### IN THE COURT OF APPEALS OF TENNESSEE AT NASHVILLE August 8, 2002 Session FELIX M. WOODS, ET AL 

### . v. JAMES N. FARIS Direct Appeal from the Chancery Court for Davidson County No. 00-2240-III Ellen Hobbs Lyle, Chancellor

No. M2001-02901-COA-R3-CV - Filed Septem ber 17, 2002

This appeal arises from an action brought by the plaintiff/seller to enforce an ag reement made as an addendum

to a contract for sale of a home purporting to give a mortgage to the seller. We find that both parti es acted with unclean hands. Judgment of the trial court is affir med in part, rever sed i n part, and this case is remanded for further proceedings consistent with this opinion. Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Affirmed in part; Reversed in Part; and Remanded
D AV ID R. F ARMER , J., de liver ed th e opi nion o f the

cour t, in w hich W. F RANK C RAWFORD , P.J., W.S., and A LAN E. H IGHERS , J., joined.
RenardA. Hirsch, Sr., Na shville , Tennessee, for the app ell ant s, Feli x M. W ood s an d Ag nes J. Woods.
A Russell Willisand William B. Hawk ins, Nashville, Tennessee, for the a ppellee , James N. F aris.
OPINION
Felix and Agn

es Woods (Woo ds), the plaintiffs/sellers and James Faris (Faris), the defendant/counter-claimant/buy er, entered into a contract

for sale of a home

in Nashville in Aug

ust of 1998. The

list ing pric e was $116,900, but the sales contract and deed of trust recited a selling price of $147,500. The transaction between the parties also included an addendum giving Woods a second mortgage on the property equal to twenty perc ent of the agreed upon sales price of $147,500. The addendum provided, “the parties ag ree that in a timely manne r following closing the secondmortgage will, in fact, be forg iven and the debt released.” Faris secur ed a first mortgage of $118, 000 from WMC Mortgage and executed a dee d of trust note for $29,500 for the second mortgage, which was sec ured by a deed of trust. Woods did not release the debt after closing, nor didFaris make pay

ment on the note. In Februa ry of 2000, Faris attempted to secure a release of the lien by Woods in order to re-se ll the property. Woods signed the release, but the parties disput e whether it was delivered

to Faris . The release c ould not be record ed, howe ver, bec ause

it had not-2-

been notarized. The lien thus resulted in a cloud on Faris’ title to the property , preventing him from closing on the sale.
In July of 2000, Woods filed a complaint to collect the unpaid b alan ce on the promissory note. Faris answered and counter-c omplained for breach of contract, intentional fra ud, misrepresentation and rescission of the contract. Both parties asser ted, inter alia , th e defense of unclean hands. The tria

l court dis missed Wood s’ complaint at the conclusion of Woods’ proof. The court awarded Faris a judgment for consequential dama ges in the amount of $21,384, representing $1,188 of interest per month from February 2000 through August of 2001, and reasonable attorney ’s fees and discretionary

costs. The trial court rejected the defense of unclean hands, finding there was no evidence to support the defense. This appeal followed. Issues Presented Woods pres ents the f

ollowing issues fo r revie w by

this Court: (1) Whether the sales contract merged into the deed, deed of trust note, deed of trust and settlement sheet, thereby rendering the sales contract inoper ative. (2) Whether Faris comes into court withunclean hands with a contract that is a sham and is fraudulent as to [a] third party lende r. (3) Whether the [trial] court erred i n al lowing counter-plaintiff to recover when he failed to mitigate damage s and declar[ed] mitigation is a burden. (4) Whether the deed of trust note and deed of trust [were] rele ased.
Faris r aises thr ee addit ional issue s: (1) Whether the trial court erred b y deny

ing Faris request for Rule 11 sa nc ti on s b as ed up on th e a ct io ns of th e W oo ds an d t he ir at to rn ey. (2) Whether the trial court erred b y not aw ar di ng po st -j ud gm en t a tt or ne ys fees. (3) Whether

the trial court erred by

ruling that Woods did not commit fraud. Standard of Review In a nonjury

trial, our standard of

review i s de novo . See Wright v . City of Kno

xville , 898 S.W.2d 177, 181 (Tenn. 1995). There is a presumption of corr ectnes s as to the tr ial co urt’s findi ngs of fact, un less the p reponde rance o f the evi dence isotherwise. Tenn. R. App. P. 13(d). With respect-3-

to the trial court’s legal

conclusions, however, there is no presumption of correc tness. See Bowden v. Ward , 275 S.W.3d 913, 916 (Tenn. 2000); Tenn. R. App. P. 13(d). Unclean Hands Defense The doctrine

of uncle an hands operate s to preve nt parti es fro m using a court to enforce agree ments that “arise out of unconscionable, immoral or just plain ‘crooked’ c onduct.” Farmers & Merchants B

ank v. Templeton , 646 S.W.2d 9 20, 924 (T enn. Ct. App.1982). It is well settled that a court will not enforce illegal transactions. Reaves Lumber Co. v. Cain-Hurley Lumber Co. , 279 S.W. 257, 258 (Tenn. 1925). A transaction need not be pun

ishable as a crime, however, to justify application of the unclean hands doctrine by the c ourt. See McDo nnell Dye r, P.L.C. v. Select-OHits, Inc. , No. W2000-00044-COA-R3-CV, 2001 Te nn. App. Lexis 272, at *32 (Tenn. Ct. App. Apr. 20, 2001) ( no perm. app. filed ). When a cause of actio n arises from a

fraudulent collusion and is designed

to “gild over and conceal the truth ... [the court] will brush away the cobweb varnish and show the t ransaction[] in [its] true light.” Reaves Lumber , 279 S.W. at 258. Such fraud “baffles definition.” Knox-Tenn Re ntal Co. v. J

enkins Insurance, Inc ., 755 S.W.2d 33, 40 (Tenn. 1988) (quoting Smith v. Ha rrison , 49 Tenn. 230 (1871)). But when a cause of action arises out of a transaction that the parties know to be fraudulent or “just plain crooked,” the court will not enforce their agreement or give

them relief. Reaves Lumber , 279 S.W. at 258.
It is clear from the eviden ce in the reco rd that the listed sales price for this property was $116,900. It is also undisputed that thecontract for sale recitesa sales p

rice of $147,500, that Far

is obtained a first mortgage from a le nder in the amount of $118,000, and that he executed a second mortga ge to W oods in the amount of $29,500. The addendum agreement whic h the parties voluntar ily a nd knowing

ly e xecuted a nd which i s the crux of this law suit provid es: This addendum is a part

of the Con

tract fo r the Sale of Real Estate dated August 11, 1998. The above parties agree and affirm that as part of the above contra ct, the sellers will hold a second mort gage equal to 20% of the a greed purchase price

of $147,500. The above parties a gree t hat in a tim

ely manner, following

closing this second mortgage will in fact, be f orgiven and the debt released.
Woods contends , in essence, that this adde ndum is with out effect beca use the c ontract fo r salemerged into thedeed and the settlement sheet and warranty deed recite a sales price of $147,500. Woods argues that the deed beca me the contract of the parties and that there is no mention of any agreement

to release the note or deed of trust in the closing documents. Woods further contends that the inflated sales price allowed Faris to g et 100% financing from the third party lender.
Faris contendsthat the a

ctual ag reed upo n sales pr

ice was $ 116,900. He submits t hat the contract price was inflated because he c ould obtain financing of only 80% and thus the inflated price permitted him to obtain financing of $118,000 and provide the Woods wi th cash at closing. He argues that Woods breached the sales contract by refusing to release the second mortgag e subsequent to th e clos ing.1 We do not agree with Wo ods asser tion t hat t his t ransact ion perpet

rat ed a fraud against th e lend er. It is undisp uted th at the lend er had notice that this ad den dum had b een e xecu ted p rior to c losing. -4- In sum, it is clear to this Court that the parties agreed to a sales pr ice of $116,900 and then i ntentiona

lly inflated the price in the sales contract to repre sent a selling price of $147,500. Th e parties agreed in the ad

dendum tha

t the selle

rs would h old a sec ond mortg age e qual to twe nty percent of the inflated sales price of $147,500 which, following closing, was to be forgiven and the deedof trust

securing the same released. F aris signed an affidavit of

consideration on the face of the deed, under oath, that the value of the property or actual consideration, whichever was greater, was $147,500. By

inflating the sale s price, Faris w as able t o obtain 100% financing from the lender and Woods wa s a bl e s el l t he pr op er ty. 1 Regar dless of which party be

nefitted more or who initiated the transaction, the parties j ointly conspired to misreprese nt the value of this property . In short, the parties agr eed to one pri ce a nd t hen “co oke d t he b ook s” t o re fle ct a not her . It is irr efutabl y th is conspiracy

between the parties that gave rise to the present action.
This transaction offends the sensibilities of this Court. We respectfully disagree with the trial court’s conclusion that the evidence did not support a finding of uncle an hands . We find th at both parties came

into cour t with uncl ean han ds. We accordingly hold that this transaction is untenable. In light of the foregoing, we affirm the trial court’s order that Woods shall execute a relea se of the secondmortgage. Judgment for Faris is reversed, including amounts awarded for attorney ’s fees and discretionary

costs. We affirm

the trial cou

rt’s den ial of Fa ris’ req uest for Rule 11 sa

nctions a gainst Woods. Other issues are pretermitted as non-dispositive in this case.
This cause is rema nded for further procee dings co nsistent w ith this opin ion. Costs of

this appeal are divided equally , one-half to the Appellee, James N. F aris, an d one-ha lf to the A ppellant s, Fe li x M . a nd Ag ne s J . W oo ds , a nd th ei r s ur et y, f or wh ic h e xe cu ti on ma y is su e i f n ec es sa ry.

___________________________________ DAVID R. FARMER, JUDGE