The opinion of the court was delivered by: PAUL L. FRIEDMAN
On a motion to dismiss, the Court operates within the factual universe described by the complaining party. This requires that the pleader's factual allegations be taken as true and that any ambiguities be resolved in his favor. Summit Health, Ltd. v. Pinhas, 500 U.S. 322, 325, 114 L. Ed. 2d 366, 111 S. Ct. 1842 (1991); Kowal v. MCI Telecommunications Corp., 305 U.S. App. D.C. 60, 16 F.3d 1271, 1276 (D.C. Cir. 1994); Tele-Communications of Key West, Inc. v. United States, 244 U.S. App. D.C. 335, 757 F.2d 1330, 1334-35 (D.C. Cir. 1985).
According to Mr. Edde's description of the events leading up to this contentious dispute, a promise of employment by Sheikh Al-Ibrahim lured him away from his home in California during the mid 1980's. Mr. Edde found himself occupied as the Sheikh's constant companion. He alleges that the Sheikh, a frequent high stakes gambler, required Mr. Edde to accompany him on numerous visits to casinos in the United States and "insisted that Mr. Edde . . . claim credit for [Sheikh Al-Ibrahim's gambling] winnings." Counterclaim P 7. Mr. Edde admits that he signed for the Sheikh's winnings on documents that were submitted to the Internal Revenue Service. Countercl. P 7. Mr. Edde asserts that he "clearly understood that his signing for the Sheikh's gambling winnings was a condition of his employment and that if he refused to do so, he would be discharged." Countercl. P 9.
In 1991 Mr. Edde's circumstances deteriorated. Sheikh Al-Ibrahim's demands left Mr. Edde at the point of exhaustion, he began to have marital difficulties, and the IRS began to contact him about taxes due on the gambling winnings he had signed for. Countercl. PP 10-11. Mr. Edde gave notice of his resignation to Sheikh Al-Ibrahim because "he could no longer continue to work for him at such a pace," and left the Sheikh's employ in late 1991. Countercl. P 13. After leaving the Sheikh, Mr. Edde began negotiations with the IRS regarding the unpaid taxes on the gambling winnings. In August 1992, Mr. Edde reached an agreement with the IRS by which he would pay past obligations, interest and penalties on the gambling winnings he had claimed as his own. Countercl. P 14. Mr. Edde asserts that as a result of representations made by the Sheikh both during and after his employment, he understood that the Sheikh would reimburse him for his tax obligations. Countercl. PP 8, 12, 13. Mr. Edde never informed the IRS that the gambling winnings actually were won by and retained by Sheikh Al-Ibrahim. See Countercl. PP 11, 12, 14.
Mr. Edde seeks reimbursement for the taxes he paid and compensation for breach of contract, fraud and intentional infliction of emotional distress. He maintains that "to the extent Mr. Edde may have participated in an illegal act, he was not equally in the wrong with the Sheikh. Mr. Edde's payment of the Sheikh's tax obligations was solely for the benefit of the Sheikh." Countercl. P 26. Sheikh Al-Ibrahim has moved to dismiss, arguing, essentially, that Mr. Edde is a dishonorable character who should not be permitted to use the federal courts to enforce an illegal contract.
The Court heard oral argument on plaintiff's motion to dismiss the counterclaim and granted the motion on August 28, 1995. This Opinion sets forth the reasons for that decision.
A Breach of Contract Claim
Generally, a contract to perform an illegal act, such as the alleged contract between Mr. Edde and Sheikh Al-Ibrahim, is void and unenforceable. See, e.g., Lewis & Queen v. N.M. Ball Sons, 48 Cal. 2d 141, 308 P.2d 713, 719 (Cal. 1957).
The purpose of this rule is to prevent wrongdoers from using or abusing the legitimate judicial process to resolve disputes over their illegal undertakings. Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 306, 86 L. Ed. 2d 215, 105 S. Ct. 2622 (1985). Whether an action is brought in equity or at law, "neither party to an illegal contract will be aided by the court, whether to enforce it or to set it aside. If the contract is illegal, affirmative relief against it will not be granted at law or in equity . . .." United States v. Farrell, 196 U.S. App. D.C. 434, 606 F.2d 1341, 1348-49 (D.C. Cir. 1979) (quoting St. Louis R.R. v. Terre Haute R.R., 145 U.S. 393, 407-08, 36 L. Ed. 748, 12 S. Ct. 953 (1892)). The rule denying recovery is "based on public policy rather than a desire to benefit or punish either party." United States v. Farrell, 606 F.2d at 1349 (emphasis in original); see Crylon Steel Co. v. Globus, 185 F. Supp. 757, 760 (S.D.N.Y. 1960) ("where . . . a transaction is a fraud upon the public and is contrary to public policy . . . courts will leave the parties where it finds them.")
The courts of California and Nevada have recognized two exceptions to this otherwise accepted rule that fraud or illegality renders contracts unenforceable. A party who performed under an illegal contract may recover from a breaching party only if: (1) permitting relief to the non-breaching party would promote enforcement of the underlying law that led to the invalidity of the contract, or (2) denying relief would result in a harsh forfeiture when weighed against the seriousness of the illegality or the relative culpability of the parties. See Homestead Supplies v. Executive Life Insurance Co., 81 Cal. App. 3d 978, 147 Cal. Rptr. 22, 29 (Cal. Ct. App. 1978); Magill v. Lewis, 74 Nev. 381, 333 P.2d 717, 719 (Nev. 1959). Applying these principles, the Court must consider the nature and the degree of the illegality, the public policy or policies to be served by enforcing or by refusing to enforce the contract, and the relative culpability of the parties. Homestead Supplies v. Executive Life Insurance Co., 147 Cal. Rptr. at 29; Magill v. Lewis, 333 P.2d at 719; see 6A CORBIN ON CONTRACTS (1962) § 1534 (1962 and 1994 Supp.).
While not denying that his conduct was illegal, Mr. Edde argues that his conduct was not terribly serious compared with that of Sheikh Al-Ibrahim. Under a comparative culpability analysis, he contends that because the Sheikh avoided his tax obligation entirely while Mr. Edde paid the IRS, the Sheikh is the real culprit in the case. Indeed, at oral argument, counsel for Mr. Edde repeatedly argued that what Mr. Edde did was to make a "lawful payment" to the IRS. Tr. at 14. He therefore maintains that the Sheikh is the more culpable and that public policy would be served by holding the Sheikh liable in contract. He relies on Homestead Supplies and Magill v. Lewis.
Mr. Edde's characterization of this aspect of his conduct as lawful must be rejected. A United States citizen, Mr. Edde made false statements to the Internal Revenue Service in an effort to frustrate the lawful and timely collection of taxes. The fact that Mr. Edde ultimately paid the IRS does not excuse his behavior. According to the facts alleged in his own counterclaim, he broke the law.
To enforce the contract between Mr. Edde and Sheikh Al-Ibrahim would be to excuse Mr. Edde's conduct, to enforce a contract that had as its purpose the commission of illegal acts, and to permit the judicial process to be used in violation of public policy. See Dent v. Ferguson, 132 U.S. 50, 66, 33 L. Ed. 242, 10 S. Ct. 13 (1889); Maryland v. Baltimore & Ohio R.R. ...