Opinion ID: 1268078
Heading Depth: 1
Heading Rank: 4

Heading: The 25% matter; whose testimony should be believed?

Text: As has been stated, Shinn's share in the profits was fixed at 37½% at the April 26, 1966 meeting. [4] At this April meeting the parties were in agreement that there was only 75% to be divided, but there was a conflict in the evidence as to why this was so. On one view of the evidence the clean hands maxim was applicable. This matter was not pursued in the trial court, as the defendants did not raise it there nor did the court raise it of its own motion. A direction for determination of the applicability of the clean hands maxim should be included in the remand for further fact determination which in my judgment must issue. Dr. Shinn testified that all through the year of 1966 was the most difficult year in the history of the United States ... that means Hawaii, too, ... to raise mortgage money. Yee assured him at one of their early meetings that he had both interim financing and take-out money for the project from Island Federal Savings and Loan Association. During a conversation in the month of January 1966, Shinn testified, Yee told him that it had been arranged with Cliff Krueger, the president of Island Federal, that 25 per cent interest in the building will be given away underneath the table. According to Shinn's testimony, he hotly refused to go along with the arrangement, telling Yee: Just forget about it. I don't want to be [a] partner. I don't want any money to go underneath the table. Yee's reply, according to Shinn, was Cool, cool. We'll drop the subject. Shinn further testified he never heard about the 25% again until the later negotiations, which as noted above commenced April 26, 1966. I went for 50-50 or none at all... . Yee testified he never said that 25% of the profits was to go to Cliff Krueger, and never made such an arrangement. According to Yee, from the very beginning his arrangement with Shinn was that 75% of the profits would be shared between them. I said to Dr. Shinn that the 25% is committed to people who are helping in the project and helping in the financing, and Dr. Shinn said okay. Yee never told Dr. Shinn to whom I was going to give the 25 percent, just someone else for help with the sales and financing. What he had in mind, he testified, was division of this 25% among associates and relatives who regularly helped him with his projects. He explained the practice of having nominees who act as apartment buyers, saying this was the kind of help in securing financing he had in mind. Cliff Krueger, called as a witness at the first trial, [5] testified on October 30, 1969 that he made no arrangements or a 25% kickback for arranging financing for Kahala Towers. He was not a witness at the second trial. [6] Upon argument in this court, we were assured that no kickback was paid. The trial court made a similar inquiry and received the same answer. Shinn would not admit that he ultimately agreed to the 25% payment even though his memory was refreshed by calling to his attention his testimony at the first trial. The evidence that he did so agree consists in his signature on Exhibit 4, the pertinent provisions of which are reviewed below, and the testimony of his attorney, Genro Kashiwa, who on April 26, 1966 was present at the negotiations for the first time. Kashiwa testified he had never heard of this 25% matter before. It was one of two things that were really different from what Shinn had told him. Instead of a 50-50 joint venture, at this meeting they say it's 37½, and we discussed why it was 37½. The testimony continues: And the reason was that Dr. Shinn was to get one half of 75 per cent of the profits, and I found out that the 25 per cent of the profits was supposed to go to the person who arranged to get the mortgage financing ... a 6.8 million mortgage loan commitment... . And, therefore, the only thing remaining to be split between the two partners was 75 per cent, and 37½ per cent is 50 per cent of 75 per cent. He further testified as to the person who would receive the 25%: And we understood that this was not Edwin Yee or his brothers or anybody else, but we understood that to be Mr. Cliff Krueger of Island Federal. Kashiwa advised Shinn to go along with this plan, and testified that Shinn ultimately agreed on the understanding that the 25 per cent would go to Cliff Krueger or somebody else for obtaining the mortgage loan commitment. And it was made  And that's what I clarified in my letter ..., referring to Paragraph 5 of Exhibit 4 which read: 5. It is understood that 25% of profits has been committed to third party or parties other than Edwin Yee, Edwin Yee, Ltd. or any other corporation that Edwin Yee or his relative and associates are connected with or have any interest in, as consideration for obtaining financing for the project; that the total profit to Shinn and Yee shall not in any event be less than 75% of the profits of the project; and that Edwin Yee's profits and advantages shall not in any way, directly or indirectly exceed 37½%. Kashiwa's testimony continued: Q... . Now, nowhere in this provision does it state that this 25 per cent is going to Mr. Cliff Krueger, does it? A. No, it doesn't state that... . ...... A. I didn't think it was appropriate to use his name. Q. You were informed that this was to go to Mr. Krueger? A. Yes. Q. Specifically Mr. Krueger? A. Yes. Exhibit 3 had contained nothing as to the disposition of the 25%, merely showing that there was 75% to be divided between the parties. On its face, this gave considerable leeway to Yee, the managing partner, as to the disposition of the remaining 25%, and if this truly represented what was agreed at the April 26, 1966 meeting and Yee's other testimony were believed, no question of clean hands was involved. On the other hand, if Shinn's and Kashiwa's testimony were believed and paragraph 5 of Exhibit 4 more nearly represented what was agreed at the April 26, 1966 meeting, the real intent being that 25% of the profits should be paid to the president of Island Federal as a reward for the loan commitment, Shinn would be out of court under the clean hands maxim. Illegality, if of a serious nature, need not be pleaded. If it appears in evidence the court of its own motion will deny relief to the plaintiff. The defendant cannot waive the defense if he wishes to do so. Indeed, if the court suspects illegality, it may examine witnesses and develop facts not brought out by the parties, and thereby establish illegality that precludes recovery by the plaintiff... . Restatement of Contracts § 600, Comment a; Sinnar v. Le Roy, 44 Wash.2d 728, 270 P.2d 800 (1954). If the issue of illegality has not been pursued in the trial court, the appellate court may itself raise the issue and remand for findings on the point, Waring v. Lobdell, 63 Wash.2d 532, 387 P.2d 979 [7] (1964), or if further findings are not necessary, the appellate court may order the case dismissed though the issue of illegality was not raised in the trial court. Gaudiosi v. Mellon, 269 F.2d 873 (3d Cir.1959); Primeau v. Granfield, 193 F. 911 (2d Cir.1911); Armstrong v. Gresham, 73 Colo. 13, 213 P. 114 (1923). Quoting from Gaudiosi v. Mellon, supra : Courts are concerned primarily with their own integrity in the application of the clean hands maxim and even though not raised by the parties the court will of its own motion apply it. (p. 881) This court has said: The application of the maxim of `clean hands' is not in protection or vindication of rights of parties but a salutary guide of the conscience of the chancellor. The right to apply the maxim does not depend upon the state of the pleadings. It is inherent in the court. Young v. Wo, 36 Haw. 676, 685 (1944). As stated by Lord Mansfield in the much quoted case of Holman v. Johnson, 1 Cowper 341, 343, 98 Eng.Rep. 1120, 1121 (1775): The objection, that a contract is immoral or illegal as between plaintiff and defendant, sounds at all times very ill in the mouth of the defendant. It is not for his sake, however, that the objection is ever allowed; but it is founded in general principles of policy, which the defendant has the advantage of, contrary to the real justice, as between him and the plaintiff, by accident, if I may say so... . That a plaintiff is able to make a good case for relief without alleging or proving the illegality will not save his case when the evidence shows a hidden corrupt purpose. Sinnar v. Le Roy, supra, 44 Wash.2d 728, 270 P.2d 800 (1954); Corbin on Contracts, Vol. 6A, §§ 1460, 1533. The court will act in accordance with the realities of the situation, not confining itself to technicalities as to the exact provisions of the contract between the parties but instead taking into account any resultant fraud upon third parties. Baccioces v. Transamerica Corp., 2 Cal. App.2d 595, 38 P.2d 417, 418 (1934); Kaiser-Frazer Corp. v. Otis & Co., 195 F.2d 838 (2d Cir.1952). Here, if the testimony of Shinn and Kashiwa is believed, Shinn, practically from the beginning of the negotiations, understood that the vital construction loan for the project had been obtained by commercial bribery. [8] Whether or not in violation of the penal law of the state, commercial bribery is regarded as being of a heinous character. McConnell v. Commonwealth Pictures, 7 N.Y.2d 465, 166 N.E.2d 494, 199 N.Y.S.2d 483, 487 (1960), followed in Colyvas v. Red Hand Compositions Co., 318 F. Supp. 1376 (S.D.N.Y. 1970). If a bank official receives a bonus for making a loan, it is a fraud upon the stockholders. Fleishacker v. Blum, 109 F.2d 543 (9th Cir.1940). When Shinn, according to Kashiwa's testimony, agreed that Krueger should be paid 25% of the profits, he did so knowing that the front money for which he was committing himself would bring to fruition the loan which he had been informed was illegally obtained. He understood also that if all went as hoped this would culminate in the payoff from profits to which he had agreed, with 37½% of the profits going to himself. The exact date of the loan commitment has no bearing. One who acquires rights in the fruits of a wrong already committed cannot excuse himself on that ground when he has acted affirmatively to magnify and increase its effects. Precision Instrument Manufacturing Co. v. Automatic Maintenance Machinery Co., 324 U.S. 806, 819, 65 S.Ct. 993, 89 L.Ed. 1381 (1945). Nor does it matter that it was Yee who obtained the loan. Even if Shinn had no wrongful purpose of his own, he can maintain no action for breach if he does any act in furtherance of the other party's wrongful purpose. Corbin on Contracts, Vol. 6A, § 1518, p. 747; Restatement of the Law of Contracts, Vol. II, § 602(2); Sherwood & Roberts-Yakima, Inc. v. Leach, 67 Wash.2d 630, 409 P.2d 160 (1965); Paul Jones & Co. v. Wilkins, 135 Tenn. 146, 185 S.W. 1074 (1916); Aiken v. Blaisdell, 41 Vt. 655, 668 (1869). Though the actions of the defendant, as depicted by Shinn and Kashiwa, were more reprehensible than those of plaintiff, this is immaterial when public policy requires the assertion of the clean hands maxim because of the seriousness of the illegality involved. Precision Instrument Manufacturing Co. v. Automatic Maintenance Machinery Co., supra, 324 U.S. 806, 814, 65 S.Ct. 993, 89 L.Ed. 1381 (1945). In respect to offenses in which is involved any moral delinquency or turpitude, all parties are deemed equally guilty, and courts will not inquire into their relative guilt. Lowell v. The Boston and Lowell Rail Road Corp., 40 Mass. (23 Pick.) 24, 32 (1839). Nor is plaintiff in the clear just because defendant denies that any wrong occurred. Young v. Wo, supra, 36 Haw. 676, 681 (1944). And the result would not be affected though the court found that no kickback ever was promised Krueger, if Shinn and Kashiwa understood that it was and agreed that 25% of the profits should be reserved for that purpose. Kuehnert v. Texstar Corporation, 412 F.2d 700, 703-704 (5th Cir.1969); Bishop v. Bishop, 257 F.2d 495, 501 (3d Cir.1958). Furthermore, the fact that the immoral purpose was not consummated has no bearing. Hyde Park Amusement Co. v. Mogler, 358 Mo. 336, 214 S.W.2d 541 (1948); Young v. Hampton, 36 Cal.2d 799, 228 P.2d 1, 5 (1951); Belling v. Croter, 57 Cal. App.2d 296, 134 P.2d 532 (1943). If Shinn's and Kashiwa's testimony is believed, this case calls for application of the rule that the court will not serve as referee in an accounting between coconspirators. James v. Du Breuil, 500 F.2d 155, 160 (5th Cir.1974); Morrison v. Bennett, 20 Mont. 560, 52 P. 553, 557 (1898); Primeau v. Granfield, supra, 193 F. 911 (2d Cir.1911). See also the following cases, involving suits by an inactive partner, who nevertheless is aware of the illegality, against the active partner. Tucker v. Binenstock, 310 P. 254, 165 A. 247 (1933); Vaszaukus v. Vaszaukus, 115 Conn. 418, 161 A. 856 (1932). Accordingly, I would reverse and remand for further proceedings.