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

• Decision Date: 13 August 1985
• Docket Number: No. 614A84,614A84
• Citation: 314 N.C. 267,333 S.E.2d 236
• Court: North Carolina Supreme Court
• Parties: J. Travis SKINNER and Barbara R. Skinner v. E.F. HUTTON & COMPANY, INC., John Hudson, and Donald Fontes.

Page 236

333 S.E.2d 236

314 N.C. 267

J. Travis SKINNER and Barbara R. Skinner v. E.F. HUTTON & COMPANY, INC., John Hudson, and Donald Fontes.

No. 614A84.

Supreme Court of North Carolina.

Aug. 13, 1985.

Haythe & Curley by Samuel T. Wyrick, III, Christie Speir Price and James Arthur Pope, Raleigh, for plaintiffs-appellants.

Manning, Fulton & Skinner by Howard E. Manning and Michael T. Medford, Raleigh, for defendant-appellees.

Thad Eure, Secretary of State, amicus curiae by Eugene J. Cella, Staff Atty.

MITCHELL, Justice.

The primary issue presented is whether the doctrine of in pari delicto provides a defense to claims under state law when defendant stockbrokers induce plaintiffs to buy securities by representing that they have "inside information" which will result in those securities increasing in value. We conclude that the mere fact that the plaintiffs in such cases have attempted to act upon inside information unlawfully does not cause the doctrine of in pari delicto to raise an affirmative defense which will defeat otherwise valid claims for relief asserted under state law. We also must decide whether securities transactions are beyond the scope of N.C.G.S. 75-1.1 prohibiting unfair trade practices. We conclude that securities transactions are beyond the scope of that statute.

In their complaint the plaintiffs Skinners allege in pertinent part that they maintained general margin accounts with the defendant E.F. Hutton and Company, Inc. for their stock trading. In 1981 the defendants Hudson and Fontes, registered representatives and account executives with E.F. Hutton, encouraged the plaintiffs to "load up" on securities in two companies the defendants represented as take-over candidates. The defendant Fontes told Travis Skinner that he had "inside information that corporate take-overs were imminent that would shortly drive up the price of Washington National Corporation [hereinafter WNT] and Academy Insurance Group [hereinafter ACIG] which securities were being traded either on an exchange or over the counter." Relying on the advice of Hudson and Fontes that take-overs of WNT and ACIG definitely were going to take place soon, the Skinners purchased 3,850 shares of WNT for $109,850 and 4,100 shares of ACIG for $81,484 through their margin accounts at E.F. Hutton.

Fontes told the plaintiffs that the WNT take-over would take place by the end of May 1981. No such take-over occurred nor did the price of the WNT securities increase. Hudson and Fontes first told the plaintiffs that the ACIG take-over would occur by July 28, 1981. After that date had passed they stated that the take-over of ACIG would be complete by August 28, 1981. This did not occur. No take-over occurred.

The plaintiffs also allege in their complaint that on at least two occasions they could have sold a good number of their WNT shares at a substantial profit. They did not due to Fontes' strong urging not to sell and his representations that the WNT take-over was imminent and certain. In order "[t]o cut their losses and free their capital by the year end, Plaintiffs sold all their holdings in WNT and ACIG in October, November and December 1981, absorbing losses of at least $47,526.84 in stock losses, brokers' commissions, margin interest, and a margin call." The plaintiffs allege that these losses are the direct result of their reliance to their detriment on the false representations of the defendants.

The plaintiffs seek to recover on alternative claims for relief for fraud, constructive fraud and negligent misrepresentation. They seek both compensatory and punitive damages. They also seek treble damages under N.C.G.S. 75-16 and reasonable attorney's fees under N.C.G.S. 75-16.1 upon the theory that their allegations establish that the plaintiffs have committed unfair or deceptive acts or practices in violation of N.C.G.S. 75-1.1. By their complaint the plaintiffs also seek to have the defendants held jointly and severally liable.

The trial court held that the "plaintiffs' purported claims are barred as a matter of law by the doctrine of in pari delicto, except as to commissions and margin interest received by Defendants." The plaintiffs appealed. The defendants cross appealed and assigned as error the trial court's failure to dismiss all of the plaintiffs' claims. Although stating that the appeals were interlocutory in nature, the Court of Appeals chose to treat them as though "allowed under certiorari and to review the parties' appeals on their merits." 70 N.C.App. at 518, 320 S.E.2d at 425. The majority of the panel in the Court of Appeals held "that the in pari delicto defense must work as a bar against all the claims for relief asserted by the plaintiffs, including those for commissions and margin interest." 70 N.C.App. at 522-23, 320 S.E.2d at 428. Therefore, the Court of Appeals affirmed in part and reversed in part. One judge having dissented in the Court of Appeals, the plaintiffs appealed as a matter of right under N.C.G.S. 7A-30(2).

On appeal we review the holding of the Court of Appeals that the trial court was required to grant the defendants' motion to dismiss under N.C.G.S. 1A-1, Rule 12(b)(6) for failure to state any claim upon which relief might be granted. Such a motion tests the legal sufficiency of the complaint, and in ruling on "the motion the allegations of the complaint must be viewed as admitted, and on that basis the court must determine as a matter of law whether the allegations state a claim for which relief may be granted." Stanback v. Stanback, 297 N.C. 181, 185, 254 S.E.2d 611, 615 (1979). When the complaint states a valid claim but also discloses an unconditional affirmative defense which defeats the asserted claim, however, the motion will be granted and the action dismissed. Sutton v. Duke, 277 N.C. 94, 102, 176 S.E.2d 161, 166 (1970). The defendants contend that the doctrine of in pari delicto causes the complaint in the present case to disclose just such an unconditional affirmative defense.

The defendants specifically contend that the complaint shows on its face that the plaintiffs were "tippees" who received and acted upon purported nonpublic "inside information" and took steps to profit by this knowledge to the exclusion of the general public. The defendants argue that such conduct by the plaintiffs violated inter alia antifraud provisions of The North Carolina Securities Act ¹ such as N.C.G.S. 78A-8 and federal prohibitions against trading in securities on inside information, such as those contained in the general antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder. For purposes of this appeal, we assume arguendo without deciding the question that the plaintiffs were "tippees" ² and in violation of all pertinent provisions of North Carolina and federal law prohibiting trading in securities on inside information. Nevertheless, the doctrine of in pari delicto does not give rise to an affirmative defense requiring dismissal of the plaintiffs' claims.

The common law defense by which the defendants seek to shield themselves from liability in the present case arises from the maxim in pari delicto potior est conditio possidentis [defendentis] or "in a case of equal or mutual fault ... the condition of the party in possession [or defending] is the better one." Black's Law Dictionary 711 (rev. 5th ed. 1979). The defense and the maxim describing it are products of Roman law. See generally Grodecki, In Pari Delicto Potior Est Conditio Defendentis, 71 Law Q.Rev. 254 (1955). Under Roman law the defense was limited to contract actions to recover money paid under an illegal or immoral contract. Id. In such cases the Roman Law left the parties as it found them. This Court and others, however, have not limited the defense to contract actions. In Lloyd v. R.R., 151 N.C. 536, 540, 66 S.E. 604, 605-06 (1909), for example, this Court stated:

It is very generally held--universally, so far as we are aware--that an action never lies when a plaintiff must base his claim, in whole or in part, on a violation by himself of the criminal or penal laws of the State. In Waite's Actions and Defenses, Vol. 1, p. 43, the principle is broadly stated as follows: "No principle of law is better settled than that which declares that an action cannot be maintained upon any ground or cause which the law declares to be illegal,"....

(Citations omitted). See also 37 Am.Jur.2d Fraud and Deceit § 303 (1968). Nevertheless, we reject the defense entirely in the present case.

In their complaint the plaintiffs seek to pursue only claims under North Carolina common law and statutes. Therefore, any question concerning whether the in pari delicto defense applies to those claims is a question exclusively of North Carolina law as to which this Court is authoritative and final. White v. Pate, 308 N.C. 759, 766, 304 S.E.2d 199, 204 (1983); Lea Co. v. N.C. Board of Transportation, 308 N.C. 603, 610, 304 S.E.2d 164, 170 (1983). See Missouri v. Hunter, 459 U.S. 359, 103 S.Ct. 673, 74 L.Ed.2d 535 (1983). However, we pay great deference in any event to decisions of the Supreme Court of the United States when they address issues similar to those before us in a given case.

In resolving the questions concerning the applicability of the in pari delicto defense to the plaintiffs' state law claims in the present case, we find the reasoning of a recent opinion of the Supreme Court of the United States compelling. In Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 105 S.Ct. 2622, 86 L.Ed.2d 215 (1985), a securities broker and an officer of a corporation were alleged to have fraudulently induced investors to purchase stock in the corporation by divulging false and materially incomplete information about the corporation on the pretext that it was accurate inside information. The investors brought a private action against...