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In re Cendant Corporation Securities Litigaion

April 17, 2001

IN RE: CENDANT CORPORATION SECURITIES LITIGATION


The opinion of the court was delivered by: Walls, District Judge

FOR PUBLICATION

This document Relates to: All Actions: Except PRIDES

OPINION

Both breach of fiduciary claims, because public accounting firms do not have a fiduciary relationship with a public company.

DISCUSSION

Standard for Motion to Dismiss

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).

Analysis

I. Contribution and the PSLRA (Count VIII)

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. *fn2 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.

A. Right to Contribution Under Section 11(f)

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-that the "becomes liable" language does not apply to a party who has settled. Cendant responds that the Ninth Circuit has explicitly rejected this argument. In Laventhol , Krekstein, Horwath & Horwath v. Horwitch, 637, F.2d 672, 675-76 (9th Cir. 1980), cert. denied sub nom Frank v. U.S. Trust Co. of New York, 452 U.S. 963, 101 S. Ct. 3114, 69 L.Ed.2d 975 (1981), the Ninth Circuit reversed the grant of summary judgment of non-settled defendants' cross-claims for contribution against settled defendants because it found that settled defendants may be liable to non-settled defendants for contribution for Section 11 claims. Id. That Circuit also rejected the settled defendants' arguments that to allow contribution in such a case would discourage settlements:

[T]he statute is silent as to the encouragement of settlements. Moreover, contribution strengthens the policy underlying the securities laws. As between the culpable parties, contribution reinforces the deterrent effect of the statute by preventing one wrongdoer from unjustly escaping loss by shifting its responsibility to another wrongdoer for the same payment. Each party liable for the same payment mst pay its proper share of that payment. Equally important, contribution gives the injured investor an extra measure of protection by broadening its potential source of reimbursement for damages. Id. at 675.

E&Y responds that only non-settled defendants in Laventhol sought contribution, and that case accordingly did not determine whether a settled defendant "becomes liable" under Section 11. E&Y is correct: Laventhol did not address whether a settled defendant could "become liable" for purposes of § 77k(f)(1).

E&Y also relies upon a footnote in a Northern District of California case, Nelson v. Quimby Island Reclamation District Facilities Corp., which suggested that the language of the statute implies that a right to contribution "accrues after a judgment is rendered." No. C-77-0784, No. C-80-0477, 1980 WL 1405, at *2 (N. D. Cal. 1980). This analysis was in the context of its determination of whether the claim for contribution was timely under California's one-year statute of limitations for contribution actions. The Court relied upon the Restatement (Second) of Torts, which allows a claim for contribution only for a "tortfeasor who has discharged the entire claim for harm by paying more than his equitable share of the common liability." Id. at *5, quoting Rest. (Second) Torts § 886A (1979). However, Nelson did not deal directly with whether a settled party had "become liable."

Cendant also cites In re Del-Val Financial Corp. Sec. Litig., 868 F. Supp. 547, 553-54 (S.D.N.Y. 1994), which found that a settled defendant could maintain a Section 11 contribution claim against an accounting firm that had audited the financial statements alleged to be misleading. There Deloitte & Touche ("D&T") moved to dismiss settled defendants cross-claims against it. Although D&T did not expressly argue that the settled defendants had not "become liable," it did argue that they could not be joint tortfeasors because they had settled and explicitly denied liability to the plaintiffs. Id. at 533. The district court rejected this contention because "[a] party need not actually be adjudged liable to the injured party to be a joint tortfeasor. . . . All that is required are `allegations that the defendant and third-party defendant were joint participants in the fraud alleged by plaintiff.'" Id. It explained:

Settling Defendants have certainly made allegations that, if proven, would establish that Settling Defendants and D&T, their independent auditor, were jointly involved in causing injury to Plaintiffs. These allegations are sufficient to support Settling Defendants' cross-claims for contribution of Plaintiffs' federal securities claims. Id. (citation omitted).

Under this analysis, so long as it is possible to determine that Cendant has paid more than its equitable share of common liability under the settlement and that Cendant and E&Y were joint tortfeasors, Cendant need not have had a judgment rendered against it to maintain its claims for contribution under Section 11 because it has "become liable" under the settlement. *fn3 The allegations are sufficient to state that E&Y and Cendant are joint tortfeasors. This Court finds that a defendant need not have a judgment rendered against it for that defendant to seek contribution under § 77k(f)(1).

Even if Section 11 affords a settled defendant a right of contribution, the Court must determine whether the "contribution bar" provision of the Private Securities Litigation Reform Act ("PSLRA") nevertheless would preclude such an action.

B. PSLRA's Contribution Bar:

Under the Private Securities Litigation Reform Act of 1995 ("PSLRA"), Pub. L. No. 104-67,

A covered person who settles any private action at any time before final verdict or judgment shall be discharged from all claims for contribution brought by other persons. Upon entry of the settlement by the court, the court shall enter a bar order constituting the final discharge of all obligations to the plaintiff of the settling covered person arising out of the action. The order shall bar all future claims for contribution arising out of the action--

(i) by any person against the settling covered person; and

(ii) by the settling covered person against any person, other than a person whose liability has been extinguished by the settlement of the settling covered person. 15 U.S.C. §78u-4(f)(7)(A) (emphasis added).

The Act defines a "covered person" as

(i) a defendant in any private action arising under this chapter [the Securities Exchange Act of 1934]; or

(ii) a defendant in any private action arising under section 77k of this title [section 11 of the Securities Act], who is an outside director of the issuer of the securities that are the subject of the action. 15 U.S.C. § 78u-4(f)(10)(C) (emphasis added).

Cendant argues that the contribution bar does not apply to actions for contribution to recover amounts paid to settle a Section 11 claim because the PSLRA contribution bar "applies by its terms only to claims for contribution based on liability under the Exchange Act (such as Rule 10b-5 claims) or to claims under section 11 against outside directors." Cendant Br. at 6. It argues it is not a covered person because only outside directors in Section 11 claims are "covered persons." Id.

E&Y relies upon Lucas v. Hackett Associates, Inc., 18 F. Supp. 2d 531 (E.D. Pa. 1998). There the plaintiffs filed a lawsuit against several defendants, which alleged a Section 10(b) claim and a variety of state law tort and contract claims, including fraudulent misrepresentation and misappropriation of investment funds, that arose out of the allegedly fraudulent sale of viatical settlements. *fn4 18 F. Supp.2d at 533-34. After defendants impleaded plaintiffs' attorney, plaintiffs filed claims against the attorney for breach of an escrow agreement, breach of a specific term of the legal representation agreement and legal malpractice. Id. at 533. Certain defendants settled and sought the entry of a bar order that would preclude the non-settling defendants from pursuit of any contribution or indemnity claims against the settled defendants. Id. at 533-534. The district court denied the specific settlement bar order requested on two grounds: (1) that it required an adjudication of joint tortfeasor status on the part of the settling defendants before a reduction in the award would be allowed; and (2) that it would bar all indemnity claims, even those premised on non-securities state law claims. Id. at 534-536. However, the Court indicated it would approve an order "which, for purposes of any contribution claim, the settling defendants will be treated as joint tortfeasors. . . ." Id. at 537. It held that claims for contribution that arose out of the plaintiffs' state law tort claims would be barred by because they were "integrally related to the securities transaction" and thus "ar[o]se out of the [securities] action." Id. at 534-35. *fn5 E&Y argues that the "integrally related" analysis should apply equally to claims for contribution under Section 11 of the Securities Act. Because here, plaintiffs' section 11 claim was "integrally related" to the 10(b) claim, E&Y urges that the section 11 contribution claim is barred by the PSLRA. E&Y Br. at 10. Although Cendant protests that the Lucas court specifically addressed only the state law claims for contribution, not any claims under Section 11, that does not persuade this Court that the phrase "all future claims for contribution arising out of the action" does not apply to Section 11 claims as well. Id. at 534-35.

E&Y contends that it is a "covered person" under the PSLRA contribution bar because it was a defendant in an action under the 1934 Act. To iterate, because plaintiffs' complaint contained Section 10(b) claims against it, it is a covered person under §78u-4(f)(7)(A)(i). That it does not happen to fall within the second possible definition of "covered person" provided in §78u-4(f)(7)(A)(ii) does not prevent it from being a covered person under the first definition. Because the Section 11 claims against it arose out of the same action as the Section 10(b) claims against it, E&Y is still a covered person under the contribution bar.

Cendant argues that E&Y's reading of Lucas stretches its holding because it held only that pendent state law claims would be barred by the PSLRA. However, it maintains, Congress explicitly decided that section 11(f) contribution claims are not barred unless they are made by an outside director.

Cendant's interpretation of the plain language of the PSLRA is too narrow. By its language, the bar applies to prohibit all future claims for contribution arising out of the action- against a settling covered person. Cendant tries to avoid this inevitability by reference to the definition of "covered person" in isolation. One may be a covered person under the PSLRA if one was a defendant in an action under the `33 Act (including Section 10(b) claims). That E&Y is not also a covered person under Section 78u-4(f)(7)(ii) does not mean that it is not a covered person under Section 78u-4(f)(7)(i). Lucas held that to the extent a claim is "integrally related" to the securities claim settled, all contribution claims that arise out of that action are barred. Although it only considered related state law claims, its rationale does not prevent one federal securities claim from being integrally related to another. Nor does Cendant deny that the Section 11 claim is "integrally related" to the Section 10(b) claim. The two claims arise out of practically the exact same factual environment and require nearly identical proofs. That (1) defendants' Section 11 liability to plaintiffs would have been limited only to those statements made in connection with a prospectus or registration statement and (2) Section 10(b) requires proof of scienter do not prevent the claims from being "integrally related." *fn6

E&Y's motion to dismiss Cendant's Count VIII for contribution is granted, to the extent that Cendant seeks contribution for payments ...


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