Contribution Rights in Colorado Securities Fraud Cases

• Publication year: 2000
• Pages: 51
• Citation: Vol. 29 No. 6 Pg. 51

29 Colo.Law. 51 Colorado Lawyer 2000.

2000, June, Pg. 51. Contribution Rights in Colorado Securities Fraud Cases

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51

Vol. 29, No. 6, Pg. 51

The Colorado Lawyer
June 2000
Vol. 29, No. 6 [Page 51]

Specialty Law Columns
Business Law Newsletter
Contribution Rights in Colorado Securities Fraud Cases
by Sandra L. Potter

Despite the Private Securities Litigation Reform Act of 19951 ("PSLRA") and Colorado's 1986 tort reform,2 most private securities fraud actions involve joint and several liability, a defendant's least favorite type of liability. Joint and several liability allows injured plaintiffs to recover entire losses from any one of the defendants found liable for a portion of the loss. Joint and several liability mitigates the unfairness to an injured plaintiff when one tortfeasor is judgment-proof, as between defendants; however, joint and several liability can create significant inequities. Securities fraud actions, especially under the Securities Exchange Act of 19343 ("1934 Act") § 10(b) and Colorado's analogousprovision,4 typically involve several defendants whose level of participation in the allegedly fraudulent conduct can vary dramatically. Mechanisms for shifting or sharing the burden of joint and several liability are important to these defendants

Unlike indemnification, which shifts the burden of joint and several liability, contribution redistributes it.5 A right of contribution allows defendants who become jointly and severally liable to recover from the responsible person their portion of the plaintiff's damages. This article analyzes the circumstances under which Colorado securities fraud defendants can be held jointly and severally liable and the nature of their contribution rights under those circumstances

Federal Securities Statutes

The federal securities statutes provide contribution rights in general terms. Congress left questions concerning the timing and scope of these rights for the courts to determine The courts are split concerning whether contribution rights come into existence before a judgment is entered and against whom the rights may be asserted.

PSLRA Contribution

Until 1995, the federal securities statutes imposed joint and several liability as a general rule, regardless of differing degrees of fault. The PSLRA amended the 1934 Act to limit joint and several liability to knowing violators of the 1934 Act's provisions.6 The same provision also amended the Securities Act of 1933 ("1933 Act") with respect to outside directors sued under 1933 Act § 11.7 Defendants in private actions arising under the 1933 Act, except for outside directors sued under § 11, do not come under this proportionate liability provision. Most notably, the statute does not change the status quo for defendants sued under 1933 Act § 12(1) and (2) (for violations of § 5 registration or prospectus requirements) or for 1933 Act § 11 liability (misrepresentation in registration statement as effective) of issuers, underwriters, experts, and inside directors. In sum, the PSLRA limits joint and several liability to "knowing" violators of the provisions of the 1934 Act and outside directors who participate in a fraudulent registration statement.

However, the PSLRA carves out a complicated exception from proportionate liability to compensate plaintiffs who are unable to collect damages from a defendant.8 Depending on the net worth of the plaintiff, defendants are jointly and severally liable for the entire uncollectible share, or their additional exposure may be limited to one-half of their proportionate share.9 The plaintiff has six months after final judgment to file a motion seeking the court's determination that a share is uncollectible.10

Under § 21D(g)(5), as amended by the PSLRA, the 1934 Act gives contribution rights to defendants who must make additional payments under § 21D(g)(4). The defendant can collect from any other defendant and "any other person responsible for the conduct giving rise to the payment that would have been liable to make the same payment."11 Therefore, the defendant can seek to collect from responsible persons, regardless of whether they were named as defendants. However, this language strongly suggests that the right of contribution does not extend to nonparties who were responsible for a portion of the plaintiff's loss but were not responsible for the conduct giving rise to the payment.

More broadly, the 1934 Act gives an express right of contribution to covered persons (outside directors sued under 1933 Act § 11 and defendants sued under the 1934 Act) who become jointly and severally liable.12 Such a defendant "may recover contribution from any other person who, if joined in the original action, would have been liable for the same damages."13 The phrase "if joined in the original action" appears to be taken verbatim from 1934 Act § 9(e). The primary legislative history for the bill does not discuss the contribution section.14 Thus, no definitive secondary evidence exists of Congress' intent in this provision.

Subsection (8) of the 1934 Act also applies to those defendants who have become liable for an uncollectible share under § 21D(g)(4)(i), but not (ii). Congress specified that when the plaintiff meets net-worth requirements, a covered person shall be "jointly and severally liable for the uncollectible share," while for all other plaintiffs, the covered person shall be "liable for the uncollectible share in proportion to the percentage of responsibility."15 (Emphasis added.) In effect, with respect to defendants jointly and severally liable for an entire uncollectible share, the limitation to persons responsible for the tortfeasors' conduct (as opposed to responsibility for the plaintiff's loss) is removed under subsection (8).

The time in which a defendant can assert these rights of contribution may be unclear despite the 1934 Act's express language. Subsection (8) gives the right to a covered person who "becomes" jointly and severally liable, suggesting that the right does not exist until the defendant is judged liable. However, the circuit courts are split regarding the same language contained in 1934 Act §§ 9 and 18 and formerly implied in § 10(b). In deHaas v. Empire Petroleum Co.,16 the court did not question whether the defendant's contribution claims were brought properly on a third-party complaint.17 The Ninth Circuit has held that a right of contribution does not arise until the defendant actually has paid more than his or her share of damages.18

On the other hand, the district courts in the Second Circuit have expressly held that defendants need not wait until judgment is entered.19 In In Re Del-Val Financial Corp. Securities Litigation, the court reasoned that

[j]oint tort-feasors are 'two or more persons who are the joint participants or joint actors in the wrongful production of an injury to a third person'. . . A party need not actually be adjudged liable to the injured party to be a joint tort-feasor. Indeed, the plaintiff in the underlying action need not even sue a party in order to be liable for contribution. . . . All that is required are "allegations that the defendant and third-party defendant were joint participants in the fraud alleged by plaintiff."20

The Second Circuit has analyzed third-party claims for contribution brought prior to entry of judgment without questioning whether such claims are ripe.21

Additional language in the 1934 Act, as amended by the PSLRA may have clarified the timing. Section 21D(g)(2)(A) limits joint and several liability to covered persons "against whom a final judgment is entered." Also, the contribution right, with respect to an uncollectible share, logically cannot arise until a defendant actually has made an additional payment. Therefore,...