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Posted: June 30, 2017

Derivative Lawsuits Stayed In Favor of Related Suits in Federal Court

On June 7, 2017, Justice Singh of the New York County Commercial Division issued a decision in Reaves v. Kessler, 2017 NY Slip Op 31245(U), staying four derivative lawsuits in favor of related litigation in federal court.

At issue in Reaves were four derivative actions filed against directors of Resource Capital Corp. (“Resource Capital”), a real estate investment trust. The defendant directors and Resource Capital Corp., as nominal defendant, moved the Court to stay the state proceedings during the pendency of related derivative actions filed in the Southern District of New York. Justice Singh granted the motion, explaining:

A court has broad discretion to issue a stay particularly where the stay would avoid the risk of inconsistent adjudications, application of proof, and potential waste of judicial resources. A stay is appropriate even where there is not complete identity of parties and claims where there is a common question of law and fact.

Under appropriate circumstances, including the existence of an identity of issues and parties, an action in state court may be stayed where there is another action pending in federal court. In such a situation, the issuance of a stay is not a matter of right; rather it is a matter of comity, orderly procedure and judicial discretion. . . .

In addition to the claims asserted in the state cases, the federal shareholder derivative actions involve a proxy fraud claim under Section 14(a) of the Exchange Act. The federal court has exclusive jurisdiction over such claims (see 15 U.S.C. § 78aa). Accordingly, as the federal court is the only court that has jurisdiction over every claim asserted by the derivative plaintiffs, the federal court can provide a more complete disposition of the claims at issue.

(Citations omitted).

Justice Singh rejected the plaintiffs’ argument that a stay would result in undue prejudice because, they alleged, the allegations of demand futility in “the federal lawsuits are weaker than the complaint filed in the Reaves action.” The Court found “no New York case law explicitly stating that this Court must compare the federal action to the state action on the merits to make a preliminary determination as to which party is more likely to prevail.” Finally, Justice Singh declined plaintiff’s argument that the state court litigation should take precedence because it was the first filed, explaining:

[T]he first-filed rule, which gives precedence to the court in which an action is first commenced should not be mechanically applied. Rather the court may look to factors outside of the first-filed rule in making its determination as to whether this court should grant a stay. As discussed, supra, the federal courts have exclusive jurisdiction under Section 14(a) of the Exchange Act. Therefore, the federal courts can provide a more complete disposition of the claims at issue. This factual determination weighs heavily in favor of issuing a stay in this proceeding.

(Citations omitted).

NOTE: Schlam Stone & Dolan LLP represents the nominal defendant, Resource Capital in this case, and in the related federal litigation.

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