Laventhol, Krekstein, Horwath & Horwath v. Horwitch

Decision Date18 February 1980
Docket NumberNos. 78-1296,s. 78-1296
Citation637 F.2d 672
Parties, Fed. Sec. L. Rep. P 97,810 LAVENTHOL, KREKSTEIN, HORWATH & HORWATH, Defendant/Cross-Claimant/Appellant, v. Arnold M. HORWITCH, Douglas E. Frank and Michael H. Folb, William Myers, Milton H. Corwin, John A. Pizer, and Walter P. Siders, Defendants/Cross- Defendants/Appellees. UNITED STATES TRUST COMPANY OF NEW YORK, Defendant/Cross-Claimant/Appellant, v. Douglas E. FRANK and Michael H. Folb, Defendants/Cross-Defendants/Appellees. to 78-1299, 78-1397.
CourtU.S. Court of Appeals — Ninth Circuit

Donald E. Dyekman, O'Connor, Cavanagh, Anderson, Westover, Killingsworth & Beshears, Phoenix, Ariz., for defendant/cross-claimant/appellant Laventhol, Krekstein, Horwath & Horwath.

Allen L. Feinstein, Daughton, Feinstein & Wilson, Phoenix, Ariz., argued for defendant/cross-claimant/appellant U.S. Trust Co. of N.Y.; Allen L. Feinstein, Jeffrey S. Leonard, Daughton, Feinstein & Wilson, Phoenix, Ariz. and Carter, Ledyard & Milburn, New York City, on brief.

Seymour Sacks, James Powers, Phoenix, Ariz., argued for defendants/cross-defendants/appellees; N. Warner Lee, Ryley, Carlock & Ralston, Phoenix, Ariz., Philip E. von Ammon, Fennemore, Craig, von Ammon & Udall, Phoenix, Ariz., Powers, Boutell, Fannin & Kurn, Dushoff & Sacks, Phoenix, Ariz., on brief.

Appeal from the United States District Court for the District of Arizona.

Before MERRILL, GOODWIN and ANDERSON, Circuit Judges.

MERRILL, Circuit Judge:

This case involves the sale of securities in the form of limited partnerships. On August 12, 1974, plaintiff Jay Herman filed suit on behalf of a class consisting of 95 investors who purchased limited partnerships in Western Properties Limited Partnership, pursuant to a prospectus and registration statement dated November 30, 1972. The complaint alleged that the registration statement filed with the Securities and Exchange Commission was false and misleading; that the prospectus under which the partnership interests were sold contained material misstatements of fact, omitted material facts, and contained misleading statements as to finances, project completions, and tax status. It was alleged that the general partner of Western Properties, the Doug Frank Development Corporation (Frank Corporation), through its president, Douglas E. Frank, and its executive vice president, Michael H. Folb, intended to and did convert the proceeds of the offering for uses other than those stated in the prospectus. Plaintiffs alleged that "at least $2,000,000 has been misappropriated."

Among the defendants in the action were Western Properties, Frank Corporation, Frank, Folb, appellant United States Trust Company of New York (the Bank), alleged to be underwriter of the issue of partnership interests, and appellant Laventhol, Krekstein, Horwath & Horwath (the Accountants), alleged to be the accounting firm employed by the issuer, Western Properties, to prepare the registration statement.

The Bank and the Accountants filed cross claims against Frank and Folb, seeking contribution and indemnification. Frank and Folb were alleged by appellants to be in control of Frank Corporation and Western Properties.

On December 6, 1976, plaintiffs and defendants Western Properties, Frank Corporation, Frank and Folb moved for approval of a settlement agreement. Plaintiffs agreed to release all claims against Frank and Folb and Western Properties if the settling defendants would co-operate with plaintiffs in their case against the remaining defendants and pay plaintiffs $8,000 on account of costs. The settlement was approved by court order on February 10, 1977, and judgments against Frank and Folb have been entered in accordance with its terms.

Frank and Folb then moved for summary judgment on the cross claims of appellants. The district court, without opinion, granted summary judgment dismissing the cross claims on December 13, 1977. Pursuant to Fed.R.Civ.P. 54(b), a certificate was filed by the district court and these appeals were taken by the Bank and the Accountants. 1 They were consolidated in this court. The liability of the Bank and the Accountants to the plaintiff class remains to be decided at trial.

The sole question on appeal is whether issues of fact remain to be tried bearing on the liability of Frank and Folb to the Bank and the Accountants for contribution and indemnity. Frank and Folb contend that as matter of law appellants have no right to contribution or indemnity. As to contribution, they contend that the law does not require contribution from persons situated as they were. We disagree.

Liability is established by the Securities Act of 1933, 15 U.S.C. § 77k(a). There, five classes of persons are made liable to the purchasers of securities for untrue statements or material omissions in a registration statement. This includes every person who signed the registration statement, every accountant who has, with his or her consent, been named as having prepared or certified any part of the statement, and every underwriter with respect to such securities. Under allegations of the complaint Western Properties, the Bank, and the Accountants are all liable to the purchasers of the securities under § 77k(a).

Section 77k(f) provides a right of contribution. It reads:

"All or any one or more of the persons specified in subsection (a) of this section shall be jointly and severally liable, and every 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."

Under this provision the Bank and the Accountants can recover contribution from any person who, if sued separately, would have been liable to make the same payment.

Appellees Frank and Folb are charged with liability as controlling persons whose liability is set forth in § 77o of the statute. Under that section they shall "be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person had no knowledge of or reasonable ground to believe in the existence of the facts by reason of which the liability of the controlled person is alleged to exist." The controlled person in this case is alleged to be Western Properties, liable under § 77k(a)(1) as the party who signed the registration statement.

Appellees make several arguments to avoid liability for contribution. They contend first that nothing is said in § 77o respecting liability of controlling persons for contribution. Nothing need be said; § 77k(f) has said it all. Section 77o provides that Frank and Folb, as controlling persons, shall be liable jointly and severally with and to the same extent as Western Properties, and to any person to whom Western Properties is liable under § 77k. If this liability subjects Western Properties to contribution under § 77k(f), then Frank and Folb are likewise affected.

There can be no question that the liability of the Bank, the Accountants, Western Properties, Frank and Folb is for the "same payment" under § 77k(f). This is payment for the same harm suffered by the purchasers resulting from the direct action of Frank and Folb, and from the negligence or oversight of the Bank and the Accountants in failing to discover the harmful conduct of Frank and Folb.

Had Frank and Folb not settled with the plaintiffs, the separate suit brought against them would have proceeded, and they would have been exposed to liability under § 77k to make the same payment for the same injury for which appellants may be held liable. That the settlement eliminated Frank's and Folb's liability to the plaintiff class does not affect their liability in contribution to appellants who were not parties to that settlement, nor does the settlement affect the identity of payment as between these cross-defendants.

Appellees' final contention is that public...

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