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AXEL JOHNSON, INC. v. ARTHUR ANDERSEN & CO.

August 19, 1993

AXEL JOHNSON, INC., Plaintiff,
v.
ARTHUR ANDERSEN & CO., Defendant and Third-Party Plaintiff, v. INDUSTRIAL TECTONICS, INC., ITI HOLDING CORPORATION, HELMUT F. STERN, ROBERT A. GOCKEL, FREDERICK J. MALECKI and JIM BABCOCK, Third-Party Defendants.



The opinion of the court was delivered by: MORRIS E. LASKER

 Third party defendants Industrial Tectonics, Inc. ("ITI"), ITI Holding Corporation, Helmut Stern, Robert A. Gockel, Frederick J. Malecki, and Jim Babcock, move to dismiss the third party complaint of defendant Arthur Andersen pursuant to Rule 9 and Rule 12(b)(6) of the Federal Rules of Civil Procedure.

 I.

 ITI manufactures precision ball products and high performance bearings, particularly for defense, aerospace, and advanced commercial application. In December 1982, plaintiff Axel Johnson, Inc. bought all of ITI's outstanding shares. In this action, Johnson asserts that two key facts were materially misrepresented to it upon which it relied in making its purchase: (a) ITI's net income and net sales figures, which Johnson claims were overstated by several million dollars, and (b) ITI's report of potential liabilities, which Johnson claims failed to disclose its potential liability for defectively priced contracts.

 On December 18, 1985, a former employee of ITI filed a qui tam action on behalf of the United States against ITI and Johnson under the False Claims Act alleging that ITI had submitted inaccurate cost or pricing data in connection with a number of government military contracts entered into between 1980 and 1984. ITI and Johnson settled the action for $ 14,279,524.00. *fn1"

 On September 28, 1989, Johnson brought an action against Arthur Andersen asserting that it had "relied on audit and other reports and representations made by [Arthur Andersen] in connection with Johnson's purchase of ITI and its conduct of ITI's business." Johnson's claims were brought under § 10(b) and Rule 10b-5 of the Securities and Exchange Act of 1934, and under state law principles of negligence, breach of contract and professional malpractice. Arthur Andersen had served as ITI's outside auditor since 1974.

 By its third party complaint, filed May 22, 1991, Andersen seeks to make ITI and ITI's management bear their "fair" share of the damages. The third party defendants are ITI, ITI Holding, which sold 362,000 of the 368,000 shares of ITI stock to Johnson in December 1982, and ITI's senior financial management:

 
Helmut Stern, President of ITI, and also the President and 85% owner of third-party defendant ITI Holding Corporation ("ITI Holding"), which owned 362,000 of the 368,000 shares of ITI that were sold to Johnson.
 
Robert Gockel, Vice-President, Secretary and Treasurer of both ITI and ITI Holding, and the owner of the remaining 6000 shares of ITI that were sold to Johnson.
 
 
Frederick Malecki, Controller of both ITI and ITI Holding, and
 
Jim Babcock, ITI's Chief Accountant.

 Andersen's third party complaint alleges three causes of action:

 
The first claims that "if Andersen is adjudged liable to plaintiff Johnson on the First Claim of the Complaint [i.e., the 10b-5 claim], the third-party defendants ITI, ITI Holding, Stern, Malecki, and Babcock are, along with Andersen, joint tortfeasors and must contribute towards payment of the judgment." This claim for contribution is made solely with respect to the federal 10b-5 claim asserted by Johnson against Andersen.

 The second seeks indemnification from those entities -- ITI Holding, Gockel and Stern -- who formerly owned and controlled ITI and sold their ITI shares to Johnson. According to Andersen's Memorandum in Opposition to the Motion, this claim relates solely to Andersen's potential liability under the state law claims asserted by Johnson.

 The third seeks a recovery in unjust enrichment against ITI Holding, Gockel and Stern in the event Andersen is found liable to Johnson. The unjust enrichment claim relates only to the state law claims.

 Andersen asserts that its third party complaint "does what Johnson's complaint failed to do -- it brings the persons who were responsible for ITI's allegedly misleading financial statements which are at the heart of Johnson's complaint to this Court." Andersen points out that in connection with the engagement of Andersen to audit ITI's financial statements for the year ended August 31, 1982 (the primary financial statements underlying Johnson's complaint), Stern, Gockel and Malecki represented to Andersen that:

 
We are responsible for the fair presentation in the financial statements of financial position, results of operations, and changes in financial position in conformity with generally accepted accounting principles.

 (November 8, 1982 management representation letter, signed by Stern, Gockel and Malecki).

 The third party defendants move to dismiss the third party complaint pursuant to Fed. R. Civ. P. 9(b) and 12(b)(6).

 A. Contribution under § 10(b) of the Securities and Exchange Act of 1934

 The Supreme Court has recently held that there is an implied right of contribution in an action under § 10(b) of the Securities and Exchange Act of 1934. Musick, Peeler & Garrett v. Employer's Insurance of Wausau, 1993 WL 179262 (U.S. June 1, 1993). Accordingly, ITI's principal argument -- that "there is no right to contribution in a 10b-5 case" -- fails.

 ITI makes three other arguments which are ...


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