Court Opinion

ID: 8173801
Source: CourtListenerOpinion
Date Created: 2022-09-09 21:31:16.230222+00
Date Added: 2024-06-11T16:39:51.179918
License: Public Domain

OPINION OF THE COURT
This appeal requires us to determine whether, in the circumstances of this case and its posture on appeal, the defense of in pari delicto requires reversal of the territorial court. We hold that the defense is inapplicable and we will affirm the judgment of the territorial court.
I. FACTS
In November 1984, Walter E. Preiss, the appellant/crossappellee, sold his juice distributorship to R. D. Severe and Baker’s, Inc., the appellee/cross-appellant. The purchase price was $191,010.90, of which Severe paid $75,000 at the closing and issued two notes in Preiss’ favor covering the balance. Almost immediately, *435Severe defaulted on the notes and Preiss filed the debt action herein in March 1985. Severe counterclaimed, alleging that Preiss had fraudulently misrepresented the income of the distributorship by assuring him that a brisk business'had been conducted off-the-books.
The territorial court dismissed the Preiss debt action and held that Preiss had defrauded Severe. It awarded him $38,283.80 in compensatory and punitive damages. Preiss now appeals the finding of fraud and the propriety of the punitive damages. In the cross-appeal, Severe argues that the court undervalued the compensatory award. The judgment is amply supported by the record and will, therefore, be affirmed in all respects. We write only in response to our dissenting colleague’s opinion that Severe was< barred under the doctrine of in pari delicto from asserting fraud. We granted the parties leave to brief this issue.
II. DISCUSSION
As an initial matter, we must correct Preiss’ post-argument statement that estoppel was pled as an affirmative defense to Severe’s- counterclaim for fraud. Such a defense was not asserted, either at trial or on appeal. The applicability of in pari delicto was raised for the first time by a member of this panel during oral argument. Rule 8(c) of the Federal Rules of Civil Procedure, however, required Preiss to raise all affirmative defenses, at the latest, during trial or else waive them. E.g., Systems Incorporated v. Bridge Electronics Co., 335 F.2d 465, 466 (3d Cir. 1964). And as a general rule of appellate procedure, issues raised for the first time on appeal should be rejected summarily. E.g., Singleton v. Wulff, 428 U.S. 106, 120-21 (1976). We perceive no reason to deviate from this established practice here and hold that Preiss waived the estoppel defense. We proceed to discuss its merits only to explain the basis for our disagreement with the dissent.
 In pari delicto, like its equitable companion principle of unclean hands, is a common law doctrine designed to prevent profit from one’s wrongful acts. Literally, in pari delicto means “in equal fault” and thus, it is not surprising that the bedrock requirement of this circuit, and the classic rule of the common law, is that the guilt of the party asserting fraud must be “substantially equal to that of the defendant.” Tarasi v. Pittsburgh National Bank, 555 F.2d 1152, 1156-59, 1161 (3d Cir.), cert. denied, 434 U.S. 969 (1977). *436Eichler v. Berner, 105 S.Ct. 2622, 2626-27 (1985); Perma Life Mufflers, Inc. v. International Parts Corp., 392 U.S. 134, 147 (1968) (Fortas, J., concurring); Mallis v. Bankers Trust Co., 615 F.2d 68, 94-97 (2d Cir. 1980), cert. denied, 449 U.S. 1123 (1981); Collins v. PBW Stock Exchange, Inc., 408 F. Supp. 1344, 1349 (E.D. Pa. 1976).
The Third Circuit defined the in pari delicto defense in the widely-cited Tarasí case:
In pari delicto, which literally means “of equal fault,” is one of the common law doctrines fashioned to assure that transgressors will not be allowed to profit from their own wrongdoing. Under this construct, a party is barred from recovering damages if his losses are substantially caused by “activities the law forbade him to engage in.”
The rule has developed many complexities and has been applied where plaintiffs have had only a minimal association with the allegedly unlawful acts. However, when in pari delicto is given a narrow interpretation, the scrutiny of the relative moral worth of litigants that it allows is a limited one. Only in those cases where it can fairly be said that the plaintiffs’ fault is substantially equal to that of the defendant will recovery be precluded. Moreover, a court may look only to conduct associated with the transaction before it, and may not forbid recovery on account of a plaintiff’s activities in a separate setting.
555 F.2d at 1156-57 (footnotes omitted).
Tarasí presents a classic example of equal guilt: a tippee claiming fraud against the tipper who supplied inaccurate insider securities information. The court allowed the defendant to invoke in pari delicto because by acting on the tip, the plaintiff violated the same statute as did the defendant and this, in turn, posed the same threat to the stability of the stock market.
The in pari delicto defense is inapplicable here because the parties’ guilt is not equal. Severe’s requisite culpability consists of an allegation that he bought Preiss’ business with the intent to commit tax fraud. Purportedly, this intent can be inferred from Severe’s direct testimony:
Q Sir, did you hire an accountant to review the books or anything of the records of the company?
A No, I did not.
*437Q Why not?
A Well, Mr. Preiss had represented to me that the books were immaterial, that Baker’s, Inc., was selling half a dozen trailer loads a year that were unreported to the government and he said that in order—
ATTORNEY RAMES: Your Honor, I object.
THE COURT: Overruled.
ATTORNEY CANNON: Go ahead.
THE WITNESS: And, in order to do this, that there could be no trace left of any information regarding those trailer loads or any product that was being sold under the table.
Q And, you believed that?
A Yes, I did.
Q Why did you believe that?
A Well, it’s — in any business you run into, [there are] all kinds of people who will, you know, will use any method to produce a net profit. I said to Mr. Preiss at the time that that was fine that he was doing that, but it was immaterial to me. Because, what it would be saving was gross receipts taxes. Those gross receipts taxes would equal about $4,000 if the business was, in fact, netting $70,000 to $80,000 before taxes and doing six trailer loads, illegally. Then, it would be doing $70,000 to $75,000 if the taxes were reported.
(Tr. 154-55.)
 Tarasi makes clear that in pari delicto is applicable only where the plaintiff’s illegal conduct occurred in the course of the transaction that is the basis of the fraud claim. 555 F.2d at 1157. The sole concurrent act of which Severe can be accused is formulating the intent to hide some business income. Presuming the truth of this charge, the Tarasi test is not met because a passing thought is not illegal conduct. And even if Severe’s “act” could be deemed unlawful, guilt that is unproven and merely inferred cannot be “substantially” equated with the fraud actually perpetrated by Preiss. Tarasi, supra at 1157.
Hence we conclude that even if the in pari delicto defense had been raised in a timely manner, it is inapplicable here.
*438III. CONCLUSION
The defense of in pari delicto may only be asserted against a party of comparable guilt. Moreover, as an affirmátive defense, this issue must be raised, at the latest, during trial or else it is deemed waived.