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Edward Dipple et al v. Michael R. Odell et al

May 2, 2012

EDWARD DIPPLE ET AL., PLAINTIFFS,
v.
MICHAEL R. ODELL ET AL., DEFENDANTS.



The opinion of the court was delivered by: Yohn, J.

MEMORANDUM

Plaintiffs have filed a motion to expedite discovery and defendants have filed a response thereto. For the reasons set forth below, I will deny plaintiffs' motion.

I. Background

This case arises out of an offer by The Gores Group, LLC ("Gores"), a private-equity firm, to acquire all the outstanding shares of common stock of The Pep Boys - Manny, Moe & Jack ("Pep Boys" or the "Company") for $15.00 per share, at a total enterprise value of approximately $1.0 billion (the "Proposed Transaction"). (Consolidated Compl. ¶ 2.) Following the announcement of the Proposed Transaction, ten actions alleging breach of fiduciary duties were filed by Pep Boys shareholders in the Court of Common Pleas of Philadelphia County. These state-court actions have been consolidated before Judge Arnold L. New, and discovery has commenced.*fn1 (Pls.' Mem. in Supp. of Mot. for Expedited Disc. ("Pls.' Mem.") at 2-3; Defs.' Opp'n to Pls.' Mot. for Expedited Disc. ("Defs.' Opp'n") at 2-3.)

On March 7, 2012, Pep Boys filed its first preliminary proxy ("March 7th Proxy") with the U.S. Securities and Exchange Commission ("SEC") recommending that Pep Boys shareholders vote in favor of the Proposed Transaction. (Consolidated Compl. ¶ 57.) The document is 88 pages long. (Defs.' Opp'n at 2.) Plaintiff Edward Dipple filed this securities action against defendants, Pep Boys and the members of the Company's board of directors*fn2 (the "Board"), on March 20, 2012. Subsequently, plaintiffs Linda Dickens and John Chevedden filed similar actions that were consolidated before me. Pep Boys filed an amended preliminary proxy ("April 6th Proxy") that is 89 pages in length with the SEC on April 6, 2012.*fn3 (Pls.' Mem. at 2; Defs.' Opp'n at 3 n.1.)

Plaintiffs filed a consolidated complaint dated April 10, 2012. In the consolidated complaint, plaintiffs contend that both the value of the Proposed Transaction to Pep Boys shareholders and the process by which the Board approved the Proposed Transaction are unfair. (Consolidated Compl. ¶ 43.) Plaintiffs allege that defendants prepared, filed, and disseminated a false and misleading proxy statement in violation of sections 14(a) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78n(a) and 78t(a), and Rule 14a-9 promulgated thereunder. (Id. at ¶¶ 91-93, 99.) Defendants filed a motion to dismiss the consolidated complaint on April 17, 2012, which is awaiting further briefing.

Plaintiffs filed this motion to expedite discovery in order to facilitate their anticipated motion for a preliminary injunction enjoining defendants from convening a shareholder meeting scheduled for May 30, 2012, where a vote on the Proposed Transaction will take place. Plaintiffs seek to depose a member of Pep Boys' Board, management, and financial advisor. Plaintiffs also request eight categories of documents. Defendants argue that these requests are little more than a "fishing expedition" and oppose the motion on the ground that all discovery must be stayed pending resolution of their motion to dismiss under the Private Securities Litigation Reform Act of 1995 ("PSLRA").

II. Analysis

In securities-fraud actions, the PSLRA provides that "all discovery and other proceedings shall be stayed during the pendency of any motion to dismiss." 15 U.S.C. § 78u-4(b)(3)(B). Contrary to plaintiffs' contention, a substantial body of law exists supporting the conclusion that the automatic-stay provision of the PSLRA applies to federal securities claims brought individually in addition to claims brought collectively, see Nichting v. DPL Inc., No. 3:11-141, 2011 U.S. Dist. LEXIS 76739, at *6 n.5 (S.D. Ohio July 15, 2011) (collecting cases that reject the argument that the PSLRA automatic stay applies only to class actions), and at least one other court in this circuit has applied the automatic-stay provision accordingly, see Botton v. Ness Techs., Inc., No. 11-3950, 2011 U.S. Dist. LEXIS 85950, at *6-8 (D.N.J. Aug. 4, 2011) (applying the PSLRA stay provision to federal securities claims brought individually). The automatic-stay provision applies to "any private action." 15 U.S.C. § 78u-4(b)(3)(B). By contrast, other subsections of 15 U.S.C. § 78u-4 apply to claims "brought as a plaintiff class action." 5 U.S.C § 78u-4(a). Congress knew how to limit the application of the PSLRA to class actions only-it chose not to limit the automatic-stay provision in this manner.

The PSLRA prohibits discovery in this action "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). Plaintiffs do not argue that a reprieve from the stay is necessary to preserve evidence. Instead, they argue that the stay should be lifted because it would not serve congressional purposes in this case, or alternatively, because their discovery requests are particularized and necessary to prevent undue prejudice.

"Congress enacted the discovery stay in order to minimize the incentives for plaintiffs to file frivolous securities . . . actions in the hope either that corporate defendants will settle those actions rather than bear the high cost of discovery . . . or that the plaintiff will find during discovery some sustainable claim not alleged in the complaint." In re Worldcom Sec. Litig., 234 F. Supp. 2d 301, 305 (S.D.N.Y. 2002) (internal citations omitted). Plaintiffs argue that "[w]here these concerns do not exist, courts have lifted the stay of discovery." (Pls.' Mem. at 14.) The cases plaintiffs rely on are inapposite.*fn4 Instead, I adopt the reasoning of In re Marvell Tech. Group Ltd. Derivative Litig., No. 06-03894, 2007 U.S. Dist. LEXIS 41268, at *7-8 (N.D. Cal. May 29, 2007), that "Congress specified a stay for all privately-prosecuted Exchange Act cases and made exceptions for evidence [preservation] and undue prejudice. Congress did not merely instruct courts to stay discovery in cases in which courts perceived abuses."*fn5 See also In re Spectranetics Corp. Sec. Litig., No. 08-02048, 2009 U.S. Dist. LEXIS 100748, at *22 (D. Colo. Oct. 14, 2009) ("[A] securities plaintiff cannot rely upon PSLRA policy alone to overcome its failure to meet the strict statutory requirements of the exceptions to the discovery stay.").

Under the PSLRA, the automatic stay may be lifted in "extraordinary circumstances" where the plaintiff can show that particularized discovery is necessary to prevent undue prejudice. Winer Family Trust v. Queen, No. 03-4318, 2004 U.S. Dist. LEXIS 1825, at *5 (E.D. Pa. Feb. 6, 2004). Although "the concept of particularized discovery is a nebulous one, and the phrase is not devoid of ambiguity," Faulkner v. Verizon Communs., Inc., 156 F. Supp. 2d 384, 405 (S.D.N.Y. 2001) (internal quotations omitted), "[a] discovery request is particularized within the meaning of 15 U.S.C. § 78u-4(b)(3)(B) if the party seeking discovery under the exception . . . adequately specif[ies] the target of the requested discovery," Nichting, 2011 U.S. Dist. LEXIS 76739, at *10 (internal quotations omitted). In other words, "[d]iscovery is sufficiently particularized when it is directed at specific persons and sufficiently limits the type of documents to be preserved." In re Heckmann Corp. Sec. Litig., No. 10-378-LPS, 2010 U.S. Dist. LEXIS 141663, at *15 (D. Del. Feb. 28, 2010). Thus, whether discovery requests are "particularized" depends upon "the nature of the underlying litigation." In re Royal Ahold N.V. Sec. & ERISA Litig., 220 F.R.D. 246, 250 (D. Md. 2004).

Here, plaintiffs request the following discovery:

[1.] The documents Defendants already produced in the state ...


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