Thursday, November 2, 2017
The Delaware Court of Chancery denied an attempt to stay civil litigation in light of a related federal criminal investigation
The public interest calls for having this litigation go forward. The public has a vital interest in rooting out the fraud that the plaintiffs alleged, as well as an interest in ensuring that the aggrieved parties (should they prove their case) are made whole in a timely fashion. This case was filed over a year ago. The well-pleaded complaint stated claims for breach of contract and fraud. The parties have invested substantial efforts in discovery and are proceeding toward a trial in March 2018.
By contrast, the criminal investigation remains at a nascent stage. No one knows when or if indictments will be brought. To date, subpoenas have been issued to five individual defendants, but none to the other defendants in the case. It would undermine the public interest to derail this case on the basis of the subpoenas that the U.S. Attorney has issued. Doing so effectively would reward individuals who engaged in more serious wrongdoing by enabling them to use a threatened (but not yet commenced) criminal proceeding as a shield against a longstanding civil case.
The plaintiffs sued an array of defendants. The defendants moved to dismiss the complaint pursuant to Rule 12(b)(6), contending that its allegations failed to state a claim on which relief could be granted. This court largely denied the motion, holding that the detailed allegations of the complaint stated claims for fraud and breach of contract. Discovery commenced. Over the past sixteen months, the parties exchanged nearly 500,000 documents and took more than forty depositions, with dozens more on the horizon. The matter is currently scheduled for trial in March 2018.
On October 3, 2017, the Federal Bureau of Investigation served the five individual defendants with subpoenas that required them to produce documents as part of an investigation being conducted by the United States Attorneys’ Office for the Southern District of Indiana. The FBI also served subpoenas on other former employees of HGGC Citadel Plastic Holdings, Inc. and Lucent Polymers, Inc.
Even though the numerous defendants in this action were differently situated, faced different threats of liability based on the allegations of the complaint, and likely possessed different defenses, they had chosen to be represented by a single Delaware firm and a single forwarding firm. After the subpoenas were served, defense counsel cancelled the upcoming depositions so that the five individuals could retain new counsel.
On October 16, 2017, the defendants moved to stay this case in light of the criminal investigation. Although they claim to seek only a ninety-day stay to allow the new lawyers to familiarize themselves with the civil action and assess their clients’ potential criminal exposure, in reality they seek an indefinite stay. Their proposal contemplates an open-ended postponement of all deadlines and case activity with a status conference after ninety days to update the court and discuss how to proceed. All of the defendants in the case would benefit from the stay, even though only the five individual defendants have received subpoenas.
Inconsistent arguments hurt
During the hearing on the motion to stay, the new lawyers for these defendants expressed deep concern about the seriousness of the government’s interest in their clients’ documents. Yet just months ago, their clients argued vigorously that the plaintiffs’ detailed averments could not state a claim on which relief could be granted, even under the lenient and plaintiff-friendly pleading standard that governs civil cases. Their clients’ prior posture undercuts the lawyers’ current protests. Equally important, the government has not asked for a stay, as it has in other cases, even though all parties agree that the government knows about this litigation. In summary, the criminal proceedings remain at a preliminary, investigatory stage, with no indictments as of yet.