Employers Ins. of Wausau v. Musick, Peeler & Garrett

• Decision Date: 23 January 1992
• Docket Number: No. 90-55791,90-55791
• Citation: 954 F.2d 575
• Parties: , Fed. Sec. L. Rep. P 96,486 EMPLOYERS INSURANCE OF WAUSAU, Federal Insurance Company, Plaintiffs-Appellants, 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 thru 100, and Does 1 thru 300, Inclusive, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 575

954 F.2d 575

60 USLW 2489, Fed. Sec. L. Rep. P 96,486

EMPLOYERS INSURANCE OF WAUSAU, Federal Insurance Company, Plaintiffs-Appellants, 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 thru 100,

and Does 1 thru 300, Inclusive, Defendants-Appellees.

No. 90-55791.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted June 6, 1991.

Decided Jan. 23, 1992.

Lawrence H. Nagler, Nagler & Schneider, Beverly Hills, Cal., for plaintiffs-appellants.

William J. Reifman, Mayer, Brown & Platt, Los Angeles, Cal., Charles A. Bird, Luce, Forward, Hamilton & Scripps, San Diego, Cal., for defendants-appellees.

Appeal from the United States District Court for the Southern District of California.

Before GOODWIN, PREGERSON and ALARCON, Circuit Judges.

GOODWIN, Circuit Judge:

The securities fraud contribution question left open in Franklin v. Kaypro Corp., 884 F.2d 1222 (9th Cir.1989), cert. denied sub nom., Franklin v. Peat Marwick Main & Co., --- U.S. ----, 111 S.Ct. 232, 112 L.Ed.2d 192 (1990) is presented in this appeal by insurance carriers who are subrogated to the contribution rights of settling defendants (their insureds).

The plaintiffs seek recovery against nonparties now alleged to be culpable in the original public offering that resulted in the underlying litigation. Kaypro held that the district court could properly bar the nonsettling defendants from seeking contribution from the settling defendants, and held further that the nonsettling defendant's exposure should be limited to their actual percentage of liability based upon their culpability as determined by trial. Kaypro left open the contribution liability of nonparties who would have been defendants had they been sued by the original plaintiffs, but who were, for various reasons, not named as parties and thus were not participants in the settlement negotiations.

Employers Insurance of Wausau (Wausau) and Federal Insurance Co. (Federal), insurers of the settling defendants in a securities fraud class action, In re Cousins Securities Litigation, No. 84-1821-(IEG), appeal the dismissal of their action for contribution under federal law and for comparative equitable indemnity under state law against the defendants, persons who were the attorneys and accountants of the insureds in the public offering that gave rise to the class action suit.

Shareholders of Cousins Home Furnishings, Inc. filed the class action against insureds--Cousins, along with its holding company, certain of its officers and directors, and its two lead underwriters--alleging violations of federal securities law and California corporations law in connection with a public offering in 1983. The shareholders did not, however, sue, nor did insureds implead the attorneys and accountants involved in the underlying transaction. All defendants in the suit entered into a settlement agreement with the plaintiff class agreeing to pay plaintiff shareholders $13.5 million, an amount determined by a federal magistrate after a "good faith" hearing to "represent[ ] the settling defendants' fair or proper share of the total damages sought by the plaintiffs."

The settlement contained a general release from liability, including the release of potential claims by the plaintiff class against insureds' attorneys and accountants, even though they were not defendants. At the time of the agreement, the statute of limitations had already run on claims by the plaintiff class against the non-party lawyers and accountants. Although agreeing to the settlement, insureds expressly denied liability. Wausau and Federal (the "Insurers") have paid their appropriate percentages of the settlement amount.

The Insurers now assert the right, as insureds' subrogees, to sue the attorneys and accountants. Insurers' complaint, which resembles the shareholders' complaint against insureds in the class action, alleges various misrepresentations that defendants caused insureds to make to investors about matters germane to the public offering, in violation of section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities Exchange Commission, 17 C.F.R. § 240.10b-5.

Holding that a settling defendant who has paid no more than its fair share of the total liability is not entitled to contribution under federal securities law, the district court dismissed the action without leave to amend for failure to state a claim upon which relief may be granted, pursuant to Fed.R.Civ.P. 12(b)(6). This court reviews the granting of a 12(b)(6) motion de novo. Massey v. Inland Boatmen's Union of Pacific, 886 F.2d 1188, 1189 (9th Cir.1989). Because we find that the Insurers have stated a valid claim for contribution, we reverse.

No explicit right to contribution is provided for in section 10(b) of the Securities Exchange Act of 1934 or Rule 10b-5. We have recognized, however, that these provisions imply a right of contribution. See Kaypro, 884 F.2d at 1226; Smith v. Mulvaney, 827 F.2d 558, 561 (9th Cir.1987).

Actions for contribution arise in many different procedural settings. For example, contribution may be sought by one defendant against other named defendants by a motion to the court, see Globus, Inc. v. Law Research Service, Inc., 318 F.Supp. 955, 957 (S.D.N.Y.1970), aff'd, 442 F.2d 1346 (2nd Cir.), cert. denied sub nom., Law Research Service, Inc. v. Blair & Co., 404 U.S. 941, 92 S.Ct. 286, 30 L.Ed.2d 254 (1971). An individual seeking contribution is not limited, however, to the parties named by the plaintiff in the original suit. Contribution may be the sought through a third party action pursuant to Rule 14(a) of the Federal Rules of Civil Procedure. See Tucker v. Arthur Andersen & Co., 646 F.2d 721, 727 n. 7 (2nd Cir.1981); Odette v. Shearson, Hammill & Co., Inc., 394 F.Supp. 946, 958 (S.D.N.Y.1975); Liggett & Myers, Inc. v. Bloomfield, 380 F.Supp. 1044, 1047 (S.D.N.Y.1974).

While actions for contribution are frequently brought in the context of third party practice, it does not follow that third party procedure is the exclusive remedy. The right of contribution is substantive in nature. "Rule 14, like all of the Federal Rules of Civil Procedure, is purely procedural. It does not create or modify any substantive rights, such as the right to indemnification or contribution." 3 Moore's Fed.Prac., p 14.03. Thus, a claim for contribution may be maintained in a separate action. Heizer Corp. v. Ross, 601 F.2d 330, 334 (7th Cir.1979). See also Restatement (Second) of Torts § 886A(2) comment i (1979) ("A separate action for contribution is also available, particularly against a tortfeasor who was not a party to the original action.").

The provisions of the securities laws that explicitly provide for contribution envision the possibility of such claims being brought as separate causes of action. Contribution is not limited to parties involved in the original suit. Section 78r(b), for example, provides:

Every person who becomes liable to make payment under this section may recover contribution as in cases of contract from any person who, if joined in the original suit, would have been liable to make the same payment.

15 U.S.C. § 78r(b) (emphasis added). Actions for contribution may be brought, as in this case, in a separate proceeding.

The law of contribution is intricate, but the basic principle is easy to state:

Typically, a right to contribution is recognized when two or more persons are liable to the same plaintiff for the same injury and one of the joint tortfeasors has paid more than his fair share of the common liability. Recognition of the right reflects the view that when two or more persons share responsibility for a wrong, it is inequitable to require one to pay the entire cost of reparation, and it is sound policy to deter all wrongdoers by reducing the likelihood that any will entirely escape liability.

Northwest Airlines, Inc. v. Transport Workers Union, 451 U.S. 77, 87-88, 101 S.Ct. 1571, 1578-79, 67 L.Ed.2d 750 (1981) (footnotes omitted).

The defendants argue that an action for contribution exists only when an individual has paid more than her "fair share" of the common liability. Since the court in Cousins found that the settlement represented the insureds "fair and proper share of the total damages sought against them in the action," the defendants contend that the present action was properly dismissed.

The problem with this argument is that it fails to recognize that the meaning of the term "fair share" depends upon the context in which it is used. The concept of fairness is inherently relational. There are three distinct relationships involved in the present case, each of which engenders a separate standard to assess the fairness of the Cousins settlement: (i) the relationship between individual Cousins defendants and the plaintiff class, (ii) the relationship between the Cousins defendants, "inter se," and (iii) the relationship between the Cousins defendants and joint tortfeasors who were not party to the suit.

Given that all tortfeasors are jointly and severally liable for the damages suffered by the plaintiff class, if only one of them were sued, it would be "fair" for that individual to be required to pay plaintiffs the full amount of the damages. The total sum of the damages would be that defendant's "fair share." When a number of joint tortfeasors are named as defendants, then the "fair share" of individual defendants is determined by their relative culpability. Smith v. Mulvaney, 827 F.2d at 561. "Relative" in this context is defined "inter se," in reference to the other defendants involved to the suit. The failure to join all culpable actors has the obvious effect of inflating the relative culpability of the parties who are joined.

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