Charles McDonald v. John P. Abizaid et. Al.: Stay Granted During Pendency of SEC Action

In Charles McDonald v. John P. Abizaid et. Al., No. 1:17CV907 2018 WL 692006 (N.D. Ohio February 2, 2018), the United States District Court for the Northern Division of Ohio granted John Abizaid’s (“Defendant”) motion to stay a shareholder derivative complaint filed by Charles McDonald on behalf of nominal defendant, RPM International, Inc. (“Plaintiff”), until the completion of an SEC action. The court held the Plaintiff would not be prejudiced by the stay, but there was a higher likelihood of duplicative litigation without the stay.

According to the allegations, the directors of PRM International, Inc. consciously disregarded multiple signs of possible violations of securities laws. Plaintiff also argued the individual directors attempted to cover up the misconduct by filing materially false and misleading statements with the SEC that caused the company greater harm. Additionally, Plaintiff alleges Defendant has done the opposite of what is required by fiduciaries because Defendant is supporting the wrongdoers and pledging to fight the SEC through trial.

Courts allow a stay of a shareholder derivate suit if there is also an enforcement action by the SEC so long as the plaintiff is not unfairly prejudiced. Courts weigh three factors when determining the hardships to the parties in determining if a stay is justified: (1) if a stay is necessary to prevent harm to the entity; (2) if a stay is necessary to promote justice or avoid duplicative litigation; and, (3) if the plaintiff will be prejudiced by the stay.

The court held the factors weighed in favor of a stay. First, the court reasoned because of the similarities in the SEC enforcement action and the current case, Defendant would be wasting litigation resources in defending the duplicative litigation. Next, the court held the similarity of the underlying facts necessitated a stay because the complaint cited to the SEC record seventy-five times indicating the facts were sustainably similar. Finally, the court held that although the Plaintiff’s relief may be delayed, it would not be unduly prejudiced.

For the above reasons, the court granted a stay in the present case until the SEC action is completed. 

The primary materials for this case may be found on the DU Corporate Governance website.