This post was prepared by Brian E. O’Neill, Esq. of Eckert Seamans.
The Delaware Court of Chancery recently denied a motion to stay proceedings, which was filed by five defendants who had been served with subpoenas by the Federal Bureau of Investigation in connection with a criminal probe. In A. Schulman, Inc. v. Citadel Plastic Holdings, LLC, C.A. No. 12459-VCL (Del. Ch. Nov. 2, 2017), Vice Chancellor Laster addressed the defendants’ motion to stay proceedings for ninety days, and their request to hold a status conference at the expiration of the ninety-day stay.
Background: The underlying civil litigation involved claims for breach of contract and fraud. The defendants moved to dismiss the complaint, which motion was denied. The parties then engaged in voluminous discovery practice over sixteen months. The matter was scheduled for trial in March 2018. On October 3, 2017, the FBI served the five individual defendants with subpoenas to produce records in connection with a criminal investigation.
The five individual and numerous corporate defendants in the Court of Chancery litigation were all represented by the same firm. After service of the FBI’s subpoenas, the five individual defendants requested a ninety day stay, citing their need to retain separate counsel due to the criminal investigation. Plaintiffs consented to a postponement of the depositions of the five individual defendants, but otherwise objected to the motion for stay. [Parenthetically, a Section 220 Chancery decision on November 13, 2017, involving the plaintiff companies was highlighted on these pages].
Analysis: The Court noted that although the defendants requested a ninety day stay of proceedings, “in reality they seek an indefinite stay.” The Court also noted that “Delaware courts have not articulated a specific test to apply when analyzing whether to stay a civil case in light of a pending criminal investigation.” Absent controlling precedent, Vice Chancellor Laster turned to the relevant test articulated by the United States Court of Appeals for the Third Circuit.
The Third Circuit has identified two overarching issues to guide a trial court’s analysis of whether to stay a civil action due to the pendency of a related criminal case. The two issues are: (1) “the status of the criminal case, including whether the defendants have been indicted” and (2) “the extent to which the issues in the criminal and civil cases overlap.”
Guided by those two overarching principles – status of the criminal case and its overlap with the civil action – the Third Circuit then looks to the balancing of five factors. The five factors are:
(1) the interest of the plaintiff in proceeding expeditiously with his case and any potential prejudice it may suffer from any delay;
(2) the burden upon the defendants from going forward with any aspects of the proceedings, in particular any prejudice to their rights;
(3) the convenience of the court and the efficient management of judicial resources;
(4) the interests of any non-parties; and
(5) the interest of the public in the pending civil and criminal litigation.
Vice Chancellor Laster noted that the grant of a total stay in a civil action is an “extraordinary remedy.” Upon its review of the two guiding principles, the Court found that the criminal matter was in its earliest stages (pre-indictment) and noted that civil stays are infrequently granted at that point. As to the issue of overlap, the Court found that “the defendants have not made a meaningful showing on that point”. Moreover, the Court noted that the defendants failed to attach the FBI subpoena to their motion for stay, and failed to present meaningful information during an off-the-record discussion with the Court.
After weighing the merits of each the five factors, the Court concluded that the motion should be denied. The Court found that the criminal investigation “remains at a nascent stage” and that the grant of the requested stay “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.” Accordingly, the Court denied the five individual defendants’ motion for a stay.
Takeaway: Litigants seeking to stay civil proceedings based on the pendency of a related criminal matter must satisfy a five-factor test, and must articulate the extent of overlap between the civil litigation and the criminal matter. Moreover, there is less likelihood of obtaining a stay of the civil action before an indictment has been issued.