NURLYBAYEV v. SMILEDIRECTCLUB INC (2022)

Order, Supreme Court, New York County (Andrea Masley, J.), entered on or about May 25, 2021, which granted defendants’ motions to dismiss the complaint, unanimously affirmed, with costs.

On June 19, 2020, plaintiff brought this securities class action on behalf of all persons and entities who acquired Class A common stock of defendant SmileDirectClub, Inc. (SDC) in accordance with the offering documents issued in connection with SDC's initial public offering on September 12, 2019, The complaint alleged violations of §§ 11, 12[a][2], and 15 of the Securities Act of 1933.  There are four consolidated Securities Act actions against SDC pending in Tennessee state court and three consolidated Securities Act actions against it pending in Tennessee federal court (collectively, the Tennessee actions).  Plaintiff herein first brought a Securities Act action against SDC in Michigan state court, but the Michigan court dismissed that complaint in accordance with Michigan's prior pending action rule (Mich. Ct Rule 2.116[c][6]) and forum non conveniens.

Supreme Court properly dismissed this action under CPLR 3211(a)(4) (see Whitney v. Whitney, 57 N.Y.2d 731, 732, 454 N.Y.S.2d 977, 440 N.E.2d 1324 [1982]).  Plaintiff in this action and plaintiffs in the Tennessee actions assert substantially similar causes of action and seek substantially similar relief.  Moreover, there is substantial identity of the parties in the two actions.  Although plaintiff in this action is not a party to the Tennessee actions, he is a potential member of the class in those actions.  Furthermore, there are 19 overlapping defendants between this action and the Tennessee actions, and only two different defendants in this action (see Brook v. Zuckerman, 155 A.D.3d 415, 415–416, 62 N.Y.S.3d 801 [1st Dept. 2017];  White Light Prods., Inc. v. On the Scenes Prods., Inc., 231 A.D.2d 90, 93–94, 660 N.Y.S.2d 568 [1st Dept. 1997]).

In addition, Supreme Court providently exercised its discretion in determining that dismissal, rather than a stay, was the appropriate action.  After the instant appeal was fully briefed, the Tennessee Court of Appeals modified the trial court's order in the Tennessee state litigation.  In its decision the Tennessee Court of Appeals held that the class plaintiffs in the Tennessee state litigation do not have standing to bring claims under section 12(a)(2) of the Securities Act of 1934 (15 USC § 77l).  Plaintiff argues that the instant case, in which he alleges such standing, should accordingly be stayed and not dismissed.  However, there is already a pending putative class action in New York County asserting a section 12(a)(2) claim (Sasso v. Katzman, Sup Ct, N.Y. County, index No. 657557/2019). That action is stayed.  Plaintiffs in the consolidated federal class action pending in Tennessee also assert a claim under 12(a)(2) (Franchi v. Smile Direct Club, Inc., MD Tenn. No. 19–CV–00962).  Accordingly, section 12(a)(2) claims remain in other cases that preexist this one, should such claims maintain their viability upon the termination of the Tennessee state litigation.

Plaintiff also argues that he would be entitled to greater damages in this action than in the Tennessee actions because the stock price had dropped by the time he filed this complaint.  That argument fails, as federal courts have tried to prevent the practice of “date shopping” for Securities Act § 11 damages by directing that damages are to be calculated as of the date of filing of the first action (see e.g. Beecher v. Able, 435 F. Supp. 397, 402 [S.D. N.Y.1975];  see also Alpern v. UtiliCorp United, Inc., 84 F.3d 1525, 1542 [8th Cir.1996]).  To stay this action and allow plaintiff to calculate damages as of its filing date would create an opportunity for that very practice.

Alternatively, Supreme Court providently exercised its discretion in dismissing the complaint on forum non conveniens grounds (see Trimarco v. Edwards, 183 A.D.3d 402, 403, 123 N.Y.S.3d 594 [1st Dept. 2020]).  The issue of forum non conveniens was fully litigated in Michigan and decided in favor of dismissing the complaint to allow for litigation to proceed in Tennessee (see Peters v. UBS AG, 588 Fed. Appx. 57, 57 [2d Cir.2014]).  Plaintiff also failed to preserve his argument that dismissal on forum non conveniens grounds was improper under CPLR 327(b) and General Obligations Law §§ 5–1401 and 5–1402, as the argument was never made to the trial court and the record does not contain the underwriting agreement upon which the argument relies (see Ta–Chotani v. Doubleclick, Inc., 276 A.D.2d 313, 313, 714 N.Y.S.2d 34 [1st Dept. 2000]).