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Estate of Pew v. Cardarelli

December 6, 2006


The opinion of the court was delivered by: Hon. Norman A. Mordue, Chief U.S. District Judge



Presently before the Court is plaintiffs' motion (Dkt. No. 8) to remand this putative class action on the ground of lack of subject-matter jurisdiction or mandatory abstention. The complaint seeks to recover damages based on defendants' alleged violation of section 349 of New York General Business Law in connection with the sale of securities issued by Agway, Inc. ("Agway"), an agricultural cooperative. This action involves the same parties and is based on the same transactions as were the subject of a previous action before this Court (No. 03-CV-742) alleging violations of federal securities law and New York law. On March 17, 2005, this Court dismissed the amended complaint in that action with prejudice, except for the single state law claim under section 349 of New York General Business Law, which the Court dismissed without prejudice. The Second Circuit affirmed. See Pew v. Cardarelli, 2005 WL 3817472 (N.D.N.Y.), aff'd 164 Fed.Appx. 41 (2d Cir. 2006). The present action, filed in New York State Supreme Court on September 22, 2005, and removed by the individual defendants to district court on October 19, 2005, is a reassertion of the state law claim. For the reasons set forth below, the Court grants plaintiffs' motion to remand to state court.


Plaintiffs seek to recover damages allegedly stemming from defendants' violations of New York law in connection with the sale of Subordinated Money Market Certificates ("Certificates") offered by Agway. Plaintiffs, who sue on behalf of a putative class defined as all persons who acquired Certificates during the class period, claim that defendants made false and misleading statements in the applicable Registration Statements, Annual Reports, Quarterly Reports and Current Reports filed with the Securities and Exchange Commission ("SEC") during the relevant period, in violation of section 349 of New York General Business Law. Defendant Donald P. Cardarelli, then Agway's Chief Executive Officer, and defendant Peter J. O'Neill, then Agway's Senior Vice President of Finance and Control, signed allegedly false and misleading Registration Statements and other SEC filings during the class period. Defendant PricewaterhouseCoopers LLP ("Pricewaterhouse"), an accounting firm, audited Agway's financial statements and issued allegedly false and misleading audit reports which, with the knowledge and express consent of Pricewaterhouse, were incorporated into and made part of Agway's Registration Statements and Annual Reports filed with SEC during the class period.

Agway traditionally financed much of its working capital with proceeds from the sales of Certificates, which were fixed-interest debt instruments subordinated to Agway's other debt.

Plaintiffs purchased Certificates during the period from November 1, 2000, through November 3, 2001, pursuant to the 1998 Registration Statement (filed August 31, 1998, effective September 21, 1998) and the 2001 Registration Statement (filed April 30, 2001, effective July 9, 2001). On March 6, 2002, Agway announced a temporary suspension of sales of Certificates; it never resumed selling them. On June 17, 2002, Agway announced the suspension of its practice of repurchasing Certificates prior to maturity. Agway's turnaround efforts failed and on September 30, 2002, it announced its intention to file a petition for reorganization under Chapter 11 of the Bankruptcy Code. It filed the petition in October 2002.

Plaintiffs claim that defendants made numerous false and misleading statements in the following SEC filings relevant to the Certificates issued to and purchased by the class: the 1998 and 2001 Registration Statements (Forms S-3), which incorporated by reference all pertinent annual, quarterly and current reports, and which included by consent the Pricewaterhouse unqualified audit reports for the relevant fiscal years ending in June 1999, 2000 and 2001; the 2000 and 2001 Annual Reports (Forms 10-K), which included by consent the Pricewaterhouse unqualified audit reports; the five Quarterly Reports (Forms 10-Q) for the quarters ending September 2000, December 2000, March 2001 and December 2001; and the two Current Reports (Forms 8-K) dated March 1, 2001 and March 31, 2001. All of these documents were signed either by O'Neill alone or by O'Neill and Cardarelli.

More particularly, in paragraph 97 of the complaint, plaintiffs claim that statements in the Registration Statements and incorporated SEC filings were "materially deceptive, untrue and misleading because they either concealed or failed to disclose" that:

(i) Agway was insolvent from the beginning of the Class Period because the value of its assets during that time, even in complete liquidation, was insufficient by hundreds of millions of dollars to discharge its Money Market Certificate-related liabilities; (ii) the only substantial liquid source of funds available to discharge the hundreds of millions of dollars of Money Market Certificates maturing during the Class Period and thereafter was "other peoples' money" derived from the sale of the new Money Market Certificates; (iii) because substantially all of Agway's most valuable assets were either pledged to senior debt or otherwise unavailable in connection with maturity obligations, the sale of Agway's presently available assets would be insufficient to fully satisfy its payment obligations with respect to the currently maturing Money Market Certificates, let alone newly sold Certificates; (iv) the potential proceeds from substantially dismantling all of Agway's remaining businesses (the antithesis of a "going concern") were only a fraction of the Money Market Certificates outstanding and maturing in the future; (v) Agway's inability to satisfy its obligations concerning the maturing Money Market Certificates from the results of its operations created serious doubt as to whether Agway could continue as a "going concern," and the imminent risk of default; and (vi) therefore, at the time of purchase, the newly issued Money Market Certificates were worth, at most, only a small fraction of the face amount that Agway collected from plaintiffs and the Class.

Paragraph 98 states:

In short, during the Class Period, Agway's Registration statements and incorporated SEC filings were materially deceptive, untrue and misleading, inter alia, because they either concealed or failed to disclose that Agway's existing insolvency from the beginning of and throughout the Class Period exceeded several hundred million dollars, and that the continuing sale of Money Market Certificates during the Class Period to Agway's farmer-members was in essence a Ponzi scheme intended solely to keep Agway afloat without any possibility of discharging the newly sold Money Market Certificates.

Plaintiffs claim that at the time they acquired the Certificates, neither they nor any class member knew or by the exercise of reasonable care could have known of the facts concerning the inaccurate and misleading statements and omissions. Based on these allegations, the complaint asserts that defendants engaged in materially deceptive acts or practices in the conduct of business, trade or commerce in violation of section 349 of New York General Business Law.

Section 349 of New York Business Law provides in subdivision (a): "Deceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service in this state are hereby declared unlawful." Subdivision (h) affords a private cause of action to "any person who has been injured by reason of any violation of this section." The complaint avers that section 349 applies to "virtually all economic activity," citing Karlin v. IVF Am., Inc., 93 N.Y.2d 282, 290 (1999), and states: "Its application here is particularly appropriate in light of, inter alia, the decades long membership relationship between Agway and its farm members, the fact that none of the Money Market Certificates here was traded on any market, and the fact that the name 'Money Market Certificates' in and of itself is confusing to plaintiffs and other members of the Class." The complaint adds: "Its application here is also particularly appropriate in light of the fact that plaintiffs and the Class have lost their money by means of a quintessentially deceptive act and ...

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