Heizer Corp. v. Ross, 78-2349

• Decision Date: 13 September 1979
• Docket Number: No. 78-2349,78-2349
• Citation: 601 F.2d 330
• Parties: Fed. Sec. L. Rep. P 96,926 HEIZER CORPORATION, Plaintiff-Appellant, v. Jordon ROSS, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 330

601 F.2d 330

Fed. Sec. L. Rep. P 96,926

HEIZER CORPORATION, Plaintiff-Appellant, v. Jordon ROSS, Defendant-Appellee.

No. 78-2349.

United States Court of Appeals Seventh Circuit.

Argued May 21, 1979.

July 10, 1979.

Rehearing and Rehearing In Banc Denied Sept. 13, 1979.

Allan Horwich, Chicago, Ill., for plaintiff-appellant.

N. A. Giambalvo, Chicago, Ill., for defendant-appellee.

Before SPRECHER, Circuit Judge, PECK, Senior Circuit Judge, ^* and WOOD, Circuit Judge.

SPRECHER, Circuit Judge.

The principal question in this appeal is whether the right of contribution is available from joint securities wrongdoers under Rule 10b-5 in a cause of action separately brought subsequent to the judgment creating the securities laws liability.

I

In a separate cause of action, two shareholders of International Digisonics Corporation (IDC), formed in 1969 to develop electronic monitoring of television commercials as a service for the advertising industry, brought a derivative claim against IDC and its dominant shareholder, Heizer Corporation (Heizer), alleging that Heizer had defrauded IDC in several securities transactions whereby in exchange for lending IDC money Heizer received IDC notes, warrants and common stock. The action was brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and Rule 10b-5 thereunder. The relief sought was equitable only, by way of injunction, rescission and reformation.

The district court cancelled the conversion feature of, and any price adjustment effected through, IDC's notes theretofore convertible to common stock, cancelled a pledge of shares in another corporation given by IDC to Heizer and enjoined Heizer from certain future activities in regard to IDC. Wright v. Heizer Corp., 411 F.Supp. 23 (N.D.Ill.1975). Although modifying some details, the equitable relief granted by the district court was substantially affirmed by this court in 560 F.2d 236 (1977), Cert. denied, 434 U.S. 1066, 98 S.Ct. 1243, 55 L.Ed.2d 767 (1978).

A few months after the issuance of this court's opinion, Heizer brought a cause of action in the district court against Jordon Ross, the former president, chief executive officer and director of IDC and the owner or controller of over 40% Of its outstanding common stock, seeking in two counts indemnification by Ross of Heizer and in two additional counts contribution by Ross to Heizer, of all (indemnification) or one-half (contribution) of the "diminution in the value of its investment" which Heizer allegedly suffered.

On May 22, 1978, the district court dismissed Heizer's complaint on the ground that the court lacked jurisdiction over "contribution or indemnification claims under § 10(b) or Regulation 10b-5, except when they arise as third party claims or cross-claims between defendants in an otherwise maintainable 10b-5 action."

Heizer filed a motion to reconsider, pointing out the three sections of the Securities Act of 1933 and Securities Exchange Act of 1934 which expressly provide for contribution, but on August 18, 1978, the district court denied reconsideration, adding that these sections do not "create any liability or duty within the meaning of the 1934 Act" and noting that Heizer "is attempting to sue Ross for the 'diminution in value of Heizer Corp. investment in I.D.C.' and not for any payment made by plaintiff."

Heizer has appealed the district court's orders of May 22 and August 18, 1978.

II

Insofar as the lower court held that there is no separate right of action for contribution arising out of a Rule 10b-5 case, it was in error.

The availability of contribution in securities fraud cases is a matter of federal law and, where that availability is implied, a matter of federal common law. Professional Beauty Supply, Inc. v. National Beauty Supply, Inc., 594 F.2d 1179, 1182 (8th Cir. 1979); Fischer, Contribution in 10b-5 Actions, 33 Bus. Lawyer 1821, 1827 (1978).

Contribution distributes the amount of damage sustained by the victim of a tort among the tortfeasors by requiring each to contribute proportionately to the total damages assessed. Indemnity shifts the entire loss from one tortfeasor to another who, by express or implied contract, is deemed responsible for making the full payment. 1 Dooley, Modern Tort Law § 26.01, at 538 (1977).

The common law rule is that contribution is not available from joint tortfeasors. Prosser, The Law of Torts § 50, at 305 (4th ed. 1971). ¹ However, although neither Section 14(a) nor 10(b) of the Securities Exchange Act of 1934 by their terms create an express civil remedy for their violation, and there is no indication that Congress, or the Securities and Exchange Commission when adopting Rule 10b-5, contemplated such a remedy, the existence of an implied private cause of action for violation of the statute and the rule is well established. J. I. Case Co. v. Borak, 377 U.S. 426, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964) (§ 14(a)); Superintendent of Insurance v. Bankers Life & Casualty Co., 404 U.S. 6, 13 n. 9, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971) (§ 10(b)); Affiliated Ute Citizens v. United States, 406 U.S. 128, 150-54, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972) (§ 10(b)). Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 730, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975) (§ 10(b)); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 196-97, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976) (§ 10(b)).

Once it has been established that private remedies may be implied under the securities laws, "a 'more equal distribution of justice' can best be achieved by ameliorating the common-law rule against contribution which permits a plaintiff to force one of two wrongdoers to bear the entire loss, though the other may have been equally or more to blame." Cooper Stevedoring Co. v. Fritz Kopke, Inc., 417 U.S. 106, 111, 94 S.Ct. 2174, 2177, 40 L.Ed.2d 694 (1974). ²

This result is buttressed by the fact that of the seven express civil remedies provided in the Securities Act of 1933 ³ and the Securities Exchange Act of 1934, ⁴ three of those provide expressly for contribution. ⁵ This indicates that when it occurred to Congress to do so, it expressed its desire that contribution be available among joint securities tortfeasors. Inasmuch as three specific liability provisions include the remedy of contribution, that ancillary remedy should be implied when the remedy itself has been implied as under Section 10(b) of the 1934 Act and Rule 10b-5.

"The existence of a statutory right implies the existence of all necessary and appropriate remedies." Sullivan v. Little Hunting Park, Inc., 396 U.S. 229, 239, 90 S.Ct. 400, 405, 24 L.Ed.2d 386 (1969). "(T)he power to make the right of any recovery effective implies the power to utilize any of the procedures or actions normally available to the litigant according to the exigencies of the particular case." Deckert v. Independence Shares Corp., 311 U.S. 282, 288, 61 S.Ct. 229, 233, 85 L.Ed. 189 (1940).

The policy underlying the securities laws is reinforced by applying contribution. By apportioning the loss among joint wrongdoers 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.

In Wassel v. Eglowsky, 399 F.Supp. 1330 (D.Md.1975), Aff'd, 542 F.2d 1235 (4th Cir. 1976), where recovery was based on Section 12(2) of the Securities Act of 1933, which contains an express civil remedy but does not provide for contribution, the district court implied relief by way of contribution and the Fourth Circuit affirmed by adopting the lower court's opinion.

Many courts have held that there is an implied right of action for contribution arising out of Rule 10b-5 and out of other implied remedy sections of the 1933 and 1934 securities acts. De Haas v. Empire Petroleum Co., 286 F.Supp. 809 (D.Colo.1968), Aff'd in part, rev'd in part on other grounds, 435 F.2d 1223 (10th Cir. 1970) (Rule 10b-5); Globus, Inc. v. Law Research Service, Inc., 318 F.Supp. 955 (S.D.N.Y.1970), Aff'd, 442 F.2d 1346 (2nd Cir.), Cert. denied, 404 U.S. 941, 92 S.Ct. 286, 30 L.Ed.2d 254 (1971) (§ 17(a) of 1933 Act and Rule 10b-5); Altman v. Liberty Equities Corp., 54 F.R.D. 620 (S.D.N.Y.1972) (Rule 10b-5); Getter v. R. G. Dickinson & Co., 366 F.Supp. 559 (S.D.Iowa 1973) (§§ 12(2) and 17(a) of 1933 Act, § 15(c)(1) of 1934 Act and Rule 10b-5); Liggett & Myers Inc. v. Bloomfield, 380 F.Supp. 1044 (S.D.N.Y.1974) (Rule 10b-5); Alexander & Baldwin, Inc. v. Peat, Marwick, Mitchell & Co., 385 F.Supp. 230 (S.D.N.Y.1974) (Rule 10b-5 and other securities sections); Gould v. American-Hawaiian Steamship Co., 387 F.Supp. 163 (D.Del.1974), Vacated on other grounds, 535 F.2d 761 (3rd Cir. 1976) (§ 14(a)); Odette v. Shearson, Hammill & Co., Inc., 394 F.Supp. 946 (S.D.N.Y.1975) (Rule 10b-5 and other securities sections; McLean v. Alexander, 449 F.Supp. 1251 (D.Del.1978) (Rule 10b-5). See also Kuehnert v. Texatar Co., 412 F.2d 700, 705 n. 7 (5th Cir. 1969).

In Madigan, Inc. v. Goodman, 498 F.2d 233 (7th Cir. 1974), we reversed what was in effect a summary judgment for the defendants on the ground that "it denies plaintiffs the opportunity to prove their right to indemnity or contribution" in connection with their potential exposure to liability in a separately filed action based on the Securities Exchange Act of 1934. 498 F.2d at 237, 240. We added that "(i)f the Madigan Group plaintiffs are too culpable to be entitled to indemnification, they may nonetheless be entitled to contribution," citing De Haas, supra, and Globus, supra. ⁶

In holding that an implied right of contribution may be enforced among joint tortfeasors in an Antitrust action, the Eighth Circuit noted that in Perma Life Mufflers, Inc. v. International Parts Corp., 392 U.S. 134, 138-39, 88 S.Ct. 1981, 20 L.Ed.2d 982 (1968), the Supreme Court emphasized that the public interest and statutory aim of deterring antitrust violations and enforcing the antitrust laws are of...