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SEYMOUR v. BACHE & CO.

September 23, 1980

Cy SEYMOUR, Plaintiff,
v.
BACHE & COMPANY, INC. and Alex Canaan, Defendants



The opinion of the court was delivered by: TENNEY

Plaintiff Cy Seymour moves pursuant to Federal Rule of Civil Procedure ("Rule") 12(b) and (c) to dismiss defendant Alex Canaan's indemnification cross-claim against defendant Bache & Company, Inc. ("Bache") for failure to state a claim, or alternatively, for judgment on the pleadings. Canaan seeks to amend his cross-claim to assert a claim for contribution against Bache. The plaintiff's motion is denied. Canaan may amend his claim to assert a cause of action for contribution.

Background

 Canaan served as plaintiff's securities sales manager from about 1969 to 1974, when he was employed by Bache. Seymour's amended complaint in this action asserted five basic claims against Canaan and Bache jointly. These claims included the following: violations of section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. 240.10b-5; breach of fiduciary duty; violations of Rule 405 of the New York Stock Exchange, which imposes certain due diligence requirements on Exchange members; violations of Article III, section 2 of the Rules of Fair Practice of the National Association of Securities Dealers ("NASD"), which requires registered representatives to ensure that their recommendations are "suitable" to their customers; and violations of Article III, section 27 of NASD's Rules, which imposes a duty on members to supervise their employees. In November 1979, Seymour and Bache settled their differences and a Stipulation of Discontinuance was entered as to Bache. Canaan, however, remains in the action and his cross-claim for indemnification against Bache is now, in effect, a third-party claim. Canaan contends that Bache trained and supervised him, that he acted within the scope of his employment, and that the company always approved his actions and promoted him accordingly.

 Arguments

 Seymour argues that Canaan's claim must be dismissed because indemnification is not allowed in favor of a defendant who knowingly violated the securities laws. According to the plaintiff, each of his claims against Canaan requires proof of scienter and, if this burden is met, Canaan will be ineligible for indemnification. Seymour concedes that Canaan may seek contribution from Bache if he is found liable on the securities laws claims. In contrast to indemnification, which totally shifts liability from one joint tortfeasor to another, a party seeking contribution is entitled to recover only his co-defendant's proportionate share of liability. Seymour therefore argues that "since Defendant Bache's liability is derivative or passive, it would seem fairly apparent that Defendant Canaan would bear a major proportion of the liability which is vastly different (than) if Defendant Canaan was permitted to shift the entire loss to Defendant Bache by way of indemnification." Plaintiff's Memorandum at 10. According to the plaintiff, this vast difference is important to him for

 
plaintiff should know well in advance of trial the basic complexion of this case and how he must present it at time of trial and the witnesses he may rely on. Allowing the determination of this motion to wait until trial will only work a hardship on all of the parties and will undoubtedly result in lengthening delay at time of trial.

 Plaintiff's Reply Memorandum at 7.

 In response, Canaan first contends that the plaintiff does not have standing to seek dismissal of Canaan's claim against Bache. Bache could assert this defense against Canaan's claim but has not done so. Furthermore, Canaan argues, Rule 12 does not authorize the plaintiff to assert a defense to or to seek dismissal of a cross-claim that does not affect the plaintiff. Finally, with respect to Seymour's interest in the claim, Canaan argues that the indemnification action will have no effect on the plaintiff's trial preparation.

 Canaan's second contention is that the indemnification claim is viable because he acted as Bache's agent in executing the challenged transactions. Third, he contends that if indemnification is prohibited, as a matter of law, under the facts of this case, he should be permitted to amend his claim to seek contribution.

 Bache has submitted an affidavit to the Court stating that it "seeks no relief at this time." Affidavit of Charles E. Ramos, sworn to May 6, 1980. Bache "makes no comment" on the memoranda submitted by the other parties, but requests "that the motion not be considered at this time." Id. In Bache's opinion, "the obvious benefits to itself, if the motion is granted, are overshadowed by the risks should the motion be denied against Bache on the merits." Id.

 Discussion

 A plaintiff may move to dismiss a third-party complaint even though the third-party defendant does not seek dismissal of the claim. 2A Moore's Federal Practice P 12.06(1), at 2245 (2d ed. 1979); see, e.g., Hart v. Simons, 223 F. Supp. 109 (E.D.Pa.1963). In the case at bar, Canaan's cross-claim against Bache is, in effect, a third-party claim now that the plaintiff's case against Bache has been discontinued. The Court thus concludes that the same principle should apply and that Seymour has "standing" to make a motion to dismiss Canaan's claim against Bache.

 The Court also agrees with Seymour's assertion that indemnification is unavailable to a defendant who violated the securities laws with knowledge of the fraud or misconduct or with reckless disregard of the truth. See Globus v. Law Research Serv., Inc., 418 F.2d 1276, 1288-89 (2d Cir. 1969), cert. denied, 397 U.S. 913, 90 S. Ct. 913, 25 L. Ed. 2d 93 (1970); Odette v. Shearson, Hammill & Co., Inc., 394 F. Supp. 946, 954 (S.D.N.Y.1975); Herzfeld v. Laventhol, Krekstein, Horwath & Horwath, 378 F. Supp. 112, 135 (S.D.N.Y.1974), aff'd in part, rev'd in part on other grounds, 540 F.2d 27 (2d Cir. 1976). If Canaan were found to have violated section 10(b) and Rule 10b-5, the weight of authority in this Circuit indicates that he could not seek indemnity from Bache. The liability resulting from the other causes of action is not, however, quite so clear.

 Seymour asserts that the breach of fiduciary duty claim rests on the same allegations of fraudulent conduct giving rise to the section 10(b) claim; therefore, indemnification would also have to be prohibited with respect to that charge. Furthermore, he argues, since he is seeking punitive damages, he must prove that Canaan acted in a "wilful or wanton" manner and such proof would likewise preclude indemnification. The Court need not, at this point, consider whether Seymour can assert a claim for breach of fiduciary duty against Canaan. Assuming the existence of a valid claim, a jury could find that Canaan abused Seymour's confidence and trust, see Mobil Oil Corp. v. Rubenfeld, 72 Misc.2d 392, 339 N.Y.S.2d 623 (Civ.Ct.N.Y.1972), without finding that he engaged in "reckless, wilful or criminal misconduct," Globus v. Law Research Serv., Inc., supra, 418 F.2d at 1288, or "violated the fraud provisions of the securities laws with actual knowledge of the falsity of (his) statements or reckless disregard for the truth." Odette v. Shearson, Hammill ...


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