Newby v. Enron Corp., 02-20486.
| Decision Date | 30 July 2003 |
| Docket Number | No. 02-20486.,02-20486. |
| Citation | 338 F.3d 467 |
| Parties | Mark NEWBY, et al., Plaintiffs, Jane Bullock; John Barnhill; Don Reiland; Scott Borchart; Michael Mies; et al., Plaintiffs-Appellants, Dr. Robert Stark; Sudie Stark; Delbert H. Stark, Jr.; Henry Boehm, M.D.; Virginia Lake; et al., Appellants, v. ENRON CORPORATION, et al., Defendants, Andrew S. Fastow; Kenneth L. Lay; Jeffrey J. Skilling; Arthur Andersen L.L.P.; David B. Duncan; D. Stephen Goddard, Jr.; Thomas H. Bauer, Defendants-Appellees. Jane Bullock; John Barnhill; Don Reiland; Scott Borchart; Michael Mies; Virginia Acosta; Jim Hevely; Mike Bauby; Robert Moran; Jack Turner; Marilyn Turner; Hal Moorman, Co-Trustee for Moorman, Tate, Moorman & Urquhart Money Purchase Plan and Trust; Milton Tate, Co-Trustee for Moorman, Tate, Moorman & Urquhart Money Purchase Plan and Trust, Plaintiffs-Appellants, Dr. Robert Stark; Sudie Stark; Delbert H. Stark, Jr.; Henry Boehm, M.D.; Virginia Lake; et al., Appellants, v. Arthur Andersen L.L.P., et al., Defendants, Debra A. Cash; Roger Willard, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Gregory Sean Jez (argued), George M. Fleming, Sylvia Gerald Davidow, Fleming
& Associates, Houston, TX, for Plaintiffs-Appellants.
Craig Smyser (argued), Asim M. Bhansali, Smyser, Kaplan & Veselka, Houston, TX, John W. Keker, Keker & Van Nest, San Francisco, CA, for Fastow.
James E. Coleman, Jr., Bruce William Collins, Diane M. Sumoski, Carrington, Coleman, Sloman & Blumenthal, Dallas, TX, for Lay.
Jeffrey William Kilduff, O'Melveny & Myers, McLean, VA, Bruce Hiler, Robert Michael Stern, O'Melveny & Myers, Washington, DC, for Skilling.
Sharon Katz, Davis, Polk & Wardwell, New York City, Andrew Lee Ramzel, Rusty Hardin & Associates, Houston, TX, for Arthur Andersen LLP.
Barry Grattan Flynn, Law Offices of Barry G. Flynn, Houston, TX, for Duncan.
Michael D. Warden, Sidley, Austin, Brown & Wood, Washington, DC, for Goddard.
George William Shepherd, Cruse, Scott, Henderson & Allen, Houston, TX, for Goddard and Cash.
Scott B. Schreiber, Arnold & Porter, Washington, DC, Clayton C. Cannon, Stumpf, Craddock, Massey & Pulman, Houston, TX, for Bauer.
Amelia Toy Rudolph, Sutherland, Asbill & Brennan, Atlanta, GA, for Willard.
Appeal from the United States District Court for the Southern District of Texas.
Before DAVIS, CYNTHIA HOLCOMB HALL* and EMILIO M. GARZA, Circuit Judges.
Plaintiffs in a state court case appeal from the order of the United States District Court in charge of the Enron multi-district litigation staying discovery in their related state court action and enjoining the parties from seeking further injunctions in that case without leave of the district court. Based on our conclusion that the district court was authorized under the Securities Litigation Uniform Standards Act of 1998 and the All Writs Act to issue its orders, we affirm.
The district court in this case is the multi-district litigation transferee for all Enron-related litigation. The lead case for the securities group of cases consolidated under In re Enron is Newby, et al. v. Enron Corp., et al. (Newby). The district judge presiding over these cases has ruled on numerous motions and has been heavily engaged in the considerable task of managing this complex litigation, including issuing a comprehensive pre-trial scheduling order. In addition to the securities cases, the same district judge also presides over a group of cases brought on behalf of Enron employees, which are consolidated into Newby.
Discovery in all cases has been coordinated. Once discovery is authorized, the district court has ordered the parties to confer regarding the establishment of a document depository accessible to the attorneys for all parties. In these early stages of federal court litigation, the district court has ordered defendant Arthur Anderson to segregate, preserve, and protect all writings and other materials relating to Enron and any Enron-related entities. It also denied the federal plaintiffs' request for an order freezing all assets of the defendants in the Newby case. All discovery in Newby is stayed in accordance with the automatic stay provisions of the Private Securities Litigation Reform Act (PSLRA) pending a ruling on Defendants' Motion to Dismiss.1
The underlying lawsuit, Bullock, et al., v. Arthur Anderson, L.L.P., et al., (Bullock), which precipitated the district court order being challenged in this appeal, was filed in the 21st District Court of Washington County, Texas in January 2002 on behalf of thirteen individual plaintiffs. The Bullock case is one of seven separate securities-related lawsuits filed by Appellants' counsel, Fleming & Associates (Fleming), in various Texas state courts. Enron is not a defendant in the Bullock case. Many of the defendants in the Bullock case however are also defendants in the cases consolidated under Newby. The defendants attempted to remove Bullock to the United States District Court for the Western District of Texas, but the case was remanded for lack of subject matter jurisdiction under the Securities Litigation Uniform Standards Act (SLUSA).2
After remand, the Bullock plaintiffs sought permission from the state court to commence discovery. The state court issued a number of rulings. It allowed immediate discovery, rejected a request by the Defendants to coordinate discovery with the Newby litigation and set a schedule that would result in trial in state court before the trial in the federal court. There is no dispute that the discovery sought in Bullock would have fallen squarely within the discovery that may eventually take place in Newby if the plaintiffs survive a motion to dismiss. The Bullock plaintiffs also sought a hearing on a request for temporary injunction to freeze Defendants' assets.
The appellees sought emergency injunctive relief in the United States District Court presiding over Newby. They asked the court to stay all discovery in Bullock, order Appellants' counsel, Fleming, to withdraw their motion for temporary injunction, and prohibit Appellants and Fleming from seeking further temporary injunctions without leave of the court. The district court granted all requested relief, enjoined all discovery in Bullock until it ruled on a motion to dismiss in the Newby case and enjoined Fleming from seeking any injunctive relief in state court without prior leave from the federal district court. The district court specifically found that the orders were "necessary in aid of its jurisdiction, and to protect and effectuate its judgments." The Bullock plaintiffs appeal.
Appellants argue that the district court erred in concluding that 15 U.S.C. § 78u-4(b)(3)(D) gave it the authority to stay discovery in a state court non-class action suit. Relying on legislative history and the language of the statute, they contend that the PSLRA and SLUSA were designed to deal with perceived abuses in securities class actions, not with an individual action like Bullock. Also relying on legislative history and the plain language of the statute, we disagree.
Congress passed the Private Securities Litigation Reform Act in 1997 (PSLRA). (Codified in part at 15 U.S.C. § § 77z-1, 78u-4.) The PSLRA amended the Securities Act of 1933, 15 U.S.C. §§ 77a, et seq. and the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a, et seq. It was enacted in response to an increase in securities fraud lawsuits perceived as frivolous, including shareholder strike suits and other meritless lawsuits. See generally, John F. Olson, David C. Macaffey, Brian E. Casey, Pleading Reform, Plaintiff Qualification and Discovery Stays under the Reform Act, 51 Bus. Law. 1101 (1996); Lander v. Hartford Life & Annuity Ins. Co., 251 F.3d 101, 107 (2d Cir.2001). The automatic stay of discovery under 15 U.S.C. § 78u-4(b)(3)(B) was one of the measures put into place by the PSLRA. The provision reads as follows:
(B) Stay of discovery
In any private action arising under this chapter, 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.
The rationale underlying the stay was to prevent costly "extensive discovery and disruption of normal business activities" until a court could determine whether a filed suit had merit, by ruling on the defendant's motion to dismiss. See Reform Act, 51 Bus. Law at 1101-03. The stay protected defendants from plaintiffs who would use discovery to substantiate an initially frivolous complaint. See H.R. Rep. 369, 104th Cong., 1st Sess. 31, 32 (1995). The PSLRA also incorporated heightened pleading standards.
These safeguards did not have the desired effect. Congress responded with the passage of SLUSA in 1998. House Report 105-640 on SLUSA indicates that following the passage of the PSLRA, the number of securities lawsuits filed in state courts increased substantially. H. Rep. 105-640 (1998). The purpose of SLUSA was "to prevent plaintiffs from seeking to evade the protections that Federal law provides against abusive litigation by filing suit in State, rather than Federal, court." Id. This problem was addressed in SLUSA in two ways: (1) by preempting certain securities fraud class actions brought under state law, and (2) by granting the power to federal court judges to quash discovery in state court actions if discovery in the state case conflicted with an order of the federal court. Id. The purpose of the grant was "to give Federal judges tools to combat abuse of discovery proceedings in individual actions that may be brought in State court." Id. Specifically as to § 78u-4(b)(3)(D) (Subsection 101(a)(2) of SLUSA), the Report states that it —
amends [section 78u-4(b)] to include a provision to prevent plaintiffs from circumventing the stay of discovery under the Reform Act...
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