Opinion
NO. 3-02-CV-0299-G
April 5, 2002
MEMORANDUM ORDER
James D. Lapicola, James Burkhart, James Moore, and Gene Colin ("Plaintiffs") have sued Alternative Dual Fuels, Inc. and its president, Robert A. Lynch ("Defendants") for violations of the Securities Act of 1933 and the Securities and Exchange Act of 1934, 15 U.S.C. § 77e(a)(1), 771(a)(2), 78j(b) 17 C.F.R. § 240.10b-5. In a separate action filed in Texas state court, plaintiffs have sued defendants for common law fraud, statutory fraud, negligent misrepresentation, self-dealing, conversion, breach of fiduciary duty, and breach of the duty of good faith and fair dealing. Defendants have filed a motion to dismiss the claims alleged in the federal court action which automatically stays all discovery in that case. See 15 U.S.C. § 77z-1(b)(1) 78u-4(b)(3)(B). Shortly after this motion was filed, plaintiffs filed an application for writ of mandamus for the inspection of corporate books and records and served interrogatories and document requests in the state court action. Defendants now seek an order requiring plaintiffs to withdraw the mandamus application and written discovery served in the state court litigation.
Many of these state law claims were contained in Plaintiff's Complaint and Application for Injunction filed on February 13, 2002. However, Plaintiff's First Amended Complaint filed on February 26, 2002 alleges only violations of federal securities laws.
The Private Securities Litigation Reform Act of 1995 ("PSLRA") provides for the automatic stay of discovery and "other proceedings" in private federal securities actions "during the pendency of any motion to dismiss, unless the court finds upon the motion of any party that particularized discovery is necessary to preserve evidence or to prevent undue prejudice to any party." Id. §§ 77z-1(b)(1) 78u-4(b)(3)(B). The power to stay discovery also extends to state court proceedings brought to circumvent the stay applicable to federal cases:
Upon a proper showing, a court may stay discovery proceedings in a private action in a State court, as necessary in aid of its jurisdiction, or to protect or effectuate its judgments, in an action subject to a stay of discovery pursuant this paragraph.Id. §§ 77z-1(b)(4) 78u-4(b)(3)(D). The clear language of this statute requires a defendant to make a "proper showing" that a stay of discovery in the state court action is necessary to either: (1) aid the federal court's jurisdiction; or (2) protect or effectuate a federal court judgment. "A `proper showing' would include evidence that a stay is necessary to protect important interests that the [PSLRA] was passed to protect." In re Transcrypt International Securities Litigation, 57 F. Supp.2d 836, 847 (D. Neb. 1999). See also Tobias Holdings, Inc. v. Bank United Corp., 177 F. Supp.2d 162, 168 (S.D.N.Y. 2001) ("While a federal court does have the power to stay discovery in state court proceedings, the grounds on which it may do so are quite limited.").
Sections 77z-1(b)(4) and 78u-4(b)(3)(D) were added to the PSLRA by the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"). See In re Bank of America Corp. Securities Litigation, 263 F.3d 795, 800-01 (8th Cir. 2001), cert. denied, 2002 WL 109322 (2002).
The Court notes at the outset that it is not clear that the stay provisions of sections 77z-1(b)(4) and 78u-4(b)(3)(D) are even applicable to private individual lawsuits brought in state court. See Transcrypt International, 57 F. Supp.2d at 842-47 (holding that the words "a private action in a State court" appearing in the statute refers only to private state court class actions). Assuming arguendo that this Court has the power to stay discovery in a private individual state court action alleging only state law claims, defendants have failed to make "a proper showing" that a stay is warranted in this case. There are two primary purposes for the stay of discovery contained in the PSLRA: (1) to prevent the imposition of any unreasonable burden on a defendant before disposition of a motion to dismiss; and (2) to avoid the situation in which a plaintiff sues without possessing the requisite information to meet the heightened pleading requirements of the PSLRA, then uses discovery to acquire that information and resuscitate a complaint that is otherwise subject to dismissal. See In re Comdisco Securities Litigation, 166 F. Supp.2d 1260, 1263 (N.D. Ill. 2001). Neither of those concerns is implicated here. Plaintiffs have represented that they will not use any discovery obtained in the state court action to amend their federal complaint before a ruling on defendants' motion to dismiss. (Jt. Stat. Rep. at 6, ¶ D(2)(d)). Nor have defendants presented any evidence or argument that the state court discovery is unduly burdensome. Moreover, plaintiffs' state law claims do not mirror the federal securities claims but represent "legally cognizable, substantive causes of action." Cf. Tobias Holdings, 177 F. Supp.2d at 168 (declining to stay discovery as to state law claims alleged in federal securities case). Consequently, the claims asserted in the parallel state court action do not interfere with the jurisdiction of this Court or threaten its judgment in any way. Id.
Indeed, plaintiffs have already filed a response to defendants' motion to dismiss without obtaining any of the discovery requested in the state court litigation.
For these reasons, the Court declines to stay discovery in the state court proceeding. Defendants' motion is denied.
SO ORDERED.