it unanimously held that the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) does not strip state courts of subject-matter jurisdiction over class actions involving claims exclusively brought under the Securities Act, and does not allow for the removal of those cases to federal court. This Blog wrote about the Cyan decision here.]
Cyan was, nevertheless, helpful, explained the Court, “in that it further underscore[d] the most basic and fundamental rule in statutory interpretation—the court must start with the express language of the statute and presume that it means what it says.” Id. at **5-6.
Looking at the automatic stay provision of the PSLRA, the Court held that “[t]he simple, plain, and unambiguous language [of the statute] expressly provides that discovery is stayed during a pending motion to dismiss ‘[i]n any private action arising under this subchapter.’” Slip Op. at *6 (orig’l emphasis). The Court noted that “[n]owhere in 15 USC § 77z-1 (b) (1) does the statute indicate that it applies only to actions brought in federal court.” Id. at **6-7. To underscore the point, the Court explained that “[t]he statute simply does not say that the automatic stay is limited to claims brought pursuant to the 1933 Act in federal court. Put another way, as the Cyan Court held, ‘[t]he statute says what it says—or perhaps better put here, does not say what it does not say.’” Id. at *7, quoting Cyan, 138 S.Ct. at 1069.
The Court rejected plaintiffs’ argument that 15 U.S.C § 77z-1 (b) (1) and 15 U.S.C § 77z-1 (b) (2), when read together, indicate that the stay applies only to federal court actions because it incorporates the Federal Rules of Civil Procedure, which do not apply in state court:
15 USC § 77z-1(a)(1) provides that “[t]he provisions of this subsection shall apply to each private action arising under this subchapter that is brought as a plaintiff class action pursuant to the Federal Rules of Civil Procedure” — i.e., in federal court. By contrast, as discussed above, 15 USC § 77z-1 (b) does not provide that this subchapter applies only to private actions brought as a plaintiff class action pursuant to the FRCP. 15 USC § 77z-1 (b) (2) as written creates a uniform approach to document preservation. Any party with notice of the allegations must treat documents “as if” they were the subject of a continuing document request for production under the FRCP—i.e., without regard to each individual and potentially different jurisdiction’s rules regarding document preservation and spoliation. The “as if” highlights how Congress made clear that Federal Rule principles apply both to state and federal proceedings where document perseveration was concerned during the pendency of the discovery stay.
Slip Op. at *7.
In addition, the Court rejected plaintiffs’ argument that because 15 USC § 77z-1 (c), titled Sanction For Abusive Litigation, requires the court to determine at the conclusion of the litigation if sanctions are warranted under Rule 11 of the Federal Rules of Civil Procedure, 15 USC § 77z-1 (c) necessarily means that the automatic discovery stay provision of the PSLRA applies only in federal court. Id.
Most significantly, however, although Congress did provide for sanctions for violations of the Reform Act’s automatic discovery stay and corresponding requirement for the preservation of evidence, 15 USC § 77z-1 (c) is not the applicable statutory provision, subsection (3) of 15 USC § 77z-1(b) (i.e., 15 USC § 77z-1 [b] [3]) is. And, as set forth above, 15 USC § 77z-1 (b) (3) Sanction for Willful Violation provides that “[a] party aggrieved by the willful failure of an opposing party to comply with paragraph (2) [preservation of evidence] may apply to the court for an order awarding appropriate sanctions (emphasis added).” Significantly, the language of the relevant sanctions provision, 15 USC § 77z-1 (b) (3), on its face does not refer to FRCP 37 (e) or sanctions generally under the FRCP. Rather, providing that an aggrieved party of a violation of the Reform Act’s discovery stay and corresponding preservation of evidence requirement may apply for “appropriate sanctions” without reference to the FRCP, further underscores that Congress made clear that 15 USC § 77z-1 (b) applies both to state and federal proceedings.
Id. at **7-8.
Moreover, the Court rejected plaintiffs’ argument that the PSLRA interferes with a state court’s docket management. This argument, said the Court, “is wholly without merit.” Id. at *8.
First, the Court noted that the automatic stay applies only during the pendency of a motion to dismiss, “not in advance of one.” Id. Second, observed the Court, “state court proceedings are often stayed for a host of other reasons.” Id. Third, said the Court, “the critical issue is not how a stay of discovery squares in the abstract with either Commercial Division Rule 11 or CPLR 3214 or case assignment. Rather, the controlling issue is how this court implements the congressional mandate regarding how it is to manage 1933 Act claims that find their way into state courts.” Id. “That mandate,” held the Court, “requires a stay, and is not, in any event, inconsistent with rules relating only to a ‘presumption’ as to discovery generally with respect to dispositive motions of all kinds.” Id. at **8-9.
Finally, the Court held that its ruling advanced the policy underlying the PLSRA. Id. at *9. In this regard, the Court noted that not only is application of the automatic stay in state court supported “by the text of the statute,” but a contrary finding “would … run afoul of the well-recognized purpose of the Reform Act and SLUSA” – to provide defrauded investors a mechanism “to recover their losses,” while at the same time curtailing perceived abuses in litigating securities class actions, including the filing of lawsuits and making discovery requests in otherwise meritless lawsuits in the hope of securing a settlement. Id.
In conclusion, Justice Borrok cautioned that a contrary ruling would “create the undesirable … and absurd incentive for lawsuits brought under the 1933 Act to be brought in state court as opposed to federal court to avoid the very protection supporting the enactment of the [PSLRA] and necessarily confounding Congress’ acknowledged intention that the lion’s share of securities litigation would occur in the federal courts.” Id., citing Cyan, 138 S.Ct. at 1073 (“SLUSA ensured that federal courts would play the principal role in adjudicating securities class actions.”).
EverQuote is one of several recent putative class actions filed in New York state court alleging violations of the Securities Act. As noted in a prior post, following the U.S. Supreme Court’s decision in Cyan, plaintiffs have been filing Securities Act cases in state court with more frequency. And, defendants, who are also the subject of parallel litigation in federal court have been filing motions to stay with similar frequency. EverQuote is notable because of its focus on the PSLRA’s automatic stay of discovery provision, rather than on CPLR § 2201, and its rejection of the contextual interpretation of the statute.
While Cyan explained that Securities Act claims can be brought in state court, it did not decide whether the automatic stay of discovery under the PSLRA applies in a state court action. The absence of such a ruling has left a vacuum for the lower courts to fill.
A number of courts outside of New York have reached the same conclusion as Justice Scarpulla (albeit many prior to Cyan) and found that the automatic stay does not apply in state court. These courts have concluded that the PSLRA discovery stay does not apply in state court because the text, structure, and reference to the Federal Rules of Civil Procedure demonstrate that Congress intended the statute to apply in federal court only. But see City of Livonia Retiree Health & Disability Benefits Plan v. Pitney Bowes Inc., 2019 WL 2293924 (Conn. Super. Ct. May 15, 2019) (applying the stay pursuant to the plain mean of the statutory text). Cyan supports this view, say plaintiffs, when it held that the PSLRA’s “substantive” provisions “appl[y] even when a 1933 Act suit [i]s brought in state court,” unlike the PSLRA’s procedural provisions, which do not. 138 S.Ct. at 1066-67.
EverQuote joins the Livonia court in applying the “plain meaning rule” of statutory interpretation. As discussed, under this rule, the court is to presume that the statute means what it says. Since PPDAI is on appeal, it remains to be seen whether this approach will prevail over the one applied by Justice Scarpulla.
Tagged with: 1933 Act, Automatic Stay of Discovery, Business Litigation, Class Actions, Commercial Litigation, Private Securities Litigation Reform Act of 1995, PSLRA, Securities, Securities Act of 1933, Stay of Discovery
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