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Estate of Pew v. Cararelli

September 29, 2009

ESTATE OF BARBARA PEW (DECEASED), JOHN PEW, JR., INDIVIDUALLY AND AS EXECUTOR OF THE ESTATE OF BARBARA E. PEW, HAROLD PEW, DONNA PEW, H. NANCY HANN, JULIA HUDASKY, AND KATHLEEN PRICKETT, ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS,
v.
DONALD P. CARDARELLI, PETER J. O'NEILL, AND PRICEWATERHOUSECOOPERS LLP, DEFENDANTS.



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

MEMORANDUM-DECISION AND ORDER

INTRODUCTION

Presently before the Court is defendants' motion (Dkt. No. 24) to dismiss this class action for failure to state a claim upon which relief may be granted. Fed. R. Civ. P. 12(b)(6). The single cause of action is based on defendants' alleged violation of section 349 of New York General Business Law ("GBL § 349") in connection with the sale of securities issued by Agway, Inc. ("Agway"), an agricultural cooperative. For the reasons set forth below, the Court grants the motion and dismisses the complaint.

BACKGROUND

In a previous action involving the same parties and based on essentially the same transactions (Case No. 5:03-CV-742), plaintiffs' amended complaint alleges that defendants, officers of Agway and Agway's auditor, violated section 11(a) of the Securities Act ("section 11"), 15 U.S.C. § 77k(a), and GBL § 349 by making false and misleading statements in public filings with the Securities and Exchange Commission ("SEC") regarding the sale of subordinated Money Market Certificates ("Certificates") offered by Agway. According to plaintiffs, the SEC filings failed to disclose that Agway was insolvent, thus deceptively inducing plaintiffs to invest in the Certificates. This Court dismissed the Securities Act claims with prejudice and dismissed the state law GBL § 349 claim without prejudice. The Second Circuit affirmed. See Pew v. Cardarelli, 2005 WL 3817472 (N.D.N.Y. Mar. 17, 2005), aff'd 164 Fed.Appx. 41 (2d Cir. 2006) ("Pew I").

Thereafter, plaintiffs reasserted the GBL § 349 claim by filing the instant complaint in New York State Supreme Court. Defendants removed the action to district court, relying on diversity jurisdiction under the Class Action Fairness Act ("CAFA"). 28 U.S.C. § 1332(d). This Court granted plaintiffs' motion to remand, holding that the case fell within an exception to CAFA jurisdiction for any class action that solely involves "a claim that relates to the rights, duties ... and obligations relating to or created by or pursuant to any security...." 28 U.S.C. § 1332(d)(9)(C). The Second Circuit granted leave to appeal, reversed, and remanded, holding that the exception did not apply. See Estate of Pew v. Cardarelli, 2006 WL 3524488 (N.D.N.Y. Dec. 6, 2006), rev'd 527 F.3d 25 (2d Cir. 2008) ("Pew II").

Upon remand, defendants made the present motion to dismiss the GBL § 349 complaint on a number of grounds (Dkt. No. 24). As set forth below, the Court grants the motion.

DISCUSSION

The factual background of the case is set forth in the prior decisions and is not repeated here. The Court refers the reader to those decisions. See Pew v. Cardarelli, 164 Fed.Appx. 41 (2d Cir. 2006), aff'g 2005 WL 3817472 (N.D.N.Y. Mar. 17, 2005) ("Pew I"); Estate of Pew v. Cardarelli, 527 F.3d 25 (2d Cir. 2008), rev'g 2006 WL 3524488 (N.D.N.Y. Dec. 6, 2006) ("Pew II"). In particular, the complaint in Pew II is summarized at 2006 WL 3524488, *1-3. Applicable Law Defendants move to dismiss for failure to state a claim under Fed. R. Civ. P. 12(b)(6). In assessing the legal sufficiency of a claim on a motion to dismiss, the Court takes the factual allegations to be true and draws all reasonable inferences in plaintiffs' favor. Harris v. Mills, 572 F.3d 66, 71 (2d Cir. 2009). The Court may consider the facts alleged in the complaint, as well as "documents that the plaintiffs either possessed or knew about and upon which they relied in bringing the suit." Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000)

The single cause of action in the instant action, Pew II, is based on GBL § 349(a), which provides: "Deceptive acts or practices in the conduct of any business, trade or commerce ... are hereby declared unlawful." GBL § 349 is "a powerful remedy for consumer fraud." Genesco Entm't, a Div. of Lymutt Industries, Inc. v. Koch, 593 F.Supp. 743, 751 (S.D.N.Y.1984). To state a GBL § 349 claim, a plaintiff must prove three elements: "first, that the challenged act or practice was consumer-oriented; second, that it was misleading in a material way; and third, that the plaintiff suffered injury as a result of the deceptive act." Stutman v. Chemical Bank, 95 N.Y.2d 24, 29 (2000). Actionable deceptive acts or practices are "limited to those likely to mislead a reasonable consumer acting reasonably under the circumstances." Oswego Laborers' Local 214 Pension Fund v. Marine Midland Bank, 85 NY2d 20, 26 (1995).

Collateral Estoppel

In moving to dismiss, defendants argue that plaintiffs' GBL § 349 claim is barred by the doctrine of issue preclusion, or collateral estoppel, which bars a party from relitigating an issue that has been resolved in a prior proceeding. See Colon v. Coughlin, 58 F.3d 865, 869 (2d Cir. 1995). Under New York law, collateral estoppel will apply if "(1) the issue in question was actually and necessarily decided in a prior proceeding, and (2) the party against whom the doctrine is asserted had a full and fair opportunity to litigate the issue in the first proceeding." Id.

Defendants ask this Court to give preclusive effect in this action to the Second Circuit's holding in Pew I that Agway's SEC filings were not misleading within the meaning of section 11 of the Securities Act ("section 11"), 15 U.S.C. § 77k.*fn1 In Pew I, the Second Circuit stated:

Upon our review of the record, and of plaintiffs' Amended Complaint, we hold that the District Court did not err in concluding that, during the period at issue here, no reasonable investor could have been misled about the nature and extent of the risks associated with investing in Agway Certificates. Even assuming arguendo that defendants failed to disclose "that Agway had virtually no remaining assets and no operating income by which to discharge its obligations and its 'guarantee' with respect to" outstanding Certificate debt, ... Agway's filings are replete with other warnings about the risk of defaulting on the Certificate debt, the subsidiary nature of that debt, Agway's resort to increasingly bleak credit arrangements, the loss of core business assets and operations, and the consequences of a potential bankruptcy. In light of these warnings, any reasonable investor of ordinary sophistication would have been aware of the risk of non-payment on his Agway Certificates, ...


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