of Housing and Urban Development, 820 F. Supp. 14, 20 (D.D.C. 1993).
Accordingly, in view of the procedural posture in which the Forest Isle matter was raised, the question before the Court next becomes whether York Associates' breach of fiduciary duty in connection with Forest Isle (and, according to the Government, in connection with Quail Run) constitutes "unclean hands" warranting denial of all relief in Civil Action No. 91-3094. It is to this issue which the Court now turns.
III. YORK ASSOCIATES' UNCLEAN HANDS WARRANT A COMPLETE DENIAL OF ANY MONETARY RELIEF IN CIVIL ACTION NO. 91-3094
The Government implores the Court to utilize its equitable powers under the Administrative Procedure Act
to deny all monetary relief to York Associates in Civil Action No. 91-3094, arguing that York Associates comes to this Court with "unclean hands" in its dealings concerning Quail Run and Forest Isle. As an alternative to denial of all relief, the Government seeks an offset of $ 795,681.00 against the damages the Court might otherwise award in Civil Action No. 91-3094.
In opposition, the York Parties argue that the improper conduct identified by the Government as grounds for precluding recovery of damages in the prior suit is not sufficiently connected to York Associates' claim in Civil Action No. 91-3094 to permit application of the unclean hands defense.
For the reasons discussed below, the Court finds that the unclean hands defense does apply to warrant denial of all relief in that case.
The Government claims that the York Parties acted improperly toward the Ginnie Mae in at least three ways, thereby warranting the denial of any monetary relief in Civil Action No. 91-3094. The Court shall focus on two of them, the first and most obvious of which is York Associates' violation of its fiduciary duty to Ginnie Mae in the two transactions at issue in this case.
Secondly, the Government asserts that York Associates breached the Sub-Contract Servicing Agreement by turning over to USGI extensive information that it had received from GNMA concerning DRG's portfolio, including loan payment status, the identities of security holders, and data regarding over 60 loans, in order to gain profits from redemptions of securities likely to prepay. The Agreement contains an express provision that York Associates received such information from GNMA "for the purpose of performing its duties under this Agreement." The fact that York Associates disclosed such information notwithstanding the language of the Agreement is also undisputed.
"The guiding doctrine . . . is the equitable maxim that 'he who comes into equity must come with clean hands.'" Precision Instrument Mfg. Co. v. Automotive Maintenance Machine Co., 324 U.S. 806, 814, 89 L. Ed. 1381, 65 S. Ct. 993 (1945). This is "a self-imposed ordinance that closes the doors of a court of equity to one tainted with inequitableness or bad faith relative to the matter in which he seeks relief, however improper may have been the behavior of the defendant." Id. Although the maxim applies "only where some unconscionable act of one coming for relief has immediate and necessary relation to the equity that he seeks in respect of the matter in litigation," courts of equity "are not bound by formula or restrained by any limitation that tends to trammel the free and just exercise of discretion." Keystone Driller Co. v. General Excavator Co., 290 U.S. 240, 245-46, 78 L. Ed. 293, 54 S. Ct. 146 (1933). Notably, the doctrine "assumes even wider and more significant proportions" when the suit in equity concerns the public interest as well as the litigants' private interests. Precision Instrument Mfg. Co., 324 U.S. at 815.
As a preliminary matter, the Court finds that the unclean hands doctrine plainly applies to bar recovery of additional insurance proceeds on the Forest Isle mortgage. "What is material is not that the plaintiff's hands are dirty, but that . . . the manner of dirtying renders inequitable the assertion of such rights against the defendant." Republic Molding Corp. v. B.W. Photo Utilities, 319 F.2d 347, 349 (9th Cir. 1963). With respect to Forest Isle, the York Parties used their superior knowledge and control over the Forest Isle loan to ensure themselves a tidy profit in the purchase and redemption of the Forest Isle security. In turn, York Associates now stands before the Court in Civil Action No. 91-3094 seeking further insurance proceeds from the United States on that same loan, where it had filed the claim for coinsurance on the loan only after purchasing the Forest Isle security, thereby ensuring themselves a premium on the redemption.
In light of this breach of fiduciary duty, the Court finds that York Associates cannot as a matter of equity recover the further sums it seeks as additional insurance proceeds on the Forest Isle loan.
The question remains, however, whether York Associates' improper conduct warrants denial of all relief sought in Civil Action No. 91-3094, as opposed to a mere offset of the profits gleaned from the purchase and redemption of the Forest Isle security. The Government argues that York Associates' improper disclosure to USGI of data regarding 60 DRG loans (as part of an "arrangement" to usurp valuable securities prior to redemption) is directly related to its prayer in Civil Action No. 91-3094 that the Court award additional insurance proceeds on a number of those same loans.
The York Parties argue, on the other hand, that there is no direct relationship between the equity York Associates seeks in Civil Action No. 91-3094 and the conduct challenged by the Government in this case.
In the exercise of its equitable discretion, the Court finds that there is a sufficient nexus between York Associates' conduct in connection with Forest Isle, Quail Run, and 60 other DRG loans to warrant denial of all relief in Civil Action No. 91-3094. As set forth above, under Keystone Driller Co. and like cases, "the wrong which may be involved to defeat the suit must have an immediate and necessary relation to the equity which the complainant seeks to enforce against the defendant." NLRB v. Fickett-Brown Mfg. Co, 140 F.2d 883, 884 (5th Cir. 1944). See also Mitchell Bros. Film Group v. Cinema Adult Theater, 604 F.2d 852, 863 (5th Cir. 1979), cert. denied, 445 U.S. 917, 63 L. Ed. 2d 601, 100 S. Ct. 1277 (1980); Pierce v. Apple Valley, Jr., 597 F. Supp. 1480, 1485 (S.D. Ohio 1984). The Court finds such a relation here, bearing in mind the Supreme Court's emphasis in Keystone Driller Co. that courts of equity are not limited by formula in their just discretion to apply the doctrine. Keystone Driller Co., 290 U.S. at 245-46.
In light of the broad discretion afforded courts of equity under Keystone Driller Co., the Court declines to hold -- as the York Parties apparently would have it -- that it may only invoke the unclean hands doctrine if the improper conduct were precisely related to the calculation of insurance proceeds on the twenty loans involved in Civil Action No. 91-3094. The equitable doctrine is not so restrictive. Rather, the rule "denies relief if the granting of the relief asked will, because of the complained of activities of the litigant, produce an illegal or unjust result." Fickett-Brown Mfg. Co., 140 F.2d at 884. Here, the York Parties' conduct was antithetical to the very purpose of the Ginnie Mae mortgage-backed securities program, and the Court shall not use its equitable discretion to award York Associates additional insurance proceeds on loans the majority of which the York Parties' impropriety implicated. This is particularly so given the fact that, prior to filing Civil Action No. 91-3094, York Associates already received full insurance payments from HUD on the defaulted loans, and now merely seeks further interest on those payments, which they had received in cash. See generally York Associates, Inc. v. Secretary of Housing and Urban Development, 820 F. Supp. 14, 16 (D.D.C. 1993).
In any event, the Court finds that the misconduct identified by the Government has a sufficient nexus to the relief sought by York Associates for the unclean hands doctrine to apply. York Associates' disclosure of loan servicing information in apparent furtherance of a scheme to locate and usurp redemption premiums is directly related to its attempt to maximize its insurance recoveries on those very same loans, one of which was Forest Isle. Moreover, while York Associates ultimately seeks further relief in the prior action by virtue of its status as a coinsuring lender and issuer (and thus an agent) of Ginnie Mae, it is this same agency relationship which York Associates violated in its dealings with Forest Isle and, under the Sub-Contract Servicing Agreement governing a number of the loans for which it now seeks further relief, in its dealings with Quail Run. Denying recovery of additional insurance benefits on these loans is not "punishment for extraneous transgressions, but instead is based upon 'considerations that make for the advancement of right and justice.'" Republic Molding Corp., 319 F.2d at 349 (quoting Keystone Driller Co., 290 U.S. at 245)).
Furthermore, it is of no import that York Associates did not disclose servicing information for all the loans involved in Civil Action No. 91-3094 or, for that matter, succeed in purchasing and redeeming each corresponding security at a premium. In Keystone Driller Co., the Supreme Court upheld the district court's application of the unclean hands doctrine to nullify five patents where the plaintiff's improper conduct (inducing an individual who knew about a defect in one of the patents to conceal his knowledge) involved only one of the five patents. Keystone Driller Co., 290 U.S. at 245-46. As the Ninth Circuit later explained, a court applying the unclean hands doctrine "must weigh the substance of the right asserted by the plaintiff against the transgression which, it is contended, serves to foreclose that right. The relative extent of each party's wrong upon the other and upon the public should be taken into account and an equitable balance struck." Republic Molding Corp., 319 F.2d at 347.
In the instant case, that balance is squarely struck in favor of the Government, particularly as a suit implicating the doctrine "assumes even wider and more significant proportions" where, as here, it involves the public interest. Precision Instrument Mfg. Co., 324 U.S. at 815. Accordingly, the Court finds that York Associates shall not recover any further relief in Civil Action No. 91-3094 in light of its breach of fiduciary duty and other improper conduct towards Ginnie Mae.
For the foregoing reasons, the Court finds in this case (Civil Action No. 93-839) that the Government's Motion for Summary Judgment shall be granted, and the Defendants' Motions for Summary Judgment Dismissing the Counterclaim in Civil Action No. 91-3094 and the instant Complaint, for Summary Judgment Dismissing the Government's Defenses, and for Further Relief Pursuant to the Court's prior Declaratory Judgment shall be denied. The Court shall issue an Order of even date herewith consistent with this Opinion.
Judgment at this time shall be entered in favor of the Government in the amount of $ 5,874,531.87, a sum reflecting the fees York Associates received under the Sub-Contract Servicing Agreement it had with Ginnie Mae. The Court shall further direct each side to submit to the Court a Declaration in support of their respective views of the correct calculation of the profits the York Parties unlawfully obtained in their purchase and redemption of the Quail Run security, and the Court shall thereafter make a determination as to the proper amount and enter an amended Judgment therefor, plus costs.
May 30, 1995
CHARLES R. RICHEY
UNITED STATES DISTRICT JUDGE
For the reasons set forth in the Court's Memorandum Opinion of even date herewith, it is, by the Court, this 30 day of May, 1995,
ORDERED that the Plaintiffs' Motion for Summary Judgment shall be, and hereby is, GRANTED, as hereinafter provided; and it is
FURTHER ORDERED that Counterdefendant York Associates' Motions for (1) Summary Judgment Dismissing Counterclaim and Complaint, (2) Summary Judgment Dismissing Defenses, and (3) Further Relief Pursuant to Declaratory Judgment shall be, and hereby are, DENIED; and it is
FURTHER ORDERED that Judgment shall be, and hereby is, ENTERED in favor of the Plaintiffs and against Counterdefendant York Associates, Defendant John C. York, Defendant First Commonwealth Savings Bank, and Defendant USGI, Inc., jointly and serverally, in the amount of $ 5,874,531.87, representing the fees paid York Associates under the Sub-Contract Servicing Agreement; and it is
FURTHER ORDERED that, in view of the dispute between the parties as to the amount of profits obtained by the York Parties on the Quail Run transaction, i.e., the difference between the price at which USGI first purchased the Quail Run security and the price at which it was redeemed (the Plaintiffs represent that the proper amount is $ 508,770.86 while the York Parties represent that the proper amount is $ 455,620.00), each side shall submit to the Court a Declaration in support of their position on or before 4:00 p.m. on June 16, 1995 and, thereafter, the Court shall make a determination based on said Declarations as to the proper amount of profits obtained on the Quail Run transaction and enter an amended Judgment therefor in favor of the Plaintiffs, plus costs, in addition to the sum specified in the above-Ordered paragraph herein; and it is
FURTHER ORDERED that any and all Motions or pleadings herein shall be, and hereby are, rendered and declared MOOT, and the case shall stand dismissed, without prejudice, from the dockets of this Court. However, each side may submit the aforementioned Declarations on or before 4:00 p.m. on June 16, 1995, for a determination of profits obtained on the Quail Run transaction and entry of an amended Judgment.
CHARLES R. RICHEY
UNITED STATES DISTRICT JUDGE