Calcaterra v. Garrabrants et al

Filing 125

ORDER Denying 118 Motion to Stay; and Denying 119 as Moot Motion for Extension of Time to File Amended Complaint. Within 21 days of the date of this order, Plaintiffs shall file an amended complaint. Signed by Judge Gonzalo P. Curiel on 8/21/18. (dlg)

1
2
3
4
5
6
7
8

UNITED STATES DISTRICT COURT

9

SOUTHERN DISTRICT OF CALIFORNIA

10
11
12

IN RE BofI HOLDING, INC.
SHAREHOLDER LITIGATION

Case No.: 3:15-cv-02722-GPC-KSC
ORDER:

13
(1) DENYING MOTION TO STAY
[ECF No. 118]; and

14
15

(2) DENYING AS MOOT MOTION
FOR EXTENSION OF TIME TO
FILE AMENDED COMPLAINT
[ECF No. 119]

16
17
18
19
20
21
22
23
24
25
26
27

I.

Background

This shareholder derivative action was first filed on December 3, 2015. (ECF No.
1.) On June 9, 2016, the Court granted a motion to consolidate this case with several
others. (ECF No. 31.) On August 26, 2016, Plaintiffs filed the first consolidated
complaint. (ECF No. 36.)
On March 1, 2017, the Court granted Defendants’ motion to dismiss the first
consolidated complaint on the ground that the complaint failed to allege demand futility.
(ECF No. 54.) The Plaintiffs responded by filing an amended shareholder complaint (the
“ASC”) on April 10, 2017. (ECF No. 65.) Defendants again moved to dismiss on the

28
1
3:15-cv-02722-GPC-KSC

1

ground of demand futility. (ECF No. 68.) Because of an intervening change of the

2

membership of BofI’s Board of Directors, the Court found that Plaintiffs had adequately

3

alleged demand futility. (ECF No. 75.)

4

On March 7, 2018, Defendants filed a motion for judgment on the pleadings in

5

which they asserted that the ASC’s substantive allegations of liability were inadequate.

6

(ECF No. 95.) The Court granted the motion in part, concluding that a sizeable portion

7

of Plaintiffs’ claims was unripe because it was based on liability BofI might have to pay

8

in the future in two separate cases: (1) a whistleblower protection lawsuit filed by former

9

BofI employee Charles Matthew Erhart, which is pending before a different judge in this

10

district, and (2) a related securities class action, which this Court had recently dismissed

11

for failure to allege loss causation, and which is now on appeal. The Court also

12

concluded that the ASC’s allegations describing BofI’s harm were, for the most part, too

13

vague to support Article III standing. The Court determined that the only claim in the

14

ASC (1) for which BofI’s injury was not contingent upon the outcome of other litigation

15

and (2) that “identifie[d] an actual concrete injury sufficient to support an assertion of

16

Article III standing” was Plaintiffs’ claim that alleged wrongdoing by four of Defendants

17

caused BofI to have to engage in an internal investigation into allegations of wrongdoing

18

originally reported by Erhart. (Id. at 21–27.)

19

At the end of its ruling, the Court noted that Plaintiffs had two options in how to

20

respond to the Court’s decision: (1) “proceed only on the claims relating to actions by

21

Defendants that caused BofI to investigate Erhart’s allegations,” or (2) “seek a stay of

22

this case until the unripe claims become ripe, at which time the Court can proceed with

23

all of Plaintiffs’ surviving claims at the same time.” (Id. at 27.) The Court nonetheless

24

ordered Plaintiffs, regardless of their choice between those two options, to amend the

25

ASC. This was because the ASC was so prolix that it failed to comply with Federal Rule

26

of Civil Procedure 8. Such a second amended complaint, the Court ordered, must (1) “be

27

confined to relevant allegations of wrongdoing,” and (2) name as defendants only those

28

“against whom specific conduct is alleged.” (Id.)
2
3:15-cv-02722-GPC-KSC

1

Plaintiffs have filed a motion to stay this case until the conclusion of the Erhart

2

and securities fraud lawsuits. (ECF No. 118.) Plaintiffs have also filed a motion for a

3

“deferral” of the deadline to file a second amended consolidated complaint, asking the

4

Court to extend that deadline until 30 days after the proposed stay is lifted. (ECF No.

5

119.) Defendants oppose both motions. (ECF Nos. 121, 123.) For the reasons set forth

6

below, the Court finds that under Supreme Court and Ninth Circuit case law, the stay

7

proposed by Plaintiffs is not appropriate.

8

II.

9

Federal district courts have an inherent power to issue stays of cases before them.

Legal Standard

10

The Supreme Court appears to have first described this power in Landis v. North

11

American Co., 299 U.S. 248 (1936). There, the Court explained that “the power to stay

12

proceedings is incidental to the power inherent in every court to control the disposition of

13

the causes on its docket with economy of time and effort for itself, for counsel, and for

14

litigants.” Id. at 254.

15

The Landis Court nonetheless explained that district courts must follow at least

16

two guidelines when evaluating a request to stay a pending case. First, the party

17

requesting the stay “must make out a clear case of hardship or inequity in being required

18

to go forward, if there is even a fair possibility that the stay for which he prays will work

19

damage to some one else.” Id. at 255. The Ninth Circuit has, on multiple occasions,

20

emphasized this requirement. See Dependable Highway Express, Inc. v. Navigators Ins.

21

Co., 498 F.3d 1059, 1066 (9th Cir. 2007) (“Landis cautions that ‘if there is even a fair

22

possibility that the stay . . . will work damage to some one else,’ the stay may be

23

inappropriate absent a showing by the moving party of ‘hardship or inequity.’”); Lockyer

24

v. Mirant Corp., 398 F.3d 1098, 1109–13 (9th Cir. 2005) (quoting this requirement and

25

holding that “the balance of hardships between the parties” did not justify a stay). In

26

Dependable Highway Express, the court held that the district court committed an error of

27

law by ignoring this test. 498 F.3d at 1067 (“Because[, inter alia,] the stay is likely to do

28

damage to Dependable [who opposed the stay], . . . the district court misapplied
3
3:15-cv-02722-GPC-KSC

1

Landis . . . , committing an error of law which rendered the order an abuse of

2

discretion.”).
Second, the stay’s duration must be reasonable. In Landis, the district court’s stay

3
4

was to be lifted only after the separate lawsuit on which the stay was based passed

5

Supreme Court review. 299 U.S. at 253. The Landis Court held that imposing a stay of

6

that length was an abuse of the district court’s discretion. It explained that the related

7

litigation had been proceeding for at least a year, and that “with the possibility of an

8

intermediate appeal to the Circuit Court of Appeals, a second year or even more may go

9

by before this court will be able to pass upon the” relevant issues.1 Id. at 256. The Ninth

10

Circuit has reformulated this discussion into the following test: “A stay should not be

11

granted unless it appears likely the other proceedings will be concluded within a

12

reasonable time in relation to the urgency of the claims presented to the court.” Leyva v.

13

Certified Grocers of Cal., 593 F.2d 857, 864 (9th Cir. 1979).

14

In light of Landis, the Ninth Circuit has characterized the three considerations a

15

district court should take into account before entering a stay as follows: (1) “the possible

16

damage which may result from the granting of a stay,” (2) “the hardship or inequity

17

which a party may suffer in being required to go forward,” and (3) “the orderly course of

18

justice measured in terms of the simplifying or complicating of issues, proof, and

19

questions of law which could be expected to result from a stay.” CMAX, Inc. v. Hall, 300

20

F.2d 265, 268 (9th Cir. 1962).

21

III.

22

Before engaging in the analysis described above, the Court finds it necessary to

Discussion

23
24
25
26
27
28

1

It should also be noted that the Landis Court expressly rejected the assertion that the stay was
reasonable because the party opposing the stay could later ask to vacate the stay if it became
“oppressive.” Id. at 257 (“The stay is immoderate and hence unlawful unless so framed in its inception
that its force will be spent within reasonable limits, so far at least as they are susceptible of prevision and
description. . . . [A]n order which is to continue by its terms for an immoderate stretch of time is not to
be upheld as moderate because conceivably the court that made it may be persuaded at a later time to
undo what it has done.”).
4
3:15-cv-02722-GPC-KSC

1

reject out of hand two assertions made by Defendants in their opposition to the Plaintiffs’

2

stay motion. First, Defendants argue that the Court lacks the power to stay this case

3

because, at this moment, there is no operative pleading. That is incorrect. In its ruling on

4

Defendants’ motion for judgment on the pleadings, the Court did not dismiss the entire

5

ASC. Rather, the Court granted Defendants’ motion in part. While the Court did order

6

Plaintiffs to re-work the complaint—because the ASC’s length and inclusion of irrelevant

7

information made evaluation of the surviving claims too difficult—the Court did not

8

dismiss the ASC in its entirety. Second, Defendants assert that the stay requested by

9

Plaintiffs is “indefinite.” That is also incorrect. The stay, as proposed, would last until

10

the conclusion of both the Erhart and securities fraud lawsuits. (ECF No. 118-1 at 3.2)

11

Upon consideration of the relevant factors and standards, however, the Court

12

concludes that the stay proposed by Plaintiffs is not appropriate. Defendants’ entitlement

13

to reasonably speedy resolution of serious claims against them would be harmed by the

14

proposed stay. The trial in Erhart is currently set for almost a year from now. See Erhart

15

v. BofI Holding, Inc., No. 3:15-cv-02287-BAS-NLS, ECF No. 62 at 5 (setting a trial date

16

of June 11, 2019). If the judgment in that case is appealed, the delay would be

17

substantial. As for the securities fraud litigation, a delay could be even longer. The issue

18

currently on appeal in that case is whether the plaintiffs’ allegations of loss causation

19

were sufficient to state a claim for securities fraud. The notice of appeal on that issue

20

was only recently filed, and no argument has been scheduled. See In re BofI Holding,

21

Inc. Secs. Litig., No. 18-55415 (9th Cir.). If the Ninth Circuit reverses the Court’s

22

dismissal, the merits of that lawsuit will not be determined until years from now. If, on

23

the other hand, the Ninth Circuit affirms the Court’s dismissal of that case on the basis of

24

the plaintiffs’ failure to plead loss causation, a stay based on that litigation would have

25

been pointless. Thus, while the proposed stay is not “indefinite” as Defendants suggest,

26
27
28

2

References to specific page numbers correspond to the pagination provided by the CM/ECF system.
5
3:15-cv-02722-GPC-KSC

1

its potential length appears to be unreasonable.

2

The Court recognizes that some district courts in this circuit have suggested that

3

such a general assertion of harm—that is, that a “cloud” will hang over Defendants

4

during the pendency of a stayed lawsuit—is inadequate to oppose a stay. In Aliphcom v.

5

Fitbit, Inc., for example, the district court rejected such an assertion of prejudice as

6

“inadequately articulated.” 154 F. Supp. 3d 933, 937–38 (N.D. Cal. 2015). But even if

7

those courts’ view is correct, Defendants here have identified a specific harm that delayed

8

resolution of this case will cause them: a stay here would affect their professional

9

interests because they must list pending litigation on all “loan applications, licensure

10

applications and applications to serve on corporate boards.” (ECF No. 121 at 7.)

11

As for Plaintiffs, they have not demonstrated that the requested stay will prevent

12

“hardship or inequity” on their end. Landis, 299 U.S. at 255. The Court is unpersuaded

13

by Plaintiffs’ arguments to the contrary. First, Plaintiffs claim that a stay would ensure

14

that BofI obtains “complete relief” in light of the fact that many of the claims they wish

15

to assert are “contingent upon the outcome of the Whistleblower Action and the

16

Securities Class Action.”3 (ECF No. 124 at 7.) The Court does not see how this is so.

17

Proceeding with the currently ripe and properly alleged claims in this case now will not

18

harm BofI’s ability to recoup all the damages to which it eventually might be entitled. If

19

either (or both) of the Erhart or securities fraud actions conclude in those plaintiffs’

20

favor, Plaintiffs in this case will be able to pursue claims against Defendants based on

21

that liability. If, by that time, this litigation is still ongoing, Plaintiffs could add those

22

claims in this case. If this litigation has since concluded by the time those additional

23

claims becomes ripe, Plaintiffs may file a new suit.
Moreover, proceeding with Plaintiffs’ currently ripe claims now—rather than

24
25
26
27
28

3

Because this is a derivative shareholder suit, the Court must take particular account of the interests of
BofI, the corporation on whose behalf Plaintiffs are taking action. Rosenblum ex rel. Amgen, Inc. v.
Sharer, No. CV 07-6140 PSG (PLAx), 2008 WL 9396534, at *8 (C.D. Cal. July 28, 2008).
6
3:15-cv-02722-GPC-KSC

1

waiting years for the other lawsuits to conclude—might allow BofI to obtain some relief

2

much sooner, which would be in the company’s interest. Any costs BofI avoids by

3

staying this litigation would be counteracted by the delay in BofI being able to recoup

4

any losses resulting from the alleged conduct underlying Plaintiffs’ claims. This case is

5

already old: come December, it will begin its fourth year. BofI’s countervailing interest

6

in timely obtaining at least some recompense as a result of Defendants’ alleged

7

wrongdoing limits any benefits the proposed stay could provide to Plaintiffs. As a result,

8

Plaintiffs have “not made out [the] ‘clear case of hardship or inequity’” necessary to

9

show the appropriateness of their proposed stay. Lockyer, 398 F.3d at 1112 (quoting

10
11

Landis, 299 U.S. at 255).
The factors just discussed make the circumstances here unlike those in the cases

12

cited by Plaintiffs, in which the courts found it appropriate to stay a derivative action

13

during the pendency of a related securities fraud action. See In re First Solar Deriv.

14

Litig., No. CV-12-00769-PHX-DGC, 2012 WL 6570914 (D. Ariz. Dec. 17, 2012); In re

15

Ormat Techs., Inc., No. 3:10-cv-00177-ECR-RAM, 2011 WL 3841089 (D. Nev. Aug. 29,

16

2011); Rosenblum ex rel. Amgen, Inc. v. Sharer, No. CV 07-6140 PSG (PLAx), 2008 WL

17

9396534 (C.D. Cal. July 28, 2008). Those cases presented run-of-the-mill circumstances

18

of parallel securities fraud and derivate lawsuits in which the securities fraud litigation

19

was proceeding on the merits in the district court at the time the stay was requested. First

20

Solar, 2012 WL 6570914, at *1–2; Ormat Techs., 2011 WL 3841089, at *1–3;

21

Rosenblum, 2008 WL 9396534, at *1. Notably, in all three of those cases, the district

22

judge assigned to the derivative case was also handling the securities fraud case. The

23

judges in those cases were in a good position to ensure that the underlying securities case

24

to which the stay was tied proceeded expeditiously. Indeed, the court in First Solar

25

relied on this fact in finding that the stay was appropriate. 2012 WL 6570914, at *2

26

(“Plaintiffs argue that the corporation will be harmed by a stay because their litigation

27

could be delayed for years. The Court has no intention of permitting the [securities] class

28

action to be litigated for years. The Court will set a vigorous schedule for resolution of
7
3:15-cv-02722-GPC-KSC

1

the class action and will hold th[e] parties to that schedule. Indefinite delay will not

2

occur.” (emphasis added)). Here, by contrast, both cases on which the proposed stay

3

would rely are at this moment out of this Court’s hands. While the undersigned is

4

assigned to the securities fraud action, an appeal of its dismissal, on non-merits grounds,

5

is pending before the Ninth Circuit. More importantly, the Erhart action is assigned to a

6

different judge in this district; the undersigned has no control over the proceedings in that

7

suit.

8
9

As a final matter, the Court does not agree with Plaintiffs that granting the
proposed stay would be in the interest of efficiency. As just discussed, courts have found

10

that a stay would promote efficiency when pending before them are parallel securities

11

fraud and derivative suits. Staying the derivative suit in that scenario promotes efficiency

12

because it prevents the need for the parties and the Court to litigate two cases at the same

13

time, will likely lead to a narrowing of the issues in the derivative suit, and limits the

14

possibility of inconsistent judgments. See, e.g., First Solar, 2012 WL 6570914, at *2.

15

But here, there are three items of litigation that must be considered, all of which are on

16

separate timelines. What’s more, at this moment, the relationship between this suit and

17

the securities fraud action cannot be described as parallel; it is—to continue the math

18

analogy—orthogonal. It is true that the outcomes of the Erhart and securities fraud cases

19

might narrow the issues in this case. But it is also very possible that they will not. If the

20

plaintiffs in those cases both lose, a stay of this case will have been for nothing.

21

Permitting cases to languish on the Court’s docket, even when stayed, is also a drain on

22

this Court’s resources. In all, the Court is not persuaded that any potential efficiency

23

gains are weighty enough to make an otherwise inappropriate stay appropriate.

24

IV.

25

The Court concludes that a stay of this case is not warranted. The Court DENIES

Conclusion

26

Plaintiffs’ motion to stay. As a result, the Court DENIES as moot Plaintiffs’ motion to

27

defer the deadline to file a second amended complaint until the proposed stay is lifted.

28

Within 21 days of the date of this order, Plaintiffs shall file an amended complaint.
8
3:15-cv-02722-GPC-KSC

1
2

IT IS SO ORDERED.
Dated: August 21, 2018

3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
9
3:15-cv-02722-GPC-KSC