Thompson v. Orcutt

• Decision Date: 07 August 2001
• Docket Number: (SC 16398)
• Citation: 257 Conn. 301,777 A.2d 670
• Parties: GEORGE A. THOMPSON, TRUSTEE v. DAVID ORCUTT ET AL.
• Court: Connecticut Supreme Court

257 Conn. 301

777 A.2d 670

GEORGE A. THOMPSON, TRUSTEE v. DAVID ORCUTT ET AL.

(SC 16398)

Supreme Court of Connecticut.

Argued April 20, 2001.

Officially released August 7, 2001.

Borden, Norcott, Katz, Palmer and Zarella, JS. Bruce S. Beck, for the appellants (named defendant et al.).

Clifton E. Thompson, for the appellee (plaintiff).

Opinion

KATZ, J.

The sole issue in this certified appeal is whether the Appellate Court properly concluded that the doctrine of clean hands¹ did not apply in this mortgage foreclosure action. The defendants, David Orcutt and Sandra Orcutt,² appeal from the judgment of the Appellate Court, reversing the judgment of the trial court, which had applied the clean hands doctrine to preclude the plaintiff, George A. Thompson,³ from foreclosing on the mortgage on their property. The defendants claim that the Appellate Court improperly determined that the clean hands doctrine did not apply. We agree with the defendants and reverse the judgment of the Appellate Court.

The opinion of the Appellate Court summarizes the following facts and procedural history. "The plaintiff commenced this action against the defendants to foreclose on a mortgage that secured a note, the original balance of which was $25,000. The note was signed by the defendant David Orcutt as president of Alpha Equipment Sales and Rentals, Inc., and by the defendants individually and severally.⁴ The note was secured by a mortgage (Thompson mortgage) on property owned by the defendants known as 95 Greenwood Drive in Manchester, which mortgage was the subject of the foreclosure action. Although the plaintiff claimed that he was the trustee of that mortgage for himself and Jack L. Rosenblit, a business associate, no written trust agreement existed. [See footnote 3 of this opinion.]

"The mortgaged premises were subject to three encumbrances superior to the Thompson mortgage: A first mortgage to the New Haven Savings Bank in the amount of $60,000, a second mortgage in favor of the Connecticut Bank and Trust Company in the amount of $35,000 and a lien in favor of Northeast Financial Services (Northeast) [in the amount of $32,712]. The principals of Northeast were the plaintiff and Rosenblit, and [although] the debt securing the mortgage to Northeast [had been] paid prior to the creation of the Thompson mortgage, [the lien] had not been released.

"In January, 1992, the plaintiff filed a voluntary petition in [chapter 7] bankruptcy in the United States Bankruptcy Court for the District of Connecticut, listing as an asset a one-half interest in the Thompson mortgage. The bankruptcy court appointed [a bankruptcy trustee to administer the bankruptcy] estate." Thompson v. Orcutt, 59 Conn. App. 201, 202-203, 756 A.2d 332 (2000).⁵

During the pendency of the bankruptcy case, the plaintiff represented to the bankruptcy trustee that the property securing the Thompson mortgage was "encumbered in excess of its value...." On the basis of that representation, the bankruptcy trustee abandoned the Thompson mortgage as an asset of the bankruptcy estate because it "[did] not justify further administration." See 11 U.S.C. § 554 (a) (bankruptcy trustee may abandon property of estate "that is burdensome to the estate or that is of inconsequential value and benefit to the estate").

"In their answer to the foreclosure complaint, the defendants admitted the existence of the debt and the execution of the loan agreement and mortgage deed, but filed a special defense asserting that the plaintiff was `guilty of unclean hands' insofar as he had induced the bankruptcy trustee to abandon the [Thompson mortgage]." Thompson v. Orcutt, supra, 59 Conn. App. 204. The trial court concluded that the plaintiff had committed "misrepresentation or fraud" in the bankruptcy case. The trial court determined that because the misrepresentation or fraud concerned the Thompson mortgage, and that mortgage was the subject of the plaintiffs foreclosure action, the clean hands doctrine could apply. Although the trial court recognized that the clean hands doctrine generally applies only where "the wrong [has been] done to the party against whom [affirmative] relief is sought," and the plaintiffs conduct in this case had occurred in the bankruptcy court, the trial court determined that the plaintiffs misrepresentation or fraud in the bankruptcy case involved an important public interest that justified a broader application of the doctrine. Accordingly, the trial court applied the clean hands doctrine, denied the relief sought by the plaintiff, and rendered judgment for the defendants. In addition, the trial court ordered the plaintiff to release the Northeast lien.

Thereafter, the plaintiff appealed to the Appellate Court, claiming, inter alia, that the trial court improperly had applied the doctrine of unclean hands.⁶ The Appellate Court concluded that "the wrong committed [by the plaintiff] was with respect to the bankruptcy proceeding and not the mortgage transaction," and, therefore, the doctrine of unclean hands did not preclude him from recovering in this case. Id., 205-206. The Appellate Court determined that the trial court had applied the doctrine improperly because "[t]he wrong alleged and found by the trial court to exist in this case concerned the plaintiffs misleading [the bankruptcy trustee] into believing that there was no equity in the mortgaged premises to satisfy the debt owed by the defendants" on the Thompson mortgage note, and there had been "no fraud or deception with regard to the mortgage transaction" between the plaintiff and the defendants. Id., 206-207. Furthermore, the Appellate Court declined to apply the public policy exception to the doctrine of unclean hands. Id., 206 n.7.

We granted the defendants' petition for certification to appeal limited to the following issue: "Under the circumstances of this case, did the Appellate Court properly hold that the doctrine of clean hands did not apply?" Thompson v. Orcutt, 254 Conn. 934, 761 A.2d 758 (2000). Following oral argument before this court, we sua sponte ordered the trial court to articulate its judgment with respect to the application of the doctrine of unclean hands. Specifically, we directed the trial court to respond to the following questions: "(1) Was the basis for the plaintiffs unclean hands (a) misrepresentation, or (b) fraud? (2) If the basis was misrepresentation, what was the nature of the misrepresentation, e.g., intentional, negligent or innocent? [and] (3) In either event, what was the evidentiary basis of the finding of misrepresentation or fraud?"

Thereafter, the trial court, after conducting a hearing on the order for articulation in accordance with Practice Book § 66-5,⁷ issued an articulation, in which it found "by clear and convincing evidence that the plaintiff committed fraud...." The trial court determined that the plaintiff had "lied to the [bankruptcy] trustee" with respect to the value of his interest in the Thompson mortgage, because he had represented to the trustee that the property had been "`encumbered in excess of its value.'" The trial court found that, at the time the plaintiff had filed for bankruptcy, there had been enough equity in the property to satisfy the prior encumbrances and the Thompson mortgage.⁸ The trial court further found that the plaintiff, one of the two partners in Northeast, had known that the Northeast lien, which had priority over the Thompson mortgage, had been paid in full but not released. The trial court concluded that, had the plaintiff informed the trustee of that fact, the Thompson mortgage would not have been abandoned as an asset of the bankruptcy estate.

After the trial court submitted its articulation, we sua sponte granted the parties an opportunity to file simultaneous supplemental briefs in response thereto. The defendants filed a supplemental brief; the plaintiff did not.

I

As a threshold matter, the defendants claim that the Appellate Court improperly employed the plenary standard of review, rather than reviewing the trial court's decision to apply the doctrine of unclean hands for an abuse of discretion. We disagree.

This court has recognized that "[a]pplication of the doctrine of unclean hands rests within the sound discretion of the trial court." A & B Auto Salvage, Inc. v. Zoning Board of Appeals, 189 Conn. 573, 578, 456 A.2d 1187 (1983); accord Cohen v. Cohen, 182 Conn. 193, 196, 438 A.2d 55 (1980) ("[i]t is clear that [the doctrine of unclean hands] is to be applied ... by the court in the exercise of its sound discretion"); DeCecco v. Beach, 174 Conn. 29, 35, 381 A.2d 543 (1977) ("[t]he maxim should be applied in the trial court's discretion"). "The exercise of [such] equitable authority ... is subject only to limited review on appeal.... The only issue on appeal is whether the trial court has acted unreasonably and in clear abuse of its discretion.... In determining whether the trial court abused its discretion, this court must make every reasonable presumption in favor of [the trial court's] action." (Citations omitted; internal quotation marks omitted.) Mazziotti v. Allstate Ins. Co., 240 Conn. 799, 809, 695 A.2d 1010 (1997).

Whether the trial court properly interpreted the doctrine of unclean hands, however, is a legal question distinct from the trial court's discretionary decision whether to apply it. Cf. Babcock v. Bridgeport Hospital, 251 Conn. 790, 820, 742 A.2d 322 (1999) ("[p]rovided the trial court properly interpreted the [law], a question over which this court has plenary review ... [the trial court's] decision [to grant or deny a discovery request] will be reversed only if such an order constitutes an abuse of [its] discretion" [citation omitted]). Although the Appellate Court recognized that "`[t]he trial court enjoys broad discretion in determining whether the promotion of public policy and the preservation of the court's integrity dictate that the clean hands doctrine be invoked'"; ...