holding that "unclean hands" doctrine only applies "where the plaintiff has dealt unjustly in the very transaction of which he complains"Summary of this case from Nautilus Neurosciences, Inc. v. Fares
Argued October 29, 1963
Decided December 30, 1963
Appeal from the Appellate Division of the Supreme Court in the Second Judicial Department, ANTHONY M. LIVOTI, J.
Hein, Bradie, Waters Klein ( Thomas R. Newman of counsel), for appellant. Maurice Young for respondent.
This action, brought by plaintiff as the owner of real property, seeks, in effect, to remove a cloud on title. Defendant, the owner of record, conveyed the property to plaintiff in 1950. Plaintiff did not record this deed and it is now lost. The specific relief requested is a decree compelling the execution of a replacement deed. Although these simple affirmed findings of fact warrant the relief requested, the Appellate Division has reversed a judgment for plaintiff and dismissed the complaint on the theory of "unclean hands" because of a certain transaction concerning the property that occurred prior to that sued on here.
In 1934 Jacob Landau, the sole stockholder and concededly alter ego of plaintiff corporation, caused it to convey the subject property, together with other property, to his son, Alfred Landau, without consideration, and for the purpose of concealing it from his creditors. Alfred agreed to hold the property for his father's benefit. It also appears that Jacob Landau filed a petition in bankruptcy in 1945 in which he swore that he had no interest in real property. In 1950, Alfred, at his father's request, discharged his oral promise of 1934 by conveying the subject property to the defendant Chazanof, the son-in-law of Jacob Landau. This conveyance was also without consideration. The courts below have found that, simultaneously with the conveyance to him, defendant orally promised to convey to plaintiff, and did in fact execute and deliver a deed to plaintiff.
In view of the ground upon which the Appellate Division has reversed, it is important to note that any connection between defendant's promise to convey to plaintiff and the illegality of the conveyance to Alfred Landau in 1934 would be relevant only if plaintiff were suing on that promise. In such a case we would be called upon to apply the rule that the unclean hands doctrine bars only causes of action founded in illegality or immorality. ( Dering v. Earl of Winchelsea, 1 Cox Eq. 318 ; Railroad Co. v. Durant, 95 U.S. 576; Stone v. Freeman, 298 N.Y. 268; Wood v. Hill, 214 App. Div. 417, 423.) This, in turn, would require an examination into the motive and circumstances surrounding the conveyance to defendant, to which his promise to convey to plaintiff was incident. (2 Pomeroy, Equity Jurisprudence, § 403, pp. 139-142.)
This case, however, presents no such issue. Plaintiff is not seeking to enforce a contractual duty of defendant against which illegality could be argued ( Reiner v. North Amer. Newspaper Alliance, 259 N.Y. 250; McConnell v. Commonwealth Pictures Corp., 7 N.Y.2d 465), or to enforce an "inequitable" interest in real property, in bar of which unclean hands could be raised (as where the "equity" lay in a promise given in consideration of a fraudulent conveyance, Pattison v. Pattison, 301 N.Y. 65; Flegenheimer v. Brogan, 284 N.Y. 268). However vulnerable to attack may have been defendant's promise to convey to plaintiff, and we express no opinion on this, that promise has been fully performed. The property has been conveyed to plaintiff, who now holds title, both legal and equitable. Defendant has no interest whatever in the property. ( Robertson v. Sayre, 134 N.Y. 97; Jackson ex dem. Malin v. Garnsey, 16 Johns. 189; Paddon v. Williams, 1 Robt. 340; 2 Moore, Fraudulent Conveyances, 645.) It is established by the unanimous assent of authority that a voluntary reconveyance to the fraudulent grantor, even from the immediate fraudulent grantee, is effective as between the parties and is entitled to the protection of the courts in its enjoyment. (2 Pomeroy, Equity Jurisprudence, § 401a, p. 110; 2 Moore, Fraudulent Conveyances, 653-654.) Such incidental protection of ownership is typified in cases where a reconveyance to a fraudulent grantor subsequently required the assistance of the courts in replacing a lost deed. ( Moore v. Livingston, 14 How. Prac. 1, revd. on evidentiary grounds 28 Barb. 543; O'Gasapian v. Danielson, 284 Mass. 27, 34; Springfield Homestead Assn. v. Roll, 137 Ill. 205.)
It is suggested, nevertheless, that moral considerations of fundamental importance require a different result in this case. The short answer, given at Trial Term (per LIVOTI, J.), is that equity is not an avenger at large (2 Pomeroy, Equity Jurisprudence, § 399; Rice v. Rockefeller, 134 N.Y. 174, 187). Conceding that the relief sought in this case is of equitable origin, the maxim must be applied only where the plaintiff has dealt unjustly in the very transaction of which he complains. It must also be remembered, as we are reminded by the late Professor Zechariah Chafee, that moral indignation against the plaintiff must operate, not in a vacuum, but in harmony with other important purposes and functions of the substantive law involved. As he criticized the application of the unclean hands doctrine in a situation similar to that here present, "This ethical attitude seems entirely out of place. What ought to count is the strong social policy in favor of making the land records furnish an accurate map of the ownership of all land in the community. Whatever A's old misdeeds, he is the lawful owner of this lot and the records ought to show this fact. The existing record falsely makes R owner. It may mislead scores of honest citizens — people who have strong reasons for wishing to buy the lot, such as creditors of A, creditors of R, or lawyers drawing deeds of adjoining lots who are anxious to insert an accurate description. What is the sense of perpetuating an erroneous land record in order to penalize A for past misdeeds by causing him inconvenience? [Footnote omitted.] Better regard his dirty hands as washed during the lapse of twenty years rather than mess up the recording system." (Chafee, Some Problems of Equity, 21-22 .)
We find this reasoning persuasive. When equitable relief is sought, not to enforce an executory obligation arising out of an illegal transaction, but to protect a status of legal ownership, wrongs done by Jacob Landau to creditors in respect of the property at some time prior to the acquisition of the title now in issue may not now be raised by this defendant to defeat otherwise available relief.
The judgment of the Appellate Division should be reversed and that of the Supreme Court reinstated, without costs.
I vote to affirm the judgment below because it is an absolutely correct application of an ancient maxim honored and followed by this and other American and English courts in decisions innumerable. Variously articulated ("ex dolo malo non oritur actio"; "ex turpi causa non oritur actio"; "in aequali juri melior est conditio possidentis"; "pacta quae turpem causam continent non sunt observanda") the maxim means that no right of action can spring from an illegal contract and that courts do not sit to give protection to cheaters or to act "as paymaster[s] of the wages of crime" ( Stone v. Freeman, 298 N.Y. 268, 271). As Justice JOHNSON explained it for the Supreme Court in 1829, "no court of justice can in its nature be made the handmaid of iniquity" or "become auxiliary to the consummation of violations of law" ( Bank of United States v. Owens, 2 Pet. [27 U.S.] 527, 538, 539). Some of our own recent utterances in the same vein are found in Stone v. Freeman ( 298 N.Y. 265, 271, supra), Carr v. Hoy ( 2 N.Y.2d 185, 187) and McConnell v. Commonwealth Pictures Corp. ( 7 N.Y.2d 465, 469).
Despite all these precedents, plaintiff is being awarded a decree which will crown with final success a fraudulent transaction begun by its sole stockholder Jacob Landau in 1934 when he conveyed this same land to his son Alfred Landau, without consideration and in fraud of his creditors. The fraudulent transaction was carried a step further in 1945 when Jacob Landau took bankruptcy proceedings but swore in the schedules that he had no real property. In 1950 son Alfred conveyed the property to son-in-law defendant Chazanof, again without consideration, and Chazanof simultaneously conveyed the land to Jacob Landau's corporation, plaintiff Seagirt Realty Corporation. The latter deed was never recorded but was lost and plaintiff now asks the court to require the son-in-law to deliver another deed. This a court of equity cannot do without ignoring a whole series of cases typical of which are Flegenheimer v. Brogan ( 284 N.Y. 268), O'Connor v. O'Connor ( 288 N.Y. 579) and Pattison v. Pattison ( 301 N.Y. 65). The essential facts in Flegenheimer are indistinguishable from those proven here. Plaintiff's intestate Arthur Flegenheimer owned a brewery but put it in the name of a corporation and turned the stock over to one Vogel to conceal Flegenheimer's ownership from Federal and State authorities who would not give Flegenheimer permits. Vogel turned the stock over to defendant Brogan. After Flegenheimer's death his administratrix sued for the value of the stock. The Court of Appeals described the action as "one brought by an alleged secret owner to vindicate his assertion of beneficial title to property he had parted with in order to perpetrate a fraud upon the statute which regulates and controls traffic in alcoholic beverages." The plaintiff made the same argument (see 284 N.Y. 268, 272) as does plaintiff here, namely that the transaction whereby defendant got the stock was different from the alleged illegal first transaction. This court through Judge LOUGHRAN made this answer: "But our primary concern is not with the position of the defendant. The immediate question is whether on the presently admitted facts a recovery by the plaintiff should be denied for the sake of public interests. This is a question of public policy in the administration of the law. `The principles of public policy remain the same, though the application of them may be applied in novel ways. The ground does not vary. As it was put by TINDAL, C.J., in Horner v. Graves (7 Bing. 735, 743), "Whatever is injurious to the interests of the public is void, on the grounds of public policy."' ( Naylor, Benzon Co. v. Krainische Industrie Gessellschaft, 1 K.B. 331, 342, 343.)"
The Pattison case ( 301 N.Y. 65, 73, supra) was one where a grantor was, just like this plaintiff, trying to get back property transferred in fraud of creditors. We held that the general rule that the courts would extend no remedy to such a grantor "`is too well settled to be now called in question.'"
Of course, all this goes back long before Flegenheimer (see, for instance, Schermerhorn v. Talman, 14 N.Y. 93, 141). We said in 1932 in Reiner v. North Amer. Newspaper Alliance ( 259 N.Y. 250, 256) that this "[clean hands] defense is allowed not as a protection to a defendant, but as a disability to the plaintiff." In McConnell v. Commonwealth Pictures Corp. ( 7 N.Y.2d 465, 469-472, supra) we went all over the ground again tracing the rule as far as the statement in Riggs v. Palmer ( 115 N.Y. 506, 511) that the courts will not let a plaintiff "profit by his own fraud, or * * * take advantage of his own wrong, or * * * found a claim upon his own iniquity, or * * * acquire property by his own crime." We said something else in McConnell (p. 470) that is applicable here: "We are not working here with narrow questions of technical law. We are applying fundamental concepts of morality and fair dealing not to be weakened by exceptions." Today, ignoring that warning, we are seriously weakening an old, good rule of law and morality, essential for the integrity of the courts themselves.
The judgment should be affirmed, with costs.
I cannot agree that the plaintiff is entitled to the relief sought herein. The majority is permitting this plaintiff corporation's president to invoke the aid of the court to bring to a successful conclusion that which he admits was a scheme to defraud his creditors.
The conveyance of the property by Landau, the defrauding debtor, to his son Alfred concededly was made without consideration and for the purpose of concealing the property from Landau's creditors. Thereafter, at the father's request, the son conveyed this property to the defendant, the son-in-law of Landau, also without consideration. Simultaneously with this conveyance to him, and at Landau's request, defendant executed and delivered a deed to the property to Landau's corporation, which deed has been lost. It is this deed which plaintiff corporation seeks to have replaced by having the court direct that another deed be executed by the defendant to the plaintiff, in which Landau is the sole stockholder.
It is clear that all these conveyances were calculated steps in Landau's design to keep the property concealed from his creditors. It is well-established law that our courts will not grant relief to a plaintiff who does not come into equity with "clean hands" ( McConnell v. Commonwealth Pictures Corp., 7 N.Y.2d 465, 469; Michalowski v. Ey, 4 N.Y.2d 277, 282; Carr v. Hoy, 2 N.Y.2d 185; Pattison v. Pattison, 301 N.Y. 65; Stone v. Freeman, 298 N.Y. 268, 271; Tooker v. Inter-County Tit. Guar. Mtge. Co., 295 N.Y. 386; Flegenheimer v. Brogan, 284 N.Y. 268). These cases stand for the proposition that relief will not be granted by our courts to one who stands to profit by his own fraud, and the plaintiff in this action should not be permitted to do so.
It is suggested that equity is not an avenger at large and that it should not invoke the "clean hands" doctrine to separate transactions except where the plaintiff has dealt unjustly in the very transaction of which he complains. There can be little doubt that Landau dealt fraudulently and unjustly with his property. It is my view that in the circumstances here this fraudulent conduct taints with the same fraud the very transaction of which he complains.
To say that the conveyance from the son to the defendant was a separate transaction and, therefore, does not come within the "clean hands" doctrine is to overlook the realities of these family conveyances, all of which were initiated at the direction and for the benefit of Landau. Moreover, in my opinion, the separate transaction concept was rejected by this court in the Flegenheimer case ( supra).
Certainly, if plaintiff here were seeking a reconveyance of the property from the immediate transferee, there is no doubt that the relief would be denied. As was stated in Pattison v. Pattison ( supra) at page 73, "To allow such a plan to succeed would put a premium upon dishonorable conduct". So, in this case, dealing as we are with an integral and necessary part of the fraudulent scheme, to grant the relief sought would be to "put a premium upon dishonorable conduct".
On this record, we should not permit concepts of technical law, which are limited in their scope and application, to obscure the overriding considerations of fundamental honesty, morality, fair play and public policy ( McConnell v. Commonwealth Pictures Corp., 7 N.Y.2d 465, 469, supra).
The judgment should be affirmed, with costs.
Judges FULD, VAN VOORHIS and FOSTER concur with Judge BURKE; Chief Judge DESMOND and Judge SCILEPPI dissent in separate opinions in each of which the other concurs and in both of which Judge DYE concurs.
Judgment reversed, etc.