Opinion
Civil Action No. 18533
June 26, 2001
Norman M. Monhait, Rosenthal Monhait Gross Goddess, P.A.
Kevin G. Abrams, Srinivas M. Raju, Richards, Layton, Finger.
Dear Counsel:
This is my decision on the pending motion to dismiss or stay proceedings in this matter. The moving parties, defendants Westell Technologies, Inc. and six of its directors, seek a stay or dismissal in light of similar pending class action cases in the United States District Court in Illinois, the first of which was filed before the commencement of this action. The Federal Court class actions have been consolidated and are proceeding to trial, which has been set for October 1, 2001. The defendants contend that a stay would be appropriate under either the standard enunciated by the Delaware Supreme Court in McWane Cast Iron Pipe Corp. v. McDowell-Wellman Eng'g Co. or under the doctrine of forum non conveniens.
These six directors are Marc Zionts, J. William Nelson, Howard L. Kirby, Jr., Thomas A. Reynolds, Robert C. Penny, III, and Melvin J. Simon.
Del. Supr., 263 A.2d 281 (1970).
The Delaware action, brought by plaintiffs derivatively for the benefit of Westell, alleges that the defendant directors misappropriated corporate information through trading on non-public information, wasted corporate assets, and grossly mismanaged the Company. Specifically, plaintiffs allege that the defendants disposed of significant portions of their holdings in Westell in a two-week period in July or August 2000, on the basis of nonpublic information about the Company's prospects. When they sold their stock, it was trading in the range of $22 to $30 per share. When the adverse information became public, Westell's market price declined severely.
See Compl. at ¶ 1-6.
The Federal Court class actions are based on these same facts. They are brought against the Company and a number of its directors on behalf of a class of public investors who bought Westell stock between approximately late June and mid-October, 2000. Count I of each of these suits alleges that the defendants made misrepresentations and omissions during the class period concerning changes to the business structure of one of Westell's major customers, in violation of section 10(b) of the Securities Exchange Act of 1934. Count II of each of these suits alleges that the defendants violated Section 20(a) of the 1934 Act by allowing Westell to commit securities violations. In addition to the Federal Court class actions, a derivative suit based on these facts (and nearly identical to the Delaware action) was filed on April 21, 2001, in the Illinois Federal Court. This recent derivative action is being reassigned for consolidation with the Federal Court class actions, which (to repeat) are scheduled for trial on October 1.
Defendants' motion requires the application of well-settled procedural principles. If the Federal Court class actions were in fact "first-filed, " then their motion for a stay will be judged under the McWane doctrine, which holds that "discretion should be freely exercised in favor of the stay when there is a prior action pending elsewhere, in a court capable of doing prompt and complete justice, involving the same parties and the same issues. . . . By contrast, if the Delaware action was first-filed, then defendants may obtain a dismissal only if they meet the exacting burden of demonstrating that the weight of the traditional forum non conveniens or " Cryo-Maid" factors overwhelmingly weigh against the suitability of Delaware as a forum and that defendants therefore face undue and excessive inconvenience here.
Id. at 283.
See General Food Corp. v. Cryo-Maid, Inc., Del. Supr., 198 A.2d 681 (1964).
In this case, there is no dispute that several of the Federal Court class actions were filed before the Delaware action. Moreover, plaintiffs make no argument that this Court should consider the Delaware action to be firstfiled. Thus, defendants motion for a stay will be analyzed under the McWane doctrine.
See Pls.' Answering Br. in Opposition to Defs.' Motion to Dismiss or Stay, at 6 n. 4.
McWane requires that the Illinois Federal Court be capable of "doing prompt and complete justice." McWane also requires that the Federal Court class action involve the "same parties" and the "same issues" as the Delaware action. It goes without saying that the United States District Court for the Northern District of Illinois is capable of rendering prompt and complete justice. Plaintiffs do not dispute this point. Plaintiffs do, however, argue that the parties and the issues are not "the same" for purposes of McWane's analysis.
Plaintiffs insist that the parties are not the same for two reasons. First, they contend that the Delaware action is brought on behalf of all current shareholders, while the Federal Court class actions are brought on behalf of shareholders who purchased stock during the class period (June-October, 2000). Second, plaintiffs argue that the parties are not identical because two of the defendant directors being sued in the Delaware action are not defendants in the Illinois proceeding.
Our cases have consistently held that, in determining whether parties, issues, or claims are similar for the purpose of a McWane analysis, "[s]ubstantial or functional identity is sufficient." While it is true that the plaintiff classes may differ slightly, they are functionally identical in that they are all holders of Westell stock and they all complain of the same conduct. Likewise, although the Federal Court class actions do not include two of the director defendants named in the Delaware action, this difference is not substantial. In Schnell v. Porta Systems Corp., this Court found that the absence of five outside directors in the non-Delaware suit was not a material difference. Finally, both of these issues will become moot once the new derivative action in Illinois is formally consolidated with the Federal Court class actions, since the Illinois derivative action involves exactly the same parties as the Delaware action.
ATT Corp. v. Prime Security Distributors, Inc., Del. Ch., C.A. No. 15177, mem. op. at 2, Jacobs, V.C. (Oct. 24, 1996).
See Schnell v. Porta Sys. Corp., Del. Ch., C.A. No. 12948, slip op. at 11, Hartnett, V.C. (Apr. 12, 1994).
The plaintiffs also argue that the issues are not the same because the Delaware plaintiffs are asserting common law breach of fiduciary duty claims, while the Federal plaintiffs are asserting claims under the federal securities laws. This Court rejected a similar argument in Schnell when it held that the federal securities law claims of the prior-filed New York action were substantially similar to the breach of fiduciary duty claims in the Delaware action because, while the claims require different prima facie allegations, "they are actually the same claims and arise out of the same transactional facts." Similarly, this Court recognized in Derdiger v. Tallman that claims based on the same facts are similar even though "repackaged" as securities law claims. Once a gain, however, plaintiffs' argument will become moot once the recently filed derivative action in Illinois is formally consolidated with the Federal Court class actions, since it involves nearly identical issues, including fiduciary duty claims, as the Delaware action.
Id., slip op. at 9.
See Derdiger v. Tallman, Del. Ch. C.A. No. 17276, mem. op. at 27, Chandler, C. (July 20, 2000).
For all the reasons stated above, and in the interests of comity and the efficient administration of justice, I stay this action in favor of the Federal Court class actions. Since I have decided to stay this action under the principles set forth in McWane, I need not reach the question whether dismissal is appropriate under the forum non conveniens doctrine.
IT IS SO ORDERED.