Using Equity: The Procedural Maxims
Six equitable maxims explain equity’s procedural rules: (1) equity acts in personam; (2) equity will not aid a volunteer; (3) he who comes into equity must come with clean hands; (4) equity aids the vigilant, not the indolent; (5) one who seeks equity must do equity; and (6) equity delights to do justice, and not by halves.
Equity acts in personam.Equity generally acts by issuing decrees against a person—in other words, in personam. There are some exceptions, notably with respect to litigants who have property outside of a court’s jurisdiction.
The rule is that equity courts may act if the court has personal jurisdiction over the party and the action relates to more than just the question of the property’s title. Thus, in Toller v. Carteret, an English court enforced an agreement relating to land in the Duchy of Normandy because the defendant was served in England; and in Penn v. Lord Baltimore, an English court similarly chose to enforce an agreement regarding the boundary between the colonies of Pennsylvania and Maryland.
Somewhat more recently, in Knott v. Evans, the trial judge decided that the operation of a motorcycle racetrack was a nuisance and enjoined its operation during specified dates and times.The trial judge decided that the restrictions in his order would run with the land. The Georgia Supreme Court reversed. The trial court’s power to issue an injunction was an equitable remedy, and a court of equity acts in personam, not in rem. Thus, while the trial court might enjoin the current owner from violating the order, the trial court’s order did not automatically apply to successor owners.
The case of JP Morgan Chase Bank v. Jackson impliedly interpreted this maxim and added a twist. Here, a loan applicant’s future husband’s name was mistakenly included on a deed but was not included on the mortgage. Before the error was fixed, the future husband filed for bankruptcy. Based on all of the circumstances, the trial court held that the future husband’s interest was subject to an equitable lien, a constructive trust, and that the lender had equitable subrogation rights. The future husband appealed, asserting that as his personal liability for any debts was extinguished in bankruptcy, so, too, were the equitable liens on the property. The appellate court disagreed. While the decision to allow an equitable lien was in personam against the husband, the enforcementof an equitable lien in this circumstance was in rem, against the property; thus, the equitable lien was not extinguished by the bankruptcy.
Equity will not aid a volunteer.The Supreme Court of Washington issued a detailed opinion on why a lender was not a volunteer in an equitable subrogation context. In Columbia Community Bank v. Newman Park, LLC, the bank was deceived into lending money to a limited liability company (LLC) to be secured on real property, but the LLC never had authority to enter into the transaction. In lending the money, the bank paid off a prior first lien. The lower courts held that the bank was a volunteer because the bank was not acting under any legal compulsion to protect some existing interest and refused equitable subrogation. The Washington Supreme Court reversed; the court noted that the bank was a volunteer under the older strict rule of interpretation, but the court adopted the modern Restatement’s view that one who satisfies a mortgage is entitled to subrogation in order to avoid unjust enrichment.
This maxim was also at issue in Hartford Insurance Co. v. Ohio Casualty Insurance Co., too. Hartford’s insured was the developer of a condominium project. Hartford funded a settlement of various claims against the insured and then sought equitable contribution from those subcontractors and their insurers who refused to participate in the settlement. The defendant argued that Hartford was a volunteer in paying a settlement because Hartford’s insured had ceased to exist. The court stated that whether one is a volunteer is determined in light of all of the surrounding circumstances. A volunteer is one who has no right or interest of his own to protect. Here, Hartford still had a duty to defend some claims under its policy even though the insured was out of business, so Hartford was entitled to proceed against the defendant under a subrogation theory.
He who comes into equity must come with clean hands.Those seeking equity must be free of corruption, or, more simply stated, they must not have “unclean hands.” The number of cases and situations that may apply is innumerable. A few cases may illustrate some particular issues.
In Roberson v. Odom, the plaintiff filed a quiet title action and claimed adverse possession. The defendant asserted unclean hands. The court struck the defense because under Texas law, quiet title and adverse possession claims are legal, not equitable, claims. The unclean hands doctrine does not apply to claims that are legal in nature. However, in Michigan, for example, these are equitable claims, as we see in Yuille v. American Home Mortgage Services. Thus, Roberson and Yuille teach us to consider carefully whether an underlying claim is legal or equitable in nature.
Finally, in In Re NJ Affordable Homes Corp., one bankruptcy judge explained how the unclean hands doctrine may work in the bankruptcy context. In Affordable Homes, the debtor was engaging in a scheme to sell securities in the form of promissory notes. Over 400 adversary proceedings were filed, many by the trustee for the purpose of avoidance and recovery from those who had received the debtor’s funds. As the trustee stepped into the debtor’s shoes, the issue was whether the unclean hands doctrine applied to the trustee’s claims. The court held that the unclean hands doctrine did not apply to the trustee as applying the doctrine would undermine the bankruptcy statute.
Equity aids the vigilant, not the indolent. Lawyers may best understand this doctrine by one word: laches. For the layperson, the doctrine is summed up by the phrase “Do not sleep on your rights.”
The most famous recent application of the laches doctrine pertains to the Washington Redskins’ trademark. In Pro Football, Inc. v. Harjo, certain Native Americans claimed that the “Redskins” mark was offensive and challenged its trademark protection. Because the mark came into existence in 1933, the court held that the Native Americans had waited too long to challenge the trademark and thus were barred by laches.
For a real estate–related case, we may look to Barber v. Magnum Land Services, LLC. In Barber, four years after entering into leases that provided fracking rights to oil and gas companies, the landowners alleged that they were defrauded into signing the leases. However, the landowners knew of the alleged fraud shortly after signing the leases. Their legal claims were barred by the two-year statute of limitations. Similarly, the court barred their equitable claims, if any, under the laches doctrine.
One who seeks equity must do equity. Sometimes in rescission cases or cancellation cases, plaintiffs are confused by what they might be required to do in order to obtain relief.
Herrejon v. Ocwen Loan Servicing, LLC, answered this question under California law. In Herrejon, the plaintiffs sought to challenge the foreclosure of their real property, yet they did not tender their indebtedness to the court or to the defendants. The court dismissed the case and held that this “doomed” the plaintiffs’ case because
to obtain “rescission or cancellation, the rule is that the complainant is required to do equity, as a condition to his obtaining relief, by restoring to the defendant everything of value which the plaintiff received in the transaction.”
In In Re Cooper, one bankruptcy court applied the maxim to decide what date to use for valuation of property in a lien-stripping context. It was unclear which date was the most appropriate to use. Therefore, the court decided that, under the circumstances, the maxim required the use of the valuation date least favorable to the debtor.
Equity delights to do justice, and not by halves. This doctrine exists to prevent a multiplicity of suits. While extant, the doctrine is somewhat superseded by the changes in the Federal Rules of Civil Procedure. Thus, a court of equity, if obliged to take on a case, will retain the case for all purposes, even if it has to decide some issues not ordinarily within its authority.
More relevant in the modern era is that the doctrine also stands for the proposition that an equity court has continuing jurisdiction to enforce its own orders. In a child custody context, a trial court decided to award joint custody to the parents, and the children would shift back and forth between the parents. The mother objected, stating that this violated the maxim as it promoted additional litigation between the parents. Nevertheless, the Mississippi Court of Appeals affirmed the trial court, stating that the chancellor did not abuse his discretion in making his ruling.
What Equity Will Do: The Substantive Maxims
Eight equitable maxims explain what equity will do for those who are entitled to it: (1) equity follows the law; (2) equity sees that as done what ought to be done; (3) equality is equity; (4) equity imputes an intent to fulfill an obligation; (5) equity abhors a forfeiture; (6) between equal equities, the first in order of time shall prevail; (7) equity regards the beneficiary as the true owner; and (8) equity regards substance rather than form.
Equity follows the law. While equity is powerful, it does not operate completely independently of the law. In fact, aequitas nunquam contravenit legem, i.e., equity never contradicts the law. Thus, while there are variations of this theme, the general maxim is that equity follows the law.
This maxim is cited expressly in Ex parte Lawson, in which the Supreme Court of Alabama decided that the constructive notice supplied by the materialman’s lien statute defeats the lender’s equitable subrogation claim. In this case, the materialman’s statute stated that the lien “shall have priority over all other liens. . . .” To avoid this express legislative intent would defeat the maxim.
The Indiana Court of Appeals impliedly applied the “Equity follows the law” maxim in Puente v. Beneficial Mortgage Co. of Indiana. In Puente, Beneficial acquired property at a foreclosure sale. However, seven days later, another person, Wolverton, acquired the same property through a tax sale. Beneficial then sold the property to a third person, Puente, who purchased a Fidelity owner’s title insurance policy upon closing. Wolverton reappeared and asserted his claim. Fidelity elected not to try to settle with Wolverton. At trial, Wolverton prevailed. Fidelity paid off Puente’s lender under the loan policy, subtracted that sum from the owner’s policy and offered the remaining amount to Puente if he confirmed Fidelity’s subrogation rights against third parties. Puente refused. In his view, subrogation was an equitable doctrine, and the equities weighed against subrogation (with Puente losing his house, the value of his improvements, the increase in the property value, and his peace). After further litigation, the court decided that the contractual subrogation rights set forth in the policy prevailed over the common law equitable subrogation right. Nevertheless, under the “made whole” doctrine, Fidelity would not receive a penny until Puente was first made whole for his losses.
Equity sees that as done what ought to be done. This maxim is best explained by the title of the Spike Lee movie Do the Right Thing. Courts of equity do justice, not injustice. Thus, when a buyer refuses to close on a transaction without having any good reason for failing to close, a court may order specific performance even if the seller sues solely for monetary damages.
The case of Hoyt Street Properties, L.L.C. v. Burlington Northern & Santa Fe Railway impliedly applies the doctrine in an environmental cleanup case. Under Oregon law, owners of property are liable for preexisting contamination on their property, whether they are aware of the prior contamination or not. Here, a nonparty, Glacier Park, owned land and contracted to sell the land to Prendergast Associates. Prendergast Associates never closed on the transaction itself but sold its contract rights to Burlington Railway. Burlington Railway later sold the land to Hoyt Properties. When it learned of contamination, Hoyt Properties sued Burlington Railway for contribution of the cleanup costs. Burlington Railway then filed a third-party complaint for contribution against Prendergast Associates, claiming that Prendergast Associates was an “equitable owner.” The court disagreed, stating that Prendergast Associates was not an equitable owner because it never had actual title to the property at any time and never had a right to possession under the contract.
In an equitable subrogation context, the Court of Special Appeals of Maryland applied the maxim when it held that a buyer of real property was entitled to equitable subrogation because there was a clear duty on the part of the seller to convey the property. In Nooria Noor v. Centerville Bank, a bank had a confessed judgment note against the seller.After Noor contracted to purchase the property, the bank confessed judgment. Unfortunately, the settlement agent did not identify the judgment when Noor closed on the property. At closing, Noor paid a debt superior to the bank’s judgment and unwittingly benefited the bank by paying off the superior lien. The trial court found for the bank, but the appellate court reversed, reasoning that without applying equitable subrogation, the bank would be unjustly enriched.
Finally, the Delaware Court of Chancery issued an opinion that touches a number of equitable maxims and traces some of equity’s history. In In Re Carlisle Etcetera, LLC, the owners were deadlocked, and one of them petitioned for dissolution. Due to a technicality, Delaware’s statute on corporate dissolution did not apply. However, the court determined that while statutory dissolution was not available, the court could still exercise its own inherent powers under equity to order equitable dissolution.
Equality is equity. The “Equality is equity” maxim arises frequently in the receivership context when there are commingled but insufficient assets to repay all of the creditors. In such cases, the receiver distributes the proceeds to creditors with similar claims and priorities on a pro rata basis.
Equity imputes an intent to fulfill an obligation. In general, when someone has an obligation and that person has the means of performing the obligation, equity will presume that the person intended to fulfill the obligation and may not permit the person to present contrary evidence.
A good example of the use of this maxim is found in Federal Land Bank of Omaha v. Bollin. An Iowa statute states that the filing of a bankruptcy petition waives normal redemption rights related to a foreclosure sale. Facing foreclosure, the Bollinses filed for bankruptcy prior to the sale. In the bankruptcy case, the parties entered a stipulated lift stay order that allowed the bank to sell the property “and to begin the running of the redemption period of the debtors.” Thereafter, the bank took the position that the debtors had no redemption rights under Iowa law. The trial court sided with the bank, but the Iowa Supreme Court reversed, using several equitable maxims to justify its decision. The Iowa Supreme Court believed that the intention behind the stipulated order was to permit redemption, and this required the bank to fulfill the obligation in the stipulated order to permit redemption.
Equity abhors a forfeiture. It is an ancient doctrine that legal requirements that impose forfeitures are penal in nature, and the courts must strictly construe them.
In Gallimore v. Washington,the District of Columbia Court of Appeals applied this maxim to the slayer statute. Under the statute, a murderer cannot inherit from the deceased and is presumed to have died first. In this case, the appellant held property as tenancy by the entirety with his wife and was convicted of killing her. But, as was later revealed, his wife was already married to someone else. The D.C. Court of Appeals held that the convicted murderer did not forfeit his interest in jointly held property.
Between equal equities, the first in order of time shall prevail. This maxim is also expressed as “First in time, first in right.”
In Hudson Valley Bank v. Kissel, Kissel obtained a mortgage from Washington Mutual Bank (WaMu) in the amount of $1.6 million. He then forged a release of the WaMu mortgage and obtained another loan from Hudson Valley bank in the amount of $4.5 million. He then forged a release of the Hudson Valley loan to obtain a $1 million loan from Independence Bank. Finally, he forged a release of the Independence loan to obtain a $4.525 million loan from Fairfield County Bank. First American had provided title insurance to WaMu and Hudson Valley. Stewart had provided the insurance for Independence Bank. Hudson Valley foreclosed, and the sale proceeds were deposited in the court. Stewart Title argued for the pro rata allocation of proceeds, but the Connecticut Supreme Court held that First American, through its insureds, WaMu and Hudson Valley, was first in time and first in right. Thus, the court awarded First American all of the proceeds.
Equity regards the beneficiary as the true owner. Like the old Crusaders, the modern courts view the beneficiary of a trust as the true owner.
A modern example of this maxim’s use is found in Mortgage Electronic Registration Systems, Inc. (MERS) cases. In Brandup v. ReconTrust Co., in the loan documents, the parties recognized (1) that MERS would hold legal title to the properties, solely as nominee for the lender; (2) that MERS was a “beneficiary”; and (3) that MERS had the right to foreclose on the properties. When the borrowers defaulted, the lenders initiated foreclosure sales under MERS’s name, and the borrowers sought to enjoin the sales. The Oregon Supreme Court agreed with the borrowers that MERS was not a beneficiary as defined by Oregon law because MERS was not the true owner of the debts. Thus, the foreclosure sales could not proceed in their current procedural posture.
Equity regards substance rather than form. Simply stated, an equity court will look under a veil in order to achieve justice, and in order to achieve justice a court may disregard technicalities.
Gatz v. Ponsoldt provides a recent example of the maxim “Equity regards substance rather than form.” In Gatz, a minority shareholder had de facto control of a corporation and used that control to convert his interest into a majority interest via a recapitalization scheme. When the other shareholders learned of the outcome, they filed suit. The trial court found that their claims were derivative and dismissed the suit because the plaintiffs had failed to lodge a presuit demand letter as required by statute. On appeal, the Supreme Court of Delaware reversed, finding that the requirement of a presuit demand letter emphasized substance rather than form under these circumstances.
What Equity Will Not Do: More Substantive Maxims
Five equitable maxims explain what equity will not allow: (1) equity will not suffer a wrong without a remedy, (2) equity does not require an idle gesture, (3) equity will not allow a statute to be used as a cloak for fraud, (4) equity will not allow a trust to fail for want of a trustee, and (5) equity will not perfect an imperfect gift.
Equity will not suffer a wrong without a remedy. Said differently, if there is a right, then in equity there is a remedy. For equity to apply this maxim, (1) the law must not recognize the right; (2) the law does not or cannot administer the right; or (3) the right as administered by the law is inadequate, incomplete, or uncertain.
In PCS Nitrogen, Inc. v. Ross Development Corp., the defendant was a former owner of a contaminated site. While knowing of the contamination and likely future liability, the defendant sold the property and distributed all of the defendant’s cash or other assets to its shareholders. In this fraudulent conveyance action, the court determined that it could not order a constructive trust for various reasons but ordered judgment against every recipient of Ross’s assets, mandating that the recovery proceeds go to “a trust . . . established for the benefit of Ross’s creditors, to be administered according to details to be determined at a subsequent time.”
Equity does not require an idle gesture. Equity will not do or require a useless, vain, or futile thing. A corollary principle is that equity is not concerned with “trifles,” or futile gestures. Furthermore, equity is not intended to resolve small monetary amounts—small and intangible injuries are part of living in society.
For example, in Duenas v. Ocwen Loan Servicing, LLC, the court refused to set aside a foreclosure sale even though the notice of the sale was deficient. Under California’s “tender rule,” the plaintiff was unable to pay off the entire loan, and thus rescinding the sale was futile.
Equity will not allow a statute to be used as a cloak for fraud. While not a recent case, the Supreme Court of Michigan used the maxim “Equity will not allow a statute to be used as a cloak for fraud” to avoid the statute of frauds in Stephenson v. Golden. In Stephenson, a purchaser hired a real estate broker to assist in the purchase of real property. Yet, the real estate broker purloined the opportunity for himself and immediately conveyed the property to a third party. The trial court dismissed the purchaser’s claim based on the statute of frauds. The Michigan Supreme Court reversed, finding that the purchaser had an oral agreement with the broker, the broker had a fiduciary duty to the purchaser under common law, and the third-party purchaser was not a bona fide purchaser without knowledge of the broker’s fraud. Thus, the court imposed a constructive trust on the property in favor of the purchaser.
Equity will not allow a trust to fail for want of a trustee. In Harter v. Johnson, a physician died and there was some dispute over his will, which the physician had drafted himself. Ultimately, the court decided that it was the physician’s actual intent to use the residue of his estate to fund a local hospital in service to African Americans as no such hospital had previously existed. Some of the physician’s heirs objected and raised several arguments in opposition, one of which was that the will failed to appoint a trustee. The South Carolina Supreme Court found the objection unimportant due to the equitable maxim “Equity will not allow a trust to fail for want of a trustee.” The court then appointed the executors of the physician’s will as the trustees.
Equity will not perfect an imperfect gift. In contrast to Harter, which highlighted one example of equity’s use to provide charity toward African Americans, Barker v. Barker’s Administrator illustrates our last equitable maxim with an example of how the courts applied equity in an abusive role—lest we forget history’s harshness.
In Barker, the executor of an estate filed suit to recover a slave named Abel. The decedent, Abel’s owner under the law, contracted for Abel to work for a third person but stated that if he never returned to Virginia, then he wished for the third person to take Abel as his own slave. Abel’s owner died and never returned to Virginia. The trial court determined that the gift of Abel was not perfected because it was not perfected while the decedent was alive, and that equity would not perfect the gift for him. On appeal, the Virginia Supreme Court agreed, and Abel was required under the law to travel to his new owner in Kentucky.
Conclusion
As you can see from this article, while equity may have begun to assist the hapless Crusader who was trying to get his castle back, there are now all kinds of equitable proceedings. In certain kinds of legal proceedings, the court still will apply equitable principles. And, sometimes, when the law fails, the courts will apply equity in its place. Thus, knowing the equitable maxims and thinking about how they might apply to your cases may mean the difference between victory and defeat for you and your clients.
