Dahl v. Pinter

• Decision Date: 18 April 1986
• Docket Number: No. 84-1970,84-1970
• Citation: 787 F.2d 985
• Parties: Blue Sky L. Rep. P 72,383, 54 USLW 2554, Fed. Sec. L. Rep. P 92,700 Maurice DAHL, Gary Clark, W. Grantham, Robert Daniele, Charles Dahl, Dowayne Bockman, Ray Dilbeck, Richard Koon, Art Overgarrd, Jack Yeager, Accra Tronics Seals Corp., and Aaron Heller, Plaintiffs-Appellees, v. Billy J. "B.J." PINTER, Black Gold Oil Company, Pinter Energy Company, and Pinter Oil Company, Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 985

787 F.2d 985

Blue Sky L. Rep. P 72,383, 54 USLW 2554,

Fed. Sec. L. Rep. P 92,700

Maurice DAHL, Gary Clark, W. Grantham, Robert Daniele, Charles Dahl, Dowayne Bockman, Ray Dilbeck, Richard Koon, Art Overgarrd, Jack Yeager, Accra Tronics Seals Corp., and Aaron Heller, Plaintiffs-Appellees, v. Billy J. "B.J." PINTER, Black Gold Oil Company, Pinter

Energy Company, and Pinter Oil Company,

Defendants-Appellants.

No. 84-1970.

United States Court of Appeals, Fifth Circuit.

April 18, 1986.

Braden W. Sparks, Newman, Shook & McManemin, Dallas, Tex., for defendants-appellants.

John A. Spinuzzi, Denton, Tex., for plaintiffs-appellees.

Appeal from the United States District Court for the Northern District of Texas.

Before BROWN, REAVLEY, and HILL, Circuit Judges.

ROBERT MADDEN HILL, Circuit Judge:

In this appeal Pinter ¹ urges that his liability under section 12(1) of the Securities Act of 1933, 15 U.S.C. Sec. 77l(1), and article 33 A(1) of the Texas Securities Act, Tex.Rev.Civ.Stat.Ann. art. 581-33 A(1) (Vernon Supp. 1986), should be diminished by plaintiff Maurice Dahl's wrongful conduct. We disagree with this contention and affirm the decision of the district court granting judgment for plaintiffs.

I.

This controversy arises out of the sale of unregistered securities (fractional undivided interests in oil and gas leases) by Pinter to Dahl and to Dahl's associates. Dahl is a California real estate investor who, at the time of his dealings with Pinter, was a veteran of two failed oil and gas ventures. Ever an optimist, Dahl aggressively sought out additional oil and gas properties for investment and after an extensive search settled on some leases held by Pinter. Dahl toured the property several times, frequently without Pinter, so that he could talk to others and "get a feel for the properties." After looking at the geology, drilling logs, and production history assembled by Pinter, he concluded that there was no way he could lose.

Dahl was so enthusiastic about Pinter's leases that he told plaintiff Wendy Grantham and the ten other plaintiffs, all of whom were either friends or family of Dahl, about the venture. The district court found that with the exception of Grantham who herself conceived the idea to purchase, Dahl "solicited" these friends "in connection with the offer, purchase, and receipt of their oil and gas interests." These solicitations clearly were motivated by Dahl's desire to enrich his friends and family as Dahl received no commission by way of discount or otherwise in connection with the purchases made by any plaintiff.

Each investment letter-contract signed by the purchasers was a form prepared by Pinter. That document contained the following language:

Whereas the parties constitute a predetermined and limited group of sophisticated and knowledgeable well informed investors who desire to arrange for participation in an oil and/or gas drilling venture as an investment and do declare that it is not for the purpose of reselling their interest therein. (These participating interests are being sold without the benefit of registration under the Securities Act of 1933, as amended, and on reliance of rule 146 thereunder.)

Dahl, who helped each of the other plaintiffs complete the letter contracts, knew that the interests were being sold without benefit of registration. There is no evidence, however, that Dahl knew that Pinter's failure to register was in violation of federal and state securities laws.

The plaintiffs' acquired interests ultimately proved worthless and plaintiffs sought relief under section 12(1) of the Securities Act of 1933 ² and article 33 A(1) of the Texas Securities Act. ³

The district court found that Pinter's failure to register the securities purchased by plaintiffs was unlawful and permitted plaintiffs to recover the purchase price of the unregistered securities plus interest less investment income. Pinter maintains that because of his promotional activities Dahl, too, is liable as a "seller" of unregistered securities under section 12(1) and article 33 A(1) and thus should be accountable to Pinter in contribution for the amounts awarded to the other plaintiffs. Further, Pinter argues that Dahl should be barred from any personal recovery from Pinter under the equitable doctrines of in pari delicto, estoppel and unclean hands.

II.

A. Availability of Equitable Defenses

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.

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].

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.

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).

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:

(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

(2) preclusion of suit would not significantly interfere with the effective enforcement of the securities laws and protection of the investment public.

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.

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).

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.

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...