OPINION OF THE COURT

ANDREW BORROK, J.

For the reasons set forth below, because this court holds that the Private Securities Litigation Reform Act of 1995's (the Reform Act) automatic stay of discovery (15 USC § 77z-1 [b] [1]) during a pending motion to dismiss applies in state court as well as federal court securities litigation, discovery is stayed pending resolution of the pending motion to dismiss.

The Facts Relevant to the Instant Motion

Mark Townsend, individually and on behalf of all others similarly situated, brought this action against Everquote, Inc., certain of Everquote's officers and directors, and the underwriters of Everquote's initial public offering alleging strict liability claims under sections 11, 12, and 15 of the Securities Act of 1933 (the 1933 Act). The defendants have filed a motion to dismiss. By order to show cause (mot. sequence No. 003), the defendants have also moved the court to stay discovery pending adjudication of the motion to dismiss pursuant to the Reform Act's automatic stay of discovery (15 USC § 77z-1 [b] [1]).1 The plaintiffs oppose the motion and urge this court to follow a court of concurrent jurisdiction's rulings in Matter of PPDAI Group Sec. Litig. (64 Misc.3d 1208[A], 2019 NY Slip Op 51075[U] [Sup Ct, NY County 2019]) and Matter of Dentsply Sirona, Inc. Shareholders Litig. v XXX (2019 NY Slip Op 32297[U] [Sup Ct, NY County 2019]).

In PPDAI, the court acknowledged that courts are divided in applying the Reform Act's discovery stay in state court (see e.g. Switzer v Hambrecht & Co., L.L.C., 2018 WL 4704776, *1, 2018 Cal Super LEXIS 4031, *1 [Sept. 19, 2018, Nos. CGC-18-564904, CGC-18-565324]; cf. City of Livonia Retiree Health & Disability Benefits Plan v Pitney Bowes Inc., 2019 WL 2293924, *4, 2019 Conn Super LEXIS 1604, *9-10 [May 15, 2019, No. Xo8 FST CV 18 6038160 S]). Ultimately, however, in PPDAI, the court wrote that

In Matter of Denstsply Sirona, Inc., the same court wrote: "to hold that the PSLRA automatic stay applies to state court actions would undermine Cyan's holding that '33 Act cases can proceed in state courts. Cyan, 138 S Ct at 1078. Thus, the PSLRA's automatic discovery stay is not applicable to state court actions" (Matter of Dentsply Sirona, Inc., 2019 NY Slip Op 32297[U], *14).

This court respectfully disagrees with this reasoning and conclusion. As discussed more completely below, Cyan only addressed the jurisdictional issue as to whether the Securities Litigation Uniform Standards Act of 1998 (SLUSA) stripped state courts of jurisdiction to adjudicate claims brought under the 1933 Act and whether removal of such claims is permitted.

Discussion

As this court has previously acknowledged, Congress enacted the 1933 Act and the Securities Exchange Act of 1934 (the 1934 Act) to promote honest business practices in the securities market. The 1933 Act created private rights of action in connection with the initial public offering of securities and the 1934 Act regulates subsequent trading activity.

Subsequently, while recognizing that private securities litigation is an "indispensable tool with which defrauded investors can recover their losses" (Merrill Lynch, Pierce, Fenner & Smith Inc. v Dabit, 547 U.S. 71, 81 [2006], quoting HR Conf Rep No. 104-369, 104th Cong, 1st Sess at 31, reprinted in 1995 US Code Cong & Admin News at 730), as the United States Supreme Court in Merrill acknowledged, the United States House of Representatives identified in its House Conference Report "ways in which the class-action device was being used to injure `the entire U. S. economy'" (id. [emphasis added]). To wit, the Reform Act was enacted to address perceived abuses in class action lawsuits (i.e., "nuisance filings, targeting of deep-pocket defendants, vexatious discovery requests, and `manipulation by class action lawyers of the clients whom they purportedly represent'" [id. (emphasis added)]). Or as the United States Supreme Court more recently observed in Halliburton Co. v Erica P. John Fund, Inc.:

The Reform Act did not by its terms apply to state law securities litigation, and, accordingly, plaintiffs could avoid the protections enacted under the Reform Act by bringing complaints of securities misconduct under state law. To address this unintended "loophole," Congress passed the Securities Litigation Uniform Standards Act of 1998, which bars "covered class action" state-law-based securities claims and otherwise authorizes their removal to ensure dismissal.

15 USC § 78bb (f) (5) (B) defines a "covered class action" as:

Notably, Congress exempted derivative actions (15 USC § 78bb [f] [5] [C]) from the definition of "covered class action" and otherwise provided that the state court's discretion as to whether an action should be "joined, consolidated, or otherwise allowed to proceed as a single action" (15 USC § 78bb [f] [5] [F]) remains undisturbed by the definition of "covered class action." As this court recently observed, to the extent that there was certain ambiguity as to whether SLUSA divested state courts of jurisdiction to preside over "covered class action"4 securities lawsuits brought under the 1933 Act and whether such claims could be removed to federal court, the United States Supreme Court addressed these two issues in Cyan, Inc. v Beaver County Employees Retirement Fund (583 US ___, 138 S.Ct. 1061 [2018]).

In Cyan, the Beaver County Employees Retirement Fund filed a lawsuit in 2014 in California state court against Cyan, Inc. alleging that Cyan violated section 11 of the 1933 Act by filing an inaccurate and misleading registration statement in connection with its initial public offering because the prospectus did not disclose anticipated issues with the company's revenue stream, which issues ultimately led to a precipitous decrease in the stock price. Cyan moved to dismiss the lawsuit arguing that state courts no longer had jurisdiction to hear claims brought under the 1933 Act. The controversy involved statutory interpretation of 15 USC §§ 77v (a) and 77p (b).

15 USC § 77v (a) provides that

15 USC § 77p (b) provides:

The California trial court denied the motion to dismiss based on Luther v Countrywide Fin. Corp. (195 Cal.App.4th 789, 125 Cal.Rptr.3d 716 [2011]), which had held that SLUSA did not eliminate concurrent state and federal court jurisdiction of claims brought under the 1933 Act.6 The case was ultimately appealed to the United States Supreme Court. The Federal Government filed an amicus curiae brief both opposing Cyan's jurisdictional position and also asking the question whether SLUSA enabled defendants to remove 1933 Act class actions from state to federal court (i.e., essentially arguing that Congress intended to make the federal courts the courts of exclusive jurisdiction for class action securities lawsuits). Although not directly at issue because Cyan never attempted to remove the case, the United States Supreme Court also addressed the issue of removal of claims brought under the 1933 Act because the removal issue was directly related to the parties' jurisdictional arguments.

15 USC § 77p(c) provides:

"Any covered class action brought in any State court involving a covered security, as set forth in subsection (b), shall be removable to the Federal district court for the district in which the action is pending, and shall be subject to subsection (b)."

In Cyan, the United States Supreme Court unanimously held that SLUSA did not divest state courts of jurisdiction of claims brought under the 1933 Act because the express language of 15 USC § 77v(a) maintains concurrent jurisdiction except as otherwise provided in 15 USC § 77p, which is limited to covered class actions based on the statutory or common law of any State (i.e., as opposed to federal law) and otherwise authorized those claims (i.e., and not claims brought under the 1933 Act) to be removed to federal court for dismissal.7

Cyan had offered a different statutory interpretation which the Court rejected. Much like the defendants in Luther, Cyan had argued that 15 USC § 77v(a)'s except clause refers only to 15 USC § 77p(f)(2), which refers to a covered class action (i.e., as opposed to 15 USC § 77p's entire section as the language expressly provides). This section does not refer to whether the suit is based on state or federal law and therefore the except clause, according to Cyan, necessarily divests exempt covered class actions from state court jurisdiction. In rejecting Cyan's attempt to "cherry pick" material from the cross reference, the Court explained that the express language of the statute does not refer to section 77p(f)(2) but instead refers to section 77p as a whole. To wit, the Court wrote: "`[w]hen Congress want[s] to refer only to a particular subsection or paragraph, it sa[ys] so.' It said no such thing in the except clause" (Cyan, 583 US at ___, 138 S Ct at 1070 [citation omitted], quoting NLRB v SW General, Inc., 580 US ___, ___, 137 S.Ct. 929, 938-939 [2017]).

In addition, the Court wrote that the definition paragraph cannot be read to provide an exception to the rule of concurrent jurisdiction. Simply put,

The Court further commented that Cyan was making too much of a mere "conforming amendment[ ]" (583 US at ___, 138 S Ct at 1068, citing 112 US Stat 3230) and that for the 65 years prior to SLUSA, state courts had adjudicated all manner of 1933 Act cases including class actions which could not be removed to federal court:

Cyan further argued that putting the uncooperative express language aside, its interpretation is consistent with SLUSA's purpose and legislative history. According to Cyan, Congress could not deliver on the Reform Act's promise in enacting SLUSA without divesting state courts of jurisdiction of 1933 Act class actions. The Cyan Court rejected this position in further indicating that SLUSA's purpose was to "limit the conduct of securities class actions under State law, and for other purposes" (583 US at ___, 138 S Ct at 1071-1072 [emphasis added], citing 112 US Stat 3227) and that purpose which the text actually reflects ensured that "the Reform Act's substantive protections necessarily apply" (583 US at ___, 138 S Ct at 1073). Finally, the Court commented

The heart of the issue before this court does not center around 15 USC §§ 77v(a) and 77p(b) or otherwise involve the jurisdictional question addressed in Cyan. Cyan therefore does not control the outcome of the issue presented by the instant motion.

However, Cyan is helpful in that it further underscores the most basic and fundamental rule in statutory interpretation—the court must start with the express language of the statute and presume that it means what it says.

As the United States Supreme Court aptly said in Connecticut Nat. Bank v. Germain:

The statute at issue in front of this court is 15 USC § 77z-1(b)(1)—the Reform Act's automatic stay of discovery pending a motion to dismiss.

15 USC § 77z-1(b) provides:

The simple, plain, and unambiguous language expressly provides that discovery is stayed during a pending motion to dismiss "[i]n any private action arising under this subchapter" (emphasis added). To be sure, Congress did provide that discovery could go forward notwithstanding the Reform Act's automatic stay—i.e., "upon the motion of any party, that particularized discovery is necessary to preserve evidence or to prevent undue prejudice." Period. Full stop. Nowhere in 15 USC § 77z-1(b)(1) does the statute indicate that it applies only to actions brought in federal court. Indeed, the only reference to state court in 15 USC § 77z-1(b) is in 15 USC § 77z-1(b)(4) which expressly authorizes the federal court to stay discovery proceedings in any private action in a state court. In other words, to the extent that federal and state courts have concurrent jurisdiction to adjudicate 1933 Act claims, a federal court can stay discovery in a state court proceeding pursuant to 15 USC § 77z-1(b)(4). The statute simply does not say that the automatic stay is limited to claims brought pursuant to the 1933 Act in federal court. Put another way, as the Cyan Court held, "[t]he statute says what it says—or perhaps better put here, does not say what it does not say" (Cyan, 583 US at ___, 138 S Ct at 1069).

The plaintiffs argue that because 15 USC § 77z-1(b)(2), "Preservation of evidence," indicates that during the pendency of a stay, any party to the action with actual notice of the allegations must treat all documents, etc. as if they were the subject of a continuing request for production of documents from an opposing party under the Federal Rules of Civil Procedure, the stay contained in subsection(b)(1) must only apply in federal court because state courts do not apply the Federal Rules of Civil Procedure (plaintiff's mem of law in opp to defendant's mot to stay discovery pending resolution of any mot to dismiss at 11). The argument however fails.

15 USC § 77z-1(a)(1) provides that "[t]he provisions of this subsection shall apply to each private action arising under this subchapter that is brought as a plaintiff class action pursuant to the Federal Rules of Civil Procedure"—i.e., in federal court. By contrast, as discussed above, 15 USC § 77z-1(b) does not provide that this subchapter applies only to private actions brought as a plaintiff class action pursuant to the Federal Rules of Civil Procedure. 15 USC § 77z-1(b)(2) as written creates a uniform approach to document preservation. Any party with notice of the allegations must treat documents "as if" they were the subject of a continuing document request for production under the Federal Rules of Civil Procedure—i.e., without regard to each individual and potentially different jurisdiction's rules regarding document preservation and spoliation. The "as if" highlights how Congress made clear that federal rule principles apply both to state and federal proceedings where document perseveration was concerned during the pendency of the discovery stay.

The plaintiffs also argue that because the 15 USC § 77z-1(c) sanctions for abusive litigation provision like 15 USC § 77z-1(b)(1) applies to "any private action arising under this subchapter" requires the court at the end of a case to determine if sanctions are warranted under Federal Rules of Civil Procedure rule 11, 15 USC § 77z-1(c) necessarily means that the Reform Act's automatic discovery stay (15 USC § 77z-1[b][1]) only applies in federal court. The plaintiffs further argue that federal and state courts have universally held that Federal Rules of Civil Procedure rule 11 does not apply in state court proceedings (plaintiff's mem of law in opp to defendant's mot to stay discovery pending resolution of any mot to dismiss at 12). This argument however also fails.

Federal Rules of Civil Procedure rule 11 governs the signing of pleadings, motions and other papers and requires an attorney of record to sign the pleadings and certify to the best of their knowledge, information, and belief that the presented papers are not being offered for an improper purpose, that the claims or defenses are either warranted by existing law or by a non-frivolous argument for extending, modifying, or reversing existing law, and that the factual contentions and denials have evidentiary support. After notice and an appropriate opportunity to respond, upon a determination by the court of a violation of the Federal Rules of Civil Procedure, rule 11 subjects an attorney to an appropriate sanction. By contrast, under the Federal Rules of Civil Procedure, rule 37(e), "Failure to Preserve Electronically Stored Information," governs sanctions for spoliation. And, the sanctions provided for in Federal Rules of Civil Procedure rule 37(e) are discovery-related sanctions. In other words, 15 USC § 77z-1(c) and Federal Rules of Civil Procedure rule 11 are simply inapplicable to 15 USC § 77z-1(b). Most significantly, however, although Congress did provide for sanctions for violations of the Reform Act's automatic discovery stay and corresponding requirement for the preservation of evidence, 15 USC § 77z-1(c) is not the applicable statutory provision, paragraph (3) of 15 USC § 77z-1(b) (i.e., 15 USC § 77z-1[b][3]) is. And, as set forth above, 15 USC § 77z-1(b)(3), "Sanction for willful violation," provides that "[a] party aggrieved by the willful failure of an opposing party to comply with paragraph (2) [preservation of evidence] may apply to the court for an order awarding appropriate sanctions" (emphasis added). Significantly, the language of the relevant sanctions provision, 15 USC § 77z-1(b)(3), on its face does not refer to Federal Rules of Civil Procedure rule 37(e) or sanctions generally under the Federal Rules of Civil Procedure. Rather, providing that an aggrieved party of a violation of the Reform Act's discovery stay and corresponding preservation of evidence requirement may apply for "appropriate sanctions" without reference to the Federal Rules of Civil Procedure further underscores that Congress made clear that 15 USC § 77z-1(b) applies both to state and federal proceedings.

Finally, the plaintiffs argue that if the Reform Act's automatic discovery stay (15 USC § 77z-1[b][1]) applies, state court practices and procedures would be constrained, including without limitation that the court could not order a preliminary conference or direct a case to mediation, and the case could not even be assigned to the Commercial Division (see 22 NYCRR 202.70 [e]). The argument is wholly without merit.

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, Rules of Practice for the Commercial Division rule 11(d) (22 NYCRR 202.70[g]) 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 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 Federal Rules of Civil Procedure. 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 (Cyan, 583 US at ___, 138 S Ct at 1073 ["SLUSA ensured that federal courts would play the principal role in adjudicating securities class actions"]).

Accordingly, discovery is stayed pursuant to 15 USC § 77z-1(b)(1) and the parties are directed forthwith to a conference to finalize a briefing schedule for the pending motion to dismiss.