Filed July 25, 2006.
Appeal from the District Court, Todd County, File No. C2-04-862.
Charles A. Cox, Cox, Goudy, McNulty Wallace, P.L.L.P., (for appellant).
Michael J. Dolan, Thomas J. Reif, Thornton, Hegg, Reif, Dolan Bowen, P.A.
Considered and decided by Shumaker, Presiding Judge; Kalitowski, Judge; and Ross, Judge.
This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (2004).
On appeal from summary judgment, appellant Calvin Abers argues that the district court (1) erred in finding that no fact issues remained regarding his unjust-enrichment claim; and (2) abused its discretion by concluding that appellant was barred from seeking equitable relief under the doctrines of in pari delicto and unclean hands. We affirm.
"On an appeal from summary judgment, we ask two questions: (1) whether there are any genuine issues of material fact and (2) whether the [district court] erred in [its] application of the law." State by Cooper v. French, 460 N.W.2d 2, 4 (Minn. 1990). When reviewing the decision of the lower court, "the reviewing court must view the evidence in the light most favorable to the party against whom judgment was granted." Fabio v. Bellomo, 504 N.W.2d 758, 761 (Minn. 1993). There is no genuine issue of material fact when the record as a whole "could not lead a rational trier of fact to find for the nonmoving party." DLH, Inc. v. Russ, 566 N.W.2d 60, 69 (Minn. 1997) (quotation omitted).
In order to establish a claim of unjust enrichment, a claimant must show that another party knowingly received something of value to which he was not entitled and that the circumstances are such that it would be unjust for that person to retain the benefit. ServiceMaster of St. Cloud v. GAB Bus. Servs., Inc., 544 N.W.2d 302, 306 (Minn. 1996). "An unjust-enrichment claim does not lie merely because one party benefits from another's efforts or obligations; rather it must be shown that a party was unjustly enriched in the sense that the term could mean illegally or unlawfully." Custom Design Studio v. Chloe, Inc., 584 N.W.2d 430, 433 (Minn.App. 1998) (quotation omitted), review denied (Minn. Nov. 24, 1998).
Here, appellant was elected gambling manager of respondent Veterans of Foreign Wars Post 7902 in 1997. As gambling manager, appellant's salary was to be paid from gambling funds. Initially, appellant volunteered to receive no salary for his work until he increased respondent's gambling income. In September 1998, appellant began receiving a salary of $500 per month. The record indicates that in March 2000, respondent's board and officers authorized a raise for appellant so that he could make payments out of his personal account on a loan respondent had taken out for a remodeling project. Respondent had previously entertained a motion to pay a different loan with gambling proceeds, but the state gambling board informed it that it could not lawfully do so. As gambling manager, appellant knew that gambling proceeds, with few narrow exceptions, were required to be given to charities. Thus, appellant acknowledged in his deposition that he knew that the transaction proposed would constitute "laundering money" and that it would be "an unlawful expenditure of gambling dollars."
Nonetheless, appellant's salary was increased to $1,000 per month, retroactive to January 1, 2000. And appellant began making payments of $400 on respondent's loan in January 2000. When respondent increased his monthly salary to $1,600 in October 2000, appellant increased his monthly payments to $800. Appellant paid off the loan in April 2004 and was terminated from his position of gambling manager in May 2004.
Appellant filed suit, alleging that respondent was unjustly enriched because it failed to reimburse appellant for the amounts he paid on respondent's loan. The district court granted respondent's motion for summary judgment, concluding that the record reflected a "complete lack of proof" as to the essential elements of an unjust-enrichment claim. The court added that appellant's relief was also barred by the doctrine of in pari delicto and the doctrine of unclean hands.
Appellant argues that fact issues remained on his unjust-enrichment claim. We agree. Specifically, the record indicates that there are disputed facts regarding the exact nature of the arrangement, if any, between appellant and respondent concerning reimbursement of appellant's loan payments. And viewing the facts in a light most favorable to appellant, this issue could determine the extent to which respondent condoned the transaction and was therefore unjustly enriched by the fraudulent arrangement.
But we conclude that even if the district court erred in granting summary judgment on appellant's unjust-enrichment claim, the district court properly determined that appellant was barred from obtaining equitable relief as discussed below.
Appellant argues that the district court abused its discretion by holding that appellant's unjust-enrichment claim was barred by the doctrine of in pari delicto and the doctrine of unclean hands. We disagree.
The decision to grant equitable relief is within the discretion of the court and will not be reversed unless there is a clear abuse of that discretion. Medtronic, Inc. v. Advanced Bionics Corp., 630 N.W.2d 438, 450 (Minn.App. 2001).
1. In pari delicto
The doctrine of in pari delicto may operate to prevent the enforcement of an equitable remedy when the parties have been involved in mutually unlawful activity. Brubaker v. Hi-Banks Resort Corp., 415 N.W.2d 680, 684 (Minn.App. 1987), review denied (Minn. Jan. 28, 1988). Minnesota's leading case on in pari delicto is State by Head v. AAMCO Automatic Transmissions, Inc., 293 Minn. 342, 199 N.W.2d 444 (1972). In AAMCO, the franchiser of automobile-transmission-repair shops created deceptive advertisements for its franchisees. Id. at 343-44, 199 N.W.2d at 445-46. In a suit brought by the state to enjoin the deceptive practices, the franchisee cross-claimed against the franchiser, AAMCO, arguing that AAMCO forced its franchisees to use and pay for the deceptive advertisements, precipitating the state's action against them and harming the franchisee's business. Id. On appeal by the franchisee, the supreme court held that the doctrine of in pari delicto barred the franchisee's claim because his participation in the fraudulent advertising was "both knowing and willing." Id. at 348, 199 N.W.2d at 448. The supreme court explained that "[in pari delicto] is based upon judicial reluctance to intervene in disputes between parties who are both wrongdoers in equal fault." Id. at 347, 199 N.W.2d at 448.
Minnesota law requires that gambling proceeds be expended for lawful, primarily charitable, purposes. Minn. Stat. §§ 349.15, subd. 1, 349.12, subd. 25(a) (Supp. 2005). And organizations are prohibited from using gambling proceeds for improvement or repair of real property with the exception of a few narrow circumstances not relevant here. Minn. Stat. §§ 349.15, subd. 1, 349.12, subd. 25(b) (Supp. 2005).
Here, the district court held that the doctrine of in pari delicto barred appellant's claim for relief. The court found that appellant willfully participated in a fraudulent scheme with respondent to underhandedly use gambling proceeds to make payments on respondent's remodeling loan. Thus the court stated that it was "disinclined to provide [appellant] any judicial relief by virtue of his knowing participation in a deceptive, fraudulent scheme to circumvent Minnesota's gambling laws."
The record indicates that appellant agreed to and executed a plan to fraudulently evade Minnesota gambling regulations as they pertain to lawful expenditures of gambling proceeds. Appellant was aware of the legal restrictions on the use of gambling proceeds. When appellant obtained his license to act as gambling manager, he learned that he could not apply gambling proceeds to noncharitable purposes. And when one of respondent's members proposed that appellant be given a raise and then make loan payments from his personal account, appellant stated that he knew it would be an "unlawful expenditure of gambling dollars."
By filtering the proceeds through his personal accounts, appellant was a knowing and willing participant in a scheme to avoid Minnesota lawful gambling regulations. And under the doctrine of in pari delicto, "anyone who engages in a fraudulent scheme forfeits all right to protection, either at law or in equity." AAMCO, 293 Minn. at 347, 199 N.W.2d at 448 (emphasis added) (quotation omitted). Accordingly, the district court did not abuse its discretion by holding that appellant was barred from asserting that his rights under that fraudulent scheme had been violated.
2. Unclean hands
Unclean hands is an equitable defense that restricts the availability of equitable remedies to parties who are guilty of unconscionable conduct. Fred O. Watson Co. v. U.S. Life Ins. Co., 258 N.W.2d 776, 778 (Minn. 1977). For a successful unclean-hands defense, a party's conduct must be unconscionable by reason of a bad motive or because the result brought about by the conduct would be unconscionable. Creative Communc'ns Consultants, Inc. v. Gaylord, 403 N.W.2d 654, 658 (Minn.App. 1987).
Under reasoning similar to its analysis of the doctrine of in pari delicto, the district court held that appellant's claim was also barred under the doctrine of unclean hands. The court stated that appellant used funds disguised as a pay raise to pay respondent's loan in a manner proscribed by law.
Appellant knew that gambling proceeds could only be used for charitable purposes and that applying them toward respondent's loan was unlawful. Nonetheless, he tried to circumvent the gambling regulations when he received gambling proceeds through a salary increase and then applied that excess salary toward respondent's loan. Moreover, he sought to evade the same regulations he was licensed to uphold as gambling manager. See Minn. Stat. § 349.167, subd. 1(a) (2004) (stating that a gambling manager "is responsible for the gross receipts of the organization and for its conduct in compliance with all laws and rules"). We conclude that the district court did not abuse its discretion by holding that the doctrine of unclean hands barred appellant from seeking equitable relief.