257 Conn. 301 | Conn. | 2001
Opinion
The sole issue in this certified appeal is whether the Appellate Court properly concluded that the doctrine of clean hands
The opinion of the Appellate Court summarizes the following facts and procedural history. “The plaintiff commenced this action against the defendants to foreclose on a mortgage that secured a note, the original balance of which was $25,000. The note was signed by the defendant David Orcutt as president of Alpha Equipment Sales and Rentals, Inc., and by the defendants individually and severally.
“The mortgaged premises were subject to three encumbrances superior to the Thompson mortgage: A first mortgage to the New Haven Savings Bank in the
“In January, 1992, the plaintiff filed a voluntary petition in [chapter 7] bankruptcy in the United States Bankruptcy Court for the District of Connecticut, listing as an asset a one-half interest in the Thompson mortgage. The bankruptcy court appointed [a bankruptcy trustee to administer the bankruptcy] estate.” Thompson v. Orcutt, 59 Conn. App. 201, 202-203,756 A.2d 332 (2000).
During the pendency of the bankruptcy case, the plaintiff represented to the bankruptcy trustee that the property securing the Thompson mortgage was “encumbered in excess of its value . . . .” On the basis of that representation, the bankruptcy trustee abandoned the Thompson mortgage as an asset of the bankruptcy estate because it “[did] not justify further administration.” See 11 U.S.C. § 554 (a) (bankruptcy trustee may abandon property of estate “that is burdensome to the estate or that is of inconsequential value and benefit to the estate”).
“In their answer to the foreclosure complaint, the defendants admitted the existence of the debt and the execution of the loan agreement and mortgage deed, but filed a special defense asserting that the plaintiff was ‘guilty of unclean hands’ insofar as he had induced the bankruptcy trustee to abandon the [Thompson
Thereafter, the plaintiff appealed to the Appellate Court, claiming, inter alia, that the trial court improperly had applied the doctrine of unclean hands.
We granted the defendants’ petition for certification to appeal limited to the following issue: “Under the circumstances of this case, did the Appellate Court properly hold that the doctrine of clean hands did not apply?” Thompson v. Orcutt, 254 Conn. 934, 761 A.2d 758 (2000). Following oral argument before this court, we sua sponte ordered the trial court to articulate its judgment with respect to the application of the doctrine of unclean hands. Specifically, we directed the trial court to respond to the following questions: “(1) Was the basis for the plaintiffs unclean hands (a) misrepresentation, or (b) fraud? (2) If the basis was misrepresentation, what was the nature of the misrepresentation, e.g., intentional, negligent or innocent? [and] (3) In either event, what was the evidentiary basis of the finding of misrepresentation or fraud?”
Thereafter, the trial court, after conducting a hearing on the order for articulation in accordance with Practice Book § 66-5,
After the trial court submitted its articulation, we sua sponte granted the parties an opportunity to file simultaneous supplemental briefs in response thereto. The defendants filed a supplemental brief; the plaintiff did not.
As a threshold matter, the defendants claim that the Appellate Court improperly employed the plenary standard of review, rather than reviewing the trial court’s decision to apply the doctrine of unclean hands for an abuse of discretion. We disagree.
This court has recognized that “[application of the doctrine of unclean hands rests within the sound discretion of the trial court.” A & B Auto Salvage, Inc. v. Zoning Board of Appeals, 189 Conn. 573, 578, 456 A.2d 1187 (1983); accord Cohen v. Cohen, 182 Conn. 193, 196, 438 A.2d 55 (1980) (“[i]t is clear that [the doctrine of unclean hands] is to be applied ... by the court in the exercise of its sound discretion”); DeCecco v. Beach, 174 Conn. 29, 35, 381 A.2d 543 (1977) (“[t]he maxim should be applied in the trial court’s discretion”). “The exercise of [such] equitable authority ... is subject only to limited review on appeal. . . . The only issue on appeal is whether the trial court has acted unreasonably and in clear abuse of its discretion. ... In determining whether the trial court abused its discretion, this court must make every reasonable presumption in favor of [the trial court’s] action.” (Citations omitted; internal quotation marks omitted.) Mazziotti v. Allstate Ins. Co., 240 Conn. 799, 809, 695 A.2d 1010 (1997).
Whether the trial court properly inteipreted the doctrine of unclean hands, however, is a legal question distinct from the trial court’s discretionary decision whether to apply it. Cf. Babcock v. Bridgeport Hospital, 251 Conn. 790, 820, 742 A.2d 322 (1999) (“[ppovided the trial court properly interpreted the [law], a question over which this court has plenary review . . . [the trial court’s] decision [to grant or deny a discovery request] will be reversed only if such an order constitutes an abuse of [its] discretion” [citation omitted]). Although
II
The defendants next claim that the Appellate Court improperly determined that the doctrine of unclean hands did not apply in this case. First, the defendants contend that the Appellate Court improperly determined that the plaintiffs bankruptcy fraud regarding the Thompson mortgage was not “ ‘in regard to the matter in litigation’ ” for applying the doctrine of unclean hands. See Lyman v. Lyman, 90 Conn. 399, 406, 97 A. 312 (1916). Second, although the defendants acknowledge that the clean hands doctrine generally requires that the alleged prior wrong must have been directed toward their interests, rather than toward those of a third party, they claim that the Appellate Court improperly refused to apply the doctrine on broader policy grounds. In contrast, the plaintiff maintains that the Appellate Court properly determined that the clean hands doctrine did not apply in this case.
Before addressing these claims, we note that an action to foreclose a mortgage is an equitable proceeding. OCI Mortgage Corp. v. Marchese, 255 Conn. 448, 464, 774 A.2d 940 (2001); Danbury v. Dana Investment Corp., 249 Conn. 1, 30, 730 A.2d 1128 (1999). “It is a fundamental principle of equity jurisprudence that for a complainant to show that he is entitled to the benefit of equity he must establish that he comes into court with clean hands. . . . The clean hands doctrine is applied not for the protection of the parties but for the protection of the court. ... It is applied not by way of punishment but on considerations that make for the advancement of right and justice.” (Internal quotation marks omitted.) Eldridge v. Eldridge, 244 Conn. 523, 536, 710 A.2d 757 (1998). “The doctrine of unclean hands expresses the principle that where a plaintiff seeks equitable relief, he must show that his conduct has been fair, equitable and honest as to the particular controversy in issue. . . . Unless the plaintiffs conduct is of such a character as to be condemned and pronounced wrongful by honest and fair-minded people, the doctrine of unclean hands does not apply.” (Citation omitted.) Bauer v. Waste Management of Connecticut, Inc., 239 Conn. 515, 525, 686 A.2d 481 (1996).
Because the doctrine of unclean hands exists to safeguard the integrity of the court; Eldridge v. Eldridge, supra, 244 Conn. 536; Pappas v. Pappas, 164 Conn. 242, 246, 320 A.2d 809 (1973); “[w]here a plaintiffs claim grows out of or depends upon or is inseparably connected with his own prior fraud, a court of equity will, in general, deny him any relief, and will leave him to whatever remedies and defenses at law he may have.” (Internal quotation marks omitted.) Samasko v. Davis, 135 Conn. 377, 383, 64 A.2d 682 (1949). The doctrine generally “applies [only] to the particular transaction under consideration, for the court will not go outside
B
The defendants first claim that the Appellate Court improperly determined that, in order for the clean hands doctrine to apply, the fraud had to relate to the mortgage transaction at issue in the present case. The defendants maintain that, as long as the plaintiff requires the fraud to make out his case, the doctrine can apply. They contend that the fraud need not directly relate “to the precise transaction giving rise to the claim,” and argue
This court has addressed the scope of the doctrine of unclean hands and, as noted previously, if a party’s claim “grows out of or depends upon or is inseparably connected with his own prior fraud, a court of equity will, in general, deny him any relief . . . .” (Internal quotation marks omitted.) Samasko v. Davis, supra, 135 Conn. 383. Indeed, this court has applied the doctrine to preclude a litigant from recovering in equity if his or her conduct has been inequitable with respect to the subject of the action. See Pappas v. Pappas, supra, 164 Conn. 246 (applying clean hands doctrine to preclude plaintiff in action to recover property from son; plaintiff had committed perjury in separate dissolution proceeding with respect to character of transfer of property to son; equity that plaintiff sought was “directly and inseparably connected” with prior perjury); see also Salzman v. Bachrach, 996 P.2d 1263, 1269 (Colo. 2000) (“[C]ourts apply [doctrine of unclean hands] only when a plaintiffs improper conduct relates in some significant way to the claim he [or she] now asserts. Otherwise, only those leading pristine and blameless lives would ever be entitled to equitable relief.”).
The trial court in this case determined that, for the purposes of applying the clean hands doctrine, the plaintiffs fraud in the bankruptcy proceeding regarding the Thompson mortgage directly related to the foreclo
Under the circumstances of the present case, we conclude that the plaintiffs cause of action to foreclose on the mortgage was “directly and inseparably connected” to his prior fraud on the bankruptcy court. Pappas v. Pappas, supra, 164 Conn. 246; Samasko v. Davis, supra, 135 Conn. 383. “[A] foreclosure complaint must contain certain allegations regarding the nature of the interest being foreclosed.” (Internal quotation marks omitted.) New England Savings Bank v. Bedford Realty Corp., 246 Conn. 594, 610, 717 A.2d 713 (1998); see New Milford Savings Bank v. Jajer, 244 Conn. 251, 256 n. 11, 708 A.2d 1378 (1998) (noting that “a mortgagee in Connecticut is deemed to have taken legal title under the execution of a mortgage on real property” subject to equitable rights of redemption). In this case, the plaintiff alleged in his complaint that he had title to the Thompson mortgage, an allegation that the defendants denied. Thus, the plaintiffs title to the Thompson mortgage was a contested issue in the foreclosure action.
The plaintiffs alleged ownership of the Thompson mortgage herein would not have existed had he not lied to the bankruptcy trustee and withheld information concerning the Northeast lien. The original transaction creating the Thompson mortgage was not tainted with fraud, but the plaintiffs ability to foreclose on the defen
C
The defendants next claim that the Appellate Court improperly refused to apply the clean hands doctrine on broad policy grounds. Emphasizing that the trial court found by clear and convincing evidence that the plaintiff had committed fraud in the bankruptcy court, the defendants claim that this case implicates the important public policy of precluding litigants from profiting from their own fraudulent conduct. The plaintiff contends that the Appellate Court properly refused to apply the doctrine on the grounds of public policy because the defendants “failed to show . . . that [he] violated a public policy.” We agree with the defendants.
This court has recognized that the doctrine of unclean hands “is not one of absolutes . . . .” Cohen v. Cohen, supra, 182 Conn. 204; DeCecco v. Beach, supra, 174 Conn. 35. It “is not a judicial straightjacket.” Cohen v. Cohen, supra, 204. Because the doctrine is “founded on public policy, [it] may be relaxed on that ground . . . .” Id.; see also S & E Contractors, Inc. v. United States, 406 U.S. 1, 15, 92 S. Ct. 1411, 31 L. Ed. 2d 658 (1972), quoting Precision Co. v. Automotive Co., 324 U.S. 806,
The trial court concluded that the public interest was implicated in this case because “fraud was perpetrated on the bankruptcy court trustee who was acting on behalf of the United States Bankruptcy Court in fulfilling a congressionally mandated duty of collecting [and administering] property of the [plaintiffs bankruptcy] estate.” The trial court recognized that the Thompson mortgage had been listed as an asset on the plaintiffs bankruptcy schedules and that, if the plaintiff had not fraudulently induced the bankruptcy trustee to abandon it, it would have been property of the bankruptcy estate. The trial court recognized that concealing assets and making false statements in bankruptcy matters are federal crimes; see 18U.S.C. §§ 152 and 157; and it reasoned that permitting the plaintiff to foreclose on the mortgage would “reward the very misconduct [that] Congress has found to be abhorrent and against the public policy of the United States . . . .” The Appellate Court determined, however, that “the representations made to the federal court in the bankruptcy proceeding [did] not involve a public interest so great as to necessitate application of the [public policy] exception” to the general rule governing the doctrine of unclean hands that the wrong must be done to the patty against whom relief is sought. Thompson v. Orcutt, supra, 59 Conn. App. 206 n.7.
In this case, the plaintiffs fraud in bankruptcy court allowed him to retain an interest in the Thompson mortgage.
The judgment of the Appellate Court is reversed and the case is remanded to that court for consideration of the plaintiffs remaining claims.
In this opinion the other justices concurred.
The clean hands doctrine, also referred to as the doctrine of unclean hands; Bauer v. Waste Management of Connecticut, Inc., 239 Conn. 515, 525, 686 A.2d 481 (1996); derives from “the equitable maxim that he who comes into equity must come with clean hands.” (Internal quotation marks omitted.) DeCecco v. Beach, 174 Conn. 29, 34, 381 A.2d 543 (1977); accord Gelinas v. West Hartford, 225 Conn. 575, 587, 626 A.2d 259 (1993) (“[o]ne who seeks equity must also do equity and expect that equity will be done for all” [interned quotation marks omitted]).
Several parties holding subordinate liens on the property were also joined as defendants in the foreclosure action. They have not joined in this appeal. For purposes of this appeal, references herein to the defendants are to David Orcutt and Sandra Orcutt.
Although the plaintiff filed this action in his capacity as trustee for his business partnership with Jack L. Rosenblit, who also held a one-half interest in the mortgage on the defendants’ property, the trial court found that the alleged trust relationship was “nothing more than a sham . . . .” That finding is not an issue in this appeal.
The plaintiff also named Alpha Equipment Sales and Rentals, Inc., as a defendant, but it was defaulted for failure to appear.
Although the trial court granted the defendants’ motion to join the bankruptcy trustee, John J. O’Neil, Jr., as a plaintiff in this case, he subsequently was defaulted and is not a party to this appeal. See Thompson v. Orcutt, supra, 59 Conn. App. 203 n.3.
The plaintiff also claimed that the trial court, improperly had: (1) found that there had been no trust agreement between the plaintiff and Rosenblit; (2) ordered the plaintiff to release the Thompson mortgage note; (3) ordered the plaintiff to release the Northeast lien; (4) found that Rosenblit should be subjected to the unclean hands doctrine; (5) ignored the appearance filed by the bankruptcy trustee; and (6) ordered the plaintiff to release the Thompson mortgage. The Appellate Court did not address these claims; Thompson v. Orcutt, supra, 59 Conn. App. 204 n.5; and neither do we.
Practice Book § 66-5 governs motions for articulation and provides in relevant part that “[i]f any party requests it and it is deemed necessary by the trial court, the trial court shall hold a hearing at which arguments may be heard, evidence taken or a stipulation of counsel received and approved. ...”
Based on testimony at trial that the market value of the property subject to the Thompson mortgage in 1990 had been $147,200, the trial court used an annual depreciation rate of 4 percent, which was derived from the testimony of the plaintiffs expert appraiser, and found that the fair market value of the property during the first year of the plaintiffs bankruptcy case would have been approximately $135,000. The trial court noted that that figure was consistent with the testimony of the plaintiffs appraiser who estimated the value of the property in 1999 to be $103,000. Deducting $95,000, which represented the face amount of the two priority encumbrances, and disregarding the Northeast lien, which had been paid in full but not released, the trial court found that there had been $40,000 in equity in the property in 1992, more than enough to satisfy the full amount of the $25,000 Thompson mortgage.
It is noteworthy that with interest on the Thompson mortgage note, which originally had been 24 percent, and the late payment charges, the outstanding debt on the Thompson mortgage note had risen to approximately $34,000 in January, 1992, the month that the plaintiff filed for bankruptcy protection. At the time of trial in this case, the indebtedness had increased to more than $60,000.
We emphasize that, although the plaintiff had an opportunity to respond to the trial court’s articulation regarding its finding of fraud, he did not do so. Therefore, we are bound by the trial court’s factual findings. Herbert S. Newman & Partners, P. C. v. CFC Construction Ltd. Partnership, 236 Conn. 750, 762, 674 A.2d 1313 (1996) (trial court’s factual findings binding on this court unless clearly erroneous in light of all evidence).
The plaintiff claims that “[i]t is very important to note that [although] the bankruptcy trustee was made a party to this matter and has had ample opportunity to reopen [the plaintiffs] bankruptcy file based on the allegations of fraud,” the trustee has failed to do so.
We note that, although the bankruptcy court enjoys broad power to reopen a case that has been closed; see 11 U.S.C. § 350; the Thompson mortgage, because it was abandoned by the bankruptcy trustee, was no longer property of the bankruptcy estate. 11 U.S.C. § 554; Correll v. Equifax Check Services, Inc., 234 B.R. 8,11 (D. Conn. 1997) (property of bankruptcy estate not abandoned by trustee remains property of estate). The bankruptcy trustee, therefore, not only would be required to open the case, but also would have to petition the bankruptcy court to revoke the plaintiffs discharge in bankruptcy. See 11 U.S.C. § 727 (d); In re Covino, 245 B.R. 162, 170 (Bankr. D. Idaho 2000) (“[Revocation of discharge is an extraordinary remedy [and] is a penalty . . . not lightly invoked by the [c]ourt”). Moreover, revocation based on fraud under 11 U.S.C. § 727 (e) (1) and (2) is subject to strict time limits—one year after discharge and one year after discharge or the date that the case is closed, whichever is later, respectively. See In re Boyd, 243 B.R. 756, 763, 766 (Bankr. N.D. Cal. 2000) (“bankruptcy code and rules do not contemplate equitable tolling [of time limits for seeking revocation] because of a debtor’s fraud”; party seeking revocation “cannot use fraud allegations as a way to obtain authority to administer . . . funds after the time limit for revoking discharge has expired”). Although the record before this court does not disclose the date of the plaintiffs bankruptcy discharge, it is safe to assume that, because the bankruptcy case was commenced in 1992, the opportunity to seek a revocation of the discharge has long since passed, and accordingly, the bankruptcy trustee successfully could not seek relief in that forum.
Article one, § 8, of the constitution of the United States provides in relevant part: “The Congress shall have Power To . . . establish . . . uniform Laws on the subject of Bankruptcies . . . .”