In what circumstances will the court apply the unclean hands doctrine?

Defendant's argument against the validity of the injunction is based entirely on defendant's contention that plaintiff cannot have such relief since plaintiff itself is in violation of section 101-b of the Alcoholic Beverage Control Law which was upheld by this court in Seagram & Sons v. Hostetter (16 N.Y.2d 47, 262 N.Y.S.2d 75, 209 N.E.2d 701, supra, probable jurisdiction noted, 382 U.S. 924, 36 S.Ct. 316, 15 L.Ed.2d 338, Nov. 23, 1965). Seemingly, this argument represents an attempt to bring into the case the equitable rule or maxim that 'he who comes into equity must come with clean hands'. We hold that this doctrine, whatever may be the limits of its vague coverage, cannot apply here and this for a number of reasons. In the first place it is never used unless the plaintiff is guilty of immoral, unconscionable conduct and even then only 'when the conduct relied on is directly related to the subject matter in [17 N.Y.2d 16] litigation and the party seeking to invoke the doctrine was injured by such conduct. Green v. Le Beau, 281 App.Div. 836, (118 N.Y.S.2d 585); 2 Pomeroy on Equity Jurisprudence (5th Ed.), § 399, p. 99.' (Weiss v. Mayflower Doughnut Corp., 1 N.Y.2d 310, 316, 152 N.Y.S.2d 471, 474, 135 N.E.2d 208 210; see 32 Boston U.L.R.ev. 66 et seq.). Plaintiff is committing no wrong at all since it is merely proceeding under a statute which authorizes the granting to it of injunctive relief in just such a situation as this the violation of a subsisting fair trade agreement. As to relation to the 'subject matter in litigation' we point out that defendant's wrong is in the deliberate violation of a fair trade agreement as to certain brands of [214 N.E.2d 363] intoxicating liquor while all the defendant accuses plaintiff of is a failure to lower its New York sale prices to wholesalers under a statute which is concededly not now in effect.

"In the absence of prejudice or surprise to the opposing party, leave to amend a pleading should be freely granted unless the proposed amendment is palpably insufficient or patently devoid of merit" (Markowits v. Friedman, 144 A.D.3d 993, 995, 42 N.Y.S.3d 218; see CPLR 3025[b]; Yong Soon Oh v. Hua Jin, 124 A.D.3d 639, 640, 1 N.Y.S.3d 307 ). Here, the defendants' proposed affirmative defense of unclean hands, based on the plaintiff's issuance of two Form 1099–C's with respect to the forgiveness of the subordinate mortgage, was patently devoid of merit. "The doctrine of unclean

[186 A.D.3d 1489]

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" (Kopsidas v. Krokos, 294 A.D.2d 406, 407, 742 N.Y.S.2d 342 [internal quotation marks omitted]; see Ortiz v. Silver Invs., 165 A.D.3d 1156, 87 N.Y.S.3d 50 ). Although the plaintiff concedes that it need not have issued a Form 1099–C to each of the defendants (see 26 CFR 1.6050P–1 [e][1]), in support of their cross motion, the defendants offered nothing to substantiate their claim that, by doing so, the plaintiff effectively doubled their tax liability with respect to the forgiven mortgage debt. In any event, the defendants failed to demonstrate that such an unwarranted tax liability would have been directly related to the consolidated mortgage at issue in this foreclosure action. Also without merit is the defendants' contention that the plaintiff's alleged misapplication of their payment in the sum of $31,242.30 constituted immoral, unconscionable conduct for purposes of the doctrine of unclean hands.

Mouyios' motion was properly denied. Reliance upon the doctrine of unclean hands is applicable 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" (Mehlman v Avrech, 146 AD2d 753, 754 [1989]; see Rooney v Slomowitz, 11 AD3d 864, 868 [2004]). To charge a party with unclean hands, it must be shown that said party was "guilty of immoral or unconscionable conduct directly related to the subject matter" (Frymer v Bell, 99 AD2d 91, 96 [1984]). Here, the fraudulent transfer issue was separate from the original litigation commenced by Citibank, and there was nothing in the record to suggest that the settlement agreement between Citibank and the family members of Demetrios Contos was illegal, inequitable or barred by a contract right (see e.g. Sparkling Waters Lakefront Assn., Inc. v Shaw, 42 AD3d 801, 804 [2007]). Furthermore, Mouyios' argument for apportionment of liability based on common-law contribution is not compelling as the Contos family members who settled the fraudulent transfer action were not debtors on the Citibank credit line.

It is suggested, nevertheless, that moral considerations of fundamental importance require a different result in this case. The short answer, given at Trial Term (per LIVOTI, J.), is that equity is not an avenger at large (2 Pomeroy, Equity Jurisprudence, § 399; Rice v. Rockefeller, 134 N.Y. 174, 187, 31 N.E. 907, 911, 17 L.R.A. 237). Conceding that the relief sought in this case is of equitable [13 N.Y.2d 287] origin the maxim must be applied only where the plaintiff has dealt unjustly in the very transaction of which he complains. It must also be remembered, as we are reminded by the late Professor Zecharish Chafee, that moral indignation against the plaintiff must operate, not in a vacuum, but in harmony with other important purposes and functions of the substantive law involved. [...]

"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" (Citimortgage, Inc. v. Heyman, 186 A.D.3d 1487, 1488–1489, 131 N.Y.S.3d 95 [internal quotation marks omitted]; see Ortiz v. Silver Invs., 165 A.D.3d 1156, 1157, 87 N.Y.S.3d 50). Furthermore, "[r]elief 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" (Farino v. Farino, 88 A.D.2d 902, 903, 450 N.Y.S.2d 593, quoting Reiner v. North Am. Newspaper Alliance, 259 N.Y. 250, 256, 181 N.E. 561 ).

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

[148 N.Y.S.3d 120]

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 (see National Distillers & Chem. Corp. v. Seyopp Corp., 17 N.Y.2d 12, 15–16, 267 N.Y.S.2d 193, 214 N.E.2d 361 ; Weiss v. Mayflower Doughnut Corp., 1 N.Y.2d 310, 316, 152 N.Y.S.2d 471, 135 N.E.2d 208; Ortiz v. Silver Invs., 165 A.D.3d at 1157, 87 N.Y.S.3d 50; Lucia v. Goldman, 145 A.D.3d 767, 769, 44 N.Y.S.3d 89; Abdel–Qader v. Abdel–Qader, 79 A.D.3d 674, 911 N.Y.S.2d 910; Jara v. Strong Steel Door, Inc., 58 A.D.3d 600, 602, 871 N.Y.S.2d 363; Columbo v. Columbo, 50 A.D.3d 617, 619, 856 N.Y.S.2d 159; Fade v. Pugliani/Fade, 8 A.D.3d 612, 614, 779 N.Y.S.2d 568; Kopsidas v. Krokos, 294 A.D.2d 406, 407, 742 N.Y.S.2d 342; Moo Wei Wong v. Wong, 293 A.D.2d 387, 740 N.Y.S.2d 614 ; Welch v. DiBlasi, 289 A.D.2d 964, 737 N.Y.S.2d 716; Zimberg v. Zimberg, 268 A.D.2d 232, 700 N.Y.S.2d 473; Langdon v. Langdon, 138 A.D.2d 358, 525 N.Y.S.2d 649; Higgins v. Normile, 130 A.D.2d 828, 829, 515 N.Y.S.2d 148; Frymer v. Bell, 99 A.D.2d 91, 96, 472 N.Y.S.2d 622; Agati v. Agati, 92 A.D.2d 737, 461 N.Y.S.2d 95, affd 59 N.Y.2d 830, 464 N.Y.S.2d 743, 451 N.E.2d 490; but see Walker v. Walker, 289 A.D.2d 225, 734 N.Y.S.2d 470; Jossel v. Meyers, 212 A.D.2d 55, 57–58, 629 N.Y.S.2d 9). 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 A.D.3d 412, 820 N.Y.S.2d 302 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 N.Y.2d at 316, 152 N.Y.S.2d 471, 135 N.E.2d 208. 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 (id.).

The plaintiff's contention that the Supreme Court erred in granting the equitable relief of vacatur of the judgment of foreclosure and sale at issue because the movant had unclean hands is without merit. The doctrine of unclean hands is used only to bar the grant of equitable relief to a party who 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 (Green v. Le Beau, 281 App. Div. 836, 118 N.Y.S.2d 585; 2 Pomeroy on Equity Jurisprudence [5th ed.], § 399, p. 99)’ ( Weiss v. Mayflower Doughnut Corp., 1 N.Y.2d 310, 316, 152 N.Y.S.2d 471, 135 N.E.2d 208; see 32 Boston U.L.Rev. 66 et seq.)” (National Distillers & Chem. Corp. v. Seyopp Corp., 17 N.Y.2d 12, 15–16, 267 N.Y.S.2d 193, 214 N.E.2d 361; see Gilpin v. Oswego Bldrs., Inc., 87 A.D.3d 1396, 1399, 930 N.Y.S.2d 120; Columbo v. Columbo, 50 A.D.3d 617, 619, 856 N.Y.S.2d 159). “It is a well-settled exception to the unclean hands doctrine that one who, although at fault, is not equally at fault, will not be denied equitable relief (see Miseveth v. Pribishuk, 85 N.Y.S.2d 595)” (Dillon v. Dean, 158 A.D.2d 579, 580, 551 N.Y.S.2d 547).

Here, the evidence presented at the hearing held before the referee supports the Supreme Court's finding that while the defendant cannot claim to be completely blameless, he was less culpable in the fraudulent transaction than the plaintiff's assignor. Further, the plaintiff's assignor also was significantly more sophisticated than the defendant. We therefore decline to find that the defendant was barred from seeking vacatur of the judgment of foreclosure and sale by the doctrine of unclean hands (see Janke v. Janke, 47 A.D.2d 445, 450, 366 N.Y.S.2d 910, affd. 39 N.Y.2d 786, 385 N.Y.S.2d 286, 350 N.E.2d 617).

Ample evidence supports the trial court's finding that

[24 A.D.3d 190]

defendants-appellants breached the subject contract by failing to make the $1.5 million payment to plaintiff on September 30, 1997. Although the contract consisted of two agreements, a Sale Agreement and a Commission Agreement, it is clear that the $1.5 million payment set forth in the Commission Agreement was in fact part of the purchase price, where the purchase price for plaintiff's 44 condominiums was $4.7 million but the Sale Agreement accounted for only $3.2 million. The doctrine of unclean hands does not avail defendants notwithstanding that plaintiff's principal initiated the transaction in order to avoid a temporary restraining order barring a transfer of the property pending his divorce action. The doctrine of unclean hands is an equitable defense that is unavailable in an action exclusively for damages (see Hasbro Bradley v. Coopers & Lybrand, 128 AD2d 218, 220 [1987], lv dismissed 70 NY2d 927 [1987]). Also, defendants were willing wrongdoers (see Brown v. Lockwood, 76 AD2d 721, 729 [1980]). With knowledge of the restraining order, and with the full expectation that the transaction could result in litigation against them by plaintiff's principal's wife, defendants designed a transaction that violated the restraining order. Nor does Real Property Law § 442-d, which prohibits recovery of a real estate broker's commission by brokers who are not licensed in New York, avail defendants. First, as above indicated, the $1.5 million payment was not compensation for real estate brokerage services, but was rather part of the purchase price. Second, section 442-d does not apply to real estate brokerage services rendered outside of New York (see Gartrell v. Jennings, 283 App Div 879 [1954]; Sutton v. Transcontinental Inv. Corp., 31 Misc 2d 832 [1961], affd 17 AD2d 807 [1962]). The evidence at trial established that plaintiff, a Japanese corporation, performed services only in Japan, and thus it is inconsequential that the property marketed was in New York. Ample evidence also supports the trial court's piercing of the corporate defendants' corporate veils in order to hold defendant Suzuki personally liable. Suzuki dominated and controlled his corporations, disregarded corporate formalities, used corporate funds to pay his personal bills, and effectively stripped the assets of the corporation transferred to him by plaintiff to enrich himself while making the corporation judgment proof, thus committing a wrong against plaintiff that resulted in injury (see Simplicity Pattern Co. v. Miami Tru-Color Off-Set Serv., 210 AD2d 24 [1994]). We have considered defendants-appellants' remaining arguments, as well as the arguments raised by plaintiff in its cross appeal, and find them to be without merit.

Defendants' principal defense is predicated upon the doctrine of equitable estoppel, which may be established by extrinsic evidence despite the existence of a written contract (see, Hoffman v. Brokers' Marketplace, 105 A.D.2d 1082, 1083, 482 N.Y.S.2d 602). To establish this defense defendants relied on the affidavit of defendant Jerome Terracino, who averred that the promissory note was supposed to be payable in two years rather than one year. Allegedly, when he raised this point at the closing, a bank officer

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told him not to be concerned because the note would be renewed at the end of the year under the same terms. Relying on this assurance defendants completed the transaction, purportedly to their detriment because the note was not renewed. This proof falls short of establishing an equitable estoppel defense because it is devoid of any facts explaining how defendants prejudicially changed their position in reliance upon plaintiff's assurances (see, Nassau Trust Co. v. Montrose Concrete Prods. Corp., 56 N.Y.2d 175, 184, 451 N.Y.S.2d 663, 436 N.E.2d 1265; Dimacopoulos v. Consort Dev. Corp., 166 A.D.2d 631, 632, 561 N.Y.S.2d 59; Chadirjian v. Kanian, 123 A.D.2d 596, 506 N.Y.S.2d 880).

Inasmuch as plaintiff was not contractually obligated to extend the loan for another year, the defense that it breached the implied duty of good faith and fair dealing lacks merit. The defense of unclean hands also lacks merit due to defendants' failure to come forward with admissible evidence showing that plaintiff's conduct was immoral or unconscionable (see, National Distillers & Chem. Corp. v. Seyopp Corp., 17 N.Y.2d 12, 15, 267 N.Y.S.2d 193, 214 N.E.2d 361; City of New York v. Corwen, 164 A.D.2d 212, 218, 565 N.Y.S.2d 457).