United States District Court, W.D. Pennsylvania
December 20, 2005.
THOMAS L. PAYNE, SID ARCHINAL, GARY H. KARESH, JO ANN KARESH, BELCA D. SWANSON AND MERLE K. SWANSON, individually and on behalf of all others similarly situated, Plaintiffs,
ANTHONY J. DeLUCA, HARRY J. SOOSE, FRANCIS J. HARVEY, JAMES C. McGILL, RICHARD W. POGUE, DANIEL A. D'ANIELLO, PHILLIP B. DOLAN, E. MARTIN GIBSON, ROBERT F. PUGLIESE, JAMES DAVID WATKINS, and THE CARLYLE GROUP, Defendants.
The opinion of the court was delivered by: WILLIAM STANDISH, Senior District Judge
Pending before the Court are (1) a motion by Plaintiffs to lift
the discovery stay imposed in this case pursuant to the Private
Securities Litigation Reform Act ("PSLRA"), correctly filed at
Docket No. 103, and (2) a motion by Defendants, seeking an order
of Court to permit issuance of subpoenas to preserve certain
documents relevant to discovery herein, filed at Docket No. 106.
For the reasons discussed below, Plaintiffs' Motion is denied and
Defendants' Motion is granted subject to certain modifications discussed below.*fn1
The facts of this case are largely irrelevant to the pending
motions and have been provided in the Court's previous Memorandum
denying without prejudice Defendants' motion to dismiss the
amended class action complaint. (See Docket No. 68, December
16, 2004, at 2-3.) Briefly stated, the named Plaintiffs filed an
action on behalf of themselves and other investors similarly
situated against the "Individual Defendants"*fn2 and The
Carlyle Group*fn3 (collectively, "Defendants"), claiming
that Defendants' actions on behalf of IT Group, Inc., violated
federal securities law. IT Group, Inc. ("IT" or "the Company"),
was an environmental waste remediation firm based in Monroeville,
Pennsylvania. The Carlyle Group acquired control of IT in
November 1996 and, at approximately the same time, the Company
expanded rapidly by acquiring other firms who performed similar
services. Plaintiffs claim that by the end of 2001, Defendants had made a number of poor financial and management decisions
which, inter alia, resulted in liquidity problems and violation
of the Company's highly lucrative government contracts. IT
declared bankruptcy on January 15, 2002.
During the course of the bankruptcy proceedings, Plaintiffs
learned that Defendants had consistently misrepresented IT's
financial condition in annual and quarter filings made with the
Securities and Exchange Commission, press releases, and other
statements disseminated to the investing public. As a result,
Plaintiffs and other investors were damaged when they purchased
IT common stock at artificially inflated prices during the Class
Period.*fn4 Plaintiffs did not learn of Defendants'
fraudulent activities until March and April 2002 when the
relevant documents were published in the bankruptcy proceedings.
II. THE PENDING MOTIONS
A. Plaintiffs' Motion to Lift the Discovery Stay
At this point in time, the bankruptcy proceedings are nearing
completion in the United States District Court for the District
of Delaware. On October 21, 2005, the Trustee of the IT Group
Litigation Trust*fn5 filed a motion with the bankruptcy
court, seeking approval of a proposed document retention plan. (See
Declaration of Robert M. Zabb in Support of Motion to Lift the
PSLRA Stay of Discovery, correctly filed at Docket No. 105,
Exhibit H, IT Litigation Trust Trustee's Renewed Motion for Entry
of an Order Authorizing Document Retention Procedures, "the
Trustee's plan.")*fn6 According to Plaintiffs, the Trustee's
plan applicable to some 134,000 boxes of documents at 45
storage sites throughout the United States would result in the
irreversible loss of documents they need to prosecute this
securities fraud action. As proposed in October, the plan would
allow the Trustee to begin destroying documents as of December
31, 2005; the only documents the Trustee would retain would be
those identified by an interested party prior to that date or
those which the Trustee determined were relevant to its own
pending litigation. Moreover, although Plaintiffs acknowledge the
Trustee's plan allows them to access the documents through
December 31, 2005, they claim such access would be meaningless
because the Trustee has indicated it would not respond to
document requests or otherwise assist Plaintiffs in identifying
and locating documents relevant to this lawsuit. (Plaintiffs'
Memorandum of Law in Support of Motion to Lift the PSLRA Stay of Discovery in Connection with Potential Destruction of Company
Documents, correctly filed at Docket No. 104, "Plfs.' Memo," at
1.) The Trustee's motion to approve its proposed document
retention plan was scheduled to be heard by the bankruptcy court
on November 16, 2005.*fn7
On November 4, 2005, Plaintiffs filed a motion with this Court,
seeking an order lifting the PSLRA stay of discovery pursuant to
15 U.S.C. § 78u-4(b) (3) (B) in the event the bankruptcy court
approved the Trustee's plan. Specifically, Plaintiffs sought to
have the stay "lifted as to discovery of documents in the custody
of the Trustee, as well as to depositions to ascertain the nature
and extent and location of the documents held by the Trustee
which are relevant to this case." (Plaintiffs' Notice of Motion
and Motion to Lift the PSLRA Stay of Discovery in Connection with
Potential Destruction of Company Documents, correctly filed at
Docket No. 103.) The only named deponent is Defendant Harry
Soose, IT's former chief financial officer and now an employee of
the Trustee, whom Plaintiffs identify as "the single person best
situated to locate the financial and accounting documents" they
need. They claim that without this deposition, they would be playing "blindman's
bluff" trying to locate relevant documents among the 134,000
boxes. (Plfs.' Memo at 1, note 3.)
Plaintiffs' motion is based on the PSLRA exception to the
mandatory discovery stay imposed while a motion to dismiss is
under consideration by the district court when such discovery is
"necessary to preserve evidence or to prevent undue prejudice" to
the plaintiff. (Plfs.' Memo at 2, citing 15 U.S.C. § 78u-4(b)
B. Defendants' Motion for an Order Permitting Issuance of
Subpoenas to Preserve Documents
In response to Plaintiffs' motion, Defendants filed a motion
based on an alternative plan to preserve the documents in
question. (Defendants' Notice of Motion and Motion for Order
Permitting Issuance of Subpoenas to Preserve Documents, Docket
No. 106.) Defendants agree to a lifting of the stay imposed by
the PSLRA, but only for the far more limited purpose of allowing
subpoenas to be issued which would direct the Trustee to preserve
the documents "for the duration of this litigation," but not
require immediate document production. Further, the subpoenas
would advise the Trustee that it would not have to respond until
this Court has ruled on a pending Motion to Dismiss the Second
Amended Complaint and lifted the stay. (Defendants' Memorandum of
Law in Opposition to the Motion to Lift the PSLRA Stay . . . and
in Support of Motion for Order Permitting Issuance of Subpoenas to Preserve Documents, Docket No. 100, "Defs.' Memo.,"
Defendants agree with Plaintiffs that the all parties to this
litigation have an interest in preserving the documents held by
the Trustee, but contend that this interest will be adequately
served by allowing Plaintiffs to issue preservation subpoenas.
(Defs.' Memo. at 4-9.) They oppose a blanket order lifting the
stay on discovery with regard to all documents held by the
Trustee and permitting depositions, arguing that the PSLRA
anticipates lifting the discovery stay only for "particularized"
discovery. (Id. at 9.)
While acknowledging that protective subpoenas "would be better
than nothing," Plaintiffs respond to Defendants' suggestion by
arguing that (1) the Trustee, based on its past behavior, cannot
be trusted to honestly comply with a protective subpoena and
could easily claim to comply with its terms while proceeding
unchecked in its drive to destroy documents; (2) the bankruptcy
court itself is of no help in protecting Plaintiffs' interests
because the court has previously indicated its inclination to
approve the Trustee's plan; (3) protective subpoenas are not
sanctioned by the PSLRA in that Congress provided only a single
remedy for protecting evidence which may potentially be lost,
i.e., lifting the discovery stay; and (4) contrary to Defendants'
argument that the discovery request is not sufficiently particularized, Plaintiffs seek to have the stay
lifted only with regard to the 134,000 boxes in the Trustee's
control, an amount which is not unreasonable in light of the
magnitude of this case. (Plaintiffs' Reply Memorandum of Law in
Support of Motion to Lift the PSLRA Stay of Discovery . . . and
in Opposition to Defendants' Motion for Order Permitting Issuance
of Subpoenas to Preserve Documents, Docket No. 101, "Plfs.'
The PSLRA provides:
In any private action arising under this title
[15 U.S.C.S. §§ 78a et seq.], 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).
Defendants' Motion to Dismiss the Second Amended Complaint,
filed on May 27, 2005, and now pending at Docket No. 73, thus
mandates the stay Plaintiffs seek to have lifted.
The PSLRA further provides that "during the pendency of any
stay of discovery . . . any party to the action with actual
notice of the allegations contained in the complaint shall treat
all documents . . . that are relevant to the allegations, as if
they were the subject of a continuing request for production of
documents for the opposing party under the Federal Rules of Civil Procedure." 15 U.S.C. § 78u-4(b) (3) (C) (i). The statute
provides for court-ordered sanctions if a party to the litigation
willfully fails to comply with this preservation requirement.
15 U.S.C. § 78u-4 (b) (3) (C) (ii). However, the statute does not
address those situations in which a party to the litigation
claims that relevant documents are held by a non-party.
We begin our analysis with the recognition that whatever action
this Court takes is entirely contingent on the assumptions that
(1) at its hearing in mid-January 2006, the bankruptcy court will
approve the Trustee's plan to begin destroying documents as of
January 31, 2006; and (2) destruction will begin immediately
thereafter in an as-yet-undisclosed manner which will negatively
affect both Plaintiffs and Defendants. We also begin with the
assumption that Defendants' Motion to Dismiss the Second Amended
Complaint will be decided by this Court within the next 60 days.
We have considered the arguments of both parties, together with
the case law they cited. As an initial matter, we agree with
Plaintiffs that some action must be taken to assure that
documents held by the Trustee are retained until discovery, by
both parties herein, can commence. However, we find that
Plaintiffs' proposed motion which would allow them to begin
unrestricted discovery of 134,000 boxes of documents scattered
throughout the United States is not sufficiently particularized
to meet the threshold requirement of 15 U.S.C. § 78u-4 (b) (3)
(B). A discovery request meets the particularized requirement if it
identifies the "specific types of evidence that fall within its
scope," is "directed at specific persons" and "sufficiently
limits the type of documents to be preserved." Houlihan v.
Andrews (In re Nat'l Century Fin. Enters.), 347 F. Supp.2d 538,
541 (S.D. Ohio 2004), citing In re Tyco Int'l, Ltd., Sec.
Litig., MDL No. 00-MD-1335-B et al., 2000 U.S. Dist. LEXIS
11659, *12-*13 (D.N.H. July 27, 2000). In reaching this
conclusion, we are not concerned with Plaintiffs' contention that
134,000 boxes of documents is a reasonable and "particularized"
amount given the scope of this litigation, but rather with their
acknowledgment that the indices prepared by the Trustee are
relatively useless, that they cannot at this time identify even
broad categories of documents, and that the deposition of at
least one Individual Defendant is necessary in order to
accomplish any meaningful discovery. This leads to the conclusion
that Plaintiffs have not established a "clearly defined universe
of documents," and could easily be off on a "fishing expedition"
contrary to the intent of the PSLRA.*fn8 Moreover, even if
we were inclined to lift the stay, it would be for the sole
purpose of preserving the evidence as provided by statute
inasmuch as that is one of the two purposes stated by Congress for which such a motion might be granted.
Although we agree that Plaintiffs would be unfairly prejudiced if
the documents were indiscriminately destroyed before discovery
could take place in this matter, Plaintiffs have failed to
explain how assuming the documents themselves are protected
they will be prejudiced if they are not permitted to immediately
depose Mr. Soose.
In addition, we reject Plaintiffs' argument that because the
PSLRA does not explicitly provide for issuance of protective
subpoenas, our only alternative is to lift the stay entirely and
allow them to proceed with discovery and depositions. One need
only review the numerous cases considering protective subpoenas
as an alternative to an outright lifting of the stay to recognize
that courts throughout the country have adopted this much more
limited method of preserving documents in the hands of third
parties. See, e.g., Sedona Corp. v. Ladenburg Thalmann & Co.,
CA 03-3120, 2005 U.S. Dist. LEXIS 23905 (S.D.N.Y. Oct. 14, 2005)
(lifting of the PSLRA stay was unnecessary inasmuch as plaintiff
had been permitted to send preservation letters to ten
non-parties); Houlihan v. Andrews, supra. (granting
plaintiffs' motion for leave to issue a document preservation
subpoena to non-party where relevant documents would likely be
destroyed because of that party's reorganization in bankruptcy);
In re Cree, Inc. Sec. Litig., CA 03-549, 2004 U.S. Dist. LEXIS
5442 (M.D.N.C. Mar. 31, 2004) (quashing document preservation subpoenas because they had
been issued without leave of court); Vezzetti v. Remec, Inc.,
CA No. 99-796L, 2001 U.S. Dist. LEXIS 10462 (S.D. Cal. July 23,
2001) (granting ex parte application to issue subpoenas
requiring non-parties to preserve documents); Tyco Int'l, Ltd.
Sec. Litig., supra. (third party subpoenas ordering
preservation of evidence were appropriate if adequately
particularized); In re Carnegie Int'l Corp. Secs. Litig.,
107 F. Supp.2d 676 (D. Md. 2000) (subpoena duces tecum served on
non-party quashed as violative of PSLRA's stay of discovery, but
court required non-party to preserve documents subject to
subpoena); Neibert v. Monarch Dental Corp., CA No. 3-99-762-X,
1999 U.S. Dist. LEXIS 22312 (N.D. Tex. Oct. 20, 1999) (granting
plaintiffs' request to serve document preservation subpoenas to
non-parties subject to the modification that the parties had no
obligation to respond other than by preserving documents); and
In re Grand Casinos, Inc. Secs. Litig., 988 F.Supp. 1273 (D.
Minn. 1997) (granting plaintiffs' motion to lift stay of
discovery for the limited purpose of serving, but not enforcing,
subpoenas requiring non-party businesses to preserve relevant
documents which might be destroyed in the ordinary course of
their document retention programs.) But see, In re Fluor Corp.
Secs. Litig., CA No. 97-734, 1999 U.S. Dist. LEXIS 22128 (C.D.
Cal. Jan. 19, 1999) (denying motion to issue preservation
subpoenas to third parties because court found no authority for such in the PSLRA, third
parties had not yet been identified, and plaintiffs did not show
that discovery was necessary to preserve evidence.)
We conclude that issuing a protective subpoena is the most
expeditious and least disruptive way to proceed in this matter.
First, the Trustee may decide, as it has at least twice in the
past, to voluntarily continue its motion seeking bankruptcy court
approval of its document retention plan, in which case the
subpoena would not actually have to be served. Second, the
bankruptcy court, cognizant of the need of both Plaintiffs and
Defendants herein to have discovery of those documents and the
fact that this Court intends to rule promptly on the Motion to
Dismiss, may decline to approve the proposed starting date for
document destruction. Third, should the bankruptcy court accept
the Trustee's plan, a preservation subpoena would accomplish
Plaintiffs' goal without intruding on the prerogative of that
court to control its own caseload and calendar. That is, by
allowing a subpoena to be issued, we will not interfere with the
bankruptcy court's authority to grant the Trustee's motion, but
simply impose for reasons relatively unimportant to the
bankruptcy proceedings themselves a moratorium on initiating
the approved plan. Fourth, a subpoena which requires the Trustee to merely preserve the documents for a brief period of
time,*fn9 does not require production or any other action on
its part, and does not permit depositions aimed at identifying
specific documents, is not particularly onerous on the
Trustee.*fn10 Finally, this Court may grant Defendants'
Motion to Dismiss the Second Amended Complaint herein, thereby
obviating any need for discovery.
AND NOW, this 20th day of December, 2005, Plaintiffs'
Motion to Lift the PSLRA Stay of Discovery in Connection with
Potential Destruction of Company Documents, filed at Docket No.
103, is DENIED. Defendants' Motion for Order Permitting
Issuance of Subpoenas to Preserve Documents, Docket No. 106, is
GRANTED, subject to the following modifications.
Since both parties have represented to the Court that they have
an interest in maintaining the documents in question, counsel for
Plaintiffs and Defendants shall jointly draft a preservation
subpoena. That subpoena shall require the Trustee to preserve
relevant documents, identified to the best of the parties' ability, for a period of time to be agreed upon by the
parties, taking into account the Court's intention to issue a
decision on the pending Motion to Dismiss the Second Amended
Complaint within 60 days of the date hereof.
The draft preservation subpoena shall not require the Trustee
of the IT Group Litigation Trust to produce documents to either
party until further notice of Court, nor shall it compel
deposition of any person, pending the Court's approval of a case
management order following resolution of the Motion to Dismiss.
The draft subpoena shall be submitted to this Court for
approval not later than January 3, 2006, together with an order
directing its issuance by the appropriate court. Plaintiffs and
Defendants may each concurrently submit a brief, not to exceed
ten pages, stating their objections, if any, to the draft
subpoena. Should counsel for the parties desire, such briefs may
propose alternative language to any portion of the draft subpoena
to which the party objects.
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