MAZ Partners LP v. PHC, Inc. ( 2014 )

United States Court of Appeals
For the First Circuit
No. 13-2273
IN RE: PHC, INC. SHAREHOLDER LITIGATION
MAZ PARTNERS LP, on behalf of itself and all others similarly
situated; PETER BLAKESLEE, individually and on behalf of all
others situated,
Plaintiffs, Appellants,
v.
PHC, INC.; BRUCE A. SHEAR; DONALD E. ROBAR; DOUGLAS J. SMITH;
HOWARD W. PHILLIPS; WILLIAM F. GRIECO; DAVID E. DANGERFIELD;
ACADIA HEALTHCARE COMPANY, INC.; and ACADIA MERGER SUB, LLC,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. George A. O’Toole, Jr., U.S. District Judge]
Before
Thompson and Selya, Circuit Judges,
and McConnell, Jr.,* District Judge.
Chet B. Waldman, with whom Patricia I. Avery, Natalie Mackiel,
Wolf Popper LLP, David A.P. Brower, Brian C. Kerr, Brower Pivin PC,
Norman Berman, Nathaniel L. Orenstein, Berman DeValerio, Patrick J.
Sheehan and Whatley Kallas LLP were on brief, for appellants.
James H. Hulme, with whom Matthew Wright, Arent Fox LLP,
Richard M. Zielinski, Leonard H. Freiman and Goulston & Storrs were
on brief, for PHC Director defendants/appellees.
*
Of the District of Rhode Island, sitting by designation.
August 6, 2014
McConnell, Jr., District Judge. This stockholders’ class
action suit challenging the fairness of a corporate merger raises
the issue of whether the district court precipitately granted
summary judgment in light of plaintiffs’ Rule 56(d) Affidavit
outlining the discovery they needed to respond to the dispositive
motion. After a thorough and careful review of the entire record,
we find that plaintiffs should have been afforded the opportunity
to conduct additional discovery, and, therefore, remand this matter
for further proceedings below.
BACKGROUND
Plaintiffs MAZ Partners, LP (“MAZ”) and Peter Blakeslee
were holders of Class A common stock of PHC, Inc. (“PHC”). They
filed separate but similar class action suits in Massachusetts,
alleging that an announced merger between PHC and Acadia Healthcare
Company, Inc. (“Acadia”) was the result of an unfair process that
provided them with too little compensation. Plaintiffs sued PHC,
Acadia, and Acadia Merger Sub, LLC (“Merger Sub”), an entity
created to facilitate the merger, as well as PHC’s chairman,
several directors, and a board member (collectively, the
“Individual Defendants”). MAZ filed in state court, while
Mr. Blakeslee filed in federal court. Plaintiffs’ claims included
breaches of fiduciary duty, aiding and abetting those breaches, and
a disclosure violation.
Plaintiffs claim that defendants breached their fiduciary
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duty to Class A stockholders because the announced merger between
PHC and Acadia gave them only one quarter of one share of Acadia
common stock for each share of PHC stock they owned. In contrast,
in addition to the one quarter of one share of Acadia common stock,
a $5 million cash payment was made to the holders of PHC Class B
common stock, 93.2% of which was owned by defendant Bruce A. Shear,
PHC’s president, chief executive officer, and chairman. Mr. Shear
negotiated the merger’s terms.
In the MAZ case, a Massachusetts Superior Court judge
entered a discovery order allowing discovery in connection with
MAZ’s filing of a preliminary injunction motion to stop the merger.
Defendants then removed the case to federal court. The parties
reached an agreement: plaintiffs would not seek remand and
defendants would provide expedited discovery. MAZ alleges that
defendants only produced limited and redacted materials. After the
30-day period for remand expired, defendants filed a motion to stay
discovery. Although the court ultimately denied the stay of
discovery, defendants produced only a handful of documents and no
depositions were taken.
Plaintiffs filed amended complaints and all defendants
moved to dismiss those complaints under Rule 12(b)(6) of the
Federal Rules of Civil Procedure. At the hearing on the motions to
dismiss, the federal district court consolidated the two cases1 and
1
MAZ Partners LP v. Shear, Civ. A. No. 1:11-cv-11099-GAO
consolidated with Blakeslee v. PHC, Inc., Civ. A. No. 1:11-cv-
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took the motions to dismiss under advisement. After the hearing
and while the motions to dismiss were pending, the merger was
consummated.
The district court granted in part and denied in part the
motions to dismiss. In re PHC, Inc. S’holder Litig., Civ. A. No.
11-11049-GAO, 2012 WL 1195995, at *4 (D. Mass. Mar. 30, 2012). The
claims against PHC, the corporation itself, were dismissed, as was
the disclosure claim. Id. at *3-*4. Plaintiffs’ remaining
claims — breach of fiduciary duty against the Individual
Defendants, and aiding and abetting against Acadia and Merger Sub
— all survived. Id. at *2, *4.
Remaining defendants again sought to dismiss the
complaints, this time by filing a motion for judgment on the
pleadings under Rule 12(c) of the Federal Rules of Civil Procedure.
At that hearing, the district court denied the motion for
procedural reasons and then stated that “a motion for summary
judgment may be appropriate” but the court did not “know whether
we’re at the stage yet where there would be agreement on both sides
that the factual record is so clear that that’s appropriate.” The
district court went on to “anticipate the possibility” of a motion
under Rule 56(d) of the Federal Rules of Civil Procedure and said
“I think we should maybe just permit some discovery before the
[summary judgment] motion is filed and head that off.”
11049-GAO and proceeded as In re PHC, Inc. S’holder Litig., Civ. A.
No. 11-11049-GAO.
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A month after the denial of their Rule 12(c) motion,
defendants moved for summary judgment. Apparently ignoring the
district court’s caution about the need for discovery first,
defendants argued that plaintiffs had no viable claims. Regarding
the breach of fiduciary duty and aiding and abetting claims,
defendants argued that plaintiffs lacked evidence. Plaintiffs
opposed the motion, arguing that it was “entirely premature” and,
just as the district court predicted, submitted an affidavit
pursuant to Rule 56(d) of the Federal Rules of Civil Procedure
(“Rule 56 Affidavit”). The fourteen-page Rule 56 Affidavit
chronicles plaintiffs’ attempts to obtain discovery and defendants’
failure to provide it. It delineates the categories of information
about which the identified witnesses are likely to have information
and specifies the essential information, in defendants’ hands, that
would support plaintiffs’ opposition to the motion for summary
judgment. In addition to arguing that it was premature for the
district court to entertain a summary judgment motion, plaintiffs
also opposed the motion on its merits.
The district court granted summary judgment without
addressing the lack of discovery or the Rule 56 Affidavit.
Instead, the district court concluded that the case “could be
framed as a lack of standing or as the absence of proof of an
essential element of the claims. In either event, the fact that
the plaintiffs are unable to demonstrate that they have suffered an
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actual injury is fatal to their claims.” In re PHC, Inc. S’holder
Litig., Civ. A. No. 11-11049, 2013 WL 5441745, at *2 (D. Mass.
Sept. 30, 2013). Judgment entered in favor of defendants.
Plaintiffs appealed, asserting various substantive errors
in the district court’s ruling and arguing that the district court
abused its discretion by effectively denying their invocation of
Rule 56(d) by granting summary judgment. Defendants argue that the
Rule 56 Affidavit was legally insufficient and they seek affirmance
on other grounds. In light of the Rule 56 Affidavit, we hold that
the district court abused its discretion by not allowing discovery
before ruling on the motion for summary judgment; we need not delve
into any other assertions of error.
STANDARD OF REVIEW
Ordinarily, a review by this court of the grant of
summary judgment is de novo. Morelli v. Webster, 552 F.3d 12, 18
(1st Cir. 2009). However, because we ultimately conclude that the
district court erred in not affording appropriate consideration to
the Rule 56 Affidavit, our review is for abuse of discretion. See
Rivera-Almodóvar v. Instituto Socioeconómico Comunitario, Inc., 730
F.3d 23, 28 (1st Cir. 2013) (“We review a district court’s denial
of a Rule 56(d) motion for abuse of discretion.”). “Under the
abuse of discretion standard, we will not reverse a district
court’s discovery order unless it appears that the order ‘was
plainly wrong and resulted in substantial prejudice to the
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aggrieved party.’” Sánchez-Rodríguez v. AT & T Mobility P.R.,
Inc., 673 F.3d 1, 9 (1st Cir. 2012) (quoting Universal Commc’n.
Sys., Inc. v. Lycos, Inc., 478 F.3d 413, 425 (1st Cir. 2007)).
DISCUSSION
The district court’s summary judgment decision addressed
neither plaintiffs’ invocation of Rule 56(d) nor their assertion of
the lack of discovery. The district court’s grant of summary
judgment, however, necessarily denied plaintiffs’ request for
relief pursuant to Rule 56(d).
Although our review of the decision below as it relates
to Rule 56(d) is for abuse of discretion, this court has been clear
and concordant in its direction to district courts regarding how to
analyze Rule 56(d) issues: “Consistent with the salutary purposes
underlying Rule 56(f),2 district courts should construe motions
that invoke the rule generously, holding parties to the rule’s
spirit rather than its letter.” Resolution Trust Corp. v. N.
Bridge Assocs., Inc., 22 F.3d 1198, 1203 (1st Cir. 1994).
Under Rule 56(d), “[i]f a nonmovant shows by affidavit or
declaration that, for specified reasons, it cannot present facts
essential to justify its opposition” to a motion for summary
2
“Rule 56(d) was formerly Rule 56(f),” and “the textual differences
between current Rule 56(d) and former Rule 56(f) are purely
stylistic.” Nieves-Romero v. United States, 715 F.3d 375, 381 n.3
(1st Cir. 2013). Therefore, “case law developed under former Rule
56(f) remains controlling, and we cite to it where applicable.”
Id.
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judgment, then the district “court may: (1) defer considering the
motion or deny it; (2) allow time to obtain affidavits or
declarations or to take discovery; or (3) issue any other
appropriate order.” Fed. R. Civ. P. 56(d).
“Rule 56(d) serves a valuable purpose.” Rivera-
Almodóvar, 730 F.3d at 28. “It protects a litigant who justifiably
needs additional time to respond in an effective manner to a
summary judgment motion.” Id. (citing Vargas–Ruiz v. Golden Arch
Dev., Inc., 368 F.3d 1, 3 (1st Cir. 2004)). It “provides a safety
valve for claimants genuinely in need of further time to marshal
‘facts, essential to justify [their] opposition . . . to a summary
judgment motion.’” Reid v. New Hampshire, 56 F.3d 332, 341 (1st
Cir. 1995) (alteration in original) (quoting Mattoon v. City of
Pittsfield, 980 F.2d 1, 7) (1st Cir. 1992)).
In order to gain the benefit of Rule 56(d), the party
opposing summary judgment must make a sufficient proffer: “the
proffer should be authoritative; it should be advanced in a timely
manner; and it should explain why the party is unable currently to
adduce the facts essential to opposing summary judgment.”
Resolution Trust Corp., 22 F.3d at 1203. If the reason the party
cannot “adduce the facts essential to opposing summary judgment” is
incomplete discovery, the party’s explanation (i.e., the third
requirement) should: (i) “show good cause for the failure to have
discovered the facts sooner”; (ii) “set forth a plausible basis for
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believing that specific facts . . . probably exist”; and (iii)
“indicate how the emergent facts . . . will influence the outcome
of the pending summary judgment motion.” Id. Thus, in a case
involving incomplete discovery, the Rule 56(d) proffer requirements
can be categorized as: “authoritativeness, timeliness, good cause,
utility, and materiality.” Id. “[T]hese requirements are not
inflexible and . . . . one or more of the requirements may be
relaxed, or even excused, to address the exigencies of a given
case.” Id. When all the requirements are satisfied, “a strong
presumption arises in favor of relief.” Id. With this in mind, we
turn now to our review of the record.
There is no question that plaintiffs have satisfied the
first two requirements, “authoritativeness” and “timeliness.”
Plaintiffs promptly invoked Rule 56 shortly after defendants moved
for summary judgment, and they did so by filing an authoritative
affidavit.
Turning to the third requirement, the Rule 56 Affidavit
should show “good cause for [plaintiffs’] inability to have
discovered or marshalled the necessary facts earlier in the
proceedings.” Mir-Yépez v. Banco Popular de P.R., 560 F.3d 14, 16
(1st Cir. 2009) (quoting Rivera-Torres v. Rey-Hernández, 502 F.3d
7, 10 (1st Cir. 2007)). A review of the litigation below
establishes that discovery had barely begun before the court
entered summary judgment. “Typically, when the parties have no
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opportunity for discovery, denying the Rule 56(f) motion and ruling
on a summary judgment motion is likely to be an abuse of
discretion.” CenTra, Inc. v. Estrin, 538 F.3d 402, 420 (6th Cir.
2008). The Rule 56 Affidavit establishes plaintiffs’ persistence
in their pursuit of discovery at an early stage of the litigation.
On multiple occasions, the parties reached agreement on discovery
schedules but defendants did not comply; instead, they sought to
stay discovery and filed numerous motions. We are mindful that a
party seeking “discovery expeditiously is not obligated to take
heroic measures to enforce his rights against a recalcitrant
opponent.” Carmona v. Toledo, 215 F.3d 124, 135 (1st Cir. 2000)
(citation omitted) (internal quotation marks omitted). Although
defendants Acadia and Merger Sub represented that they had gathered
over 140,000 responsive pages that they would produce, and PHC and
the Individual Defendants had additional documents, plaintiffs
received only about 170 pages. The parties took no depositions.
Much of the information sought was within defendants’ control, “a
factor which weighs heavily in favor of relief under Rule 56(f).”
Reid, 56 F.3d at 342.
To fulfill the fourth requirement, that of “utility,”
plaintiffs’ proffer must show “a plausible basis for believing that
additional facts probably exist and can be retrieved within a
reasonable time.” Rivera-Torres, 502 F.3d at 10. In the Rule 56
Affidavit, plaintiffs point to defendants’ admissions as proof of
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readily available additional facts. For example, the Individual
Defendants’ initial disclosures enumerate several persons and
entities likely to have relevant information regarding negotiations
and diligence related to the merger at issue, including the
valuation of Acadia. Those disclosures also identify documents,
emails, and electronically stored information at PHC’s corporate
headquarters and on PHC’s servers regarding diligence and financial
analyses related to the merger. Acadia and Merger Sub’s initial
disclosures identify several individuals involved with negotiating
and preparing the merger agreement. They also specify email
communications related to the merger at issue, as well as due
diligence documents related to another Acadia merger. The Rule 56
Affidavit also describes several categories about which the
identified witnesses are likely to have information, such as the
merger ratio, the valuations of PHC and Acadia, and the $5 million
premium paid to the holders of Class B PHC common stock.
In a matter like this, when “plaintiffs’ case turns so
largely on their ability to secure evidence within the possession
of defendants, courts should not render summary judgment because of
gaps in a plaintiff’s proof without first determining that
plaintiff has had a fair chance to obtain necessary and available
evidence from the other party.” Carmona, 215 F.3d at 133. To rule
otherwise would encourage defendants “to ‘stonewall’ during
discovery — withholding or covering up key information that is
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otherwise available to them through the exercise of reasonable
diligence.” Id.
Finally, to accomplish the fifth requirement of
“materiality,” the Rule 56 Affidavit “should indicate how the
emergent facts, if adduced, will influence the outcome of the
pending summary judgment motion.” Resolution Trust Corp., 22 F.3d
at 1203. Because “[e]valuating the potential significance of
unknown facts in regard to unadjudicated issues is something of a
metaphysical exercise . . . . [T]he threshold of materiality at
this stage of a case is necessarily low.” Id. at 1207.
In the Rule 56 Affidavit, plaintiffs articulate how the
discovery sought pertains to material factual disputes, such as the
Individual Defendants’ fiduciary duties, potential conflicts of
interest of financial advisors, the relationships among the
Individual Defendants, and the existence of other merger
opportunities. The lack of discovery on these issues was
acknowledged by the district court when it stated that “there are
no facts” to support the plaintiffs’ claim for breach of fiduciary
duty. In re PHC, Inc. S’holder Litig., 2013 WL 5441745, at *1.
Plaintiffs timely sought discovery from defendants
relevant to the issues presented in the motion for summary
judgment. Despite plaintiffs’ perseverant efforts, minimal
discovery in the conventional sense took place. Plaintiffs
survived several dispositive legal motions only to be faulted by a
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summary judgment motion for lacking evidence. Under these
circumstances, the district court’s disregard of plaintiffs’
detailed, plausible, and comprehensive Rule 56 Affidavit was
plainly wrong and an abuse of discretion. See Reid, 56 F.3d at
341-42 (finding that the district court granted summary judgment
prematurely where plaintiff made timely motion supported by
affidavit describing requested discovery); Resolution Trust Corp.,
22 F.3d at 1203-09 (district court abused its discretion by
granting summary judgment when discovery was incomplete); Nestor
Colón Medina & Sucesores, Inc. v. Custodio, 964 F.2d 32, 39 (1st
Cir. 1992) (vacating portion of summary judgment where “plaintiffs
set forth enough to indicate that they may conceivably be able to
make out a triable issue” (emphasis in original) (citation
omitted)).
CONCLUSION
Accordingly, we hereby vacate the judgment of the
district court and remand this matter for further proceedings
consistent with this opinion.3 Costs shall be taxed in favor of
the plaintiffs.
3
In as much as plaintiffs raise any legal issue that the district
court decided prior to his ruling in the motion for summary
judgment, this court takes no position. Rather, the matter is
remanded to the district court in the same posture in which it
existed when summary judgment proceedings began.
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