Can courts consider contract illegality defenses not properly pleaded? Fibro Trust, Inc. v. Brahman Financial, Inc. Explained

In Fibro Trust, Inc. v. Brahman Financial, Inc., the Utah Supreme Court addressed when trial courts may consider illegality defenses that were not properly pleaded and the evidentiary standards for proving securities law violations in contract disputes.

Background and Facts
Fibro Trust owned millions of shares in Leasing Technology, Inc. and entered into agreements with Brahman Financial for stock marketing services. Fibro transferred 5.5 million restricted LTI shares to be held in trust, but Brahman instead transferred 4 million shares to American Pacific Securities and distributed the remainder to other entities. When Fibro demanded return of the shares, defendants moved for directed verdict claiming the contract violated Utah securities laws under Utah Code section 61-1-1.

Key Legal Issues
The court addressed three critical issues: (1) whether defendants waived the illegality defense by failing to plead it as an affirmative defense; (2) what mental state requirements apply to different subsections of Utah’s securities fraud statute; and (3) whether sufficient evidence supported a finding that the contract was illegal.

Court’s Analysis and Holding
The Supreme Court held that Brahman waived its illegality defense by not pleading it in its answer. When Fibro objected to consideration of the unpleaded defense, Rule 15(b) required the trial court to determine whether amendment would serve the merits and prejudice the objecting party—steps the trial court failed to take. Regarding the securities statute, the court clarified that section 61-1-1(1) requires scienter (willful intent to defraud), while subsections (2) and (3) require only willful conduct without intent to deceive. The court found insufficient evidence that Fibro willfully violated securities laws.

Practice Implications
This decision emphasizes the importance of proper pleading practices for affirmative defenses. Practitioners should immediately object when opponents raise unpleaded defenses and ensure courts follow Rule 15(b) procedures. The ruling also clarifies Utah’s securities law mental state requirements, providing guidance for both prosecution and defense of securities-related contract disputes. Additionally, the court’s reversal of the conversion ruling demonstrates that legal title does not automatically preclude conversion claims when trust arrangements are involved.