SW Legal studies in Business

Unclean Hands Estop a Party from Litigation
Description The owner of a corporation fraudulently transferred his stock to evade litigation. Years later, he wanted to assert ownership of the stock under a rule of equity. The high court of Montana held that he was estopped from appearing in court on the matter under the unclean hands doctrine.
Topic Court Procedure
Key Words Estoppel; Equity; Unclean Hands
C A S E   S U M M A R Y
Facts Dr. and Mrs. Kauffman owned property which, to limit estate taxes imposed on personal assets, they placed in a corporation. They could give corporate stock to their children as a way to transfer the assets to them. Later, to avoid payment of a judgment against him, Dr. Kauffman transferred all his stock in the corporation to Mrs. Kauffman. During the following years, Mrs. Kauffman gave the stock to each of their four children. Later the children fell into a dispute among themselves and ended up in court making claims against each other. Dr. and Mrs. Kauffman intervened, claiming, on the basis of equity, that the stock was in a constructive trust for the children and so was still under their control. The trial court ordered all stock transferred to Dr. and Mrs. Kauffman; two of the children appealed.
Decision

Reversed. Judicial estoppel bars Dr. and Mrs. Kauffman from litigating their position. Years ago, Dr. Kauffman transferred the stock originally to evade enforcement of a judgment against him. That transfer was allowed to stand because it was not challenged and Dr. Kauffman did not claim the transfer was fraud when it occurred. His new claim that the stock was actually in a trust for the children is not consistent with his previous position that he had given up all claim to the stock. He cannot now change his position, so judicial estoppel bars him from raising the equitable claim that a trust exists. Furthermore, the clean hands doctrine states that parties may not seek relief in equity unless they come into court with clean hands; no one can take advantage of his own wrong. The earlier stock transfer was done to evade judgment creditors. That willful action is sufficient to invoke the clean hands doctrine. Hence, Dr. and Mrs. Kauffman gave up stock ownership years ago and have no right to intervene in the matter; the dispute among the children may proceed.

Citation Kauffman-Harmon v. Kauffman, 36 P.3d 408 (Sup. Ct., Mont., 2001)

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