Nakahara v. NS 1991 American Trust

• Decision Date: 14 September 1998
• Docket Number: No. 15905,15905
• Citation: 718 A.2d 518
• Parties: Kiiko NAKAHARA and Jean-Paul Renoir, Plaintiffs, v. The NS 1991 AMERICAN TRUST, a Delaware Business Trust, Defendant, v. NIHON SANGYO KABUSHIKI KAISHA, a Japanese Corporation, Defendant-Intervenor. . Submitted:
• Court: Court of Chancery of Delaware

Page 518

718 A.2d 518

Kiiko NAKAHARA and Jean-Paul Renoir, Plaintiffs, v. The NS 1991 AMERICAN TRUST, a Delaware Business Trust, Defendant, v. NIHON SANGYO KABUSHIKI KAISHA, a Japanese Corporation,

Defendant-Intervenor.

No. 15905.

Court of Chancery of Delaware New Castle County.

Submitted: Sept. 14, 1998.

Decided: Sept. 28, 1998.

Edward M. McNally, Richard D. Kirk, and Nancy R. Walsh, of Morris, James, Hitchens & Williams, Wilmington, for Plaintiffs.

Stephen E. Jenkins, of Ashby & Geddes, Wilmington, for defendant.

David S. Eagle, of Klehr, Harrison, Harvey, Branzburg & Ellers, L.L.P., Wilmington; Glen A. Weiner, of Klehr, Harrison, Harvey, Branzburg & Ellers, L.L.P., Philadelphia, PA, for defendant-intervenor.

OPINION ON REMAND

CHANDLER, Chancellor.

This case raises the novel question of whether a court of equity should permit a party to avoid the impact of their inequitable conduct by attempting to undo that conduct after an adverse verdict. For the reasons stated below, I deny the Plaintiffs Rule 60(b) motion and hold that Plaintiffs, who were previously denied equitable relief due to their own unclean hands, ¹ did not successfully purge the taint of their inequitable actions. Therefore, I will not grant the relief from judgment that they now seek.

I. BACKGROUND

The operative facts underlying the dispute are detailed at length in my earlier opinion in this case and as such I do not intend to repeat them here. Essentially, this controversy is centered around, among other things, rights of indemnification and advancement of litigation expenses in pending cases which may ultimately determine rightful ownership of the Empire State Building in New York City ² (collectively, the "New York litigation").

Plaintiffs Kiiko Nakahara and Jean-Paul Renoir (collectively "Plaintiffs"), are the managing trustees of the nominal defendant The NS 1991 American Trust (the "American Trust"). Pursuant to an indemnification provision in the American Trust trust instrument, Plaintiffs sought the advancement of their litigation expenses in connection with defending the New York litigation. The American Trust has sought to remain neutral throughout and only seeks a judicial determination of the rights of the parties. Nihon Sangyo Kabushiki Kaisha ("NSKK"), a Japanese corporation, intervened on the ground that as a beneficiary of the American Trust's parent trust, the NS 1991 Trust (the "Isle of Man Trust")--the indirect owner of 100% of the American Trust--NSKK had a sufficient stake in any further distribution of assets for advancement of litigation expenses. ³

In my earlier opinion, I held that Delaware's Business Trust Act permits business trusts to make advancements to their trustees. I further held that Plaintiffs satisfied all prerequisites imposed by the advancement provision of the American Trust's governing instrument. But, because I found that Plaintiffs suffered from unclean hands, I did not authorize the payment of advancements in this case. ⁴

In light of the unclean hands doctrine, my decision to hold against the Plaintiffs turned on, among other things, the fact that Plaintiffs acted in bad faith and in violation of a standstill agreement ⁵ by withdrawing from the American Trust the monies they sought as advances for pending New York litigation expenses. In addition, I felt that those withdrawals, and their timing in particular, ⁶ were an attempt to "preempt any judicial determination" ⁷ regarding the Isle of Man Trust trustee's--the Abacus Trust Company ("Abacus")--authority to make the requested advancements. In short, Plaintiffs "withdrew the $200,000 and $700,000 wrongfully, without permission, and surreptitiously." ⁸

After I entered the Order in this case denying Plaintiffs their requested relief, a rather interesting turn of events ensued. Over a month after my ruling, Plaintiffs took it upon themselves to return the sum of $900,000 to the American Trust--exactly the amount of money that they had improperly withdrawn. On the basis of this action alone Plaintiffs now seek Rule 60(b) relief from prior judgment.

II. LEGAL ANALYSIS

A. Rule 60(b)

Plaintiffs' motion cites Court of Chancery Rule 60(b) as the basis for their present claim. As Plaintiffs do not allege any mistake, newly discovered evidence, fraud or satisfaction, I assume that subsections (b)(1), (2), (3), (4) & (5) do not apply. ⁹ After oral argument, it is clear that Plaintiffs' motion is based on Rule 60(b)(6) as that subsection provides a basis for relief for "any other reason justifying relief from the operation of the judgment."

A motion for relief from judgment under paragraph (b) of Rule 60 contemplates the prudent exercise of judicial discretion. ¹⁰ The rule should not serve as a substitute for a motion for new trial or for an appeal from a final judgment. ¹¹ "Thus, relief under paragraph (b) is not available to a party who received an adverse judgment, then elected not to seek a new trial nor to appeal from the final judgment." ¹² Under subsection (b)(5) the standard for granting relief is a showing that, if unchanged, the prior judgment will work manifest injustice on the moving party. ¹³ The standard under (b)(6) is the "extraordinary circumstances" test as set forth in Delaware decisional law. ¹⁴

In support of their motion Plaintiffs give the Court absolutely no guidance as how their position either avoids manifest injustice or proof that theirs is a case of extraordinary circumstances. Plaintiffs point out that this is an unusual case and by virtue of that fact alone the circumstances here should be considered "extraordinary". ¹⁵ Unfortunately for Plaintiffs, this is not the strongest argument. In light of my findings of fact which included bad faith and knowingly improper conduct on behalf of the Plaintiffs, the fact that this case presents a seemingly novel issue of law in Delaware does not by itself merit the designation of "extraordinary circumstances." In any event, it certainly does not automatically raise the suspicion of manifest injustice.

Plaintiffs' logic is simple and is as follows: if the basis for my denial of Plaintiffs' requested relief was the acts of improper withdrawals of money, then if they give the money back they should now be entitled to that relief. So, Plaintiffs must be heard to say that the act of returning the previously improperly withdrawn money is the new fact or circumstance that merits the reconsideration of my prior judgment under Rule 60(b). ¹⁶ Plaintiffs' logic proves too simple.

Any acts done by Plaintiffs after judgment do not change the fact that their conduct was inequitable--thereby dirtying their hands--at the time this case was originally under consideration. In other words, the new facts here do not change the old facts. Plaintiffs still acted in bad faith, "underhanded [ly]," in a manner "deserving condemnation," ¹⁷ "wrongfully, without permission, and surreptitiously" ¹⁸ with an aim at subverting the judicial process when they first sought relief from a court of equity. Regardless of their later actions, Plaintiffs nonetheless came to this Court with unclean hands and remained in front of the Court with unclean hands even after final judgment. ¹⁹ While Plaintiffs' action of giving the money back might be considered extraordinary in a colloquial sense, as it does not change the way I view their original transgressions ²⁰ it does not fall within the ambit of Rule 60(b)(6).

A recitation of the practical effect of what Plaintiffs ask me to do dismisses any lingering doubt. Suppose that I were to accept Plaintiffs' logic. In that case, by returning the $900,000 I would have to grant consideration of Plaintiffs' claims to a right of advancement based on the merits of their case. And, since I already decided in my earlier opinion that Plaintiffs would have otherwise been entitled to succeed on their advancement claims, ²¹ ultimately, Plaintiffs would receive at least the $900,000 in addition to any other appropriate advancements for litigation costs. In effect, Plaintiffs would return the money with one hand and then reach out to take it right back with the other. Effectively, Plaintiffs now seek to avoid all consequences of their inequitable actions.

In response Plaintiffs might be heard to say that if the state of affairs after repayment is where it should have been initially and, if matters had been in good order, and since they would have received the monies they now seek, then to deny them the opportunity to succeed on the merits is fundamentally inequitable. In addition to being insufficient at addressing their prior misconduct, as explained below, Plaintiffs' act of returning the money is a testament to their misunderstanding of the nature of the doctrine of unclean hands. The doctrine of unclean hands functions to promote and protect courts of equity notwithstanding the fact that the doctrine may act as a bar to a review of the case on the merits. ²²

B. Doctrine of Unclean Hands

The maxim of equity that "[he] who comes into equity must do so with clean hands" ²³ dates back to the late eighteenth century when it was gleaned by a British barrister from a collection of cases in which plaintiffs had been denied relief on the basis of their inequitable conduct. ²⁴ While the doctrine might be considered relatively new in light of the long history of maxims of equity it is well embedded in American jurisprudence. ²⁵

The unclean hands doctrine is aimed at providing courts of equity with a shield from the potentially entangling misdeeds of the litigants in any given case. The Court invokes the doctrine when faced with a litigant whose acts threaten to tarnish the Court's good name. In effect, the Court refuses to consider requests for equitable relief in circumstances where the litigant's own acts offend the very sense of equity to which he appeals. As former Vice Chancellor Brown aptly put it,

[T]he purpose of the clean hands maxim is to protect the public and the court...