661 F. Supp. 1403. Plaintiffs in this case argue vigorously in favor of a pro tanto rule on policy grounds, urging that, under an analysis guided by the factors identified in McDermott, the pro tanto approach is preferable in partially settled securities actions. The McDermott decision has settled this question for us, however. Because we find that the concerns in securities actions and in admiralty actions in which there are partial settlements are sufficiently similar that the proportionate share rule should apply to securities actions as well, we need not revisit the arguments for and against each judgment credit method.
Instead, we hold that the proportionate share judgment reduction rule applies to this case. Because D&T will not be required to pay more than its equitable share of any judgment Plaintiffs may obtain against it, its contribution action against Settling Defendants is unnecessary. See McDermott, 114 S. Ct. at 1466. We therefore grant Settling Defendants' motion for summary judgment dismissing D&T's action for contribution. In accordance with the requirements of the proportionate share rule, we will instruct the jury at the trial of the class claims to apportion fault among the Defendants.
B. Effect of the One-Satisfaction Rule
The fate of Settling Defendants' action seeking contribution from D&T is less clear. Certainly, if D&T pays its full proportionate share of any judgment against it won by Plaintiffs, Settling Defendants cannot require D&T to pay more than its equitable share of the damages. If this court could apply the proportionate share rule without modification, then dismissal of Settling Defendants' claim for contribution from D&T would certainly be appropriate.
The application of the proportionate share rule is not that simple in this Circuit, however. The Second Circuit has adopted the one-satisfaction rule, which provides that a plaintiff's total recovery may not exceed the amount of the judgment that it obtains in an action based on any given injury. See Singer, 878 F.2d at 600 (applying one-satisfaction rule to partially settled securities case). This rule is firmly entrenched: almost every court in this Circuit that has discussed the issue of judgment credit or bar orders in partially settled securities cases has cited Singer.
See Masters Mates, 957 F.2d at 1030; Bragger, 1993 U.S. Dist. LEXIS 10087, *2, Morin, 1993 U.S. Dist. LEXIS 8882, *2. In addition, our Order dated December 3, 1993 provides that, as required by the one-satisfaction rule, any judgment obtained by Plaintiffs in the trial of the class claims will be reduced by at least $ 10.822 million, the value of the settlement as determined by Plaintiffs' expert.
As D&T correctly points out in its brief, the one-satisfaction rule might be violated if Settling Defendants settled for more than their proportionate share of the judgment and D&T were required to pay its proportionate share. See Memorandum of Law in Response to the Motion of Settling Defendants for Summary Judgment, at 12. Under those circumstances, plaintiffs would recover more than the amount of the judgment on the class claims. To avoid this "overcompensation," D&T proposes that this court reduce any judgment won by Plaintiffs against D&T by either Settling Defendants' proportional share of fault or the amount of the settlement, whichever is greater.
Under D&T's suggested method, D&T would pay its proportionate share of the judgment if Settling Defendants settled for less than their proportionate share of fault. In that case, any contribution action by Settling Defendants would be unnecessary. If, on the other hand, Settling Defendants settled for more than their share of fault, the allocation of payment among the Defendants would depend on the permissibility of contribution. If Settling Defendants could not bring an action seeking contribution from D&T, they would pay more than their equitable share of the judgment, while D&T would pay less than its share. If Settling Defendants could seek contribution, however, each defendant would pay its equitable share of the judgment.
We are afforded no direct guidance concerning the viability of Settling Defendants' contribution action. The McDermott opinion says nothing about the contribution rights of the settling defendant. Indeed, all of the case law that this court has found on the subject of partial settlements, judgment credits and contribution bars has focused exclusively on the rights of the non-settling defendant and the plaintiff.
Dictum in McDermott indicates, however, that the one-satisfaction rule should not be applied to reduce the amount that the non-settling defendant is obligated to pay. In discussing the interaction between the one-satisfaction rule and the proportionate share rule, the McDermott Court stated that if it were presented with a situation in which the plaintiff would be overcompensated, it would not apply the one-satisfaction rule in the partial settlement context.
The Court found that "the law contains no rigid rule against overcompensation. . . . Making tortfeasors pay for the damage they cause can be more important than preventing overcompensation." McDermott, 114 S. Ct. at 1470-71. The Court continued: "It seems to us that a plaintiff's good fortune in striking a favorable bargain with one defendant gives other defendants no claim to pay less than their proportionate share of the total loss." Id. at 1471.
Perhaps because the settling defendant in McDermott did not seek contribution, the only alternatives that the Court considered with respect to the application of the one-satisfaction rule were that the plaintiff would be overcompensated or that the non-settling defendant would pay less than its equitable share of the damages. We see a third alternative: adopting D&T's suggested judgment reduction method, but allowing the settling defendant to seek contribution from the non-settling defendant for the amount by which the settlement amount exceeds the settling defendant's proportionate share of the judgment.
This approach is in keeping with the McDermott Court's focus on the equitable apportionment of damages among the defendants, since after the resolution of the settling defendant's contribution claims each defendant will pay its proportionate share of the plaintiff's damages. Furthermore, the plaintiff's recovery will be unaffected by the outcome of the settling defendant's suit for contribution. In accordance with the McDermott Court's allocation of risk, the plaintiff bears the risk of settling for less than the settling defendant's share of the liability whether or not the settling defendant is permitted to bring an action for contribution. This approach also adheres to the one-satisfaction rule without reducing the amount for which the non-settling defendant is liable, thereby eliminating the McDermott Court's concerns with respect to applying the one-satisfaction rule.
Our recognition of the settling defendant's right to bring an action for contribution creates the possibility that, under some circumstances, there may be a trial following the trial of the class claims to resolve the settling defendant's contribution claims. This subsequent trial would most likely cover much of the same ground as the trial of the class claims and could be quite wasteful of the court's and the parties' resources. We may not, however, refuse to recognize a settling defendant's right to contribution merely to save the court and the parties the trouble of trying valid claims. In addition, the settling defendant will only have a claim for contribution where it settled for more than its equitable share of the damages. It seems unlikely that the settling defendant will overestimate its potential liability to the plaintiff. Quite the contrary, the Supreme Court has noted that
in most cases in which there is a partial settlement, the plaintiff is more apt to accept less than the proportionate share that the jury might later assess against the settling defendant, because of the uncertainty of recovery at the time of settlement negotiations and because the first settlement normally improves the plaintiff's litigating posture against the non-settlors.
McDermott, 114 S. Ct. at 1471. Finally, when the settling defendant's contribution claim against the non-settling defendant has been filed prior to the trial of the class claims, as it has in this case, the claims may be tried together and the jury can render a verdict on both actions at the same time. This procedure will eliminate the potential for duplication and waste.
Accordingly, we hold that any judgment obtained by Plaintiffs against D&T will be reduced by Settling Defendants' proportionate share of the fault or by the amount of the settlement ($ 10.822 million), whichever is greater. Settling Defendants may maintain an action for contribution based on Plaintiffs' securities claims. If they wish to pursue their contribution claims, however, they must do so at the trial of the class claims.
III. Effect of Ruling on Settlement Agreement
Finally, we must determine what effect, if any, these rulings have on the partial settlement agreement. Plaintiffs argue that if summary judgment were granted to D&T and Settling Defendants, resulting in the apportionment of liability among the Defendants at the trial of the class claims, the damage done to the carefully wrought provisions of the settlement agreement would be so substantial that the court's only possible course would be to rescind the settlement agreement.
Of course, our ruling does not create precisely the situation that Plaintiffs fear. We have granted summary judgment on D&T's contribution claims and on some of Settling Defendants' contribution claims, but Settling Defendants' contribution claims for securities law violations will be finally disposed of at a later stage in this litigation. Nevertheless, liability will be apportioned among the Defendants at the trial of the class claims and, because D&T's contribution claims have been dismissed, Settling Defendants will not be obligated to defend the issue of their proportionate fault. Given the similarities between this situation and the one on which Plaintiffs based their argument for recission, we will address the issues that they raise.
Under New York law,
"there is no hard and fast rule on the subject of rescission, for the right usually depends on the circumstances of the particular case." Callanan v. Powers, 199 N.Y. 268, 92 N.E. 747, 752, (N.Y. 1910). Rescission is permitted where there is fraud or duress in the inducement of the contract, failure of consideration, inability to perform, or a breach of the contract so substantial that it defeats the object of the parties in making the contract. See Babylon Assocs. v. County of Suffolk, 101 A.D.2d 207, 475 N.Y.S.2d 869, 874 (App. Div. 1984) (citing Callanan, 92 N.E. at 752); Baratta v. Kozlowski, 94 A.D.2d 454, 464 N.Y.S.2d 803, 806 (App. Div. 1983). The Plaintiffs have made no allegations of fraud, duress, inability to perform or failure of consideration. Because the terms of the settlement agreement do not apply where the Defendants' cross-claims are dismissed by the court, Settling Defendants will not be in breach of the settlement agreement at all, much less substantially, as a result of receiving summary judgment on D&T's cross-claims. Plaintiffs are therefore not entitled to rescission of the settlement agreement.
Even if Settling Defendants were in breach of the settlement agreement following the dismissal of the contribution claims, that breach would not be so substantial as to require rescission. The only argument that Plaintiffs raise in their attempt to demonstrate a substantial difference between the proportionate share rule and the procedure outlined in the settlement agreement is the so-called "empty chair syndrome." Plaintiffs contend that if Settling Defendants are not a party to the action where proportional fault is determined, Non-Settling Defendants will point to the "empty chair" and argue that Settling Defendants bear the lion's share of the blame for the alleged acts. See also Jiffy Lube, 772 F. Supp. at 894. Plaintiffs therefore run the risk that the jury will allocate a lower proportion of fault to the Non-Settling Defendants' than is warranted. If Non-Settling Defendants must pay only that portion of the judgment that corresponds to the jury's determination of their proportion of fault, Plaintiffs would recover less than they are actually entitled to from Non-Settling Defendants. Plaintiffs argue that, in order to counteract this possibility, they would be obliged to defend Settling Defendants in addition to presenting their own case at the trial of the class claims, without commensurate access to Settling Defendants' witnesses and documents. Plaintiffs argue, in short, that a major goal of the settlement agreement they negotiated with Settling Defendants was to avoid the effects of the empty chair syndrome and that the frustration of this aim renders essential aspects of the settlement agreement meaningless.
We are mindful of the psychological dynamics of the courtroom and the risk that a jury may find it easier to blame a non-party. We are also mindful of the possibility that Plaintiffs may to some extent be obliged to make Settling Defendants' case as well as their own to avoid the risk of a skewed fault determination. In this case, however, Settling Defendants will, if they wish to pursue their contribution claims, be required to try them to the same jury that will be deciding the class claims. Under these circumstances, no empty chair problem exists.
Settling Defendants could, of course, elect not to pursue their contribution claims if they believe that they have settled for less than their equitable share of any damages Plaintiffs may recover. Even if Settling Defendants are not present at the trial to argue their contribution claims, however, they will be present as witnesses. In fact, as Settling Defendants are the company and the directors of the company that allegedly issued securities under fraudulent circumstances, it would be impossible for Plaintiffs to make their case against any or all of the defendants without extensive examination of the roles of these key players. Furthermore, Settling Defendants are contractually obligated by the settlement agreement to be available to Plaintiffs as witnesses and to provide any information that Plaintiffs require. See Sett., at PP 2, 5-7. Even if Settling Defendants do not pursue their contribution claims, the additional burden on Plaintiffs at the trial of the class claims would not be so substantial as to require rescission of the entire settlement agreement.
For the foregoing reasons, this court grants Settling Defendants' motion for summary judgment dismissing D&T's contribution claims. D&T's motion for summary judgment is granted as to Settling Defendants' indemnification and state law contribution claims, but is denied as to their contribution claims based on federal securities law.
Date: November 10, 1994
New York, New York
William C. Conner
United States District Judge