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In re Cendant Corporation Securities Litigation

August 27, 2001

IN RE: CENDANT CORPORATION SECURITIES LITIGATION


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

FOR PUBLICATION

OPINION

This document Relates to All Actions Except PRIDES

This opinion is a companion to this Court's earlier opinion which resolved Ernst & Young ("E&Y")'s motion to dismiss various cross-claims asserted against it by Cendant Corporation ("Cendant"). See In re: Cendant Corp. Sec. Litig., Master File No. 98-CV-1664 (WHW), slip op. (D.N.J. Apr. 16, 2001), 139 F. Supp.2d 585 (D.N.J. 2001) (the "April 16 order" or "April 16 slip op."). Familiarity with that opinion is presumed. That opinion granted E&Y's motion to dismiss Count VIII of the Amended Cross-Claims, styled a contribution claim, but denied the remainder of the motion as to Cendant's state law claims against E&Y, which E&Y had sought to dismiss on various theories. However, it did not directly address E&Y's argument, raised in its reply papers, and in E&Y's motion to certify the April 16 order for immediate appeal, that all of Cendant's Amended Cross-Claims should be dismissed because they are impermissible contribution claims in disguise, or alternatively, E&Y's motion to strike the portion of the damages claim to the extent it seeks to recover any of the $2.8 billion paid in settlement to plaintiffs by Cendant. The Court solicited further response from Cendant on this issue, and now, pursuant to Fed. R. Civ. P. 78, decides the remaining issue without oral argument. The motion to dismiss the state law claims and/or to strike the damages demand is denied.

E&Y also moves to certify the April 16 order which denied in part E&Y's motion to dismiss Cendant's cross-claims as immediately appealable under 28 U.S.C. § 1292(b). E&Y asserts that it seeks review of the holding in that opinion that the PSLRA contribution bar did not preclude Cendant from attempting to seek contribution from E&Y for its alleged fair share of the $2.8 billion settlement under other independent state law tort theories. Because the issue E&Y seeks to appeal was not directly addressed in that opinion but is now directly addressed in Part I of this opinion, this Court construes E&Y's request as one to certify this Opinion and Order as appealable. That motion is decided without oral argument and is denied.

I. Motion to Strike Prayer For Damages Which Seeks Recovery of Amounts Paid By Cendant in Settlement With Plaintiffs

E&Y argues that if any of the state law claims survive the motion to dismiss, which they did, then this Court should strike Cendant's prayer for damages to the extent Cendant seeks to recover any portion of the $2.8 billion settlement payment by Cendant to plaintiffs. E&Y maintains that because Cendant is seeking to recover the settlement payment, which is measured by Cendant's liability to plaintiffs, this element of damages transforms the state law claims into impermissible contribution claims, which it asserts are equally barred by the PSLRA contribution bar, no matter how they are styled. E&Y contends that no matter how a claim is labeled, it is a contribution claim if it is "`measured by' the defendant's liability to the plaintiff." E&Y Reply to E&Y's Motion to Dismiss Cendant's Cross Claims ("E&Y Reply"), at 5, quoting TBG, Inc. v. Bendis, 36 F.3d 916, 928 (10th Cir. 1994). It also makes the related argument that in any event, to the extent the claim seeks to recover damages that could have been sought by contribution, that portion of the claim should be considered barred by the PSLRA contribution bar because it seeks to shift liability between joint tortfeasors. Cendant responds that it does not matter that the damages sought overlap with what could have been sought in a contribution claim so long as there is an independent basis for recovery under Cendant's independent state tort and contract theories.

In Bendis, upon which E&Y relies, plaintiffs settled their securities law claims with certain defendants but not others, and the settlement provided that the settlement was contingent upon the court's entry of a bar order which would bar all related claims against settling defendants by the non-settling defendants and upon the court ordering a judgment reduction for any judgment against the non-settling defendants by the amount paid by the settling defendants (a "pro tanto" judgment reduction). 36 F.3d at 919, 922. The non-settling defendants opposed entry of the bar order. The court began by first observing that Congress had not yet passed any statutory bar order under the securities laws but that many federal courts had agreed to enter bar orders in securities cases in reliance on the federal policy which favors encouragement of settlements. Id. at 923-24. The Bendis court observed that the other courts which had agreed to bar related state law claims have done so when the "damages are measured by the defendant's liability to the plaintiff. . . . Besides contribution and indemnity claims, these include any claims in which the injury is the non-settling defendant's liability to the plaintiff. . . . No court has authorized barring claims with independent damages." Id. at 928 (emphasis added), citing Alvarado Partners, L.P. v. Mehta, 723 F. Supp. 540, 554 (D. Colo. 1989); U.S. Oil & Gas Litig., 967 F.2d 489, 495-96 (11th Cir. 1992). The court did not say, contrary to E&Y's interpretation, that all claims for which damages are "measured by" the defendant's liability to the plaintiff constitute claims for contribution. In fact, the court's language indicates that it distinguished among claims for contribution, indemnity, and those other claims whose injury and damages happen to encompass the defendants' liability to defendants. It simply stated that it would be fair to bar related claims that seek to recover those damages. The Court does not agree with E&Y's interpretation of this statement that all claims by a defendant against a co-defendant which measure damages by a defendants' liability to the plaintiff are automatically claims for contribution.

In re Oil & Gas involved a review of a district court's entry of a settlement bar order which extinguished all claims related to the litigation against the settling defendants. See 967 F.2d 489, 493 (11th Cir. 1992). The bar order stated:

All claims, however denominated, regardless of the allegations, fact, law, theories, or principles on which they are based, including but not limited to claims for contribution or indemnity against the settling defendants by any individual corporation, partnership, unincorporated association, or other type of entity, including, but not limited to any party to this litigation, which claims now exist or have accrued or in the future may exist or accrue, and which arise out of or are in any way related to the class action or the receiver's action or the subject matter of those actions, or arise out of or are in any way related to the Companies, are extinguished, discharged, satisfied, and/or otherwise unenforceable. Id. at 493 n. 2.

One of the settling defendants, Pinnacle, challenged the propriety of the bar order, which barred Pinnacle's claims for indemnity, fraud and negligence against a co-defendant, A&A. Id. at 495. There the Eleventh Circuit held that entry of the bar order was proper, and emphasized that A&A had expressed a "strong unwillingness to [settle] unless it was assured that Pinnacle's cross-claims would not subject it to further liability." Id. at 494. The district court below had explained:

If litigation of cross-claims were allowed, the resources of the court, class members, class members' counsel, and defendants' counsel would continue to be expended, because it would be impossible to try cross-claims without addressing the complex facts underlying this litigation. . . . Settlements in complex cases cannot satisfy their ultimate purposes unless they conclude the litigation in its entirety. Id. at 493.

The Court further observed that defendants "buy little peace through settlement unless they are assured that they will be protected against co-defendants' efforts to shift their losses through cross-claims for indemnity, contribution, and other causes related to the underlying litigation." Id. at 484. Oil & Gas further stated that there was little distinction between claims for contribution and independent claims because those causes of action were not independent of Pinnacle's liability to the plaintiffs. Id. at 495. One element of damages sought by Pinnacle's cross-claim was recovery to the extent it had been liable to the plaintiffs. Id. at 495-96. The Eleventh Circuit concluded that "Pinnacle's fraud and negligence claims `are nothing more than claims for contribution or indemnification with a slight change in wording.'" Id. at 495-96 (citation omitted). Although the Oil & Gas court endorsed the propriety of the bar order, at no time did it have occasion to address whether such a bar order would be required in all circumstances. It simply explained that under the circumstances, that court believed the bar order requested was fair and appropriate. Moreover, that court did not explain beyond overlap of damages, why it assumed the claims were not "independent" instead of claims for contribution or indemnity.

In Alvarado Partners, several defendants settled a securities action with plaintiffs and sought entry of a bar order which would extinguish any and all claims by the non-settling defendant against the settling defendants, including but not limited to claims for contribution and/or indemnification. This included all claims which were related to, based upon or arose out of the settled claims. See 723 F. Supp. 540, 547 (D. Colo. 1989). The Alvarado Partners court observed that a number of states had enacted settlement bar statutes which would prevent rights of contribution after a complex action had settled and that the purpose of such statutes is to allow a settling defendant to "`buy its peace' through a bar to any contribution action against the settling defendant." 723 F. Supp. at 550. Although no such comparable federal statutory bar existed, the court commented that federal courts had long recognized that such bars would further the "public policy in favor of the settlement of complex securities actions." Id. at 551-52. In addition, the non-settling defendants argued that the court could not extinguish the pendent state law claims against the settling defendants. Id. at 554. The court held that it could extinguish the state law claims which sought damages for breach of warranty, breach of contract, fraud, and negligent misrepresentation, because those were "measured by" the non-settling defendants' liability for violations of the securities laws. Id. However, to the extent the damages sought went beyond those for violation of the securities laws, the court held the state law claims "are independently viable pendent state claims" which it could not extinguish through a settlement bar. Id.

E&Y seeks to apply the holdings of those cases which held that imposition of a bar against independent state law claims was appropriate in light of the federal policy to encourage settlement of securities actions to read into the PSLRA contribution bar a requirement that such independent state law claims are also barred. The PSLRA was passed after each of these cases, and contains very narrow language:

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).

The corresponding right of contribution which is extinguished by § 78u-4(f)(7)(A) is established by statute in § 78u-4(f)(8), and the contribution bar itself affords a right of reduction of the ultimate judgment by either the percentage fault of the covered person or the amount actually paid in settlement by the covered person. See 15 U.S.C. §§ 78u-4(f)(7)(B)(i)-(ii).

The plain language of the statute speaks of a bar against all future claims for contribution which arise out of the action. It says nothing about a bar of related state law claims, as it could have, had Congress meant to bar state law claims in addition to federal securities contribution claims. Moreover, despite E&Y's repeated protests in its earlier briefing that the PSLRA bar was meant to buy settling defendants "complete peace" when settling, this Court's own review of the legislative history of the PSLRA reveals that the history is silent on that issue. The Senate's report indicates that the major goals of the PSLRA were to encourage voluntary disclosure of information by issuers, to empower investors to have control over securities litigation instead of lawyers, and to reduce frivolous "strike suits" and encourage meritorious suits. See S. Rep. No. 104-98, at p. 5-6, 104th Cong., 1st Sess. 1995, reprinted in 1995 U.S.C.C.A.N. 679. The report also indicates that the joint and several liability provisions would be amended to impose full joint and severable liability on all defendants who engage in knowing securities fraud but to limit joint and several liability for defendants found liable but nor for knowing securities fraud, to avoid undue burdens on defendants who were less culpable. Id. at 22. However, neither House's report indicates why the contribution bar was included and no statement in either report indicates that it was meant to encompass related state law claims. See id.; H.R. Conf. Rep. No. 104-369, 104th Cong., 1st Sess. 1995, reprinted in part at 1995 U.S.C.C.A.N. 730, 1995 WL 709276. Nor does either report say anything about affording defendants "complete peace" when settling. And E&Y does not point the Court to any other history which would give insight into the intended purpose of the contribution bar apart from its plain language. *fn1 The Court appreciates that several pre-PSLRA cases held that the imposition of a contribution bar, which might in certain circumstances encompass state law claims, was permissible and fair in light of the federal policy in favor of settlement of securities suits. However, none of those cases stated that such settlement bars would be required. In light of the language of the PSLRA contribution bar, which focuses only on barring contribution claims, the Court is not convinced that the PSLRA intended to codify a requirement that related state law claims which seek to recover similar damages are also barred, notwithstanding the pre-existing federal common law which held that such a bar would be permissible. In fact, the language implies that the statute does not intend to impose a bar on independent state law claims because it does not include a corresponding provision for reduction of the ultimate judgment on the state law claims by the amounts paid in settlement or by the proportionate fault of the settled defendants. See 15 U.S.C. 78u-4(f)(7)(B). *fn2 In the absence of any statutory language or legislative history which would indicate an intent to codify a requirement that independent state law claims be barred in addition to contribution claims, this Court does not read such a requirement into the PSLRA bar.

Only a handful of district court cases have addressed the meaning of the PSLRA settlement contribution bar. At least one case has held that the PSLRA does not prohibit entry of a more comprehensive bar order than one which covers only contribution claims. See In re Rite Aid Corp. Sec. Litig., 146 F. Supp.2d 706, 726-28 (holding that the PSLRA does not contain any explicit language which would prohibit entry of a broader bar order than that provided for by the PSLRA and finding acceptable language in proposed settlement bar which barred all claims which arose out of the action) (E.D. Pa. 2001). However, Rite Aid is as unhelpful here as the cases cited by E&Y because it discussed only the propriety of entry of a comprehensive bar order. It did not discuss whether state law claims are automatically encompassed within the bar against "contribution" claims when a court agrees to entry of a bar order which bars contribution claims only to the extent required by the PSLRA bar and no further.

In its earlier opinion, this Court discussed at length another district court case from within this Circuit, Lucas v. Hackett Assocs., 18 F. Supp.2d 531 (E.D. Pa. 1998). That case warrants further attention here because the Lucas court's opinion contains some ambiguous language which this Court believes might be misinterpreted. In Lucas, plaintiffs brought an action against certain defendants under the federal securities laws and related state tort and contract theories. See 18 F. Supp.2d at 533. Certain defendants impleaded the plaintiffs' former attorney, and plaintiffs filed an Amended Complaint to allege breach of an escrow agreement, breach of a legal representation agreement and legal malpractice against the attorney. See id. In addition, the plaintiffs there asserted the same claims against the attorney in state court. Certain defendants settled with plaintiffs and sought entry of a settlement contribution bar order pursuant to the PSLRA. That order contained a provision which would bar any claim "for contribution or indemnity or otherwise" by non-settling parties against the settling defendants "based upon, relating to, or arising out of the settled claims, this action, a lawsuit pending in the Court of Common Pleas . . . or the settlement of this action and the state action . . ." Id. at 533. The Lucas court ultimately did not approve the proposed language because the order did not adequately protect the non-settling defendants, as it allowed a credit against the ultimate judgment against non-settling defendants only if the non-settling defendant were adjudicated a "joint tortfeasor" first. Id. at 535. Before it reached this conclusion, however, Lucas discussed the language of the PSLRA and stated that it must determine whether claims "arise out of" the action before the PSLRA bar order provisions could be applied to certain claims. Id. at 534. The court concluded that

. . . the `arise out of language' encompasses the state law claims brought against defendant Murland [the attorney] by plaintiffs. Those claims arise out of the transactions underlying plaintiffs' securities claims, not only because they are causally linked-that is, but for the securities transactions, there would be no claims against Murland-but also because they are integrally related to the securities transactions, that is, Murland was hired to provide legal advise on the nature, structure, and risks of the . . . transaction. Because the claims against Murland ...


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