MICA v. Lichtenstein

• Decision Date: 14 February 1996
• Docket Number: Civil No. 96-0039-B.
• Citation: 917 F. Supp. 717
• Parties: MEDICAL IMAGING CENTERS OF AMERICA, INC., Plaintiff/Appellant, v. Warren G. LICHTENSTEIN, et al., Defendants/Appellees.
• Court: U.S. District Court — Southern District of California

917 F. Supp. 717

MEDICAL IMAGING CENTERS OF AMERICA, INC., Plaintiff/Appellant, v. Warren G. LICHTENSTEIN, et al., Defendants/Appellees.

Civil No. 96-0039-B.

United States District Court, S.D. California.

February 14, 1996.

Peter H. Benzian, Latham & Watkins, San Diego, CA, James W. Baker, Latham & Watkins, San Diego, CA, for plaintiff.

Donald G. Rez, Cynthia A. Fissel, Sullivan, Hill, Lewin, Rez, Engel & Labazzo, San Diego, CA, David E. Bamberger, Olshan, Grundman Frome & Rosenzweig, New York City, Paul Gonson, Securities & Exchange Commission, Washington, DC, as Amicus Curiae, for defendants.

ORDER AFFIRMING THE MAGISTRATE JUDGE'S ORDER STAYING DISCOVERY BY PLAINTIFF/APPELLANT PENDING RESOLUTION OF DEFENDANTS'/APPELLEES' MOTION TO DISMISS

BREWSTER, District Judge.

On February 7, 1996, this Court held a hearing in the above-captioned matter considering Plaintiff's Objection to Magistrate Judge Anthony J. Battaglia's ruling of January 19, 1996, which denied Plaintiff's Motion for Expedited Discovery and granted Defendants' Motion for a Stay of Discovery. Peter H. Benzian, Esq. and James W. Baker, Esq. appeared on behalf of Plaintiff/Appellant, Medical Imaging Centers of America (MICA). Donald G. Rez, Esq., Cynthia A. Fissel, Esq. and David E. Bamberger, Esq. appeared on behalf of the Defendants/Appellees, Warren F. Lichtenstein, et. al. Paul Gonson, Esq. appeared on behalf of the Securities and Exchange Commission, which has entered in this case as Amicus Curiae.

After due consideration of the parties' briefs and arguments in this matter, the Court AFFIRMS the Magistrate Judge's Order.

I. INTRODUCTION

On December 22, 1995, Congress passed the Private Securities Litigation Reform Act of 1995 (hereinafter "Reform Act"). This appeal presents a case of first impression interpreting a provision of these new amendments to the federal securities laws which it is suggested was designed to prevent discovery "fishing expeditions" by plaintiffs.

The parties are before this Court pursuant to an action filed by Appellant alleging various violations of federal and state law by Appellees, and requesting declaratory and injunctive relief. Appellant is seeking, among other things, to enjoin Appellees' continuing violations of disclosure requirements by acquiring shareholders, particularly with respect to a special shareholders meeting scheduled for February 26, 1996, which was called by Appellees pursuant to California Corporations Code §§ 600-601. Appellees have filed a proxy statement and indicated their intention to unseat the current Board of Directors of MICA at this meeting.

On January 10, 1996, following Appellees' call for the special meeting, Appellant filed a Complaint seeking damages alleging (1) violations of Section 13(d) of the Securities Exchange Act (hereinafter "1934 Act"), 15 U.S.C. § 78m(d)(1);¹ and (2) tortious interference with economic relations. In response to Appellant's Complaint, Appellees filed a Motion to Dismiss the Complaint, based on their contention that they have not violated the law as described by Appellant. In preparation for the preliminary injunction hearing, Appellant made a Motion for Expedited Discovery, requesting leave to depose witnesses and gather documents. In response, Appellees filed a Motion to Stay Discovery pending a decision on Appellees' Motion to Dismiss.

The Motion to Stay was based on Section 21D(b)(3)(B) of the newly enacted Reform Act, which provides, in relevant part, that:

In any private action arising under this title, all discovery and other proceedings shall be stayed during the pendency of any 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.

Section 21D(b)(3)(B) of the Reform Act, to be codified at 15 U.S.C. § 78u-4(b)(3)(B) (emphasis added). At the hearing before the Magistrate Judge, Appellant alleged that without expedited discovery it would suffer several harms that amounted to "undue prejudice" and thus it should be exempted from the Section 21D(b)(3)(B) discovery stay. It repeats these arguments here. First, Appellant contends that without concrete evidence of stock ownership by the Appellees, it will be unable to consider the viability of instituting MICA's "poison pill" provisions, discussed supra. In response to questioning by the Court, however, it appears that Appellant is uncertain as to whether it wants to activate the "poison pill" even in the event it were available.² In addition, Appellant alleges that a finding of 13(d) violations on the part of the Appellees subsequent to the February 26th vote would require an "unscrambling of the eggs" in order to rescind the election and reinstate the original Board of Directors, causing harm to the corporation in the interim. Appellant also alleges that if the Appellees gain control of the corporation at the February 26th meeting, the current case maintained by the Appellant corporation will be dismissed and the alleged violations of the federal securities laws will never be adjudicated. Thus, Appellant argues that allowing it to pursue discovery prior to the February 26th vote is necessary to avoid "undue prejudice." After considering the arguments advanced by all parties, the Magistrate Judge denied Appellant's request to lift the statutory stay pursuant to Section 21D(b)(3)(B) of the Reform Act. Appellant now appeals that ruling.

II. STANDARD OF REVIEW

Reconsideration of a magistrate's order is governed by 28 U.S.C. § 636(b)(1)(A) and Fed.R.Civ.P. 72(a). Section 636(b)(1)(A) provides in part that "a judge of the court may reconsider any pretrial matter ... where it has been shown that the magistrate's order is clearly erroneous or contrary to law." Fed.R.Civ.P. 72(a) echoes § 636. Rule 72(a) provides that, "the district judge to whom the case is assigned shall consider such objections and shall modify or set aside any portion of the magistrate judge's order found to be clearly erroneous or contrary to law." Thus, for issues of fact determined by the Magistrate Judge, the District Court review must limit itself to conclusions that are "clearly erroneous." Section 636(b)(1), however, has been interpreted to provide for de novo review by the district court on issues of law. Adolph Coors Co. v. Wallace, 570 F.Supp. 202 (C.D.Cal.1983). Appellant contends that the case at bar presents a mixed question of fact and law. Because the Court agrees that the questions of fact and law in this case are at least closely intertwined and because no transcript of the proceeding below was prepared, the Court has undertaken a de novo review of both the legal and factual findings of the Magistrate Judge.

III. MOTION FOR STAY OF DISCOVERY

At the outset, the Court wishes to emphasize its predominating concerns in this case. First, the Court is concerned with upholding the underlying purpose of the federal securities laws: to preserve a healthy market environment by ensuring full and truthful disclosure of all material information. Second, the Court believes that resolving disputed legal issues ex ante, prior to effected events such as the shareholders meeting that is precipitating the case at bar, is preferable to an ex post resolution of those issues, which may require an "unscrambling of the eggs." As the Supreme Court has noted, "in corporate control contests the stage of preliminary injunctive relief, rather than post-contest lawsuits, `is the time when relief can best be given.'" Piper v. Chris-Craft Indus., 430 U.S. 1, 41-42, 97 S.Ct. 926, 949-50, 51 L.Ed.2d 124 (1976) (citing Electronic Specialty Co. v. International Controls Corp., 409 F.2d 937, 947 (2d Cir.1969) (Friendly, J.)).

A. Standard of Law

At issue in this case is a new section of the 1934 Act, added by the Reform Act, which mandates a stay of discovery whenever a motion to dismiss is pending, unless either or both of two statutorily prescribed exceptions to that mandate apply as follows: (1) "particularized discovery is necessary to preserve evidence" or (2) "to prevent undue prejudice to that party." Section 21D(b)(3)(B) of the Reform Act (emphasis added). No party contends the first exception applies; rather, the issue on this appeal is whether the facts of this case justify application of the second exception so as to permit immediate discovery for Appellant.

"The starting point for interpreting any statute is the plain meaning of the language used by Congress." Lewis v. McAdam, 762 F.2d 800, 804 (9th Cir.1985). See also, Rubin v. United States, 449 U.S. 424, 430, 101 S.Ct. 698, 701, 66 L.Ed.2d 633 (1981). If questions remain after examining the plain language, the Court may attempt to infer Congressional intent. Central Bank of Denver v. First Interstate Bank of Denver, ___ U.S. ___, ___, 114 S.Ct. 1439, 1448, 128 L.Ed.2d 119 (1994). Congress gave very little guidance as to the meaning of Section 21D(b)(3)(B). The legislative history concerning this provision of the new law provides that:

Courts must stay all discovery pending a ruling on a motion to dismiss, unless exceptional circumstances exist where particularized discovery is necessary to preserve evidence or to prevent undue prejudice to a party. For example, the terminal illness of an important witness might require the deposition of the witness prior to the ruling on the motion to dismiss.

Statement of Managers — The "Private Securities Litigation Reform Act of 1995," 141 Cong.Rec. H13699, H13701 (daily ed. Nov. 28, 1995); H.Rep. 104-369, 104th Cong. 1st Sess. at 63 (hereinafter "Statement of Managers").

In considering Appellant's Motion for Expedited Discovery, and Appellees' Motion for a Stay, the Magistrate Judge was required to determine whether granting a stay would cause "undue prejudice" to Appellant. Both Appellant and the SEC have suggested that the Magistrate Judge, rather than applying an "undue prejudice" standard, instead "sadd...