Laperriere v. Vesta Ins. Group, Inc.

• Decision Date: 30 April 2008
• Docket Number: No. 06-14524.,06-14524.
• Citation: 526 F.3d 715
• Parties: Kittie LAPERRIERE, Class certification to consist of all persons who acquired the publicly traded equity securities of Vesta Insurance Group, Inc., between June 2, 1995, and June 28, 1998, inclusive (the "Class Period"). Excluded from the class, Israel Burger, Richard Sullivan, Pointers, The Cleaners & Caulkers Local 1 Pension Fund, Florida State Board of Administration, Plaintiffs-Appellants, v. VESTA INSURANCE GROUP, INC., et al., Defendants, Torchmark Corporation, Defendant-Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

526 F.3d 715

Kittie LAPERRIERE, Class certification to consist of all persons who acquired the publicly traded equity securities of Vesta Insurance Group, Inc., between June 2, 1995, and June 28, 1998, inclusive (the "Class Period"). Excluded from the class, Israel Burger, Richard Sullivan, Pointers, The Cleaners & Caulkers Local 1 Pension Fund, Florida State Board of Administration, Plaintiffs-Appellants, v. VESTA INSURANCE GROUP, INC., et al., Defendants Torchmark Corporation, Defendant-Appellee.

No. 06-14524.

United States Court of Appeals, Eleventh Circuit.

April 30, 2008.

James W. Johnson, Kelso Anderson, Thomas A. Dubbs, Labaton Sucharow, LLP, New York City, for Plaintiffs-Appellants.

Matthew H. Lembke, Michael R. Pennington, Bradley, Arant, Rose & White, LLP, William J. Baxley, Elizabeth Wood McElroy, Charles A. Dauphin, Baxley, Dillard, Dauphin, McKnight & Barclift, Birmingham, AL, for Torchmark Corp.

Appeal from the United States District Court for the Northern District of Alabama.

Before EDMONDSON, Chief Judge, and CARNES and FAY, Circuit Judges.

PER CURIAM:

This interlocutory appeal presents an issue of first impression in the circuit courts: whether, and to what extent, the proportionate liability scheme of section 21(D)(f) of the Securities Exchange Act of 1934 (the "Act"),¹ enacted as part of the Private Securities Litigation Reform Act of 1995 (the "PSLRA"), amends section 20(a) of the Act, under which a person who controls a violator of the Act is "liable jointly and severally with and to the same extent" as that violator.

In 1998, Appellants, a group of investors in publicly traded securities, filed a securities class action against three groups of defendants: (1) Vesta Insurance Group, Inc. ("Vesta") and certain of its officers and directors; (2) KPMG Peat Marwick, LLP, Vesta's outside auditor; and (3) Appellee, Torchmark Corporation, the former parent company of Vesta. After completing discovery, obtaining class certification, and surviving various motions to dismiss by defendants, Appellants reached court approved settlements with Vesta and KPMG. Torchmark, whose motion for summary judgment was denied by the district court, is the only remaining defendant in the action.

In 2003, Appellants filed a motion to strike two of Torchmark's affirmative defenses to the extent those defenses improperly sought to graft the PSLRA's scheme of "proportionate liability" onto the joint and several liability existing between a controlling person and a controlled person under section 20(a). In 2004, the district court entered an order denying the motion to strike, concluding, as a matter of first impression, that the proportionate liability regime set out in section 21(D)(f) of the Act "trumps" section 20(a). In 2006, the district court granted Appellants' motion to file an interlocutory appeal and certified the present issue as one "involv[ing] a controlling question of law as to which there is substantial ground for difference of opinion." 28 U.S.C. § 1292(b) (West 2007).

Under section 21(D)(f), a controlling person is liable jointly and severally for the entirety of plaintiffs' damages only if it commits a knowing violation of the Act. Section 20(a) exposes a controlling person who cannot prove the affirmative defense provided in that section to derivative liability for the acts of its controlled person. For the reasons explained below, we do not interpret section 21(D)(f) as "trumping" a controlling person's derivative liability under section 20(a). Recognizing that implicit repeals of statutory provisions are disfavored, we hold that section 21(D)(f) and section 20(a) should be read in harmony to preserve both the PSLRA's proportionate liability scheme and a controlling person's derivative liability under section 20(a).

BACKGROUND

A. The PSLRA and Proportionate Liability

In 1995, "motivated in large part by a perceived need to deter strike suits by opportunistic private plaintiffs that filed securities fraud claims of dubious merit in order to exact large settlement recoveries," Congress passed the PSLRA. Novak v. Kasaks, 216 F.3d 300, 306 (2d Cir.2000). The PSLRA was a reaction to the "significant evidence of abuse in private securities lawsuits," including "the routine filing of lawsuits against issuers of securities and others whenever there is a significant change in an issuer's stock price, without regard to any underlying culpability of the issuer." H.R. Conf. Rep. No. 104-369, at 31 (1995), reprinted in 1995 U.S.C.C.A.N. 730, 730. Congress also hoped to put an end to "the abuse of the discovery process to impose costs so burdensome that it is often economical for the victimized party to settle." Id.

Before the PSLRA, the general rule in most securities law actions was that defendants found to have violated the Act were jointly and severally liable for all the plaintiff's damages. See Musick, Peeler & Garrett, 508 U.S. at 292, 113 S.Ct. 2085 (noting that violators "share joint liability for that wrong under a remedial scheme established by the federal courts."); G.A. Thompson & Co., Inc., 636 F.2d at 963; TBG, Inc. v. Bendis, 36 F.3d 916, 927 (10th Cir.1994). In addition to strike suits, the legislative history of the PSLRA suggests Congress was concerned about the many cases in which the application of traditional joint and several liability unfairly resulted in defendants having to pay for damages caused by other defendants. See H.R.Rep. No. 104-369, at 37 (1995) (Conf.Rep.), reprinted in 1995 U.S.C.C.A.N. 730, 736 ("Under current law, a single defendant who has been found to be 1% liable may be forced to pay 100% of the damages in the case."); S.Rep. No. 104-98, at 20 (1995), reprinted in 1995 U.S.C.C.A.N. 679, 699 ("Under joint and several liability, each defendant is liable for all of the damages awarded to the plaintiff. Thus, a defendant found responsible for only 1% of the harm could be required to pay 100% of the damages.").

To combat these perceived injustices, Congress enacted section 21(D)(f) of the PSLRA, which replaced the existing joint and several liability regime with a proportionate liability scheme that restricts joint and several liability to persons who knowingly violate the Act. Section 21(D)(f) provides in relevant part:

(f) Proportionate liability

(1) Applicability

Nothing in this subsection shall be construed to create, affect, or in any manner modify, the standard of liability associated with any action arising under the securities laws.

(2) Liability for damages

(A) Joint and several liability

Any covered person against whom a final judgment is entered in a private action shall be liable for damages jointly and severally only if the trier of fact specifically determines that such covered person knowingly committed a violation of the securities laws.

(B) Proportionate liability

(i) In general

Except as provided in subparagraph (A), a covered person against whom a final judgment is entered in a private action shall be liable solely for the portion of the judgment that corresponds to the percentage of responsibility of that covered person, as determined [by the fact finder].

15 U.S.C. § 78u-4(f)(2) (West 2007).

Importantly, Congress clarified that section 21(D)(f) affects only the allocation of damages between liable defendants and must not "be construed to create, affect, or in any manner modify, the standard of liability associated with any action" arising under the Act. 15 U.S.C. § 78u-4(f)(1).

Under Section 21(D)(f)'s proportionate liability scheme, there is a three step process to be followed by the fact finder determining a liable defendant's share of responsibility under the Act.² The first step is for the fact finder to determine whether the "covered person [or] other persons claimed by any of the parties to have caused or contributed to the loss incurred by the plaintiff" violated the securities laws.³ Second, the fact finder determines the percentage of responsibility of each person "measured as a percentage of the total fault of all persons who caused or contributed to the loss incurred by the plaintiff." Lastly, the fact finder determines whether such person knowingly committed a violation of the securities laws.

A person "knowingly commits a violation of the securities laws" and thus is responsible for damages jointly and severally if it (1) "makes an untrue statement of a material fact, with actual knowledge that the representation is false" or (2) "omits to state a fact necessary in order to make the statement made not misleading, with actual knowledge that ... one of the material representations of the covered person is false" or (3) "engages in ... conduct with actual knowledge of the facts and circumstances that make the conduct of that covered person a violation of the securities laws." 15 U.S.C. § 78u-4(10) (West 2007).

B. Section 20(a) of the Act and Derivative Liability

The Act imposes liability not only on the person who actually commits a securities law violation, but also on an entity or individual that controls the violator.⁴ Section 20(a) provides:

Every person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.

15 U.S.C. § 78t(a) (emphasis added).

The text of section 20(a) unambiguously imposes derivative liability on persons that control primary violators of the Act. Under section 20(a), a controlling person is liable to the plaintiff jointly and severally with and to the same extent as a controlled person for the controlled person's acts, unless the controlling person can establish the affirmative defense of good faith and...