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WINER FAMILY TRUST v. QUEEN

February 6, 2004.

THE WINER FAMILY TRUST
v.
MICHAEL QUEEN, et al



The opinion of the court was delivered by: JOHN PADOVA, District Judge

MEMORANDUM

Presently before the Court in this securities fraud class action is The Winer Family Trust's "Motion to Confirm Right to Proceed with Discovery Related to Breach of Fiduciary Duty Claim and for Relief from Stay of Discovery Related to Federal Securities Claims." For the reasons that follow, the Court grants the Motion in part and denies the Motion in part.

I. BACKGROUND

  On July 24, 2003, The Winer Family Trust (hereinafter "Lead Plaintiff") filed a putative Class Action Complaint on behalf of public investors who purchased the securities of Pennexx Foods, Inc. ("Pennexx") during the period from February 8, 2002 until June 12, 2003. The Class Action Complaint alleged violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78j (b), 78t(a), and Rule 10b-5 promulgated thereunder, see 17 C.F.R. § 240.10b-5, as well as a breach of fiduciary duty claim, against Pennexx, Smithfield Foods, Inc. Page 2 ("Smithfield"), and various officers and directors of those corporations.*fn1 On December 5, 2003, Pennexx filed a Cross-Claim against Defendants Smithfield, Joseph W. Luter IV, and Michael H. Cole, alleging a number of state law claims. On December 22, 2003, Lead Plaintiff filed an Amended Class Action Complaint that reiterated the federal securities claims, and also asserted, on behalf of public investors who currently own Pennexx securities, state law claims for breach of fiduciary duty against Defendant Michael Queen, breach of fiduciary duty against Smithfield, aiding and abetting the breach of fiduciary duty against Defendants Joseph W. Luter IV and Michael H. Cole, and successor liability against Smithfield and Showcase Foods, Inc. ("Showcase"). On December 30, 2003, Lead Plaintiff filed the instant Motion, to which Smithfield, Showcase, Joseph W. Luter IV, and Michael H. Cole (collectively "the Smithfield Defendants") filed a timely response. Pennexx, Michael Queen, Dennis Bland, and Thomas McGreal (collectively "the Pennexx Defendants") have not timely responded to the instant Motion.*fn2 Subsequent to the filing of the instant Motion, the Page 3 Pennexx Defendants and the Smithfield Defendants each filed Motions to Dismiss the Amended Complaint, the response to which is due by February 20, 2004.

 II. LEGAL STANDARD

  The PSLRA provides that "[i]n any private action arising under this title, all discovery and other proceedings shall be stayed during the pendency of any motion to dismiss, unless the court finds upon the motion of any party that particularized discovery is necessary to preserve evidence or to prevent undue prejudice to that party." 15 U.S.C. § 78u-4 (b)(3)(B). The automatic stay of discovery proceedings reflects the PSLRA's general purpose of restricting abuses in securities class action litigation, including the abuse of the discovery process to coerce settlement. In re Advanta Corp. Securities Litigation, 180 F.3d 525, 531 (3d Cir. 1999)(citing H.R. Conf. Rep. No. 104-369, at 28 (1995)); see also Novak v. Kasaks, 216 F.3d 300, 304 (2d Cir. 2000)(observing that PSLRA is intended "to deter strike suits wherein opportunistic private plaintiffs file securities fraud claims of dubious merit in order to exact large settlement recoveries"). Because the PSLRA's automatic stay of discovery provision contemplates that "discovery should be permitted in securities class actions only after the court has sustained the legal sufficiency of the complaint," only "exceptional circumstances" will justify relief from the stay prior to a ruling on the motion to dismiss. SG Cowen Sec. Corp. v. U.S. Page 4 Dist. Ct. for N. Dist. of Cal., 189 F.3d 909, 912-13 (9th Cir. 1999)(quoting S. Rep. No. 104-98, at 14 (1995)).

  Such extraordinary circumstances are established only where discovery is necessary either "to preserve evidence or to prevent undue prejudice to [the moving] party." 15 U.S.C. § 78u-4 (b)(3)(B). A party alleging that discovery is necessary to preserve evidence is required to make a specific showing that "the loss of evidence is imminent as opposed to merely speculative." In re CFS-Related Sec. Fraud Litig., 179 F. Supp.2d 1260, 1265 (N.D. Okla. 2001). A party alleging that discovery is necessary to prevent undue prejudice must specifically identify "improper or unfair treatment amounting to something less than irreparable harm." Sarantakis v. Gruttadauria, Civ. A. No. 02-1609, 2002 WL 1803750, at *2 (N.D. Ill. Aug. 5, 2002) (citations omitted); see also In re CFS-Related Sec. Fraud Litig., 179 F. Supp.2d at 1265 ("Undue prejudice is prejudice that is improper or unfair under the circumstances.").

  Even where a movant demonstrates that discovery is necessary to either preserve evidence or prevent undue prejudice, the court should refrain from lifting the PSLRA stay unless the movant has made "particularized" requests for discovery. 15 U.S.C. § 78u-4(b)(3)(B). Thus, the movant must "adequately specify the target of the requested discovery and the types of information needed" to relieve the extraordinary circumstances. In re Lernout & Hauspie Page 5 Sec. Litig., 214 F. Supp.2d 100, 108 (D. Mass. 2002).

 III. DISCUSSION

  A. Discovery for Breach of Fiduciary Duty Claims

  Despite the express applicability of the PSLRA's automatic stay provision to "all discovery," Lead Plaintiff argues that this Court should allow discovery to proceed on the state common law breach of fiduciary duty claims, which are set forth in counts III-V of the Amended Complaint. In support of this argument, Lead Plaintiff cites Tobias Holdings, Inc. v. Bank United Corp., 177 F. Supp.2d 162 (S.D.N.Y. 2001), wherein the court held that the PSLRA does not stay discovery with respect to a plaintiff's non-fraud state law claims where such claims are separate and distinct from the federal securities claims alleged in the complaint and where the court has an independent basis for jurisdiction over the non-fraud state law claims. Id. at 168-69.

  In contrast to the scenario presented in Tobias Holdings, this Court does not have an independent basis for jurisdiction over Lead Plaintiff's breach of fiduciary duty claims. Indeed, the lone basis for jurisdiction identified in Plaintiff's Amended Complaint is supplemental jurisdiction. (See Am. Compl. ¶ 11.) As the United States Court of Appeals for the Ninth Circuit has recognized, "Congress' attempt to address [concerns of discovery abuse] would be rendered meaningless if securities plaintiffs could circumvent the stay simply by asserting pendent state law claims in Page 6 federal court in conjunction with their federal law claims." SG Cowen Sec. Corp., 189 F.3d at 913 n.1 (9th Cir. 1999) (emphasis added). For this reason, numerous courts have held that the PSLRA stay on discovery is applicable to pendent state law claims. See, e.g., Sarantakis, 2002 WL 1803750, at *4 (holding that Tobias Holdings was inapposite because plaintiff did not plead diversity jurisdiction); In re CFS-Related Sec. Fraud Litig., 179 F. Supp.2d at 1267 (holding that PSLRA stay provision applied to plaintiffs' state law claims in part because plaintiffs have "not demonstrated that they have an independent jurisdictional basis for their state law claims").

  Lead Plaintiff attempts to distinguish these cases by asserting that supplemental jurisdiction over its breach of fiduciary duty claims is predicated on Pennexx's Cross-Claim, rather than on the federal securities claims alleged in the Amended Complaint. See (Pl. Reply Mem. at 2-3.) Lead Plaintiff maintains that since Pennexx has an independent basis of jurisdiction with respect to its Cross-Claim, i.e., diversity jurisdiction, this Court may properly exercise jurisdiction over the breach of fiduciary duty claims, which are related to the same set of facts as Pennexx's claims. In essence, Lead Plaintiff appears to argue that allowing discovery on state law claims where supplemental jurisdiction is predicated on a defendant's cross-claim is less offensive to the PSLRA's general purpose of restricting abuses in Page 7 securities class action litigation, as the defendant has "opened the door" for such discovery by filing the cross-claim.

  This Court concludes, however, that Congress's attempt to address concerns of discovery abuse would also be rendered meaningless if securities plaintiffs could circumvent the PSLRA stay (and relevant case law) simply by asserting pendent state law claims in conjunction with a defendant's cross-claim. Indeed, regardless of whether supplemental jurisdiction is based on Lead Plaintiff's federal securities claims or Pennexx's Cross-Claim, any discovery sought on the breach of fiduciary duty claims will very likely be relevant to the federal securities claims, as each set of claims is necessarily based on a "common nucleus of operative fact." See De Asencio v. Tyson Foods, Inc., 342 F.3d 301, 308 (3d Cir. 2003)(noting that federal courts may exercise supplemental jurisdiction where state law claims share a "common nucleus of operative fact" with claims that support the court's original jurisdiction)(quoting United Mine Workers v. Gibbs, 383 U.S. 715, 725 (1966)); Ambromovage v. United Mine Workers of America, 726 F.2d 972, 990 (3d Cir. 1984) (holding that ...


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