Party Asserting Unclean Hands Defense Must Have Been Injured by the Plaintiff's Misconduct

On April 7, 2021, the Second Department issued a decision in Toobian v. Golzad, 2021 NY Slip Op. 02186, holding that a party asserting an unclean hands defense must have been injured by the plaintiff's misconduct, explaining:

The doctrine of unclean hands applies when the complaining party shows that the offending party is guilty of immoral, unconscionable conduct and even then only when the conduct relied on is directly related to the subject matter in litigation and the party seeking to invoke the doctrine was injured by such conduct. Furthermore, relief is denied under the clean hands doctrine, not as a protection to a defendant, but as a disability to the plaintiff and as a matter of public policy in order to protect the integrity of the court.

Here, the evidence strongly suggests that the plaintiff sought the defendant's participation in the purchase of the subject property at least in part to avoid, shield and/or divert assets from his creditors and to use the defendant's name and credit to obtain credit for which he otherwise would not have qualified. However, the defendants have pointed to no way in which the plaintiff's apparent efforts to avoid his creditors damaged himself. While the record indicates that the plaintiff borrowed millions of dollars from the defendant, the plaintiff has not denied doing so or attempted to excuse repayment of that debt except to the extent that he claims he has repaid portions of it. Furthermore, since the interlocutory judgment referred the matter to a special referee to prepare an accounting and provided for an award, with interest, to the defendant to the extent that monies were due him, the Supreme Court properly safeguarded the defendant's interest in the plaintiff's legitimate debts to him. Accordingly, to the extent that the plaintiff had unclean hands, that did not preclude the court's imposition of a constructive trust upon the subject property.

While decisional authorities over the years contain some inconsistency on the issue of who must be damaged for there to be an invocation of the unclean hands doctrine, the overwhelming number of cases require that the damage be incurred by a party in the case seeking to invoke the defense. Many of the cited cases involve actions where the damaged party is the same as that invoking the unclean hands defense, as distinguished from nonparties. The defendants' reliance upon Festinger v Edrich (32 AD3d 412) is misplaced, as the holding there is based more on the doctrine of judicial estoppel than on the doctrine of unclean hands. Ultimately, we are bound by the language and precedent of Weiss v Mayflower Doughnut Corp. (1 NY2d at 316). In Weiss, the Court of Appeals held that a "party" must incur damage in order to invoke the doctrine of unclean hands against the plaintiff and, therefore, damage incurred by a nonparty is insufficient to invoke the doctrine.

In determining matters of equity such as unclean hands, trial justices have discretion to do what is fair, proper, and just. Here, we defer to the Supreme Court's findings of fact and conclusions of law explaining its decision to not invoke the doctrine of unclean hands against the plaintiff. The defendant was a willing participant in the plaintiff's scheme to hide assets, and as noted by the court, was not damaged by it. The court had a full opportunity to observe the parties and their evidence in a nonjury context, consider the issues presented to it, assess witness credibility, and exercise its equitable discretion as it saw best.

(Internal quotations and citations omitted) (emphasis added).

We frequently litigate disputes over the sale or leasing of commercial property. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you are involved in a dispute regarding a commercial real estate transaction.