Appendix — American Insurance v. Scheufler

50 SUMMARY OF POINTS DISCUSSED

Vil. The “unclean hands” rule (which the three-

Judge Court applied adversely to the 139 Companies)

cannot bar them from their right to a decision on the

merits with respect to the 16-2/3% Rate Increase (p.

122, infra), because:

(1) All facts connected with the Street-Pendergast-

O’Mailey fraud—and ali facts of which the three-Judge

Court held the 139 Companies had “implied” knowledge

—(a) occurred five years after the 139 Companies filed

their suits in the Federal Court asking equitable relief,

and (b) have no relationship whatever to the 139 Com-

panies’ asserted right to a 16-2/3% Rate Increase (1930-

1935), and to the impounded funds representing that

increase;

(2) The “unclean hands” doctrine does not destroy

the plaintiffs’ [139 Companies’] right to the equitable

relief prayed for in their Bills in Equity, where the al-

leged (but denied) fraudulent conduct (a) happened

after the beginning of the litigation, and (b) is not re-

quired by the plaintiffs as an aid to the establishment of

their original claim to equitable relief.

In Re Meyerfeld, 46 F. (2d) 665.

Shaver v. Heller & Merz Company, 108 F. 821

(i. G, AS).

Smith v. Ajax Pipe Line Co., 87 F. (2d) 567, 568

(C. C. A. 8th).

Olsness v. Home Ins. Co., 14 F. (2d) 907 xaos

A. 8th).

Keystone Driller Co. v. General Excavator Co., 290

U. S. 240.

Primeau v. Garfield, 193 F. 911.

Vill. The “unclean hands” doctrine has no ap-

plication here, because in these proceedings, as

defined by the three-Judge Court, the 139 Companies

are actually defendants (p. 129, infra).

Shoe Co. v. Wyble, 261 Mo. 675.

Rude v. Buckhalter, 54 F. (2d) 834.

122 PoINnT SEVEN—“UNCLEAN HANDS” RULE INAPPL ICABLE

SEVENTH POINT.

The “unclean hands” rule (which the three-Judge

Court applied adversely to the 139 Companies) cannot

bar them from their right to a decision on the merits

with respect to the 16-2/3% Rate Increase, because:

(1) All facts connected with the Street-Pendergast-

O'Malley fraud—and all facts of which the three-Judge

Court held the 139 Companies had “implied” knowledge

—(a) occurred five years after the 139 Companies filed

their suits in the Federal Court asking equitable relief,

and (b) have no relationship whatever to the 139 Com-

panies’ s’ asserted right to a 16-2/3% Rate Increase (1930-

1935), and to the impounded funds representing that

increase;

(2) The “unclean hands” doctrine does not destroy

the plaintiffs’ [139 Companies’] right to the equitable

relief prayed for in their Bills in Equity, where the al-

leged (but denied) fraudulent conduct ( a) happened

after the beginning of the litigation, and (b) is not re-

quired by the plaintiffs as an aid to the establishment of

their original claim to equitable relief.

[Vol. A p. 493; IV.]

Up to this point, we have devoted substantially our

entire BrieF to one factual question, to-wit, whether or

not any of the Companies knew facts which should have

placed them on inquiry regarding Street’s conduct. We

did this in order that the Court might have a clear under-

standing of the facts.

* * * * & * * *

There is a principle of law (not previously discussed)

which, when applied to the undisputed facts in the 137

Cases, would make it unnecessary for this Court to de-

termine any other question in the Case.

In 1930, the 139 Companies entered the District Court

with “clean hands.” On filing their suits a legitimate

ek

Point SEVEN—“UNCLEAN HANDS” RULE INAPPLICABLE 123

controversy arose as to (a) the confiscatory nature of the

old rates, and (b) the legality of the 16-2/3% increased

rates, from which the impounded funds were accumulated.

During nearly five years of litigation, hundreds of

witnesses, thousands of pages of testimony, and the

Master’s Reports in each case, all supported the Com-

panies’ contentions (p. 5, 28, supra).

There was never a suggestion that the Companies or

any one else—not even Street—had been guilty of any

possible kind of fraud or other wrongful conduct. The

cases were simply awaiting the three-Judge Court’s iong

deferred (14 months) decision on the Record as it stood on

final submission. It all rested in the breast of the Court

as a matter for legal decision. Nothing thereafter done

could affect the Companies’ right, or lack of right, to the

equitable relief originally prayed for.

Thereafter, January—February, 1935, Street-Pender-

gast-McCormack-O’Malley entered into a wicked con-

spiracy to obtain money from the Insurance Companies

under the guise of legitimate expenses for a settlement of

the litigation for the purpose of enriching Pendergast—

and through him O’Malley (p. 74-78, supra; Ors, J.’s

charge to Grand Jury, Reprint p. 63, 65, 66).

That wicked conspiracy (whether successful or abor-

tive) (1) had no relationship whatever to sustaining the

Companies’ right to a decision on the merits regarding the

equitable relief sought and the right to the impounded

funds; (2) did not, and does not, inhere in, or in anywa™"

aid in, the support of the Companies’ causes of action, (3)

was, and is, wholly unrelated to the plaintiffs,’ or defend-

ants’ title to the impounded funds. The right or title to

the impounded funds depended exclusively upon whether

the old rates were confiscatory.

The validity of the old rates, or the right to the in-

creased rates, depended upon many factors: but neither

could possibly be affected, one way or the other, by the

Street-Pendergast-O’Malley fraud, occurring, as it did, long

after the increased rates were charged and collected, and

124 Pornt SEVEN—‘UNCLEAN HANDS” RULE INAPPLICABLE

not related in any way to any of the factors controlling

the confiscatory nature, or legality, of either the old or the

new rates.

The Street-Pendergast-O’Malley conduct was fraudu-

lent, criminal, contemptous of the Court, and the parties

engaged in the fraud should be punished by the criminal

laws.

Neither the 139 Companies, nor the policyholders,

should be permitted to obtain or to retain any fruits of

the fraud.

The 139 Companies on learning of the frauds repudi-

ated the Decrees and all benefit thereunder; and restored to

the Court, not merely what they received under the De-

crees, but also what had been paid to the Superintendent

for the State’s expenses and his counsel fees (and was un-

recoverable). The 139 Companies renounced, and have not

retained, any fruits of a fraud to distribute the impounded

funds, by a bribed agreement, instead of by a judicial de-

cision. On the other hand, the Superintendent (a) holds

on to all the fruits of the fraud,® and (b) wants to obtain

new and additional fruits of the same fraud®°—which, in

other words, means that he wishes to obtain $8,000,000 for

the policyholders as the result of the Street-O’Malley fraud.

Therefore, it is the Superintendent acting for the pol-

icyholders, and not the Insurance Companies, who is seek-

ing an “unjust enrichment” flowing from the frauds.

With that factual understanding, what is the law re-

garding “unclean hands” upon which the three-Judge

Court rejected the Insurance Companies’ right to a decision

and summarily gave the entire funds to the policyholders?

He holds on to $593,040 of the impounded funds, of which

$423,600 went to pay his atiorneys’ fees and $169,440 to pay the

expenses of his litigation (p. 16, supra).

®He desires to obtain (as the result of the fraud of his pred-

ecessor in office as a State official), the title to the rest of the

impounded funds amounting to approximately $8,000,000 without

any legal decision as to the ownership thereof.

OO

Point SEVEN—“UNCLEAN HANDS” RULE INAPPLICABLE 125

The “unclean hands” doctrine does not apply here. It

does not destroy a party’s right to a decision on the merits,

where the “unclean” acts complained of (a) happened

during the progress of the litigation, and (b) were ex-

trinsic to, and did not inhere in, the original cause of

action.”

Even if the Companies knew of, or had closed their

eyes to, the Street fraud (which of course they absolutely

deny and of which there is not a scintilla of proof), the

“ynclean hands’ rule does not support the three-Judge

Court’s action (1) in refusing to decide the cases, which

they had held under submission for more than a year

before the fraud was committed, and (2) in ordering a

summary distribution of the $8,000,000 “impoundings,” to

the policyholders. This is because, as stated in 4 A. L. R.

(p. 60):

“If a cause of action in its inception was meritorious,

the fact that the complainant in the suit, has during its

continuance been guilty of inequitable conduct, will not

prevent his recovery of the relief prayed, provided such

conduct ‘does not go to the cause of action.’ ”

A party has the right to a determination of his claim

on the merits, despite his subsequent fraudulent conduct

“7Chute v. Wisconsin Chemical Co., 185 Fed. 115, 118; In re

Meyerfield, 46 F. (2d) 665, 666; Smith v. Ajax Pipe Line Co., 87

F, (2d) 567, 568 (C. C. A. 8th); Small v. Heywood-Wakefield,

21 F. S. 697, 700; Barnes v. Barnes, 282 Ill. 593; Chicago v. Union

Stock Yards & Transit Co., 164 Ill. 224; 1 Pomeroy’s Eq. Jur. 5th

Ed., Sec. 399; 10 R. C. L., Sec. 140; 4 A. L. R. p. 60; Trice v. Com-

stock, 121 Fed. 620 (C. C. A. 8th); Olsness v. Home Ins. Co., 14

F. (2d) 907 (C. C. A. 8th) Oscar Barnett Foundry Co. v. Crowe,

219 Fed. 450 (C. C. A. 8th); American Sugar Refining Co. v.

McFarland, 229 Fed. 284, affirmed 241 U. S. 78; Camors-McCon-

nell Co. v. McConnell, 140 Fed. 412 (C. C. A. 8th); Talbot v. In-

dependent Order of Owls, 220 Fed. 660 (C. C. A. 8th); Baker v.

McCarl, 24 F. (2d) 897; Cunningham v. Pettigrew, 169 Fed. 335

(C. C. A. 8th); Keystone Driller Co. v. General Excavator Co.,

290 U. S. 240; Stegman v. Weeks, 279 Mo. 131, 139; Bateman v.

Fargason, 4 Fed. 32, 33; Goodyear Tire & Rubber Co. v. Overman

Tire & Cushion Tire Co., 95 Fed. (2d) 978.

126 Pornt SEVEN—“UNCLEAN HANDS” RULE INAPPLICABLE

in attempting to get all, or a part, of his claim by wrongful

methods. The Courts customarily apply that principle

without comment.”

There is a proper way [through indictment] to punish

such conduct; but such punishment does not permit clos-

ing the Court’s doors even to a guilty party.

In Re Meyerfeld, 46 F. (2d) 665, Meyerfeld, the bank-

rupt, held some property in his name which was actually

owned by Levy, who had furnished the money for its pur-

chase. Meyerfeld’s Trustee in Bankruptcy proposed to

sell all property standing in Meyerfeld’s name, including

the property that was claimed by Levy. In attempting to

prove that the property belonged to him, Levy produced a

forged deed conveying the property in question from

Meyerfeld to himself. But Levy had actually paid for the

property, and was entitled to a resulting trust. The

Referee refused to enforce a resulting trust in Levy’s

behalf, because of his “unclean hands”’ in forging the deed.

The Court overruled the Referee, enforced the trust, and

held that Levy was not barred because of the ‘unclean

hands” doctrine, saying (p. 666):

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“Reprehensible though Levy’s conduct may have been,

I am constrained to hold that the referee erred in deny-

ing him all relief because he came into equity with

unclean hands. The transaction by which the resulting

trust was created was not tainted with fraud, illegality,

or unconscionable conduct on his part...

“The applicable principle is well stated in Barnes v.

Barnes, 282 Ill. 593, where a plaintiff had fabricated evi-

dence to support various items in an account, but had

established her right generally to an accounting in

equity; ‘He who comes into a court of equity must come

with clean hands, and one who does iniquity cannot have

equity; but that maxim is limited in its application to

8S[White v. Crow, 110 U. S. 183, 187; National Surety Co. v.

State Bank, 120 F. 593, 598-599 (C. C. A. 8th); William Lane, Inc..

v. Shelby Shoe Co., 45 F. (2d) 581, 582 (C. C. A. 2d).]

ea

Point SEVEN—“UNCLEAN HANDS” RULE INAPPLICABLE 127

where the substance of the thing is inequitable, and the

iniquity must apply to the particular subject-matter. It

is not sufficient to bar relief that inequitable conduct

should relate to the proof of some item or some fact, and

where the origin of the claim is not inequitable, a fraudu-

lent act in relation to it will not bar relief” [Citing

cases |.

This misconduct, which will repel a plaintiff from a

court of equity, must inhere in, and infect, the cause of

action which the plaintiff seeks to enforce. It must have

an immediate and necessary relation to the equity for

which the plaintiff prays in respect of the matter in litiga-

tion. The ‘‘unclean hands” doctrine cannot be applied

where the alleged misconduct (i) occurred after the in-

stitution of a suit and (ii) had no relation to the equitable

relief which the plaintiff sought. In Primeau v. Garfield,

193 F. 911 (cited by the three-Judge Court in its opinion),

the Court said:

“The real test in such a case as this is whether the

plaintiff requires any aid from the fraudulent transac-

tion to establish his demand.”

In Shaver v. Heller & Merz Company, 108 F. 821

(C. C. A. 8), the Court said (p. 834):

“The principle that ‘he who comes into equity must do

so with clean hands’ is familiar and indisputable. But

it does not repel all sinners from courts of equity, nor

does it disqualify any complainant from obtaining relief

there who has not dealt unjustly in the very transaction

concerning which he complains. The iniquity which will

repel him must have an immediate and necessary rela-

tion to the equity for which he sues.”

The three-Judge Court argued that it would be fan-

tastic to have the power to throw a case out of court, be-

cause the plaintiff entered with “unclean hands,” and yet

not to have the power to throw the plaintiff out of Court,

if the unconscionable conduct occurred after it was filed,

but while the case was still progressing before the Court.

—

128 Pornt SEVEN—“UNCLEAN HANDS” RULE INAPPLICABLE

That argument is ‘“‘bad law’; and it is opposed to the

settled principles of equitable jurisprudence, which the

three-Judge Court must follow; and it cannot create new

concepts contrary to the established rules of equity.”

6921 C. J., Sec. 12, p. 34, 35, and note 7-A.