The opinion of the court was delivered by: Walls, District Judge
Derivative action plaintiff moves for partial summary judgment against the individual defendants named in his first amended complaint under Section 11(f) of the Securities Act of 1933, 15 U.S.C. § 77k(f). Plaintiff seeks a ruling that the individual director defendants violated Section 11 and are liable to Cendant Corporation for contribution under Section 11(f) for monies (to be) paid out in the proposed class action settlement. Plaintiff also urges the Court to conclude that the proposed settlement is an illegal indemnification of the individual class action defendants by Cendant. *fn1 Defendants E. Kirk Shelton; Henry Silverman, Martin Edelman, John Snodgrass, James Buckman, Michael Monaco, Stephen Holmes, Robert Kunisch and E. John Rosenwald, Jr. (the "HFS defendants"); Bartlett Burnap, T. Barnes Donnelley, Walter Forbes, Christopher McLeod, Burton Perfit, Stanley Rumbough, Jr., and Robert Tucker (the "CUC defendants"); and nominal defendant Cendant Corporation oppose this motion.
Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k, provides for damages caused by a false or misleading registration statement. See generally In re Cendant Corp. Litig., 60 F. Supp. 2d 354, 262-64 (D.N.J. 1999). If the registration statement "contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading," then "any person acquiring such security" may sue a number of enumerated individuals and entities. 15 U.S.C. § 77k(a). In particular, acquirers of the security may sue:
(1) every person who signed the registration statement; (2) every person who was a director of (or person performing similar functions) or partner in the issuer at the time of the filing of the part of the registration statement with respect to which his liability is asserted; (3) every person who, with his consent, is named in the registration statement as being or about to become a director, person performing similar functions, or partner; (4) every accountant, engineer, or appraiser, or any person whose profession gives authority to a statement made by him, who has with his consent been named as having prepared or certified any part of the registration statement, or as having prepared or certified any report or valuation which is used in connection with the registration statement, with respect to the statement in such registration statement, report, or valuation, which purports to have been prepared or certified by him; (5) every underwriter with respect to such security. 15 U.S.C. § 77k(a).
Section 11 does not require a showing of intent or scienter of that person.
However, Section 11(b) provides an affirmative defense to liability under § 11(a): "[N]o person, other than the issuer, shall be liable . . . who shall sustain the burden of proof" that "he had, after reasonable investigation, reasonable ground to believe and did believe, at the time such part of the registration statement became effective, that the statements therein were true and that there was no omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading. . . ." 15 U.S.C. § 77k(b)(3).
(1) Except as provided in paragraph (2), 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.
(2)(A) The liability of an outside director under subsection (e) of this section shall be determined in accordance with section 78u-4(f) of this title.
(B) For purposes of this paragraph, the term "outside director" shall have the meaning given such term by rule or regulation of the Commission. Id. (emphasis added).
Defendants *fn2 dispute plaintiff's ability to sue for the harms alleged in the motion for summary judgment. The individual defendants contend that a motion for contribution under Section 11(f) is not ripe because any right to contribution is inchoate until a defendant pays more than his or her share of a judgment or settlement. For example, the statute of limitations on an action for contribution does not begin to run until liability has been adjudged and excess payment has been made. See, e.g., Ades v. Deloitte & Touche, 1993 WL 362365, at *15 (S.D.N.Y. Sept. 17, 1993). Here, they argue, the settlement has not been approved by the Court; Cendant's obligation to pay has not yet accrued. Defendants add that any objection to the settlement as "illegal" is best brought up as an objection to settlement, not as a "new" derivative action claim.
Plaintiff avers that the motion should be resolved pre-settlement because the settlement is "probable" and "reasonably estimable." Reply Brf. at 22. He posits that Cendant has already "written off the $2.83 billion charge as an expense in its 1999 income statement." He further argues that the issue of illegal indemnification should be determined before the settlement becomes effective. Plaintiff also remarks that because, according to defendants, outside directors are immune from Section 11 contribution actions post-settlement, the issue should be addressed now.
As noted by the Third Circuit in Sea-Land Service, Inc. v. United States of America, 874 F.2d 169, 171 (3d Cir. 1989), a cause of action for contribution does not arise until the party seeking contribution has paid more than his or her fair share of a common liability. See also Ades, 1993 WL 362364, at *15-16 (third party plaintiff's claim for contribution arises after direct defendant pays judgment entered against him). Cendant has not yet paid class action plaintiffs.
Further, the Court finds unavailing plaintiff's argument that contribution is ripe for consideration because Cendant has already set aside the settlement sum-- the realization of settlement depends on more. Plaintiff cannot ignore the Court's duty to scrutinize the settlement and hear objections before the settlement is approved. The issue of illegal indemnification (and any other objection to settlement) is best raised after all parties and the Court have had a chance to conduct a substantive review of the settlement and hear any objections. In sum, plaintiff ...