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In re Sunrise Senior Living

October 28, 2008

IN RE SUNRISE SENIOR LIVING, INC. DERIVATIVE LITIGATION


The opinion of the court was delivered by: Reggie B. Walton United States District Judge

This Document Relates To: ALL ACTIONS

MEMORANDUM OPINION

Currently before the court is the plaintiffs' Motion to Partially Lift Discovery Stay ("Pls.' Mot."). The stay at issue was automatically imposed by the Private Securities Litigation Reform Act ("PSLRA") 15 U.S.C. § 78u-4 (2000).*fn1

On behalf of Sunrise Senior Living, Inc. ("Sunrise") and its shareholders, Brockton Contributory Retirement System ("Brockton"), Catherine Molner ("Molner"), and Robert Anderson ("Anderson") (collectively the "plaintiffs") initiated, in this now-consolidated case, separate stockholder-derivative suits on January 19, January 31, and February 5, 2007, against Sunrise, as a "nominal defendant," certain former and current members of its Board of Directors ("the Board"), and some of its former and current executive officers ("the Executives") as individual defendants. Complaint ("Compl.") ¶ 1.*fn2 The plaintiffs' separate suits were consolidated on May 11, 2007, as each of the individual plaintiffs' claims arose "out of the same transactions and occurrences [and] involve[d] the same or substantially similar issues of law and fact." Stipulation and [Proposed] Order Consolidating Cases for All Purposes and Appointing a Leadership Structure ("Stipulation") [D.E. 19] at 5. Brockton, Molner, and Anderson were then appointed lead plaintiffs in the consolidated case. Id. On June 29, 2007, the plaintiffs filed their consolidated complaint against the defendants on behalf of the Sunrise shareholders, alleging "breaches of fiduciary duties, unjust enrichment, statutory and other violations of the law." Compl. ¶ 1. On August 27, 2007, the defendants filed motions to dismiss the consolidated complaint. Rather than responding to those motions, on October 26, 2007, the plaintiffs sought to file an amended consolidated complaint to which the defendants objected. On March 28, 2008, the Court granted the plaintiffs' request to file an amended consolidated complaint. On May 16, 2008, the plaintiffs filed the current motion.

Under the PSLRA, once a defendant moves for dismissal all discovery must be stayed "during the pendency of [the] 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); see also 15 U.S.C. § 77z-1(b)(1).*fn3 The plaintiffs now ask the Court to lift the stay in this action so they may discover documents produced to the Securities and Exchange Commission ("SEC") and documents produced in a parallel lawsuit pending in a Delaware state court (the "Delaware Action").*fn4 Memorandum of Point and Authorities in Support of Plaintiffs' Motion ("Pls.' Mem.") at 1. Although the District of Columbia Circuit has not spoken on this issue, it has been addressed by several District courts. Upon review of these cases, the Court concludes that the circumstances of the instant case do not warrant lifting the stay.

I. Particularized Discovery

The PSLRA requires that the plaintiffs' request for discovery seek "particularized discovery." 15 U.S.C. § 78u-4(b)(3)(B). Here, the plaintiffs seek documents already produced both to the SEC and in the Delaware Action. Plaintiffs' Omnibus Reply Memorandum in Further Support of Their Motion to Partially Lift Discovery Stay ("Pls.' Reply") at 1. They argue that their request is particularized because the

Plaintiffs' requests are sufficiently particular for Defendants to easily copy and produce the documents requested. There is no ambiguity as to what documents are sought in Plaintiffs' request for documents relating to the Special Committee's findings that have been ordered to be produced by Sunrise in the Delaware Action. [In addition,] Plaintiffs' demand for documents that Sunrise has produced to the SEC in the course of the SEC's investigation is likewise sufficiently particularized.

Pls.' Reply at 7 (internal quotation and citation omitted). The plaintiffs therefore reason that ordering production of the documents will not impose an undue burden on the defendants. Id.

The defendants argue in response that the plaintiffs' contention that their discovery request is particularized is inaccurate because Sunrise has produced a significant amount of documents to the SEC, which "involv[e] issues different from those in dispute in this case." Nominal Defendant Sunrise Senior Living, Inc.'s Memorandum in Opposition to Plaintiffs' Motion to Partially Lift Discovery Stay ("Nom/ Def.'s. Opp'n") at 12. "Therefore, in order to produce documents relating to the Plaintiffs' claims, Sunrise would have to review (again) every document provided to the SEC, in order to identify irrelevant documents." Id. Sunrise argues that it would be extremely expensive to engage in another review of those documents, and that in fact, the payment for such discovery expenses is exactly the type of expenditures that Congress sought to avoid in passing the PSLRA. Id.

A request for discovery is "particularized" when it "is necessary to preserve evidence or to prevent undue prejudice to [the moving] party." 15 U.S.C. § 78u-4(b)(3)(B); accord Ross v. Abercrombie & Fitch Co., Nos. 2:05-cv-0819, 0848, 0860, 0879, 0893, 0913, 0959, 0964, 0998, 1084, 2006 WL 2869588, at *2 (S.D. Ohio Oct. 5, 2006) ("[T]he focus of the statutory language is on the need either to preserve evidence in the case (presumably because, if the discovery were not permitted, such evidence would be destroyed) or to prevent undue prejudice to the plaintiff.") (emphasis in original). Moreover, while courts often take into account the burden that would be imposed by the production if the automatic discovery stay is lifted, see, e.g., In re LaBranche Securities Litigation, 333 F. Supp. 2d 178, 183 (S.D.N.Y. 2004), the ease with which the defendant can produce the documents is not the standard for accessing whether a discovery request is particularized, see Ross, 2006 WL 2869588, at *2. Furthermore,

Although courts have considered the goals of the PSLRA and the burden of production on defendants in determining whether to lift stays of discovery, the mere fact that the PSLRA's goals would not be frustrated by the lifting of the stay and the documents at issue already have been provided to the SEC and USAO is not sufficient to warrant lifting the stay. According to express statutory language, the PSLRA's discovery stay may be lifted only if a court finds that doing so is necessary to preserve evidence or prevent undue prejudice. [See]15 U.S.C. § 78u-4(b)(3)(B). Counter to Plaintiffs' contention, even where the goals of the PSLRA are not frustrated and a plaintiff's discovery request is limited to documents already produced to government regulators, courts have refused to lift the discovery stay if the narrow statutory exceptions of evidence preservation or undue prejudice have not been met.

380544 Canada, Inc. v. Aspen Technology, Inc., No. 07 Civ. 1204, 2007 WL 2049738, at * 2 (S.D.N.Y. July 18, 2007). Like the Court in Aspen, this Court finds that a stay under the PSLRA cannot be lifted absent a showing of undue prejudice or a need to preserve evidence, even if lifting the stay may ...


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