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Employers Insurance of Wausau v. Musick

filed: January 23, 1992.

EMPLOYERS INSURANCE OF WAUSAU; FEDERAL INSURANCE COMPANY, PLAINTIFFS-APPELLANTS,
v.
MUSICK, PEELER & GARRETT, A PARTNERSHIP; LEONARD CASTRO, AN INDIVIDUAL; ROBERT SCHUCHARD, AN INDIVIDUAL; K.M.G. MAIN HURDMAN, A PARTNERSHIP; PEAT, MARWICK, MAIN & CO., A PARTNERSHIP; J.H. COHN & CO., A PARTNERSHIP; ED BACANI, AN INDIVIDUAL; ROBERT TORKAR, AN INDIVIDUAL; DOES 1 THRU 100; AND DOES 1 THRU 300, INCLUSIVE, DEFENDANTS-APPELLEES.



Appeal from the United States District Court for the Southern District of California. D.C. No. CV-89-705-JLI. J. Lawrence Irving, District Judge, Presiding.

Before: Alfred T. Goodwin, Harry Pregerson and Arthur L. Alarcon, Circuit Judges. Opinion by Judge Goodwin.

Author: Goodwin

GOODWIN, Circuit Judge:

The securities fraud contribution question left open in Franklin v. Kaypro Corp., 884 F.2d 1222 (9th Cir. 1989), cert. denied sub nom., Franklin v. Peat Marwick Main & Co., 112 L. Ed. 2d 192, 111 S. Ct. 232 (1990) is presented in this appeal by insurance carriers who are subrogated to the contribution rights of settling defendants (their insureds).

The plaintiffs seek recovery against nonparties now alleged to be culpable in the original public offering that resulted in the underlying litigation. Kaypro held that the district court could properly bar the nonsettling defendants from seeking contribution from the settling defendants, and held further that the nonsettling defendant's exposure should be limited to their actual percentage of liability based upon their culpability as determined by trial. Kaypro left open the contribution liability of nonparties who would have been defendants had they been sued by the original plaintiffs, but who were, for various reasons, not named as parties and thus were not participants in the settlement negotiations.

Employers Insurance of Wausau (Wausau) and Federal Insurance Co. (Federal), insurers of the settling defendants in a securities fraud class action, In re Cousins Securities Litigation, No. 84-1821-(IEG), appeal the dismissal of their action for contribution under federal law and for comparative equitable indemnity under state law against the defendants, persons who were the attorneys and accountants of the insureds in the public offering that gave rise to the class action suit.

Shareholders of Cousins Home Furnishings, Inc. filed the class action against insureds - Cousins, along with its holding company, certain of its officers and directors, and its two lead underwriters - alleging violations of federal securities law and California corporations law in connection with a public offering in 1983. The shareholders did not, however, sue, nor did insureds implead the attorneys and accountants involved in the underlying transaction. All defendants in the suit entered into a settlement agreement with the plaintiff class agreeing to pay plaintiff shareholders $13.5 million, an amount determined by a federal magistrate after a "good faith" hearing to "represent[ ] the settling defendants' fair or proper share of the total damages sought by the plaintiffs."

The settlement contained a general release from liability, including the release of potential claims by the plaintiff class against insureds' attorneys and accountants, even though they were not defendants. At the time of the agreement, the statute of limitations had already run on claims by the plaintiff class against the non-party lawyers and accountants. Although agreeing to the settlement, insureds expressly denied liability. Wausau and Federal (the "Insurers") have paid their appropriate percentages of the settlement amount.

The Insurers now assert the right, as insureds' subrogees, to sue the attorneys and accountants. Insurers' complaint, which resembles the shareholders' complaint against insureds in the class action, alleges various misrepresentations that defendants caused insureds to make to investors about matters germane to the public offering, in violation of section 10(b) of the Securities Exchange Act of 1933 and Rule 10b-5 of the Securities Exchange Commission, 17 C.F.R. § 240.10b-5.

Holding that a settling defendant who has paid no more than its fair share of the total liability is not entitled to contribution under federal securities law, the district court dismissed the action without leave to amend for failure to state a claim upon which relief may be granted, pursuant to Fed. R. Civ. P. 12(b)(6). This court reviews the granting of a 12(b)(6) motion de novo. Massey v. Inland Boatmen's Union of Pacific, 886 F.2d 1188, 1189 (9th Cir. 1989). Because we find that the Insurers have stated a valid claim for contribution, we reverse.

No explicit right to contribution is provided for in section 10(b) of the Securities Exchange Act of 1933 or Rule 10b-5. We have recognized, however, that these provisions imply a right of contribution. See Kaypro, 884 F.2d at 1226; Smith v. Mulvaney, 827 F.2d 558, 561 (9th Cir. 1987).

Actions for contribution arise in many different procedural settings. For example, contribution may be sought by one defendant against other named defendants by a motion to the court, see Globus, Inc. v. Law Research Service, Inc., 318 F.Supp. 955, 957 (S.D.N.Y. 1970), aff'd, 442 F.2d 1346 (2nd Cir.), cert. denied sub nom., Law Research Service, Inc. v. Blair & Co., 404 U.S. 941, 30 L. Ed. 2d 254, 92 S. Ct. 286 (1971). An individual seeking contribution is not limited, however, to the parties named by the plaintiff in the original suit. Contribution may be the sought through a third party action pursuant to Rule 14(a) of the Federal Rules of Civil Procedure. See Tucker v. Arthur Andersen & Co., 646 F.2d 721, 727 n.7 (2nd Cir. 1981); Odette v. Shearson Hammill & Co., Inc., 394 F.Supp. 946, 958 (S.D.N.Y. 1975); Liggett & Myers, Inc. v. Bloomfield, 380 F.Supp. 1044, 1047 (S.D.N.Y. 1974).

While actions for contribution are frequently brought in the context of third party practice, it does not follow that third party procedure is the exclusive remedy. The right of contribution is substantive in nature. "Rule 14, like all of the Federal Rules of Civil Procedure, is purely procedural. It does not create or modify any substantive rights, such as the right to indemnification or contribution." 3 Moore's Fed. Prac., Par. 14.03[1]. Thus, a claim for contribution may be maintained in a separate action. Heizer Corp. v. Ross, 601 F.2d 330, 334 (7th Cir. 1979). See also Restatement (Second) of Torts § 886A(2) comment i (1979) ("A separate action for contribution is also available, particularly against a tortfeasor who was not a party to the original action.").

The provisions of the securities laws that explicitly provide for contribution envision the possibility of such claims being brought as separate causes of action. Contribution is not limited to parties involved in ...


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