Opinion ID: 14897
Heading Depth: 2
Heading Rank: 2

Heading: unlawful, illicit, or immoral purpose

Text: Parker argues that, in light of the jury’s determination that 6 Omnitech Int’l v. Clorox Co., 11 F.3d 1316, 1323 (5th Cir.), cert. denied, 513 U.S. 815, 115 S. Ct. 71, 130 L. Ed. 2d 26 (1994). 7 Id. (quoting In re Letterman Bros. Energy Sec. Litig., 799 F.2d 967, 972 (5th Cir. 1986), cert. denied, 480 U.S. 918, 107 S. Ct. 1373, 94 L. Ed. 2d 689 (1987)). 8 Martinez v. Johnson, 104 F.3d 769, 771 (5th Cir.), cert. denied, 118 S. Ct. 195, 139 L. Ed. 2d 133 (1997). 9 Dawson v. Wal-Mart Stores, Inc. 978 F.2d 205, 208 (5th Cir. 1992). 10 Marcel v. Placid Oil Co., 11 F.3d 563, 566 (5th Cir. 1994). 11 Nickel v. Estate of Estes, 122 F.3d 294, 301 (5th Cir. 1997). 10 Davis actually continued to own the Campbell Wells stock transferred under the Act of Cash Sale & Assumption by virtue of Parker’s oral promise to return Davis’s stock on request, the evidence at trial conclusively established that the agreement was executed to place Davis’s interest in Campbell Wells beyond the reach of his creditors. As such, urges Parker, the purported written-and-oral agreement, found by the jury to exist, cannot be enforced because it was entered into for the illicit purpose of defrauding Davis’s creditors. Thus, concludes Parker, Davis can recover nothing under the agreement and the jury verdict cannot be permitted to stand. In support of his argument, Parker invites our attention to several Louisiana cases from the nineteenth century that stand for the proposition that contracts executed for the purpose of defrauding creditors are unenforceable.12 These cases were decided 12 See Meyer v. Farmer, 36 La. Ann. 785 (1884); Bernard v. Auguste, 1 La. Ann. 69 (1846) (dismissing plaintiff’s rescission action —— brought on ground that defendant’s failure to give consideration for transfer of plaintiff’s property rendered sale a simulation —— based on evidence that plaintiff was only titleholder of property, true owner having purchased property in plaintiff’s name to screen it from creditors); Puckett v. Clarke, 3 Rob. 81 (1842) (holding that plaintiff could not recover property from defendant when the two had arranged defendant’s purchase of property at a sham sheriff’s sale with understanding that defendant would return property to plaintiff after danger of seizure by plaintiff’s creditors had subsided); Gravier’s Curator v. Carraby’s Ex’or, 17 La. 118, 127 (1841) (refusing to enforce agreement and denying plaintiff’s recovery of property conveyed to defendant as security for defendant’s loans where parties held out conveyance as transfer of title for purpose of concealing property from plaintiff’s judgment creditors). 11 under the rationale that courts of law will not give effect to contracts having an unlawful or immoral purpose.13 As courts will not mediate disputes “between joint venturers in iniquity,”14 the parties to such contracts have no recourse at law against one another. Under the Roman Law maxim, “In pari causa turpitudinem potior est conditio possidentis”15 —— in case of equal wrongdoing, the one in possession is in a better position —— courts will “leave [the] property where the dishonest acts of the parties have placed it.”16 Parker argued to the district court that this line of cases bars recovery under the well-known “unclean hands” canon which devolved from English equity: “One who has unclean hands or is 13 Boatner v. Yarborough, 12 La. Ann. 249, 251 (1857) (“The law, whose mission is to right the innocent and to enforce the performance of licit obligations only, leaves parties who traffic in forbidden things and then break faith with [one another], to such mutual redress as their own standard of honor may award.”); Bernard, 1 La. Ann. at 70 (“[C]ontracts prohibited by law, or contrary to good morals or public order, can have no effect.”); Gravier’s Curator, 17 La. at 127 (“[A]n obligation without a cause or with a false or unlawful one can have no effect.”). 14 Boatner, 12 La. Ann. at 251; see also Gravier’s Curator, 17 La. at 131 (“[C]ourts of justice are not reduced to the humiliation of adjusting among dishonest men the results of their unholy speculations or of protecting one party against another while engaged in a common purpose, at war with the best interest of society and subversive of public order.”). 15 LA. CIV. CODE ANN. art. 2033, cmt. (c) (West 1987); see also Gravier’s Curator, 17 La. at 127 (“[W]here both parties are charged with the same turpitude[,] the law gives no action [and,] . . . [i]n such cases[,] the maxim is ‘Impari causa turpitudinus potior est causa possidentis.’”). 16 Bernard, 1 La. Ann. at 71. 12 himself a wrongdoer should not be able to benefit from the concurrent wrongdoing of another.”17 Although a rudimentary version of the Anglo-American concept of unclean hands (which became a common law doctrine as a result of the merger of law and equity) appears to have seeped interstitially into Louisiana’s Civil Law system,18 at least nominally so, the extent to which it has been embraced as a substantive maxim of Civil Law is uncertain at best.19 And, to the extent that the courts of Louisiana have conflated the Anglo-American unclean hands canon with the Civil Law notion that neither party to an unlawful or immoral agreement may seek 17 Vidrine v. Michigan Millers Mut. Ins. Co., 268 So. 2d 233, 239 (La. 1972). 18 See Thomason v. Thomason, 355 So. 2d 908, 910 (La. 1978) (noting that the doctrine of recrimination —— barring recovery by either party to a domestic dispute when both parties are equally at fault —— is “based on the equitable idea that he who comes into court with unclean hands cannot obtain relief”); Rhodes v. Miller, 179 So. 2d 430, 431 (La. 1938) (“[C]ourts will not relieve a litigant who appeals for relief with unclean hands.”); Coker v. Supreme Indus. Life Ins. Co., Inc., 43 So. 2d 556, 559 (La. Ct. App. 1950) (“It is axiomatic in our jurisprudence that equity will not aid one who comes into court with unclean hands. The line of decisions confirming this maxim is unbroken and too well known to need citation here.”). 19 See Poole v. Guste, 262 So. 2d 339, 345 (La. 1972) (noting that “limitations to the remedy of equity recognized in common-law jurisdictions . . . are not necessarily applicable to Louisiana, with its different civilian procedural background” and rejecting defendants’ argument that plaintiffs’ unclean hands barred injunctive relief); Bramblett v. Wilson, 413 So. 2d 600, 602 (La. Ct. App. 1982) (“It is questionable that the so-called ‘clean hands’ doctrine, an equitable common law theory, has any application in our civilian jurisdiction.”). 13 enforcement in a court of law,20 the doctrine occupies a unique niche in Louisiana as a defense to actions ex contractu: It bars legal recovery.21 However this hybrid doctrine is characterized, though, it is now firmly ensconced in Article 2033 of Louisiana’s Civil Code, which provides, in pertinent part: [A] performance rendered under a contract that is absolutely null because its object or its cause is illicit or immoral may not be recovered by a party who knew or should have known of the defect that makes the contract null. The performance may be recovered, however, when that party invokes the nullity to withdraw from the contract before its purpose is achieved and also in exceptional situations when, in the discretion of the court, that recovery would further the interest of justice.22 20 See Spearman v. Willson, 99 So. 2d 31, 33 (La. 1958) (likening the principle of law under which neither party to an agreement designed to hide property from creditors to prevent its seizure can seek judicial relief to “leaving the parties in the same position [the court] found them on the theory that both plaintiff and defendants have unclean hands”) (emphasis added); Bernard, 1 La. Ann. at 71 (“[W]e leave the property where the dishonest acts of the party have placed it. Whoever claims it hereafter, must come before us with clean hands.”) (emphasis added). 21 See Poole, 262 So. 2d at 345 (noting that the defense of unclean hands is a “[limitation] to the remedy of equity recognized in common-law jurisdictions, based on the historical use in them of injunctions by the chancery court where the damage-remedy in the regular courts was inadequate”); Terrebonne Parish Police Jury v. Kelly, 428 So. 2d 1092, 1093 (La. Ct. App. 1983) (“The doctrine of ‘clean hands’ is an equity principle that requires that ‘he who comes into a court of equity must come with clean hands.’”) (quoting City of New Orleans v. Levy, 98 So. 2d 210, 218 (La. 1957)). 22 LA. CIV. CODE ANN. art. 2033 (West 1987). 14 Inasmuch as simulated transfers designed to defraud creditors are absolute nullities,23 Article 2033 codifies the line of cases relied on by Parker for his “unclean hands” defense.24 Davis attacks the applicability of Article 2033 here on the ground that simulated transfers are not, in fact, absolute nullities. He argues that Parker may not avail himself of Louisiana’s extant version of the unclean hands doctrine because agreements in fraud of creditors produce only relative nullities.25 Davis maintains that, as a matter of statutory construction, transactions that prejudice creditors by transferring assets to third persons cannot be “absolutely null” because the Civil Code provides defrauded creditors with specific remedies —— the revocatory action for cases of actual transfers to third parties; 23 See LA. CIV. CODE ANN. art. 2030 (West 1987) (“A contract is absolutely null when it violates a rule of public order, as when the object of a contract is illicit or immoral.”); Succession of Webre, 172 So. 2d 285, 288 (La. 1965) (“Since the property has never left the patrimony of the ostensible seller, a simulated sale is an absolute nullity.”); Spearman, 99 So. 2d at 33 (noting that agreements designed to hide property from creditors to prevent its seizure are contra bonos mores and unenforceable); Gast v. Gast, 19 So. 2d 138, 140 (La. 1944) (“[A fraudulent simulation] is not in reality a contract; it is a mere pretense, a sham, a disguise, the purpose of which is to defeat the rights of creditors with respect to the debtor’s property; it is an absolute nullity.”). 24 See LA. CIV. CODE ANN. art. 2033, cmt. (a) (West 1987). 25 See LA. CIV. CODE ANN. art. 2031 (West 1987) (“A contract is relatively null when it violates a rule intended for the protection of private parties, as when a party lacked capacity or did not give free consent at the time the contract was made.”). 15 the action to declare a simulation for cases of feigned transfers.26 The Code’s specific provision of a remedy for feigned transfers would be mere surplusage, argues Davis, if fraudulent transactions produced absolute nullities: Any creditor would already have standing —— by virtue of such transaction’s absolute nullity27 —— to have the court declare the transaction null. Davis’s argument would appear unmeritorious in light of the pronouncements of the Supreme Court of Louisiana in Gast v. Gast.28 We need not, however, decide whether the interplay among some modern provisions of the Code affects the enforceability of 26 See LA. CIV. CODE ANN. arts. 2025, 2036 (West 1987). 27 See LA. CIV. CODE ANN. art. 2033 (West 1987) (“Absolute nullity may be invoked by any person. . . .”). 28 The Gast court noted that feigned transfers in fraud of creditors are absolute nullities, notwithstanding the co-existence of the declaration of simulation remedy: [T]here is a vast and clear distinction between a fraudulent simulation and a real contract made in fraud of creditors. The former is not in reality a contract; it is a mere pretense, a sham, a disguise, the purpose of which is to defeat the rights of creditors with respect to the debtor’s property; it is an absolute nullity. The creditor may disregard the fraudulent simulation entirely and seize the affected property under execution, or he may resort to the action en declaration de simulation. But a real contract, although fraudulently entered into, cannot be so disregarded by the creditors. No matter how fraudulent, it must be set aside by a judgment; and for this purpose the revocatory action is provided. Gast, 19 So. 2d at 140 (emphasis added) (citations omitted). 16 simulated transfers as between the parties to such agreements, for we conclude that Parker’s unclean hands defense fails on other Article 2033 grounds. By its terms, Article 2033 does not bar recovery unless —— in addition to the absolute nullity prerequisite —— (1) the party seeking enforcement entered into the agreement with knowledge of its improper nature, and (2) the parties achieved their improper objective.29 In its verdict, the jury found that Davis did not enter into the asset transfer agreement for an unlawful, immoral or illicit purpose. We cannot say that, in its denial of Parker’s alternative motion for j.m.l. or new trial, the district court’s implicit determination that the jury’s conclusion is not against the great weight of the evidence constitutes an abuse of discretion, which would require reversal and the grant of a new trial. Neither can we say that the evidence points so strongly in favor of a scienter finding against Davis that reasonable jurors 29 See supra note 22 and accompanying text. Contrary to Parker’s assertions otherwise, Article 2033 does not appear to have altered the Civil Law’s pre-codification treatment of unlawful contracts; scienter and successful attainment existed as prerequisites to barring recovery before Article 2033 was enacted. See LA. CIV. CODE ANN. art. 2033, cmts. (a), (d) & (e) (West 1987); Gravier’s Curator, 17 La. at 127 (“By the Roman law right to recover back what had been paid on an illicit contract depended upon the question which of the parties was dishonest or whether both were chargeable with the same turpitude. If the party who had received were alone dishonest the sum paid could be recovered back even though the purpose for which it was given had been accomplished.”) (emphasis added); Id. at 127-128 (“These principles apply in cases where the corrupt or reprobated contract has had its effect . . . .”) (emphasis added). 17 would have to conclude that he knew of the illicit purpose of the transfer, which would require reversal and the grant of a j.m.l. As evidence that Davis’s motive for executing the asset transfer agreement was to hide his Campbell Wells interest from his creditors, Parker relies on Davis’s intentional failure to (1) list his Campbell Wells interests on financial statements submitted to creditors, including the IRS, the FDIC, and Guaranty Bank; (2) report his beneficial interest in Campbell Wells on his 1986-1994 tax returns;30 and (3) disclose his Campbell Wells interests during debt reduction negotiations with a number of his creditors.31 The district court, however, found sufficient support for the jury’s verdict in the evidence that Parker initiated the asset transfer scheme, inducing Davis to divest his interests in Campbell Wells based on the Parker-generated specter of a potential judgment creditor’s attempting to seize that interest. According to Davis’s testimony, Parker, in his capacity as attorney for Davis, accompanied him to a meeting called by the general partner of Preferred Properties, a real estate development company in which 30 Davis reported substantially diminished or negative taxable income on these returns, as well as creditor forgiveness of substantial debt obligations that he was unable to meet. Parker contends that had Davis disclosed his Campbell Wells interest in the insolvency calculations he used to avoid the payment of taxes on phantom income from the forgiveness of debt, his tax liability would have been different. 31 This nondisclosure, urges Parker, gave Davis greater leverage with which to negotiate favorable settlements and enabled him to persuade the FDIC to abandon the prosecution of a $3 million collection suit. 18 Davis had invested. Preferred Properties had borrowed heavily to finance one of its projects, but the project failed to produce enough cash flow to service its debt obligations. At the meeting, investors were asked to make supplemental contributions sufficient to service the loan that was secured by a mortgage on the company’s property. Several partners announced that they were filing for bankruptcy and thus would not be able to make any contributions toward the partnership’s obligations. When Davis —— whose own financial situation was deteriorating —— indicated that he too would be unable to contribute, one of the partners became upset and openly hostile towards the other members of the investment group and Davis in particular. Davis testified that after the meeting Parker advised him that the disgruntled partner could try to seize Davis’s assets, depriving him of resources with which to pay his other creditors. At the time, Davis’s interests in Campbell Wells was the only one of his business holdings that had a significant value; the company was netting approximately $100,000 per month. Davis averred that Parker offered to take title to Davis’s stock and apply Davis’s share of the company’s revenues towards their substantial mutual debt.32 In this way, rather than losing his sole income-generating asset to one anxious creditor, Davis would retain the possibility 32 Parker and Davis, as business partners, owed —— in addition to their Campbell Wells indebtedness —— some 2.6 million dollars in joint indebtednesses on various investments. 19 of recovering from his financial straits by satisfying most, if not all, of his creditors. As such, stated Davis, his purpose in entering the asset transfer agreement was to pay his creditors, not to defraud them. The jury obviously believed him; whether we or the trial judge would have is of no moment. Parker admitted at trial, via impeachment, that the asset transfer agreement was discussed in these terms, but denied that the agreement was ultimately confected for the purpose of preserving the stock’s income-generating potential for Davis. Instead, testified Parker, the two settled on an outright exchange —— Davis transferred his interests to Parker in full ownership, and Parker assumed Davis’s proportionate share of the debts incurred in the Campbell Wells acquisition. Parker would not deny, however, that he originally approached Davis with the asset transfer proposal, not vice versa; and conceded that both parties understood that any proceeds from the transferred assets were to be applied to their joint debt. Davis posits that Parker’s version of the nature of their agreement is implausible because Davis was never concerned that he might be called on to meet his own obligations as guarantor on the loans with which the Campbell Wells acquisition had been financed: The company was making more money than it needed to service its notes, so Davis had no incentive to trade his interests for the assumption of his share of the company’s debt by Parker. It appeared quite likely to all concerned that those debts would be 20 timely and fully satisfied out of the company’s earnings, and unlikely that, even if there were a default, a foreclosure sale would not produce sufficient proceeds to cover the debts and thus make unnecessary the payment of deficiencies by the shareholders under their personal guaranties. Indeed, Davis saw the venture’s profitability as a means of satisfying the debts he had incurred on other ventures as well.33 In addition to the evidence of Parker’s inducement, the district court, in refusing to render a j.m.l., relied on the fact that Parker had represented Davis in a legal capacity throughout the attempted work-out of Davis’s debts. His ex-wife, Jeanne Davis, apparently handled all the paper work associated with her husband’s finances. She testified that in connection with the work-out of Davis’s bank debt,34 Guaranty Bank had given her a blank form to use in furnishing information on Davis’s financial 33 Parker contested Davis’s characterization of his Campbell Wells stock. At trial, Parker referred to the investment as a “touch and go” concern, the success of which was far from certain. The jury was presented with ample evidence to the contrary: The financial statements for Campbell Wells indicated that, prior to its acquisition, the company had approximately $500,000 in accounts receivable and cash, and was netting approximately $90,000 per month in earnings; Parker responded affirmatively when asked whether the company was well on its way to success when the Campbell Wells deal was closed; six weeks after the purchase, the financial statements reflected shareholder equity in the amount of $1,101,554; the pro forma submitted to Guaranty Bank in conjunction with the loan application projected $2,390,000 in profit for the first full year of operation following the company’s purchase; and its five-year projection totaled $21,511,000 in profit. 34 Davis had obtained loans from the bank to finance several ventures that ultimately failed. 21 condition. She further testified that when she asked Parker whether the Campbell Wells interest should be included on the bank’s financial statement form under the heading “assets held in trust,” Parker instructed her to discard the bank’s form and gave her an alternative form that did not contain a similar entry space. She stated that Parker advised her that Davis’s Campbell Wells interests need not be included on the substituted form as the stock was not in Davis’s name and there “was nothing in writing.” Ms. Davis also testified that she considered Parker’s instruction to be legal advice, and that she felt safe in assuming that Parker would give her sound advice inasmuch as he was also an attorney for Guaranty Bank —— the institution to which the financial statement was to be submitted. Mr. Davis testified that he ratified the decision to omit his interests from the statement for the same reasons. Based on the testimony adduced at trial, the jury could reasonably have concluded that Davis relied on Parker’s counsel —— legal, business, and personal —— for the legitimacy of their mutual actions. In the light most favorable to the verdict, the evidence supports the conclusion that Parker’s advice was born out of his own self-interest —— keeping outsiders from becoming involved in the Campbell Wells venture, if nothing else —— and that he manipulated Davis to further that self-interest.35 In 35 According to Davis’s testimony, Parker took advantage of their mutual trust in dictating the nature of and circumstances 22 surrounding their transaction: Q: What confidence did you have in Mr. Parker as your attorney when you transferred your Campbell Wells interest to him on February 3rd, 1986?