Opinion
Civil Action No. 3:94cv2477-H
April 1, 2002
AMENDED REPORT AND RECOMMENDATION OF THE UNITED STATES MAGISTRATE JUDGE
Pursuant to the district court's order of referral filed on January 30, 2002, and the provisions of 28 U.S.C. § 636(b)(1)(B) and (C) came onto be considered Plaintiffs' and Voluntary Purchasing Groups., Inc.'s ("VPG") Joint Motion to Bar the Assertion of Third-Party Claims against VPG filed on September 27, 2001; ASARCO's response thereto filed on October 15, 2001; VPG's reply filed on October 22, 2001; Meridian Housing Company, Michael Smith, Dean Smith, and James T. "Cooter" Moody's (hereinafter referred to as the "VPG-Related Parties") response to the instant motion filed on October 29, 2001; VPG's reply thereto filed on November 5, 2001; the VPG-Related Parties' sur-reply filed on November 14, 2001; and VPG's sur-reply thereto filed on November 27, 2001. Also before the court are (1) VPC's Brief in Support with attached exhibits, (2) ASARCO's Brief in Opposition and attached Appendix of Exhibits, (3) VPG's Reply Brief with attached exhibits, and (4) the VPG-Related Parties' Brief in Opposition with attached exhibits. The findings and recommendation of the United States magistrate judge, as evidenced by his signature thereto, are as follows:
Although VPG has taken issue with their use of this designation, the court considers this term to be the most appropriate to refer to these parties hereinafter. Moreover, VPG contends, in both its reply and response to the VPG-Related Parties response and sur-reply, that since Cooter Moody has been fully released by virtue of a Settlement Agreement entered into by VPG, it is unnecessary to include him as a VPG-Related Party. The court agrees, however, only to the extent that he is protected from any liability to the settling plaintiffs. See note 20, infra.
Following a Settlement Agreement dated February 26, 2001 between Defendants VPG,, various railroad companies, and a host of plaintiffs, Defendant VPG as well as each of the plaintiffs who entered into the Settlement Agreement jointly filed the instant motion to bar the assertion of third-party claims by non-settling defendants against VPG. Post-Settlement Status of the VPG Litigation
VPG's reply to ASARCO's response in opposition to the motion to bar third party claims, Ex. A at 1-21 (dated October 22, 2001).
Ferti-Lome Distributors, Inc. is included within the groups comprising VPG pursuant to Section 1.1 of the Settlement Agreement discussed infra. See VPG's reply to ASARCO's response in opposition to the motion to bar third party claims, Ex. A at 6.
Section 4.1 of the Settlement Agreement provides that a group of defendants referred to as the "VPG Releasees" — defined in Section 1.5 of the Agreement — have been released from an and all claims by the Settling Parties. See VPG's reply to ASARCO's response in opposition to the motion to bar third party claims, Ex. A at 6, 15. Pursuant to Section 1.5 the VPG Releasees included:
[T]he past, present, or future principals, directors, officers, shareholders, parent, affiliated and subsidiary corporations or entities, affiliates, employees, contractors, insurers, attorneys, agents, and servants of [VPG] and Ferti-Lome whether in one or more of the above capacities or their individual capacities, along with their respective representatives, heirs, successors, grantees, and assigns.See Id.
Specifically exempted from the class of VPG Releasees were:
[A]ny other defendants in the Lawsuits other than the VPG Releasees and does not include Universal Chemical Company, now know[n] as Meridian Housing Company[-one of the VPG-Related Parties opposing the motion before the court-], Bonny Corporation, or Dean and/or Mike Smith Smith[-two of the VPG-Related Parties-] for any ultra vires acts that may have been committed outside the scope of their duties and authority as officers, directors, employees, servants and/or agents of VPG.See id. (emphasis added).
Namely Defendant Southern Pacific Transportation Company, now known as Defendant Union Pacific Transportation Company, and its former subsidiary Defendant St. Louis Southwestern Railroad Company, Industrial Compliance, and S.P. Environmental Systems, Inc. (hereinafter collectively referred to as the "Railroads")
In light of the sheer number of the various cases related to this VPG litigation, it would be exceedingly difficult to list every settling plaintiff. However, by way of reference to the settlement agreement discussed in footnote 4, infra, it appears that each plaintiff that has settled with VPG and the Railroads is specifically listed therein.
Section 5.3 of the Settlement Agreement provides that ". . .the Settling Parties and the VPG Releasees shall jointly file a Motion. . . to move the [c]ourt. . .to enter orders barring any and all claims against the VPG Releasees brought by any party other than the Settling Parties, whether brought as third-party claims, cross-claims, counterclaims, or otherwise. . ." See VPG's reply to ASARCO's response in opposition to the motion to bar third party claims, Ex. A at 16.
According to the Eighth Amended Complaint, filed on behalf of plaintiffs represented by the Law Offices of Windle Turley (hereinafter referred to as the "Turley Plaintiffs"), numerous causes of action are alleged against the following named Defendants: VPG-as to non-settling plaintiffs; Meridian Housing Company ("Meridian Housing"), formerly known as Universal Chemical; Summit Furniture Industries, Inc., formerly known as Wood Designs, Inc.; Furniture Crafters, Inc.; both Hershel Lee Cain, Jr. and Betty Jane Cain, individually; Sizemore Environmental Group, Inc. — as to non-settling plaintiffs; EnClean Environmental Services Group, Inc. — as to non-settling plaintiffs; EnClean, Inc. — as to non-settling Plaintiffs; ASARCO, Inc.; American Smelting and Refining Company; Michael W. Smith; and H. Dean Smith. The causes of action alleged include contribution for Comprehensive Environmental Response, Compensation, and Liability Act of 1980, § 101 et. seq., 42 U.S.C. § 9601, et. seq. ("CERCLA") response costs incurred by VPG; negligence; negligence per-se; strict liability based on ultra-hazardous and abnormally dangerous activities; assault and battery; fraud/fraudulent concealment; nuisance; and trespass.
The Eighth Amended Complaint includes both settling and non-settling plaintiffs which are separately identified as to status in the complaint. For example, each of these groups is specifically identified following each respective Defendant listed in the Eighth Amended Complaint. See, e.g., Turley Pls.' Eighth Am. Compl.
Hershel Cain appears to be the president of Summit Furniture, as well as the vice president, secretary and treasurer of Furniture Crafters. Betty Cain is the vice president of Summit Furniture. See Turley Pls.' Eighth Am. Compl. at 2, ¶¶'s I:E-H.
Section 6.5 of the Settlement Agreement provides that VPG assigned its rights, claims, and causes of action against ASARCO, in connection with 42 U.S.C. § 9601, et. seq. ("CERCLA"), to the settling plaintiffs as additional consideration for the agreement.
Moreover, according to the Fifth Amended Original Complaint, filed on behalf of plaintiffs represented by McClanahan and Clearman, L.L.P. (hereinafter referred to as the "McClanahan Plaintiffs"), there are a number of causes of action alleged against the following named defendants: VPG — as to non-settling Plaintiffs; Bonny Corporation, a subsidiary of VPG; Meridian Housing Company, the successor-in-interest to Universal Chemical Company; Ferti-Lome Distributors — as to non-settling plaintiffs; H. Dean Smith; Michael D. Smith; James T. Moody; Southern Pacific Transportation Company — as to non-settling plaintiffs and St. Louis Southwestern Railway Company-as to non-settling plaintiffs (hereinafter referred to as the "Railroads"); Chickasha Cotton Oil Company-as to non-settling plaintiffs; ASARCO, Inc.; and Tomen America, Inc.-as to non-settling plaintiffs. The McClanahan Plaintiffs allege various causes of action based on alter ego and respondeat superior including negligence per se; negligence; res ipsa loquitur; gross negligence; increased risk of disease; fear of future disease; medical monitoring; nuisance; trespass; toxic assault and battery; strict products liability; fraud; and conspiracy. Additionally, Plaintiffs Betty Bergin, individually, and Carolyn and George Bergin (hereinafter referred to collectively as "the Bergins"), owners of property adjacent to and just east of the Ridgeway site, have alleged claims for remediation against ASARCO and the Railroads under subsection 7002(a)(1) of the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976 ("RCRA"), 42 U.S.C. § 6972 and 40 C.F.R. § 254.3.
The Fifth Amended Original Complaint also includes both settling and non-settling plaintiffs, each separately identified as to status.
Analysis
As stated previously, VPG and the settling plaintiffs (hereinafter collectively referred to as the "Movants") have jointly moved this court to enter an order barring any third party claims by non-settling Defendants against VPG.
The Movants initially contend that, in general, the settlement of complex litigation before trial is favored by the federal courts. See Eichenholtz v. Brennan, 52 F.3d 478, 486 (3rd Cir. 1995); see also Franklin Kaypro Corp., 884 F.2d 1222, 1225 (9th Cir. 1989) citing FED. R. Civ. P. 16(c) advisory committee note ("[s]ince it obviously eases crowded court dockets and results in savings to the litigants and the judicial system, settlement should be facilitated at as early a stage of the litigation as possible.") and FED. R EVID. 408 advisory committee note ("public policy favor[s] the compromise and settlement of disputes"). However, in multi-party litigation, settlement may be exceedingly difficult. Eichenholtz, 52 F.3d at 486.
Further, the Movants contend that defendants who are willing to settle, "buy little peace though settlement unless they are assured that they will be protected against co-defendants' efforts to shift their losses though cross-claims for indemnity, contribution, and other causes related to the underlying litigation" In re U.S. Oil and Gas Litig., 967 F.2d 489, 494 (11th Cir. 1992); see In re Jiffy Lube Sec. Litig., 927 F.2d 155, 160 (4th Cir. 1991). This is predicated on the notion that in cases involving multiple defendants, as in the instant litigation, a right to contribution inhibits partial settlement. Therefore, according to the Movants, in order to encourage settlement in such cases, modern settlements increasingly incorporate settlement bar orders into partial settlements. A bar order is appropriate because, "[t]he facts specified in the pleadings may give rise to cross-claims or counterclaims based on contribution or indemnity. In such cases, settling defendants cannot obtain finality unless a `bar order' is entered by the court. In essence, a bar order constitutes a final discharge of all obligations of the settling defendants and bars any further litigation of claims made by non-settling defendants." Franklin Kaypro Corp., 884 F.2d at 1225.
In support of their position, the Movants rely on two cases out of the Fifth Circuit which endorse the entering by a district court of an order barring third party claims. In McDonald v. Union Carbide Corp., the Fifth Circuit, construing Federal Rule of Civil Procedure 14, held that a district court had the requisite authority to enter a partial final judgment which prohibited non-settling defendants from bringing third-party claims against settling defendants. 734 F.2d 182, 184 (5th Cir. 1984). The court held that the district court is accorded "wide discretion in determining whether to permit such third party procedure to be resorted to," including the approval of settlement agreements which deal with third-party actions against those released by those who remain as parties to the litigation. Id. citing Southern Railway Co. v. Fox, 339 F.2d 560, 563 (5nth Cir. 1964). Moreover, in In re Terra-Drill Partnerships Secs. Litig., a district court held that a settling defendant is entitled to a bar against contribution because any other rule would inhibit settlement of claims. In its opinion, the district court noted that the payments made by the settling defendants would constitute an offset to the liability of the non-settling defendants. 726 F. Supp. 655, 656-657 (S.D. Tex. 1989).
Accordingly, under the "settlement bar rule", a co-defendant does not have a right of contribution against a settling defendant. Odeco Oil Gas Co. v. Petroleum Helicopters, Inc., 857 F. Supp. 29, 31 (E.D. La. 1994) citing Leger v. Drilling Well Control, Inc., 592 F.2d 1246 (5th Cir. 1979). The rationale underlying this rule is to protect the finality of settlements. Id.
However, ASARCO contends that these cases are inapplicable to one component of this litigation, because whereas each of the cases cited by the Movants afforded non-settling defendants adequate contribution protection-i.e., a settlement credit or offset of liability when calculating monetary damages —, no such protection exists when dealing with claims for injunctive relief
In its response to the instant motion, ASARCO did not address the propriety of a bar order with respect to the various personal and property tort causes of action alleged by the Plaintiffs, see infra. Accordingly, since ASARCO only takes issue with the matter of injunctive relief it appears that it does not dispute the fact that adequate protection exists for its' contribution rights under the other causes of action.
The United States Supreme Court, in discussing a partial settlement-albeit in an admiralty context —, stated that a proportionate share approach-i.e., where the money paid by settling defendants extinguishes any claim that the injured party has against the released tortfeasor and also diminishes the claim that the injured party has against the other tortfeasors by the amount of the equitable share of the obligation of the released tortfeasor —, adequately protects non-settling defendants' contribution rights. See McDermott, Inc. v. AmClyde, 511 U.S. 202, 209, 114 S.Ct. 1461, 1466, 128 L.Ed.2d 148 (1994). The Court further stated, "Under [the proportionate share] approach; no suits for contribution are permitted, nor are they necessary, because the non-settling defendants pay no more than their share of the judgment." Id
ASARCO contends that the RCRA claims brought against it by the Bergins seek injunctive relief by way of either a mandatory injunction, i.e., that ASARCO "take action" by attending to the cleanup and proper disposal of the toxic waste at the Ridgeway site, or a prohibitory injunction, i.e., that "restrains" ASARCO from further violating RCRA. See Meghrig v. KFC Western, 516 U.S. 479, 484, 116 S.Ct. 1251, 1254 (1996). Further, ASARCO claims that it can bring a "direct" cause of action against VPG under the various "citizen-suit" provisions. However, as alluded to by VPG, it is difficult to see how ASARCO would have any standing to bring such a suit as it was neither an owner nor a former owner of the affected Ridgeway property. Although the magistrate judge understands that the Bergins have non-suited VPG on claims arising under RCRA, this does not affect their separate claims against ASARCO for which ASARCO in turn seeks contribution from VPG. Therefore, VPG is not entitled to a bar order with respect to any third-party claim brought against it by ASARCO in response to any claims brought against ASARCO by non-settling plaintiffs for injunctive relief pursuant to 42 U.S.C. § 6972 (RCRA).
A 32.99 acre tract of land located in Ridgeway, Hopkins County, Texas ( see Pls.' Fifth Am. Compl. at 37 ¶ 106) onto which over 2 million gallons of arsenic waste-transported from the if-Yield Commerce Plant between 1968 and 1973-was deposited (see McClanahan Pls.' Fifth Am. Original Compl. Ex. 1 at 2 (Report by Gary D. Schoeder)).
Of course, in order to establish liability on the part of ASARCO, the Bergins would be required to prove that ASARCO is (1) a party who was or is a generator or transporter of solid or hazardous waste, (2) that has "contributed to" or "is contributing to" the handling, storage, treatment, transportation, or disposal of solid or hazardous waste, and (3) that the solid or hazardous waste may present an imminent and substantial endangerment to health or the environment. See Cox v. City of Dallas, 256 F.3d 281, 292 (5th Cir. 2001).
ASARCO cited five cases for the proposition that it may bring an "independent" action against VPG, however, each of the cases cited by ASARCO dealt with either an owner or former owner of property bring suit against past owners under RCRA.
Under the Supreme Court's decision in Meghrig, see supra, a party is not entitled under RCRA to sue for clean-up costs absent an "imminent and substantial endangerment to health or the environment." The issue in Meghrig was whether RCRA's citizen suit provision authorizes the recovery of environmental clean up costs at sites that no longer pose a contamination threat. The Court unanimously held that it did not, holding that § 6972(a) was designed to provide a remedy that ameliorates present or obviates the risk of future "imminent" harms, not a remedy that compensates for past cleanup efforts. Id. at 486, 1255. Therefore, if the district court were to find that the alleged endangerment at the Ridgeway site is not imminent — i.e., not an immediate threat —, then ASARCO would not be prejudiced by a bar order as to common law contribution.
ASARCO claims that it can seek monetary relief from VPG under either common law or CERCLA provisions. However, it does not cite any authority for this proposition. Notwithstanding its lack of authority, it is reasonably clear that ASARCO may have claims against VPG to recover any clean-up costs under either state law or common law provisions, particularly to the extent that VPG is liable to non-settling plaintiffs. Also — absent a bar order — ASARCO will, likely, be able to state a claim for contribution from VPG under CERCLA for any clean up costs to the extent that VPG is liable to non-settling plaintiffs.
RCRA does not prevent a private party from recovering its cleanup costs under other federal or state laws. Meghrig, at 487, 1256, citing § 6972(f) (preserving remedies under statutory and common law). Moreover, CERCLA provides that "[a]ny person may seek contribution from any other person who is liable or potentially liable" for response costs. See id. citing § 9613(f)(1) (emphasis added).
With respect to ASARCO's liability to settling plaintiffs, ASARCO is entitled to an offset or settlement credit based on VPG's settlement.
Accordingly, the court finds that the entry of a bar order, with respect to all causes of action alleged against ASARCO, except for those under RCRA, is consistent with the "settlement bar rule" which warrants the entry of a partial bar order under the following terms: ASARCO shall be barred from bringing any third party actions for contribution against VPG with respect to all causes of action alleged by plaintiffs, except for those under RCRA. Moreover, this bar shall only apply to the extent that VPG has "bought its peace" with settling plaintiffs and will not be extended to any claims ASARCO may have against VPG with respect to those plaintiffs who have not settled with VPG. Moreover, because it is not immediately necessary to elaborate with respect to the type of contribution protection which ASARCO will be afforded, the court should defer such until required to do so.
Contribution vs. Indemnity
The VPG-Related Parties, on the other hand, oppose the instant motion on a distinctly different set of grounds. Whereas ASARCO seeks contribution from VPG, the VPG-Related Parties contend that they are entitled to either contractual indemnification from VPG pursuant to VPG's Bylaws or, alternatively, common law indemnification.
To the extent that the February 2000 Settlement Agreement totally covers Cooter Moody with respect to all settling plaintiffs, he is no longer exposed to any damages for which he could seek either contribution or indemnity. However, since he is still liable to non-settling plaintiffs, he is arguably still entitled to indemnification and advancement of costs from VPG.
See note 23, infra.
At this point it is necessary to examine the fundamental differences between claims for contribution and those for both common law and contractual indemnity. Common law indemnity shifts the entire loss from a tortfeasor only technically or constructively at fault to the person primarily responsible, while contribution apportions the loss among those jointly responsible. See Diggs v. Hood; 772 F.2d 190, 193 (5th Cir. 1985) citing Green v. TACA Int'l Airlines, 304 So.2d 357, 359 (La. 1974). Alternatively, contractual indemnity shifts the loss to a party who is or is not liable pursuant to an express agreement. See RESTATEMENT (THIRD) OF TORTS: APPORTIONMENT OF LIABILITY § 32 (Proposed Final Draft (Rev.) 1999).
The Movants rely on In re U.S. Oil and Gas Litigation, 967 F.2d 489 (11th Cir. 1992), for the proposition that a court may properly enter an order barring indemnity claims. In U.S. Oil and Gas, the Eleventh Circuit directly addressed the question of whether a district court could enter an order barring indemnity, fraud and negligence claims brought against settling defendants. The court held that, under the facts of the case, there was "no principled distinction" between indemnity and contribution and noted that, because the indemnity claim was premised on federal securities laws, with did not permit such claims, it was within the authority of the district court to enter its bar order. Id. at 495. The Eleventh Circuit likewise held that the fraud and negligence claims asserted were mere variations on the non-settling defendants' indemnity claim. Id. at 496. However, the magistrate judge is of the opinion that In re Oil and Gas does not stand for the broader proposition that in all instances there is "no principled distinction" between claims for contribution and claims for indemnity.
Movants also rely on In re Consolidated Pinnicle West Securities Litigation, 51 F.3d 194 (9th Cir. 1995), in which the Ninth Circuit upheld the entry of an order by the district court which barred non-settling defendants from asserting either contribution or indemnity claims against settling defendants. The court, relying in part on In re U.S. Oil and Gas, ultimately held that the district court did not abuse its discretion by entering such an order. Id. at 197.
However, the VPG-Related Parties assert that both In re Oil and Gas and In re Consolidated Pinnicle West Securities Litigation are inapplicable because each dealt primarily with claims arising under federal securities laws, in which no right to indemnity exists.
Further, while Movants are correct that courts have entered orders barring indemnity claims unrelated to securities laws, those cases are also distinguishable from the instant matter. See In re Munfora Inc., 172 B.R. 404 (N.D.Ga. 1993) (bar order entered in Bankruptcy litigation after the court acknowledged the adequacy of protection afforded to non-settling defendants' contribution rights via the pro tanto method of judgment reduction); McDonald v. Allied Chemical Co., 734 F.2d 182 (5th Cir. 1984) (in a multi-party, consolidated diversity suit based on claims arising from personal injuries, the court approved the entry of a judgment prohibiting non-settling defendants from asserting third party claims against settling defendants under Federal Rule of Civil Procedure 14); FDIC v. Booth, 955 F. Supp. 651 (M.D. La. 1996) (in FDIC litigation, without any apparent applicable indemnification provisions, the court entered an order barring the assertion of claims for contribution and indemnity by non-settling defendants against settling defendants after recognizing that under the Louisiana proportionate reduction rule, liability of non-settling defendants is reduced by the percentage of fault attributed to settling parties).
Movants erroneously cite U.S. Fidelity Guarantee Co. v. Patriot's Point Development Auth, 788 F. Supp. 880 (D.S.C. 1992), as involving a bar order foreclosing indemnity claims in a matter unrelated to securities laws. However, this case, in fact, involved an order barring indemnity claims by non-settling defendants against settling defendants in a class action securities action.
The VPG-Related Parties contend that the instant motion to bar third-party claims should be denied because VPG is obligated to indemnify its past officers, directors, servants, and agents pursuant to paragraph 53 of VPG's Bylaws and common law principles. Specifically, paragraph 53 of VPG's Bylaws entitled "INDEMNIFICATION" states in pertinent part:
The VPG-Related Parties contend that they are entitled to common law indemnity based on the rule that "an agent, who in the performance of his duties for his principal incurs liability for an act not morally wrong, may have indemnity from the principal." Oats v. Dublin Nat'l Bank, 127 Tex. 2, 11-12, 90 S.W.2d 824, 829 (1936). However, it appears that the Texas Supreme Court has made it clear that in cases governed by the comparative responsibility statute, an agent's common law right to indemnity from his principal has been abolished. Aviation Office of America, Inc. v. Alexander Alexander of Texas, Inc., 742 S.W.2d 835, 837 (Tex.App.-Dallas 1987), rev'd, 751 S.W.2d 179, 180 (Tex. 1988). To the extent that Plaintiffs allege causes of action based on intentional torts-i.e., fraud, conspiracy, etc. — the comparative responsibility statute is inapplicable, therefore common law indemnity claims are unaffected. Coleman v. Dupree, (NO. 05-92-00963-CV) 1994 WL 8614, at *4 (Tex.App.-Dallas 1994, writ denied) citing TEX. CIV. PRAC. REM. CODE ANN. § 33.002(a) (Vernon Supp. 1993) (for claims predicated on fraud and conspiracy, any common law cause of action for indemnity is unaffected.).
The Corporation shall indemnify and advance reasonable expenses to any current or former director officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another foreign or domestic corporation. . . to the greates extent permitted by Article 2.O[2]-1 of the Texas Business Corporation Act, and where not inconsistent with such statute, successor statute or amendment thereto, to such further extent as is consistent with law. . .In particular, and not by way of limitation, the Corporation shall indemnify and advance reasonable expenses to any person qualified for indemnification against expenses actually and necessarily incurred by him or her and any amount paid in satisfaction of judgments in connection with; or in settlement of any threatened, pending or completed action, suit or proceeding, whether civil or criminal in nature. . . except as such person may otherwise fail to meet the requirement of law for permitting indemnification . . .The Corporation shall promptly proceed to make a determination of whether indemnification should be granted and a determination as to reasonableness of expenses requested to be paid upon written request to the Secretary of the Corporation by or on behalf of the person for whom indemnification or an advance of expenses is sought. . .
According to counsel for Michael Smith; Dean Smith; and Cooter Moody, the reference to an article 2.01-1 of the Texas Business Corporation Act in VPG's Bylaws was a typographical error in light of the non-existence of such an article and the later reference to 2.02-1 in paragraph 53. See VPG-Related Parties' Resp. Ex. D (Letter to counsel for VPG from counsel for M. Smith; D. Smith, and C. Moody).
VPG-Related Parties' Resp. Ex. A (emphasis added).
After reading the correspondence between counsel for VPG and counsel for the various VPG Related Parties, now before the court as exhibits B, C, and E to the VPG Related Parties' response to the instant motion, it is clear that following the February 2000 Settlement Agreement VPG took the position that it was no longer necessary to indemnify and advance any reasonable expenses to the VPG-Related Parties because each of them, except Meridan Housing, see footnote 3 infra, was released from liability as a VPG Releasee under the provisions of the Settlement Agreement. However, VPG expressly exempted release of Michael Smith and Dean Smith for any ultra vires acts that may have been committed outside the scope of their duties and authority as officers/directors of VPG. of note here is that while the Turley Plaintiff's have alleged ultra vires violations — i.e., without a corporate purpose and against the best interest of any corporate purpose — committed by Michael Smith and Dean Smith, employees of VPG and Universal, the predecessor-in-interest of Meridian Housing ( see Turley Pls.' Eighth Am. Compl at 5, ¶ IV:B). However, it does not appear that the McClanahan Plaintiff's have asserted similar claims in their Fifth Amended Original Complaint.
The court notes that this release is only with respect to the settling plaintiffs and in no way affects each party's potential liability to non-settling plaintiffs.
See footnote 19, supra.
VPG contends that to the extent that Meridian Housing can show that it was an agent of VPG's it may be able to limit its liability. However, since Meridian Housing was in existence before VPG was incorporated in 1967 it would be independently liable for its activities which predate VPG's existence. Additionally, Michael Smith and Dean Smith were officers of Universal Chemical Company, the predecessor-in-interest to Meridian Housing. As such; they are also independently liable for any alleged improper conduct predating VPG.
A brief historical background of this litigation appears to be in order. See, e.g., S. Pac. Transp. Co. and St. Louis Southwestern Ry Co. v. Voluntary Purchasing Groups Inc., et. al, No. 3:94-cv-2477, 1997 WL 457510, at * 1 (N.D. Texas Aug. 7, 1997). At the heart of the Commerce Site is a piece of property originally owned by Lamar Cotton Oil Company and operated as a chemical plant. Id. In 1951, Lamar transferred a portion of the property to if-Yield Chemical Company, which manufactured arsenical based compounds. Id. Following a series of mergers and transfers, the if-Yield plant came to be owned by Universal Chemical Company, the predecessor-interest of Meridian Housing. Id.
The court agrees with the Movants that to the extent that Meridian Housing and its officers Michael Smith and Dean Smith engaged in conduct which contributed to the arsenic pollution at the Commerce site prior to 1967, and if these VPG-Related Parties were liable to the plaintiffs, they, in turn, would not be entitled to any indemnification or the advancement of costs from VPG for pre- 1967 pollution. However, the extent to which these acts of the VPG-Related Parties, which occurred after VPG's inception, may give rise to indemnification and/or the advancement of costs from VPG becomes less clear when considered in light of these pates' association with VPG in the capacities of officers, directors, or agents of VPG as described in paragraph 53 — the indemnification provision — of VPG's Bylaws, infra.
Although VPG claims that Meridian was never one of its agents, Meridian has proffered a management services contract and subsequent amendment thereto, entered into between Universal Chemical Company, the predecessor-in-interest of Meridian Housing, and VPG. See VPG-Related Parties' Resp. Ex. D. The management services contract, dated October 17, 1967, provided that Universal would sell all of its operating assets to VPG for $3.5 million. Id. at ¶ 1. The purpose of the contract was to furnish VPG with the managerial services of Universal's Chief Executive Officer, H. Dean Smith. Id. The contract provided that Dean Smith would not be an employee of VPG, but could act as an officer. Id. at ¶ 3. Additionally, the managerial services rendered by Universal would be subject to the direction and control of the Board of Directors of VPG. Id. at ¶ 4. On September 9, 1969, this contract was amended to provide that H. Dean Smith would be an employee of both Universal and VPG (¶ 3) and would collect his salary from VPG (¶ 5). Id. (Amendment).
Obviously, based on the release language employed in the Settlement Agreement and to the extent that Michael Smith, Dean Smith, and Meridian Housing are part of the VPG releasees, each party is released from any liability with regard to all of the settling plaintiffs. The difficulty arises with respect to each party's liability to non-settling plaintiffs and what affect, if any, alleged ultra vires acts have on otherwise valid indemnity and advancement of costs provisions in a corporation's bylaws.
See footnote 3, infra.
Neither the Movants nor the VPG-Related Parties have cited the court to any relevant case law with regard to the latter. The Movants contend, without support, that Texas law does not require indemnification for ultra vires acts, while the VPG-Related Parties contend- also without support that the mere allegation of ultra vires acts does not extinguish a party's obligation to indemnify.
In Pearson v. Exide Corp., a Pennsylvania district court, construing Delaware law, held that a corporation's bylaws entitled former officers to advancement of litigation expenses and that the bylaws did not excuse the corporation from a requirement to provide advancement of litigation expenses based on alleged wrongful or ultra vires acts. 157 F. Supp.2d 429 (E.D. Pa. 2001). In Exide Corp. the court began its analysis by noting that Delaware law permits Delaware corporations to provide for the indemnification of its officers and director. Id. at 437 citing DEL. CODE ANN. tit 8, § 145. Further, the court noted that Delaware confers this power to corporations regardless of whether the suit was initiated by a third party or by the corporation itself ( id. citing 145(a), (b)) and such power is generally within the discretion of the shareholders or other disinterested directors. Id. citing § 145(d). Moreover, the court noted that Delaware law permits indemnification only if the director or officer acted in good faith and in a manner that he reasonably believed to be in the best interests of the corporation. Id. citing § 145(a), (b). Further, in a separate section of Section 145, the statute also provides for the advancement of expenses, including attorney's fees. Id. citing § 145(e). In construing the provisions of Exide's Bylaws, which provided in pertinent part: "[t]he right to indemnification conferred in Section 1 of this Article V shall include the right to be paid by the corporation the expenses (including attorney's fees) incurred in defending any such proceedings in advance of its final disposition," the court found that Exide had voluntarily provided an entitlement to an advancement of litigation costs. Moreover, the court further found that, under the bylaw?, the alleged wrongful or ultra vires conduct of the officers did not excuse Exide from satisfying its requirement to provide advancement of litigation expenses for which the officers were otherwise entitled. Id. at 438.
Which state in pertinent part:
A corporation shall have power to indemnity any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action by reason of the fact that the person is a director, officer, employee or agent of the corporation.
DEL. CODE ANN. tit. 8, § 145(a), (b).
Which states in pertinent part:
Expenses (including attorneys' fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the corporation as authorized in this section. Such expenses (including attorneys' fees) incurred by former directors and officers or other employees and agents may be so paid upon such terms and conditions, if any, as the corporation deems appropriate.
DEL. CODE ANN. tit. 8, § 145(e).
Apparently certain provisions provided that to the extent that an indemnitee had not met the standards under Delaware Corporate law it would be a defense in a suit by an indemnitee to enforce a right of indemnification. However, this defense was expressly inapplicable in a suit for advancement of costs. Id. at 438. The applicable standard states that an officer or director is entitled to indemnity "if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person's conduct was unlawful." See DEL. CODE ANN. tit 8, § 145(a). Since Exide could not invoke this standard as a defense to the officers' claim for advancement of litigation expenses, Exide's argument that the officers were not entitled to such advancements because of their alleged wrongful or ultra vires conduct failed.
It appears that the Texas Business Corporation Act contains indemnity provisions which are substantially similar to the Delaware provisions construed in Exide Corp. For instance, TEX. Bus. Corp. ACT Art. 2.02-1(B) provides in pertinent part that:
A corporation may indemnify a person who was, is, or is threatened to be made a named defendant or respondent in a proceeding because the person is or was a director only if it is determined. . .that the person:
(1) conducted himself in good faith;
(2) reasonably believed:
(a) in the case of conduct in his official capacity as a director of the corporation, that his conduct was in the corporation's best interests; and
(b) in all other cases, that his conduct was at least not opposed to the corporation's best interests; and
(3) in the case of any criminal proceeding, had no reasonable because to believe his conduct was unlawful.
(emphasis added). Moreover, Section H provides that "A corporation shall indemnify a director against reasonable expenses incurred by him in connection with a proceeding in which he is a named defendant or respondent because he is or was a director if he has been wholly successful, on the merits or otherwise, in the defense of the proceeding."(emphasis added). Section K provides that:
Reasonable expenses incurred by a director who was, 4, or is threatened to be made a named defendant or respondent in a proceeding may be paid or reimbursed by the corporation; in advance of the final disposition of the proceeding and without the determination specified in Section F of this article or the authorization or determination specified in Section G of this article, after the corporation receives a written affirmation by the director of his good faith belief that he has met the standard of conduct necessary for indemnification under this article and a written undertaking by or on behalf of the director to repay the amount paid or reimbursed if it is ultimately determined that he has not met that standard or if it is ultimately determined that indemnification of the director against expenses incurred by him in connection with that proceeding is prohibited by Section E of this article. A provision contained in the articles of incorporation, the bylaws a resolution of shareholders or directors, or an agreement that makes mandatory the payment or reimbursement permitted under this section shall be deemed to constitute authorization of that payment or reimbursement.
(emphasis added). Section O provides that:
An officer of the corporation shall be indemnified as, and to the same extent, provided by Sections H, I, and J of this article for a director and is entitled to seek indemnification under those sections to the same extent as a director. A corporation may indemnify and advance expenses to an officer, employee, or agent of the corporation to the same extent that it may indemnify and advance expenses to directors under this article.
(emphasis added). Section P provides that:
A corporation may indemnify and advance expenses to persons who are not or were not officers, employees, or agents of the corporation but who are or were serving at the request of the corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another foreign or domestic corporation, employee benefit plan, other enterprise, or other entity to the same extent that it may indemnify and advance expenses to directors under this article.
(emphasis added). With respect to VPG's Bylaws, under which the VPG-Related Parties seek indemnification and advancement of costs, there are no provisions synonymous with those contained in Exide Corp.'s Bylaws, see, supra, which limit the imposition of a defense for failure to meet the qualifications for indemnity under the Act to actions for indemnification as opposed to actions for advancements of expenses. Moreover, when construing the language contained in VPG's Bylaws together with various sections of the Texas Business Corporation Act Art. 2.02-1, especially Section K supra, it appears that VPG has voluntarily authorized the mandatory payment of advancement costs in its bylaws and that it is entitled to a reimbursement of such costs upon the determination that the VPG-Related Parties have not met the standards articulated in Section B supra. Simply stated, it does not appear that VPG may deny, as it has done, the VPG-Related Parties' entitlement to an advancement of costs and right of indemnification based solely on the allegation of ultra vires conduct on the part of VPG-Related Parties. However, VPG would be entitled to a reimbursement of any costs it has incurred with respect to advancing costs to or indemnifying a VPG-Related Party upon a finding that he/it conducted himself/itself in a manner which fails to meet the "good faith" and "best interest of the corporation" standards in Section B, supra.
RECOMMENDATION:
At this juncture and for the reasons stated above, it is recommended that the district court enter its order GRANTING Plaintiffs and Voluntary Purchasing Group, Inc.'s (VPG) Joint Motion to Bar the Assertion of Third Party Claims Against VPG, filed on September 27, 2001, IN PART as follows:
1. Barring any third-party claims brought by ASARCO, Inc. (American Smelting and Refining Company) against VPG for contribution and indemnity for liability based on claims asserted against ASARCO by plaintiffs who have settled such claims against VPG — i.e., as set out in the settlement agreement dated February 26, 2001.
2. Barring any third-party claims brought by Michael Smith, Dean Smith, James T. "Cooter" Moody, and Meridian Housing Company — and by any of Meridian's predecessors-in- interest- against VPG for contribution, indemnity and/or advancement of costs based upon (1) any claims of liability for damages brought by any plaintiff based upon conduct attributed to such third parties, alleged to have occurred prior to the incorporation of VPG and (2) any claims brought by any settling plaintiff relating to conduct which occurred after VPG came into existence and which claims are the subject of the settlement agreement dated February 26, 2001.
Except as set out above, it is further recommended that Movants' motion be DENIED.
A copy of this recommendation shall be mailed to counsel for all parties.
NOTICE
In the event that you wish to object to this recommendation, you are hereby notified that you must file your written objections within ten days after being served with a copy of this recommendation. Pursuant to Douglass v. United Servs. Auto Ass'n, 79 F.3d 1415 (5th Cir. 1996) (en banc), a party's failure to file written objections to these proposed findings of fact and conclusions of law within such ten-day period may bar a de novo determination by the district judge of any finding of fact or conclusion of law and shall bar such party, except upon grounds of plain error, from attacking on appeal the unobjected to proposed findings of fact and conclusions of law accepted by the district court.