Adams v. Manown

• Decision Date: 01 September 1992
• Docket Number: No. 2,2
• Citation: 615 A.2d 611,328 Md. 463
• Parties: J. Stephen ADAMS v. Patricia J. MANOWN, etc. ,
• Court: Maryland Court of Appeals

Page 463

328 Md. 463

615 A.2d 611

J. Stephen ADAMS v. Patricia J. MANOWN, etc.

No. 2, Sept. Term, 1992.

Court of Appeals of Maryland.

Nov. 23, 1992.

Daniel M. Press (Kaplan, Russin and Vecchi, Washington, D.C., and W. Bryan Hall and Carolyn B. Press of the Law Offices of W. Bryan Hall, Cumberland), all on brief, for petitioner.

Kenneth J. Mackley (Mackley, Gilbert & Marks, Hagerstown), both on brief, for respondent.

Argued before MURPHY, C.J., and ELDRIDGE, RODOWSKY, McAULIFFE, CHASANOW, KARWACKI and ROBERT M. BELL, JJ.

RODOWSKY, Judge.

Petitioner, a discharged bankrupt, sued the respondent for the repayment of numerous alleged loans, none of which were scheduled by the petitioner as assets of the bankruptcy estate. Petitioner obtained a verdict and judgment for one loan which had been made prior to bankruptcy. Relying on evidence that the omission of the loans from the schedules was intentional, the respondent sought a complete legal bar to the petitioner's recovery under the label, "unclean hands." The Court of Special Appeals agreed with the respondent, concluding that summary judgment in favor of the respondent should have been granted. Manown v. Adams, 89 Md.App. 503, 598 A.2d 821 (1991). We granted certiorari on a petition which asked us to determine whether the equitable defense of unclean hands applies to this action which, historically, is one at law. We shall hold, however, that the uncontradicted facts relied upon for the clean hands defense demonstrate that the trustee in bankruptcy and not the petitioner, is the real party in interest as plaintiff.

I

J. Stephen Adams (Adams), the petitioner, is a freelance, professional photographer. His base of operations for that activity was Washington, D.C., where Adams traded, apparently as a sole proprietor, under the name, "Steve Adams Photography." Adams also owned a business in Oakland, Maryland, The Colour Company, Inc., which failed during the period relevant to this action. Garrett County Development Corporation had assisted in establishing The Colour Company through loans on which Adams was personally liable.

Adams and his wife separated in February 1986 after twenty-three years of marriage. He left the marital abode in Springfield, Virginia and took up residence in an A-frame building in Deer Park, Garrett County, owned by him and his wife.

In April 1986, Adams met Patricia J. Manown (Manown), the respondent. Manown, who was divorced, is a businesswoman whose background is in hotel and convention sales and tourism promotion. Adams and Manown began living together in September 1986. In July 1987, Adams and his wife executed a separation and property settlement agreement. They were divorced by decree of the Circuit Court for Garrett County in September 1987.

Also beginning in September 1986, Adams and Manown discussed combining his artistic talent and her business experience in a business venture. The concept was that Adams would photograph Garrett County scenes in different seasons, the scenes would be reproduced on souvenir items, and Manown would handle marketing and sales of the items.

The parties formalized their business relationship to the same extent that they solemnized their personal relationship. They called their business "North Star Design &amp Publishing," (North Star). It was not incorporated. The Maryland Retail Sales Tax License was issued in the name of Manown, as North Star. Both Adams and Manown testified that their arrangement was a partnership in which each was to share equally in the profits. Postcards, calendars, and address books featuring photographs by Adams were produced for North Star and, to some extent, sold. There were no undistributed profits when the partnership and the personal relationship terminated. No party claims in this action for the value, if any, of the North Star inventory on hand at termination.

As early as the summer of 1986, Adams had begun accumulating cash by selling assets of The Colour Company. Adams avoided depositing significant sums of cash in his own name because, according to Manown, Adams anticipated a divorce action, and Adams was concerned that his creditors from The Colour Company would force him to seek protection under the Bankruptcy Code. On August 1, 1986, Adams transferred title to his boat to Manown, reciting a purchase price of $3,200 in the bill of sale. The parties both testified, however, that Manown paid nothing for the boat. Adams admitted that he transferred the boat to Manown so that his wife would not find out about it in the anticipated divorce proceedings. Adams did not list the boat as an asset on his financial statements filed in the divorce action. Manown later sold the boat for $2,000. Adams does not claim the value of the boat, or its proceeds, in the action sub judice.

North Star initially conducted operations out of a rented office in Hagerstown which North Star shared with Steve Adams Photography. In addition, Adams and Manown were paying rent on an apartment leased to Manown. To save money the parties decided to purchase a house in Frederick that was under construction. The intention was to use the premises for the activities of Adams's freelance photography business, for North Star, and as their dwelling. The contract to purchase was signed in Manown's name at a purchase price of $169,685. Of that price $43,000 was paid in cash which Adams had accumulated over some unspecified period of time, which he had kept in a safe deposit box, and which he had transferred to Manown, for deposit in her checking account, in increments of $5,000 to $10,000. At closing in February 1988, the deed to the house was taken in Manown's name only, and she alone obligated herself to repay the mortgage for the balance of the purchase price.

Adams filed a Voluntary Petition for Bankruptcy in the United States Bankruptcy Court for the District of Maryland on November 4, 1988. In his schedules filed in bankruptcy, Adams swore that he had no interest in property held by another and that he had no interest in any partnerships. He made oath that the only liquidated debt owing to him was $1,000, described by him as "[o]ne week's wages," and for which he claimed exemption. He denied owning any contingent or unliquidated claims of any type. His schedules reported debts of $190,000 and assets of $10,000, including those for which he claimed exemptions of $7,000. By the bankruptcy court's order of February 21, 1989, Adams was discharged. The bankruptcy case was closed.

The parties' relationship soured. Manown moved out of the Frederick home in March 1989, and Adams lived there until July 1989. Manown sold the house on October 13, 1989, for a gross selling price of $239,500 from which she netted $92,236.45 in cash at settlement. Manown testified that from these proceeds she used $23,000 to pay in full, with interest, certain outstanding loans, including loans for North Star from Adams's mother and from Manown's mother, $8,500 to purchase a new car, approximately $14,000 to pay capital gains taxes on the sale of the realty, and an unspecified amount to cover her legal fees.

II

On June 26, 1989, Adams filed the instant suit against Manown. ¹ The complaint presents the claims of Adams in eighteen counts, seventeen of which seek to recover alleged loans. These seventeen counts each aver that the loan alleged therein had been made by Adams to Manown, or to Manown trading as North Star. Some of these counts aver that the loans were made on specific dates while others claim total sums advanced incrementally over periods of time, including one period of seventeen months. Count I claimed that the $43,000 used toward purchase of the house was a loan. The other loan counts sought to recover sums expended by Adams in other aspects of the relationship between the parties. The amounts claimed in all counts averring loans totalled approximately $92,000. The final count, necessarily a claim in the alternative, alleged that North Star was a partnership between Adams and Manown which had terminated. Relief sought in that count was that North Star should be dissolved with an accounting. Adams prayed a jury trial.

Manown filed a motion for summary judgment seeking application as a matter of law of the clean hands doctrine and relying in particular on Adams's failure to schedule as assets in bankruptcy the claims which Adams was asserting against Manown. The circuit court denied summary judgment, and the matter went to trial before a jury.

At his pretrial deposition Adams had refused to answer, on self-incrimination grounds, any questions directed to his failure to schedule as assets in bankruptcy the claims asserted against Manown. At trial Adams testified on the subject, saying that he had not included the loans, or any interest in North Star or in the Frederick house, as assets in bankruptcy because his counsel for the bankruptcy proceedings had advised him not to do so. ² Adams acknowledged on cross-examination that he had given "a lot of thought" to the possibility that he was subjecting himself to criminal penalties by failing to list the $43,000 loan or any interest in the house in Frederick.

Manown also introduced portions of two letters written by Adams to her after their relationship had terminated. In one letter Adams said:

"I will await for the guy with the badge to knock on my door. Like I have said before I have had the law knock on my door before. It is very humiliating and degrading but I am ready to handle it."

Adams acknowledged that the reference was to the United States Marshal. In the other letter Adams said, "And I am still willing to pay the price and go to jail." Adams acknowledged the reference was to the possibility of going to jail for bankruptcy fraud.

At the conclusion of the defendant's case, in which Manown testified, she moved for judgment, without success. Her motion incorporated, inter alia, the clean hands doctrine which she had argued in support of...