# Petition for Writ of Certiorari — New Valley Corp. v. Corporate Property Associates 2, 120 S. Ct. 983 (2000) (No. 99-904)

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 2000

## Text

RIL ED
29 904 Nov 2 6 1999
MRE 05 Tus coPex
No. 99-
IN THE

Supreme Court of the United States

NEW VALLEY CORPORATION,

Petitioner,
v.

CORPORATE PROPERTY ASSOCIATES 2 and
CORPORATE PROPERTY ASSOCIATES 3,

Respondents.

On PETITION FOR A WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

PETITION FOR A WRIT OF CERTIORARI

Haro_p G. LEvISON
Counsel of Record
DavipD M. FRIEDMAN
Rosert M. Novick
KASOWITZ, BENSON, TORRES
& FRIEDMAN LLP
Attorneys for Petitioner
1301 Avenue of the Americas
New York, New York 10019
(212) 506-1700

156313 @ Counsel Press LLC
FORMERLY LUTZ APPELLATE SERVICES
(800) 274-3321 » (800) 359-6859

i
QUESTION PRESENTED

Does the doctrine of unclean hands bar a creditor from
recovering in a bankruptcy proceeding where that creditor
presented false testimony and manufactured documentary
evidence but abandoned its scheme once discovered?

ul

PARTIES TO THE PROCEEDING AND
STATEMENT PURSUANT TO RULE 29.6

Petitioner

New Valley Corporation (“New Valley”). New Valley is a
publicly held corporation. The principal stockholder of New
Valley is Brooke Group Ltd., a publicly held company.

Respondents

Corporate Property Associates 2, and Corporate Property
Associates 3 (together, “CPA”). According to information
filed by Respondents below, Respondents are limited
partnerships whose general partner and owner of more than
99% of limited partner interests is Carey Diversified LLC, a
publicly held company.

en

il

TABLE OF CONTENTS
Page
SES ee 1
Parties to the Proceeding and Statement Pursuant to
any SE a ea ne il
ee geo k ls ven il
Table of Cited Authorities .................... IV
Ee ee v1
gy et ee eek 6 oo l
Statement of Jurisdiction ..................... l
Statutory Provision Involved .................. l
I ccc k cesccdenedec. 2
Reasons for Granting the Writ ................. 9
I. The Court Of Appeals’ Severe Restriction
Upon The Circumstances In Which A Court
May Apply The Unclean Hands Doctrine
Conflicts In Principal And Undermines The
Precedential Value Of This Court’s Decisions
In Keystone And Precision Instrument .... 10
Il. A Writ Of Certiorari Should Be Issued
Because The Panel’s Decision, If Left To
Stand, Creates Precedent That A Party May,
With Impunity, Attempt To Defraud Its
Adversary And The Trial Court So Long As
It Abandons That Attempt Once Caught. .. 17

ee 20

iv

TABLE OF CITED AUTHORITIES

Page
Cases:
Art Metal Works v. Abraham & Straus, 70 F.2d 641
CPG. SDs ss caw kk ieee GaRee axa 19
Burson v. Freeman, 504 U.S. 191 (1992) ........ 18

Gaudiosi v. Mellon, 269 F.2d 873 (3d Cir. 1959) .. 7,19

Hazel-Atlas Glass Co. v. Hartford-Empire Co.,

Se Gs eek wae ehh eee 19
In re Abrams, 521 F.2d 1094 (3d Cir), cert. denied,

CAF Uh, TO MUTED ono Ries hx hd 18
In re Levander, 180 F.3d 1114 (3d Cir. 1999) .... 18

In re Quakertown Glass Co., 73 B.R. 468 (Bankr.
ue: PEED aa clus eevee wneaeeee Meee 18

Keystone Driller Co. v. General Excavator Co.,
290 U.S. 240 (1933) ........ 9, 10, 11, 12, 13, t7, 2

Manhattan Medicine Co. v. Wood, 108 U.S. 218
SE ks wae eh Geek ee oe ee 16

Monsanto v. Rohm & Haas Co., 456 F.2d 592
Ce ee SI os a a ee eee ees 13

Precision Instrument Mfg. Co. v. Automotive
Maintenance Mach. Co., 324 U.S. 806 (1945) ..
ivenG alae ee ReR aan aG 10, 13, 15, 16, 17, 20, 21

Cited Authorities

Page
Statutes:
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Pe ak. © EO 6.05.64 oh. ca een ene ees 8
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Rule:

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vi

TABLE OF APPENDICES

Appendix A — Opinion And Judgment Of The
United States Court Of Appeals For The Third
Circuit Dated And Filed July 6, 1999 .........

Appendix B — Opinion And Order Of The United
States District Court For The District Of New
Jersey Dated July 135, 1998 .......cccccvesass

Appendix C — Opinion Of The United States
Bankruptcy Court For The District Of New Jersey
Dated And Filed December 23, 1997 .........

Appendix D — Order Of The United States
Bankruptcy Court For The District Of New Jersey
Dated Fanuely 26, FIOO <ovcacedvedseacseten

Appendix E — Opinion Of The United States Court
Of Appeals For The Third Circuit Denying
Petition For Rehearing Dated August 27, 1999

‘*eeen6466082 8866 2 © © @ 88 2 6 4 6-8 2 O'R O. 6 68 8S oe ee Ss Oo ee ee

Page

l

OPINIONS BELOW

The opinion of the United States Court of Appeals for
the Third Circuit is reported at 181 F.3d 517. A copy of the
opinion and judgment is included in the Appendix at App.
A at la-25a. The opinion of the United States District Court
for the District of New Jersey is reported at 222 B.R. 722.
A copy of the District Court’s opinion and judgment is
included in the Appendix at App. B at 26a-55a. The opinion
of the United States Bankruptcy Court for the District of
New Jersey is unpublished but can be found at 1997 Bankr.
LEXIS 2193, 31 Bankr. Ct. Dec. 1168, and is included in
the Appendix at App. C at 56a-101a.

STATEMENT OF JURISDICTION

The United States Court of Appeals for the Third Circuit
issued its opinion on July 6, 1999. On July 20, 1999,
Petitioner filed a timely Petition for Rehearing and Petition
for Rehearing En Banc which the United States Court of
Appeals denied on August 27, 1999 (Appendix E). This
Petition for Writ of Certiorari is filed within 90 days of the
denial of the Petition for Rehearing. The Court’s jurisdiction
is invoked pursuant to 28 U.S.C. §§ 1254(1) and 2106.

STATUTORY PROVISION INVOLVED

United States Code, title 11, section 502 is provided at
App. F.

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STATEMENT OF THE CASE

Since the early 1970s, Western Union Telegraph
Company (“Western Union’), New Valley’s predecessor-in-
interest, had been the tenant pursuant to leases relating to
certain properties located in Reno, Nevada (the “Reno
Lease’), Moorestown, New Jersey (the “Moorestown
Lease”), and Bridgeton, Missouri (the “Bridgeton Lease”).
App. B at 27a-28a, App. C at 57a-58a.

In November 1981, CPA purchased the three properties
and became Western Union’s landlord. App. A at 3a; App.
B at 27a-27b; App. C at 57a-58a. In December 1981, Western
Union changed its name to Western Union Corporation
(“WUC”) and continued to be the tenant under the leases at
the Moorestown, Reno and Bridgeton properties. App. A at
3a; App. C at 58a.

In August 1989, Western Union Financial Services, Inc.
(“FSI”), formerly a division of Western Union, was created
as a wholly-owned subsidiary corporation to hold a
substantial portion of the assets of WUC’s money transfer
business. App. A at 3a; App. B at 28a; App. C at 58a. On
April 18, 1991, WUC changed its name to New Valley
Corporation. App. A at 3a; App. B at 28a; App. C at 58a.

On March 15, 1990, Donald Wasson, New Valley’s
Director of Real Estate Operations, wrote to Barclay Jones,
then vice-president of CPA, to request that CPA consent to
the assignment of the Bridgeton and Reno Leases to FSI.
Wasson enclosed consent to assignment forms (the
“Proposed Consents’) with the letter. App. A at 4a; App. C
at 79a-80a. In April, 1990, Wasson and Jones discussed the

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Proposed Consents, at which time CPA stated that it would
not sign the Proposed Consent unless the Moorestown Lease
was also assigned to FSI. App. A at 4a-5a; App. B at 28a;
App. C at 80a. New Valley would not assign the Moorestown
Lease. App. A at Sa; App. B at 28a; App. C at 80a.

At trial, Jones testified “unequivocally” that New Valley
and CPA had not reached any deal regarding CPA’s consent
to the assignment. App. C at 80a New Valley understood
this as well; in April 1990, Wasson had sent a memorandum
to his colleague, Jan Wolpert, in which he stated that there
was no business deal with respect to the assignment of the
Bridgeton and Reno Leases since CPA would not consent
without the inclusion of the Moorestown Lease. App. C at
80a. Between April 1990 and May 1993, there were no further
discussions about, or references to, any assignment of the
Leases. App. A at Sa; App. C at 80a.

On November 15, 1991, an involuntary petition pursuant
to Chapter 11 of the Bankruptcy Code was filed against New
Valley. App. A at 6a; App. B at 29a; App. C at 6la.
On March 30, 1993, New Valley consented to the entry of
an order for relief and became a debtor-in-possession. App.
A at 6a; App. B at 29a; App. C at 6la. Approximately one
month later, New Valley sought approval from the
Bankruptcy Court to reject its Moorestown lease. App. A at
6a; App. C at 67a. The Bankruptcy Court entered an order
approving the rejection in May, 1993. App. A at 6a; App. B
at 29a; App. C at 67a.

In April of 1993, New Valley filed an application for an
extension of its time to assume or reject its remaining non-
residential real property leases, including the Reno and
Bridgeton Leases, until confirmation of a plan of

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reorganization. App. 6a; App. B at 30a; App. C at 80a.
CPA filed an objection to New Valley’s application on or
about May 14, 1993, arguing inter alia that a blanket
extension of time until confirmation would be unfair to CPA
and that such relief would undermine § 365(d)(4) of the
Bankruptcy Code. App. A at 6a; App. C at 80a. On May 18,
1993, however, CPA advised New Valley that it would be
withdrawing its objection on the basis that CPA had
“discovered” that the Bridgeton and Reno Leases had been
assigned by New Valley to FSI in 1990. CPA then executed
copies of the Proposed Consents, backdated them three
years to 1990, and faxed them to New Valley. App. A at 5a;
App. B at 30a; App. C 81a-82a.

After confirming that New Valley had not previously
received executed copies of the Proposed Consents, New
Valley sent a letter to CPA’s counsel setting forth New
Valley’s understanding that no assignments had been
implemented with respect to the Reno or Bridgeton Leases
and that New Valley remained the tenant under those Leases.
App. at 5a; App. B at 30a; App. C at 81a. CPA’s counsel
responded in a letter that it was CPA’s position that an
assignment had indeed occurred and that New Valley was
attempting to construct a “creative bankruptcy solution” in
order to avoid FSI’s liability on the Reno and Bridgeton
Leases.' App. A at 5a; App. B at 30a.

1. CPA’s claims against New Valley, a Chapter 11 debtor, are
capped at one year’s rent pursuant to section 502(b)(6) of the
Bankruptcy Code. By arguing that its tenant was FSI, CPA could
assert a claim for the full remaining multi-year terms of the Leases
without limitation. If successful, CPA could have asserted a breach
of contract claim against FSI that would have been approximately
$7 million greater than the claims it could have lawfully asserted
against New Valley. App. B at 42a.

5

CPA then proceeded to file its initial Proof of Claim
against New Valley in which it stated, under penalty of
perjury, that:

Although the Bridgeton, Missouri and Reno,
Nevada leases were assigned to and assumed by
Western Union Financial Services, Inc. (“FSI”),
a non-debtor subsidiary of the Debtor, because
the Debtor has taken the position in this
bankruptcy case that the two leases were not
assigned, CPA:2 and CPA:3 have included these
amounts in its Proof of Claim as a precautionary
measure. CPA:2 and CPA:3 hereby reserve the
right to argue that the Bridgeton and Reno leases
were in fact assigned to and assumed by FSI.

App. A at 7a; App. B at 31a (emphasis added).

CPA’s motive for proceeding in this fashion was patent
to all. As the Bankruptcy Court explained:

CPA’s course of action becomes more
understandable when considered against the
backdrop of New Valley’s financial difficulties
both pre-bankruptcy and afterwards. As New
Valley points out, its lengthy history of financial
difficulty and involuntary bankruptcy were well
known. When New Valley filed its motion to
extend the time to assume the Moorestown, Reno
and Bridgeton Leases, and CPA had miraculously
uncovered the executed consents, New Valley was
in the early stages of its voluntary case, the
outcome of which was unknown, and FSI was a
solvent non-debtor subsidiary. The attractiveness

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of FSI as a tenant rather than New Valley ts
readily apparent. Again, as New Valley points out,
Jones knew that while § 365 and 502(b)(6) of the
Bankruptcy Code would limit CPA’s claims in
the New Valley bankruptcy, no such limitation
existed if FSI was the tenant.

App. C at 86a.

At all times, CPA knew that the Leases had not been
assigned to FSI, that New Valley, not FSI, was the party
liable for rejection or breach of the Leases, and that CPA's
ability to obtain damages would therefore be limited by
§ 502(b) of the Bankruptcy Code. App. C. at 79a-86a.
CPA knew the leases had not been assigned to FSI because
no assignment of the Leases could have been effective
without CPA’s consent, which it had never given. Therefore,
after New Valley was in bankruptcy, and despite CPA's
knowledge that there had never been an assignment, CPA
manufactured evidence of its consent by signing and
backdating a “Consent to Assignment” form that was
originally prepared in 1990 in connection with a deal that
was never consummated. Virtually all of New Valley's
accusations against CPA were found by the Bankruptcy Court
to be true, leaving no doubt about CPA’s fraudulent behavior.
App. C at 79a-88a.

After eight days of evidentiary hearings, the Bankruptcy
Court found that, inter alia, CPA intentionally and falsely
maintained that the Leases were assigned (App. C at 79a);
CPA asserted that position as a “negotiating tactic” (id.);
CPA “backdated and then produced [the consents] to avoid
the prospect of being limited to a lease rejection claim in the
New Valley bankruptcy” (App. C at 81a, 86a); “Jones” lack

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of memory” was not “credible” (App. C at 85a ); CPA’s
“lack of any explanation as to why CPA did not tender the
allegedly executed consents to New Valley” was
“remarkable” (App. C at 86a); neither “Jones or CPA as an
entity were confused as to whether New Valley or FSI was
the tenant” (id.); it is “inconceivable” that CPA did not know
who the tenant was (App. C at 87a); and “expert testimony
convincingly demonstrates that the consents were backdated”
(App. C. at 81la-82a, 97a). CPA did not appeal from the
Bankruptcy Court's underlying factual findings, which were
adopted by the District Court.

Although the Bankruptcy Court declined to punish CPA
for its fraud, the District Court properly concluded on appeal
that, based upon the Third Circuit’s opinion in Gaudiosi v.
Mellon, 269 F.2d 873 (3d Cir. 1959), the Bankruptcy Court
was in error. The District Court observed that although CPA’s
fraudulent claims were directed at FSI, CPA asserted a theory
it knew to be false, manufactured evidence, and proffered
false testimony concerning its conduct in New Valley's
bankruptcy proceeding through proofs of claim and other
pleadings, thus committing its fraud before the Bankruptcy
Court. App. B at 52a-S3a.

There was unrebutted evidence at trial that New Valley
was actually harmed by CPA’s attempted fraud. New Valley
was obligated to indemnify FSI in full for any liability under
the Leases’, and it expended hundreds of thousands of dollars
in defending, investigating and ultimately exposing as

2. New Valley's indemnification obligation arose because FSI
was sold at the conclusion of New Valley's bankruptcy case as part
of its plan of reorganization. At the time CPA first asserted its
fraudulent assignment theory, FSI was still the wholly-owned
subsidiary of New Valley.

|

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fraudulent CPA’s assignment claims. Of course, New Valley
would necessarily have been severely harmed if CPA had
succeeded in its scheme to nominally defraud FSI, because
FSI was a wholly owned subsidiary of New Valley and the
only significant asset of New Valley’s bankruptcy estate.
The District Court correctly ruled that it is abhorrent to the
principles of bankruptcy jurisprudence that a creditor may
come into a court of equity with unclean hands, and yet share
in the assets of the bankruptcy estate. App. B at 50a-53a.

On appeal, the Panel reversed the District Court
concluding that the facts did not establish a direct relationship
between CPA’s inequitable conduct and its claim in the
Bankruptcy Court against New Valley for the unclean hands
doctrine to apply. App. A at 18a, 21a-23a.

The Bankruptcy Court had jurisdiction over this matter
pursuant to 28 U.S.C. § 1334 and the Standing Order of
Reference by the United States District Court of New Jersey,
dated July 23, 1984, and because the matter is a core
proceeding under 28 U.S.C. § 157(b)(2)(B). The United
States District Court had mandatory jurisdiction to hear the
appeal from the final order of the Bankruptcy Court pursuant
to 28 U.S.C. § 158(a)(1) and Fed. R. Bank. Pro. 8001(a),
and jurisdiction over the subject matter pursuant to 28 U.S.C.
§ 1334. Appellate jurisdiction in the Court of the Appeals
for the Third Circuit arose pursuant to 28 U.S.C. § 158(d),
28 U.S.C. § 1291 and 28 U.S.C. § 1294.

t

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REASONS FOR GRANTING THE WRIT

By holding that a fraudulent breach of contract claim
asserted against a bankruptcy debtor’s wholly owned
subsidiary is not sufficiently “related” to a subsequent
assertion of that claim against the debtor itself to implicate
the unclean hands doctrine, the Third Circuit committed clear
error. The Third Circuit improperly renounced this Court’s
longstanding precedent, established in Keystone Driller Co.
v. General Excavator Co., 290 U.S. 240, 245 (1933), that
the unclean hands doctrine may apply so long as the
inequitable conduct “in some measure affect the equitable
relations between the parties in respect of something brought
before the court for adjudication” in favor of a wooden rule
that the inequitable conduct must be committed, and not
abandoned, in direct pursuit of the claim.

The need for this Court to grant a writ of certiorari to
correct the Third Circuit’s opinion and ruling is acute,
because it is not only New Valley alone that will suffer from
the Panel’s errors. Rather, the Third Circuit, perhaps
inadvertently, has created a socially destructive rule that a
litigant is free to behave dishonesty before the court without
fear of reprisal or adverse consequences. The dishonest
litigant can give its best efforts to succeed in its fraud, while
maintaining the option to come back into court and recover
by asserting a conflicting set of facts if the fraud should be
discovered before trial. That is precisely what the Third
Circuit permitted CPA to do here.

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THE COURT OF APPEALS’ SEVERE RESTRICTION

UPON THE CIRCUMSTANCES IN WHICH A COURT

MAY APPLY THE UNCLEAN HANDS DOCTRINE

CONFLICTS IN PRINCIPAL AND UNDERMINES THE

PRECEDENTIAL VALUE OF THIS COURT’S DECISIONS
IN KEYSTONE AND PRECISION INSTRUMENT

chinese ens pet Fro

The July 6, 1999 opinion (the “Opinion”) of the Third ‘
Circuit Panel (the “Panel”) reversing the Order of the United
States District Court for the District of New Jersey (Wolin,
J.) barring CPA’s claim for relief on the basis of unclean
hands was erroneous and contrary to this Court’s decisions
in Keystone Driller Co. v. General Excavator Co., 290 U.S. !
240, 245 (1933) (“Keystone”) and Precision Instrument Mfg. ;
Co. v. Automotive Maintenance Mach. Co., 324 U.S. 806 |
(1945). The basis of the Panel’s decision — that CPA’s fraud
and misconduct did not bear a sufficient relationship to the
claims against New Valley — undermines the Supreme
Court’s prior holdings that the cause of action need not be
the fruit of a party’s misconduct, but such misconduct must
only affect in some measure the equitable relations among
the parties. In the instant case, the equitable relations among
the parties can be summarized as follows:

(1) New Valley was a chapter 11 debtor;
(2) The value of New Valley’s estate consisted almost
entirely of the value of its wholly-owned non-debtor

subsidiary, FSI;

(3) CPA was a creditor of New Valley by virtue of its
status as New Valley’s landlord;

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1]

(4) CPA sought to avoid the legal consequences of New
Valley’s bankruptcy by fraudulently asserting that FSI was
liable under the Leases, and manufacturing evidence to
support these assertions;

(5) CPA asserted its fraudulent theory in the Proofs of
Claim filed in New Valley’s bankruptcy proceeding, and in
subsequent testimony and argument before the Bankruptcy
Court.

(6) Had CPA been successful in perpetrating its fraud,
(a) CPA would have been precluded from asserting its present
claims against New Valley, while at the same time (b) the
value of New Valley’s estate would have been diminished
by additional millions of dollars.

(7) CPA returned to court after failing in its fraud to
seek to hold New Valley liable for those Leases.

Clearly, CPA’s conduct affected the equitable relations
of the parties as set forth in Keystone.

In Keystone Driller Co. v. General Excavator Co., 290
U.S. 240, 245 (1933), this Court articulated the unclean hands
doctrine as follows:

It is one of the fundamental principles upon which
equity jurisprudence is founded, that before a
complainant can have standing in court he must
first show that not only has he a good and
meritorious cause of action, but he must come into
court with clean hands ... The governing
principle is that whenever a party who, as actor,
seeks to set the judicial machinery in motion and

12

obtain some remedy, has violated conscience, or
good faith, or other equitable principle, in his prior
conduct, then the doors of the court will be shut
against him in limine; the court will refuse to
interfere on his behalf, to acknowledge his right,
or to award him any remedy ... The equitable
powers of this court can never be exerted on behalf
of one who has acted fraudulently, or who by
deceit or any unfair means has gained an
advantage. To aid the party in such a case would
make this court an abetter of iniquity.

290 U.S. at 244-245 (citations omitted).

In Keystone, the plaintiff had alleged that the defendant
was infringing upon five of its patents. The defendant there
argued that the plaintiffs claims should be barred by unclean
hands because the plaintiff had improperly suppressed
evidence of a prior use of one of the patented devices in a
prior infringement action against a different defendant.
Id. 290 U.S. at 243. The district court, like the Bankruptcy
Court here, concluded that the misconduct was reprehensible,
and was motivated by an improper purpose. Nonetheless,
the lower court did not bar the claim, finding that the
misconduct as to the first patent was not related to the merits
of the dispute as to the five patents at issue in the second
action. On appeal, this Court adopted a broad view of the
requisite relationship between the misconduct and the equity
sought, and nullified all five patents, even though the
improper conduct related to only one of them. /d. at 246.

Indeed, “[a]ny willful act concerning the cause of action

which rightfully can be said to transgress equitable standards
of conduct is sufficient cause for invocation of the maxim.”

NT eT

13

Precision Instrument Mfg. Co. v. Automotive Maintenance
Mach. Co., 324 U.S. 806, 815 (1945); see also Monsanto v.
Rohm & Haas Co., 456 F.2d 592, 598 (3d Cir. 1972). There
is simply no strict formula that limits the court’s power to
invoke the unclean hands doctrine, and one generally
need only show the following for the doctrine to apply:
(i) an unconscionable act; (ii) that in some measure affects
the equitable relations between the Parties; (iii) concerning
something brought before the court for adjudication.
See Keystone, 290 U.S. at 245.

Under the standard set forth in Keystone, the District
Court’s conclusion that “CPA’s improper conduct was
immediately and necessarily related to the equity CPA sought
before the Bankruptcy Court and definitely affected
the equitable relations between the parties” was correct.
The unclean hands doctrine applies to parties who come into
equity with unclean hands. Keystone, 290 U.S. at 244 (party
“must come into court with clean hands”). CPA came to the
Bankruptcy Court with unclean hands by filing a proof of
claim that fraudulently misrepresented that FSI was liable,
and proceeded to “support” the false position for many
months with fabricated evidence and false testimony.

CPA also asserted the assignment “theory” it knew to
be untrue in a manner that constituted a fraud on the
Bankruptcy Court and an attempted fraud upon New Valley
through, among other artifices, two sworn proofs of claim,
discovery, motion, and litigation practice that CPA attempted
' to support with manufactured evidence.*? CPA’s failure to

3. The Panel expressed concern that the District Court had
focused primarily on the Proposed Consents which related only to
the Reno and Bridgeton Leases, but not the Moorestown property.

(Cont’d)

14

succeed in fraudulently obtaining a ruling that FSI was liable
under the Leases does not negate that CPA pressed a
fraudulent theory. Both the Bankruptcy Court and the District
Court held that the theory itself was a sham. See App. B at
52a; App. C at 79a.

The Panel’s acceptance of CPA’s argument that its proof
of claim was a harmless reservation of rights to assert an
alternative theory (App. A at 22a-23a) is a further error,
which mutes the extreme malevolence of CPA’s conduct and
demonstrates a misunderstanding of the facts by the Panel.
CPA’s proof of claim, as well the false evidence proffered
by CPA to support its assignment theory, demonstrates that
the proof of claim itself was the alternative fall-back position
to protect CPA from the possibility New Valley prevailed in
establishing the truth. See App. B at 31a (“Although the
Bridgeton, Missouri and Reno, Nevada leases were assigned
to and assumed by Western Union Financial Services, Inc.
(“FSI”), a non-debtor subsidiary of the Debtor, because the
Debtor has taken the position in this bankruptcy case that
the two leases were not assigned, CPA:2 and CPA:3 have
included these amounts in its Proof of Claim as a
precautionary measure.”). The Panel’s conclusion that CPA
was “merely” reserving its rights to assert a “differing
(Cont'd)

Because New Valley never requested or transmitted a Proposed
Consent to assignment with respect to the Moorestown Lease, CPA
was unable to assert its fraudulent theory with respect to
Moorestown. Nonetheless, New Valley does not believe it is
improper to bar all of CPA’s similar claims when it had behaved so
fraudulently and deceitfully with respect to some of them. However,
the fact that CPA did not manufacture evidence of an assignment of
the Moorestown lease most certainly does not cleanse CPA of its

other wrongdoings but at most may have some bearing upon the
proper extent of the remedy.

———

15

interpretation” demonstrates that the Panel misunderstood
the issue: it is not CPA’s inconsistent reservation of supposed
rights against New Valley that bars its claims, but that CPA
dedicated its efforts to perpetrating a fraud in the first
instance, holding the truth in abeyance as a “precautionary
measure” in case its fraud failed.

CPA’s misconduct clearly was “related to” the relief
CPA sought. The relief CPA sought was a finding that FSI,
New Valley’s subsidiary, was liable to it for damages under
the Leases; CPA asserted that the proofs of claim were filed
against New Valley in the event that CPA was unsuccessful
in establishing FSI’s liability. To get that relief, CPA filed
fraudulent proofs of claim with the Bankruptcy Court that
misrepresented that FSI was the true liable party, and
manufactured evidence — the backdated Proposed Consents
— to support the claim. The essential and direct relationship
is clear if the Court considers the consequences that would
have resulted if CPA had accomplished its fraud: the claims
upon which CPA now seeks to recover could not have been
filed against New Valley because CPA’s fraud would have
produced a determination that New Valley was not the tenant
under the Leases. Because successful accomplishment of the
fraudulent scheme would have been outcome determinative and
preclusive as to the claims CPA asserts against New Valley,
CPA’s fraud was necessarily closely related to and determinative
of the equities and claims between the parties.

In contrast, the resulting precedent established by the
Panel’s decision requires, in actuality, nothing short of a finding
that the existence of the cause of action must be the fruit of the
fraud. This result conflicts directly with the Supreme Court’s
decision in Precision Instrument Mfg. Co. v. Automotive
Maintenance Machinery Co., 324 U.S. 806 (1945), which

16

explicitly held that the cause of action need not have been the
fruit of the misconduct.

In Precision Instrument, the plaintiff sued the defendant
for breach of contract and patent infringement. The contract
and one of the patents resulted from a settlement of a prior
dispute between the parties concerning the defendant’s fraud
and perjury in connection with a patent application. The plaintiff
did not report the defendant’s fraud to the Patent Office or the
District Attorney, choosing instead to settle the dispute and
acquire the rights to the patent. On appeal, the Supreme Court
held that plaintiff's failure to report the defendant’s fraud and
perjury to the authorities required the court to invoke the unclean
hands doctrine to bar the plaintiff's claims, despite the fact that
plaintiff's misconduct was not the substance of its claims
against the defendant. Precision Instrument at 816-819.
See also Manhattan Medicine Co. v. Wood, 108 U.S. 218 (1883)
(unclean hands barred plaintiffs trademark infringement claim
where plaintiff made false statements to the public concerning
the product, even though the misconduct had no bearing on its
claims against the defendant).

In the instant case, the relationship is far more proximate.
As explained above, CPA’s success or failure in carrying
out its fraudulent attempt to portray FSI as the tenant would
have been directly determinative of whether it would have
any ability to subsequently assert that New Valley is the
tenant liable for breach of the Leases. A successful fraud
would have precluded assertion of the same claims directly
against New Valley.

Additionally, the Panel appears to have overlooked that,

as the wholly owned subsidiary and primary asset of New
Valley, any pecuniary injury to FSI causes equal economic

ar mmaacsscmccseasccmmcmmmacmscmmmcss ae

17

injury to New Valley by diminishing the net value of New
Valley’s primary asset, FSI. Thus, CPA’s attempted to assert
uncapped claims against FSI would have caused greater
damage to New Valley than if it had asserted its statutorily
capped claim directly against New Valley. The fraud against
FSI was thus equally a fraud upon New Valley. The Panel
appears to have overlooked this point in concluding that there
was no sufficient relationship between CPA’s claims against
New Valley and its earlier fraudulent conduct. In so erring,
the Third Circuit has effectively overruled Keystone and
Precision.

For these reasons, New Valley urges that a writ of
certiorari is necessary to correct the Panel’s decision to the
extent it is inconsistent with Keystone and Precision
Instrument and/or to the extent the Panel’s decision resulted
from a clearly erroneous apprehension of the proximate
relationship between CPA’s attempted fraud on New Valley
through FSI, and its subsequent direct claims against New
Valley.

A WRIT OF CERTIORARI SHOULD BE ISSUED
BECAUSE THE PANEL’S DECISION, IF LEFT TO
STAND, CREATES PRECEDENT THAT A PARTY
MAY, WITH IMPUNITY, ATTEMPT TO DEFRAUD ITS
ADVERSARY AND THE TRIAL COURT SO LONG AS
IT ABANDONS THAT ATTEMPT ONCE CAUGHT.

New Valley also urges that a writ of certiorari should
issue because this action will otherwise set a socially
destructive precedent. It is uncontested that the Bankruptcy
Court found, and the District Court observed, that CPA had

18

attempted to perpetrate a fraud on the court by, among other
things, manufacturing and utilizing false evidence, and
propounding a “theory” it knew to be false. See supra. It is
also clear from the record that the fraud was perpetrated for
the purpose of obtaining millions of dollars of damages which
are barred by applicable bankruptcy law. Yet, the Panel’s
decision fully excused CPA’s conduct. In effect, the Panel
has ruled that parties, despite oaths under penalty of perjury,
may try to deceive courts and manufacture evidence to
support the deception provided that the deception is
abandoned after discovery by the Court.* Despite its
egregious behavior, CPA goes unpunished under the Panel’s
decision, whereas the targeted victim, New Valley, was
forced to spend nearly $1 million to uncover and demonstrate
CPA’s fraud upon the Bankruptcy Court, and put at risk of
losing millions more if it had failed to do so.

Generally speaking, the importance of an issue is a
reason for this Court to grant review. See, e.g., Burson v.
Freeman, 504 U.S. 191, 194 (1992) (“Because of the
importance of the issue, we granted certiorari.””). There can
be few questions of more important and or more pervasive
effect than those which threaten to undermine public
confidence in and respect for the legal system. Jn re Abrams,
521 F.2d 1094 (3d Cir), cert. denied, 423 U.S. 1038 (1975)
(maintenance of public confidence in our legal system and
the bar is an important policy); Jn re Quakertown Glass Co.,
73 B.R. 468, 470 (Bankr. E.D. Pa. 1987) (“the courts and
the Bar are responsible for maintaining public confidence in
the legal system’’). See also, In re Levander, 180 F.3d 1114,
1118 (3d Cir. 1999) (courts’ historic power to set aside or
amend fraudulently begotten judgments arises from the

4. CPA continued in its fraud long after it had been discovered
by New Valley.

19

principal that tampering with the administration of justice
in this manner involves far more than an injury to a single
litigation. It is a wrong against the institutions set up to
protect and safeguard the public.”).

The unclean hands doctrine is an important hedge around
the integrity of the legal system, and hence the public
welfare,’ because

[p]ublic policy not only makes it obligatory for
courts to deny a plaintiff relief once his ‘unclean
hands’ are established but to refuse to even hear
a case under such circumstances.

Gaudiosi v. Franklin, 269 F.2d 873, 882 (3d Cir. 1959).

The Panel’s decision unfortunately states in certain terms
that a multi-million dollar fraud effort that entailed, among
other things, fabrication of evidence, is not the sort of
inequitable and deceptive conduct that the courts should
penalize. Public policy, however, required the court to close
its doors to CPA after CPA conducted itself before the court
in a manner so shocking to the sensibilities. See Art Metal
Wor:s v. Abraham & Straus, 70 F.2d 641, 646 (2d Cir. 1934)
(Learned Hand dissent) (“The doctrine [of unclean hands] is
confessedly derived from the unwillingness of a court,
originally and still nominally one of conscience, to give its
peculiar relief to a suitor who in the very controversy has so
conducted himself as to shock the moral sensibilities of the
judge.”’).

5. See, e.g., Hazel-Atlas Glass Co. v. Hartford-Empire Co.,
322 U.S. 238, 246 (1944) (“The public welfare demands that the
agencies of public justice be not so impotent that they must always
be mute and helpless victims of deception and fraud.”)

20

A writ of certiorari is therefore appropriate and necessary
in this case, because allowing the Panel’s decision to stand
would create a rule, at least in the Third Circuit, that a party
seeking money from a bankruptcy debtor need not conduct
itself in accordance with fundamental ethical standards or
black letter law, transfiguring the distinction between truth
and lie into a mere abstraction. Accordingly, New Valley
submits that the Panel’s conclusions should be reviewed by
this Court.

CONCLUSION

CPA’s fraudulent and dishonest conduct — fabricating
false evidence and perpetrating a fraud upon the court in a
failed effort to circumvent unfavorable bankruptcy law by ;
asserting claims for breach of certain leases against debtor |
New Valley’s wholly owned non-debtor subsidiary instead
of New Valley — is sufficient to bar CPA’s claims under
the unclean hands doctrine under the Keystone rule. Instead,
of barring the claims, the Panel employed a novel rule of
law whereby the subject claim must constitute the fraudulent
conduct. This is inconsistent with the Supreme Court’s rule
in Precision Instrument that the fraud must concern the
claim, not constitute the claim. Because New Valley would
have been a derivative victim of CPA’s scheme because it
attempted to injure New Valley by devaluing its wholly
owned subsidiary (and sole asset) with millions of dollars
of false claims, CPA’s conduct concerned its claims for relief
against New Valley.

Additionally, the Panel’s Opinion effectuates an
incorrect public policy decision of exceptional consequence.
CPA propounded a blatantly fraudulent position in order to
injure New Valley by extracting more money than it was

iia

21

legally entitled to from New Valley’s sole asset. After getting
caught and thus having no remaining option but to abandon
the fraud, CPA adopted a directly inconsistent position with
regard to its claims to see what it could salvage by resort to
the truth. The Panel’s decision to permit CPA to remain in
court under these circumstances creates a rule that condones
and rewards dishonest litigants who abandon a fraud upon
the court and upon their adversary for no other reason than
necessity after getting caught undermines the entire moral
paradigm of our judicial system. New Valley’s Petition for
a Writ of Certiorari should be granted to prevent the
constructive reversal of this Court’s precedent in Keystone
and Precision Instrument, and to safeguard the efficacy of
the unclean hands doctrine in discouraging litigants from
defrauding their adversaries and the courts.

Respectfully submitted,

HAROLD G. LEVISON

Counsel of Record

Davip M. FRIEDMAN

RoBERT M. Novick

KASOwITZ, BENSON, TORRES

& FRIEDMAN LLP

Attorneys for Petitioner

1301 Avenue of the Americas
New York, New York 10019
(212) 506-1700

ee

APPENDIX

la

APPENDIX A — OPINION AND JUDGMENT OF THE
UNITED STATES COURT OF APPEALS FOR THE
THIRD CIRCUIT DATED AND FILED JULY 6, 1999

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 98-6267
IN RE: NEW VALLEY CORPORATION,
Debtor

NEW VALLEY CORPORATION,
c/o BROOKE GROUP LTD.

¥.

CORPORATE PROPERTY ASSOCIATES 2 AND 3,
c/o W.P. CAREY & COMPANY, INC.

Corporate Property Associates 2 and 3,
Appellants
On Appeal from the United States District Court
for the District of New Jersey

(D.C. No. 98-cv-00982)
District Judge: Honorable Alfred M. Wolin

Argued Friday, May 21, 1999

2a
Appendix A

BEFORE: McKEE, RENDELL and GARTH,
Circuit Judges

(Opinion filed July 6, 1999)

* * *

OPINION OF THE COURT
GARTH, Circuit Judge:

This appeal presents us with the question of whether the
doctrine of unclean hands can be applied to deny relief to a
landlord-creditor when the Bankruptcy Court has held the
landlord-creditor’s Proofs of Claim were not related to the
events giving rise to the assertion of unclean hands.

In this case, the Bankruptcy Court held that the alleged
“unclean hands” did not bar the claims for relief sought by
the landlord-creditor, Corporate Property Associates
(“CPA”). The District Court for the District of New Jersey
reversed that determination and denied all relief to CPA.

We agree with the Bankruptcy Court that the challenged
actions taken by CPA did not relate to the matters for which
CPA sought payments under its leases, and that the Proofs
of Claim filed by CPA did no more than reserve CPA’s rights,
which were controverted by the lessee, New Valley
Corporation (“New Valley”). Accordingly, we will reverse
the district court’s Order dated July 13, 1998, denying relief
to CPA, and remand to the district court so that it may resolve
the remaining issues raised by the parties in their respective
appeals to the district court.

ee

3a

Appendix A
I.

The district court had appellate jurisdiction over the final
order of the Bankruptcy Court, dated January 26, 1998 which
followed from its opinion of December 23, 1997, pursuant
to 28 U.S.C. § 158(a).

This Court has jurisdiction under 28 U.S.C. § 158(d)
and 28 U.S.C. § 1291 over the final order of the district court,
dated July 13, 1998, which dismissed the claims of CPA
against New Valley. CPA filed a timely Notice of Appeal
on August 11, 1998.

II.

In November, 1981, CPA' purchased properties in Reno,
Nevada; Moorestown, New Jersey and Bridgeton, Missouri,
from the Western Union Realty Corporation. The Western
Union Telegraph Company had been the tenant of the
properties, which had been owned by Western Union Realty
Corporation.

In December 1981, Western Union Telegraph Company
changed its name to Western Union Corporation (“WUC”).
WUC continued to be the tenant of record of the properties.
In August, 1989, Western Union Financial Services, Inc.
(formerly a division of WUC) (“FSI”) was spun off as a
wholly-owned corporate subsidiary. Two years later, in April,
1991, WUC changed its name to New Valley Corporation.

1. There are actually two entities involved as appellees, CPA
2 and CPA 3, which will be referred to collectively as “CPA.”

4a
Appendix A

On March 15, 1990, Donald Wasson, Director of Real
Estate Operations for New Valley,’ faxed proposed “Consent
to Assignment” forms (the “Consents”) to Barclay Jones,
then Vice President of CPA.’ The cover letter to the proposed
consent forms stated that as a result of Western Union’s
corporate restructuring, New Valley wished “to assign its
lease[s]” to FSI for the Bridgeton and Reno properties. The
proposed Consents concerned only the Bridgeton and Reno
properties. No attempt was made by New Valley to assign
the Moorestown, New Jersey lease. New Valley asked that
CPA execute the Consents.

CPA took no immediate action on the two proposed
Consents. About a month later, however, Wasson and Jones
had a telephone conversation in which Jones stated that CPA
would not agree to any assignments unless the Moorestown
lease was also assigned by New Valley to FSI. Wasson
replied that New Valley did not want to assign the
Moorestown lease, as a decision had already been made by
New Valley to abandon Moorestown. FSI had already been
operating out of the Bridgeton and Reno properties, whereas
New Valley had already moved much of its operation out of
Moorestown. Wasson confirmed his impression that CPA
had not agreed to the assignment of the Bridgeton and Reno

2. Although, as indicated, WUC did not change its name until
April 1991, “New Valley” will be used throughout in the interest of
clarity.

3. CPA’s brief identifies Jones as Vice President of CPA’s
“general partner.” Because no further identification of CPA’s general
partner appears in the record, we refer to Jones as CPA’s Vice
President.

a

Sa
Appendix A

leases in an internal April 12, 1990 memorandum. Jones
testified at trial that there had been no meeting of the minds
with regard to the assignments of the leases.

No discussions were held between the parties on the issue
of the assignments until May, 1993. On May 18, 1993, CPA
faxed to New Valley what were purported to be executed
“Consent to Assignment” forms for the Bridgeton and Reno
leases. New Valley was already in bankruptcy by that date.
In a letter from New Valley to CPA’s counsel, dated
September 8, 1993, New Valley stated that it “flatly
dispute{d]” CPA’s execution of the proposed Consents. New
Valley had no record of the fully executed “Consent to
Assignment” forms in its files. CPA responded with a letter
on September 30, 1993, stating that New Valley’s position
reflected only a “creative bankruptcy solution” that was
intended to shield FSI from liability.

On October 4, 1993, John C. Walters, a Senior Vice
President of New Valley, sent a letter to CPA in order to
clarify the situation involving the Bridgeton and Reno leases.
The letter stated that “[w]hile FSI admittedly has operated
out of the Bridgeton and Reno sites since it became
operational in 1990, it has done so pursuant to an agreement
with New Valley . . . which obligates FSI to reimburse New
Valley for its pro rata share of the expenses... .” Walters
noted that New Valley had wanted to assign the leases to
FSI in 1990, but that it believed it could not do so without
CPA’s approval.

The Consents that were forwarded by CPA on May 18,
1993, had been signed on behalf of CPA by Jones, but they
were dated April 15, 1990. Jones was named as “Executive

6a
Appendix A

Vice President,” a title that he in fact did not attain until
approximately a year after the purported execution date. The
date the Consents were executed, April 15, 1990, also
happened to be the date of Easter Sunday. New Valley at
trial presented evidence that the Consents could not have
been executed on April 15, 1990, and the Bankruptcy Court
credited this evidence. At trial, Jones testified that although
he recalled signing the Consents, he could not recall whether
he signed them on Easter Sunday, 1990.

In addition, there was evidence that, even after the
purported date of the assignments (April 15, 1990), CPA
was aware that New Valley in fact remained the tenant of
Bridgeton and Reno. For example, Jones testified that, in
September 1991, CPA sent a letter to New Valley announcing
a rent increase. Further, CPA accountants requested
information from New Valley in December 1991 and again
in December 1994 relating to the tenancy of Bridgeton and
Reno.

Hl.

The instant litigation commenced on November 15,
1991, when an involuntary Chapter 11 petition was filed
against New Valley. New Valley consented to an entry of an
order for relief under Chapter 11 on March 30, 1993.

In April, 1993, New Valley moved before the
Bankruptcy Court to reyect the Moorestown lease. At about
the same time, New Valley moved to extend the deadline to
assess whether to reject the leases for Bridgeton and Reno.
On May 24, 1993, the Bankruptcy Court approved the
rejection of the Moorestown lease. Although initially CPA

i eallalciliaealaladeaiiaiaalallll

Ta

Appendix A

objected to the extension of the deadline sought by New
Valley, it withdrew its objection because, it alleged, these
leases [Bridgeton and Reno] may have been assi gned to FSI.

As earlier mentioned, on May 18, 1993, in support of its
argument that the Bridgeton and Reno leases had been
assigned to FSI, CPA faxed copies of what were purported
to be fully executed “Consent to Assignment” forms for those
leases. On September 8, 1993, New Valley wrote to CPA
and stated that it was New Valley’s understanding that the
leases had not been assigned. In its September 30, 1993 letter,
CPA implied that whether the leases had been assigned
informally or de facto was a question best resolved through
litigation.

Also on September 30, 1993, CPA filed its first Proof
of Claim with the Bankruptcy Court. With respect to the
Bridgeton and Reno leases, CPA contended that

[a]lthough the [Bridgeton and Reno] leases were
assigned and assumed by [FSI], a non-debtor
subsidiary of [New Valley], because [New Valley]
has taken the position in this bankruptcy case that
the two leases were not assigned, [CPA] hafs]
included these amounts in its Proof of Claim as a
precautionary measure. [CPA] hereby reserve[s]
the right to argue that the Bridgeton and Reno
leases were in fact assigned to and assumed by
FSI.

CPA included an almost identical reservation of rights in its
second Proof of Claim, which was filed on January 20, 1995.

8a
Appendix A

This second Proof of Claim was concerned only with Reno,
and was evidently filed to reflect additional information. The
Bankruptcy Court approved New Valley’s rejection of the
Reno lease in December 1994.

After extensive discovery and briefing, the Bankruptcy
Court resolved some rental issues in an order dated October
29, 1996, on the parties’ cross-motions for summary
judgment on New Valley’s objections to the Proofs of Claim.
Those matters not resolved on motions proceeded to trial on
issues relating only to the Reno and Moorestown properties.
CPA’s claims concerning Bridgeton had been settled before
trial, and CPA’s claims regarding Bridgeton were withdrawn
with prejudice in June, 1997.

The trial, which was held in July, 1997, took eight days
to complete. The Bankruptcy Court determined that CPA’s
statements in its Proofs of Claim — and its similar statements
in January 1996 in a response to New Valley’s Request for
Admissions and Interrogatories — did not constitute
admissions by CPA of its belief that the leases had been
assigned. Rather, the Bankruptcy Court held that CPA did
not have sufficient information to determine whether the
leases had been assigned or not.

On December 23, 1997, the Bankruptcy Court issued an
opinion in favor of CPA. The Bankruptcy Court, after
deducting certain amounts from CPA’s claims, awarded CPA
a total of $2,888,469.30 in unpaid rent and other costs.‘

4. CPA had claimed a total due from New Valley of
$3,499 ,084.84.

9a

Appendix A

Approximately $824,000.00 of this amount was attributable
to the Reno lease, and the remainder ($2,056,469.30) was
attributable to the Moorestown lease.°

The Bankruptcy Court explicitly found that CPA’s
conduct regarding the assignments of the Bridgeton and Reno
leases did not merit disallowance of its claims. Although
the Bankruptcy Court was “wholly unconvinced” that CPA
actually believed that the Bridgeton and Reno leases had
been assigned, nevertheless it found “no impact on the proofs
of claim ... since the alleged assignments did not bear on
any element of the proof|s] of claim. Without more, they are
not sufficient circumstantial evidence that CPA concocted
an inflated claim. Rather, it appears to have been a somewhat
misguided effort to preserve a right against FSI in the event
CPA was unlikely to be paid in the New Valley case.”®
Further, the Bankruptcy Court agreed with New Valley that
it was “likely that the Consents were backdated and then
produced to avoid the prospect of being limited to a lease
rejection claim in the New Valley bankruptcy.”

The Bankruptcy Court concluded that CPA’s conduct
with regard to a claim against FSI arising out of the alleged

5. We note that these figures, employed by CPA in its brief,
add up to $2,880,469.30, while the Bankruptcy Court, as noted in
text, awarded CPA a total of $2,888,469.30. This discrepancy is
not explained by the parties. The discrepancy, however, does not
affect our disposition of this appeal.

6. Bankruptcy Court Op. at 41.

7. Id. at 25.

10a
Appendix A

assignments, was not dispositive of its claims against New
Valley. “If the court had before it an objection by FSI to a
CPA claim the issues surrounding execution of the Consents
would be directly pertinent.” However, as the claims at issue
were against New Valley, and not FS/, CPA’s conduct did
not warrant having its claims disallowed.

Both parties appealed to the District Court for the District
of New Jersey. While both raised a number of issues, the
district court ruled only on the issue of unclean hands, raised
by New Valley. The other issues, it decided, were rendered
moot by its decision."

8. In addition to the issue of unclean hands, New Valley
appealed the Bankruptcy Court’s evidentiary ruling regarding CPA’s
alleged admissions, and its ruling that CPA’s claim for rent for the
Moorestown property was not subject to 11 U.S.C. § 502(b)(6)’s
mandatory cap.

CPA appealed 1) the ruling of the Bankruptcy Court that its
deferred maintenance costs were capped under section 502(b)(6);
2) the calculation of the section 502(b)(6) cap; 3) the determination
of the reasonable rental rate for Moorestown; 4) the exclusion of
CPA’s claim for the cost of retaining maintenance; and 5) the
Bankruptcy Court’s determination of the effective rejection date for
the Moorestown lease.

Because the district court held that all of CPA’s claims were
barred by CPA’s “unclean hands,” it did not reach or decide the
appeals taken with regard to the other issues decided by the
Bankruptcy Court. We have no occasion to address those issues
either, as the only question before us is whether the district court
erred in holding that CPA’s unclean hands barred it from relief.

lla
Appendix A

The district court reversed the Bankruptcy Court’s
determination on the grounds that the Bankruptcy Court had
“abused its discretion . . . because [it] applied the wrong legal
principle.” The district court did not dispute that the
Bankruptcy Court did in fact have discretion to refuse to
apply the unclean hands doctrine.

Specifically, the district court, relying upon Gaudiosi v.
Mellon, 269 F.2d 873 (3d Cir.), cert. denied, 361 U.S. 902
(1959), concluded that the Bankruptcy Court, by failing to
apply the unclean hands doctrine, did not follow the law of
this Circuit. Rather, the district court concluded that the
doctrine of unclean hands should be applied to protect the
integrity of the court itself, regardless of whether the unclean
hands of a creditor injured a party and regardless of the
presence of any immediate and necessary relationship
between the claims before the court and the events giving
rise to the assertion of unclean hands. The district court then
held that CPA’s conduct involving the Consents amounted
to unclean hands and therefore it disallowed CPA’s claims.

The district court did not hold that the Bankruptcy
Court’s findings of fact were clearly erroneous. However,
while crediting the Bankruptcy Court’s findings of fact, the
district court concluded that CPA had fabricated evidence
(1.e., the executed Consents) and had advocated before the
Bankruptcy Court a theory of assignment that it knew not to
be true. The district court also questioned the testimony that
Jones gave before the Bankruptcy Court. Predicated on its
own analysis, and drawing upon selected findings made by
the Bankruptcy Court, the district court then concluded,
contrary to the conclusion reached by the Bankruptcy Court,

12a
Appendix A

that CPA’s conduct did have an immediate and necessary
relationship with CPA’s claims against New Valley.

The district court closed its opinion with the observation
that “this Court must hold corporations responsible for their
misconceived and improper conduct. Corporate ethics,
professionalism, and verity are not lost on this Court, and
when corporations denigrate these values through lack of
candor ... this Court will not countenance this type of
conduct ... [and will cause it] to apply the appropriate
punishment.” The district court’s “appropriate punishment”
here consisted of barring all relief to CPA, thereby denying
CPA the $2,888,469.30 which the Bankruptcy Court had
determined was due from New Valley.

This appeal followed.
IV.

In bankruptcy proceedings, we have determined that an
abuse of discretion exists when “the [trial] court’s decisions
rests upon a clearly erroneous finding of fact, an errant
conclusion of law, or an improper application of law to fact.”
In re Marvel Entertainment Group, Inc., 140 F.3d 463, 470
(3d Cir. 1998) (citations omitted). Here, as the district court
did not question the Bankruptcy Court’s findings of fact, it
concluded that the Bankruptcy Court had abused its
discretion in not applying the unclean hands doctrine on the
basis of an incorrect conclusion of law.

This court reviews findings of fact by the Bankruptcy
Court under a clearly erroneous standard, and its conclusions

13a

Appendix A

of law under a plenary standard. Jn re Visual Indus., Inc., 57
F.3d 321 (3d Cir. 1995). Because the district court sits as an
appellate court in bankruptcy cases, our review of the district
court’s decision is plenary. /d. at 324. See also Fellheimer,
Eichen & Braverman, P.C. v. Charter T, echnologies, Inc.,
57 F.3d 1215, 1223 (3d Cir. 1995).

CPA frames the issue as whether the Bankruptcy Court,
“which presided over the lengthy proceedings and trial in
this matter, abused its discretion in declining to apply”
unclean hands. CPA referred us to Castle vy. Cohen, 676
F. Supp. 620 (E.D. Pa. 1987), aff'd in part and remanded on
other grounds, 840 F.2d 173 (3d Cir. 1988),’ which had
declined to apply the unclean hands doctrine to trustees of
an employee stock ownership plan. In doing so, CPA
identified five elements that must be present to warrant
application of unclean hands against a party. CPA argued
that the doctrine is applicable when: 1) a party seeking
equitable relief; 2) is guilty of conduct involving fraud,
deceit, unconscionability, or bad faith; 3) directly related to
the matter in issue; 4) that injures the other party; and 5)
affects the balance of equities between the litigants. CPA
claims that essential elements of the unclean hands doctrine
are lacking in the instant case.

9. This court, affirming the Castle district court on this issue,
held that the district court had not abused its discretion in rejecting
a claim that the trustees had “unclean hands.” We recited that under
our “limited scope of review on this issue [unclean hands], we cannot
conclude after reviewing the record [in Castle v. Cohen] that the

district court’s finding on this point is clearly erroneous.” Castle,
840 F.2d at 178.

l4a
Appendix A

In particular, CPA argued that there was no direct
relationship between its conduct regarding the “Consent to
Assignment” forms and its Proofs of Claim. CPA reinforces
its argument by referring to the Supreme Court’s “clean
hands” analysis in Keystone Driller Co. v. General
Excavating Co., 290 U.S. 240 (1933), which, among other
elements, requires that there be an “immediate and necessary
relationship” between the conduct and the matters in
litigation. The Supreme Court stated:

[C]Jourts of equity do not make the quality of
suitors the test. They apply the maxim requiring
clean hands only where some unconscionable act
of one coming for relief has immediate and
necessary relation to the equity that [the party]
seeks in respect of the matter in litigation. They
do not close their doors because of plaintiff's
misconduct whatever its character, that has no
relation to anything involved in this suit, but only
for such violations of conscience as in some
measure affect the equitable relations between the
parties in respect of something brought before the
court for adjudication. . . . They apply the maxim,
not by way of punishment for extraneous
transgressions, but upon considerations that make
for the advancement of right and justice.

290 U.S. at 245. In Keystone, the plaintiff (Keystone) sued
for patent infringement. In an earlier case, against different
parties, Keystone had prevailed and its patents were declared
valid. Keystone then used this first judgment to bring actions
against other alleged infringers. In the second case, Keystone

SS ee

1Sa
Appendix A

sought preliminary injunctions to protect the patents. The
injunctions were denied, and the case proceeded to trial.

During the course of the trial in Keystone, it was
discovered that Keystone, in its earlier case, had concealed
evidence which questioned and may have tainted the validity
of the patents. Affirming the Court of Appeals, the Supreme
Court held that this conduct by Keystone constituted unclean
hands and barred Keystone from recovery. The Supreme
Court stated that the earlier decree of validity obtained in
Keystone’s first case was used as the basis of Keystone’s
action in its subsequent case. Keystone, 290 U.S. at 246. The
Court inferred that “from the beginning it was plaintiff's
intention through suppression of . . . evidence to obtain [a]
decree in [the first case] for use in subsequent infringement
Suits against these defendants and others.” /d. at 247.
Therefore, Keystone’s misconduct had a direct relation to
the relief sought, so as to bar recovery. /d.

Although here CPA acknowledges that the district court
had determined that the Consents were “immediately and
necessarily related” to the litigation before the Bankruptcy
Court, it argues that the district court erred in reaching that
conclusion. CPA contends that the district court’s conclusion
that CPA lied about the assignment “was never ‘asserted’ in
a manner that would constitute a fraud on the Bankruptcy
Court.”

CPA is persuasive in arguing that the doctrine of unclean
hands should not be used to strip away millions of dollars in
damages for conduct that the Bankruptcy Court had found
was not related to CPA’s claims. Indeed, CPA argues that

16a
Appendix A

unclean hands cannot be applied by way of punishment for
an “extraneous transgression,” see Keystone, 290 U.S. at 245,
particularly where the “transgression” charged in this case
had no relationship to the Moorestown lease.

It must be remembered that no “Consent to Assignment”
form had ever been executed or was claimed by CPA to have
been executed with respect to the Moorestown lease, and
the Moorestown lease was responsible for more than two-
thirds of the damages awarded by the Bankruptcy Court.'®
CPA goes on to argue that to sustain the decision of the
district court would be to grant New Valley “something for
nothing,” i.e. possession of CPA’s property for years without
adequate payment. Such a result, CPA claims, is alien to
principles of equity.

On the other hand, New Valley claims that the district
court was correct in holding that CPA’s conduct barred any
recovery. Referring to our decision in Ciba-Geigy Corp. v.
Bolar Pharmaceutical Company, Inc., 747 F.2d 844 (3d Cir.
1984), cert. denied, 471 U.S. 1137 (1985), New Valley
charges that for unclean hands to be applied against a party,

10. A fair reading of the Bankruptcy Court’s opinion reveals
that the Bankruptcy Court was concerned only with New Valley’s
challenges to the amount of CPA’s claims, i.e., whether CPA’s
monetary claims arising out of the leases were inflated. As a
consequence, the Bankruptcy Court did not find it necessary to
decide any issue respectii:z the Consents to Assignment but dwelt
only on the rental, maintenance, and other monetary charges that
were the subject of CPA’s Proofs of Claim. Hence, the Bankruptcy
Court concluded, as do we, that the Consents had no relation to the
merits of CPA’s claim.

17a

Appendix A

generally all that needs to be shown are the following: 1) an
unconscionable act; 2) that affects the equitable relations
between the parties; 3) concerning something brought before
the court for adjudication. New Valley claims that we should
focus on whether a party to a controversy has acted in such
a manner as to “shock the moral sensibilities of the judge,”
and, citing to Gaudiosi, 269 F.2d at 882, contends that CPA’s
conduct was directly related to the claims at issue in the
litigation. New Valley contends that merely because CPA
abandoned its “fraudulent” claim before trial does not mean
that its hands became clean after years of having advanced a
theory in motion practice and discovery that both the
Bankruptcy and district courts later discredited as a sham.

New Valley argued that what “CPA sought was a finding
that FSI ... was liable to it for damages under the leases;
the proofs of claim were filed against New Valley in the
event that CPA was unsuccessful in establishing FSI’s
liability.”'' New Valley charged that to obtain that relief,
CPA manufactured evidence and pursued a theory it knew
to be false. “Moreover, CPA’s conduct posed an enormous
monetary risk to New Valley because New Valley was
obligated to indemnify FSI against any liability under the
Reno Lease.””!?

Relying upon Keystone, New Valley argued before us
that there is a broader standard of when conduct is “related”
for purposes of unclean hands. New Valley emphasized that

11. New Valley Br. at 30.

12. /d. at 31.

18a
Appendix A

CPA backdated documents and filed fraudulent proofs of
claim before the Bankruptcy Court, and contended “[iJt
strains credulity to accept CPA’s contention that it backdated
documents and manufactured evidence to support claims that
it did not believe it had placed before the court.”

V.

Although the parties disputed the applicability of
equitable defenses to legal claims in a bankruptcy
proceeding, we are far more concerned with the critical
element of the unclean hands doctrine, i.e., the relationship
between the challenged conduct of CPA pertaining to the
Consents, and the rental and other monies sought by CPA as
a result of the Reno and Moorestown leases. First and
foremost, we are convinced by the Bankruptcy Court’s
findings and its conclusion that the Consents had no
“immediate and necessary” relationship to the Proofs of
Claim. The Proofs of Claims filed by CPA, by their own
terms, reserved for litigation the dispute as to assignment of
the leases. Inasmuch as the Bankruptcy Court’s findings were
not held by the district court to be clearly erroneous, nor can
they be so held by us, those findings could not trigger the
doctrine of unclean hands under our standard of review.

in our view, the primary principle guiding application
of the unclean hands doctrine is that the alleged inequitable
conduct must be connected, i.e., have a relationship, to the
matters before the court for resolution. We will not refuse
relief to a party merely because it has engaged in misconduct
which is unrelated to its claims before the court. Only when
“some unconscionable act of one coming for relief has

19a
Appendix A

immediate and necessary relation to the equity that” the party
seeks, will the doctrine bar recovery. Keystone, 290 U.S. at
245. Here of course those issues involved CPA’s Proofs of
Claim which sought payment for monies due under New
Valley’s leases.

As an equitable doctrine, application of unclean hands
rests within the sound discretion of the trial court. See, e.g.,
Ciba-Geigy, 747 F.2d at 855 (refusing to apply unclean
hands). Moreover, neither we nor the Supreme Court has
required, as argued by New Valley, that application of the
unclean hands doctrine is mandatory. The precedents that
we find controlling make clear that there must be a
relationship between the inequitable conduct and the claims
brought before the court in order for the doctrine to apply;
even then, the court has discretion to limit the reach of the
doctrine to only some of the claims. See, e.g., Keystone, 290
U.S. 240; Ciba-Geigy, 747 F.2d 844.

The Supreme Court in Keystone held that “when
assessing whether to invoke the doctrine of unclean hands,
courts of equity must not be bound by formula or restrained
by any limitation that tends to trammel the free and just
exercise of discretion.” 290 U.S. at 245-46. When applying
the doctrine, the courts in this Circuit have generally been
clear that the connection between the misconduct and the
claim must be close. For example, in Monsanto v. Rohm &
Haas Co., 456 F.2d 592 (3d Cir.), cert. denied, 407 U.S.
934 (1972), this Court upheld a judgment declaring a
Monsanto patent invalid and unenforceable. 456 F.2d at 594.
The Court found that Monsanto had misrepresented the
properties of its product (a herbicide) in order to obtain a

20a
Appendix A

patent, although a claim for the same product had been
rejected in an earlier patent application. /d. at 596-97. The
claim of infringement brought by Monsanto therefore directly
depended upon Monsanto’s misrepresentations of
Monsanto’s own patent, thereby providing the essential
relationship for application of the doctrine. Thus, this court,
after citing to Keystone, id. at 598, found that the district
court was correct in concluding Monsanto had come to court
with unclean hands. Monsanto, 456 F.2d at 600.

Where this Court has not applied unclean hands, the
misconduct alleged has not been directly related to the
subject of the plaintiffs suit. In Ciba-Geigy, we upheld the
district court’s grant of a permanent injunction in favor of
Ciba despite allegations that Ciba had unclean hands. The
district court found that evidence that Ciba had mislabelled
drugs, sold adulterated batches of drugs and violated FDA
regulations was insufficient to warrant application of unclean
hands, as it did not involve nor relate to the matter of Ciba’s
claims against Bolar. Ciba-Geigy, 747 F.2d at 855. See also
Northeast Women’s Ctr. v. McMonagle, 868 F.2d 1342, 1354
(3d Cir.) (reversing the district court’s ruling that unclean
hands had precluded Northeast from obtaining an injunction
against the defendants because Northeast’s alleged
misconduct (violation of health regulations) had no
relationship to the defendants’ acts in interfering with
Northeast’s claims), cert. denied, 493 U.S. 901 (1989);
General Dev. Corp. v. Binstein, 743 F. Supp. 1115, 1136
(D.N.J. 1990) (refusing to apply unclean hands despite
evidence that General Development was a general
“malefactor” because that evidence did not relate directly to
the misrepresentations alleged in the complaint).

21a
Appendix A

The two cases relied on most heavily by the parties are
not to the contrary. As we have noted, Keystone, while
holding that unclean hands precluded the plaintiff (Keystone)
from the relief it sought, nevertheless requires an “immediate
and necessary” relationship between the conduct and the
claims at issue. In Keystone, that relationship was found to

be present, and hence, the Supreme Court upheld application
of the doctrine.

In Gaudiosi, this court applied the doctrine of unclean
hands in a proxy contest context. Our court upheld the
determination of the district court that Gaudiosi had tried to
“intimidate” a set of investors by sending a letter to them in
order to influence their votes. In doing so, Gaudiosi had
violated SEC solicitation regulations. Gaudiosi, 269 F.2d at
879. While our court focussed on the integrity of the court
when faced with an assertion of inequitable conduct, and
while we explicitly stated that no injury needed to be shown,
id. at 881-82, it is crystal clear from the facts of the case that
Gaudiosi’s misconduct — the intimidation of shareholders
—— was directly related to the case before the court, which
concerned the validity of a corporate election.

Given these precedents and their uniform requirement
of an “immediate and necessary” relationship between the
challenged conduct and the claims for relief, we cannot
sustain the district court’s decision in this case, where that
relationship is absent. The district court implicitly agreed
with the Bankruptcy Court’s determination that there was
little connection between the Consents and CPA’s Claims.
The district court, while emphasizing the actions of CPA in
backdating the Consents to Assi gnment, at no time suggested

22a

Appendix A

that a direct relationship ever existed between CPA’s conduct
and CPA’s Proofs of Claim.

Rather, in its opinion, the district court stated three
reasons why unclean hands should prevent the recovery of
monies by CPA. First, CPA had alleged a consent to
assignment theory that it knew to be untrue; second, the
testimony of Jones concerning the Consents strongly
indicated a “selective memory;” and third, CPA misleadingly
implied that it was confused as to which entity was CPA’s
tenant. It did so, despite some information in CPA’s
possession that indicated New Valley had remained CPA’s
tenant.

However, none of the issues which the parties disputed
and which pertained to the Moorestown property were
connected with the Consents to Assignment, and it was those
issues that accounted for two-thirds of CPA’s claims. The
Consents, as noted earlier, related only to the Bridgeton and
Reno leases. Moreover, the Consents simply have no
relationship to CPA’s claims for monies against New Valley
arising out of New Valley’s tenancy of Reno. Even more so,
the Consents had no direct relationship to CPA’s claims
concerning Bridgeton. Those claims, as we have uoted, had
been settled earlier. Yet, the district court’s reasons focus
almost exclusively on the issue of the Consents.

Nor do the Proofs of Claim support the district court’s
holding. Indeed, under the district court’s analysis, it is
difficult to imagine what different or alternative language
CPA could have used in its Proofs of Claim to reserve any
of its rights against New Valley. The Proofs of Claim merely

ra a Rt Ag PEI LEIP PD EL PRED diel A ie Ci NP a ie EO ot RS

23a
Appendix A

set forth the fact that CPA and New Valley had differing
interpretations concerning the status of the leases. Had CPA
waited until the assignment issue had been liti gated, it would

have been out of time in presenting its bankruptcy claims
against New Valley.

We hold that the Bankruptcy Court (1) applied the
correct legal standard, drawn from Keystone and Gaudiosi,
which established the principle of direct relationship in the
cases we have cited, and (2) was not clearly erroneous in its
factfinding, when it concluded that there was no immediate

and necessary relationship between New Valley’s assertion
of unclean hands and CPA’s claims.

VI.

We will therefore reverse the Order of the district court
dated July 13, 1998, and remand to the district court for

further proceedings (see, e. g., note 8, supra) consistent with
this opinion.

A True Copy:
Teste:

Clerk of the United States Court of
Appeals for the Third Circuit

24a

Appendix A

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 98-6267
IN RE: NEW VALLEY CORPORATION,
Debtor

NEW VALLEY CORPORATION,
c/o BROOKE GROUP LTD.

Vv.

CORPORATE PROPERTY ASSOCIATES 2 AND 3,
c/o W.P. CAREY & COMPANY, INC.

Corporate Property Associates 2 aud 3,
Appellants
On Appeal from the United States District Court
for the District of New Jersey
(D.C. No. 98-cv-00982)
District Judge: Honorable Alfred M. Wolin
Argued Friday, May 21, 1999
Present: McKee, Rendell, and Garth, Circuit Judges

JUDGMENT

0 OS. en Ee 6 a << «+= we

Aemmpe —S m Sll ei y ll

25a .
Appendix A

This cause came on to be heard on the record from the
United States District Court for the District of New Jersey
and was argued by counsel on May 21, 1999.

On consideration whereof, it is now here ordered and
adjudged by this Court that the judgment of the said District
Court dated July 13, 1998 and entered July 17, 1998, be,
and the same is hereby reversed and the cause is remanded
to the District Court for further proceedings consistent with
this opinion. Costs taxed against appellee. All of the above
in accordance with the opinion of this Court.

ATTEST:

s/ P. Douglas Sisk
Clerk

Dated: July 6, 1999

26a

APPENDIX B — OPINION AND ORDER OF THE
UNITED STATES DISTRICT COURT FOR THE
DISTRICT OF NEW JERSEY DATED JULY 13, 1998

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY

Civil Action No. 98-982
In re
NEW VALLEY CORPORATION,

Reorganized Debtor

NEW VALLEY CORPORATION,
Appellant/Cross-Appellees,
v.

CORPORATE PROPERTY ASSOCIATES,

OPINION

* a *

Appellees/Cross-Appellants.
WOLIN, District Judge

Corporate Property Associates 2 and 3 (“CPA”) filed a
claim in New Valley Corporation’s (“NV”) bankruptcy. After
years of litigation and a trial, the Bankruptcy Court

_ =

27a

Appendix B

determined that CPA should recover $2,888 ,469.30 from
NV’s estate. NV raises three issues on appeal, and CPA
cross-appeals on five of the Bankruptcy Court’s rulings. The
Court has determined that the Bankruptcy Court abused its
discretion by using the wrong legal principle when it decided
that CPA’s improper conduct did not bar its claim. The Court
has also found that the Bankruptcy Court should have denied
CPA any relief because CPA entered a court of equity with
unclean hands. Thus, the Court will reverse the Bankruptcy
Court’s decision, and will deny CPA any relief. The Court
will not address the other issues raised in NV’s appeal and
CPA’s cross-appeal because the Court’s decision on the
doctrine of unclean hands has rendered those issues moot.
Pursuant to Rule 78 of the Federal Rules of Civil Procedure,
the Court decided this case without oral arguments.

el nn Ae Ses Aan PSE Oe Map stict ee PIII ns

| BACKGROUND

I. The Leases and Parties

In 1971 and 1972, Western Union Telegraph Company
(“WU”) and Western Union Realty Corporation (“WU
Realty”) entered into three separate leases for three properties
— the Moorestown Property, the Reno Property, and the
Bridgeton Property. The terms of the leases are identical
except for the rent. They are triple net leases, which make

the tenant completely responsible for the repair, maintenance,
and upkeep of the property.

a ee as

In November 1981, CPA purchased the three properties
and an additional property located in Bridgeton from WU
Realty, and became WU’s landlord for the Moorestown,

28a

Appendix B

Reno, and Bridgeton Leases. In December 1981, WU
changed its name to Western Union Corporation (“WUC”),
and thus, WUC became the tenant under the three leases.
During this time, WUC had a wholly-owned subsidiary called
Western Union Financial Services, Inc. (“FSI”). In 1989,
WUC made FSI a separate corporate entity so that FSI could
hold substantial portions of the assets of WUC’s money
transfer business. On April 18, 1991, WUC changed its name
to NV, and thus, NV became the tenant under the three leases.

On March 15, 1990, Donald Wasson, Director of Real
Estate Operations for WUC, sent a letter and signed,
proposed consents to assignment (“Consents”) to Barclay
Jones, then vice president of CPA’s general partner. The
letter requested that CPA consent to the assignment of the
Bridgeton and Reno leases from WUC to FSI. A month later,
Jones told Wasson that CPA would not grant the request
unless WUC also assigned the Moorestown Lease to FSI.
Wasson responded that CPA’s demand was unacceptable
because WUC premised its request on the facts that FSI was
working out of the Bridgeton and Reno Properties and that
the decision had been made to abandon the Moorestown
Property. Wasson then sent his colleague, Jan Wolpert, a
memorandum stating that CPA would not sign the Consents
without the inclusions of the Moorestown Lease. For some
reason, Jones signed the Consents on April 15, 1990.
Although Jones was only a vice president on the date he
allegedly signed the Consents, Executive Vice President
appears below his signature. He did not attain that position
until either June 1990 or April 1991. NV and CPA did not
discuss the Consents again until May 1993.

29a
Appendix B

During NV’s Plan of Reorganization, the Bridgeton
Lease was transferred to FSI. Following that transfer, CPA
signed a formal assumption of lease agreement with FSI
whereby FSI assumed the liabilities under the Bridgeton
Lease and absolved FSI of any liability arising before the
assumption. In November 1994, NV also sold FSI to First
Financial Management Corporation for $1.2 billion as part
of its bankruptcy reorganization. Even though CPA
ultimately withdrew its claim against NV under the Bridgeton
Lease, the Court will include facts regarding the Bridgeton
Lease where they help complete the story.

I]. The Bankruptcy Proceedings

On November 15, 1991, pursuant to Chapter 11 of the
Bankruptcy Code, an involuntary petition for bankruptcy was
filed against NV. On March 30, 1993, NV consented to an
entry of an order for relief under Chapter 11 of the
Bankruptcy Code.
III. The Leases After the Bankruptcy

A. Moorestown Lease

On May 24, 1993, the Bankruptcy Court approved NV’s
rejection of the Moorestown Lease. The base rent contained
in the Moorestown Lease was $10.85 per square foot. NV
stopped paying rent for the Moorestown Property on July

31, 1991, and stopped paying real property taxes in May
1992.

a i |

30a

Appendix B

B. The Bridgeton and Reno Leases

Near the end of April 1993, NV filed for an application
for an extension of time to assume or reject its remaining
non-residential leases, which included the Reno and
Bridgeton Leases, until its plan of reorganization was
confirmed. CPA filed an objection to NV’s application on
May 14, 1993, but withdrew the objection because it had
discovered that the Bridgeton and Reno leases had been
assigned from NV to FSI in 1990. CPA faxed copies of the
fully executed Consents to NV. After receiving the faxes,
John Walters, NV’s general counsel, told Wasson to search
the files to determine whether NV had ever received the fully
executed Consents. Wasson informed Walters that NV had
never received such Consents.

On September 8, 1993, Walters wrote CPA’s counsel a
letter stating that NV was of the position that the Reno and
Bridgeton Leases had not been assigned, and that NV or its
predecessor had always been the tenant under those Leases.
CPA’s counsel responded with a letter on September 30,
1993, and recounted what had occurred in 1990. First, he
stated that no agreement had been reached on the
Moorestown Lease. Then, he wrote that after CPA told NV
that CPA would not consent to the assignments of the Reno
and Bridgeton Leases unless WUC also assigned the
Moorestown Lease, Wasson told Jones that WUC was
assigning the two leases with or without CPA’s consent.
Thus, CPA’s counsel stated that its record indicated that
WUC assigned the two leases. He added that NV’s position
was a “ ‘creative bankruptcy tactic’ [that] is completely
inconsistent with the operating realities of [FSI].” He

31a

Appendix B

concluded: “[W]hether it can be shown that [FSI] operated
out of Moorestown, Bridgeton, and Reno as a result of an
actual assignment, or by way of a de facto assignment, is the
stuff that lawsuits are made of.”

On September 30, 1993, CPA filed its first of two Proofs
of Claim in NV’s bankruptcy proceeding. Although the first
Proof of Claim dealt mainly with the Moorestown Lease,
CPA included a footnote regarding its position on the Reno
and Bridgeton Leases:

Although the Bridgeton, Missouri, and Reno,
Nevada leases were assigned to and assumed by
[FSI] a non-debtor subsidiary of the Debtor,
because the Debtor has taken the position in this
bankruptcy case that the two leases were not
assigned, CPA[ ]. . . ha[s] included these amounts
in its Proof of Claim as a precautionary measure.
CPA[] ... hereby reserve[s] the right to argue
that the Bridgeton and Reno leases were in fact
assigned to and assumed by FSI.

Thus, in the first Proof of Claim, CPA argued in the
alternative: either it would pursue a claim against NV in the
bankruptcy proceeding, or would seek to recover from FSI.

On October 4, 1993, Walters wrote CPA’s counsel a
letter clarifying FSI’s occupancy of the Reno and Bridgeton
Properties. Walters wrote that FSI and NV had entered into
an agreement whereby FSI could operate out of the Reno
and Bridgeton Properties so long as it reimbursed NV for its
pro rata share of the expenses associated with the property.

32a

Appendix B

Walters added that NV unsuccessfully attempted to assign
the two leases in 1990, and that it could not have assigned
the leases without CPA’s consent.

In late December 1994, NV rejected the Reno Lease.
On January 20, 1995, CPA filed its second Proof of Claim.
Once again, CPA included a footnote in the Proof of Claim
to reserve its right to argue that the Reno Lease had been
assigned to FSI:

Although the lease was assigned to and assumed
by [FSI], a non-debtor subsidiary of the Debtor
which was sold to First Financial Management
Corporation on October 6, 1994, CPA[ ].. . ha[s]
filed this Proof of Claim as a precautionary
measure because the Debtor has taken a position
that the lease was not assigned and, therefore,
rejected the lease. CPA[ ] ... hereby reserve[s]
the right to argue that the Reno Lease was, in fact,
assigned to and assumed by FSI.

C. CPA’s Pursuit of the Assignment Theory

The Court finds it difficult to believe that after arduous
pre-trial discovery and a thorough trial, the parties vigorously
disagree on how long CPA pursued the theory that NV
assigned the Reno and Bridgeton Leases to FSI. NV asserts
that CPA pursued the theory until the time of trial. CPA
argues that it abandoned the theory in June 1996, one year
before the trial. Although CPA pursued the theory during
the early part of the litigation, the facts support CPA’s
argument.

|

———<— Sr rt

33a

Appendix B

In March 1995, CPA filed its Response to Objections of
NV to Proofs of Claim and Motions to Expunge, Disallow
and Reduce Claims (“Response to Objections”). Paragraph
16 provided: “At almost every stage throughout this
bankruptcy case, [CPA] ha[s] asserted that the Bridgeton
Lease and the Reno Lease were previously assigned to FSI
and that such leases were not property of [NV]’s bankruptcy
estate.” Paragraphs 19 and 31 elaborated on CPA’s statement
in Paragraph 16. Paragraph 19 discussed CPA’s lack of
discovery: “Some of the factual allegations contained in this
response are based upon information available to [CPA]. To
the extent that the allegations are based upon information
within the possession of [NV] or FSI, discovery is needed in
order to bring further light to this complicated set of facts.”
In Paragraph 31, CPA asserted that it was not relinquishing
the contention that NV was the lessee of the Reno and
Bridgeton Leases: “To the extent that this Court should find
that the Reno Lease was property of [NV]’s estate, this Court
s.vuld allow the amount asserted, $2,317,497.00, in full as
it is based upon rent due under the Reno Lease with the
502(b)(6) cap applied to such amount.”

When CPA filed its Response to Objection in March
1995, it was not heavily involved in the pursuit of its claims
or in NV’s bankruptcy proceeding. In fact, as of March 1995,
CPA had only responded to NV’s motion to extend time to
decide whether to reject or assume the leases, filed the Proofs
of Claim, and filed its Response to Objections.

On January 12, 1996, CPA filed its Response to NV’s
Request for Admissions and Interrogatories (“Request for
Admissions”). In Paragraph 2, CPA denied that NV had not

34a
Appendix B

assigned the Reno Lease to FSI. However, CPA also
cross-referenced its response to Interrogatory 2, which
provided:

If CPA denies Request No. 2 of the Admissions
Request, state the following:

(a) when the assignment occurred;

RESPONSE: CPA has made reasonable
inquiry and the information known or readily
obtainable by CPA is insufficient to be able
to admit or deny the admission or respond
to this Interrogatory. Response to this
Interrogatory may rely on documents which
cannot be fully identified by CPA because
such documents have not yet been delivered
to CPA in response to their Requests for
Production of Documents.

(b) list all documents that support such denial;
and

RESPONSE: Reno Consent. Additionally,
see response to 2(a) above.

(c) produce copies of all such documents, to the
extent not previously produced to [NV].

RESPONSE: A copy (and the original) of the
Reno Consent has been produced. CPA
cannot produce all documents that support

35a
Appendix B

such denial because responsive documents
may be in the possession of [NV] or FSI and
such documents have not yet been delivered
to CPA in response to their Requests for
Production of Documents. Additionally, see
response to 2(a) above.

After receiving discovery on the assi gnment theory, CPA
contends that it realized that no express assignment had
occurred, and that it would be difficult to prove a de facto
assignment at trial. Thus, CPA claims that it abandoned the
assignment theory, and ultimately released FSI from any
liability on the Reno and Bridgeton Leases in June 1996,
which is more than one year before trial.

IV. Pre-Trial Proceedings Before the Bankruptcy Court

CPA’s claims against NV arose out of NV’s rejection of
the Reno and Moorestown Leases. The claims contained three
general components: (1) a claim for unpaid rent obligations
(“base rent” claims); (2) a claim for unpaid obligations, i.e.,
utilities, maintenance, and service, which the leases obligated
NV to pay, (“additional rent” claims); and (3) a claim for
NV’s breach of covenants in the leases requiring NV to
maintain the properties in good condition (“deferred
maintenance claims”). The total value of CPA’s claims
amounted to $3,499,084.84.

Prior to trial, both NV and CPA moved for summary
judgment. On October 29, 1996, the Bankruptcy Court issued
an interlocutory decision on NV’s motion for partial
summary judgment and CPA’s cross-motion for partial

36a

Appendix B

summary judgment. In denying NV’s motion, the Bankruptcy
Court held that CPA’s Gap Claim is a separate component
of CPA’s claim and not subject to the statutory cap imposed
by § 502(b)(6) of the Bankruptcy Code. The Bankruptcy
Court also held that the rejection damages cap in the
Bankruptcy Code subsumed CPA’s deferred maintenance
claims. Moreover, NV conceded that if the Bankruptcy Court
determined that CPA should recover, then the recovery
should be the full amount allowable under § 502(b)(6) of
the Bankruptcy Code.

Immediately before the trial on CPA’s claims, NV filed
an in limine motion that sought to prohibit CPA from
presenting any evidence regarding its claim under the Reno
Lease. NV argued that CPA should be precluded from
presenting any evidence on this claim because it had admitted
throughout the litigation that the Reno Lease had been
assigned. NV concluded that if it had assigned the lease,
then CPA would have no claim against NV. In denying the
motion, the Bankruptcy Court held that CPA had never made
an unequivocal admission regarding the assignment, and that
NV would not be prejudiced if CPA amended or withdrew
the admission.

V. The Trial

The pre-trial motions, rulings, discovery, and
stipulations reduced CPA’s claims to two components —
base rent claims and additional rent claims on both the
Moorestown and Reno Properties. During the eight-day trial
on NV’s objections to CPA’s claims, NV objected to the
amounts asserted in CPA’s claims and sought to disallow

37a

Appendix B

the claims because of CPA’s alleged misconduct. NV argued
that CPA should not be allowed to recover because it had
deliberately and wrongfully overstated its deferred
maintenance claims for the Reno and Bridgeton Properties
and because it had wrongfully asserted that the Reno and
Bridgeton Leases had been assigned to FSI.

A. Maintenance Men

CPA submitted claims for the maintenance men that it
employed to care for the Reno and Moorestown Properties
after NV vacated them. Samantha Garbus testified that the
maintenance men ensured that the properties complied with
local regulations, and provided CPA with timely notice when
a problem arose. CPA generally employs maintenance men
to oversee vacant properties. In this situation, CPA paid its
maintenance men on a regular basis. Thus, CPA thought that
maintenance men were essential to its effective management
of the properties.

Both leases contained the identical Article III, which
deals with additional rent:

Section 3.1. The Tenant covenants and agrees to
pay, as additional rent, before any interest or
additional charge may be added thereto for the
non-payment thereof, all real estate taxes, special
assessments, water and sewer charges and other
governmental charges, general and specific,
ordinary and extraordinary, unforeseen as well as
foreseen, of any kind and nature whatsoever,
relating to any part of the premises or facilities

38a

Appendix B

described in Section 18.1, which have been or
shall become payable with respect to any portion
of the term of this lease... .

B. Effective Date of Rejection

In April 1989, CPA learned that WUC planned to close
its central telephone bureau at the Moorestown Property.
WUC removed most of its equipment and furniture and
closed its telephone operations by August 1989. WUC did,
however, use a portion of the space for a small sales staff
until October 1992. NV removed the remaining equipment
in January or February 1993 at the direction of Fred Rossi,
an employee of CPA. NV did not formally surrender the
property to CPA until March 11, 1993.

Prior to the formal surrender, Wasson visited the
property on February 23, 1993. While he was on the premises,
he noticed that CPA had removed the carpet tiles, the vinyl
floor tiles, and the ceiling tiles. He testified that it appeared
as if CPA was preparing the property for a new tenant.
Around the same time, NV stopped paying for the upkeep
and maintenance of the property.

CPA began marketing the Moorestown Property before
NV had formally surrendered or formally rejected the
property. In fact, CPA hired Fuller Corporate Real Estate
Partners (“Fuller”) to market the property in 1991, and Fuller
replaced NV’s sign with its own in October 1991. Fuller
actively marketed the property, and even asked CPA to
approve an expansion of the building for a potential tenant
in August 1992. Fuller rendered services for CPA until CPA
hired the Mertz Corporation (“Mertz’’) as its exclusive agent.

ee ee

39a

Appendix B

C. Appropriate Rent for the Moorestown Lease

During the trial, NV and CPA disagreed on what rent
the Bankruptcy Court should apply when determining the
amount of CPA’s claim for post-petition rent under the
Moorestown Lease. The Moorestown Property consists of
65,000 square feet of useable space and 6,300 square feet
for a mechanical penthouse.

NV produced George Powell, JR., MAI to support its
position that the base rent was unreasonable. Powell has been
an appraiser since 1978, received his MAI designation in
1987, teaches appraisal techniques at Rutgers University, and
has testified as an expert on property valuation. After
reviewing the Moorestown Property and commercial and
office leasing activity from November 1991 to May 1993 in
surrounding areas, he found that the office market in southern
New Jersey collapsed during the relevant period. Thus,
Powell declared that the fair market rent was $7.00 per square
foot.

CPA contended that the base rent in the Lease, $10.85
per square foot, was reasonable because it was within the
market range during the post-petition period. In trying to
rebut Powell’s testimony, CPA produced Maryann Franken
who has worked for Mertz since 1988 as a licensed real estate
broker and licensed sales associate. She is familiar with the
Moorestown Property, but has never testified as an expert
before this case and is not an appraiser. She stated that the
market base rent for the Moorestown Property during the
post-petition period was between $7.00 and $12.00 per square
foot, but that the average office transaction was between

40a

Appendix B

$8.00 and $10.00 per square foot. However, during her
testimony, she conceded that the average deal in southern
New Jersey was for 5,000 square feet, and that they “live on
deals under 10,000” square feet. Although she asserted she
reviewed leases for over 50,000 square feet, she was unable
to specify any tenant in such a property. Finally, Franken,
on behalf of CPA, attempted to lease the property for $4.50
per square foot in 1994.

D. Unclean Hands

In refuting NV’s claim that it had unclean hands, CPA
explained its reasons for originally asserting the assignment
theory. Barclay Jones, Samantha Garbus, and Elizabeth
Wagner, all of whom worked for CPA, testified that CPA
was confused as to the business arrangement between FSI
and NV regarding the Bridgeton and Reno Leases. FSI was
the operating entity at both properties, and NV transferred
valuable assets, including a number of leases, to FSI.
Moreover, testimony showed that NV wanted to transfer the
properties to FSI, and a document entitled the “Letter
Agreement for Operating Leases” could be read as an
assignment of the Bridgeton and Reno Leases.

On the other hand, NV introduced evidence to show that
CPA knew that the two leases had not been assigned. For
example, Walters stated that CPA never expressed any
confusion regarding the tenant of the two properties. In
addition, CPA’s files do not contain any documents to show
that FSI was the tenant under the two leases. More notably,
CPA’s files contained documents showing that: (1) its
accountants received confirmation that NV was the tenant

4la

Appendix B

as of December 31, 1991, December 3 1, 1992, and December
31, 1993; (2) NV gave CPA a Tenant Estoppel Certificate
for the Reno Property stating that the property had not been
assigned; (3) CPA sent rent increases to NV; and (4) CPA
communicated to its investors that NV was the tenant of the
two properties. Furthermore, Jones testified that although
CPA asserted the assignment theory in the Proof of Claims,
he did not know whether the statement was true or false when
it was made. He also stated that he told his attorneys that the
Consents “were never finalized.

In addition, Wasson, Walters, and Jones all testified that
NV and CPA never consummated a deal regarding the
assignment of the three leases. More importantly, NV claims
that the evidence establishes that the Consents were back
dated because April 15, 1990, was Easter Sunday, and
because Jones did not hold the title of Executive Vice
President in April 1990. Walters testified that he believed
that CPA believed that it held valid Consents, and that the
Consents were backdated three years because CPA wanted
to avoid a situation where NV rejected the leases. Moreover,
Richard Brunell, NV’s handwriting expert, conducted ink
identification and dryness tests to determine the date of the
signature and writing below the si gnature. He was unable to
reach a conclusion for the signature but he concluded toa
high degree of scientific certainty that “Executive Vice
President” was most possibly written in 1993.

Jones, however, testified that he remembers Signing the
documents, but could not remember the exact date. He stated
that he could have signed them on Easter Sunday. He
conceded that the dates and title were not his handwriting,

42a

Appendix B

and Eve Berman, the former head of the property
management department at W.P. Carey, testified that the title
and dates were in her handwriting, but that she could not
remember writing them. Berman also stated that she doubted
that she wrote on the Consents in 1993, and that no one from
CPA asked her to backdate the documents.

During the trial, Jones conceded that in 1993, he knew
that it was better for CPA to have FSI as a tenant because it
was a solvent subsidiary of NV. He also admitted that unlike
a claim against NV, a claim against FSI would not be subject
to a statutory cap.

NV claimed that CPA’s improper conduct regarding the
inflation of claims and the Consents caused it to incur legal
fees in excess of $850,000. Marc Bell, NV’s Associate
General Counsel, testified that NV would have settled CPA’s
claims if CPA had not asserted the assignment theory.

Despite its assertions about CPA’s improper conduct,
NV did not do anything or refrain from doing anything
because of the Consents. In fact, Walters testified that the
Consents did not alter NV’s position on the Reno and
Bridgeton Leases because they were meaningless to him and
he disregarded them. He also stated that the Consents were
not the reason that NV and CPA were unable to settle CPA’s
claims early in the litigation. Furthermore, Walters testified
that the Consents did not factor into the sale of FSI. Lastly,
NV never spent any money indemnifying FSI because of
the Consents.

43a
Appendix B

_E. Bankruptcy Court’s Rulings

On December 23, 1997, the Bankruptcy Court issued an
Opinion, which made the following rulings. First, the court
decided that it would follow the test established in Jn re
McSheridan, 184 B.R. 91 (B.A.P. 9th Cir. 1995), for
determining what items should be included as additional rent
under § 502(b)(6)(a). The court then held that the
maintenance men that CPA employed to care for the property
did not count towards the additional rent claims because they
did not fall within Article III in the leases. Thus, the
Bankruptcy Court reduced CPA’s claims by “$10,912.50 for
the maintenance man component of additional rent on the
Reno Lease, [ ] $6,000.00 for the maintenance man
component of the Gap Claim for additional rent on the
Moorestown Lease, and [ ] $18,582.35 for the maintenance
man component of rejection damages claim for additional
rent on the Moorestown Lease.”

Second, the court agreed with the majority rule that court
approval is a condition precedent for an effective rejection
of a lease under § 365(d)(3). See, e.g., In re Thinking Machs.
Corp., 67 F.3d 1021 (1st Cir. 1995). The court then stated
that it would exercise its equitable powers in making the
rejection retroactive to February 23, 1993, rather than May
24, 1993, the date the court signed the order authorizing
rejection, because it found that CPA exercised complete
control over the property on February 23, 1993. That finding
reduced CPA’s claims by $200,900.

Third, the court held that the rent in the lease, $10.85
per square foot, was unreasonable when compared to the

44a

Appendix B

market, and thus, set the rent for the postpetition period at
$7.00 per square foot. In reaching this holding, the court
found that Franken’s experience did not support her opinion
as to the reasonable rate. Thus, it relied on NV’s expert’s
opinion in declaring that the base rent in the Moorestown
Lease was unreasonable.

In its fourth ruling, the Bankruptcy Court rejected NV’s
request that it use its equitable powers and disallow CPA’s
claims because CPA had unclean hands. The court first
determined that CPA had not inflated its deferred
maintenance claims. As for the Consents, the Bankruptcy
Court found that CPA never believed that NV assigned the
Bridgeton’ and Reno Leases to FSI. “The court suspects that
CPA took that position as a negotiating tactic in order to
minimize any losses it might suffer as a result of the [NV]
bankruptcy.” The Court also agreed with Walters’s belief
that CPA had backdated the Consents: “[I]t is likely that the
[C]onsents were backdated and then produced to avoid the
prospect of being limited to a lease rejection claim in the
[NV] bankruptcy.” In reaching that finding, the Bankruptcy
Court determined that Jones’s lack of memory on when he
signed his name was incredible, and that NV’s expert was
convincing. The Bankruptcy Court also stated that CPA’s
actions are understandable when one considers the dire
financial situation of NV and the solvency of FSI in 1993 —
FSI was a more desirable tenant. The court also did not

1. In its Opinion, the Bankruptcy Court mistakenly stated
Moorestown instead of Bridgeton. This Court has substituted
Bridgeton for Moorestown because NV claims that CPA executed
the Consents for the Reno and Bridgeton Leases, not the Moorestown
Lease.

iii

45a
Appendix B

believe that CPA was confused as to which entity was the
tenant under the two leases because Jones Closely oversaw
the properties and because ample documents existed to show
that NV was the tenant.

After making those findings, the Bankruptcy Court held:
“[T]he court perceives no impact on the proofs of claim...
[because] the alleged assignments did not bear on any
element of the proof of claim. . . . [I]t appears to have been
a somewhat misguided effort to preserve a right against FSI”
if the Bankruptcy Court disallowed its claim against NV.
The court emphasized that NV’s argument would be more
persuasive if CPA’s conduct had been directed at it rather
than at FSI. The court then rejected NV’s argument that
CPA’s alleged misconduct caused NV to spend money
defending CPA’s claim because the proceeding involved
many complicated legal issues and a large claim. Ultimately,
the Bankruptcy Court allowed CPA’s claims in the amount
of $2,888,469.30.

On January 26, 1998, the Bankruptcy Court issued an
Order memorializing its Opinion. NV appeals the Bankruptcy
Court’s decision allowing CPA’s claims. NV raises three
issues in its appeal: (1) the Bankruptcy Court erred in
concluding that CPA’s conduct did not warrant the
disallowance or reduction of CPA’s claims; (2) the
Bankruptcy Court erred in denying NV’s objection that CPA
not be allowed to introduce evidence inconsistent with its
judicial admissions or regarding NV’s obligations to CPA
under the Reno Lease; and (3) the Bankruptcy Court
incorrectly determined that CPA’s claim for rent under the
Moorestown Lease for the Gap Period was not subject to
§ 502(b)(6)’s mandatory cap.

46a
Appendix B

CPA cross-appeals the Bankruptcy Court’s decision. It
raises five issues in its cross-appeal: (1) the Bankruptcy Court
erred in determining that CPA’s claims for deferred
maintenance were capped pursuant to § 502(b)(6); (2) the
Bankruptcy Court should have used the time remaining, and
not the amount of rent remaining, under the Leases to
calculate the cap under § 502(b)(6); (3) the Bankruptcy Court
erred by holding that the reasonable rental rate for the
Moorestown Property was $7.00 per square foot rather than
the rent set forth in the lease; (4) the Bankruptcy Court
mistakenly excluded CPA’s claim for the cost of retaining
maintenance; and (5) the Bankruptcy Court erred by ruling
that the effective rejection date for the Moorestown Lease
was February 25, 1993, and not May 24, 1993.

DISCUSSION
I. Relevant Legal Standards

United States District Courts have mandatory
jurisdiction to hear appeals from final orders of bankruptcy
judges. See 28 U.S.C. § 158(a)(1); Fed. R. Bankr. Pro.
8001(a). On appeal, a district court may set aside a
bankruptcy court’s findings of fact only if clearly erroneous.
See, e.g., In re Sharon Steel Corp., 871 F.2d 1217, 1222 (3d
Cir. 1989); General Elec. Credit Corp. v. Nardulli & Sons,
Inc., 836 F.2d 184, 186 (3d Cir. 1988); Jn re Brennan, 198
B.R. 445, 448 (D.N.J. 1996). “[A] finding is ‘clearly
erroneous’ when although there is evidence to support it,
the reviewing court on the entire evidence is left with the
definite and firm conviction that a mistake has been
committed.” Anderson v. City of Bessemer City, N.C., 470

47a

Appendix B

U.S. 564, 573, 105 S. Ct. 1504, 1511 (1985) (quotation
omitted). The fact that a reviewing court could have decided
the matter differently does not render a finding of fact clearly
erroneous. See Fed. R. Bankr. R. 8013; Anderson, 470 U.S.
573-74, 105 S. Ct. at 1511. In contrast, a district court reviews
a bankruptcy court’s legal conclusions or questions of law
under a plenary or de novo standard. See, e.g., In re Modular
Structs., Inc., 27 F.3d 72, 76 (3d Cir. 1994) (citation omitted);
J.P. Fyfe, Inc. v. Bradco Supply Corp., 891 F.2d 66, 69 (3d
Cir. 1989). If the questions involve both law and fact, courts
should apply the appropriate standard to each component.
See In re Sharon, 871 F.2d at 1222.

Il. Doctrine of Unclean Hands
A. Standard of Review

NV and CPA hotly contest what standard the Court
should use in reviewing the Bankruptcy Court’s decision to
not invoke the doctrine of unclean hands. NV frames the
issue as whether the Bankruptcy Court properly applied the
doctrine of unclean hands in deciding not to reduce or
disallow the claims. NV concludes that the Court should
review this issue de novo because the facts are not in dispute.
CPA counters that the proper standard of review is abuse of
discretion because the application of the doctrine of unclean
hands rests within the discretion of the trial court.

Although the Third Circuit has stated that “{a] mixed
question of law and fact is found whenever a legal precept is
applied to the sum of the facts of a case,” Meridian Bank v.
Alten, 958 F.2d 1226, 1229 (3d Cir. 1992) (citations omitted),

48a

Appendix B

a district court should reverse a bankruptcy court’s
application of the doctrine of unclean hands only if the
district court finds that the bankruptcy court abused its
discretion. See Barry v. Hialeah Miami Springs Med. Fund,
184 B.R. 611, 613 (S.D.Fla. 1995); see also Keystone Driller
Co. v. General Excavator Co., 290 U.S. 240, 245-46, 54
S. Ct. 146, 148 (1933) (discussing standard of review of
application of unclean hands in patent case); Castle v. Cohen,
676 F. Supp. 620, 628 (E.D.Pa. 1987) (discussing standard
of review of application of unclean hands in ERISA case),
aff'd in part and vacated in part, 840 F.2d 173 (3d Cir. 1988).
Abuse of discretion is the correct standard because when
assessing whether to invoke the doctrine of unclean hands,
“[courts of equity] must not be bound by formula or
restrained by any limitation that tends to trammel the free
and just exercise of discretion.” Keystone Driller, 290 U.S.
at 245-46, 54 S. Ct. 146, 148; accord Barry, 184 B.R. at
613; Castle, 676 F.Supp. at 628. Abuse of discretion occurs
when a court fails to apply the correct legal precepts or bases
its decision on clearly erroneous findings of fact. See
Meridian Bank, 958 F.2d at 1230 n.2.

The Court notes that the determination of whether to
invoke the doctrine of unclean hands is an equitable one that
can best be made by the trial court. In this case, NV does not
challenge the Bankruptcy Court’s factual findings or
statement of the law, but rather the determination that the
circumstances of this case did not warrant the invocation of
the doctrine of unclean hands. In essence, NV argues that
the court failed to apply the law properly.

49a

Appendix B

B. Analysis

NV argues that the Bankruptcy Court should have
invoked the doctrine of unclean hands to reduce or disallow
CPA’s claims for five reasons: (1) even though CPA knew
that the Reno and Bridgeton Leases had not been assigned,
CPA asserted that they were assigned in order to avoid the
statutory restrictions imposed by NV’s bankruptcy; (2) CPA
altered documents to support its assertion; (3) the Bankruptcy
Court erred in finding that CPA’s actions did not have an
impact on this case because FSI was a wholly-owned
subsidiary of NV and because NV was obligated to indemnify
FSI of any liability under the Reno Lease; (4) CPA should
not be rewarded for conduct that might be criminal; (5) the
Bankruptcy Court should have granted NV’s motion in limine
because at the trial, CPA contradicted its pre-trial admission
that NV had assigned the Reno Lease to FSI when it stated
that NV was liable for the Reno Lease.

“It is one of the fundamental principles upon which
equity jurisprudence is founded, that before a complainant
can have a standing in court he must first show that not only
has he a good and meritorious cause of action, but he must
come into court with clean hands.” Keystone Driller, 290
U.S. at 244, 54S. Ct. at 147. However, “courts of equity...
apply the maxim requiring clean hands 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.” Jd. at 245, 54 S. Ct. at 147-48:
accord CIBA-GEIGY Corp. v. Bolar Pharm. Co., Inc., 747
F.2d 844, 855 (3d Cir. 1984), cert. denied, 471 U.S. 1137,
105 S. Ct. 2678 (1985); General Dev. Corp. v. Binstein, 743

50a

Appendix B

F. Supp. 1115, 1134 (D.N.J. 1990). In essence, the doctrine
applies only to those acts that “in some measure affect the
equitable relations between the parties in respect of

something brought before the court for adjudication.”
Keystone Driller, 290 U.S. at 244, 54S. Ct. at 148.

Although the doctrine of unclean hands can only be
applied if the conduct is related to the equity being sought,
defendants need not show that plaintiffs’ inequitable conduct
injured them. See Gaudiosi v. Mellon, 269 F.2d 873, 882
(3d Cir.), cert. denied, 361 U.S. 902, 80 S. Ct. 211 (1959).
In fact, injury to the defendant is irrelevant because the
doctrine of unclean hands is invoked to protect the court’s
integrity rather than to defend a litigant. See id. at 881
(citation omitted). When a party has unclean hands, courts
must “den[y him] all relief whatever may have been the
merits of his claim.” Jd. at 881-82 (quotation omitted).

The Court finds that the Bankruptcy Court abused its
discretion in this case because the Bankruptcy Court applied
the wrong legal principle when it based its decision to not
invoke the doctrine of unclean hands on a “no harm, no foul”
rule, i.e., the doctrine of unclean hands did not apply because
the alleged assignments did not bear on the proofs of claim.
As shown supra, the Third Circuit has rejected the “no harm,
no foul” rule and adopted an approach that looks to protect
courts from unscrupulous parties. Thus, this Court must
determine whether CPA’s conduct violated the doctrine of
unclean hands as articulated supra.

The Court will adopt the Bankruptcy Court’s findings
of fact because neither party disputes or contests those

Sla

Appendix B

findings. The relevant findings of fact are that: (1) CPA never
believed that NV assigned the Bridgeton and Reno Leases,
but took that position in an attempt to minimize its losses in
NV’s bankruptcy; (2) Jones testified that he told his attorneys
that the Consents were never finalized; (3) NV’s handwriting
expert was convincing, and Jones’s lack of memory on when
he signed the Consents was incredible; (4) CPA likely
backdated the Consents because it wanted to avoid a limited
recovery in NV’s bankruptcy; (5) CPA was not confused as
to who the tenant was under the two leases because Jones
closely oversaw the properties and because CPA’s internal
documents clearly showed that NV was the tenant.

Legal precedent dictates that this Court invoke the
doctrine of unclean hands because the Bankruptcy Court’s
findings of fact clearly show that CPA’s improper conduct
was “immediately and necessarily” related to the equity CPA
sought before the Bankruptcy Court and definitely affected
“the equitable relations between the parties.” Fabricating or
altering evidence is certainly an affront to the Court that
warrants the application of the doctrine of unclean hands.
See Mas v. Coca-Cola Co., 163 F.2d 505, 508 (4th Cir. 1947)
(“It is sufficient to bar relief that plaintiff has been guilty of
unconscionable conduct directly related to the cause of
action, such as the fabrication of testimony, the subornation
of perjury or other like attempt to perpetuate fraud upon the
court or take an unconscionable advantage of his
adversary.”); Aris-Isotoner Gloves, Inc. vy. Berkshire
Fashions, Inc., 792 F. Supp. 969 (S.D.N.Y.) (finding that
doctrine of unclean hands had to be invoked because
fabricating testimony was unconscionable), aff'd, 983 F.2d
1048 (2d Cir. 1992); Grimes v. Green Point Sav. Bank, 147

52a

Appendix B

B.R. 307, 316 (Bankr. E.D.N.Y. 1992) (denying debtor's
application for preliminary injunction against mortgagee
because, inter alia, debtor “knowingly and willingly
participated in deceitful conduct involving her daughter's
forging the name of her sister ... on documents.”). CPA
also committed a fraud on the Court by asserting a theory
that it knew to be untrue. Furthermore, although the
Bankruptcy Court did not make a finding that Jones
committed perjury, it did find that his testimony was
incredible because his direct oversight of the three properties
and his position with CPA made it unlikely that he would
not remember when he signed the Consents. That finding
supports the application of the doctrine of unclean hands
because it appears as though Jones had “selective memory”
regarding CPA’s fraudulent conduct. Finally, CPA also
defrauded the Court when it alleged that it was confused as
to which entity was the tenant under the leases. The
Bankruptcy Court found that the documents in CPA's
possession showed that CPA knew that NV, and not FSI,
was the tenant during the years in question. Thus, the Court
must invoke the doctrine of unclean hands to protect its
integrity.

The Court's decision to invoke the doctrine of uncleans
against CPA mandates that the Court deny CPA any relief.
The Court recognizes that denying CPA $2,888,469.30 when
the Bankruptcy Court found that CPA’s improper conduct
did not affect the outcome of this case appears to be a harsh
result. However, this Court must hold corporations
responsible for their misconceived and improper conduct.
Corporate ethics, professionalism, and verity are not lost on
this Court, and when corporations denigrate these values

53a
Appendix B

through lack of candor in their pursuit of financial gains,
this Court has not and will not countenance this type of
conduct. Further, the Court has not and will not hesitate to
apply the appropriate punishment to protect other
corporations, individuals, and the integrity of this Court.
Therefore, the Court will reverse the Bankruptcy Court’s
decision, and will deny CPA its claim because it entered a
court of equity with unclean hands.

The Court will not address the other issues raised in NV’s
appeal or in CPA's cross-appeal because the Court’s ruling
on the doctrine of unclean hands renders the other issues
moot.

CONCLUSION
For the reasons stated supra, the Court will reverse the
Bankruptcy Court's decision on the issue of the doctrine of
unclean hands, and will deny CPA’s claim in its entirety.
An appropriate Order is attached.

Dated: July 13, 1998

s/ Alfred M. Wolin, U.S.D.J.
ALFRED M. WOLIN, U:S.D.J.

S4a
Appendix B

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY

Civil Action No, 98-982
In re
NEW VALLEY CORPORATION,
Reorganized Debtor
NEW VALLEY CORPORATION, 7 :
Appellant/Cross-Appellees,
Ve
CORPORATE PROPERTY ASSOCIATES,
Appellees/Cross-Appellants.
ORDER
In accordance with the Court’s Opinion filed herewith,
It is on this 13th day of July, 1998,
ORDERED that the Bankruptcy Court’s decision dated

December 23, 1997, and Order of January 26, 1998, which
memorializes that Opinion, is reversed; and it is further

55a
Appendix B
ORDERED that Corporate Property Associates’ claim

against New Valley Corporation's bankruptcy estate is
denied.

s/ Alfred M. Wolin, U.S.D.J.
ALFRED M. WOLIN, U.S.D.J.

S6a

APPENDIX C — OPINION OF THE UNITED STATES
BANKRUPTCY COURT FOR THE DISTRICT OF NEW
JERSEY DATED AND FILED DECEMBER 23, 1997

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW JERSEY

Case No. 91-27704 (NLW)
Chapter 11
In re
NEW VALLEY CORPORATION,

Debtor.

Before: Honorable Novalyn L. Winfield

OPINION

The court conducted an evidentiary hearing on the
objections filed by New Valley Corporation to the proofs of
claim submitted by Corporate Property Associates 2 and 3.
The following constitutes the court's findings of fact and
conclusions of law made in accordance with Federal Rule of
Bankruptcy Procedure 7052. The court has jurisdiction over
this matter pursuant to 28 U.S.C. § 1334 and the Standing
Order of Reference by the United States District Court of
New Jersey, dated July 23, 1984. Moreover, the matter at
hand is a core proceeding under 28 U.S.C. § 157(b)(2)(B).

S7a

Appendix C
FINDINGS OF FACT

A. General Factual Background

1. On or about September 16, 1971, Western Union
Telegraph Company, New Valley’s predecessor-in-interest,
entered into an Indenture of Lease with Western Union Realty
Corporation, relating to the real property located at 308 West
Route 38, Moorestown, New Jersey (“the Moorestown
Property”). This Indenture or Lease, together with all
subsequent amendments, shall be known as “the Moorestown
Lease.” (CPA-1).

2. Onor about July 12, 1972, Western Union Telegraph
Company, entered into an indenture of Lease with Western
Union Realty Corporation, CPA’s predecessor-in-interest,
relating to the real property located at 5025 Mill Street, Reno,
Nevada (“the Reno Property”). This Indenture of Lease,
together with all subsequent amendments, shall be known
as “the Reno Lease.” (CPA-4).

3. At some point in or about 1981, Western Union
Realty Corporation put these Properties, as well as two other
properties located in Bridgeton, Missouri, on the market.
(Jones Tr. 7/9/97, 81-13 to 82-24).

4. On or about November 16, 1981, CPA acquired all
four properties from Western Union Realty C

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386014_0466%3A1. Public record. Not legal advice.