Kirschner v. JP Morgan Chase Bank, N.A.

Background

The plaintiff is the trustee of a post-bankruptcy litigation trust. The trust’s beneficiaries purchased debt instruments issued as part of a $1.775 billion syndicated leveraged loan transaction involving Millennium Laboratories LLC. Millennium later filed for bankruptcy, and the bankruptcy plan created the trust on whose behalf the plaintiff brought claims against the defendants.

The plaintiff’s New York action asserts state securities-law claims and claims for negligent misrepresentation, breach of fiduciary duty, breach of contract, and breach of the implied covenant of good faith and fair dealing. The defendants removed the case to federal court under the Edge Act. The district court denied the plaintiff’s motion to return the case to New York State court.

A related action was pending in the United States Bankruptcy Court for the District of Delaware. In that action, the trust sued to recover $35 million in fees that the defendants or their affiliates allegedly received for underwriting the leveraged loan transaction. Discovery was already taking place in that action, and the defendants had produced more than 87,000 documents from 35 custodians in the New York action.

Request to Stay Discovery

The defendants asked that discovery in the New York action remain limited to discovery taking place in the Delaware action unless and until the district court denied their motion to dismiss. The court treated that request as a motion to stay discovery while the motion to dismiss was pending.

The plaintiff proposed a protocol under which document discovery in the New York action would catch up with the Delaware discovery so that party and non-party witnesses could proceed in both actions without unnecessary duplication. The plaintiff sought additional documents concerning Millennium and the defendants’ leveraged-loan and high-yield businesses.

Court’s Analysis

The court explained that filing a motion to dismiss does not automatically stop discovery, except in cases covered by the Private Securities Litigation Reform Act. Under Federal Rule of Civil Procedure 26(c), a court may stay discovery for good cause. The court considered three factors: whether the defendants made a strong showing that the claims were unmeritorious, the breadth and burden of discovery, and the risk of unfair prejudice to the party opposing the stay.

First, the defendants argued that the syndicated term loan was not a “security,” which they said would require dismissal of the state securities-law claims. The court found that the argument was not frivolous, but noted the district court’s earlier preliminary view that it was unlikely the motion to dismiss would be granted in its entirety. The court also noted that the security-status issue was not necessarily determinative of the plaintiff’s five common-law claims. This factor therefore weighed against staying discovery.

Second, the court found that the defendants had not adequately explained how extensive or burdensome the requested discovery would be. The defendants identified one request covering a five-year period but did not explain why it was overbroad, irrelevant, or unduly burdensome. The court stated that objections to individual requests could be addressed through the parties’ discussions or, if necessary, a conference with the court. This factor also weighed against a stay.

Third, the court found that delaying discovery could prejudice the plaintiff because witnesses’ memories could fade and the trust could have to use its resources to depose the same witnesses more than once. The court did not consider the burden on the defendants’ witnesses because the defendants were prepared to bear that burden. This factor weighed against a further stay.

Disposition

The court held that a further stay of discovery was not warranted. It denied the defendants’ request and ordered that discovery continue in coordination with the Delaware action. The court also scheduled a case management conference for February 25, 2020, required counsel to meet and confer under Rule 26(f), and required the parties to file a proposed case management plan before the conference.