Bank of Saipan v. CNG Financial Corp.

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