Second Circuit Affirms Latham's Securities Class Action Win for Ferrellgas

Less than a month after Latham argued the case, the appellate court affirmed a SDNY motion to dismiss victory that a Latham team had also achieved.

April 29, 2019

Latham recently won a significant appellate victory for our client Ferrellgas Partners, L.P. (“Ferrellgas”), its general partner, and two of its former executives, in a shareholder class action. Less than a month after Supreme Court and Appellate partner Melissa Arbus Sherry argued the case for Defendants, the Second Circuit issued a summary order affirming an excellent Southern District of New York (SDNY) motion to dismiss victory a Latham team obtained which had dismissed all claims without leave to amend.  

Ferrellgas is in the propane distribution and crude oil transportation business. Plaintiffs, Ferrellgas shareholders, sued the Ferrellgas defendants under Sections 10(b) and 20(a) of the Exchange Act. Plaintiffs alleged that Ferrellgas misled investors after it had acquired an oil logistics company, called Bridger, by making statements about the success of the acquisition and the company’s ability to insulate itself against commodity price risk through a “take-or-pay” contract with a third party, Jamex. Pursuant to the Jamex contract, Ferrellgas was to be paid for transportation of a minimum volume of crude oil regardless of whether the oil was actually transported. However, a downturn in the market first led to the suspension of an underlying oil supply agreement, and ultimately in Jamex being unable to fulfil its obligations to Ferrellgas. As a result, Ferrellgas recorded a $628 million asset impairment charge. 

Plaintiffs alleged that various statements Defendants made constituted securities fraud, because Defendants continued to tout the success of the Bridger acquisition and the durability of the take-or-pay contract without disclosing that the underlying supply agreement had been suspended and no oil was in fact being transported. Latham moved to dismiss and, on April 2, 2018, Judge Sullivan (then of the SDNY) granted Latham’s motion in full and denied plaintiffs leave to amend, largely adopting Latham’s key arguments that Plaintiffs’ claims failed to adequately allege that any of the statements were materially false or misleading, or that Defendants acted with scienter. 

On appeal, Plaintiffs focused on some of the more challenging aspects of the case—Defendants’ failure to disclose the suspension of the supply agreement and the undisclosed sale of a subsidiary that was an important cog in the transportation pipeline, which Plaintiffs argued demonstrated that Ferrellgas was aware that the supply agreement would in fact never resume. Latham’s appellate brief emphasized the take-or-pay nature of the Jamex contract which protected Ferrellgas even in the event that no oil was being transported, and argued that the sale of the subsidiary alone only improved Ferrellgas’s position, assuming Jamex would be able to fulfil its own obligations. The only risk Ferrellgas faced, therefore, was from Jamex’s default—and the complaint failed to plead any facts showing that Ferrellgas knew Jamex was in danger of default. The Second Circuit’s summary order concluded that the district court properly dismissed Plaintiffs’ claims on falsity and scienter grounds, and expressly agreed with Latham’s primary argument that the “complaint suffers from a fatal defect: it assumes without sufficient supporting allegations that Defendants knew or should have known that a contractual counterparty would ultimately default on payments owed.”   

In addition to Sherry, the Latham appellate team included associate Samir Deger-Sen with substantial assistance from partner Jamie Wine and counsel Tom Giblin, who were part of the underlying securities litigation team that won the motion to dismiss. That team was led by partner Miles Ruthberg and also included partner Christian Word.


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