The opinion of the court was delivered by: Nickerson, District Judge.
This consolidated action was the subject of a Memorandum and
Order, dated December 30, 1988, published Bernstein v. Crazy
Eddie, Inc., 702 F. Supp. 962 (E.D.N.Y. 1988), vacated in part
on other grounds, 714 F. Supp. 1285 (E.D.N.Y. 1989), familiarity
with which is assumed.
The present matter concerns the claims of the shareholder
plaintiffs (plaintiffs) against Peat Marwick Main & Co. (Peat
Marwick), and its third party claims against others.
Plaintiffs' claims against Peat Marwick allege violations of
Section 11 of the Securities Act of 1933, 15 U.S.C. § 77a et
seq. (1982 & Supp. IV 1986) (the Securities Act), Section 10(b)
of the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq.
(1982 & Supp. IV 1986) (the Exchange Act), and common law fraud
and negligent misrepresentation. The claims assert deficiencies
in Peat Marwick's audits of Crazy Eddie's audited financial
statements in 1984, 1985 and 1986 and Peat Marwick's
participation in the preparation of allegedly misleading
securities offering registration statements in 1985 and 1986.
Peat Marwick thereafter served and filed a third party
complaint against Oppenheimer-Palmieri Fund, L.P., (the Fund),
the Palmieri Company, Victor Palmieri, Entertainment
Marketing, Inc., and Elias Zinn for indemnification,
contribution under federal and state law. The Fund, Victor
Palmieri and the Palmieri Company (third party defendants)
move to dismiss the Complaint for failure to state a claim.
The first count of the third party complaint alleges, in
substance, the following. Upon taking control of Crazy Eddie,
Inc. (Crazy Eddie), on November 6, 1987, third party
defendants failed to amend, correct or modify the
misrepresentations contained in Crazy Eddie's documents
serving as a predicate for the plaintiffs' claims. Those
claims allege that plaintiffs continued to be misled by false
and misleading information relating to the financial
statements of Crazy Eddie through January 18, 1988, after
third party defendants took control. As a result of the third
party defendants' conduct, Peat Marwick has been named as
defendant in this and other actions, incurring expenses in
defending against suits, and possibly requiring the payment of
damages to the plaintiffs. It is therefore entitled to
indemnification or contribution.
The first count thus suggests by implication that third
party defendants intentionally or negligently overstated the
value of Crazy Eddie to the detriment of the plaintiffs who
relied on the representations.
The second count of the third party complaint asserts, in
substance, the following. Peat Marwick observed a physical
inventory conducted by Crazy Eddie employees in November 1987.
Following the inventory, but before Peat Marwick completed the
engagement, the third party defendants announced on November
19, 1987 a $45 million shortfall and shortly thereafter fired
Peat Marwick. The announcement was negligently, recklessly, or
fraudulently made and caused a decline in the price of Crazy
Apparently by these allegations Peat Marwick seeks to
suggest that the third party defendants by the announcement
intentionally or negligently understated the value of Crazy
Eddie so that shareholders relying on the announcement sold
their stock at less than true value. Peat Marwick seeks
contribution or indemnification for any liability and expenses
attributable to this conduct of third party defendants.
In addition, the second count claims that after the November
19, 1987 announcement third party defendants recklessly or
fraudulently destroyed all documentation supporting their
calculation of the purported $45 million shortfall, and
refused to assist and interfered with Peat Marwick's attempts
to determine the reason for it. Third party defendants thus
are said to have deliberately deprived Peat Marwick of
evidence crucial to its defense against plaintiffs' claims.
Rule 14(a), Fed.R.Civ.P., provides that "[a]t any time after
commencement of the action a defending party, as a third-party
plaintiff, may cause a summons and complaint to be served upon
a person not a party to the action who is or may be liable to
the third-party plaintiff for all or part of the plaintiff's
claim against the third party plaintiff." A third party claim
is permissible only if the "third party's liability is"
"dependent upon the out come of the main claim" or the third
party is "potentially secondarily liable as a contributor to
the defendant." See Kenneth Leventhal & Co. v. Joyner Wholesale
Co., 736 F.2d 29, 31 (2d Cir. 1984).
In form the claims for indemnification and contribution
purport to be dependent on the outcome of the plaintiffs'
claims against Peat Marwick. Whether the second count to the
extent it seeks "compensatory damages" for destruction of
evidence states a permissible third party claim is a more
difficult question. The court ...