Opinion ID: 696235
Heading Depth: 4
Heading Rank: 2

Heading: Direct Corporate Liability

Text: 36 Federal also argues that Nordstrom may have had direct corporate liability for the securities fraud. For example, a corporation may be liable for actions by senior management personnel that are intrinsically corporate and bear the imprimatur of the corporation itself. Caterpillar, 864 F.Supp. at 856. In the present case, however, such liability also would be concurrent with director and officer liability, because the Nordstrom directors and officers authorized the fraud, including the issuance of the press releases and public statements. Because Federal has not shown how the direct corporate liability would have increased the settlement amount, allocation is not required. See Caterpillar, 864 F.Supp. at 857 (citing Harbor ) (rejecting allocation based on direct corporate liability). 37 Federal's reliance on Olympic Club v. Those Interested Underwriters at Lloyd's London, 991 F.2d 497 (9th Cir.1993), and Slottow v. American Casualty Co., 10 F.3d 1355 (9th Cir.1993), 4 is misplaced. In Olympic Club, the underlying complaint, which alleged racial and gender discrimination by the Club, did not allege liability arising from the acts or omissions of directors or officers. 991 F.2d at 501. Thus, there was no concurrent liability. In Slottow, the parties had already agreed to an allocation; the court held that under California law, the settlement arrangement was not made in good faith because it did not reasonably reflect the relative liabilities of the parties. 10 F.3d at 1359. The case did not address an insurer's right to allocation on the basis of direct corporate liability. See Raychem, 853 F.Supp. at 1183 (rejecting reliance on Slottow in the context of allocation between corporate and D & O liability). 38 Federal also claims that Nordstrom's direct corporate liability would not be concurrent with D & O liability because the directors and officers may have defenses unavailable to the corporation. Noting that one element of a Rule 10b-5 action is scienter, see Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193, 96 S.Ct. 1375, 1380-81, 47 L.Ed.2d 668 (1976), Federal argues that it is conceivable that a jury would find that none of the named directors and officers had the requisite intent, but that the corporate entity had such intent under a theory of collective scienter. Theoretically, collective scienter could be a basis for liability. In litigation involving Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5, even though a corporation is incapable of acting except through individual directors and officers, the cumulative knowledge of its directors and officers is imputed to it.... [A] corporation's knowledge need not be possessed by a single officer or agent; the cumulative knowledge of all its agents will be imputed to the corporation. Knepper & Bailey, supra Sec. 1.02, Supp. at 4; see also William M. Fletcher, Fletcher Cyclopedia of the Law of Private Corporations Sec. 790, at 16 (perm. ed.) (The knowledge necessary to adversely affect the corporation does not have to be possessed by a single corporate agent; the cumulative knowledge of several agents can be imputed to the corporation.). 39 However, there is no case law supporting an independent collective scienter theory. Although the court in In re Warner Communications Securities Litigation, 618 F.Supp. 735 (S.D.N.Y.1985), aff'd, 798 F.2d 35 (2d Cir.1986), noted that a corporation's scienter could be different from that of an individual director or officer, it expressly stated that such scienter would require a showing that one or more members of top management knew of material information ... but failed to stop the issuance of misleading statements ... or that Warner management had recklessly failed to set up a procedure that insured the dissemination of correct information. Id. at 752. 40 Moreover, there is no evidence in this case to support collective scienter without a concurrent finding that a defendant director or officer also had the requisite intent. A finding of liability under section 10(b) requires recklessness, which is defined as a highly unreasonable omission, involving not merely simple, or even inexcusable negligence, but an extreme departure from the ordinary standards of care, ... which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it. Hollinger, 914 F.2d at 1568-70 (adopting definition articulated in Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1044-45 (7th Cir.), cert. denied, 434 U.S. 875, 98 S.Ct. 224, 225, 54 L.Ed.2d 155 (1977)). Thus, corporate scienter relies heavily on the awareness of the directors and officers, who--unlike the public relations or personnel departments--are necessarily aware of the requirements of SEC regulations and state law and of the danger of misleading buyers and sellers. See In re Warner, 618 F.Supp. at 752. On this record, we see no way that Federal could show that the corporation, but not any individual defendants, had the requisite intent to defraud. Thus, any direct corporate liability would be derivative of, or concurrent with, D & O liability. 41 Our preceding analysis reveals that Nordstrom has satisfied its burden of showing that the D & O policy covered the entire settlement amount. Federal has not demonstrated any genuine issue of material fact as to whether the corporation may have incurred liability that was not concurrent with that of the insured directors and officers so as to preclude summary judgment. See Raychem, 853 F.Supp. at 1176. If Federal maintains that it has paid more than its fair share of the settlement agreement, it may exercise its right to bring an action for contribution or indemnification. See Employers Ins. of Wausau v. Musick, Peeler & Garrett, 954 F.2d 575, 578 (9th Cir.1992), aff'd --- U.S. ----, 113 S.Ct. 2085, 124 L.Ed.2d 194 (1993); see also Grange Ins. Ass'n v. Great American Ins. Co., 89 Wash.2d 710, 575 P.2d 235, 240 (1978) (holding that an insurer who has settled a claim without admitting liability may seek indemnification from a liable insurer). However, where the settlement agreement provides for joint and several liability and the directors' and officers' liability was coterminous with that of the corporation, we reject Federal's claims for allocation. 5