E. F. Hutton & Co., Inc. v. Berns

• Decision Date: 30 June 1982
• Docket Number: Nos. 81-1426,81-1470,s. 81-1426
• Citation: 682 F.2d 173
• Parties: E. F. HUTTON & COMPANY, INC., Appellee/Cross-Appellant, v. Melford BERNS, and Lenny Garcia, Appellants/Cross-Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 173

682 F.2d 173

E. F. HUTTON & COMPANY, INC., Appellee/Cross-Appellant, v. Melford BERNS, and Lenny Garcia, Appellants/Cross-Appellees.

Nos. 81-1426, 81-1470.

United States Court of Appeals Eighth Circuit.

Submitted March 8, 1982.

Decided June 30, 1982.

Irl B. Baris, St. Louis, Mo., for appellants/cross-appellees Berns and garcia.

Jerome F. Raskas, John C. Garavaglia, St. Louis, Mo., for appellee/cross-appellant E. F. Hutton & Co., Inc.

Before LAY, Chief Judge, ROSS and McMILLIAN, Circuit Judges.

ROSS, Circuit Judge.

Background

For purposes of this appeal only a general review of the events giving rise to this litigation is necessary. Appellants Melford Berns and Lenny Garcia were partners in a business called West County Photo Supply, Inc. During the fall of 1979 the appellants and three other individuals made a series of purchases of Victoria Station stock from the appellee, E. F. Hutton, Inc. (Hutton), through one of Hutton's account executives, Bruce O'Dell. Appellants claim the purchases resulted from conversations between the appellants and O'Dell concerning the advisability of acquiring Victoria Station stock at that time. According to the appellants, O'Dell continually advised them from about mid-September 1979 to late October 1979 that a takeover of Victoria Station was imminent and that the stock's value would increase substantially in a short period of time. Appellants maintain that they were induced to purchase the stock by O'Dell's misrepresentations that he had inside information that Victoria Station was going to be acquired by another company. However, appellee contends that the information concerning Victoria Station's stock was only a rumor which was public knowledge, and that O'Dell clearly advised appellants that the information was merely rumor.

All of the purchases of Victoria Station stock by the appellants were made on margin accounts, i.e., fifty percent payment required within five business days. According to the appellants, O'Dell assured them that because of the imminence of the Victoria Station deal, they would not have to pay for their purchases until after the stock's value substantially increased. However, by October 10, 1979, the first settlement date on Garcia's margin account, the Victoria Station merger or acquisition had not occurred and Garcia was required to tender $8,500 to Hutton. By Garcia's next settlement date, October 17, 1979, the Victoria Station transaction had not occurred, and Garcia was required to tender $8,175 to cover his additional margin purchases. Because Garcia apparently did not have sufficient funds to meet his obligations, Berns consented to allow Garcia to borrow the money to cover those purchases from West Coast Photo Supply.

On October 17, 1979, when Garcia tendered payment to Hutton for his previous stock purchases, a meeting between O'Dell, Garcia, Berns, and another Hutton account executive occurred during which additional purchases of Victoria Station stock by Garcia were discussed. According to O'Dell, during this conversation Berns stated that he would guaranty Garcia's account, but a written guaranty was not signed by Berns. Berns denied making even an oral guaranty. On October 19, 1979, Garcia purchased an additional 8,000 shares of Victoria Station stock on the margin for $132,000 with an October 26 settlement date. On October 22, 1979, Garcia purchased another 5,000 shares on the margin for $80,000. Additional margin account purchases of Victoria Station stock from Hutton were made by Berns and his acquaintances other than Garcia up until October 25, 1979.

Friday, October 26, 1979, was purportedly the date that the Victoria Station transaction was to occur. On that day Garcia owed Hutton $66,000 on his margin account, but when the Victoria Station transaction was not announced, Berns and Garcia balked at making any further payment on Garcia's account. Late that day Berns, Garcia, O'Dell, and another Hutton account executive spoke in a conference telephone call during which Garcia and Berns allegedly detailed their accusations against O'Dell for his misrepresentations concerning the Victoria Station transaction.

Apparently on October 26 or 27, 1979, an article appeared in Business Week in which rumors of any acquisition or merger were denied by Victoria Station and the other company involved. On October 29 Berns contacted a co-manager at Hutton, Don Matthewson, to complain about Garcia's situation, and a meeting was set up during which Berns and Garcia asserted the alleged misrepresentations by O'Dell, refused to complete full payment of their accounts because of the misrepresentations, and sought a return of their money. Apparently, the issues of the past due accounts and O'Dell's misrepresentations were not resolved at that meeting. Because the price of Victoria Station stock had dropped, additional margin deposits were required on Berns' and Garcia's accounts, and Hutton sold Garcia out of the stock at a substantial loss to cover a part of those requirements. ¹

In a diversity action brought under 28 U.S.C. § 1332 (1976), on November 21, 1979, the plaintiff-appellee Hutton filed an eighteen count complaint against defendants-appellants Berns, Garcia, and three other individuals who had been involved in the purchases of Victoria Station stock, alleging breach of contract by failing to pay for stock purchases, breach of a guaranty by Berns to pay for Garcia's stock purchases, violations of section 10(b) of the Securities Exchange Act of 1934 ² and Rule 10b-5 promulgated under that Act, ³ common law fraud and misrepresentation, conspiracy to violate securities laws, and conspiracy to defraud. Berns and Garcia filed separate counterclaims against Hutton alleging violations of section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and common law fraud.

After a lengthy trial before a jury, the jury returned a verdict against Garcia on count II of the complaint for $68,000 (breach of contract in failing to pay for stock) and against Berns on count VI for $0 (breach of guaranty). Verdicts were returned in favor of Berns and Garcia on all other counts in which they were named, but the jury rejected all counterclaims against Hutton brought by the defendants. Judgments were entered by the court in accordance with the jury verdicts on February 12, 1981. ⁴

Berns and Garcia primarily appeal on the grounds that the defense of in pari delicto was incorrectly given to the jury in relation to their counterclaims against Hutton. In addition, appellant Berns contends that the trial court erred in submitting to the jury the count VI claim for breach of a guaranty by Berns to pay for Garcia's stock purchases in that the oral guaranty claim was barred by the Missouri Statute of Frauds, Mo.Ann.Stat. §§ 432.010 & .040 (Vernon 1952). Appellee Hutton cross-appeals primarily on the grounds that the trial court erred in failing to enter a judgment for $68,000 on the count VI guaranty verdict against Berns despite the jury's verdict of $0 damages.

After a careful consideration of all of the issues raised on appeal, we affirm all judgments entered relating to appellants Garcia and Berns which have been challenged on appeal with the exception of the judgment against appellant Berns on the oral guaranty which is vacated with directions to dismiss.

In Pari Delicto Defense

Appellants' primary contention before this court is that the trial court erred in submitting an in pari delicto instruction which was a defense by Hutton against all of the appellant's common law fraud and Rule 10b-5 counterclaims. ⁵ According to the appellants, this instruction was erroneous not only because it improperly defined the defense, but because such a defense is not available in a case such as this where a broker allegedly misrepresents that he has inside information to his client. Although the applicability of the in pari delicto defense to securities law violations is a disputed issue ⁶ which this circuit has yet to pass upon in factual circumstances similar to this case, it is not a question which we need address at this time. This is because regardless of the correctness and applicability of an in pari delicto instruction the appellants cannot be viewed as having been prejudiced as a result of the jury having been given that instruction in the present case.

Under the "harmless error" rule any error by the trial court in a proceeding must be disregarded unless it affects the "substantial rights of the parties." Fed.R.Civ.P. 61; 28 U.S.C. § 2111 (1976). It is well settled that this rule applies to jury instructions as well as other alleged errors. See Flanigan v. Burlington Northern, Inc., 632 F.2d 880, 889 (8th Cir. 1980), cert. denied, 450 U.S. 921, 101 S.Ct. 1370, 67 L.Ed.2d 349 (1981). One circumstance in which alleged errors have been held to be harmless is where in light of the instructions actually given and the jury's verdict it is clear that the jury did not actually reach the allegedly erroneous instruction in arriving at its verdict. See, e.g., Lowe v. Taylor Steel Products Co., 373 F.2d 65, 68 (8th Cir.), cert. denied, 389 U.S. 858, 88 S.Ct. 85, 19 L.Ed.2d 122 (1967); Warren v. Ward, 371 F.2d 906, 908 (8th Cir. 1967); Coughlin v. Capitol Cement Co., 571 F.2d 290, 305 (5th Cir. 1978); Eastburn v. Ford Motor Co., 471 F.2d 21, 22 (5th Cir. 1972). We believe that the present case presents such circumstances calling for the application of the harmless error rule.

Instruction 32A was given by the court as an affirmative defense to all of Hutton's claims against the appellants. It provided that:

Your verdict must be for the defendants and against plaintiff E. F. Hutton on plaintiff's claim against the defendants on all counts, if you believe:

First, plaintiff E. F. Hutton, through its agents and employees, represented to defendants that it had inside information that Victoria Station was being acquired by or merged with another...