Baker, Watts & Co. v. Miles & Stockbridge

• Decision Date: 27 June 1988
• Docket Number: Civ. A. No. Y-87-2872,Y-87-3164.
• Court: U.S. District Court — District of Maryland
• Parties: BAKER, WATTS & CO., Plaintiff, v. MILES & STOCKBRIDGE, et al., Defendants.

690 F. Supp. 431

BAKER, WATTS & CO., Plaintiff, v. MILES & STOCKBRIDGE, et al., Defendants.

Civ. A. Nos. Y-87-2872, Y-87-3164.

United States District Court, D. Maryland.

June 27, 1988.

David F. Albright, Baltimore, Md., for plaintiff.

Francis B. Burch, Jr., Baltimore, Md., for defendants.

MEMORANDUM

JOSEPH H. YOUNG, District Judge.

Plaintiff Baker, Watts & Co., a Maryland investment banking partnership, was found liable to certain investors for violations of federal and state securities law. Adalman v. Baker, Watts & Co., No. Y-83-2485 (D.Md.1985). After an unsuccessful appeal, see Adalman, 807 F.2d 359 (4th Cir. 1986), plaintiff filed identical actions in federal and state court against defendants, the law firm of Miles & Stockbridge and its partner Timothy R. Casgar, for indemnification and contribution under the federal and state securities acts, as well as for legal malpractice, negligent misrepresentation, and breach of contract.

Defendants removed plaintiff's state action to federal court. On March 18, 1988, the Court denied plaintiff's motion to remand its state action and consolidated the two suits in this action. Currently, defendants move to dismiss plaintiff's suit because it fails to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6). Plaintiff moves for partial judgment on the pleadings regarding its claim for contribution under state securities law. Fed.R.Civ.P. 12(c). Because these motions present matters outside the pleadings, the Court will treat them as cross-motions for summary judgment. Fed.R.Civ.P. 12(b), (c). Finally, defendants ask the Court to sanction plaintiff for filing this action. Fed.R.Civ.P. 11.

Background

In 1981, plaintiff retained defendants to perform all requisite legal services in connection with its private offering and sale of limited partnership interests in Superior Drilling Partners '81 ("Partners '81"). The private offering commenced on March 9, 1981, with the issuance of the Confidential Offering Memorandum, and closed on June 1, 1981. During this time, defendant Casgar held 4.2 percent of the stock of Superior Petroleum, Inc. ("Superior"), the general partner of Partners '81. In addition, fourteen partners and two employees of plaintiff owned 28 percent of Superior's stock. Together, defendant Casgar and plaintiff's partners and employees negotiated with Superior's president regarding the possible sale of their Superior stock. However, the Confidential Offering Memorandum was never amended to reflect these communications.

On July 1, 1981, defendant Casgar and plaintiff's partners and employees sold their Superior stock to Superior's president. Consequently, numerous investors who had purchased Partners '81 limited partnerships in the private offering sued plaintiff, alleging that the Confidential Offering Memorandum contained material omissions in violation of section 12(2) of the Securities Act of 1933 ("1933 Act"), 15 U.S.C. § 771(2),¹ and section 11-703(a)(1)(ii) of the Maryland Corporations and Associations Code.² These Partners '81 investors obtained a judgment against plaintiff in the amount of $1,916,314.17, Adalman, No. Y-83-2485 (D.Md.1985), and later received $2,300,000.00 from plaintiff pursuant to a settlement agreement after its unsuccessful appeal. See Adalman, 807 F.2d 359 (4th Cir.1986). Plaintiff then filed this $7,000,000.00 action against defendants for indemnification and contribution under section 12(2) of the 1933 Act and section 11-703 of the Maryland Corporations and Associations Code, as well as for legal malpractice, negligent misrepresentation, and breach of contract. The Court will now address the merits of these respective claims.

Indemnification Under Section 12(2) of the Securities Act of 1933

Although section 12(2) of the 1933 Act creates an express cause of action on behalf of a security purchaser against the seller, it does not expressly provide for indemnification or contribution. In fact, the 1933 Act "does not provide anywhere for indemnification under any circumstances." Heizer Corp. v. Ross, 601 F.2d 330, 335 (7th Cir.1979); Stowell v. Ted S. Finkel Investment Services, Inc., 641 F.2d 323, 325 (5th Cir.1981). Moreover, only section 11(f) of the 1933 Act, 15 U.S.C. § 77k(f), contains an express contribution provision. Id. Thus, plaintiff claims an implied right to indemnification and contribution under section 12(2).

In Northwest Airlines, Inc. v. Transport Workers Union of America, 451 U.S. 77, 91, 101 S.Ct. 1571, 1580, 67 L.Ed.2d 750 (1981), the United States Supreme Court provided:

In determining whether a federal statute that does not expressly provide for a particular private right of action nonetheless implicitly created that right, our task is one of statutory construction. The ultimate question in cases such as this is whether Congress intended to create the private remedy — for example, a right to contribution — that the plaintiff seeks to invoke. Factors relevant to this inquiry are the language of the statute itself, its legislative history, the underlying purpose and structure of the statutory scheme, and the likelihood that Congress intended to supersede or to supplement existing state remedies.

(citations omitted). Section 12(2) is one of "numerous carefully drawn express civil remedies provided" in the federal securities acts. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 730, 95 S.Ct. 1917, 1922, 44 L.Ed.2d 539 (1975). As the Supreme Court noted in National Railroad Passenger Corp. v. National Association of Railroad Passengers, 414 U.S. 453, 458, 94 S.Ct. 690, 693, 38 L.Ed.2d 646 (1974): "A frequently stated principle of statutory construction is that when legislation expressly provides a particular remedy or remedies, courts should not expand the coverage of the statute to subsume other remedies."

The law is clear that the 1933 Act does not provide for indemnification. See, e.g., Heizer Corp., 601 F.2d at 335; Stowell, 641 F.2d at 325. "In extending liability to underwriters and those who prepared misleading statements, the purpose of the 1933 Act is regulatory rather than compensatory, and permitting indemnity would undermine the statutory purpose of assuring diligent performance of duty and deterring negligence." Laventhol, Krekstein, Horwath & Horwath v. Horwitch, 637 F.2d 672, 676 (9th Cir.1980), cert. denied, 452 U.S. 963, 101 S.Ct. 3114, 69 L.Ed.2d 975 (1981). Moreover, many courts have specifically dismissed claims for indemnification pursuant to section 12(2) of the 1933 Act. See, e.g., In re Professional Financial Management, Ltd., Current Binder Fed.Sec.L.Rep. (CCH) ¶ 93,716, at 98,317, 683 F.Supp. 1283 (D.Minn.1988); Kennedy, 1982-1983 Transfer Binder Fed.Sec.L. Rep. (CCH) ¶ 99,204, at 95,822. Accordingly, the Court grants defendants' motion for summary judgment regarding plaintiff's claim for indemnification under section 12(2).³

Contribution Under Section 12(2) of the Securities Act of 1933

The Supreme Court recently confirmed that section 12 of the 1933 Act does not expressly provide for contribution. Pinter v. Dahl, ___ U.S. ___, ___ n. 9, 108 S.Ct. 2063, 2069 n. 9, 100 L.Ed.2d 658 (U.S.1988). Unfortunately, the Court could not address the "difficult and unsettled" question concerning the availability of contribution under section 12 because the matter was not before it. Id. ___ U.S. at ___ n. 9, ___ n. 30, 108 S.Ct. at 2069 n. 9, 2083 n. 30 at 4581 n. 9, 4588 n. 30. Nevertheless, this issue is currently ripe for resolution by this Court.

The law regarding contribution under the 1933 Act certainly requires clarification. In DeHaas v. Empire Petroleum Co., 286 F.Supp. 809, 815-16 (D.Colo.1968), aff'd in relevant part, 435 F.2d 1223 (10th Cir. 1970), the first case to address the availability of contribution in a federal securities law action, the court implied a right to contribution under section 10(b) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. § 78j(b). Recognizing that sections 9 and 18 of the 1934 Act, 15 U.S.C. §§ 78i, 78r, expressly provide for a cause of action which includes the right to contribution, the court decided to permit contribution in a section 10(b) action, where the right of action itself is implied. Id.

Since DeHaas, courts have liberally implied the right to contribution to numerous sections of the federal securities acts, including section 12(2) of the 1933 Act, which expressly provides for a right of action, but does not include contribution as a remedy.⁴See, e.g., Odette v. Shearson, Hammill & Co., 394 F.Supp. 946, 958 (S.D.N.Y.1975). This precedent "was built on a foundation of sand." In re Olympia Brewing Co. Securities Litigation, 674 F.Supp. 597, 614 (N.D.Ill.1987) ("In the case of section 12(2) of the 1933 Act that expressly provides for a right of action but not for contribution, the court finds that it has no authority to imply or create a right to contribution.").

Section 12(2) of the 1933 Act does not expressly provide for contribution. Pinter, ___ U.S. at ___ n. 9, 108 S.Ct. at 2069 n. 9. Moreover, there is no evidence of congressional intent to provide this particular remedy under section 12(2) in the legislative history of the 1933 Act or its subsequent amendments. As the Supreme Court provided:

`The failure of Congress expressly to consider a private remedy is not inevitably inconsistent with an intent on its part to make such a remedy available.' But unless this congressional intent can be inferred from the language of the statute, the statutory structure, or some other source, the essential predicate for implication of a private remedy simply does not exist.⁵

Northwest Airlines, 451 U.S. at 91, 101 S.Ct. at 1580 (quoting Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 18, 100 S.Ct. 242, 246, 62 L.Ed.2d 146 (1979)).

Consequently, three courts have recently held that contribution is not available under section 12(2) of the 1933 Act. Professional Financial Management,...