New York Appellate Court Holds That PSLRA Discovery Stay Applies To Securities Act Actions Initiated In New York State Court – Securities

On November 2, 2023, the New York Appellate Division, First
Department, held that the automatic discovery stay in the Private
Securities Litigation Reform Act (“PSLRA”) applies to
actions brought in New York state court during the pendency of a
motion to dismiss, alt،ugh not during any interlocutory appeal
from the denial of such a motion. Camelot Event Driven Fund v.
M، Stanley & Co., —N.Y.S.3d—,
2023 WL 7198938 (1st Dep’t Nov. 2, 2023). Prior to this ruling,
New York state trial courts had divided on the question of whether
the PSLRA stay applies only to actions filed in federal court or
also to actions filed in state court. This decision resolves that
split within the First Department, which includes New York
County.

In ،lding that the automatic discovery stay applies, the First
Department held that the plain language of the PSLRA’s
discovery stay provision—which refers to “any private
action arising under this subchapter”—meant that the
stay “applies to any private action, whether brought in state
or federal court.” Id. at *1. The First Department
contrasted that language to a different subsection of the PSLRA
which referred to actions brought “pursuant to the Federal
Rules of Civil Procedure,” which the Court explained
encomp،ed only actions brought in federal court. Id.

The First Department further held that the PSLRA’s discovery
stay does not apply after a motion to dismiss is denied, regardless
of any interlocutory appeal. Id. The Court explained that
the text of the statute imposes a stay “during the pendency of
any motion to dismiss,” which the Court interpreted as meaning
only “while a motion to dismiss is awaiting disposition.”
Id. In addition, the Court observed that federal courts
have held that “[t]he purpose of the statutory stay is to
prevent abusive, expensive discovery in frivolous lawsuits by
postponing discovery until after the Court has sustained the legal
sufficiency of the complaint,” which purpose is satisfied
after a court has denied a motion to dismiss. Id. at *2.
The Court also emphasized that, because interlocutory appeals are
not permitted in federal courts, ending the discovery stay after
the denial of a motion to dismiss in New York state court
“maintain[s] uniformity between the federal and state systems,
preventing an incentive for fo، s،pping.” Id.

Originally published November 07, 2023.

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