The opinion of the court was delivered by: Walls, District Judge
This document Relates to: All Actions: Except PRIDES
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) (approving settlement agreements between consolidated class and Cendant and E&Y); 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. *fn1 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:
ù 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");
ù 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);
ù 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;
ù 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;
ù All of the breach of contract claims, because they fail to plead that Cendant performed all of its obligations under the contract; and
ù Both breach of fiduciary claims, because public accounting firms do not have a fiduciary relationship with a public company.
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).
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 ...