United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
August 6, 2004
FOR THE FIFTH CIRCUIT
_____________________ Charles R. Fulbruge III
Clerk
No. 03-11053
_____________________
THE BANK OF SAIPAN; ET AL.,
Plaintiffs
THE BANK OF SAIPAN;
ANTONIO S. MUÑA, Receiver,
Plaintiffs - Appellants,
versus
CNG FINANCIAL CORP.; ET AL.,
Defendants
CNG FINANCIAL CORP.,
Defendant - Appellee.
__________________________________________________________________
Appeal from the United States District Court
for the Northern District of Texas
USDC No. 1:02-CV-117
_________________________________________________________________
Before JOLLY, DAVIS, and JONES, Circuit Judges.
E. GRADY JOLLY, Circuit Judge:
The Bank of Saipan (the “Bank”) sued CNG Financial Corp.
(“CNG”) for damages resulting from a complex fraud perpetrated by
third parties against both entities. The facts of this case
involve at least two fraudulent schemes involving con-artists who
are now tucked away in jail. The facts more specifically relevant
involve the victims of these schemes: the Bank, which loaned money
to the con-artist to purchase the subsidiaries of CNG; and CNG,
which received the loan proceeds as partial payment for the
subsidiaries, which it had to reassume when the con-artist
purchaser defaulted. The Bank argues it is entitled to the money
it loaned the purchaser, which is proceeds in CNG’s possession; but
CNG argues that the Bank is not entitled to these proceeds because
it has unclean hands, a defense to the Bank’s equitable claim for
money had and received.
At the close of the Bank’s evidence, the district court
granted judgment as a matter of law to CNG. We affirm the
dismissal of the fraud claim. We reverse the dismissal of the
money had and received claim, and remand it for trial.
I
In the summer of 2001 two sophisticated con-artists -- now
serving time in federal prison on various fraud convictions --
arrived in Saipan, an American territory in the Western Pacific.
These men, B. Douglas Montgomery and DuSean Berkich, pretended to
be important and wealthy businessmen and wanted to buy the small
Bank of Saipan. Montgomery and Berkich colluded with Bank
president Tomas Aldan and offered to buy the Bank.
Even before the sale was finalized, Montgomery and Berkich
took over the Bank and began making improper and undocumented loans
to various individuals without the knowledge of the Bank’s
shareholders or Board of Directors. In the end, Montgomery and
Berkich’s scam was discovered before the sale was finalized but not
before considerable sums of money had been looted.
2
Meanwhile, in Texas, Michael Wilson, another sophisticated
con-man with a previous felony conviction, presented himself to CNG
as an important and wealthy businessman, and expressed his intent
to purchase two of CNG’s failing subsidiaries, Finity and Fi-Scrip.
Wilson, who apparently had no funds at all, needed capital to
finance the purchase. A mutual con-artist friend arranged a
meeting with Montgomery and Berkich to obtain a loan. After
meeting in Saipan, Montgomery and Berkich loaned Wilson $5 million
of the Bank’s money, $4.5 million of which was paid to CNG in the
purchase of Finity and Fi-Scrip.
Wilson had feigned wealth on a claim to 48,000 outstanding
credit card accounts. The accounts, which were in fact
nonexistent, were to be used as collateral for his Bank loan.
Wilson actually informed Montgomery and Berkich that these accounts
did not exist, but the two loaned him the $5 million anyway. CNG
was, allegedly, also aware of Wilson’s lies regarding the phony
credit card accounts but decided to proceed with the deal provided
Wilson could obtain the necessary financing. The Bank alleges that
CNG knew or should have known that Wilson could not obtain
financing legitimately. The Bank further states that CNG raised
its asking price for its subsidiary companies substantially after
it learned of Wilson’s fraud, presumably to take advantage of the
known fraud in whatever way it could.
Wilson paid the $4.5 million from the Bank to CNG and CNG
financed the remaining amount to satisfy its $19.7 million asking
3
price in the form of promissory notes taken from Wilson. Wilson
eventually defaulted on the promissory notes and the Bank loan, and
CNG took back its interest in the subsidiary companies (but
retained the $4.5 million pilfered from the bank).
This suit arose in federal district court when Fi-Scrip,
Finity and others sued the Bank for release of the Bank’s UCC-1
filing on some of Finity and Fi-Scrip’s computer equipment. The
Bank responded with counterclaims against CNG and others for the
losses it suffered from the Wilson loan. At issue before the
district court were the remaining claims by the Bank against CNG
for misrepresentation, aiding and abetting fraud, unjust
enrichment, money had and received, and joint enterprise.
At trial, after the conclusion of the Bank’s evidence, CNG
moved for an entry of judgment as a matter of law pursuant to FED.
R. CIV. P. 50. The district court granted the motion and made the
following oral findings: 1) there was no misrepresentation by CNG
to the Bank; 2) CNG did not owe a special duty to the Bank that
would require disclosing information about Wilson; 3) there was no
joint venture between CNG and Wilson that would make CNG liable for
Wilson’s conduct; 4) there was no evidence that CNG committed fraud
or duress, or took any undue advantage of the situation; 5) there
was no evidence that CNG knew or should have known that Wilson was
defrauding the Bank; 6) any representations that may have been made
by CNG had no influence whatsoever on whether the Bank would lend
the money to Wilson; 7) the Bank lacked clean hands; and 8) CNG
4
relied upon the Bank loan by changing its position and transferring
interest in Fi-Scrip and Finity to Wilson. The Bank filed a timely
appeal of the district court’s judgment as a matter of law with
respect to the money had and received and fraud claims.
II
We review judgments as a matter of law pursuant to Rule 50 de
novo, applying the same standards that the district court applied
and considering all the evidence in the light most favorable to the
party opposing the motion. Resolution Trust Corp. v. Cramer, 6
F.3d 1102, 1109 (5th Cir. 1993). “If during a trial by jury a
party has been fully heard on an issue and there is no legally
sufficient evidentiary basis for a reasonable jury to find for that
party on that issue, the court may determine the issue against that
party and may grant a motion for judgment as a matter of law
against that party.” FED. R. CIV. P. 50(a)(1).
A
We first review the judgment as a matter of law with respect
to the money had and received claim. Texas follows the ordinary
principles of common law for such claims:
The question, in an action for money had and
received, is to which party does the money, in
equity, justice, and law, belong. All
plaintiff need show is that defendant holds
money which in equity and good conscience
belongs to him. Again, it has been declared
that a cause of action for money had and
received is less restricted and fettered by
technical rules and formalities than any other
form of action. It aims at the abstract
justice of the case, and looks solely at the
5
inquiry, whether the defendant holds money,
which belongs to the plaintiff.
Staats v. Miller, 243 S.W.2d 686, 687-88 (Tex. 1951) (quoting 58
C.J.S., Money Received § 4a, and United States v. Jefferson Elec.
Mfg. Co., 291 U.S. 386, 402-03 (1934) (internal quotations
omitted)). Most recently, an intermediate Texas court explained
that “[t]o maintain an action for money had and received, [a
plaintiff must] establish that the [defendant] held money which in
equity and good conscience belonged to [the plaintiff] . . . .
Money had and received is an equitable doctrine applied to prevent
unjust enrichment.” Miller-Rogaska, Inc. v. Bank One, Texas, N.A.,
931 S.W.2d 655, 662 (Tex. App. -- Dallas 1996).
The Bank argues, and offered evidence at trial to demonstrate,
that CNG is holding money that rightfully belongs to the Bank and
that, absent the fraud by Montgomery and Berkich, the Bank would
still possess that money. As a matter of equity, therefore, the
Bank contends that the money should be returned to it.
CNG does not dispute any of the Bank’s basic contentions but
instead argues that an action for money had and received, like all
equity-oriented actions, carries with it the affirmative defense of
“unclean hands.” That is, a plaintiff seeking equitable relief,
once the affirmative defense is raised, must show that she has not
contributed to the harm at issue. See, e.g., Truly v. Austin, 744
S.W.2d 934, 938 (Tex. 1988). The doctrine is applied where a
plaintiff’s conduct “has been unconscientious, unjust, marked by a
6
want of good faith or violates the principles of equity and
righteous dealing.” City of Fredericksburg v. Bopp, 126 S.W.3d
218, 221 (Tex. App. -- San Antonio 2003) (citations omitted).1
Further, CNG argues that a finding of “unclean hands,” or, as
the district court stated, “lack of equity . . . on the bank’s part
in regard to this transaction,” is a complete bar to recovery.
When a plaintiff’s own actions, rather than the defendant’s
equitable wrongs, are the source of the plaintiff’s loss, there can
be no unjust enrichment. See, e.g., Harris v. Sentry Title Co.,
Inc., 715 F.2d 941, 949-50 (5th Cir. 1983) (court refused to impose
constructive trust on property third party failed to surrender).2
Similarly, where monetary transactions are involved, the payor
1
The Bank argues that the money had and received claim, as an
action at law, is not subject to the “unclean hands” equitable
doctrine. CNG contends that this argument was raised for the first
time in the Bank’s reply brief, and moves to strike the relevant
portions of that brief. We need not rule on the motion, however,
as the Bank’s view of the law is not the law of Texas: “[R]ecovery
for money had and received, though legal in nature, is controlled
by equitable principles, and . . . it is axiomatic that the “clean
hands” doctrine functions in equitable actions.” Texas Bank &
Trust Co. v. Custom Leasing, Inc., 498 S.W.2d 243, 251 (Tex. Civ.
App. -- Tyler 1973) (citing 6 Tex. Jur. 2d, Assumpsit, §§ 2, 6, 9),
rev’d on other grounds sub nom. Custom Leasing, Inc. v. Texas Bank
& Trust Co., 516 S.W.2d 138 (Tex. 1974). See also Red Ball Motor
Freight, Inc. v. Bailey, 332 S.W.2d 411 (Tex. Civ. App. -- Amarillo
1959); Aetna Casualty & Surety Co. v. Corpus Christi Nat. Bank, 186
S.W.2d 840 (Tex. Civ. App. -- San Antonio 1944)); cf. Clark v.
Amoco Prod. Co., 794 F.2d 967, 971 (5th Cir. 1986) (equitable
defense of laches applicable to actions at law involving claims of
an essentially equitable character). Consequently, CNG’s motion is
DENIED as moot.
2
The mandate in Harris was recalled, but “the original
decision stands unchanged except [with respect to unrelated
issues].” 727 F.2d 1368, 1371 (5th Cir. 1984).
7
cannot recover his money when “the payment was made intentionally
and in circumstances showing a determination to pay without
choosing to investigate the facts.” Gulf Oil Corp. v. Lone Star
Prod. Co., 322 F.2d 28, 32 (5th Cir. 1963) (quoting 44 Tex. Jur. 2d
Payment § 77). CNG thus argues it is under no obligation to return
the Bank’s money because the Bank was complicit in its own loss.
Yet the cases applying the clean hands doctrine, particularly
as a defense to a claim for money had and received, are equivocal
as to whether unclean hands (or what relative degree of unclean
hands) bar recovery altogether. Texas courts have long spoken in
terms of weighing the equities, even when foreclosing recovery
completely; the inquiry must thus go beyond an analysis of the
plaintiff’s errors of omission or commission, to balance these
against the defendant’s unjust acts. See, e.g., Norris v. Gafas,
562 S.W.2d 894, 897 (Tex. Civ. App. -- Houston 1978) (clean hands
doctrine “does not operate to repel all sinners from a court of
equity”); Ligon v. E. F. Hutton & Co., 428 S.W.2d 434, 437 (Tex.
Civ. App. 1968) (mere negligence does not render hands so unclean
as to bar recovery); Red Ball, 332 S.W.2d at 418-19 (repeated
appeals to “equity and good conscience” in considering unclean
hands defense); Aetna, 186 S.W.2d at 842 (bank may recover
fraudulently obtained funds even if it is negligent, provided
recovery does not pass loss to innocent payee); Edwards v. Trinity
& B.V. Ry. Co., 118 S.W. 572, 576 (Tex. Civ. App. 1909) (negligence
must amount to violation of positive legal duty for it to wholly
8
bar relief -- and then only if the other party has been
prejudiced). Thus the unclean hands defense seems to operate akin
to the way a comparative (as opposed to contributory) negligence
regime does for ordinary tort claims.3
The evidence cited by CNG against the Bank to support its
affirmative defense of unclean hands sounds in negligence. CNG
argues that the Bank failed to investigate Wilson’s credit and
collateral, and that the Bank’s board, loan committee, and other
officers failed in their corporate responsibilities. None of CNG’s
allegations suggest that the Bank (as opposed to the con-artists)
acted in bad faith or engaged in illegal activity; in sum, CNG
contends that the Bank is guilty of gross negligence at most.4
Therefore, on the basis of the record before us, and in the light
of the Texas case law cited supra, we cannot say as a matter of law
that unclean hands completely bars recovery in this case. There
3
This is consistent with our case law. See, e.g., Gulf Oil,
322 F.2d at 31-32. The only clear precedent to the contrary, Texas
Bank & Trust, 498 S.W.2d at 251 (lack of “ordinary care” normally
precludes recovery), was vacated by the Texas Supreme Court, which
in reversing on other grounds, explicitly did not reach the
question of whether the plaintiff’s alleged negligence completely
relieved the defendant of liability. Custom Leasing, Inc. v. Texas
Bank & Trust Co., 516 S.W.2d 138, 144 (Tex. 1974).
4
The record is mixed with respect to the extent the Bank was
negligent in allowing Montgomery and Berkich to take over the
Bank’s operations prior to the completion of the sale and
permitting large loans to be disbursed without board approval. For
its part, the Bank presents evidence that certain Bank employees
worked diligently to procure security for the loan to Wilson, but
were thwarted by the illegal conspiracy among the bank president,
Montgomery, and Berkich -- some of which activity CNG is alleged to
have known about.
9
are indeed considerations for the jury; if the jury finds that the
Bank’s actions constituted negligence but that the Bank presents a
cognizable claim, it will have to take that degree of unclean hands
into account and weigh it against the proved misconduct of CNG when
determining whether the amount (if any) of the Bank’s loan should
be returned to it.5
It should be noted, however, that the unclean hands defense is
inapplicable altogether where the plaintiff’s sins do not affect or
prejudice the defendant. See, e.g., Rodgers v. Tracy, 242 S.W.2d
900, 905-06 (Tex. App. -- Amarillo 1951).6 The Bank points to the
fact that CNG gained nearly $4 million from the deal with Wilson
and ended up retaining its subsidiary companies. It argues that
CNG stumbled into a significant windfall and any negligence on the
part of the Bank only hurt the Bank itself; in short, the Bank
5
The parties dispute the degree of wrongdoing that must be
shown before a plaintiff’s actions render his hands “unclean.” CNG
argues that a conscious decision not to investigate a potential
mistake is enough to defeat the Bank’s claim. See Gulf Oil, 322
F.2d at 32. The Bank argues that mere negligence is insufficient:
“[O]ne who by innocent mistake delivers his property to another --
no matter how stupid or negligent he may have been in doing so -–
cannot be said to have such unclean hands as to bar him from
demanding the return of his property or its value.” Ligon, 428
S.W.2d at 437. Regardless of the degree of wrongdoing required,
the disputes surrounding the actions of Bank employees, the Bank
board, CNG, and the con-artists -- and the effect they have on the
equities to be weighed in resolving the claim here -- all present
material questions of fact that should be decided by the jury.
6
See also Gulf Oil, 322 F.2d at 32 (“It is not every
negligence that will stay the hand of the court . . . . Even a
clearly established negligence may not of itself be sufficient
ground for refusing relief, if it appears that the other party has
not been prejudiced thereby.”) (quoting Edwards, 118 S.W. at 576).
10
argues that its alleged negligence did not prejudice CNG because
CNG suffered no damage from the loan the Bank made to Wilson. On
the other hand, CNG asserts that Wilson crippled Fi-Scrip and
Finity when he controlled them. It claims they were saddled with
RICO, constructive trust, and UCC-1 claims against substantially
all of their assets. Thus we cannot, as a matter of law, say that
either argument prevails; it is for the jury to consider these
facts and to determine questions of unjust enrichment.
CNG further argues that there can be no claim for money had
and received without some affirmative inequitable conduct by the
defendant. In support of this proposition it cites Heldenfels
Bros., Inc. v. City of Corpus Christi, 832 S.W.2d 39, 41-42 (Tex.
1992) and Tex. Jur. Restitution & Constructive Trusts § 6 (3d ed.
2003). While both of these sources do indicate that a money had
and received claim can result from a defendant’s duress, fraud, or
undue influence, they do not hold that the equitable claim can only
arise in the context of reprehensible conduct by the defendant.
Other, less insidious acts can serve as the basis for the claim.
For example, property stolen from the plaintiff and
transferred to a third party for consideration and received in good
faith might still be recovered via an analogous equitable
restitution action. See, e.g., Tri-State Chemicals, Inc. v.
Western Organics, Inc., 83 S.W.3d 189, 195 (Tex. App. -- Amarillo
2002). Even where money is transferred instead of personalty, a
plaintiff need not show that the defendant acquired the money
11
through fraud or duress in order to bring a money had and received
action; all that a defendant need show is a lack of good faith in
the acceptance of the stolen or pilfered funds. See, e.g.,
Sinclair Houston Fed. Credit Union v. Hendricks, 268 S.W.2d 290,
295 (Tex Civ. App. -- Galveston 1954).
The facts suggest that it will not be a simple matter to
determine whether CNG accepted the Bank’s money from Wilson in good
faith. The record contains evidence that CNG knew Wilson was a
felon and a fraud and had no legitimate way of obtaining the money
to pay for CNG’s failing subsidiaries. The fact that CNG is
alleged to have raised the asking price for the subsidiaries upon
discovering that Wilson was a fraud might suggest that CNG entered
into the transaction in less than good faith. Thus there is a
genuine question of fact concerning CNG’s good faith, which is yet
another issue that should be left for the jury.
Finally, CNG argues that CNG’s change of position upon its
receipt of the Bank’s funds -- the release of its interests in
Finity and Fi-Scrip -- precludes the Bank’s recovery. See Greer v.
White Oak State Bank, 673 S.W.2d 326, 329 (Tex. App. 1984); Aetna,
186 S.W.2d at 842 (as between equally situated parties, the law
favors the one changing position in reliance on payment). Yet this
defense again depends on good faith, which, at least according to
substantial evidence, may have been lacking. See Equilease Corp.
v. Hentz, 634 F.2d 850, 853 (5th Cir. 1981) (“It is patently unfair
to require an innocent payee who has received and used the money to
12
satisfy a debt to repay the money.”); Aetna, 186 S.W.2d at 842.
Change of position is but one more factor to consider in the
overall balancing of equities, and in the determination of who in
good conscience is the rightful owner of the money.
In sum, the material issues of fact raised with respect to
this money had and received action require a fact-finder to
determine who should rightly claim the money wrongfully obtained
from the Bank. Courts are naturally hesitant to return money to
plaintiffs when both parties are at more or less equal fault; hence
we have the equitable defenses such as unclean hands.
Nevertheless, in this case there are genuine questions of fact to
be resolved in determining the equities that might require CNG to
return money to the Bank. The district court’s judgment as a
matter of law on the money had and received claim therefore
constitutes error.
B
We now turn to the judgment as a matter of law with respect to
the fraud claim. The district court held that there was no
fiduciary relationship between CNG and the Bank that would have
required disclosure of Wilson’s fraud, that there were no
misrepresentations or material omissions by CNG to the Bank, that
Wilson had not committed fraud against the Bank, and that there was
neither evidence of a common scheme between Wilson and CNG nor
evidence that CNG aided and abetted Wilson.
13
The Bank argues that the district court erred because a fraud
claim can be based upon the mere showing that CNG was aware of
Wilson’s fraud and accepted its proceeds. “The partaking of the
benefits of a fraudulent transaction makes the participants
principals and liable as such.” Five Star Transfer & Terminal
Warehouse Corp. v. Flusche, 339 S.W.2d 384, 387 (Tex. App. 1960);
see also Corpus Christi Area Teachers Credit Union v. Hernandez,
814 S.W.2d 195, 202 (Tex. App. 1991).
Yet this basis for a finding of fraud was never raised in the
trial court. The Bank did not mention knowing receipt as a basis
for fraud in its opening statements or proposed jury instructions,
nor in opposition to CNG’s Rule 50 motion. As such, the argument
is waived and we cannot find that the district court erred in
granting judgment as a matter of law on the fraud claim.7
III
In sum, the district court, in granting judgment as a matter
of law in favor of CNG for the reasons enumerated supra, got it all
right except with respect to its ruling on unclean hands. It
concluded that the evidence showed that the Bank had unclean hands,
7
Even if the knowing receipt argument were properly preserved,
Wilson did not defraud the Bank; the record shows no
misrepresentations to the Bank that the Bank relied upon. Although
Wilson told Montgomery and Berkich that he planned to use the non-
existent credit card accounts as collateral, he admitted that the
credit card accounts did not exist. Moreover, the Bank (in the
control of the criminal conspiracy) was going to lend the money to
Wilson regardless of any collateral. Without an underlying fraud,
CNG could not be derivatively liable for the knowing acceptance of
fraudulent benefits.
14
and that finding may not be incorrect. The error was in concluding
that unclean hands was an absolute bar to recovery on the money had
and received claim; the disputed facts require, for the reasons we
have addressed in this opinion, that this claim be submitted to the
jury, under proper instructions, for its determination.
Accordingly, the judgment of the district court is AFFIRMED with
respect to the fraud claim, REVERSED with respect to the money had
and received claim, and REMANDED for further proceedings not
inconsistent with this opinion.
MOTION TO STRIKE REPLY BRIEF DENIED AS MOOT; AFFIRMED in part;
REVERSED in part; REMANDED.
15