In Matter of GreenSky, Inc. Sec. Litig., Justice Jennifer G. Schecter of the Commercial Division denied defendants’ motion to stay the state court action pending resolution of a later-filed, federal action involving virtually identical claims made under the Securities Act of 1933 (“1933 Act”).[1]  Justice Schecter did grant defendants’ alternative request for a stay of discovery pending the court’s decision on their motion to dismiss.  The court’s decision addressed: 1) whether state courts should stay 1933 Act cases in deference to federal cases involving similar claims; and 2) whether the Private Securities Litigation Reform Act of 1995 (the “Reform Act”) requires a stay of discovery in state court pending the court’s decision on a motion to dismiss.

Factual Background

On November 12, 2018, the first of multiple class actions concerning GreenSky, Inc. (“GreenSky”) was filed in New York Supreme Court.[2]  GreenSky involved claims under Sections 11, 12(a)(2), and 15 of the 1933 Act, concerning statements made in connection with GreenSky’s initial public offering.  Later that month, on November 27, 2018, a federal action was filed in the Southern District of New York involving virtually identical 1933 Act claims.[3] 

Defendants in GreenSky moved for a stay in deference to the subsequently filed federal court action.[4]  Alternatively, they sought a stay of discovery until the state court ruled on defendants’ motion to dismiss.[5]

Justice Schecter’s Opinion

Stay Pending Federal Action

First, the Commercial Division addressed whether to grant a stay in deference to the federal action.  At the outset, the Court noted that the Commercial Division was plaintiffs’ first choice of forum.[6]  As a result, there was no basis for a stay in favor of federal court adjudication.[7]   The Court explained that the U.S. Supreme Court had made clear in Cyan, Inc. v. Beaver County Employees Retirement Fund that state courts can preside over 1933 Act cases and that “Congress barred their removal to federal court so if a plaintiff chooses to bring a 1933 Act suit in state court, the defendant generally cannot change the forum.”[8]  Justice Schecter reasoned that it would undermine the principle espoused in Cyan to grant a stay in deference to federal court proceedings without a compelling reason to do so.[9]  The Court also noted that “[s]tate courts are just as capable” of dealing with 1933 Act cases as are federal courts, which had handled most of those cases prior to Cyan.[10]

The Court distinguished the circumstances in GreenSky from those in Gordon v. Gridsum Holding Inc.[11]  In Gordon, plaintiff’s counsel chose to file a 1933 Act claim in federal court first and, only after losing a bid to serve as lead-counsel, refiled in state court.[12]  The Court explained that in Gordon, “[a] stay was warranted to avoid incentivizing gamesmanship.”[13]  In contrast, the GreenSky plaintiffs had not filed in federal court prior to bringing their action in state court.[14]  Accordingly, the Commercial Division concluded that there was “no reason not to honor [plaintiffs’] selection of state court for resolution of their 1933 Act claims.”[15]  Defendants’ motion to stay the action was thus denied.

Stay of Discovery

Next, the court addressed defendants’ alternative request to stay discovery pending resolution of their motion to dismiss.  As Justice Schecter noted, courts in New York County are split on whether the stay set forth in the Reform Act necessarily applies to state proceedings.[16]

The Court explained that it was “not convinced that the [Reform Act] by its terms, expressly mandates a stay in state court,” but explained that “where ‘discovery is an integral part of the legal framework governing’ proceedings, the rules of the jurisdiction giving rise to the substantive cause of action apply in New York”[17]  The Commercial Division acknowledged that “[t]he important purpose underlying enactment of the [Reform Act’s] automatic stay—ensuring that cases have merit at the outset-should not be disregarded merely because a federal cause of action is being prosecuted in state court.”[18]  Thus, the Court concluded that given this policy, it was appropriate to stay discovery until the Court rules on defendants’ motion to dismiss.[19]

Conclusion

Justice Schecter held that where a 1933 Action is first filed in state court, staying that action in deference to a later-filed federal action is inappropriate absent good cause for doing so.  Underlying the Court’s decision is the principle that state courts should honor a plaintiff’s selection of a state court as the forum in which to litigate their 1933 Act claims.  The Commercial Division also held that staying discovery until it had decided defendants’ motion to dismiss was in line with the Reform Act’s purpose of conducting an early review of securities cases to determine if they have merit before allowing what can be broad and expensive discovery.