Equitable Defense – Unclean Hands

“Unclean Hands” in Debt Litigation

How does the equitable doctrine of “unclean hands” show up in debt litigation? Can you use it in your defense? Yes… sometimes. And it might be used against you, too – although rarely with effect. The basic idea behind unclean hands is that the party with the dirty hands did something specifically that would make court intervention on his or her behalf wrong. This often, but not always, translates into some action related to the claim in question that either profits the person bringing suit or prejudices the other’s right or ability to defend unfairly.

Introduction

Like laches, the doctrine of “unclean hands” it is an equitable doctrine that has its roots in English history. And like laches, it is rarely considered, but potentially useful, in defending debt litigation.

What are “Unclean Hands?

Unclean hands are hands (figuratively speaking) soiled by some sort of wrongdoing. If your hands are “unclean,” you may not ask the court to assist you because the court is supposed to maintain a higher integrity and will not be a party to immorality or injustice.

The doctrine of unclean hands as we know it got its start in England. In English law, the law was long considered a sort of absolute, and if you could comply with the absolute words of a statute (law), you could invoke the remedy of the law regardless of how the legal wrong had occurred. Over time, the courts became aware that simple adherence to the law could sometimes lead to serious injustice, and “equity” was born. That was the idea that the court could take a look at the overall situation and should not allow itself to be a pawn in someone’s immoral game even if that game fell within the letter of the law.

Considering the difficulty of applying “morality” uniformly or predictably in as large a country as ours, courts have striven to define uncleanliness more tightly, and this has tended to merge the concepts of law and equity considerably. But there are differences.

Unclean Hands in Modern Law

The most obvious application of “unclean hands” is the well-established notion that the court will not enforce an illegal contract. The Mafia would not be able to sue a hitman for damages for failing to carry out an assassination, for example. Their remedies, if any, would be strictly “extrajudicial”–not necessarily an advantage for the incompetent hitman.

Unclean Hands in Debt Law

The doctrine of unclean hands comes up often in foreclosure law, as a party is supposedly not entitled to profit from a wrong it caused itself. Suppose you have a mortgage you’re paying which includes an escrow for taxes, for example. This is very common, and the mortgage provides that the bank will, according to certain formulas, determine that escrow and add an appropriate amount to the loan payment amount. Mortgage agreements often also provide that partial payments need not be accepted by a bank and that there is no “legal” defense to foreclosure for failure to make payments as required by contract.

If the bank wrongly increases the escrow by miscalculating the taxes, it could raise the payments due to a level beyond your ability to pay. If you then continued making the correct payments, the bank might refuse to accept those payments and put you into foreclosure. Unclean hands might be the doctrine that could stop that foreclosure: the bank itself caused the inability to make payments. Because the courts have not always applied the doctrine, Congress stepped up with various laws (e.g., the Truth in Lending Act, among others) to add to consumers’ protection.

Unclean Hands in Credit Card Debt Law

Another possible application of the doctrine  might be the ways the banks apply what is called the “universal default” provision which they so often sneak into credit card applications. According to the universal default provision, a default in payment to one creditor can be, but does not have to be, considered a default on all creditors. In other words, if you are disputing a bill with one credit card and allow it to go into default, that default might trigger default in another, unrelated credit card. When that happens, the second bank might raise its interest rates from 9% to 30%. In theory this is to cover for the increased risk of default of a troubled debtor, but in reality it is intended, as so many aspects of the credit card agreements are, to profiteer from somebody’s mistake,

At some point, a court might consider that sort of exploitation “unclean” and deny a bank the use of the courts to carry it out. Because the doctrine might also equally apply to many of the fees and charges the banks heap onto delinquent accounts, a debt defendant should always consider adding the unclean hands defense. And this would be especially true where a debt collector’s illegal actions, for example a communication to an employer, actually hampered the consumer’s ability to make the payments supposedly owed.

For More Equitable Doctrines

Click here to read about what equitable doctrines are – estoppel, issue or claim preclusion (court doctrines that prevent you from relitigating issues you either have, or should have, argued in front of court) and how they might apply to your case.

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