Baker v. BP America, Inc.

• Decision Date: 23 October 1990
• Docket Number: Civ. A. No. 90CV0911.
• Parties: Geoffrey BAKER, et al., Plaintiffs, v. BP AMERICA, INC., Defendant/Third Party Plaintiff, v. CIMCAST CORP., Third Party Defendant.
• Court: U.S. District Court — Northern District of Ohio

749 F. Supp. 840

Geoffrey BAKER, et al., Plaintiffs, v. BP AMERICA, INC., Defendant/Third Party Plaintiff, v. CIMCAST CORP., Third Party Defendant.

Civ. A. No. 90CV0911.

United States District Court, N.D. Ohio, E.D.

October 23, 1990.

Byron S. Krantz, Joshua R. Cohen, Donald S. Scherzer, Kohrman, Jackson & Krantz, Cleveland, Ohio, for plaintiffs and third party defendant.

Mark J. Valponi, Stephen M. O'Bryan, Kelley, McCann & Livingstone, Cleveland, Ohio, for defendant/third party plaintiff.

MEMORANDUM AND ORDER

ANN ALDRICH, District Judge.

Geoffrey Baker, the Hawk Corporation, and Walter Wright brought this securities fraud claim against BP America, Inc., under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5; the complaint also includes pendant state law claims for fraud and breach of contract. BP responded with a counterclaim against the three plaintiffs for contribution, and a third-party complaint against Cimcast Corporation for contribution and indemnification for all but the breach of contract claim. Pending are motions to dismiss BP's counterclaim and third-party complaint. The motions to dismiss BP's contribution claims under § 10(b) and Rule 10b-5 are denied, but the motion to dismiss BP's claim for indemnification from Cimcast is granted. The motions to dismiss those portions of BP's counterclaim and third-party complaint seeking contribution for common law fraud are granted.

I.

Baker, Wright, and Gary Worner — a BP employee — together formed Cimcast Corporation in May 1988 to acquire BP's Cast Alloy Parts Venture ("the Venture"). Baker, Wright, and Hawk Corporation — an investment group formed to acquire an interest in Cimcast — purchased Cimcast shares. Cimcast successfully acquired the Venture's assets and technology, but the Venture did not prove to be the profitable investment envisioned by the plaintiffs.

BP sold the Venture as part of its corporate efforts to divest itself of holdings outside the petroleum industry. The Venture manufactured commercial metal products known as "custom near-net shape castings", and it claimed to do so by means of a newly developed and technologically advanced process. According to the plaintiffs, BP materially misrepresented the Venture's potential, including information concerning its sales record and the viability of its technology. Allegedly, the principal source of this misinformation was Worner, the BP employee in charge of the Venture. According to the plaintiffs, Worner had first misrepresented these facts to BP in order to prevent BP from abandoning the project, and then continued these misrepresentations to further BP's efforts to find an outside buyer. The plaintiffs contend that they relied upon these misrepresentations in purchasing Cimcast stock. The plaintiffs also contend that BP breached the "asset transfer agreement" which required BP to convey certain "developed technology" to Cimcast; the plaintiffs contend that such technology did not exist.

BP denies these allegations and contends that any losses experienced by the plaintiffs were the result of their own actions. BP also claims that Cimcast purchased the Venture's assets "as is", without any warranties or representations, and that the plaintiffs are thus barred from seeking compensation from BP for their losses. BP emphasizes that Baker and Wright spent several months on the premises of the Venture's operations, evaluating its potential and soliciting possible investors. In the event it is held liable, BP contends that it would be entitled to contribution from all three plaintiffs and Cimcast. BP argues that the three plaintiffs knew of the "misrepresentations" in seeking investors for Cimcast, and that they therefore should be held liable proportionate to their wrongdoing if there is any judgment entered against BP. BP also seeks contribution and indemnification for Cimcast itself. BP asserts that any liability against it could arise only from misconduct by Worner; according to BP, BP and Cimcast entered into an indemnity agreement whereby, among other things, Cimcast agreed to indemnify BP against claims for any misconduct by Worner. Worner apparently became an employee of Cimcast once BP transferred the Venture's assets. Second, BP claims that Worner was acting as an agent (or de facto agent) of Cimcast during the relevant times, and that Cimcast — and not BP — therefore should be held liable for any misconduct by Worner.

II.

A.

The question of whether contribution is available in a private cause of action brought under § 10(b) of the Securities Exchange Act — and, by extension, Rule 10b-5 — is an open one in the Sixth Circuit. However, the vast majority of courts addressing this issue have concluded that contribution should be allowed. Smith v. Mulvaney, 827 F.2d 558, 560 (9th Cir.1987); Tucker v. Arthur Andersen & Co., 646 F.2d 721, 727 n. 7 (2d Cir.1981); Stowell v. Ted S. Finkel Investment Services, Inc., 641 F.2d 323, 325 (5th Cir.1981); Huddleston v. Herman & MacLean, 640 F.2d 534, 556-59 (5th Cir.1981), aff'd in part, rvs'd in part on other grounds, 459 U.S. 375, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983); Heizer Corp. v. Ross, 601 F.2d 330, 331-34 (7th Cir.1979); Wilder v. Williams, 1989-90 Transfer Binder Fed.Sec.L.Rep. (CCH) ¶ 94,776, 1989 WL 159591 (W.D.Pa.1989); Alexander Grant & Co. v. McAlister, 669 F.Supp. 163, 165-66 (S.D.Ohio 1987); Seiler v. E.F. Hutton & Co., Inc., 102 F.R.D. 880, 885-86 (D.N.J.1984); In re National Student Marketing Litigation, 517 F.Supp. 1345 (D.D.C.1981); Marrero v. Abraham, 473 F.Supp. 1271, 1276-78 (E.D.La.1979); McLean v. Alexander, 449 F.Supp. 1251, 1266-68 (D.Del.1978), rvs'd on other grounds, 599 F.2d 1190 (3d Cir.1979); Globus, Inc. v. Law Research Service, Inc., 318 F.Supp. 955, 957-58 (S.D.N.Y.1970), aff'd on op. below, 442 F.2d 1346 (2d Cir. 1971), cert. denied, 404 U.S. 941, 92 S.Ct. 286, 30 L.Ed.2d 254 (1971) ("Globus II"); deHaas v. Empire Petroleum Co., 286 F.Supp. 809, 815-16 (D.Colo.1968), aff'd in part, vacated in part on other grounds, 435 F.2d 1223 (10th Cir.1970). These courts recognize that the private cause of action under § 10(b) is judicially created, see Herman & MacLean v. Huddleston, 459 U.S. 375, 380, 103 S.Ct. 683, 686, 74 L.Ed.2d 548 (1983); they reason, then, that to recognize a right to contribution is appropriate since Congress provided for contribution in other portions of the securities laws which statutorily establish private causes of action.¹

Contribution promotes a fair and equitable allocation of the plaintiffs' losses among all wrongdoers and prevents a § 10(b) defendant from risking undue liability resulting from arbitrary or tactical decisions by plaintiffs regarding which parties to name as defendants to a lawsuit. Many courts point out that allowing contribution — which distributes liability among wrongdoers in proportion to their culpability — is consistent with the policies behind the securities laws: "The deterrent effect of the judgment is felt by all culpable parties and the protected investor class has available to it a broader source of reimbursement." Heizer, 601 F.2d at 332. This reasoning seems proper, and this Court accordingly agrees that contribution should be available in at least some cases arising under § 10(b).

The plaintiffs and Cimcast urge this Court to follow an emerging minority rule which declines to recognize any right of contribution in cases arising under § 10(b). First Financial Savings Bank v. American Bankers Insurance Co., 1989-90 Transfer Binder Fed.Sec.L.Rep. (CCH) ¶ 94,824, 1989 WL 168015 (E.D.N.C.1989); Robin v. Doctors Officenters Corp., 730 F.Supp. 122, 123-25 (E.D.Ill.1989); In re Professional Financial Management, Ltd., 683 F.Supp. 1283, 1285-87 (D.Minn. 1988). These cases principally rely on two Supreme Court decisions which declined to allow contribution for other federal private causes of action, Northwest Airlines v. Transport Workers Union, 451 U.S. 77, 101 S.Ct. 1571, 67 L.Ed.2d 750 (1981), and Texas Industries, Inc. v. Radcliffe Materials, 451 U.S. 630, 101 S.Ct. 2061, 68 L.Ed.2d 500 (1981). In the first case, Northwest Airlines sought contribution from two unions after a judgment had been entered against it because of pay disparity between male and female flight attendants, a violation of the Equal Pay Act of 1963 and Title VII of the Civil Rights Act of 1964, 29 U.S.C. § 206(d) and 42 U.S.C. § 2000e-2. Northwest brought its own action against the unions and argued that it was entitled to contribution because the illegal pay structure had been part of a collective bargaining agreement with the unions. 451 U.S. at 80-82, 101 S.Ct. at 1575-76. The Supreme Court concluded that Northwest could not claim any right of contribution under either the Equal Pay Act or Title VII. Looking to the text of the statutes and their legislative histories, and emphasizing that the laws were enacted solely to establish statutory rights of employees as against employers, the Court held that, as an employer, Northwest could not be a "beneficiary" of the statutes and was therefore barred from seeking contribution from the unions. 451 U.S. at 91-95, 101 S.Ct. at 1580-82. The Court reached a similar conclusion in Texas Industries, Inc. v. Radcliffe Materials, Inc., 451 U.S. 630, 101 S.Ct. 2061, 68 L.Ed.2d 500 (1981), a case involving the Sherman and Clayton antitrust acts, 15 U.S.C. §§ 1, 4. Texas Industries produced concrete, and one of its customers filed a civil antitrust action against it, alleging that Texas Industries and other concrete manufacturers had entered into a price fixing conspiracy. 451 U.S. at 632-33, 101 S.Ct. at 2062-63. The Supreme Court held that Texas Industries could not seek contribution from the other manufacturers with which Texas Industries had allegedly conspired. Using its Northwest Airlines analysis, the Court refused to find a right of contribution,...