Judy Brown v. Judith M. Lee ( 2015 )

STATE OF MINNESOTA
IN COURT OF APPEALS
A14-1031
Judy Brown,
Appellant,
vs.
Judith M. Lee,
Respondent.
Filed February 17, 2015
Reversed and remanded
Schellhas, Judge
Dakota County District Court
File No. 19HA-CV-13-2836
Robert M. McClay, McClay • Alton, P.L.L.P., St. Paul, Minnesota (for appellant)
Craig A. Brandt, Snyder & Brandt, P.A., Minneapolis, Minnesota (for respondent)
Considered and decided by Smith, Presiding Judge; Schellhas, Judge; and Hooten,
Judge.
SYLLABUS
A district court does not abuse its discretion by granting equitable relief to a party
with unclean hands if the party has purged herself of her adverse equity.
OPINION
SCHELLHAS, Judge
Appellant challenges the district court’s summary-judgment dismissal of her
contribution claim against respondent. We reverse and remand.
FACTS
In 2005, Gordon Brown personally guaranteed the debt of Weeres Industries Corp.
(WIC) to Peoples National Bank of Mora, including future debt. In 2006 and 2009,
Peoples made loans to WIC. In 2009, Judith Lee personally guaranteed the debt of
“WEERES INDUSTRIES, INC.” (WII) to Peoples.
In January 2010, Peoples sued “[WIC] a/k/a [WII],” Gordon Brown, Lee, and
numerous other business entities for the debt of WIC. Peoples alleged that “[WIC] a/k/a
[WII]” had defaulted on its loans and that Gordon Brown and Lee had breached their
guaranties. In March 2010, Peoples and all defendants except Lee entered into a
forbearance agreement and executed a confession of judgment that Peoples could file in
district court against any defendant that defaulted under the forbearance agreement.
Gordon Brown defaulted. Before entry of judgment against him, Gordon Brown
petitioned for dissolution of his marriage to appellant Judy Brown. In October 2010, the
Browns dissolved their marriage. The dissolution judgment incorporated the terms of a
marital termination agreement, under which Gordon Brown transferred substantially all
of the Browns’ assets to Judy Brown while retaining sole responsibility for their debts.
Citizens State Bank Norwood Young Am. v. Brown, 849 N.W.2d 55, 58, 64 (Minn. 2014).
In September 2011, the district court entered judgment against Gordon Brown for
his default under the forbearance agreement, and Peoples sued the Browns for fraudulent
transfer. A jury found that the Browns had violated the Minnesota Uniform Fraudulent
Transfer Act by fraudulently conveying property with the intent to hinder creditors. In
2
November 2012, the district court entered judgment against the Browns, voiding the
fraudulent transfers to the extent necessary to satisfy Peoples’s claim of $324,833.03.1 On
December 14, 2012, under power of attorney from Gordon Brown, Judy Brown assigned
to herself Gordon Brown’s right of contribution that he “may have” against Lee, arising
out of Lee’s personal guaranty of WII’s debt to Peoples. On December 18, 2012, Gordon
Brown died.
In April 2013, Judy Brown sued Lee, alleging that Judy Brown had paid Peoples
$280,000 “representing monies owed on [WIC’s] Notes” and that Lee, as a coguarantor,
was jointly and severally liable for one-half that amount, “approximately $140,000 and
any additional sums she may pay to Peoples.” Lee denied liability, counterclaimed, and
moved for summary judgment on Judy Brown’s contribution claim and partial summary
judgment on her counterclaim for indemnification of legal expenses. The district court
granted the motion, dismissed Judy Brown’s contribution claim, granted partial summary
judgment to Lee on her indemnification counterclaim, and denied Judy Brown’s request
for permission to move for reconsideration.
This appeal follows.
1
The district court further voided the fraudulent transfers “to pay $60,000 to the Kanabec
County District Court to be held in escrow to be applied towards any . . . awards of
attorney’s fees,” enjoined the Browns “from the further disposition of the assets and
property fraudulently transferred pursuant to [the Browns]’ Marital Termination
Agreement until [Peoples] c[ould] obtain full and complete recovery of its claim,” and
placed “[a] levy of execution . . . on the assets and property . . . that remain in [the
Browns]’ possession.”
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ISSUES
I. Is Judy Brown entitled to seek contribution from Lee as a coguarantor?
II. Does the doctrine of unclean hands bar Judy Brown’s contribution claim?
ANALYSIS
“Summary judgment is appropriate when the evidence, viewed in the light most
favorable to the nonmoving party, establishes that no genuine issue of material fact exists
and that the moving party is entitled to judgment as a matter of law.” Citizens State Bank,
849 N.W.2d at 61; see also Minn. R. Civ. P. 56.03. “[Appellate courts] review de novo a
district court’s grant of summary judgment” and “view the evidence in the light most
favorable to the party against whom summary judgment was granted to determine
whether there are any genuine issues of material fact and whether the district court
correctly applied the law.” Dukowitz v. Hannon Sec. Servs., 841 N.W.2d 147, 150 (Minn.
2014). “[Appellate courts] may affirm a grant of summary judgment if it can be sustained
on any grounds.” Doe v. Archdiocese of St. Paul, 817 N.W.2d 150, 163 (Minn. 2012).
I.
“Contribution is an equitable remedy that allows one who has discharged more
than his fair share of a common liability or burden to recover from another who is also
liable the proportionate share which the other should pay or bear.” In re Individual 35W
Bridge Litig., 806 N.W.2d 811, 815 (Minn. 2011) (quotation omitted). Because
contribution is an equitable remedy, a more deferential standard of review than de novo
may be applicable when the district court has balanced the equities and determined not to
award equitable relief. See RAM Mut. Ins. v. Rohde, 820 N.W.2d 1, 6 n.3 (Minn. 2012).
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But in this case, a more deferential standard of review is not applicable because, without
balancing the equities, the district court concluded that Judy Brown’s contribution claim
fails as a matter of law because Judy Brown and Lee do not have common liability. See
id. at 3–4, 6 n.3 (stating that, on appeal from summary judgment, standard of review
more deferential than de novo was not applicable when district court determined as a
matter of law that plaintiff could not maintain subrogation action).
“Contribution requires, first, a common liability of two or more actors to the
injured party, and second, payment by one of the actors of more than its fair share of the
common liability.” City of Willmar v. Short-Elliott-Hendrickson, Inc., 512 N.W.2d 872,
874 (Minn. 1994); see Engvall v. Soo Line R.R., 632 N.W.2d 560, 568 (Minn. 2001)
(“The very essence of the action of contribution is common liability.” (quotation
omitted)). “Common liability exists when both parties are liable to the plaintiff for the
same damages, even though their liability may depend on different legal theories.”
Willmar, 512 N.W.2d at 874. “[T]he nature of the common liability is of secondary
importance to the fact of common liability itself.” Id.
Right of contribution of coguarantors
The Minnesota Supreme Court has recognized a “well established rule which
gives a right of contribution from his cosureties to a surety who has paid more than his
proportion of the common liability.”2 Nat’l Sur. Co. v. Becklund, 169 Minn. 177, 178,
210 N.W. 882, 883 (1926); see Wilkin Cty. v. First State Bank of Rothsay, 170 Minn. 115,
2
‘“Surety’ includes a guarantor or other secondary obligor.” Minn. Stat. § 336.1-
201(b)(39) (2014).
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119, 212 N.W. 183, 185 (1927) (“If a surety is compelled to pay more than his share he
may enforce contribution from the others.”); Estate of Frantz v. Page, 426 N.W.2d 894,
902 (Minn. App. 1988) (“Generally, a coguarantor is not liable for more than his pro-rata
share of [a] debt, absent an agreement to the contrary.”), review denied (Minn. Sept. 16,
1988); see also Halpern v. Rosenbloom, 459 F. Supp. 1346, 1354 (S.D.N.Y. 1978)
(“[E]quity implies a contract between co-guarantors and an action for contribution is
based on that contract,” and “as between the co-guarantors, no consideration is required
to support an action for contribution.”); 23 Samuel Williston, A Treatise on the Law of
Contracts § 61.64 (4th ed. 2002) (“The right to contribution may frequently be given by
express contract or by a contract implied in fact, but the existence of the right does not
depend on such a contract.”). The Wisconsin Supreme Court has stated that the right of
contribution is not dependent on “whether the sureties are jointly and severally bound, or
only severally; or whether their suretyship arises under the same obligation or instrument,
or under divers[e] obligations or instruments, if all the instruments are for the identical
debt.” Kafka v. Pope, 533 N.W.2d 491, 495 (Wis. 1995) (quotation omitted).
Common liability of Lee and Judy Brown
The district court concluded that Judy Brown and Lee do not have common
liability. The court reasoned that Judy Brown was not personally liable to Peoples for
Gordon Brown’s original debt and that her obligation to Peoples “stem[med] only from
receiving funds fraudulently.” Although Judy Brown was not personally liable to Peoples
for Gordon Brown’s original debt, we disagree that her contribution claim therefore fails
as a matter of law. If Lee intended to guarantee the debts of WIC, Lee and Gordon Brown
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had common liability as coguarantors because WIC’s default on its loans from Peoples
triggered Peoples’s right to enforce both Lee’s and Gordon Brown’s personal guaranties.
Based on that alleged common liability with Lee, Gordon Brown assigned to Judy Brown
any right of contribution from Lee. Additionally, although Judy Brown’s liability to
Peoples arose out of the Browns’ fraudulent transfer, her liability is directly related to
Gordon Brown’s original debt to Peoples.
Without citation to any authority, Lee argues that Gordon Brown’s assignment to
Judy Brown is invalid because, when the assignment was made, Gordon Brown had no
right of contribution to assign. Lee argues that Gordon Brown had no right of
contribution to assign because Judy Brown, not Gordon Brown, paid Peoples and because
the assignment preceded any payment to Peoples. We decline to address these arguments
based on Lee’s waiver. She did not present the arguments to the district court, and the
court did not address them. See Thiele v. Stich, 425 N.W.2d 580, 582 (Minn. 1988) (“A
reviewing court must generally consider only those issues that the record shows were
presented and considered by the trial court in deciding the matter before it.” (quotation
omitted)). Moreover, “[a]n assignment of error based on mere assertion and not supported
by any argument or authorities in [a] brief is waived and will not be considered on appeal
unless prejudicial error is obvious on mere inspection.” Schoepke v. Alexander Smith &
Sons Carpet Co., 290 Minn. 518, 519–20, 187 N.W.2d 133, 135 (1971).
Even if not waived, Lee’s arguments would fail on their merits. See Wilkie v.
Becker, 268 Minn. 262, 266, 128 N.W.2d 704, 707 (1964) (acknowledging precedent that
courts of equity have upheld “assignments of mere expectancies and possibilities of the
7
future acquisition of the thing assigned” (quotation omitted)); Mut. Ben. Life Ins. Co. v.
Canby Inv. Co., 190 Minn. 144, 151, 251 N.W. 129, 133 (1933) (providing that
“[c]ontingent interests, expectancies, and things resting in mere possibility only are
assignable”). In this case, although Gordon Brown’s right to contribution had not yet
matured, his assignment nonetheless was valid as to the expectation or possibility of a
right of contribution.
We conclude that Judy Brown, as Gordon Brown’s assignee, may have a right of
contribution against Lee, as a coguarantor. Genuine issues of material fact exist regarding
whether Gordon Brown and Lee shared a common liability to Peoples as coguarantors of
WIC’s debt. The district court therefore must resolve Judy Brown’s claim regarding the
alleged scrivener’s error in Lee’s guaranty and, if that claim is resolved in favor of Judy
Brown, determine whether Judy Brown paid more than her fair share of any common
liability to Peoples.
Alleged scrivener’s error in Lee’s guaranty
Lee argues in the alternative that she did not have common liability with Gordon
Brown because she and Gordon Brown guaranteed the debt of different business entities,
WII and WIC, respectively. Citing Eng’g & Constr. Innovations, Inc. v. L.H. Bolduc Co.,
803 N.W.2d 916, 924−25 (Minn. App. 2011), rev’d on other grounds, 825 N.W.2d 695
(Minn. 2013), Lee further argues that Judy Brown has waived, by failing to raise in her
principal brief, any arguments regarding a scrivener’s error in Lee’s guaranty. But Lee’s
reliance on Bolduc is misplaced. Unlike in Bolduc, Judy Brown addressed the
scrivener’s-error issue in her reply brief after Lee raised the issue in her responsive brief.
8
We therefore do not consider the issue waived. Cf. Wood v. Diamonds Sports Bar &
Grill, Inc., 654 N.W.2d 704, 707 (Minn. App. 2002) (“If an argument is raised in a reply
brief but not raised in an appellant’s main brief, and it exceeds the scope of the
respondent’s brief, it is not properly before [an appellate] court and may be stricken from
the reply brief.”), review denied (Minn. Feb. 26, 2003).
Without citation to legal authority, Lee implicitly argues that to prove common
liability, Judy Brown must seek reformation of Lee’s guaranty. “Reformation is an
equitable remedy that is available when a party seeks to alter or amend language in a
contract so that the contract reflects the parties’ true intent when they entered into the
contract.” SCI Minn. Funeral Servs., Inc. v. Washburn-McReavy Funeral Corp., 795
N.W.2d 855, 864 (Minn. 2011). Reformation of a contract is appropriate when:
(1) there was a valid agreement between the parties
expressing their real intentions; (2) the written instrument
failed to express the real intentions of the parties; and (3) this
failure was due to a mutual mistake of the parties, or a
unilateral mistake accompanied by fraud or inequitable
conduct by the other party.
Id. at 865 (quotation omitted). “[T]he rule prohibiting the admission of parol evidence to
vary the terms of a written contract does not prevent proof of fraud or mistake.”
Aronovitch v. Levy, 238 Minn. 237, 246, 56 N.W.2d 570, 576 (1953).
Lee argues that Judy Brown waived any right to seek reformation of Lee’s
guaranty because Judy Brown’s counsel confirmed before the district court that Judy
Brown was not seeking reformation of Lee’s guaranty. Indeed, Judy Brown’s counsel
stated at the summary-judgment hearing that Judy Brown “doesn’t seek reformation of
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[Lee’s] personal guaranty.” But counsel also stated, “All [Judy Brown] asks the Court
and the fact-finder to do here is make a determination of what the parties meant. She
needs to show nothing more than . . . Lee is obligated for the same debt as the debt [Judy
Brown] paid as directed by the jury and Judge Pugh.”
We are not persuaded that Judy Brown must seek reformation of Lee’s guaranty to
prove common liability. In Lenning v. Retail Merchants’ Mut. Fire Ins. Co., the
Minnesota Supreme Court considered a case in which a contract of insurance
misidentified the insured—“Seaman-Martin Co.”—as “Seaman & Martin.” 129 Minn.
66, 66–67, 151 N.W. 425, 425 (1915). The supreme court reasoned:
An error or an ambiguity in the name of the assured is open to
oral proof as to the party intended to be protected. . . . [A]n
error of no consequence in the name of the insured should not
defeat a contract of insurance. . . . Especially ought this to be
so when the name used is applicable to no one in existence.
Id. at 68–69. In concluding that the contract’s misidentification of the insured did not
preclude an action by the insured’s assignee for loss coverage under the terms of the
contract, the court cited authorities including a treatise that “assert[s] that a misnomer of
a corporation in a contract is not fatal, if it appears from the instrument itself or is shown
by parol that the corporation is intended.” Id. at 66–67, 69.
Substantial persuasive authority is consistent with Lenning. See Humble Oil &
Refining Co. v. Jaybert Esso Serv. Station, Inc., 30 A.D.2d 952, 952 (N.Y. App. Div.
1968) (determining that misnomer of principal obligor did not relieve guarantors of their
obligations under guaranties where intent of guarantors was evident and misnomer was
not misleading); see also 27 Williston, supra, § 70.20 (“Where circumstances justify
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reformation of a writing, a court has the discretion—without a preliminary decree of
reformation—to give effect to the transaction as if the failed writing had been
reformed.”); cf. Quebecor World (USA), Inc. v. Harsha Assocs., L.L.C., 455 F. Supp. 2d
236, 241 (W.D.N.Y. 2006) (“[T]he general rule is that where there is a misnomer of the
corporation in the contract or obligation sued on, the corporation may sue or be sued, and
recovery may be had by or against it, in its true and proper corporate name.” (quotation
omitted)); Nw. Mut. Life Ins. Co. v. Germania Fire Ins. Co., 40 Wis. 446, 451 (1876)
(determining that policy’s omission of word in plaintiff’s name did not relieve defendant
of its obligation under policy, where “[t]here [wa]s not the slightest doubt that the parties
to the policy inserted the clause for the benefit of the plaintiff”).
Judy Brown presented evidence and apparently persuaded the district court that
the identification of WII in Lee’s guaranty was a scrivener’s error.3 We conclude that the
evidence, viewed in the light most favorable to Judy Brown, creates a genuine issue of
material fact about whether Lee and Gordon Brown guaranteed the same debt to Peoples
and, if so, whether Judy Brown paid more than a fair share of the debt.
II.
Lee argues that, because contribution is an equitable remedy, Brown should not be
allowed to pursue her contribution claim because she has unclean hands, evidenced by
3
Judy Brown presented evidence to the district court that WII was dissolved more than
16 years before Lee signed her guaranty and that Lee owned 40.91% of Clearwater
Marine Inc., which owned 100% of WIC. Judy Brown also provided to the court a copy
of Peoples’s complaint against various business entities, Gordon Brown, and Lee, in
which Peoples treated WIC and WII as the same entity. The district court said: “[Judy
Brown] has convincingly argued that [Lee]’s guaranty with [WII], an entity that was
dissolved several years ago, was a scrivener’s error.”
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Peoples’s fraudulent-transfer judgment against her. Under the doctrine of unclean hands,
“he who seeks equity must do equity, and he who comes into equity must come with
clean hands.” Hruska v. Chandler Assocs., Inc., 372 N.W.2d 709, 715 (Minn. 1985)
(quotation omitted). “A party ‘may be denied relief where his conduct has been
unconscionable by reason of a bad motive, or where the result induced by his conduct
will be unconscionable either in the benefit to himself or the injury to others.’” Peterson
v. Holiday Rec. Industs., Inc., 726 N.W.2d 499, 505 (Minn. App. 2007) (quoting Johnson
v. Freberg, 178 Minn. 594, 597–98, 228 N.W. 159, 160 (1929)), review denied (Minn.
Feb. 28, 2007). “‘The [unclean-hands] doctrine does not apply where the relief sought by
the plaintiff and the equitable right claimed by the defendant belong to or grow out of two
entirely separate and distinct matters or transactions.’” Id. (quoting Lindell v. Lindell, 150
Minn. 295, 298−99, 185 N.W. 929, 930 (1921)). The “adverse equity” of the party
seeking an equitable right
must grow out of the very controversy before the court or out
of such transactions as the record shows were part of its
history, or where it is so connected with the cause in litigation
as to be presented in the pleadings and proofs, with full
opportunity afforded to the plaintiffs to explain or refute the
charges.
Id. (quotation omitted). Courts of equity apply the doctrine of unclean hands “not by way
of punishment for extraneous transgressions, but upon considerations that make for the
advancement of right and justice.” Keystone Driller Co. v. Gen. Excavator Co., 290 U.S.
240, 245, 54 S. Ct. 146, 148 (1933).
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In this case, Judy Brown claims that she paid Peoples after the district court
entered the fraudulent-transfer judgment against her. Assuming without deciding that
Judy Brown has unclean hands as a result of the fraudulent-transfer judgment entered
against her, this case presents the question of whether a district court abuses its discretion
by granting equitable relief to a party with unclean hands if the party has purged herself
of her adverse equity. See Citizens State Bank v. Raven Trading Partners, Inc., 786
N.W.2d 274, 277 (Minn. 2010) (reiterating “that granting equitable relief is within the
sound discretion of the trial court and only a clear abuse of that discretion will result in
reversal” (quotation omitted)). We conclude that a district court does not abuse its
discretion by granting equitable relief to a party with unclean hands if the party has
purged herself of her adverse equity.
“A wrong which has been righted may not be pleaded against a party to a suit in
equity, on the theory that the party charged therewith is in court with ‘unclean hands.’” 2
John Norton Pomeroy, A Treatise on Equity Jurisprudence § 399 (5th ed. 1941); see Loy
v. Alston, 172 F. 90, 91–92, 95 (8th Cir. 1909) (determining that plaintiff was not barred
by doctrine of unclean hands when defendant had recovered from plaintiff for his
misconduct); Gen. Electric Co. v. Klein, 129 A.2d 250, 252 (Del. Ch. 1956) (“The
repentant sinner, especially where he has been duly punished, is not unwelcome in
equity.”); Sixty-Third & Halsted State Sav. Bank v. Martin, 38 N.E.2d 989, 990, 992 (Ill.
App. Ct. 1942) (“The fraud as to the [plaintiffs] is purged by the payment of the
judgment.”); Stewart v. Jackson, 635 N.E.2d 186, 189–90 (Ind. Ct. App. 1994) (“Indiana
has recognized the ability to purge oneself of wrongdoing, which effectively restores the
13
right to equitable relief.”); Hlista v. Altevogt, 210 A.2d 153, 156 (Md. 1965)
(“[I]mpropriety which has been purged is not, under the [unclean-hands] maxim, fatal to
plaintiff’s suit.”); Randles v. Hanson, 258 P.3d 1154, 1157, 1161 (N.M. Ct. App. 2011)
(“[W]hatever inequitable conduct [plaintiff] engaged in . . . was remedied by the
judgment [defendant] obtained against her.”); Beavers v. Walters, 537 N.W.2d 647, 651
(N.D. 1995) (“One who purges himself of his wrongdoing will have his right to relief
restored.”); McNair v. Benson, 126 P. 20, 24 (Or. 1912) (determining that plaintiff who
confessed his misrepresentations and effected settlement “purged his conduct, as far as he
was capable of cleansing it,” and “should not now be denied relief[] on the ground that he
does not come into a court of equity with clean hands”); Huntzicker v. Crocker, 115 N.W.
340, 341–42 (Wis. 1908) (determining that plaintiff was not equitably barred from
seeking dower when plaintiff’s fraudulent conveyance to daughter was voided).
In Senn v. Youngstedt, 589 N.W.2d 314, 316 (Minn. App. 1999), review denied
(Minn. May 18, 1999), a case involving the right of contribution, a defendant argued that
contribution should be disallowed because of the plaintiff’s unclean hands. In dicta, we
suggested that the timing of a party’s wrongdoing may affect its right to seek equitable
relief, noting that “all allegations of unclean hands ar[o]se only from [plaintiff]’s actions
after the original judgment was entered.” 589 N.W.2d at 316. But we did not reach the
question of whether the plaintiff’s hands were clean. Id. at 316−17.
While we have not found a Minnesota case that specifically addresses unclean
hands based on entry of a fraudulent-transfer judgment, the Minnesota Supreme Court
has been reluctant to apply the unclean-hands doctrine when the party asserting it has
14
failed to show harm resulting from the complained-of conduct. See Hruska, 372 N.W.2d
at 715 (declining to apply unclean-hands doctrine when plaintiff’s underpayment of
wages to defendant was misconduct that did not result in substantial harm to defendant
and when defendant had since recovered from plaintiff); Fred O. Watson Co. v. U.S. Life
Ins. Co., 258 N.W.2d 776, 778 (Minn. 1977) (declining to apply unclean-hands doctrine
when plaintiff made misrepresentation to defendant but defendant’s reliance was not
induced by misrepresentation). The record before us includes no claim by Lee, or
evidence that establishes, that Judy Brown’s unclean hands prejudice Lee. Any such fact-
dependent claims are appropriately resolved in the district court.
DECISION
A genuine issue of material fact exists regarding whether Lee and Gordon Brown
guaranteed the same debt. If the district court determines that Judy Brown is entitled to
contribution from Lee, the court in its discretion may grant Judy Brown equitable relief if
it finds that she has purged any adverse equity. We reverse the district court’s grant of
summary judgment to Lee on Judy Brown’s contribution claim and remand this case to
the district court for further proceedings consistent with this opinion.
Reversed and remanded.
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