Lusk v. Life Time Fitness, Inc. et al

Filing 46

MEMORANDUM OPINION AND ORDER denying plaintiff's 29 Motion to Lift Discovery Stay and for Expedited Discovery (Written Opinion). Signed by Judge John R. Tunheim on May 18, 2015. (DML)

UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
MATTHEW LUSK, individually and on behalf
of all others similarly situated,
Plaintiff,
v.
LIFE TIME FITNESS, INC., BAHRAM
AKRADI, GILES H. BATEMAN, JACK W.
EUGSTER, GUY C. JACKSON, JOHN K.
LLOYD, MARTHA A. MORFITT, JOHN B.
RICHARDS, and JOSEPH S. VASSALLUZZO,

Civil No. 15-1911 (JRT/JJK)

MEMORANDUM OPINION
AND ORDER DENYING
MOTION TO LIFT
DISCOVERY STAY AND FOR
EXPEDITED DISCOVERY

Defendants.
Kai H. Richter and Carl F. Engstrom, NICHOLS KASTER, PLLP, 4600
IDS Center, 80 South Eighth Street, Minneapolis, MN 55402; Jason M.
Leviton and Mark A. Delaney, BLOCK & LEVITON LLP, 155 Federal
Street, Suite 400, Boston, MA 02110; James M. Ficaro, THE WEISER
LAW FIRM, P.C., 22 Cassatt Avenue, First Floor, Berwyn, PA 19312,
for plaintiff.
Wendy J. Wildung, Matthew B. Kilby, and Justin P. Krypel, FAEGRE
BAKER DANIELS LLP, 90 South Seventh Street, Suite 2200,
Minneapolis, MN 55402, for defendants Life Time Fitness, Inc., Giles H.
Bateman, Jack W. Eugster, Guy C. Jackson, John K. Lloyd, Martha A.
Morfitt, John B. Richards, and Joseph S. Vassalluzzo.
Peter W. Carter and James K. Nichols, DORSEY & WHITNEY LLP, 50
South Sixth Street, Suite 1500, Minneapolis, MN 55402, for defendant
Bahram Akradi.
Plaintiff Matthew Lusk (“Lusk”) – a shareholder of defendant Life Time Fitness,
Inc. (“Life Time”) – filed this action on April 10, 2015 against Life Time and its Board of

30

Directors,1 challenging the proposed sale of Life Time to a consortium of investors led by
Leonard Green & Partners, L.P. (the “LGP Group”). Specifically, Lusk alleges that the
sale price of $72.10 per share is unfair and that the proxy materials regarding the
upcoming June 4, 2015 shareholder vote to approve the sale are materially misleading, in
violation of federal securities laws. Lusk argues that Life Time has failed to disclose
material facts about the economic interests of Life Time Chief Executive Officer
(“CEO”) Bahram Akradi (“Akradi”) in the proposed sale, including details about the
Rollover Agreement Akradi signed that would allow him to roll over his shares in Life
Time into the surviving corporate entity. Moreover, Lusk claims that Life Time failed to
disclose adequately the value of its real estate holdings. Lusk seeks to stop the sale and,
in a pending preliminary injunction motion, asks the Court to enjoin the June 4, 2015
shareholder meeting and vote.
In this motion, Lusk asks the Court to lift the discovery stay imposed by the
Private Securities Litigation Reform Act (“PSLRA”) and order expedited, limited
discovery that would take place prior to the Court’s hearing on Lusk’s preliminary
injunction motion. Specifically, Lusk seeks to depose Akradi regarding his interest in the
proposed sale and seeks the production of the following documents:
(i) the Rollover Agreement between [Akradi] and [the LGP Group], which
sets forth the terms of Akradi’s investment in the corporate entity that
survives the Proposed Transaction (the “Surviving Corporation”), including
drafts thereof; (ii) the CEO Term Sheet which defines the terms of Akradi’s
post-merger employment with the Surviving Corporation, including drafts
1

The Court will refer to Life Time, and the following independent director defendants, as
the “Life Time Defendants”: Bateman, Eugster, Jackson, Lloyd, Morfitt, Richards, and
Vassalluzzo.
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thereof; and (iii) any appraisals or attempts to determine the value of Life
Time Fitness, Inc.’s real estate holding within the last five years.
(Pl.’s Mot. to Lift Disc. Stay & for Expedited Disc. at 2, May 8, 2015, Docket No. 29.)
Because Lusk has not shown that he will face undue prejudice absent discovery, the
Court will deny Lusk’s motion to lift the discovery stay and for expedited discovery.

DISCUSSION
In cases like this one alleging violations of the federal securities laws, the PSLRA
states that “all discovery . . . 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.” 15 U.S.C.
§ 78u-4(b)(3)(B). The parties agree that the stay applies here, even though no motion to
dismiss has been filed, because the Life Time Defendants intend to file a motion to
dismiss.2 Sedona Corp. v. Ladenburg Thalmann, No. 03-3120, 2005 WL 2647945, at *2
n.1 (S.D.N.Y. Oct. 14, 2005) (“There is no dispute that the PSLRA stay of discovery
applies when an initial motion to dismiss is contemplated, but has not yet been filed.”).
Because Lusk is not alleging that lifting the discovery stay is necessary to preserve
evidence, the key issue is whether allowing discovery is necessary “to prevent undue
prejudice to” Lusk. 15 U.S.C. § 78u-4(b)(3)(B). Courts interpreting the PSLRA have
held that “undue prejudice” means “improper or unfair treatment amounting to something
less than irreparable harm.” In re Bank of Am. Corp. Sec., Derivative, & ERISA Litig.,
2

(See Pl.’s Mem. of Law in Supp. of Mot. to Lift Disc. Stay & for Expedited Disc. (“Pl.’s
Mem.”) at 3-4, May 8, 2015, Docket No. 31; Life Time Defendants’ Mem. of Law in Opp’n to
Pl.’s Mot. (“Defs.’ Mem.”) at 9 n.5, May 13, 2015, Docket No. 35.)
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No. 09 MDL 2058, 2009 WL 4796169, at *2 (S.D.N.Y. Nov. 16, 2009) (In re Bank of
Am. Litig.) (internal quotation marks omitted).

Courts have concluded that undue

prejudice exists “where plaintiffs would be unable to make informed decisions about their
litigation strategy in a rapidly shifting landscape because they are the only major
interested party without documents forming the core of their proceedings.” Id.; see also
In re Vivendi Universal, S.A. Sec. Litig., 381 F. Supp. 2d 129, 130 (S.D.N.Y. 2003)
(stating that courts have found undue prejudice “when defendants would be unfairly
shielded from liability through pursuit of their pending action or when plaintiffs would be
placed at an unfair advantage to make informed decisions about litigation and settlement
strategy”); In re Fannie Mae Sec. Litig., 362 F. Supp. 2d 37, 39 (D.D.C. 2005).
Courts have focused in particular on whether failing to lift the stay will leave the
plaintiff without redress, or will leave the plaintiff unable to litigate effectively –
especially when a large number of interested parties are involved. In In re WorldCom,
Inc. Securities Litigation, 234 F. Supp. 2d 301, 306 (S.D.N.Y. 2002), for example, the
court granted a motion to lift the discovery stay based on the unique circumstances of the
case. “Investigations and proceedings” regarding WorldCom were moving quickly; other
parties – including the U.S. Attorney, the Securities and Exchange Commission (“SEC”),
and another group of plaintiffs – had or would soon have access to the requested
documents; and failing to lift the stay would leave the plaintiff retirement fund facing
“the very real risk that it will be left to pursue its action against defendants who no longer
have anything or at least as much to offer.” Id.; see also Global Intellicom, Inc. v.
Thompson Kernaghan & Co., No. 99-342, 1999 WL 223158, at *2 (S.D.N.Y. Apr. 16,
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1999) (lifting the discovery stay in a case in which the defendants’ actions in other
forums raised the possibility that the plaintiff would be unable to seek redress in court,
absent lifting the discovery stay prior to the court’s resolution of a motion to dismiss).
The court applied similar reasoning in In re Bank of America Litigation, concluding that
undue prejudice existed because, if the discovery stay was not lifted, the plaintiff would
fall behind the SEC and other government actors, all of whom were quickly obtaining the
relevant documents in related, ongoing proceedings. 2009 WL 4796169, at *3.
Here, Lusk has not shown that he will face undue prejudice if the Court does not
lift the discovery stay. First, Lusk has not shown that he will be unable to seek redress
absent immediate discovery; indeed, he has still filed and is proceeding with a motion for
preliminary injunction and his complaint asks for relief whether or not the Court’s
decision precedes the shareholder vote. (See Compl. at 44, Apr. 10, 2015, Docket No. 1.)
Moreover, despite Lusk’s arguments to the contrary, the Life Time Defendants are
correct that the dissenting shareholder appraisal process in Minnesota Statutes
§§ 302A.471 and .473 does provide another remedy for a shareholder alleging that the
share price offered in a proposed transaction is unfair. See Botton v. Ness Techs. Inc.,
No. 11-3950, 2011 WL 3438705, at *3 (D.N.J. Aug. 4, 2011) (magistrate judge letter
rejecting motion for expedited discovery because, even if transaction is approved by
shareholders, legal remedies still exist for the plaintiff); Leone v. King Pharm., Inc.,
No. 10-230, 2010 WL 4736271, at *3 (E.D. Tenn. 2010). It is true that this case is
different than cases like Botton, because Lusk brings this case on behalf of a class, and
different policy implications are at stake in a class action. But even if non-dissenting
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shareholder class members cannot exercise state appraisal rights, Lusk still asserts a
claim for damages and rescissory relief under federal securities laws, if the sale is
finalized. (Compl. at 44). In other words, Lusk has not shown that no adequate remedy
exists absent the lifting of the stay. Dipple v. Odell, 870 F. Supp. 2d 386, 393 n.7
(E.D. Pa. 2012).
Additionally, this case does not involve the situation in many of the cases cited
above: one plaintiff or group of plaintiffs falling behind a bevy of other plaintiffs and
interested parties because he alone lacks information or documents. See In re Bank of
Am. Litig., 2009 WL 4796169, at *3.

Lusk has not shown that other parties, like

government regulators, are moving quickly to gather information on Life Time’s
proposed transaction, leaving himself and his class falling behind and unable to compete
in rapidly changing litigation.
In some cases, courts have held that a lack of information prior to a looming
shareholder vote amounts to undue prejudice such that lifting the PSLRA’s stay of
discovery is warranted. See, e.g., Malon v. Franklin Fin. Corp., No. 14-671, 2014 WL
5795730, at *2-*3 (E.D. Va. Nov. 6, 2014) (“Given the imminent shareholder vote on the
Proposed Transaction and Plaintiff’s anticipated motion for a preliminary injunction, the
Court finds that Plaintiff will suffer not only undue prejudice, but irreparable harm if the
PSLRA stay is not lifted.”); Nichting v. DPL Inc., No. 11-141, 2011 WL 2892945, at *3*4 (S.D. Ohio July 15, 2011); Ryan v. Walton, No. 10-145, 2010 WL 3785660, at *2
(D.D.C. Mar. 9, 2010).

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But other courts have held the opposite, based on the language of and the policies
underlying the PSLRA. See, e.g., Dipple, 870 F. Supp. 2d at 393-94 & n.7 (noting that
the Ryan v. Walton court had based its decision on a pre-PSLRA case, Woodward &
Lothrop, Inc. v. Schnabel, 593 F. Supp. 1385 (D.D.C. 1984)). Moreover, cases like
Malon, Nichting, and Ryan have not fully addressed and analyzed the broader undue
prejudice standard articulated in cases like In re Bank of America Litigation and have not
discussed whether monetary damages or an appraisal process provide an adequate
remedy (or the cases have assumed these alternatives do not provide an adequate remedy,
with limited explanation). See Malon, 2014 WL 5795730, at *2-*3; Nichting, 2011 WL
2892945, at *3-*4. Finally – without delving into the merits of Lusk’s allegations at this
point – these cases involve broader allegations of fraud or misconduct ahead of a
shareholder vote than in this case. See, e.g., Nichting, 2011 WL 2892945, at *3-*4 &
n.16 (alleging that the shareholder vote would be uninformed because the proxy
statement did not include critical, fundamentally important information: namely
information about the company’s cash flow projections).
In sum, Lusk has not shown that he will suffer undue prejudice if the discovery
stay is not lifted. Consequently, the Court need not consider whether his discovery
requests are sufficiently particularized, or whether to grant his request for expedited
discovery. At this point, the Court will deny Lusk’s motion to lift the discovery stay and
for expedited discovery.

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ORDER
Based on the foregoing, and all the files, records, and proceedings herein, IT IS
HEREBY ORDERED that Matthew Lusk’s Motion to Lift Discovery Stay and for
Expedited Discovery [Docket No. 29] is DENIED.

DATED: May 18, 2015
at Minneapolis, Minnesota.

____s/
____
JOHN R. TUNHEIM
United States District Judge

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