Lillie v. Off of Fincl Inst St of LA

Case: 19-30705     Document: 00515862363        Page: 1     Date Filed: 05/14/2021

           United States Court of Appeals
                for the Fifth Circuit                                United States Court of Appeals
                                                                              Fifth Circuit

                                                                        May 14, 2021
                                 No. 19-30705                          Lyle W. Cayce

   Troy Lillie; Leah Farr; Kenneth Doughtery;
   Charles White; Martha Jean Witmer; Et Al.,



   Office of Financial Institutions State of Louisiana;
   SEI Investments Company; SEI Private Trust Company;
   Continental Casualty Company;
   Certain Underwriters at Lloyd’s of London;
   Indian Harbor Insurance Company;
   Nutmeg Insurance Company; Arch Insurance Company;
   Allied World Assurance Company (U.S.), Incorporated,


                  Appeal from the United States District Court
                      for the Middle District of Louisiana
                               No. 3:13-CV-150
                               No. 3:19-CV-138

   Before Smith, Graves, and Ho, Circuit Judges.
   Jerry E. Smith, Circuit Judge:
         This is one of many lawsuits resulting from the collapse of Robert
   Stanford’s Ponzi scheme. The plaintiffs are among the unfortunate investors
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                                        No. 19-30705

   who purchased or renewed certificates of deposit (“CDs”) issued by Stan-
   ford International Bank, Ltd. (“SIBL”). After their investments went up in
   smoke, the plaintiffs sued, among others, SEI Investments Company and SEI
   Private Trust Company (jointly, “SEI”), businesses that had a longstanding
   relationship with SIBL. As relevant, the district court denied the plaintiffs a
   continuance for further discovery, then awarded summary judgment to SEI,
   concluding that it had not controlled the primary securities violations of Stan-
   ford Trust Company (“STC”). 1 We affirm.

           STC served as the custodian for all IRA accounts holding CDs from
   SIBL. Starting in 1998, SEI provided STC with investment-processing and
   reporting services using its proprietary Trust 3000 software. That software
   allows trust companies to view all their assets—including non-marketable
   assets such as CDs—in one platform.
           SEI offered its processing services through, among other means, a
   business services provider (“BSP”) model, and STC was one of SEI’s clients
   that used that model. In short, that meant that SEI assumed STC’s “back-
   office processing function.” SEI’s contract with STC outlined what that
   function would entail.
           The contract contemplated that SEI would be an independent con-
   tractor; it limited SEI’s involvement with the CDs. STC (but not SEI) priced
   the CDs and other non-marketable securities, 2 and SEI did not perform due
   diligence on how STC valued the CDs. Instead, STC provided SEI with all
   the relevant information, including the CDs’ face value, interest rate, matur-

            The court also granted summary judgment to SEI’s insurers: Allied World
   Assurance Company (U.S.), Incorporated; Arch Insurance Company; Continental Casu-
   alty Company; Indian Harbor Insurance Company; Nutmeg Insurance Company; and
   Certain Underwriters at Lloyd’s of London (collectively, the “Insurer Defendants”).
              By contrast, SEI was responsible for establishing the value of publicly traded
   securities using pricing services from Interactive Data Services, Inc.

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   ity date, and market value, and STC was “solely responsible” for that data’s
   “accuracy and completeness.” SEI could “rely upon [i]nstructions” from
   STC, and STC had a right to inspect SEI’s records, but not vice versa.
           SEI also furnished STC with statement production and printing ser-
   vices, including the creation of client statements and tax forms. To do so,
   SEI sent data from Trust 3000 to a third-party printer. STC was still respon-
   sible for reviewing and distributing the statements, and the statements made
   plain that they were STC’s (not SEI’s). 3 STC had the printer mail the state-
   ments directly to clients.
           STC paid SEI a fixed fee, including $110 for each account that had
   only CDs from SIBL. During the relevant period, SEI billed STC about
   $808,000 for all services, $279,000 of which was for CD-only accounts.
           After the Ponzi scheme had crashed and burned, the plaintiffs sued
   SEI and several others in state court, alleging violations of Louisiana securi-
   ties law. Specifically, the plaintiffs brought primary liability claims under
   Louisiana Revised Statutes §§ 51:712(D) and 51:714(A) and a sec-
   ondary control-person liability claim under § 51:714(B). The district court
   certified a class including all persons who bought or renewed CDs from SIBL
   in Louisiana between January 1, 2007, and February 13, 2009.
           After certification, the plaintiffs amended their complaint to assert
   direct-action claims against the Insurer Defendants, who promptly removed
   the case under the Class Action Fairness Act. See 28 U.S.C. §§ 1332(d)(2),
   1453(b). The Judicial Panel on Multidistrict Litigation (“JPML”) then sev-
   ered the claims against the Louisiana Office of Financial Institutions and
   transferred the rest of the case to the relevant multidistrict litigation
   (“MDL”) in the Northern District of Texas.

              The statements went so far as to explain that “SIBL is the provider of your cer-
   tificate of deposit investment(s) and, therefore, its statement is to be relied upon for the
   actual value and activity of your investment.”

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            At the plaintiffs’ request, the court ordered the parties to hold a Fed-
   eral Rule of Civil Procedure 26(f) conference. The parties did so and filed
   their report in June 2015. The court eventually dismissed or granted partial
   judgment for the defendants on the §§ 714(A) and 714(D) claims. At that
   point, only the control-person claim remained. The district court recertified
   the class.
            The case pended in the Northern District of Texas for more than five
   years, during which time the discovery process largely stalled. The parties
   dispute the cause of the breakdown and the adequacy of discovery, but the
   plaintiffs did not seek judicial assistance until May 2018—some three years
   after filing the Rule 26(f) report—when they asked for a status conference.
   At that conference, the court suggested that the plaintiffs either take a depo-
   sition under Federal Rule of Civil Procedure 30(b)(6) or move to compel
   answers to their interrogatories. The court did not enter a scheduling order,
   and it invited SEI to move for summary judgment at any time, subject to the
   plaintiffs’ right to seek a continuance under Federal Rule of Civil Procedure
            SEI so moved in September 2018. Among other things, the plaintiffs
   responded by asking for a Rule 56(d) continuance. They supported that re-
   quest with a declaration from one of their lawyers, who asserted that the
   plaintiffs lacked the discovery they needed to oppose summary judgment.
            Before ruling, the JPML remanded the case to the Middle District of
   Louisiana. That court granted SEI summary judgment, finding that SEI had
   not controlled STC’s primary securities violations. Conversely, the court
   denied a continuance, ruling that the plaintiffs had not established Rule
   56(d)’s requirements or pursued discovery with diligence. Soon thereafter,
   the court granted summary judgment to the Insurer Defendants on the
   direct-action claims. The plaintiffs unsuccessfully moved for reconsidera-
   tion and ask us to reverse.

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          The plaintiffs challenge the summary judgment, which we address
   de novo, construing all facts and reasonable inferences in favor of the non-
   moving party. Ryder v. Union Pac. R.R. Co., 

945 F.3d 194

, 199 (5th Cir. 2019).
   If proof is absent, we cannot “assume that the nonmoving party could or
   would prove the necessary facts” to defeat summary judgment. Little v.
   Liquid Air Corp., 

37 F.3d 1069

, 1075 (5th Cir. 1994) (en banc) (per curiam)
   (emphasis omitted).

          Under Louisiana law, a party can be secondarily liable for the primary
   securities violation of another:
          Every person who directly or indirectly controls a person liable
          under Subsection A of this Section, every general partner,
          executive officer, or director of such person liable under Sub-
          section A of this Section, every person occupying a similar
          status or performing similar functions, and every dealer or
          salesman who participates in any material way in the sale is lia-
          ble jointly and severally with and to the same extent as the per-
          son liable under Subsection A of this Section . . . .
   LA. REV. STAT. § 51:714(B) (emphasis added). Secondary liability under
   Section 714(B) thus requires (1) a primary securities-law violator and (2) a
   second actor that controlled the primary violator.

But what makes

for “control”? The statute defines it as “the posses-
   sion, direct or indirect, of the power to direct or cause the direction of the
   management and policies of a person, whether through the ownership of
   voting securities, by contract, or otherwise.”

Id. § 51:702(4). “The

   of [§ 714(B)] indicates that a person who exercises control refers to a general
   partner, executive, officer, director, or a person occupying a similar status or
   performing a similar function.” Solow v. Heard McElroy & Vestal, L.L.P.,

7 So. 3d 1269

, 1281 (La. App. 2d Cir.), writ denied, 

17 So. 3d 961

(La. 2009).
          “Because Louisiana precedent interpreting Section 51:714(B) is thin,

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                                           No. 19-30705

   we look to federal law for instruction.” Ahders v. SEI Priv. Tr. Co., 

982 F.3d

, 315 (5th Cir. 2020) (cleaned up). 4 At a minimum, the plaintiffs must
   “show that the defendant had an ability to control the specific transaction or
   activity upon which the primary violation is based.” Heck v. Triche, 

775 F.3d

, 283 (5th Cir. 2014) (cleaned up). But there is no requirement that the
   defendant participate in the fraudulent transaction itself. 5

           The plaintiffs say that summary judgment was improper, because the
   district court applied the wrong legal standard and ignored factual disputes
   as to SEI’s asserted control. 6 Neither theory succeeds.

           The plaintiffs’ wrong-legal-standard quibble has three steps. First,

             See also State v. Powdrill, 

684 So. 2d 350

, 353 (La. 1996) (“Our courts . . . look to
   the federal law and jurisprudence interpreting the securities law for guidance in interpret-
   ing the Louisiana provisions.”).

Heck, 775 F.3d at 283

; see also Trans Pac. Interactive, Inc. v. U.S. Telemetry Corp.,

2017 WL 1376592

, at *5 (La. App. 1st Cir. May 1, 2017) (“Control person liability does not
   require participation in the fraudulent transaction.”), writ denied, 

227 So. 3d 294

(La. 2017).
   We have not decided whether, to be liable, the alleged control person must have “actually
   exercised his power over the controlled person.” 

Heck, 775 F.3d at 283

n.18 (emphasis
   added); see also Abbott v. Equity Grp., Inc., 

2 F.3d 613

, 620 (5th Cir. 1993) (declining to
   answer that question).
            The plaintiffs insist that the references to “SEI” in their briefing include the
   Insurer Defendants. But the plaintiffs fail to discuss the direct-action claim against those
   defendants, nor do they cite the relevant statute or any case. Their claim against those
   defendants is therefore abandoned. See N. Cypress Med. Ctr. Operating Co., Ltd. v. Cigna

952 F.3d 708

, 711 n.3 (5th Cir. 2020), cert. denied, 

141 S. Ct. 1053

           But, even if we consider it, it fails. The Louisiana statute, see LA. REV. STAT.
   § 22:1269, “does not create an independent cause of action against the insurer; it merely
   grants a procedural right of action against an insurer where the plaintiff has a substantive
   cause of action against the insured,” SEC v. Stanford Int’l Bank, Ltd., 

927 F.3d 830

, 850
   (5th Cir. 2019) (cleaned up), cert. denied, 

140 S. Ct. 2567

(2020). Because the plaintiffs’
   claims against SEI are dead in the water, their claim against the Insurer Defendants perishes

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   the district court relied on Friedman v. JP Morgan Chase & Co.,
   No. 15-cv-5899, 

2016 WL 2903273

(S.D.N.Y. May 18, 2016), aff’d, 689
   F. App’x 39 (2d Cir. 2017) (per curiam). Second, Friedman mentions the
   “culpable participation” test “no [fewer] than ten times.” Third, it neces-
   sarily follows that the court improperly applied a “culpable participation”
   requirement—one that our caselaw disclaims. See 

Heck, 775 F.3d at 286

           The conclusion does not follow, and the record proves it. The district
   court correctly identified that the “[p]laintiffs need not prove that SEI parti-
   cipated in the fraudulent transaction.” The court relied on Friedman only in
   reasoning that a showing of “but-for causation”—namely that SEI might
   have been able to prevent STC’s violations—is not enough to establish con-
   trol. Such a rationale (which Louisiana caselaw supports 7) is distinct from
   Friedman’s independent holding that the plaintiffs there had not alleged
   culpability. 8 One may cite a case without endorsing everything for which it
   stands. The district court understood the law.

           The plaintiffs also inform us that it is factually disputed whether SEI
   had the requisite control. Not so.
           SEI—the movant—has offered competent evidence that it lacked the
   power to control STC’s primary securities violations. 9 SEI points first to the
   contractual terms, under which STC (not SEI) was responsible for pricing
   the CDs, providing SEI with complete and accurate data, reviewing monthly


Solow, 7 So. 3d at 1281

(holding that an auditor’s “power to halt the sale” of
   securities to the plaintiffs was not enough to establish control under Section 714(B)).
              See Friedman, 689 F. App’x at 39–40 (noting that the district court dismissed the
   plaintiffs’ control-person claims on three independent grounds).
            See Carr v. Air Line Pilots Ass’n, Int’l, 

866 F.3d 597

, 601 (5th Cir. 2017) (per
   curiam) (“Once a movant who does not have the burden of proof at trial makes a properly
   supported motion for summary judgment, the burden shifts to the nonmovant to show that
   the motion should not be granted.” (cleaned up)).

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   statements, and distributing those statements to investors. Moreover, STC
   could instruct SEI to do certain things, but that authority was not reciprocal.
          SEI also offers testimony from Al DelPizzo, SEI’s then-Vice President
   of Operations, from the class-certification hearing. He stated that, consis-
   tently with the contract, STC gave SEI all the valuation information that it
   needed for the CDs. Moreover, SEI never had custody of the CDs, and it did
   not price CDs for any bank (let alone STC), sell or market them, or audit the
   data that it prepared for STC’s accounts. SEI also lacked an ownership stake
   in STC and had no representative on its board: SEI could not direct STC’s
   management or policies.
          Because SEI, the movant, has informed “the court of the basis for its
   motion” and identified “portions of the record which highlight the absence
   of genuine factual issues” about whether SEI controlled STC’s primary vio-
   lation, the burden rests with the plaintiffs to “direct the court’s attention to
   evidence . . . sufficient to establish that there is a genuine issue of material
   fact for trial.” Topalian v. Ehrman, 

954 F.2d 1125

, 1131 (5th Cir. 1992). The
   plaintiffs come up empty. They lead off with a sweeping assertion that SEI
   was the “defacto [sic] trust company” for STC, considering the “compre-
   hensive scope of [] services” that SEI provided, “the cradle to grave relation-
   ship” between STC and SEI, and “the sophistication of SEI and the lack of
   sophistication of STC.” In considering the thrust of that evidence, the plain-
   tiffs assert, the court failed to draw inferences in their favor.
          At bottom, the plaintiffs seem to think that SEI’s longstanding ties to
   STC create a dispute over whether SEI had control. But the plaintiffs fail to
   explain how those ties evidence anything more than that SEI had a business
   relationship with STC. A party is not secondarily liable for a primary actor’s
   securities violations just because it does business with that actor, no matter
   the length of their relationship. 10 Instead, SEI must have “possess[ed],

               See, e.g., 

Abbott, 2 F.3d at 620

–21 (holding that control was not established

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   direct[ly] or indirect[ly], . . . the power to direct or cause the direction of the
   management and policies of” STC. § 51:702(4). That SEI and STC have a
   contract is not enough; the contract must grant SEI the requisite control.
   This one does not. Indeed, in Firefighters’ Retirement System v. Citco Group
   Ltd., No. 20-30654, 

2021 WL 1234258

, at *4, 2 (5th Cir. Mar. 31, 2021) (per
   curiam) (unpublished), we determined that the plaintiff had failed to estab-
   lish control-person liability, even where the defendant had had a long and
   substantial relationship with the primary violator, serving as its main source
   of credit as well as providing business operations services. The evidence
   suggests that SEI and STC’s relationship was not as close as the one between
   the defendant and primary violator in Firefighters’. The plaintiffs’ contention
   here fails.
           Nor does the plaintiffs’ reliance on the nature of SEI’s BSP relation-
   ship with STC advance the ball. The plaintiffs lean on the following general
   description of the BSP model, lifted from SEI’s regulatory filings: 11
           The BSP model . . . was designed for Private Banks, and other
           trust organizations that prefer to outsource their entire invest-
           ment operations. With the BSP solution, we assume the entire
           back-office processing function. The BSP model includes: in-
           vestment processing; account access and reporting; audit,

   despite plaintiffs’ evidence of defendant’s (1) involvement in issuing bonds for the primary
   violator’s other transactions, (2) general knowledge of the status of the primary violator’s
   debt offerings, and (3) influence over a particular bond transaction that did not form the
   basis for secondary liability); Meek v. Howard, Weil, Labouisse, Friedrichs, Inc.,
   No. 95-60680, 

1996 WL 405436

, at *3 (5th Cir. June 25, 1996) (per curiam) (“At best, the
   evidence arguably shows that Appellees had influence over Smith’s commodities trading;
   it did not show that Appellees had anything to do with Smith’s handling of the Meeks’
   securities investments, or any power to control his handling of those investments.”).
              The plaintiffs did not raise the BSP characterization until their motion for recon-
   sideration, in which they complained that the relevant documents “were first produced by
   SEI in the Spring of 2019.” But the plaintiffs forget that Forms 10-K are public documents
   accessible on the website of the Securities and Exchange Commission. They also fail to see
   that certain testimony and documents produced as early as 2010 revealed that STC was a
   BSP client. To suggest that this evidence is “new” strains credulity.

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           compliance and regulatory services; custody and safekeeping
           of assets; income collections; securities settlement; and other
           related trust activities.
   But that paragraph outlines only a range of possible BSP services. Naturally,
   the client contracts determine what services SEI will actually provide, and,
   as explained above, the terms here devastate any theory that SEI had control,
   even drawing inferences in the plaintiffs’ favor. 12
           Any determination that SEI’s business services for STC constituted
   control is precluded by Ahders. There, plaintiffs who opted out of the class
   in the present case also sued SEI, asserting that SEI had control-person
   liability for STC’s primary violations. See 

Ahders, 982 F.3d at 314

. There, as
   here, the plaintiffs contended that “SEI had direct or indirect control over
   STC’s primary violations due to various aspects of SEI’s role as a service
   provider for STC.”

Id. at 316.

Analyzing the same business services, we
   observed that “a reasonable jury could not conclude that SEI is liable as a
   control person merely because STC committed primary violations using
   SEI’s services.”

Id. We held that

SEI’s production and sending of state-
   ments containing the value of the CDs to investors was insufficient to show
   control: “[C]ontrol over day-to-day operations is not facial evidence of con-
   trol over a primary violation.”

Id. at 316–17. 13

Instead, it was incumbent on
   the plaintiffs here to show “control over the primary violations,” and they

              See, e.g., Se. Wireless Network, Inc. v. U.S. Telemetry Corp., 

2007 WL 1953148

   at *3–4 (La. App. 1st Cir. July 6, 2007), writ denied, 

967 So. 2d 525

(La. 2007) (holding that
   control was not established despite alleged control person’s contracts that gave it super-
   visory authority over the issuer’s “budget, operations, marketing, public relations, acquisi-
   tions, expenditures, stock issuances, and selection and hiring of key personnel”).
              Furthermore, in Firefighters’, 

2021 WL 1234258

at *3, the defendant not only
   created statements and sent them to investors but also provided the underlying accounting
   services and valuations for the statements, as well. We held that the fact that the defendant
   provided accounting services for the primary violator “does not establish that it had the
   ‘power to direct or cause the direction of the management and policies of [the violator].’”

Id. (quoting § 51:702(4)).

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   failed to do so.

Id. at 317.

           Next, the plaintiffs contend that, before evaluating control, the district
   court should have considered whether SEI was aware of STC’s illegal activi-
   ties. But the statute says the opposite. Section 714(B) carefully defines the
   stage at which SEI’s knowledge becomes relevant, as it makes SEI’s lack
   thereof an affirmative defense. See § 51:714(B). In other words, if SEI is
   proven to be in control, then it may raise the defense that it neither knew nor
   should have known of the violations.

Id. To require the

district court to con-
   sider knowledge before control would stand the statute on its head. 14
           Finally, the plaintiffs maintain that “control” can be shown where the
   alleged “control person is in a position to prevent the violation of the primary
   violator.” But even if “[t]he rationale behind control person liability is that
   a control person is in a position to prevent the securities violation at issue,”
   TIG Specialty Ins. Co. v. Inc., 

375 F.3d 365

, 372 (5th Cir.
   2004), the ability to stop a violation is not the same as the power to control
   it. 15 Furthermore, we rejected that same contention in 

Ahders, 982 F.3d
at 316

, stating that “[t]he control-person provision requires more than the
   power to stop a primary violation for an entity to be liable.” Instead, the
   plaintiffs “must establish that SEI directly or indirectly had ‘the power to
   direct . . . the management and policies’ of STC.”

Id. (quoting § 51:702(4)).

   Summary judgment for SEI was proper.

           The plaintiffs contend that the district court should have granted

            See Trans Pac., 

2017 WL 1376592

, at *6 (describing control as the “threshold
   requirement . . . under Section 714(B)”).

Solow, 7 So. 3d at 1281

(rejecting a control-person theory predicated on an
   allegation that the defendant “had the power to halt the sale”). We have praised Solow’s
   reasoning as “surely a correct interpretation of the control person statute.” 

Heck, 775 F.3d
at 285


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   them a continuance under Rule 56(d) so that they could gather more discov-
   ery before facing summary judgment. We review for abuse of discretion, see
   Prospect Cap. Corp. v. Mut. of Omaha Bank, 

819 F.3d 754

, 757 (5th Cir. 2016),
   and there is none.
           A party who fails to pursue discovery with diligence is not entitled to
   Rule 56(d) relief, 16 and, as the district court recognized, the plaintiffs ne-
   glected to do so. This case has been pending for more than a decade, and for
   north of seven years in federal court.
           Yet the plaintiffs waited until May 2018—more than five years after
   the case was removed and almost three years after the parties filed their Rule
   26(f) report—to move for a status conference. After that, the plaintiffs
   waited until June 2018 to serve 134 interrogatories, noticed a Rule 30(b)(6)
   deposition three months later, and then failed to serve document requests
   until two months after that.
           The plaintiffs maintain that the district court showed “a complete
   lack of understanding of the procedural gymnastics and complexity existing
   in this case over the last ten years.” They aver that the district court got the
   burdens backwards. And they repeatedly accuse SEI of “[s]tonewall[ing]”
   their discovery efforts.
           But even if SEI’s discovery tactics were wrongful, the Federal Rules
   of Civil Procedure place the onus on the discovery-seeker to invoke the judi-
   cial process. Rule 37 provides that a party may obtain a court order compel-
   ling discovery that it has not been able to obtain through cooperation with the
   other side. See Fed. R. Civ. P. 37(a). But the plaintiffs never took matters
   into their own hands, even though the MDL district judge reminded them of
   their right to file a motion to compel. Instead, the first time they “sought

              See, e.g., Jacked Up, L.L.C. v. Sara Lee Corp., 

854 F.3d 797

, 816 (5th Cir. 2017);
   McKay v. Novartis Pharm. Corp., 

751 F.3d 694

, 700 (5th Cir. 2014); Beattie v. Madison Cnty.
   Sch. Dist., 

254 F.3d 595

, 606 (5th Cir. 2001).

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                                          No. 19-30705

   judicial assistance in obtaining [discovery] was in response to [SEI’s] sum-
   mary judgment motion.” Jacked 

Up, 854 F.3d at 816

. Having dawdled for
   years, the plaintiffs had no right to a judicial rescue. 17

              See Jacked 

Up, 854 F.3d at 816

(holding that the nonmovant was not diligent,
   where it had not moved to compel the requested documents during discovery and had
   waited until summary judgment to seek judicial intervention); 

Beattie, 254 F.3d at 606

   (holding that a nonmovant was not diligent, when she had waited “several months” to
   depose key witnesses); Leatherman v. Tarrant Cnty. Narcotics Intel. & Coordination Unit,

28 F.3d 1388

, 1397 (5th Cir. 1994) (holding that the district court did not err in denying a
   Rule 56(d) continuance where the plaintiffs “undertook no discovery . . . for more than one
   year” and only deposed witnesses “shortly before the summary judgment”); Spencer v.
   FEI, Inc., 725 F. App’x 263, 269 (5th Cir. 2018) (per curiam) (holding that the plaintiff was
   not diligent when he had “waited for over a year to serve his first deposition subpoenas”
   and “filed his Rule 56(d) motion over a month after [the defendant] filed its motion for
   summary judgment and less than a month before the discovery deadline”); Mitchell v.
   Sikorsky Aircraft, 533 F. App’x 354, 358 (5th Cir. 2013) (per curiam) (holding that the plain-
   tiff was not diligent where she waited until “three weeks before motions for summary judg-
   ment were due” to coordinate depositions, despite having more than seven months to seek


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