In re Cendant Corporation Securities Litigation
| Decision Date | 16 September 2003 |
| Docket Number | Master File No. 98-CV-1664 (WHW) |
| Parties | IN RE: CENDANT CORPORATION SECURITIES LITIGATION. This document Relates to: All Actions Except PRIDES. |
| Court | New Jersey District Court |
Douglas Eakeley, Esq., Lowenstein Sandler PC, Roseland, New Jersey, Attorneys for E&Y.
Carl Greenberg, Esq., Budd Larner Gross Rosenbaum, Greenberg & Sade, P.C., Short Hills, New Jersey, Attorneys for Cendant.
Ernst & Young ("E&Y") moves to dismiss all Amended Cross-Claims by Cendant against it on various theories. Oral argument was heard January 22, 2001, and the Court requested additional submissions on the issue of how settlement proceeds could be allocated to the plaintiffs' Section 10 and Section 11 claims, if at all. After consideration of the parties' submissions and oral arguments, the Court grants E&Y's motion to dismiss Count VIII, but denies the motions to dismiss all other counts.
In December 1997, CUC International, Inc. acquired HFS in a stock-for-stock merger. CUC was the surviving corporation and was renamed Cendant. For purposes of this motion, the Court will presume the parties' familiarity with the extensive background of this litigation. See In re Cendant Corporation Sec. Litig., 109 F. Supp.2d 235 (D.N.J. 2000) (); In re Cendant Corporation Sec. Litig., slip. op., (D.N.J. August 6, 1999) (denying motions to dismiss various cross claims by E&Y against Cendant and other defendants).
In the lead case, Cendant filed Cross-Claims, which it later amended, against E&Y.1 To briefly summarize, Cendant alleges that its former senior management caused the company's operating income to be inflated by approximately $ 500 million. (Am. Cross-Cl. ¶13). It alleges that the "entire senior management of CUC, including but not limited to IRS former chairman and chief executive officer Walter Forbes, its former president Kirk Shelton, and two of its former chief financial officers, Stuart Bell and his successor Cosmo Corigliano" were involved in the illegal scheme. (Id. at ¶14). It states that the purpose of the fraud was to report sufficient income to meet Wall Street targets and to keep the price of the company's stock inflated. (Id. at ¶37.) According to the Cross-Claims, CUC targeted HFS as a merger partner and victim of the fraudulent scheme. (Id. at ¶ 39). Cendant alleges that E&Y was either negligent in failing to discover the fraud or knowingly or recklessly facilitated it. It alleges E&Y participated in the fraud by creating false documents to reverse excess merger reserves into operating income. (Id. at ¶ 58).
Cendant avers that E&Y had a duty to report the information to board and audit committee members who were not involved in the fraud and could have ended it. (Id. at ¶ 29). It also claims that E&Y represented to HFS representatives in comfort letters and oral reassurances before the merger that CUC's financial statements were accurate. (Id. at ¶ 42). Cendant contends that E&Y's audits violated numerous generally accepted auditing standards. (Id. at ¶ 101). As a result of E&Y's actions, Cendant claims damages that include business and investment opportunities lost by HFS when it was induced to merge with CUC; millions of dollars in audit fees; damage to its reputation among Wall Street analysts and the public; legal fees and other expenses incurred in defense of investor and other lawsuits as well as criminal and SEC investigations; and liability in settlements of various lawsuits for over three billion dollars. (Id. at ¶ 105).
In its Amended Cross-Claims, Cendant alleges common law fraud, negligence, and breach of contract on behalf of itself, as successor to HFS and as successor to CUC (Counts I-VI; IX-XI). It also alleges breach of fiduciary duty on behalf of itself and as successor to CUC (Counts VII and XII). Count VIII seeks contribution for liability incurred in settlement of the CalPERS action and potential future liability it may incur in other actions. E&Y moves to dismiss all of Cendant's Amended Cross-Claims under the following theories:
* Cendant's claim for contribution (Count VIII), on the grounds that (1) section 11 does not allow contribution claims by settled defendants; and (2) any claim for contribution is barred by the terms of the settlement bar provisions of the Private Securities Litigation Reform Act ("PSLRA");
* All state law claims, contending that these are "nothing more than a thinly-veiled attempt to obtain indemnity from E&Y, which is also barred by the PSLRA." (E&Y Br., at 2);
* Counts I-III, those brought as successor to HFS, because those claims belong to former HFS shareholders, and they have already been compensated in the Class settlement;
* All of the counts of the complaint that "sound in" negligence or malpractice (which it contends includes all state law claims), because Cendant has not complied with the New Jersey Affidavit of Merit statute, N.J. Stat. Ann. § 2A:53A-27;
* All of the breach of contract claims, because they fail to plead that Cendant performed all of its obligations under the contract; and
* Both breach of fiduciary claims, because public accounting firms do not have a fiduciary relationship with a public company.
Under Fed. R. Civ. P. 12(b)(6), the Court is required to accept as true all allegations in the complaint and all reasonable inferences that can be drawn therefrom, and to view them in the light most favorable to the non-moving party. See In re Cendant Corp. Derivative Action Litig., 189 F.R.D. 117, 127 (D.N.J. 1999); Oshiver v. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380, 1384 (3d Cir. 1994). The question is whether the claimant can prove any set of facts consistent with his allegations that will entitle him to relief, not whether that person will ultimately prevail. Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 2232, 81 L.Ed.2d 59 (1984). While a court will accept well-plead allegations as true for the purposes of the motion, it will not accept unsupported conclusions, unwarranted inferences, or sweeping legal conclusions case in the form of factual allegations. See Miree v. DeKalb County, Ga., 433 U.S. 25, 27 n. 2, 97 S.Ct. 2490, 2492 n. 2, 53 L.Ed.2d 557 (1977). Moreover, the claimant must set forth sufficient information to outline the elements of his claims or to permit inferences to be drawn that these elements exist. See Fed. R. Civ. P. 8(a)(2); Conley v. Gibson, 355 U.S. 41, 45-46, 78 S. Ct. 99, 101-02, L.Ed.2d 80 (1957). The Court may consider the allegations of the complaint, as well as documents attached to or specifically referenced in the complaint, and matters of public record. See Pittsburgh v. West Penn Power Co., 147 F.3d 256, 259 (3d Cir. 1998); In re Cendant Corp. Derivative Action Litig., 189 F.R.D. at 127 see also 5A Charles A. Wright & Arthur R. Miller, Federal Practice & Procedure §1357 at 299 (2d ed. 1990).
Count VIII of the Amended Cross-Claims alleges that E&Y is "responsible in substantial part for the injuries or damages alleged in the CalPERS action commenced against Cendant, because, among other things, E&Y intentionally misrepresented and concealed, or at a minimum failed to discover or recklessly disregarded, the accounting errors and irregularities hat occurred for years in the financial statements of CUC prior to the merger and in CMS' 1997 financial statements." Amended Cross-Cl., ¶ 153. Cendant seeks contribution "to the extent permitted by law" for E&Y's responsibility for the injuries and damages that led to the CALPERS settlement, "and for such other sums as Cendant may be obliged to pay in respect of liability to other claimants." Id. at ¶ 156.
Under the PSLRA, a covered defendant "who settles any private action at any time before final verdict shall be discharged from all claims for contribution brought buy other persons." 15 U.S.C. §78u-4(f)(7). This Court entered a bar order when it approved the Cendant and E&Y settlements with the class. See In re Cendant Corp. Sec. Litig., Judgment Approving Cendant Settlement (Skolnick Cert. at Ex. 4) ("Cendant Settlement Order"); August 14, 2000, at ¶ 10; Judgment Approving E&Y Settlement (Skolnik Cert. at Ex. 5) ("E&Y Settlement Order"), August 14, 2000 at ¶ 9. The bar order precludes contribution against a settled party and claims brought by a settled party. However, Cendant expressly reserved the right to assert cross-claims against E&Y (and other defendants) "otherwise permitted by any applicable federal or state statute or common law." Cendant Settlement Order, at ¶ 10.2 E&Y claims that this contribution bar prevents Cendant from pursuit of any claim for contribution against E&Y. Cendant does not dispute that it may not seek contribution for its settlement of the Class's Section 10(b) claims under the PSLRA. However, Cendant asserts that it may recover contribution based upon Section 11 of the Securities Act of 1933, and that such a right to contribution is not barred by the PSLRA. E&Y claims that a settling party has no right to contribution under Section 11(f), but even if it did, the PSLRA contribution bar would eliminate it.
The parties agree that Section 11 of the 1933 Act contains an express right to contribution:
[E]very person who becomes liable to make any payment under this section may recover contribution as in cases of contract from any person who if sued separately, would have been liable to make the same payment, unless the person who has become liable was, and the other was not, guilty of fraudulent misrepresentation.
15 U.S.C. § 77k(f)(1) (emphasis added). E&Y, however, maintains that such contribution rights apply only to parties who have "become liable," which it asserts refers only to a party against whom a judgment has been rendered...
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