Empl. Ins. of Wausau v. Musick, Peeler & Garrett, 89-0705-J (BTM).
| Decision Date | 22 November 1994 |
| Docket Number | No. 89-0705-J (BTM).,89-0705-J (BTM). |
| Citation | 871 F. Supp. 381 |
| Court | U.S. District Court — Southern District of California |
| Parties | EMPLOYERS INSURANCE OF WAUSAU and Federal Insurance Company, Plaintiffs, v. MUSICK, PEELER, & GARRETT, a Partnership; Leonard Castro, an Individual; Robert Schuchard, an Individual; K.M.G. Main Hurdman, a partnership, Peat Marwick, Main & Co., a Partnership; J.H. Cohn & Co., a Partnership; Ed Bacani, an Individual; Robert Torkar, an Individual; Does 1 through 100; and Roes 1 through 300, Inclusive, Defendants. |
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David Jordan Zubkoff, Seltzer, Caplan, Wilkins and McMahon, San Diego, CA, Larry Goldberg, Nagler and Schneider, Beverly Hills, CA, Gerald L. McMahon, Seltzer, Caplan, Wilkins and McMahon, San Diego, CA, Lawrence H. Nagler, Nagler and Associates, Beverly Hills, CA, for plaintiffs.
Charles A. Bird, Charles A. Danaher, Luce, Forward, Hamilton and Scripps, San Diego, CA, Robert G. Steiner, Luce, Forward, Hamilton & Scripps, San Diego, CA, for Musick, Peeler, & Garrett, Leonard Castro, Robert Schuchard.
William J. Reifman, Mayer, Brown and Platt, Los Angeles, CA, for KMG Main Hurdman.
William J. Reifman, Mayer, Brown and Platt, Los Angeles, CA, Stanley J. Parzen, Mayer, Brown and Platt, Chicago, IL, for Peat, Marwick, Main & Co.
Mark I. Schlesinger, Joel A. Chernov, Alvin M. Stein, New York City, for J.H. Cohn & Co., Ed Bacani, Robert Torkar.
ORDER GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS, DENYING MOTION TO STRIKE AND GRANTING REQUEST TO TAKE JUDICIAL NOTICE
This case is an action for contribution and equitable indemnity brought by insurers who paid out a $13 million settlement in the Cousins Home Furnishings, Inc. securities litigation in the late 1980's. The insurers brought this action against attorneys and accountants who were not named as defendants in the Cousins action. The insurers claim that the attorneys and accountants are joint tortfeasors along with the parties that they insured and on whose behalf they paid the settlement amount.
The district court dismissed the case in 1990, holding that the insureds had paid only their "fair share" of the settlement, so that contribution would not be allowed. The Ninth Circuit reversed, 954 F.2d 575 (9th Cir.1992), holding that the "fair share" that must be paid by settling defendants is not necessarily equal to the amount of the settlement when the parties from whom contribution is sought were not parties to the original suit. The Supreme Court granted certiorari for the narrow purpose of resolving a circuit split about whether a cause of action for contribution was allowed under section 10b-5. The Supreme Court held that contribution is permitted. ___ U.S. ___, 113 S.Ct. 2085, 124 L.Ed.2d 194 (1993). In so holding, the court distinguished between theories of liability under section 10(b) e.g. aiding and abetting and theories of recovery e.g. contribution. Id. at ___, 113 S.Ct. at 2088.
The second amended complaint now before the court alleges principally that the attorneys and accountants were the actual architects of the prospectus and registration statements, and that these documents contained material misrepresentations and omissions. It asserts federal claims under section 10(b)/Rule 10b-5 of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5, and section 11 of the Securities Act of 1933, 15 U.S.C. § 77k. It also asserts several pendant state law claims for fraud, negligent misrepresentation, and various violations of the California Corporations Code.
Defendants now move to dismiss the second amended complaint, requesting that the court take judicial notice of the securities offering documents. In the alternative, if the court does not take judicial notice, defendants request that the motion be treated as one for summary judgment.
The court grants the request to take judicial notice of the securities offering documents. Defendants cite sufficient authority holding that it is proper to take judicial notice of offering documents for the purpose of a motion to dismiss. Thus, this motion will be analyzed as a motion to dismiss.
Under Federal Rule of Civil Procedure 12(b)(6), the court will grant a motion to dismiss only when it appears beyond doubt that plaintiffs can prove no set of facts in support of their claim which would entitle them to relief. Moore v. City of Costa Mesa, 886 F.2d 260, 262 (9th Cir.1989). In reviewing a motion to dismiss the court must accept as true all material allegations in the complaint, as well as reasonable inferences to be drawn from them. Id. The court need not accept as true allegations that contradict facts which have been judicially noticed by the court. Mullis v. U.S. Bankruptcy Court, 828 F.2d 1385, 1388 (9th Cir.1987).
Defendants move to dismiss each of the 18 claims in the second amended complaint. Defendants present several alternative arguments. The court will reach only those arguments that are necessary to a resolution of this motion.
Defendants argue that after the narrow construction of section 10(b) by the Court in Central Bank of Denver v. First Interstate Bank, ___ U.S. ___, 114 S.Ct. 1439, 128 L.Ed.2d 119 (1994), the court should not imply a right of contribution by an insurer who is subrogated to a right of contribution. Defendants argue that, instead, the right of contribution approved by the Supreme Court in its opinion in this case should apply only to defendants in an action who themselves seek contribution from joint tortfeasors.
The court rejects this argument. For several reasons, the court holds that a subrogated party may bring an action for contribution under the federal securities laws.
First, the court recognizes that there is no express authority in the securities laws for actions brought by subrogees. However, it is consistent with the Supreme Court's opinion in this case and in Central Bank, to allow subrogees to sue for contribution. Allowing contribution actions by subrogees requires the court to imply only a theory of recovery under the securities laws. It does not create any new theories of liability.
In its opinion in this case, ___ U.S. ___, 113 S.Ct. 2085, 124 L.Ed.2d 194 (1993), the Supreme Court signaled that it was willing to effectuate the remedial purposes of the securities laws by expanding theories of recovery to those that were not explicit in the statute. "Even though we are being asked to recognize a cause of action that supports a suit against these parties, the duty is but the duty to contribute for having committed a wrong that courts have already deemed actionable under federal law." Id. at ___, 113 S.Ct. at 2088. In contrast, in Central Bank, the Supreme Court made clear that theories of liability would not be expanded these beyond those that were explicit in the statute. "It is inconsistent with settled methodology in § 10(b) cases to extend liability beyond the scope of conduct prohibited by the statutory text." ___ U.S. at ___, 114 S.Ct. at 1448.
In the case of contribution actions brought by an insurer rather than the original joint tortfeasor, only a theory of recovery is at issue. Thus, the court may, consistent with Supreme Court policy regarding theories of recovery, allow plaintiffs to pursue their contribution action as subrogees.
Second, defendants argue that subrogation is a type of indemnification. They contend that the Ninth Circuit has not permitted indemnification in the context of securities laws, see e.g., Riverhead Sav. Bank v. National Mortgage Equity Corp., 893 F.2d 1109, 1116 (9th Cir.1990). It follows, they argue, that suits based on subrogation should also not be allowed. However, this argument is not persuasive. There is not a direct analogy between (1) whether indemnification is allowed and (2) whether an insurer, already subrogated based on an insurance contract, may bring a suit seeking contribution of a portion of the settlement.
Indemnification includes the 100% shifting of liability from one party to the other. Contribution is the recovery of part of the cost of liability from a joint tortfeasor. Indemnification is not allowed in securities law because, as a matter of policy, a liable party should not be completely relieved of responsibility through an indemnity arrangement. However, this policy should not prevent a party from buying insurance which covers the responsibility, and which then gives the insurer the same right to seek contribution as the insured would have.
Finally, both the Ninth Circuit and the Supreme Court discussed the facts of this case, including the fact that it was brought by a party subrogated to the rights of a joint tortfeasor. Neither court commented that it was a possible issue whether a subrogated party could bring a suit for contribution.
Based on these considerations, the court holds that a right of contribution may be pursued by plaintiffs who are subrogated to the claims of a joint tortfeasor.
The 2nd, 4th, and 6th claims are alternate theories of recovery under the three federal claims for contribution brought under sections 10(b) and 11. These three claims assert state law theories of recovery for equitable indemnity based on violations of federal securities laws. However, the Ninth Circuit has precluded any theory under which this state law theory of recovery could be applied to federal securities law.
First, 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), held that indemnification is not available under federal securities laws, though contribution is. Thus, plaintiffs are not able to bring a claim for indemnity based on a federal securities law claim.
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