Minnesota Court of Appeals Published Decision: Unclean Hands Not Complete Bar to Receiving Equitable Relief

On February 17, 2015, the Court of Appeals held in a published decision that “[a] district court does not abuse its discretion by granting equitable relief to a party with unclean hands if the party has purged herself of her adverse equity.” Brown v. Lee, — N.W.2d — (Minn. Ct. App. 2015).

The facts of this case are as follows: in 2005, Gordon Brown personally guaranteed the debt of Weeres Industries Corp. (“WIC”) to Peoples National Bank of Mora. Peoples made loans to WIC in 2006 and 2009.  In 2009, Judith Lee personally guaranteed Weeres Industries, Inc.’s (“WII”) debt. Peoples ultimately brought suit against “WIC a/k/a WII” and also Brown and Lee for the unpaid debt.

Eventually, all parties with the exception of Lee entered into a forbearance agreement. Lee signed a confession of judgment. Brown defaulted under the forbearance agreement. Gordon Brown then petitioned for a divorce from Judy Brown and in 2010 their marriage was dissolved—prior to when judgment was entered against Gordon Brown. The dissolution documents essentially transferred all of Gordon Brown’s assets to Judy Brown and Gordon Brown retained sole responsibility for the couple’s debts. After judgment was entered against Gordon Brown for his default on the forbearance agreement, People’s sued both Gordon and Judy Brown for fraudulent transfer. After a jury trial, the Browns were found to have violated the Minnesota Uniform Fraudulent Act and the court entered judgment against them. Judy Brown was assigned any contribution claim Gordon Brown would have had against Judith Lee.

Judy Brown sued Judith Lee alleging Lee was jointly and severally liable for one-half of the judgment amount. Lee counterclaimed for indemnification and moved for summary judgment, which was granted. Judy Brown’s contribution claim was dismissed.

In its holding, the Minnesota Supreme Court found that Judy Brown and Lee had common liability if Lee intended to guarantee the debts of WIC, but “that the evidence…creates a genuine issue of material fact whether Lee and Gordon Brown guaranteed the same debts to Peoples and, if so, whether Judy Brown paid more than a fair share of the debt.” The Court made this conclusion because Lee argued that the guarantees were for two different entities—WIC and WII.

Lastly, the Court gets to the meat of this opinion and addresses Lee’s argument that since contribution is an equitable remedy, Brown is not entitled to such a remedy because she has unclean hands.  The doctrine of unclean hands states, “a party may be denied relief where his conduct has been unconscionable either in the benefit to himself or the injury to others.” Peterson v. Holiday Rec. Industs., Inc., 726 N.W.2d 499, 505 (Minn. App. 2007)(internal citations omitted). Judy Brown stated she paid Peoples after judgment was entered against her and therefore, the Minnesota Supreme Court held it was not an abuse of discretion of the district court for it to “grant equitable relief to a party with unclean hands if the party has purged herself of her adverse equity.”

The Court also based its holding on the fact that the Court has been “reluctant to apply the unclean-hands doctrine when the party asserting it has failed to show harm resulting from the complained-of conduct” and that Lee failed to show any evidence of how Judy Brown’s unclean hands have prejudiced her. The case was reversed and remanded.