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July 17, 1981


The opinion of the court was delivered by: PARKER


The issue now presented for determination by the Court is whether a non-settling defendant charged with a violation of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), has an implied right to assert a cross-claim for contribution against a settling defendant. Under prevailing authority, the Court concludes that such a right exists.


 In 1970, a group of shareholders brought a class action suit seeking damages against National Student Marketing Corp., the law firm of Lord Bissell & Brook (Lord Bissell or LBB), the Peat Marwick & Mitchell accounting firm, the law firm of White & Case and various other defendants. The class action complaint alleged violations of various provisions of the federal securities law and common law fraud. Later, on July 26, 1973, an order was entered providing that each defendant was deemed to have asserted cross-claims against all other defendants for such sharing of liability in the nature of contribution and indemnification as provided under the Securities Act of 1933 and the Securities Exchange Act of 1934, as well as by state statutory and common law.

 On October 26, 1979, the Lord Bissell & Brook defendants entered into a settlement with the plaintiff class. That settlement was approved by the Court on June 5, 1980. They have now moved to dismiss the cross-claims for contribution asserted against them by the remaining non-settling defendants. *fn1" By dismissal of the cross-claims, Lord Bissell seeks to avoid further involvement in this protracted litigation. The cross-claims among these settling defendants were resolved by the agreement. Any cross-claims by the twenty-three defendants, who were dismissed by the plaintiff class on April 20, 1981, have also been eliminated from these actions. *fn2" Thus, the only cross-claims remaining against the Lord Bissell defendants are the cross-claims of the non-settling defendants who have not been dismissed.

 The Lord Bissell agreement expressly provided that it was without prejudice to the rights of any defendants other than the LBB defendants. The plaintiff class agreed to indemnify Lord Bissell against all claims of every nature and description which might be asserted by any non-settling defendant. Similarly, this Court's judgment which ratified the settlement, provided that it was without prejudice to any and all cross-claims. The Lord Bissell defendants did not suggest in their application to the Court for approval of the settlement that such actions would effect dismissal of cross-claims asserted by the remaining defendants. Additionally, at the May 28, 1980 hearing on the settlement, counsel for Lord Bissell acknowledged that the cross-claims required their continued participation in this litigation. At page 56 of the transcript of that hearing, Mr. Castle, LBB's counsel, stated:

Now, the only way that our defendants, settling defendants, have any continuing connection, if you will, not concern, connection with this case is that, if a non-settling defendant asserts a cross-claim against us then we must look to the plaintiff's class for indemnification against the cross-claim, and the plaintiffs are obliged to indemnify us to the extent that they recover from the cross-claiming defendant, and that is it.

 Consequently, the LBB defendants entered into settlement fully aware that they would still be responsible for defending against any future cross-claims.


 Lord Bissell now seeks dismissal of these cross-claims and advances two theories. First, they argue that the law of the transferor court, the Southern District of New York, governs, *fn3" and that the case law of the Second Circuit, Herzfeld v. Laventhol, Krekstein, Horwath & Horwath, 540 F.2d 27 (2d Cir. 1976), does not provide a right of contribution under § 10(b) of the 1934 Act. They acknowledge that two recent Fifth and Ninth Circuit opinions recognized a federal contribution right under the securities laws but urge that they are not controlling here. Huddleston v. Herman & MacLean, 640 F.2d 534 (5th Cir. 1981); Laventhol, Krekstein, Horwath & Horwath v. Horwitch, 637 F.2d 672 (9th Cir. 1980), cert. denied, 452 U.S. 963, 101 S. Ct. 3114, 69 L. Ed. 2d 975 (1981). The second theory, advanced by LBB's counsel and proffered for the first time at the July 1, 1981 hearing, was premised on two recently decided Supreme Court cases. Texas Industries, Inc. v. Radcliff Materials, Inc., 451 U.S. 630, 101 S. Ct. 2061, 68 L. Ed. 2d 500 (1981); Northwest Airlines, Inc. v. Transport Workers Union, 451 U.S. 77, 101 S. Ct. 1571, 67 L. Ed. 2d 750 (1981). They argue from those decisions that no federal right of contribution may ever be implied under § 10(b). While those cases did not involve federal securities law, LBB argues nonetheless that they are persuasive and applicable. Counsel contends that those rulings are clear indications that the Supreme Court relies heavily, if not solely, on Congressional intent in analyzing implied contribution rights and since no right of contribution was provided in § 10(b), the federal courts have no power to imply such a remedy. Indeed, Lord Bissell argues that the two recent cases overrule any previous implication of a right of contribution under § 10(b).


 The several arguments of Lord Bissell are interesting but upon close analysis are not convincing and are unacceptable. First, they misread the ruling in Herzfeld. The Second Circuit held that under the particular set of facts there presented, the non-settling defendants were not entitled to contribution from the settling defendants. The central aspect and the one this Court believes was controlling, was that the settling defendant had agreed to pay more than half of the amount of damages the plaintiff had incurred. Therefore, the settling defendant had already paid more than its share of any potential liability. The detailed analysis the Court engaged in to determine if the damages had been apportioned fairly would have been unnecessary if the holding was, as the LBB defendants suggest, that there was no implied right of contribution under § 10(b).

 Herzfeld has been regarded as a limited holding, that when a settling defendant has paid more than his pro rata share of damages, a non-settling defendant may not be entitled to recovery. Laventhol, 637 F.2d at 675; accord, Professional Beauty Supply v. National Beauty Supply, 594 F.2d 1179, 1182 n. 4 (8th Cir. 1979). One commentator explained:

The clear implication of Herzfeld ... is ... that, if with hindsight a court determines that the settlement sum did not equal settlor's share of the judgment, the settlor will be required to contribute the difference between the ...

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