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Gruber v. Gilbertson

United States District Court, S.D. New York

September 5, 2017

JON GRUBER, on behalf of himself and others similarly situated, Plaintiffs,
RYAN GILBERTSON, et al., Defendants.

          OPINION & ORDER


         Plaintiffs move to lift the PSLRA stay on discovery for the limited purpose of subpoenaing non-parties Dakota Plains Holdings, Inc. (“Dakota Plains”) and BioUrja Trading LLC (“BioUrja”). For the reasons that follow, Plaintiffs' motion is granted in part and denied in part.


         This putative securities fraud class action arises from the alleged manipulation of Dakota Plains stock. Dakota Plains, originally a defendant in this action, was dropped as a party after it filed for Chapter 11 bankruptcy protection in the District of Minnesota. Nine months later, Dakota Plains is primed to exit bankruptcy by way of liquidation.

         In January 2017, Dakota Holdings agreed to transfer substantially all of its assets to BioUrja, an energy commodities trading company, pursuant to the terms of an asset purchase agreement. Since then, Dakota Plains has been operating these assets on behalf of BioUrja pursuant to a “Transition Services Agreement” pending completion of the bankruptcy. (Plaintiffs' Ltr. dated August 17, 2017 (“Pl. Ltr.”), ECF No. 105, at 2.) Following confirmation of Dakota Plains' Chapter 11 plan of liquidation-scheduled for September 6, 2017-Dakota Plains' assets will be transferred to BioUrja.

         As the end of Dakota Plains' bankruptcy proceeding draws near, Plaintiffs seek permission from this Court to lift the PSLRA discovery stay for the limited purpose of issuing subpoenas for the production of documents to Dakota Plains and BioUrja. Plaintiffs' request is rooted in their concern that Dakota Plains' liquidation, and its transfer of assets to BioUrja, may result in the loss of relevant documents or electronically stored information. Further compounding Plaintiffs' concern is the failure of Dakota Plains' bankruptcy counsel to respond to Plaintiffs' letter requesting preservation. Against this backdrop, Plaintiffs contend that there is “no assurance as to what will happen to the [electronically stored information] and other documents once the Plan of Liquidation has been confirmed and finalized and the transfer of all of Dakota Plains' assets is completed to a third party entity with no preservation obligation.” (Pl. Ltr., at 3.)


         In a securities fraud class action, “all discovery and other proceedings shall be stayed during the pendency of any motion to dismiss.” 15 U.S.C. § 78u-4(b)(3)(B). The rationale underlying this stay is based primarily on two concerns that the Private Securities Litigation Reform Act (“PSLRA”) seeks to obviate-that plaintiffs will use the discovery process to coerce settlements from defendants and to obtain evidence for claims not alleged in the complaint. In re Vivendi Universal S.A., Sec. Litig., 2003 WL 21035383, at *1 (S.D.N.Y. May 5, 2003) (citing H.R. Conf. Re. No., 104-369 (1995)). Therefore, to “protect defendants in actions such as this from the burden and expense of premature discovery, the [PSLRA] precludes discovery . . . until the court sustains the sufficiency of the complaint.” ATSI Commc'ns., Inc. v. Shaar Fund, Ltd., 2003 WL 1877227, at *2 (S.D.N.Y. Apr. 2, 2003).

         The PSLRA discovery stay, however, is not absolute. It may be lifted on a showing that “particularized discovery is necessary to preserve evidence or to prevent undue prejudice to th[e] [requesting] party.” 15 U.S.C. § 78-4(b)(3)(B). A discovery request is “particularized when it is directed at specific persons, and it identifies specific types of evidence that fall within its scope.” Fisher v. Kanas, 2006 WL 2239038, at *2 (E.D.N.Y. Aug. 4, 2008) (internal quotation marks and citations omitted). And “undue prejudice” in this context means “improper or unfair treatment amounting to something less than irreparable harm.” In re Vivendi, 2003 WL 2103583, at *1 (internal citations omitted). Such prejudice has been found under exceptional circumstances where plaintiffs are unable to “make informed decisions about [their] litigation strategy in a rapidly shifting landscape” and when they are “the only major interested party in the criminal and civil proceedings . . . without access to documents that currently form the core of those proceedings.” In re WorldCom, Inc. Sec. Litig., 234 F.Supp.2d 301, 305 (S.D.N.Y. 2002); In re Refco, Inc., 2006 WL 2337212, at *1 (S.D.N.Y. Aug. 8, 2006) (“[E]xceptional circumstances must be present to lift the stay.”).

         Plaintiffs' request here is sufficiently particularized. They seek four discrete categories of documents from Dakota Plains and BioUrja: (i) documents produced to the Securities and Exchange Commission (“SEC”); (ii) meeting minutes of its Board of Directors; (iii) communications with BDO USA, LLP, its auditor; (iv) and internal communications regarding defendants Ryan Gilbertson, Michael Reger, the creation and renegotiation of junior, senior and consolidated notes, the decision to go public by reverse merger, the alleged stock manipulation scheme, and the internal investigation conducted by Dakota Plains in connection with the alleged stock manipulation scheme. (Pl. Ltr., at 2.) The requests for each category of documents is relevant to Plaintiffs' allegations in this action and directed at two specific parties.

         Plaintiffs fail, however, to articulate the exceptional circumstances under which they would suffer undue prejudice. See In re AOL Time Warner, Inc. Sec., 2003 WL 21729842, at *1 (S.D.N.Y. July 25, 2003). They cite to the exigencies associated with Dakota Plains' “imminent” liquidation and the transfer of substantially all of its assets to BioUrja, contending that a stay is appropriate. But if the mere fact of bankruptcy or a sale of assets constituted the exceptional circumstances warranting a lift of stay, the PSLRA's strong presumption against discovery would be rendered meaningless since many securities class actions arise on the heels of financial distress. There must be something about those circumstances that would unduly prejudice the Plaintiffs if they were unable to obtain discovery in short order.

         In WorldCom, for example, securities class plaintiffs were “prejudiced by [their] inability to make informed decisions about [their] litigation strategy in a rapidly shifting landscape, ” because plaintiffs in a separate, concurrent ERISA action-who were not subject to the PLSRA-already had access to relevant documents that informed their litigation and settlement strategy. 234 F.Supp.2d at 305-06. The WorldCom court found the disparity of information between parties in concurrent civil actions “troubling given the likelihood that settlement discussions [would] . . . involve both the securities plaintiffs and the ERISA plaintiffs” and the “former would be severely disadvantaged in those discussions if they [were] denied access to the documents they now request.” 234 F.Supp.2d at 306; see also In re Royal Ahold N.V. Sec. & ERISA Litig., 220 F.R.D. 246, 251-52 (D. Md. 2004) (finding that ERISA plaintiffs were prepared to proceed with discovery while securities plaintiffs were deprived of that opportunity because of the PSLRA stay).

         Here, however, Plaintiffs do not face any risk that would put them at a disadvantage to other civil litigants. Aside from the SEC's enforcement action against Defendant Gilbertson, Plaintiffs will not “be left to pursue [their] action against defendants who no longer have anything or at least as much to offer.” WorldCom, 234 F.Supp.2d at 306. Nor are there any other circumstances-other than the delay inherent to briefing a motion to dismiss and waiting for a decision on that motion-that would heighten the risk of undue prejudice. “Plaintiffs' inability to gather evidence for settlement negotiations or to plan a litigation strategy” at the present moment, without more, “is not evidence of undue prejudice.” In re Refco, 2006 WL 2337212, at *2 (S.D.N.Y. Aug. 8, 2006). That is because “delay is an inherent part of every stay of discovery required by the PSLRA.” In re Smith Barney Transfer Agent Litig., 2006 WL 1738078, at *2 (S.D.N.Y. June 26, 2006) (citations omitted).

         Plaintiffs also contend that lifting the PSLRA discovery stay would be minimally burdensome because many of the documents they seek have already been produced to the SEC. But that argument merely sidesteps the undue prejudice standard. The proper inquiry for purposes of lifting the stay is not whether the expense of re-producing these documents is minimal, but whether Plaintiffs would be unduly prejudiced by continuing the ...

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