The opinion of the court was delivered by: Howard G. Munson, Sr. J.
MEMORANDUM ORDER ADOPTING REPORT AND RECOMMENDATION
This matter comes before the court on motions filed by defendants' on February 20, 2004, pursuant to Federal Rule of Procedure 12(b)(6), seeking dismissal of plaintiffs' amended complaint, primarily for failure to state a claim upon which relief can be granted.. The case was referred to United States Magistrate Judge Gustave J. DiBianco pursuant to the provisions of 28 U.S.C. § 636(b)(1)(B) and Rule 72.12 of the Local Rules of the United States District Court for the Northern District of New York, for report and recommendations for the disposition of the pending motions. The case was subsequently transferred to Magistrate Judge David E. Peebles.
The Magistrate Judge's thorough and well reasoned report found that the amended complaint satisfactorily pleads violations of § 404, § 405 and § 406 of ERISA as against the Director, Administrative Committee and Investment Committee group defendants, but not against defendant Price Waterhouse Cooper LLP, ("PWC") and that supplemental jurisdiction over plaintiff's pendent state law claims against this defendant should not be exercised; It also found that all claims plaintiff, the Agway Employees' 401(k) Thrift Investment ("the Agway Plan") Plan, has asserted against the defendants should be dismissed because this party is not properly named as a plaintiff.
The Magistrate Judge recommends that defendants' separate motions to dismiss should be granted in part, that the Agway Plan be dismissed as a party plaintiff, and that all claims be dismissed as against defendant PWC, without prejudice as to state law claims, but those motions be denied in all other aspects.
By a copy of the report and recommendation of the Magistrate Judge, the parties were advised of their right to file written objections thereto. Defendants interposed various objections to the report recommendation, and plaintiff made a limited objection to a portion thereof.
The court has received and carefully considered the objections to the Magistrate Judge's report and recommendation, the parties' arguments, the relevant parts of the record, and the applicable law, and having made de novo findings with respect thereto, does hereby adopt and approve in full the findings and recommendations set forth in the Report and Recommendation of the Magistrate Judge filed July 13, 2006. Upon careful consideration of objections, the court adopts the report-recommendation in its entirety.
IT IS ORDERED that defendants' separate motions to dismiss of plaintiffs' complaint pursuant to 12(b)(6) of the Federal Rules of Civil Procedure, for failure to state a claim upon which relief may be granted, are GRANTED IN PART, that the Agway Plan be dismissed as a party plaintiff, and that all claims be dismissed as against defendant Price Waterhouse Cooper LLP, without prejudice as to state law claims, but are DENIED, in all other aspects;
IT IS FURTHER ORDERED that the Report and Recommendation of the Magistrate Judge is hereby ADOPTED as the Courts' opinion in this matter.
The Clerk is hereby directed to attach the Report-Recommendation to constitute a complete record of the court's decision in this matter.
DAVID E. PEEBLES U.S. MAGISTRATE JUDGE
REPORT AND RECOMMENDATION
In October of 2002, Agway, Inc. ("Agway" or the "Company"), a large agricultural cooperative formed in 1964 and headquartered in the Syracuse, New York area, together with several of its wholly owned subsidiaries, filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code, 11 U.S.C. § 1101 et seq., leading ultimately to the Company's demise. Among the casualties of that collapse were participants, comprised of present and former Company employees, in a defined contribution thrift savings plan which, it turns out, was heavily invested in Agway securities and debt instruments at prices established by the Company and, it is contended, known to be grossly overvalued, particularly in the years leading up to the bankruptcy filing.
The resulting losses suffered by plan participants led to the filing of this action by the plan and an independent plan fiduciary, interposing an assortment of federal and state law claims, including predominantly under the Employee Retirement Income Security Act of 1974 ("ERISA"), as amended, 29 U.S.C. § 1001 et seq. Named as defendants in the suit are various fiduciaries of the plan, falling into four distinct groups, as well as its independent auditors. In response to plaintiffs' complaint the ERISA defendant groups remaining in the action, as well as the outside auditing agency, have moved seeking dismissal of plaintiffs' complaint principally for failure to state a claim upon which relief may be granted.*fn1
Applying the requisite, deferential Federal Rule of Civil Procedure 12(b)(6) standard, and informed by the modest, notice pleading requirements of Rule 8(a), I find that the ERISA defendant groups have not established beyond peradventure that plaintiffs will be unable to prove any set of facts entitling them to relief on at least some of their claims against them, and therefore recommend that their pending motions be denied, though with some refinement as to the scope of plaintiffs' causes of action asserted against certain of the defendant groups, and subject to dismissal of the ERISA claims brought by the plan in its own name. I further find, however, that plaintiffs' complaint fails to state an ERISA claim against the plan's auditors, and therefore recommend dismissal of the federal claim asserted against that defendant and against the exercise of supplemental jurisdiction over plaintiffs' pendent, state law claims against that party.
Agway was formed as an agricultural cooperative in 1964, its primary purpose being to provide agricultural services and products to its farmer members and customers. Amended Complaint (Dkt. No. 29) ¶¶ 8, 17. Headquartered in DeWitt, New York, the cooperative employed approximately 4,000 individuals at the time plaintiffs' amended complaint was filed in December of 2003. Id. ¶¶ 8, 18.
In 1965 Agway established a savings plan (the "Plan") for the benefit of its employees, pursuant to section 401(k) of the Internal Revenue Code, 26 U.S.C. § 401(k).*fn3 Amended Complaint (Dkt. No. 29) ¶¶ 6, 19-21. Although established under a different name, the Plan is now known as the Agway Employees' 401(k) Thrift Investment Plan. Id. ¶ 19 & Exh. A. The Plan, which qualifies as an employee pension benefit plan as defined under section 3(2) of ERISA, permits a participating Agway employee to defer a portion of his or her compensation and to elect instead to have that amount contributed into the Plan on the employee's behalf. Id. ¶¶20-21. Among the avowed purposes of the Plan was a desire to stimulate personal savings on the part of the employees by furnishing them with an incentive through contributions by the Company matching a portion of their savings, to give employees an opportunity to acquire securities of the Company and become more interested in Company affairs, to provide additional funds at retirement to supplement the benefits provided under any Agway retirement plan and to provide an additional source of funds prior to retirement in the event of need.
Amended Complaint (Dkt. No. 29) Exh. A (hereinafter cited as "Plan § __") at Introduction.
Under the Plan, as it existed at the time of filing, participating employees were given the option of electing to defer, on either a pre-tax or after-tax basis, up to six percent of their annual compensation for contribution into the Plan on their behalves; this component of the Plan contributions is sometimes referred to as the "regular contribution". Amended Complaint (Dkt. No. 29) ¶ 23; Plan § 3.01. Subject to certain specified restrictions, the Plan also permitted participants to elect to contribute, similarly on either a pre-tax or after-tax basis, up to an additional nine percent of their annual compensation, designated as an "additional contribution". Amended Complaint (Dkt. No. 29) ¶ 23; Plan §§ 3.02, 3.03.
Among the salient Plan terms are provisions requiring Agway to make contributions into the Plan on behalf of its employees. The Plan calls for Agway to make a guaranteed, matching contribution of ten percent of each participant's regular contribution to the Plan. See Amended Complaint (Dkt. No. 29) ¶ 24; Plan § 4.01. Additionally, in its discretion, under the Plan's terms Agway may also make an annual bonus contribution of up to an additional forty percent of a participant's regular contribution to the Plan. Id. The Plan authorizes Agway to satisfy its guaranteed and bonus contributory obligations, "at its option[,]" in the form of "treasury stock or authorized and unissued shares of cumulative preferred stock of the Company at the aggregate Current Market Value of the stock so delivered on the date of delivery" or, alternatively, effective as of June 12, 2002, "in cash." Plan § 4.02.
While prior to July 1, 2000, the options available to participants were more limited, as of that date participating employees were permitted by the Plan to allocate their personal contributions to one or more of eight specified investment vehicles, including a) a Company Security Fund ("CSF"), comprised solely of securities of Agway or its subsidiaries; b) a Stock Fund, which includes principally common or capital stocks and other similar investments in United States companies other than Agway and its affiliates; c) a Bond Fund, consisting primarily of various, specified types of fixed-income obligations; d) a Cash Fund, invested in short term obligations of the United States government, and other similar short term instruments; e) an Aggressive Growth Multi-Asset Fund, with an emphasis on equity investments; f) a Conservative Growth Multi-Asset Fund, consisting of equity interests and fixed income investments; g) an International Stock Fund, consisting primarily of common or capital stocks and other instruments issued by non-United States companies; and h) a United States Small Cap Stock Fund, comprised primarily of common or capital stocks and other similar instruments issued by small United States companies.*fn4 Amended Complaint (Dkt. No. 29) ¶¶ 25-26; Plan §§ 7.01-7.08. While participating employees retained the right to direct their contributions into one or more of these funds, the Plan terms required that all matching contributions made by Agway be deposited solely into the CSF, and additionally precluded participants from transferring those matching contributions from that fund into another of the investment vehicles available under the Plan. Amended Complaint (Dkt. No. 29) ¶ 27.
Section 15 of the Plan governs its administration, and introduces parties serving in various fiduciary roles with regard to the Plan. Under its terms, the Agway Board of Directors ("Board"), the Agway Employee Benefit Plans Administration Committee (the "Administration Committee") and the Company's Employee Benefit Plans Investment Committee ("Investment Committee") are charged with the responsibility of acting as fiduciaries of the Plan within the meaning of section 402(a) of ERISA. Amended Complaint (Dkt. No. 29) ¶¶ 32-34; Plan § 15.03. Under the Plan, the Administration Committee is responsible, inter alia, for "carrying out all phases of administration of the Plan, except those phases connected with the management of assets[.]" Id. ¶ 32; Plan § 15.01. The Plan also charges Agway's Investment Committee with the duty to manage Plan assets, investing in that body the authority and discretionary control over their acquisition, management, and disposition. Id. ¶ 33; Plan § 15.06. The Plan further designates the members of the Agway Board as responsible for appointing members the Administration Committee and the Investment Committee, to serve "at the pleasure of the Board[.]"
Amended Complaint (Dkt. No. 29) ¶¶ 11, 34; Plan §§ 15.01-15.02.
In August of 2002, the State Street Bank & Trust Company of Boston, Massachusetts ("State Street"), the Plan's co-plaintiff, was retained to act as an independent fiduciary with respect to the Plan's CSF. Amended Complaint (Dkt. No. 29) ¶ 7. Under that plaintiff's retainer agreement, as later amended, State Street was authorized, among other things, to investigate the CSF and the financial condition and value of investments held by that Fund and determine what, if any, appropriate action should be taken with respect to potential claims on behalf of the Fund.*fn5 Amended Complaint (Dkt. No. 29) ¶ 7.
In accordance with an amended and restated trust agreement dated August 1, 1994, and as further later amended on March 31, 1995, Boston Safe Deposit & Trust Company ("Boston Safe"), named as a defendant in plaintiffs' complaint and at the time a subsidiary of Mellon Financial Corporation, was engaged as a trustee of the Plan's assets and charged with various duties including to render statements, at least quarterly, of trust fund assets and values.*fn6 Amended Complaint (Dkt. No. 29) ¶ 12. The Plan also engaged PriceWaterhouseCoopers, LLC ("PWC"), a Delaware limited liability partnership with a principal place of business in New York City, to audit the annual financial statements of the Plan and render opinions regarding their conformance to generally accepted accounting principles ("GAAP").*fn7 Amended Complaint (Dkt. No. 29) ¶¶ 13, 118-23.
Throughout the relevant period, the Plan's Investment Committee directed the purchase of Agway preferred stock and subordinated money market certificates ("MMCs") as well as debentures issued by Agway or a former, wholly owned subsidiary, Agway Financial Corporation (collectively, "Agway Securities"), to be held in the Plan's CSF. Id. ¶ 38. Those purchases were made utilizing both personal contributions of Plan participants, to the extent that they were directed into or allocated to the CSF, and Agway guaranteed and bonus matching contributions, all of which were invested solely in that Fund. Id. ¶ 39. By June of 2002, the CSF had acquired and held Agway Securities with an assigned value of nearly $48 million; of that amount, $30 million is attributable to purchases made with personal contributions, with the remaining approximately $18 million representing purchases made through company contributions. Id. ¶ 41.
Purchases of the Agway Securities over the relevant period were made on terms unilaterally established by Agway; its stock, for example, was not publicly traded, and thus was acquired at a par value established solely by Agway. Amended Complaint (Dkt. No. 29) ¶¶ 42-43. Other instruments, including Agway MMCs, were similarly purchased for the CSF at face principal amounts and interest rates established by the Company. Id. At the relevant times prior to June 14, 2002, Agway maintained a voluntary redemption practice of repurchasing most forms of the Agway Securities held in the CSF at face amounts plus accrued interest or declared dividends. Id. ¶ 47(c). Beginning in 2000, however, the Company advised that not all of its securities were subject to the voluntary redemption practice, and that the program was strictly voluntary and could be terminated or suspended at any time. Id.; see also Amended Complaint (Dkt. No. 29) ¶¶ 61-63.
In their complaint plaintiffs allege that the fair market values of the Agway Securities held in the CSF were substantially less than those affixed by the Company, based upon a variety of factors specified in their complaint, and that the Investment Committee and Boston Safe, which actually made the purchases, failed to adequately investigate and determine the worth of those instruments. Id. ¶¶ 44, 47. Plaintiffs further allege that by receiving compensation from the Plan for its securities at greatly inflated rates, the Company was actually able to realize a return of significant portions of its matching contributions, thereby reducing its proportionate share of contributions to the Plan on behalf of its participating employees and providing the Company with an additional source of operating funds. Id. ¶¶ 48-50.
During the period commencing in or about the late 1990s and continuing until the Company's filing for bankruptcy protection on October 1, 2002, Agway's financial condition began to deteriorate markedly. Amended Complaint (Dkt. No. 29) ¶¶ 90-94. While prior to 1997 the Company had relied principally upon retained earnings as a primary source of working capital, over time it began to look increasingly to loans and the proceeds of the sale of its securities to the CSF to finance its ongoing operations. Id. ¶ 90. In annual filings made by the Company with the Securities and Exchange Commission ("SEC"), Agway reported net losses during the years 2000, 2001 and 2002, extending to $98 million in the last of those years, in contrast to the $41 million in net earnings reported in fiscal year 1998. Id. ¶ 91. The increasingly precipitous financial condition experienced by Agway necessitated extraordinary measures, including regular negotiations with lenders for additional loans and waivers of debt covenant violations, leading to more drastic action when, in 2000, Agway began selling off its assets to meet its debt service and working capital requirements. Id. ¶¶ 91-94.
Notwithstanding these circumstances, of which the Board, Investment Committee and Administration Committee were well aware, the Plan continued to purchase and hold Agway Securities and Company debt instruments at their face amounts. Amended Complaint (Dkt. No. 29) ¶¶ 95-99. Moreover, the practice of investing Company matching contributions in the CSF continued up until the fund was frozen, effective on June 14, 2002, notwithstanding an announcement on March 6, 2002 by Agway of suspension of the sale of all Agway securities until a quarterly report could be filed with the SEC for the period ending March 31, 2002.*fn8
Amended Complaint (Dkt. No. 29) ¶¶ 101-02.
On June 17, 2002 Agway announced that effective three days earlier, it had suspended all activity in the Plan's CSF, and additionally was halting its voluntary redemption practice "until further notice." Amended Complaint (Dkt. No. 29) ¶¶ 108-09. Since implementation of that freeze, Plan participants have been unable to withdraw, transfer, or take any action with respect to their respective interests in the Plan's CSF. Id. ¶ 110. As of May 31, 2002, the holdings of the CSF, including accrued interest in cash, were reported to be slightly in excess of $50 million. Id. ¶ 111. That publicly communicated figure, however, was based upon the face value of the company securities held by the fund. In the Plan's 2002 Annual Report, completed primarily as a result of the efforts of State Street -- which by then had been appointed as an independent fiduciary of the CSF portion of the Plan -- it was acknowledged that the face values did not represent an accurate measure of the fair market value of the instruments held in the fund. Id. ¶¶ 113-15. Plaintiffs allege that indeed, the assets held by the CSF are worth considerably less than the reported values, and that as such the Plan and its participants have realized significant losses. Id. ¶ 116.
Plaintiffs commenced this action on August 26, 2003. Dkt. No. 1.
Named as defendants in their complaint are the members of the Administration Committee and the Investment Committee (collectively referred to by the plaintiffs as the "Committee Defendants"); the members of the Agway Board of Directors (the "Director Defendants"); Boston Safe, a trustee designated to hold and manage the assets of the CSF;*fn9 and PWC, an independent auditor tasked with reviewing the Agway Plan's annual financial reports. Dkt. No. 1.
An amended complaint, the operative pleading now before the court, was subsequently filed by the plaintiffs on December 29, 2003. Dkt. No. 29. Plaintiff's amended complaint asserts claims under ERISA against the various defendants for violating their fiduciary duties and engaging in prohibited transactions. Those ERISA violations alleged generally relate to the failure of Plan fiduciaries to discern Agway's tenuous financial condition and the resulting overvaluation of Agway Securities held in the Plan's CSF, their failure to investigate as to whether the continued purchase of Agway Securities was a reasonable and prudent investment option, and the alleged dissemination of false and misleading information to the Plan participants regarding the financial condition of the Company and value of its securities. Plaintiffs' complaint also sets forth pendent state law claims sounding in breach of contract, malpractice and negligent misrepresentation against defendant PWC. Id.
In lieu of answering plaintiffs' complaint, as amended, the various defendants have filed multiple motions attacking the legal sufficiency of plaintiffs' claims.*fn10 See Dkt. Nos. 42-46 (Director Defendants); 47, 49, 51-55 (PWC); and 48, 50 (Committee Defendants). Those motions, which are now fully briefed, have been referred to me by Senior District Judge Howard G. Munson for the issuance of a report and recommendation, pursuant to 28 U.S.C. § 636(b)(1)(B).*fn11 See also Fed. R. Civ. P. 72(b).
A. Rule 12(b)(6) Standard
A motion to dismiss a complaint, brought pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, calls upon a court to gauge the facial sufficiency of that pleading, applying a standard which is neither controversial nor rigorous in its requirements. Under that provision, a court may not dismiss a complaint unless "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him [or her] to relief." Davis v. Goord,320 F.3d 346, 350 (2d Cir. 2003) (citing, inter alia, Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102 (1957)). In deciding a Rule 12(b)(6) dismissal motion, the court must accept the material facts alleged in the complaint as true, and draw all inferences in favor of the non-moving party. Cooper v. Pate, 378 U.S. 546, 546, 84 S.Ct. 1733, 1734 (1964); Miller v. Wolpoff & Abramson, LLP, 321 F.3d 292, 300 (2d Cir.), cert. denied, 540 U.S. 823, 124 S.Ct. 153 (2003); Burke v. Gregory,356 F. Supp.2d 179, 182 (N.D.N.Y. 2005) (Kahn, J.). Materials attached to and incorporated by reference into a complaint may also be considered when evaluating a party's claims in the face of a Rule 12(b)(6) motion.*fn12
B. Governing Pleading Requirements
Rule 8 of the Federal Rules of Civil Procedure, which sets forth the general pleading requirements applicable to most complaints filed in the federal courts, requires that such a pleading include "a short and plain statement of the claim showing that the pleader is entitled to relief[.]" Fed. R. Civ. P. 8(a); see In re WorldCom, Inc.,263 F. Supp.2d 745, 756 (S.D.N.Y. 2003). The court's determination as to the sufficiency of a complaint must take into consideration the fact that the governing pleading rules ordinarily require only that a defendant be afforded "fair notice of what the plaintiff's claim is and the grounds upon which it rests." Conley, 355 U.S. at 47, 78 S.Ct. at 103; see Phillips v. Girdich, 408 F.3d 124, 127-29 (2d Cir. 2005); In re Ferro Corp. ERISA Litig.,422 F.Supp.2d 850, 857 (N.D. Ohio 2006). This standard, though unexacting, nonetheless requires that a complaint contain "more than the bare assertion of legal ...