Different Case, Same Result: State Court Denies Motion to Stay Parallel Securities Act ClaimsPrint Article
- Posted on: Jul 5 2019
On July 1, 2019, this Blog wrote about Hoffman v. AT&T Inc., 2019 N.Y. Slip Op. 31811(U) (Sup. Ct. N.Y. County, June 21, 2019) (here). Hoffman involved a motion, under CPLR § 2201, to stay an action filed in state court, alleging claims under the Securities Act of 1933 (the “1933 Act”), in favor of a parallel action filed in federal court, alleging claims under the 1933 Act and the Securities Exchange Act of 1934 (the “Exchange Act”). As discussed in the article, the Hoffman court denied the motion, holding that a stay would be inimical to the first-filed rule, the establishment of the Commercial Division, and the U.S. Supreme Court’s decision in Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061 (2018).
Less than one week after the article was published, Justice Saliann Scarpulla of the Supreme Court, New York County, Commercial Division, decided a motion, under CPLR § 2201, to stay a securities class action alleging claims under the 1933 Act in favor of a parallel securities class action filed in federal court alleging claims under the 1933 Act and the Exchange Act. Matter of PPDAI Group Sec. Litig., 2019 N.Y. Slip Op. 51075(U) (Sup. Ct., N.Y. County July 1, 2019) (here). Like Justice Ostrager in Hoffman, Justice Scarpulla, who cited to Hoffman, denied the motion. However, unlike Justice Ostrager, Justice Scarulla applied CPLR § 2201 in making her decision.
Matter of PPDAI Group Securities Litigation
PPDAI involved alleged violations of the 1933 Act in connection with an initial public offering (“IPO”) in November 2017 of American Depository Shares (“ADS”) by PPDAI Group, Inc. (“PPDAI” or the “Company”), a Cayman Islands corporation with primary operations in China. The offering materials (“Offering Materials”) issued by Defendants included a prospectus (“Prospectus”) and Forms F-1 and F-5 registration statements (the “Registration Statement”). The Securities and Exchange Commission (“SEC”) declared the Registration Statement effective on November 9, 2017 and, on November 13, 2017, Defendants priced the ADSs at $13 per share and filed the final Prospectus for the IPO.
PPDAI was co-founded by defendants Jun Zhang (“Zhang”), Tiezheng Li (“T. Li”), Honghui Hu (“Hu”) and Shaofeng Gu (“Gu”) in 2007. The Company is an online consumer finance marketplace that connects borrowers and investors “whose needs have not been met by traditional financial institutions.” PPDAI, through its full-service peer-to-peer (“P2P”) lending platform, generates revenue “primarily from fees charged to borrowers for [its] services in matching them with investors and for other services [it] provide[s] over the loan lifecycle.” Other revenue-generating services include loan facilitation service fees, post-facilitation service fees, collection fees and management fees.
To raise additional capital, PPDAI engaged in the IPO. Credit Suisse Securities (USA) LLC (“Credit Suisse”), Citigroup Global Markets Inc. (“Citigroup”), and Keefe, Bruyette & Woods (“KBW”) served as underwriters for the IPO. Plaintiffs alleged that the underwriters generated $221 million in proceeds before underwriting discounts and commissions.
According to the complaint, plaintiffs Yizhong Huang (“Huang”) and Ravindra Vora (“Vora”) (together, “Plaintiffs”) acquired PPDAI’s ADSs in connection with the IPO “pursuant and/or traceable to” the Offering Materials. Plaintiffs alleged that, by the effective date of the Offering Materials, China had increased its scrutiny and regulation of the P2P lending industry due to widespread complaints about lending and collection improprieties. Plaintiffs also alleged that PPDAI engaged in the type of lending and collection misconduct, such as usurious loan rates and abusive collection practices, that was the subject of China’s scrutiny. Plaintiffs further alleged that investors to whom Defendants solicited to purchase ADSs in the IPO, and investors who purchased ADSs pursuant and/or traceable to the Offering Materials, were not aware of the scope of the threat to PPDAI’s business that was posed by China’s existing and prospective regulations.
Based on the foregoing, Huang filed a complaint on September 10, 2018, alleging violations of Sections 11, 12(a)(2) and 15 of the 1933 Act in connection with the alleged materially misleading statements and omissions in the Offering Materials. Vora filed a similar complaint on September 27, 2018. The two actions were consolidated by a stipulation that the Court so ordered on October 16, 2018.
On November 26, 2018, about two weeks after the parties met for a preliminary conference, Weichen Lai filed an action in the United States District Court for the Eastern District of New York, alleging violations of the 1933 Act (“EDNY Action”). Lai asserted virtually the same allegations contained in the earlier-filed Huang and Vora complaints.
On December 17, 2018, Plaintiffs filed a consolidated class action complaint (“CAC”), which amplified the factual allegations and added Law Debenture Corporate Services Inc. (“Law Debenture”), PPDAI’s agent for the service of process in the United States, as a defendant.
On January 8, 2019, plaintiff in the EDNY Action filed an amended complaint, prior to the appointment of a lead plaintiff, and added a fraud claim under the Exchange Act.
Defendants moved to stay the state court action by order to show cause. That motion was later withdrawn without prejudice. Defendants refiled the motion for a stay, pursuant to CPLR § 2201, on notice. Defendants also requested an order staying discovery until the resolution of any motions to dismiss.
The Court denied the motion.
The Court’s Decision: Motion to Stay Proceedings
The Court analyzed the motion to stay the action through the lens of CPLR § 2201.
Under CPLR § 2201, “[e]xcept where otherwise prescribed by law, the court … may grant a stay of proceedings …, upon such terms as may be just.” A motion pursuant to CPLR § 2201 to stay an action pending in favor of another action is directed to the sound discretion of the trial court. Mook v. Homesafe Am., Inc., 144 A.D.3d 1116, 1117 (2d Dept. 2016). In making the determination, a court may consider a number of factors, including: 1) which forum will offer a more complete disposition of the issues; 2) which forum has greater expertise in the type of matter; 3) which action was commenced first and the stage of the litigations; 4) whether there is substantial overlap between the issues raised in each court; 5) whether a stay will avert “duplication of effort and waste of judicial resources;” and 6) whether plaintiffs have demonstrated that they would be prejudiced by a stay. Asher v. Abbott Labs., 307 A.D.2d 211, 211-212 (1st Dept. 2003); see also Reaves v. Kessler, No. 654485/2015, 2017 WL 2482948 (Sup. Ct., N.Y. County June 8, 2017).
Identity of Parties, Substantial Overlap of Issues and Complete Disposition
The Court found that there was not complete identity of parties between the state and federal action: there were four defendants in the state action that were not named in the EDNY Action. In that regard, the Court rejected Defendants’ argument “that a ‘majority of the [Moving] Defendants are named in both actions.’” Slip Op. at *4.
The Court also found that the issues did not substantially overlap and that the EDNY Action would not provide a complete disposition of the state court action. This was especially so, if, as Plaintiffs contended, the 1933 Act claims in the EDNY Action were time-barred by the one-year statute of limitations. Id. at *5. In that case, the Court would be “the only forum that [could] resolve the ‘33 Act claims.” Id. In fact, noted the Court, “if only the ‘34 Act claims survive in federal court, overlapping of issues will be reduced.” Id.
Thus, concluded the Court, “consideration of party identity, substantial overlap of issues and complete disposition [did] not support imposition of a stay in [the] action.” Id.
First to File Rule
“Although it is not dispositive on a motion to stay, the ‘general rule in New York is that the court which has first taken jurisdiction is the one in which the matter should be determined and it is a violation of the rules of comity to interfere.’” Id., quoting In re Topps Co., Inc. S’holder Litig., No. 600715/07, 2007 WL 5018882, at *3 (Sup. Ct., N.Y. County June 8, 2007) (citation omitted). “The first to file rule, however, should not be applied mechanically irrespective of other considerations.” Id., citing AIG Fin. Prods. Corp. v. Penncara Energy, LLC, 89 A.D.3d 495, 496 (1st Dept. 2011).
The Court held that “[a]lthough it is not dispositive, being first to file is still “significant.” Id., citing Certain Underwriters at Lloyds, London v. Millennium Holdings LLC, No. 600626/06, 2006 WL 2546202, at *7 (Sup. Ct., N.Y. County Aug. 8, 2006). After Cyan, this was especially so. Indeed, citing to Cyan and Hoffman, Justice Scarpulla observed that if the first file rule were abandoned, it would render meaningless the jurisdiction conferred upon state courts to adjudicate 1933 Act cases:
If the first-to-file rule is uniformly abandoned whenever later filed federal court actions assert other federal claims along with ‘33 Act claims, New York state courts would never exercise their jurisdiction to resolve first-filed ‘33 Act claims. This result would render Cyan meaningless.”
Id. at *6.
Thus, concluded the Court, “[t]he fact that Plaintiffs commenced [the] action before the EDNY Action … significantly favor[ed] litigation of Plaintiffs’ ‘33 Act claims in [the state] court.” Id.
Justice Scarpulla rejected Defendants’ argument that because federal courts have “‘greater experience and familiarity’ with federal claims,” the state action should be stayed.” Id. Similar to Justice Ostrager, Justice Scarpulla found pre-Cyan cases advancing this argument to be “irrelevant” to a post-Cyan world: “However, these cases are irrelevant, as the Supreme Court expressly held in Cyan that state courts have jurisdiction to ‘adjudicate class actions alleging only 1933 Act violations.’” Id., quoting Cyan, 138 S.Ct. at 1078.
Moreover, Justice Scarpulla found that the Commercial Division’s “long-standing” existence as a “specialized business court which deals exclusively with complex commercial litigation” to be a factor that “weigh[ed] in favor of keeping th[e] action in the Commercial Division.” Id. In so finding, the Court found support in Justice Ostrager’s observation that “liability issues in a 1933 Act case are, if anything, less complex than issues the Commercial Division resolves every week.” Id., citing Hoffman, 2019 WL 2578360 at *2.
Duplication of Effort
Finally, the Court rejected Defendants’ assertion that absent a stay, “they will have to duplicate efforts to litigate the same claims in two courts.” Id. The Court agreed with Plaintiffs “that this concern is tempered by the alleged untimeliness of the ‘33 Act claims in the EDNY Action.” Id. The Court concluded by noting that “[t]he possibility that at some point there might be two trials is not an appropriate basis for granting a stay.” Id., citing Mt. McKinley Ins. Co. v. Corning Inc., 33 A.D.3d 51, 59 (1st Dept. 2006) (citation omitted).
The Court’s Decision: Motion to Stay Discovery
Defendants sought to stay discovery in the state court action pursuant to the automatic stay of discovery provision in the Private Securities Law Reform Act of 1995 (“PSLRA”). In this regard, Defendants argued that “Plaintiffs should not be permitted to ‘skirt the PSLRA’s mandatory stay of discovery, which automatically stays all discovery until any motions to dismiss have been resolved.’” Slip Op. at *7. To Defendants, “if Congress intended the stay to only apply to federal court actions, it would have said so.” Id.
The Court rejected the argument. First the Court held that although Cyan was silent on the issue, applying the “automatic discovery stay would undermine Cyan’s holding that ‘33 Act cases may be heard in state courts.” Id. Second, applying the stay would conflict with the rules of the Commercial Division in which “discovery generally continues during motion practice.” Id.
In this Blog’s takeaway about Hoffman, we noted that motions to stay 1933 Act claims under New York law had been met with mixed results, even after Cyan. Compare Hoffman with In re Qudian Sec. Litig., 2018 WL 6067209, at *2 (Sup. Ct., N.Y. County 2018) (post Cyan, staying 1933 Act class action pending resolution of federal securities action). Although the parties in PPDAI mentioned Qudian in their briefing, the Court did address its analysis or holding. In fact, the Court stated that Defendants did not cite to any post-Cyan authority to support their arguments in favor of staying the action. Id. at **6-7. Based upon its holding, it is apparent that the Court was referring to appellate court decisions. Id. at *7 (“Indeed, there are no decisions by the New York appellate courts addressing a motion to stay a ‘33 Act claim in favor of a later filed federal court action in a post-Cyan universe.”).
Nevertheless, with the Hoffman decision, the PPDAI decision may portend things to come in New York. While two decisions do not make a tidal wave of authority, they do indicate the current thinking of Commercial Division judges who will have to decide motions to stay 1933 Act claims under CPLR § 2201. And, that thinking points to the denial of motions to stay state court actions alleging claims under the 1933 Act in favor of parallel actions filed in federal court alleging claims under the 1933 Act and the Exchange Act.