Bank of Saipan v. Cng Financial Corp.

• Decision Date: 06 August 2004
• Docket Number: No. 03-11053.,03-11053.
• Citation: 380 F.3d 836
• Parties: The BANK OF SAIPAN; et al., Plaintiffs, The Bank of Saipan; Antonio S. Mua, Receiver, Plaintiffs-Appellants, v. CNG FINANCIAL CORP.; et al., Defendants, CNG Financial Corp., Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

380 F.3d 836

The BANK OF SAIPAN; et al., Plaintiffs The Bank of Saipan; Antonio S. Mua, Receiver, Plaintiffs-Appellants, v. CNG FINANCIAL CORP.; et al., Defendants CNG Financial Corp., Defendant-Appellee.

No. 03-11053.

United States Court of Appeals, Fifth Circuit.

August 6, 2004.

COPYRIGHT MATERIAL OMITTED

Jonathan D. Pauerstein, Bryan Allen Lopez, Lee R. Sandoloski, Loeffler, Jonas & Tuggey, San Antonio, TX, Michael Wilfred Dotts (argued), Joseph Edward Horey, O'Connor, Berman, Dotts & Banes, Saipan, MP, for Plaintiffs-Appellants.

Barry D. Hunter (argued), Frost, Brown & Todd, Lexington, KY, for Defendant-Appellee.

Appeal from the United States District Court for the Northern District of Texas.

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.

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 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 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 inquiry, whether the defendant holds money, which belongs to the plaintiff.

Staats v. Miller, 150 Tex. 581, 243 S.W.2d 686, 687-88 (1951) (quoting 58 C.J.S., Money Received § 4a, and United States v. Jefferson Elec. Mfg. Co., 291 U.S. 386, 402-03, 54 S.Ct. 443, 78 L.Ed. 859 (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 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 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...