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Seventh Circuit Clarifies Limits of SLUSA Discovery Stay

By Effie D. Silva, Litigation News Associate Editor – January 20, 2011

A recent decision from the U.S. Court of Appeals for the Seventh Circuit rejected a city’s attempt to use a discovery stay authorized by federal securities law to avoid responding to a plaintiff’s public records request made during litigation. American Bank v. City of Menasha [Wisconsin]. The decision serves as a reminder to lawyers that they can and should investigate cases by means other than formal discovery.


City Avoids Producing Public Records
American Bank filed a securities class action lawsuit against the city of Menasha in federal court, stemming from bonds the city issued to finance the conversion of an electric power plant to a coal-fired, steam-generating plant. The project ended up costing more than three times the initial estimate, and the city eventually defaulted on the bonds. American Bank was a bond-holder.


Shortly after the class action lawsuit was filed, American Bank requested public records from the city pursuant to Wisconsin’s Public Records Law. When the city failed to produce the records, the bank obtained an order compelling production from a Wisconsin state court in a separate proceeding.


Instead of responding to the public records request, the city asked the federal district court in Indiana, where the class action was filed, to stay the Wisconsin state court proceedings under a provision of the Securities Litigation Uniform Standards Act of 1998 (SLUSA). The district court observed that “SLUSA permits a Federal court to stay discovery proceedings in any private action in a State Court as necessary in aid of its jurisdiction, or to protect or effectuate its judgments.”


The district court granted the city’s motion and stayed the “discovery” proceedings in the Wisconsin state court. The order prohibited the class plaintiffs, led by American Bank, from gaining access to public records in the custody of Menasha.


Discovery Stay Does Not Stop Public Records Requests
On appeal, the Seventh Circuit analyzed whether SLUSA authorizes a district court to enjoin a private securities plaintiff from gaining access to records pursuant to a state’s public records law. The Wisconsin law entitles members of the public to see and copy public records at their own expense.


American Bank contended that “inspecting public records pursuant to a state statute is not discovery within the meaning of the [SLUSA] stay provision.” It argued that a stay of such an inspection constitutes an “injunction against enforcement of a state law and is appealable as such.”


The city, on the other hand, argued that because the bank was engaged in discovery, it could not appeal the stay unless it invoked one of the exceptions to the rule against interlocutory appeal of discovery orders. The city apparently made a strategy decision to completely ignore the state public records law in its brief. The Seventh Circuit sharply criticized this tactic in its slip opinion [PDF] as “silly” and “unprofessional” advocacy, but later amended [PDF] the opinion to remove those specific words.


The Seventh Circuit concluded that SLUSA does not authorize the district court to enjoin a private securities plaintiff from gaining access to public records. The court noted that “[t]he word ‘discovery’ is not a synonym for investigation.” It further noted that litigants investigate claims through a variety of resources outside of traditional discovery, such as public records requests.


The appellate court reasoned that a key purpose of authorizing stays of state court discovery proceedings relating to federal securities litigation is to prevent “settlement extortion.” This type of extortion occurs when a plaintiff uses parallel state court discovery proceedings to drive up costs for defendants in federal securities litigation to “force a settlement.” Those policy concerns were not present when American Bank requested public records because, under Wisconsin law, the requesting party bears the costs of responding to those requests.


Ignoring the Opponent’s Arguments Leads to Criticism
“Judge Posner’s unflattering description of the city’s brief,” says Ian H. Fisher, Chicago, cochair of the ABA Section of Litigation’s Pretrial Practice and Discovery Committee, “provides an example of what not to do as an advocate: Don’t ignore your opponent’s argument.” “By refusing to even acknowledge the existence of a state law on public records disclosure,” continues Fisher, “the city only drew attention to its heavy handed approach to the plaintiff’s request for public records.”


“The city’s arguments may have been better received by the circuit if [the city] had not taken some of the extreme positions that it did,” adds Elizabeth B. Shirley, Birmingham, cochair of the Section of Litigation’s Technology for the Litigator Committee. Shirley observes that, “the city provided an important reminder for us, as advocates, which is not to shy away from confronting the opposing party's position. Here, the city did just that by failing to cite or mention the public-records law at issue, as though failing to recognize it minimized or eliminated its existence.”


Young Lawyers, Listen Up
“Young lawyers can definitely learn from this opinion,” says Laura McLaughlin, St. Louis, cochair of the Section’s Business Torts Litigation Committee. “First, you always need to cite or at least mention the law,” says McLaughlin. She also notes that the city’s brief “did not even mention the state law it was asserting was pre-empted by SLUSA.”


“Next,” says McLaughlin, “you can’t limit your investigation of an opponent to discovery. As mentioned by Judge Posner, investigation includes talking to people, reading newspaper accounts, studying past judicial and administrative proceedings, and trolling the web. All these activities are within the norm for gathering information in litigation,” says McLaughlin. “At a minimum,” she concludes, “in most every case one should always review the opposition’s public records to discover facts, help craft discovery requests, and find out how judgment proof the party might be.”


“The case was correctly decided,” says Fisher. “One need not even consider the federalism or First Amendment issues—Congress did not appear to intend to prevent a securities plaintiff from investigating its case outside of formal federal discovery,” he adds.


Keywords: Litigation, Seventh Circuit, SLUSA, discovery


 
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