Commercial Division Blog

Posted: August 18, 2019 / Categories Commercial, Discovery/Disclosure, Securities

SLUSA Stay Applies Even in State Court Actions

On August 6, 2019, Justice Borrok of the New York County Commercial Division issued a decision in Matter of Everquote Inc. Sec. Litig., 2019 NY Slip Op. 29242, holding that a SLUSA stay applies even in state court actions, explaining:

15 USC § 77z-1 (b) (1) provides that all discovery and other proceedings shall be stayed during the pendency of any motion to dismiss, not in advance of one. As an initial matter, there was no pending motion to dismiss in this case when it had been assigned to the Commercial Division or at any initial conferences held in this case. In addition, Congress specifically authorized the stay of discovery by a federal court of state court proceedings pursuant to 15 USC § 77z-1 (b) (4). Furthermore, state court proceedings are often stayed for a host of other reasons. Moreover, Commercial Division Rule 11 (d) expressly permits the stay of discovery pending the determination of a dispositive motion. But, most importantly, this procedural/substantive distinction misses the point. The 1933 Act is a federal statute. It was Congress that created the specific rights covered by the 1933 Act including affording concurrent jurisdiction to state courts to adjudicate claims brought under the 1933 Act. This is not an issue of federal common law being applied to supply a rule of decision. Rather, this is a federal statute creating federal rules of decision that both state and federal courts are required to follow in deciding 1933 Act cases. It is axiomatic that Congress has the power under the United States Constitution, Article VI, Clause 2 (the Supremacy Clause) to provide for how these claims must be handled in state court which Congress has granted jurisdiction to hear these very federal claims. Simply put, in the Reform Act, Congress is not dictating how state courts are to run their dockets. The Reform Act merely provides for how 1933 Act cases are to be handled that are filed in state and federal court — i.e., Congress provided that during a pending motion to dismiss (except as otherwise provided in the statute), discovery should be stayed as to 1933 Act claims because in enacting the Reform Act and SLUSA, Congress was providing for a federal scheme as to federal claims. Similarly, as to document preservation, Congress provided that as to 1933 Act claims, the state courts should enforce document preservation "as if" such action were an action covered by the FRCP. As noted above, the critical issue is not how a stay of discovery squares in the abstract with either Commercial Division Rule 11 or CPLR 3214 or case assignment. Rather, the controlling issue is how this court implements the congressional mandate regarding how it is to manage 1933 Act claims that find their way into state courts. That mandate requires a stay, and is not, in any event, inconsistent with rules relating only to a "presumption" as to discovery generally with respect to dispositive motions of all kinds.

The court notes for completeness that holding that the discovery stay set forth in 15 USC § 77z-1 (b) (1) only applies in federal court and not in state court is not only unsupported by the text of the statute, but would also run afoul of the well-recognized purpose of the Reform Act and SLUSA. As discussed above, although Congress recognized that securities litigation was a critical vehicle for defrauded investors to recover their losses, Congress identified certain specific abuses that Congress decided to curtail in enacting the Reform Act—including the filing of lawsuits and making significant discovery requests in otherwise meritless lawsuits (i.e., lawsuits that will not survive a motion to dismiss) in the hope of encouraging early settlement. Accordingly, Congress enacted the automatic stay of discovery during a pending motion to dismiss to address this concern. There simply is no basis to find that Congress intended for this provision to only apply to actions brought in federal court. Finally, and at the risk of gilding the lily, the court notes that a divergence in the application of the Reform Act discovery stay in state and federal court would create the undesirable (and unsupported by the text of the statute or its purpose) and absurd incentive for lawsuits brought under the 1933 Act to be brought in state court as opposed to federal court to avoid the very protection supporting the enactment of the Reform Act and necessarily confounding Congress' acknowledged intention that the lion's share of securities litigation would occur in the federal courts.

We have substantial experience in litigation regarding securities, both in state and federal court. Contact Schlam Stone & Dolan partner John Lundin at if you or a client need help regarding a claim related to stocks, bonds or other financial instruments.