§ 4.1.2.3

• Jurisdiction: Arizona

§ 4.1.2.3 Nonstatutory Defenses

Blue-sky decisions under Arizona's pre-1951 securities laws refused to recognize equitable defenses.⁶³⁰ These blue-sky decisions are part of a growing body of state-securities law that rejects non-statutory defenses.⁶³¹

These cases typically reason that reducing investor protection through equitable defenses is inconsistent with the legislature's intent to increase public protection in securities transactions.⁶³² The cases also commonly note that unlike implied actions under Rule 10b-5, state securities acts include express, statutory defenses.⁶³³ Therefore, they reject arguments that the courts are free to read additional defenses into the securities statutes.⁶³⁴ Anti-waiver statutes—like the one in the Arizona Securities Act⁶³⁵—have also been cited as a reason for refusing to recognize equitable defenses.⁶³⁶ The courts reason that allowing equitable defenses like waiver and estoppel is inconsistent with the statutory ban on waivers.⁶³⁷

In Caruthers v. Underhill,⁶³⁸ a 2014 decision, the Arizona Court of Appeals broke with this line of reasoning. Caruthers held that equitable defenses are proper when rescission is sought because of the equitable nature of rescission.⁶³⁹ Caruthers did not address the propriety of equitable or other nonstatutory defenses when the plaintiff sues for damages rather than rescission.⁶⁴⁰ Caruthers upheld a trial court's determination that rescission in Arizona state securities-fraud cases, like those cases brought under § 44-2002, is a remedy governed by equitable principles and is therefore subject to equitable defenses.⁶⁴¹ Because of the equitable nature of the rescission remedy, Caruthers concluded that whether rescission is ultimately allowed is for the court to decide.⁶⁴² The plaintiff is only entitled to an advisory jury.⁶⁴³ In rendering its decision, the court noted the existence of potential equitable defenses in securities matters, including laches, waiver, ratification, estoppel, and in pari delicto.⁶⁴⁴ These equitable defenses are defined and discussed below.

Laches "is an equitable counterpart to the statute of limitations, designed to discourage dilatory conduct" and "will generally bar a claim when the delay is unreasonable and results in prejudice to the opposing party."⁶⁴⁵ Equitable principles require the plaintiff to seek rescission "'within a reasonable time under the existing circumstances.'"⁶⁴⁶ What constitutes a reasonable time is a question of fact for the trier of fact, which is the trial court.⁶⁴⁷ This fact-intensive inquiry depends on multiple factors, including inter alia: (1) when the party seeking rescission first made a clear and unambiguous rescission offer; (2) whether the party seeking rescission delayed in demanding rescission based on the other party's reasonable assurances; (3) whether it is possible for the other party to return the property sought; (4) whether the party seeking rescission had actual or constructive knowledge of the fraud but manifested to the other party an intention to affirm the transaction; and (5) whether there is evidence the party seeking rescission deliberately delayed seeking rescission to gain an unfair advantage.⁶⁴⁸

In an Arizona securities-fraud case, the proper delay period for the trial court to analyze is the date the party seeking rescission knew of the alleged fraud and the date that party made its rescission offer, which may be an earlier partial rescission request.⁶⁴⁹ "Where a purchaser seeks rescission of an unlawful sale of securities [under § 44-2001], the general view is that tender to the issuer or to the court at the commencement of the action is sufficient," and may include tender up to the time of trial if the purchaser did not delay electing rescission "to see if avoidance or affirmance would be more profitable to them."⁶⁵⁰

"Waiver is either the express, voluntary, intentional relinquishment of a known right or such conduct as warrants an inference of such an intentional relinquishment."⁶⁵¹ Waiver by conduct requires "evidence of acts inconsistent with an intent to assert the right."⁶⁵² For example, "one who has knowledge of fraud as grounds for rescission, but continues to treat the property as his own is deemed to have waived the fraud, at least for purposes of rescission."⁶⁵³ Like laches, waiver is a factual issue reserved for the trial court.⁶⁵⁴

While waiver requires intentionally relinquishing a known right by engaging in conduct inconsistent with that right, ratification results from approving or accepting another's conduct such that one cannot subsequently complain about that conduct:

Ratification is the affirmance by a person of a prior act which did not bind him but which was done, or professedly done on his account, whereby the act, as to some or all persons, is given effect as if originally authorized by him.

Ratification requires intent to ratify plus full knowledge of all the material facts. Ratification may be express or implied, and intent may be inferred from the failure to repudiate an unauthorized act, from inaction, or from conduct on the part of the principal which is inconsistent with any other position than intent to adopt the act.⁶⁵⁵

Like other equitable defenses when raised as a defense to rescission, ratification is a question of fact for the trial court.⁶⁵⁶

While ratification means a party is precluded by approving or accepting another's acts from taking a contrary position, estoppel means a party is precluded by its own acts from asserting a right to the detriment of another who was entitled to rely on such conduct and acted thereon.⁶⁵⁷ "Equitable estoppel 'precludes a party from asserting a right inconsistent with a position previously taken to the prejudice of another acting in reliance thereon.'"⁶⁵⁸ Traditionally, equitable estoppel...