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New York Appellate Court Holds that PSLRA Discovery Stay Applies in State Actions

A recent decision by the First Department of the New York Appellate Division held that the Private Securities Litigation Reform Act's automatic stay of discovery applies in state court, but not during the pendency of an appeal of a motion to dismiss.

On November 2, 2023, in Camelot Event Driven Fund v. Morgan Stanley & Co. et al, No. 654959/2021, New York's Appellate Division, First Department held that the Private Securities Litigation Reform Act ("PSLRA") applies in state court actions filed under the Securities Act of 1933 to stay discovery pending the trial court's resolution of a motion to dismiss. The Court further held that the PSLRA discovery stay does not apply during the pendency of appeals from denied motions to dismiss. The First Department noted that its holding was consistent with federal courts, which lift discovery stays upon a ruling on a motion to dismiss, and therefore the First Department's decision avoids creating an incentive for forum shopping.  

This decision resolves a split in the New York County Commercial Division courts, which we reported in August 2019, as to whether the PSLRA automatic stay of discovery applies in state court. The issue of whether PSLRA discovery stays apply in state court litigation was to be argued before the U.S. Supreme Court in November 2021 in Pivotal Software v. Tran, which arose from a split in the California trial courts on the issue, but the parties reached a settlement in advance of oral argument, which mooted the case. As a result, there continues to be a split in California trial courts over whether the automatic stay applies.

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