To the extent that the third party complaint is read to
assert that Peat Marwick may get contribution because the
third party defendants, by overstating the inventory
shortfall, understated the value of the Crazy Eddie stock, the
third party complaint is plainly insufficient. Plaintiffs do
not allege a claim based on such an understatement. Peat
Marwick may not seek contribution for harm the plaintiffs do
not allege to have suffered.
As Judge Haight said in Greene v. Emersons, Ltd., 102 F.R.D.
33, 35 (S.D.N.Y. 1983), "[a] Rule 14(a) branch cannot grow
without the root of a claim asserted by plaintiff." The
plaintiffs may only recover the "difference between the
[higher] price paid and the true value of the stock when
bought." Bernstein, 702 F. Supp. at 980. Peat Marwick will not
be liable for any losses incurred by plaintiffs below the "true
value" of the stock that may have been caused by
misrepresentations, if any, undervaluing the stock.
Even as an independent claim this assertion of
understatement would be insufficient. Peat Marwick argues
that, by allegedly understating the value of Crazy Eddie in
the November 19, 1987 announcement, the third party defendants
caused an undue drop in the stock price, and that this drop
induced some securities holders not to sell their stock above
their purchase price, with consequent damages to those
plaintiffs and alleged aggravation of Peat Marwick's damages.
Cf. James v. Nico Energy Co., 838 F.2d 1365, 1371 (5th Cir.
1988) (if stock sold above price of purchase, no injury
This argument ignores the fact that each member of the class
who sells stock must do so to a new buyer who is entitled to
damages up to the difference of his higher purchase price and
the lower "true value" of the stock. An individual plaintiff's
damages for claims for fraudulent overstatement might be
affected by the drop in stock price. But the aggregate damages
suffered by the class of all buyers for claims of fraudulent
overstatement during the class period is not affected by the
The third party complaint, insofar as it is read to claim
that the third party defendants made misrepresentations
overstating the value of Crazy Eddie, is insufficient.
A party may be held liable for contribution for a violation
of Section 10(b) of the Exchange Act and Rule 10b-5 only if
the defendants are joint tortfeasors in the wrongful
production of an injury to a third person. Stratton Group, Ltd.
v. Sprayregen, 466 F. Supp. 1180, 1185 (S.D.N.Y. 1979). The
courts in this circuit have interpreted that requirement to
limit contribution to "joint participant[s] in the fraud
alleged by plaintiff," and not to embrace also concurrent,
independent actors. Connecticut Nat. Bank v. Reliance Ins. Co.,
704 F. Supp. 506, 509 (S.D.N.Y. 1989); Greene v. Emersons, Ltd.,
supra, at 36 (S.D.N.Y. 1983), aff'd on different grounds sub
nom., Leventhal & Co. v. Joyner Wholesale Co., 736 F.2d 29 (2d
Cir. 1984); Stratton, supra, 466 F. Supp. at 1185. This court
follows those decisions. The third party defendants were not
joint participants with Peat Marwick in any alleged fraud.
Furthermore, the third party complaint, insofar as it is
read to claim that the third party defendants made
misrepresentations overstating the value of Crazy Eddie is
insufficient. Neither the complaint nor the third party
complaint allege statements made by the third party defendants
that allegedly overstated the value of Crazy Eddie before the
January 18, 1988 announcement. Moreover, no omissions by the
third party defendants may constitute "misrepresentations"
absent a duty to disclose during this period. See, e.g.,
Chiarella v. United States, 445 U.S. 222, 228, 100 S.Ct. 1108,
1114, 63 L.Ed.2d 348 (1980); In re AM International, Inc.,
Securities Litigation, 606 F. Supp. 600, 606 (S.D.N.Y. 1985). On
the facts as alleged, the court finds no such duty.
Contribution is not warranted under Section 10(b).
Similarly, pursuant to Section 11(f) of the 1933 Act,
15 U.S.C. § 77k(f), a party liable for damages under section 11
"may recover contribution as in cases of contract from any
person who, if sued separately, would have been liable to make
the same payment." Third party defendants are not jointly
liable for the Section 11 violations alleged in the plaintiffs'
The claims for contribution under the federal securities
laws are dismissed with prejudice.
IV. Ancillary Claims
The third party complaint does not allege diversity
jurisdiction, and the court has dismissed the federal claims.
While the federal courts may have jurisdiction over ancillary
nonfederal claims made by third party plaintiffs against third
party defendants, see e.g., Owen Equipment & Erection Co. v.
Kroger, 437 U.S. 365, 376, 98 S.Ct. 2396, 2404, 57 L.Ed.2d 274
(1978), the court need not exercise jurisdiction. See United
States v. City of Twin Falls, Idaho, 806 F.2d 862, 868 (9th
Cir. 1986), cert. denied, 482 U.S. 914, 107 S.Ct. 3185, 96
L.Ed.2d 674 (1987); United States v. Collins & Co. General
Contractors, 648 F. Supp. 967, 971 (M.D.Ga. 1986); see also
United Mine Workers of America v. Gibbs, 383 U.S. 715, 726, 86
S.Ct. 1130, 1139, 16 L.Ed.2d 218 (1966). The court chooses not
to exercise such ancillary jurisdiction.
In the first place the footnote in Finley v. United States,
___ U.S. ___, 109 S.Ct. 2003, 2009 n. 6, 104 L.Ed.2d 593
(1989), casts doubt on the question whether the court has power
to decide the ancillary third party claim. See also Aetna
Casualty & Surety Co. v. Spartan Mechanical Corp., 738 F. Supp. 664
(E.D.N.Y. 1990) (holding that after Finley no ancillary
jurisdiction over third party claims.)
Further, the claim of destruction of evidence alleges a
separate wrong that allegedly occurred more than a year after
the central events in this case, namely, the 1984, 1985 and
1986 registration statements or offerings. To sustain this
claim would require exploration at trial of the motivations
the third party defendants during November 1987, entailing the
introduction of evidence wholly irrelevant to plaintiffs'
claims. This would needlessly confuse an already complex case
and potentially lead a jury away from the central issue.
In addition, were the court to consider the destruction of
evidence claim, the court would be charting unmapped waters of
New York or New Jersey state law, an area best left to the
state courts. See Prater v. United Mine Workers of America,
793 F.2d 1201, 1208 (11th Cir. 1986); Collins, supra, at 972.
The other state law claims, while they have some
relationship to the allegations in the complaint, also concern
matters that took place after the occurrences that are at the
center of plaintiffs' claims. Proof as to such matters would
also serve to confuse the case unduly.
The third party complaint is dismissed with prejudice as to
the federal claims and without prejudice as to the state law
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