MAZ Partners LP v. PHC, Inc.

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

-3-
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-

-4-
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.

-5-
 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

-6-
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

-7-
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.

-8-
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

-9-
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

-10-
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

-11-
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

-12-
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

-13-
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.

-14-