Opinion ID: 468135
Heading Depth: 2
Heading Rank: 1

Heading: Availability of Equitable Defenses

Text: 9 In Henderson v. Hayden, 461 F.2d 1069 (5th Cir.1972), this court determined that a plaintiff seeking a return of consideration paid for unregistered securities under section 12(1) could not be estopped by virtue of his having been aware that the securities were unregistered. 10 We cannot say that in the present appeal rescission would frustrate the Act's purpose. While one of the essential purposes of the Act is to protect innocent purchasers of securities ... and though [plaintiff] is certainly not the average innocent investor, 4 nevertheless, allowing him to recover clearly will not frustrate the legislative purpose.... Congress sought to encourage sellers of securities to register those securities prior to any sales or offers to sell. By allowing recoveries such as the one in this case, unregistered sales are discouraged. Thus it is apparent that [plaintiff] may recover from [defendants]. 11 461 F.2d at 1072 (footnote added). The plaintiff in Henderson was at least as sophisticated a buyer as Dahl. His state of awareness regarding the seller's failure to register was, as far as we can tell, identical to Dahl's. There is no evidence indicating that Dahl bought the securities knowing that Pinter's failure to register violated federal statute. 12 The facts of Henderson are, in every material respect, indistinguishable from the facts of the case at bar. We forestall reliance on Henderson as controlling precedent, however, pending a determination whether it has been displaced by a recent Supreme Court Case, B. Eichler, H. Richards, Inc. v. Berner, 472 U.S. ----, 105 S.Ct. 2622, 86 L.Ed.2d 215 (1985). 13 In Eichler the Supreme Court established that the doctrine of in pari delicto will bar a plaintiff's recovery in a section 10(b) action under the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b), when: 14 (1) as a direct result of his own actions, the plaintiff bears at least substantially equal responsibility for the violations he seeks to redress, and 15 (2) preclusion of suit would not significantly interfere with the effective enforcement of the securities laws and protection of the investment public. 16 Id. at ----, 105 S.Ct. at 2629, 86 L.Ed. at 224. Unlike the standard employed in Henderson which focuses on whether preclusion of suit would further the goals of securities legislation, the Eichler test queries whether preclusion of suit would interfere with enforcement of the legislation. If Eichler applies to a section 12(1) action as well as to a section 10(b) action, it appears that Henderson would no longer be valid precedent. 17 The in pari delicto doctrine eminates from the Latin expression, in pari delicto est conditio defendentis (In a case of equal or mutual fault ... the position of the [defending party] is the better one). 5 The doctrine is a corollary of the unclean hands maxim, the principal difference being that the in pari delicto doctrine technically applies only when the plaintiff's fault is substantially equal to the defendants. Not any act suffices to bring into play the doctrines of in pari delicto and unclean hands. As the Supreme Court points out in Keystone Driller Co. v. General Excavator Co., 290 U.S. 240, 54 S.Ct. 146, 78 L.Ed. 293 (1933), the doctrines apply only where some unconscionable act of one coming for relief has immediate and necessary relation to the equity that he seeks in respect of the matter in litigation. Id. at 245, 54 S.Ct. at 147 (emphasis supplied). The unclean hands and in pari delicto maxims operate against conduct which is contrary to the dictates of good conscience or fair dealing. 2 Pomeroy, Equity Jurisprudence, 92-94 (5th ed. 1941); United States v. Second National Bank of North Miami, 502 F.2d 535, 548 (5th Cir.1974), cert. denied, 421 U.S. 912, 95 S.Ct. 1567, 43 L.Ed.2d 777 (1975); Deseret Apartments v. United States, 250 F.2d 457 (10th Cir.1957); see also United States v. I-12 Garden Apartments, 703 F.2d 900 (5th Cir.1983). Moreover, the maxims refer to willful misconduct rather than to merely negligent conduct. The improper conduct which falls within the maxim must involve intention as opposed to an inadvertent act or a misapprehension of legal rights; the conduct must be morally reprehensible as to known facts. 30 C.J.S. Equity Sec. 95, at 1022 (1965); (citations omitted); Preload Technology, Inc. v. A.B. & J. Construction Co., 696 F.2d 1080 (5th Cir.1983). 18 Unlike section 10(b) which contains an element of scienter, section 12(1) is a strict liability offense. Swenson v. Engelstad, 626 F.2d 421, 424 (5th Cir.1980). Pinter is liable thereunder notwithstanding the fact that it probably misapprehended its duty to register. Dahl, also unaware of Pinter's duty to register, was as culpable as Pinter in the sense that his conduct was an equal producing cause of the illegal transaction, in short, in the sense that he was equally non-culpable. Causation, however, does not create unclean hands nor does equal causation constitute equal fault. Absent a showing that Dahl's conduct was offensive to the dictates of natural justice, Keystone Driller, 290 U.S. at 245, 54 S.Ct. at 147, the in pari delicto and unclean hands are not available. 19 Remaining to be decided is whether Pinter may defend on grounds of estoppel, and in this regard whether Eichler, precluding suit when preclusion would not interfere with the enforcement of the securities laws, or Henderson, precluding suit only when preclusion would further the goals of the securities laws, is the governing standard. We believe that Henderson supplies the appropriate standard and, thus, the controlling authority in this case. 6 By its own terms, the Eichler standard applies when damages [are sought to] be barred on the grounds of the plaintiff's own culpability, a condition not present under our facts. Eichler, 472 U.S. at ----, 105 S.Ct. at 2629, 86 L.Ed. at 224. Additional evidence of Eichler's limited applicability lies in the fact that the second prong of Eichler substantially mirrors the classic formulation of the in pari delicto doctrine. As the Court explains, [t]he defense is grounded on two premises: first, that courts should not lend their good offices to mediating disputes among wrongdoers; and second, that denying judicial relief to an admitted wrongdoer is an effective means of deterring illegality. Id. at ---- - ----, 105 S.Ct. at 2625-26, 86 L.Ed.2d at 221-22. Traditionally, the in pari delicto defense has been precluded where there may be on the part of the court itself a necessity of supporting the public interests or public policy in many cases, however reprehensible the acts of the parties may be. 1 J. Story, Equity Jurisprudence 305 (13th ed. 1886), quoted in Eichler, 472 U.S. at ----, 105 S.Ct. at 2627, 86 L.Ed.2d at 222. A plaintiff with unclean hands, in essence, must overcome a presumption that entertainment of his suit would not serve the public interest; and, in accordance with this principle, Eichler permits the application of the in pari delicto doctrine in the context of securities regulation when preclusion of suit would not significantly interfere with the effective enforcement of the securities laws and protection of the investing public. Eichler, 472 U.S. at ----, 105 S.Ct. at 2628, 86 L.Ed.2d at 224. 20 The law imposes no such presumption on Dahl. The issue in this case is not how the parties' legal relationship should be structured in order to give maximal effect to the two independent values undergirding the unclean hands doctrine and the federal securities laws. In contrast to the unclean hands and in pari delicto defenses, the estoppel theory asserted by Pinter has no independent existence in principles of judicial integrity but arises exclusively from within the relationships that are regulated by federal statute. The issue, then, is simply whether section 12(1), providing for a general right to rescind a sale of securities not registered in compliance with the 1933 Act, may, in the context of federal securities law, be fairly construed as applying only to purchasers who do not know their securities are unregistered. In interpreting the scope of a statutory provision, courts have developed numerous aids to construction, one being whether an unprovided-for sanction or remedy further[s] the essential purpose of the enactment. See A.C. Frost & Co. v. Coeur D'Alene Mines Corp., 312 U.S. 38, 43, 61 S.Ct. 414, 417, 86 L.Ed.2d 500 (1940). We believe that Henderson, which posed the question whether allowing plaintiff's suit in accordance with the express provisions of section 12(1) would frustrate the purposes of the Securities Act of 1933, is a sound construction and conclude that the district court's failure to allow Pinter's asserted equitable defenses was not erroneous. 7 21 Because we find that Dahl has a right to recover from Pinter under federal law, we need not decide whether Pinter's asserted defenses would bar Dahl's recovery under state law.