Opinion
G052913
11-06-2017
BRADLEY BIRKENFELD, Plaintiff and Appellant, v. IGOR M. OLENICOFF et al., Defendants and Respondents.
Law Office of John D. Cline, John D. Cline; Boersch Shapiro and Lara Kollios for Plaintiff and Appellant. Wesierski & Zurek, Christopher P. Wesierski, Laura J. Barns and Christian C.H. Counts for Defendants and Respondents.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. 30-2012-00589134) OPINION Appeal from a judgment of the Superior Court of Orange County, Kim Garlin Dunning, Judge. Affirmed. Law Office of John D. Cline, John D. Cline; Boersch Shapiro and Lara Kollios for Plaintiff and Appellant. Wesierski & Zurek, Christopher P. Wesierski, Laura J. Barns and Christian C.H. Counts for Defendants and Respondents.
* * *
INTRODUCTION
Bradley Birkenfeld sued Igor M. Olenicoff and Olen Properties, Corp. (Olen) for malicious prosecution after Birkenfeld prevailed against them in a federal court lawsuit. Following a bench trial, the court found in favor of Olenicoff and Olen on their affirmative defense of unclean hands, and judgment was entered against Birkenfeld. In the appeal from that judgment, the parties agree that Birkenfeld engaged in conduct that was unconscionable or inequitable; indeed, as the trial court found, both Birkenfeld and Olenicoff are miscreants and convicted felons who worked together to defraud the United States of America.
The issue presented is whether the unclean hands conduct committed by Birkenfeld was related to the injuries claimed in the federal court lawsuit and affected the equities between Birkenfeld, on the one hand, and Olenicoff and Olen, on the other. We conclude the unclean hands conduct was sufficiently related to the alleged injuries in the federal court lawsuit to support the unclean hands defense. The trial court did not err by ordering judgment against Birkenfeld based on the unclean hands doctrine. We therefore affirm.
FACTS
This lawsuit began when Birkenfeld filed a complaint against Olenicoff and Olen asserting two causes of action for malicious prosecution. On the first day set for trial, the court decided to first conduct a bench trial on the unclean hands defense. The bench trial was conducted over three days. Olenicoff's only witness was Birkenfeld. Birkenfeld called three witnesses: Olenicoff, Stephen Newman (Olenicoff's long-time accountant), and Edward Robbins (Olenicoff's criminal tax attorney). The following facts are taken from the testimony and exhibits from the trial on the unclean hands defense.
I.
Background
UBS AG (UBS) was Switzerland's largest bank and the largest financial management institution, by number of assets, in the world. The bulk of UBS's business came from cross-border business, that is, from clients outside of Switzerland. United States tax law applied to UBS and its American clients because UBS owned banks and investment brokerages in the United States. Birkenfeld worked as a director (or private banker) for UBS in Geneva, Switzerland from 2001 to 2006. He earned about $1 million annually as a private banker at UBS.
As of December 2007, Olenicoff was the president and owner of Olen Properties, a multi-billion dollar real estate company. As early as 1992, Olenicoff "owned, controlled, and had signatory authority over financial accounts outside of the United States."
Both Olenicoff and Birkenfeld are convicted felons. From at least 1998 through 2004, Olenicoff failed to pay over $17 million in taxes. In December 2007, Olenicoff pleaded guilty to one count of submitting false tax returns in violation of title 26 United States Code section 7206(1). In the plea agreement Olenicoff admitted that between March 1992 and February 2002 he directed and authorized hundreds of millions of dollars from his offshore financial accounts. He also admitted that, on each of his federal tax returns from 1998 through 2004, he represented he had no authority of any kind over a financial account in a foreign country. He paid about $52 million in back taxes and penalties to the United States government as a result of his plea agreement. In return for pleading guilty and paying the $52 million, Olenicoff served no time in prison.
Birkenfeld and UBS had helped Olenicoff evade paying taxes and conspired with him to do so. Birkenfeld "whistleblew" on UBS to various federal agencies. In May 2008, Birkenfeld pleaded guilty to one count of conspiracy to defraud the United States in violation of section 371 of title 18 of the United States Code. He admitted to conspiring with Olenicoff and UBS to defraud the United States by assisting Olenicoff in evading income tax on the income earned on $200 million of assets hidden "offshore" in Switzerland and in Liechtenstein. The amount of tax loss due to the conspiracy was between $7 million and $20 million. Birkenfeld was sentenced to 40 months in prison.
II.
Birkenfeld and UBS Help Olenicoff Evade Taxes.
When Birkenfeld met Olenicoff in 2001, Olenicoff was in the process of terminating his relationship with Barclays Bank in the Bahamas and looking for a new bank. Olenicoff wanted to replicate the offshore structures he had in the Bahamas and asked for "a complicated litany of requests with bank accounts, companies, trusts, anonymity, discretion." Birkenfeld told Olenicoff, "We can do that, yes." Olenicoff opened accounts at UBS in 2001 or 2002.
Olenicoff was Birkenfeld's biggest client at UBS. Birkenfeld made somewhere between $1 million and $1.5 million per year from handling Olenicoff's accounts at UBS. Once Olenicoff became a UBS client, Birkenfeld and UBS conspired with him to evade taxes. Among other things, Birkenfeld helped Olenicoff conceal over $200 million of his offshore assets from the IRS, introduced Olenicoff to a trust officer in Lichtenstein who helped Olenicoff create nominee and sham entities, and completed tax forms for the benefit of Olenicoff that Birkenfeld knew were false by failing to disclose to the United States that Olenicoff was the beneficial owner of the sham entities. Birkenfeld encouraged secrecy. He advised Olenicoff not to possess any UBS documents in the United States and to obtain UBS credit cards, which Birkenfeld claimed could not be discovered by United States authorities.
All this was in keeping with UBS's practices and illegal conduct involving foreign customers. In January 2001, UBS had signed a Qualified Intermediary Agreement (QIA) with the United States government. Under the terms of the QIA, UBS "agreed to identify and document any customers who held U.S. investments, which were generally marketable securities and bonds, or received United States source income into their off-shore accounts." The QIA also required UBS to have its customers complete certain tax forms identifying the beneficial owner of their foreign bank accounts. UBS did not honor its obligations under the QIA and encouraged Olenicoff and others to prepare false and misleading tax forms that failed to identify Olenicoff as the beneficial owner of sham entities. UBS and its managers and bankers concealed their United States clients' ownership and control of offshore assets in order to evade the requirements of the QIA program, defraud the IRS, and evade paying United States income taxes.
About 19,000 of the total 20,000 American clients of UBS were "undeclared," meaning they refused to be identified or have taxes withheld from the income earned on their offshore accounts. UBS managed about $20 billion in undeclared accounts and earned about $200 million per year from them. UBS knowingly committed illegal activity to keep this income. UBS encouraged its bankers to seek out extraordinarily wealthy persons as clients because it made so much money on their accounts.
III.
Birkenfeld Begins a Whistleblowing Campaign
Against UBS.
In April 2005, Birkenfeld started his whistleblowing campaign against UBS and its fraudulent practices. He testified he began whistleblowing after he discovered UBS rules buried in UBS's intranet that were inconsistent with instructions he had been given by UBS which were to seek extremely wealthy clients and engage in illegal activity to shield their identity and income from the IRS. He came to believe the Swiss banking system was "akin to racketeering" and that UBS, its bankers, and its clients had engaged in illegal activities. Birkenfeld testified, "I thought it was important to come forward with the information I had on all of these tax cheats, including Mr. Olenicoff, to expose them and to convert this system of offshore illegal business." Birkenfeld himself had gladly participated in illegal activities; perhaps most notoriously, he had smuggled diamonds in a toothpaste tube for one client.
Birkenfeld first complained internally at UBS and, when that was unsuccessful, went to the United States Department of Justice, the IRS, the Securities Exchange Commission (SEC), and the United States Senate. In April 2006, Birkenfeld, through his attorneys, made a proffer to United States government, and Birkenfeld made a whistleblower complaint to the IRS under section 7623 of title 26 of the United States Code. In 2012, Birkenfeld received $104 million from the United States government for his whistleblowing activity. That amount was based on a percentage of fines paid by UBS which the IRS was able to collect largely as a result of Birkenfeld's whistleblowing activity.
IV.
Olenicoff is Prosecuted and Pleads Guilty to Submitting
False Tax Returns.
In May 2005, the United States government executed a search warrant at Olenicoff's home in California. In June 2005, Birkenfeld and a Liechtenstein trust officer met with Olenicoff and advised him to move his money from UBS to a bank in Liechtenstein because it had stronger bank secrecy laws than did Switzerland. In October 2005, Birkenfeld resigned his position at UBS. Before doing so, Birkenfeld told Olenicoff he no longer trusted UBS to handle Olenicoff's accounts.
The IRS conducted an investigation of Olenicoff and, in December 2007, he pleaded guilty to one count of submitting false tax returns. In the plea agreement, Olenicoff stipulated that for the years 1998 through 2004, he filed federal tax returns on which he falsely answered "no" to the question asking if he had "an interest in or a signature or other authority over a financial account in a foreign country." In return for pleading guilty and paying about $52 million in back taxes and penalties to the United States government, Olenicoff served no time in prison. He was required to execute tax forms disclosing the foreign accounts for the 1998-2004 tax years. After entering into the plea agreement, Olenicoff met with a government prosecutor and several government investigators and gave them information about his relationship with UBS and Birkenfeld.
V.
Birkenfeld Pleads Guilty to Conspiracy
to Defraud the United States.
Birkenfeld was indicted and, in May 2008, pleaded guilty to one count of conspiracy to defraud the United States in violation of section 371 of title 18 of the United States Code. The plea agreement recited in detail the tax fraud scheme perpetrated by UBS and its bankers, including Birkenfeld, their disregard for the QIA, and their relationship with Olenicoff. The plea agreement stated: "In order to circumvent the requirements of the Q.I. Agreement, [Birkenfeld] and others conspired to conceal [Olenicoff]'s ownership and control of the $200 million of assets hidden offshore by creating and utilizing nominee and sham entities." Birkenfeld was sentenced to 40 months in prison and served 30 months.
UBS was criminally investigated and, in February 2009, entered into a deferred prosecution agreement with the United States. Under the terms of the agreement, UBS waived indictment and consented to a one-count information charging UBS with conspiracy to defraud the United States and the IRS. UBS agreed to pay $780 million to the United States, accepted responsibility for violating the law, and acknowledged that between 2000 and 2007 UBS, through certain private bankers and managers, participated in a scheme to defraud the United States.
VI.
Olenicoff and Olen Bring the Underlying Lawsuit in
Federal Court.
In 2008, Olenicoff and Olen filed a civil suit against UBS, Birkenfeld, and others in the United States District Court, Central District of California captioned Olenicoff et al. v. UBS AG et al., Case No. SACV 08-1029 AG (RNBx). The federal suit was based on two general claims: (1) UBS, Birkenfeld, and others gave Olenicoff bad tax advice; and (2) UBS, Birkenfeld, and others mismanaged Olenicoff's accounts by churning them or placing them into risky investments that benefitted UBS at Olenicoff's expense.
In April 2012, the United States District Court granted summary judgment in favor of UBS and Birkenfeld. Near the outset of a forty-page order, the district court commented: "The irony of this lawsuit is apparent in UBS' Motions. To defend itself, UBS is forced to strenuously insist that its prior guilty plea only admitted to assisting willing clients with tax fraud, not forcing unsuspecting clients into tax evasion. While its argument is ironic, UBS is right. Even assuming that UBS gave Olenicoff fraudulent tax advice, that makes UBS a co-conspirator, not a defendant in this litigation. Olenicoff has already sworn that he was not an innocent dupe. He even received a sentence reduction for assuming responsibility for his tax fraud. It is directly inconsistent for him to now claim that he unwittingly relied on UBS' counsel. If Olenicoff wanted to claim he was misled by UBS, he had the option of pleading not guilty in the criminal proceedings. He pled guilty instead. Thus, his tax evasion claims against UBS are now barred. Olenicoff may not avoid the consequences of his own plea by getting UBS to indemnify him for his criminal acts."
In the tax-related claims, Olenicoff had alleged that UBS had given him bad tax advice and as a result "he did not disclose his off-shore accounts on his tax returns, was eventually charged with criminal tax fraud, had to pay a hefty fine, and now can no longer get financing for his company." The district court found those claims were directly inconsistent with Olenicoff's plea agreement, in which he admitted to knowingly submitting false tax returns to hide his offshore assets, and with the fact that his tax fraud began "long before he became a UBS client in 2001." Based on these undisputed facts, the court granted summary judgment on the tax-related claims based on judicial estoppel and the doctrine of unclean hands. The court also found that Olenicoff's plea agreement precluded any damages on is tax-based claims, and UBS proved that, despite his allegations to the contrary, Olenicoff was able to receive "two multi-million dollar loans" since pleading guilty.
In the account management claims, Olenicoff asserted that "Birkenfeld, with the full support of his superiors, improperly caused Olenicoff to invest in highly risky DOCU's [(an investment vehicle)] and then 'churned' those investments to increase UBS's own profits in complete disregard of the risk to Olenicoff and his account directives." The court found: "Olenicoff did not lose any money. In fact, Olenicoff made over $9 million dollars on the DOCU investments, for a total annual rate of return of 2.32%. This [was] consistent with his stated conservative investment goals, as [Olenicoff himself] alleged." Moreover, "there [was] no evidence that any so-called churning led to excessive investment fees or charges."
At trial in this case, Birkenfeld testified he incurred between $350,000 and $400,000 in legal fees and costs in defending Olenicoff's federal court lawsuit.
PROCEDURAL HISTORY
The first cause of action of Birkenfeld's malicious prosecution complaint was based on the tax-related claims asserted in the federal lawsuit, and the second cause of action was based on the account management claims. UBS also filed a lawsuit against Olenicoff and Olen. The two lawsuits were consolidated under the case number for the UBS complaint. Olenicoff and Olen alleged unclean hands as an affirmative defense.
The lawsuit was intensely litigated and has a long procedural history. After several status conferences, the trial court made these rulings narrowing the scope and ordering the procedure of trial:
1. The court would instruct the jury that Olenicoff and Olen had no probable cause for bringing their tax-related allegations in the underlying action against UBS and Birkenfeld.
2. The court would instruct the jury that the underlying action ended in favor of UBS and Birkenfeld.
3. The affirmative defense of unclean hands would be decided by the court, not the jury.
As a result of these pretrial rulings, the only issues left for the jury were malice on the tax-related allegations and malice and probable cause on the account mismanagement allegations.
The trial court first conducted a bench trial on the unclean hands defense. At the conclusion of the trial on the unclean hands defense, the court found that Olenicoff had been evading taxes before he opened an account at UBS and that UBS and Birkenfeld had been violating United States law before Olenicoff became their client. The court found that when Olenicoff got together with UBS and Birkenfeld, "we have this kind of perfect triumvirate where everybody agrees they're going to help each other facilitate breaking the law." The court found "that's the legal or functional equivalent of an illegal contract, an illegal agreement, between plaintiffs on [the] one hand and Mr. Olenicoff on the other, to violate the law" and "we have two individuals in a business that all facilitated illegal conduct." The court stated that Olenicoff's lawsuit against UBS and Birkenfeld "should never have been filed."
The court concluded: "I guess the question is, when does it stop? When does this stop between UBS and Mr. Birkenfeld and Mr. Olenicoff? It stops right now, frankly. . . . It should have stopped before Mr. Olenicoff filed the underlying action, but it didn't. [¶] And given . . . that the unclean hands doctrine [is] to protect judicial integrity and promote justice, there doesn't seem to be any justice in allowing Mr. Birkenfeld and UBS to proceed with the malicious prosecution action."
No party requested a statement of decision. Judgment in favor of Olenicoff and Olen was entered in September 2015. Birkenfeld timely file a notice of appeal. UBS did not appeal.
DISCUSSION
I.
Standard of Review
Whether the unclean hands doctrine can be applied to a particular transaction is a legal issue reviewed de novo. (Brown v. Grimes (2011) 192 Cal.App.4th 265, 274.) Once it is determined the unclean hands doctrine could be applied, the standard of review has been alternately described as abuse of discretion (Dickson, Carlson & Campillo v. Pole (2000) 83 Cal.App.4th 436, 447; Lovett v. Carrasco (1998) 63 Cal.App.4th 48, 55) and substantial evidence (California School Employees Assn., Tustin Chapter No. 450 v. Tustin Unified School Dist. (2007) 148 Cal.App.4th 510, 521.) Unclean hands also has been described as a question of fact. (CrossTalk Productions, Inc. v. Jacobson (1998) 65 Cal.App.4th 631, 639; Unilogic, Inc. v. Burroughs Corp. (1992) 10 Cal.App.4th 612, 620; Insurance Co. of North America v. Liberty Mutual Ins. Co. (1982) 128 Cal.App.3d 297, 306.)
We synthesize these standards as applying an abuse of discretion standard to the trial court's decision whether to uphold an unclean hands defense while applying the substantial evidence standard to the trial court's factual findings. (See Aguaro v. Amaro (2013) 213 Cal.App.4th 1102, 1109.) If the trial court's factual findings are supported by substantial evidence, the issue whether the unclean hands doctrine applies in a given situation may be decided as a matter of law.
II.
The Unclean Hands Doctrine
"The [unclean hands] doctrine demands that a plaintiff act fairly in the matter for which he seeks a remedy. He must come into court with clean hands, and keep them clean, or he will be denied relief, regardless of the merits of his claim." (Kendall-Jackson Winery, Ltd. v. Superior Court (1999) 76 Cal.App.4th 970, 978 (Kendall-Jackson).) The doctrine of unclean hands requires unconscionable, bad faith, or inequitable conduct by the plaintiff in connection with the matter in controversy. (General Elec. Co. v. Superior Court (1955) 45 Cal.2d 897, 899-900) "Unclean hands applies when it would be inequitable to provide the plaintiff any relief, and provides a complete defense to both legal and equitable causes of action. [Citations.] 'Whether the defense applies in particular circumstances depends on the analogous case law, the nature of the misconduct, and the relationship of the misconduct to the claimed injuries.'" (Fladeboe v. American Isuzu Motors Inc. (2007) 150 Cal.App.4th 42, 56.)
The conduct constituting unclean hands must affect the transaction in issue in the litigation or the equitable relationship between the parties. (E.g., Jaramillo v. County of Orange (2011) 200 Cal.App.4th 811, 820 ["The focus is the equites of the relationship between the parties, and specifically whether the unclean hands affected the transaction at issue"]; Brown v. Grimes, supra, 192 Cal.App.4th at p. 282 ["the improper conduct must be 'in the particular transaction or connected with the subject matter of the litigation that is a defense'"]; Peregrine Funding, Inc. v. Sheppard Mullin Richter & Hampton LLP (2005) 133 Cal.App.4th 658, 680 ["It has long been held that the misconduct asserted in an unclean hands defense must be sufficiently related to the matter currently before the court"].) Past misconduct or past misconduct that only indirectly affects the matter before the court is insufficient to state an unclean hands defense; the misconduct must so prejudicially affect the rights of the person against whom the relief is sought that granting relief would be inequitable. (Kendall-Jackson, supra, 76 Cal.App.4th at p. 979.)
III.
The Trial Court Did Not Err by Ruling Against
Birkenfeld on the Unclean Hands Defense.
The conduct engaged in by Birkenfeld is, without question, bad and satisfies the unconscionable, bad faith, or inequitable conduct requirement of the unclean hands doctrine. Birkenfeld does not contend otherwise and candidly acknowledges that he and Olenicoff were "partners in crime." Birkenfeld argues, however, that his behavior was not related to or connected with the claims made in the federal lawsuit, the successful resolution of which was the basis for his malicious prosecution lawsuit, and was not directed against Olenicoff. A. Pond, DeRosa, and Kendall-Jackson
No party requested a statement of decision; therefore, we infer the trial court made all factual findings necessary to support the judgment. (Fladeboe v. American Isuzu Motors Inc., supra, 150 Cal.App.4th at pp. 58-59.)
Three cases are significant in addressing whether, in a malicious prosecution action, the unclean hands conduct relates to the underlying claims: Pond v. Insurance Co. of North America (1984) 151 Cal.App.3d 280 (Pond); DeRosa v. Transamerica Title Ins. Co. (1989) 213 Cal.App.3d 1390 (DeRosa); and Kendall-Jackson, supra, 76 Cal.App.4th 970.
1. Pond. Pond was a general insurance agent with Insurance Company of North America (INA). He issued an INA aircraft liability policy, through a licensed INA agency, to Mission Beachcraft, Inc. (Mission), which rented planes and provided pilots to the public. (Pond, supra, 151 Cal.App.3d at p. 284.) In 1970, Mission had a policy with a different insurer, Associated Aviation Underwriters (the AAU Policy), and the AAU Policy required that Mission pilots have at least 20 takeoffs and landings in the same make and model of aircraft. (Ibid.) Mission decided not to renew the AAU Policy and asked Pond for quotes on a new INA policy. (Ibid.) After several meetings with Mission and an INA underwriter, Pond sent Mission handwritten notes to create a binder of insurance. (Id. at pp. 284-285.) In the notes, pilot minimum requirements were abbreviated as "'same as before.'" (Id. at p. 285.) The INA underwriter had told Pond that the pilot minimum qualifications were to be the same as in a cancelled INA policy that had been in effect in 1969. (Ibid.) The underwriter sent Pond a letter describing rates and minimum pilot qualifications, and Pond sent a letter to Mission agreeing to coverage and attaching a copy of the former INA endorsement regarding pilot qualifications. (Ibid.)
Just three days after Mission received the new policy from INA, one of Mission's planes crashed, killing the pilot and all four passengers. (Pond, supra, 151 Cal.App.3d at p. 285.) INA investigators determined the cause of the crash was pilot error. (Ibid.) INA therefore defended Mission in a wrongful death lawsuit brought by the decedents' survivors, subject to a reservation of rights on the ground the pilot was not qualified under the pilot minimum standards of the new INA policy. The pilot would have qualified under the AAU Policy standards. (Ibid.)
While the wrongful death action was pending, Mission brought an action against INA seeking a declaration of coverage under the INA Policy. (Pond, supra, 151 Cal.App.3d at p. 285.) INA filed a cross-complaint against Mission for declaratory relief and indemnity, and against Pond for indemnity in the event of coverage. (Ibid.)
The wrongful death lawsuit was settled with INA paying $110,000 and Mission paying $65,000. (Pond, supra, 151 Cal.App.3d at p. 285.) Mission dismissed its declaratory relief action but INA prosecuted its cross-complaint under the theory that Pond's actions created the wrongful impression that pilot minimums were less stringent than the actual terms of the INA Policy, and this negligent behavior created an ambiguity that may have caused INA to be liable for coverage. (Ibid.) Pond testified he never explained what "'same as before'" meant. (Ibid.) Mission representatives testified that Pond and INA had agreed to replace the AAU Policy with an INA Policy having equivalent or less stringent pilot minimum qualifications. (Id. at pp. 285-286.) The trial court ruled in favor of Pond and found he did nothing to mislead Mission as to the pilot minimums. (Id. at p. 286.)
Having prevailed, Pond brought a malicious prosecution against INA. (Pond, supra, 151 Cal.App.3d at p. 286.) The trial court granted summary judgment in favor of INA on the ground of probable cause and based on INA's unclean hands defense. (Ibid.) The Court of Appeal affirmed. As to unclean hands, the Court of Appeal explained Pond also had falsely stated in the declaratory relief lawsuit that he had been present at a meeting between the INA underwriter and Mission's president at which the pilot minimums were discussed and that Pond had failed to disclose two critical documents during the course of litigation which, if disclosed, might have changed the outcome of the indemnity action. (Id. at pp. 290-291.) In the wrongful death lawsuit, the issue of coverage was whether the pilot minimum requirements were those stated in the INA Policy, "an issue left ambiguous by Pond's conduct." (Id. at p. 291.) Based on that ambiguity, largely created by Pond's nondisclosure and misrepresentations, INA settled the wrongful death lawsuit to its detriment. (Ibid.) Accordingly, Pond's inequitable conduct in the wrongful death and indemnity lawsuit barred him from bringing a malicious prosecution lawsuit against INA. (Id. at pp. 291-292.)
2. DeRosa. An escrow was opened at Transamerica for the sale of real property to Marilyn Lapitan by DeRosa and a couple named Wolen. (DeRosa, supra, 213 Cal.App.3d at p. 1393.) A quit-claim deed conveying title to the property was executed by DeRosa and the Wolens and deposited into the escrow account. (Ibid.) Before escrow closed, a Transamerica employee gave the deed to Lapitan and her fiancé, Gary Flint, who had it recorded. (Ibid.) DeRosa contacted Transamerica and requested it take appropriate steps to return title to him. (Ibid.) Transamerica commenced a lawsuit to reform the title record and quiet title in DeRosa's favor. (Id. at pp. 1393-1394.) During this litigation, DeRosa became uncooperative and, after he was deposed, Transamerica had an investigation conducted to determine whether to sue DeRosa for fraud. Based on advice from its attorney, Transamerica amended its complaint to add a cause of action for fraud against DeRosa. (Id. at p. 1394.) The matter was tried, and DeRosa prevailed on Transamerica's fraud cause of action. DeRosa then sued Transamerica for malicious prosecution. (Ibid.)
Transamerica moved for summary judgment based on unclean hands. (DeRosa, supra, 213 Cal.App.3d at p. 1394.) Evidence presented in support of the motion revealed that DeRosa had sold certain real property to Flint in exchange for a promissory note. (Id. at p. 1395.) Later, DeRosa agreed to become title owner of the property to enable Flint to avoid creditors or tax liens. DeRosa considered Flint to be the true owner of the property, and Flint continued to make regular payments to DeRosa on the note. (Id. at pp. 1395-96.) DeRosa, tired of the work involved in participating in real estate deals on Flint's behalf, asked Flint to convey title to another person. (Id. at p. 1396.) He agreed and the Transamerica escrow was opened to effectuate the exchange. A dispute between DeRosa and Flint arose when Flint unilaterally sold the property to a third party using the quit-claim deed placed in the Transamerica escrow. DeRosa then commenced the action to quiet title. DeRosa never revealed his true relationship with Flint to Transamerica although he encouraged it to quiet title in him. (Ibid.)
The trial court granted the motion, and the Court of Appeal affirmed the judgment. (DeRosa, supra, 213 Cal.App.3d at pp. 1393, 1395.) The Court of Appeal concluded the malicious prosecution action arose from the quiet title action, which Transamerica brought due to DeRosa's unconscionable conduct. The court stated: "The malicious prosecution action arose from the earlier quiet title action which was instituted by DeRosa and prosecuted on his behalf by Transamerica. Transamerica proceeded with the underlying action based upon DeRosa's representations concerning his ownership of the property and his relationship with the various parties involved. It was only because DeRosa concealed the true facts underlying the conveyance and his ownership interest that Transamerica became involved and, subsequently, proceeded against DeRosa for fraud. Thus, it is manifest the instant action is directly related to DeRosa's unconscionable conduct in the underlying action. Accordingly, the unclean hands doctrine applies to bar DeRosa's action." (Id. at p. 1397.)
3. Kendall-Jackson. In this case, the Court of Appeal held that when unclean hands is raised as an affirmative defense in a malicious prosecution claim, the relevant misconduct is not limited to that which affected the defendant's decision to file and pursue the prior lawsuit. (Kendall-Jackson, supra, 76 Cal.App.4th at p. 974.) Kendall-Jackson, a producer of mid-priced premium wines, sued Gallo, a producer of nonpremium wines, in federal court for trademark infringement, trade dress violations, and unfair business practices. (Id. at pp. 974-975.) Kendall-Jackson alleged a wine produced by Gallo called "Turning Leaf" had a label and overall appearance that mimicked a top-selling Kendall-Jackson chardonnay called "Vintner's Reserve." (Id. at p. 975.) The federal court found in favor of Gallo. (Ibid.)
Based on the favorable judgment in federal court, Gallo sued Kendall-Jackson for malicious prosecution. (Kendall-Jackson, supra, 76 Cal.App.4th at p. 975.) Kendall-Jackson asserted unclean hands as a defense. This defense was based on evidence that Gallo had engaged in illegal and improper marketing activities directed at Kendall-Jackson; specifically, that Gallo had representatives working for chain stores who were involved with "shelf schematics" for the stores. (Id. at pp. 975-976.) Gallo had used a technique by which its distributors or salesperson were trained to place an inferior, lower priced Gallo wine next to a higher priced "category leader." The shopper's attention would be attracted to the category leader's display, but when the shopper reached for a bottle of the category leader, he or she would see the lower priced Gallo wine and buy it instead. (Id. at p. 976.) Gallo employees admitted moving Gallo wines next to Kendall-Jackson wines, which would require them to move a non-Gallo product in violation of federal and state regulations. (Ibid.)
The trial court granted Gallo's motion for summary adjudication of the unclean hands defense based on a finding there was no relevant evidence that Gallo acted with unclean hands in relation to the malicious prosecution claim. (Kendall-Jackson, supra, 76 Cal.App.4th at p. 977.) The Court of Appeal issued a writ of mandate to overturn that decision. The Court of Appeal concluded, first, that Kendall-Jackson's evidence had shown Gallo exercised undue influence over shelf schematics and other retailer activity and Gallo moved competitors' wines on retail shelf space to create product adjacencies. (Id. at pp. 982-983.) Such conduct violated the Alcoholic Beverage Control Act and supported an unclean hands defense. (Id. at p. 983.)
Gallo argued that, when unclean hands is asserted as a defense to a malicious prosecution action, the alleged unclean hands conduct must relate directly to the defendant's decision to file and pursue the prior litigation. (Id. at p. 985.) The Court of Appeal rejected that argument: "The equitable principles underlying the doctrine militate against limiting the unclean hands defense in a malicious prosecution claim to misconduct that bears on the defendant's decision to file the prior action." (Ibid.)
The Court of Appeal concluded that Gallo's unclean hands was sufficiently related to the claimed injuries to support an unclean hands defense. (Kendall-Jackson, supra, 76 Cal.App.4th at pp. 984-985.) Gallo's unclean hands conduct contributed to Kendall-Jackson's pursuit of the infringement action in federal court, which in turn resulted in Gallo having to defend Kendall-Jackson's unsuccessful claims. (Id. at p. 987.) Thus, the court concluded, "[a] jury could find that Gallo's inequitable conduct occurred in the transaction related directly to the matter before the court—the marketing of Turning Leaf wine to compete with Vintner's Reserve wine—and affects the equitable relationship between the litigants." (Ibid.) B. Birkenfeld's Unclean Hands Conduct Related to the Transactions that Were the Subject of the Federal Court Lawsuit.
As stated in Kendall-Jackson, "a plaintiff's unclean hands conduct in the underlying action or in the transaction that was the subject of that action can preclude relief in a subsequent malicious prosecution suit." (Kendall-Jackson, supra, 76 Cal.App.3d at p. 981.) Here, the underlying action was Olenicoff's federal court lawsuit, which was resolved by summary judgment in Birkenfeld's favor.
Birkenfeld's unclean hands conduct directly related to the transactions that were the subject matter of the federal court lawsuit—the underlying action. The federal court lawsuit was based on allegations that UBS, Birkenfeld, and others gave Olenicoff bad tax advice and mismanaged Olenicoff's accounts at UBS. The bad tax advice alleged by Olenicoff was the part and parcel of the scheme perpetrated by Birkenfeld and UBS to defraud the United States by assisting UBS clients to evade taxes. Birkenfeld's unclean hands conduct is what made him a defendant, along with UBS and others, in Olenicoff's federal court lawsuit. Birkenfeld's costs in defending that lawsuit, which are the claimed injury for which damages were sought in the malicious prosecution lawsuit, are a direct consequence of Birkenfeld's unclean hands.
The relationship between Birkenfeld's unclean hands conduct and the subject of the federal court lawsuit was at least as direct as the corresponding relationship in Kendall-Jackson. In that case, the underlying lawsuit was Kendall-Jackson's trademark infringement action against Gallo, which was based on allegations that the label and appearance of Gallo's Turning Leaf wine mimicked that of Kendall-Jackson's Vintner's Reserve wine. When Gallo sued Kendall-Jackson for malicious prosecution, Kendall-Jackson asserted the unclean hands doctrine based on allegations of a wider range of unlawful and unfair marketing activities such as the claims of shelf schematics and moving Kendall-Jackson's product on retailers' shelves. Here, Olenicoff's federal court lawsuit asserted claims arising directly out of Birkenfeld and UBS's scheme to defraud the United States. Although the unclean hand conduct proven at trial was not limited to the precise tax advice and account mismanagement allegations that were the subject of the federal court lawsuit, it was no less related to those allegations than the allegations of Gallo's unlawful and unfair marketing activities were related to Kendall-Jackson's trademark infringement claims. C. Birkenfeld's Arguments
Birkenfeld contends his unclean hands conduct was not related to his claimed injuries because that conduct was not directed at Olenicoff but at the United States government. Birkenfeld asserts that Olenicoff suffered no injury from the unclean hands conduct and was in fact a coconspirator with him in defrauding the United States.
Birkenfeld's argument fails because the purpose of the unclean hands doctrine is not to protect litigants. The purpose, rather, is "to protect the integrity of the court and ensure a just result." (Kendall-Jackson, supra, 76 Cal.App.4th at p. 986.) "The unclean hands doctrine protects judicial integrity and promotes justice. It protects judicial integrity because allowing a plaintiff with unclean hands to recover in an action creates doubts as to the justice provided by the judicial system. Thus, precluding recovery to the unclean plaintiff protect the court's, rather than the opposing party's, interests." (Id. at p. 978.) The relevant question is whether the unclean hands conduct was related to the transaction concerning which the complaint is made, and "not whether it is part of the basis upon which liability is being asserted." (Peregrine Funding, Inc. v. Sheppard Mullin Richter & Hampton LLP (2005) 133 Cal.App.4th 658, 681.) Regardless whether Olenicoff was the target of or suffered injury from Birkenfeld's unclean hands conduct, invoking and upholding the unclean hands doctrine in this case serves the purpose of protecting the integrity of both this court and the trial court.
Birkenfeld cites Brown v. Grimes, supra, 192 Cal.App.4th 265 in support of his contention that the unclean hands doctrine is inapplicable because his conduct was not directed at Olenicoff. In that case, the trial court refused to enforce a fee-sharing agreement between two lawyers—plaintiff Brown and defendant Grimes—arising out of cases they handled in Texas. (Id. at pp. 268-269.) The trial court upheld Grimes's unclean hands defense, which was based on Brown's unethical conduct in agreeing to share fees with attorney Paul Ross, who had resigned from the bar. (Id. at p. 269.) The Court of Appeal concluded the unclean hands doctrine was inapplicable because the relationship between the unclean hands conduct and the transaction in issue was "attenuated." (Id. at p. 283.) "The amount of compensation under the Grimes-Brown fee-sharing agreement is unaffected by the offending agreement between Brown and Ross. The unclean hands emanating from the Brown-Ross agreement did not directly affect or infect the relationship between Grimes and Brown and, most importantly, was not inequitable conduct towards Grimes." (Ibid., italics added.)
Birkenfeld's unclean hands conduct directly related to the transaction that was the subject of the federal court lawsuit. Birkenfeld's conduct not only was inequitable, it was illegal, and was directed toward Olenicoff in that Birkenfeld and Olenicoff conspired to defraud the United States. Further, the trial court found that Olenicoff did suffer harm from Birkenfeld's unclean hands conduct. The court found: "There was harm to Mr. Olenicoff. Frankly most of it was of his own making, but it couldn't have been accomplished without UBS and Mr. Birkenfeld." Substantial evidence supports this finding.
Birkenfeld argues his unclean hands conduct did not affect or precipitate Olenicoff's decision to file the federal court lawsuit. In Kendall-Jackson, supra, 76 Cal.App.4th at page 985, the court rejected a narrow formulation of the unclean hands doctrine that would limit its application to situations in which the unclean hand's conduct affected the decision to file the underlying lawsuit. The Kendall-Jackson court recognized that in Pond and DeRosa the misconduct did not affect the defendant's decision to file the underlying lawsuit; however, "neither court tied its application of the unclean hands doctrine to that fact." (Id. at p. 985.)
Birkenfeld also argues that his unclean hands conduct did not "affect the equitable relationship between the litigants" (Kendall-Jackson, supra, 76 Cal.App.4th at p. 984) because Olenicoff engaged in misconduct and "admitted to defrauding the government long before ever meeting Birkenfeld." We do not interpret the term "affect the equitable relationship between the litigants" to mean the unclean hands conduct must render the party asserting the doctrine to be blameless or even less blameworthy than the party against whom the doctrine is asserted. The federal district court found that Olenicoff was a convicted felon who had committed tax evasion and based the order granting summary judgment in part on a finding that Olenicoff had come into court with unclean hands. Thus, coming into the malicious prosecution action, Birkenfeld had an advantage in his equitable relationship with Olenicoff and Olen. Birkenfeld's unclean hands conduct did affect the equitable relationship, not by exonerating Olenicoff, but by eliminating whatever equitable advantage Birkenfeld might have had.
Both Birkenfeld and Olenicoff deserved to lose their respective lawsuits. In drawing this conclusion we find both guidance and solace in the famed Highwayman's Case, Everet v. Williams (1725) reported in 1893 at 9 L.Q. Rev. 197, which the parties cited and argued before the trial court here. Dean Prosser described that the Highwayman's Case in his characteristically dry style: "This was a suit by one highwayman against another for an accounting of their plunder. The bill was dismissed with costs to be paid by the defendant; the plaintiff's solicitors were attached and fined fifty pounds each for contempt. Both plaintiff and defendant were subsequently hanged. In short, contribution was not allowed." (Prosser, Law of Torts (4th ed. 1971) § 50, pp. 305-306, fn. 40.)
DISPOSITION
The judgment is affirmed. Respondents shall recover their costs on appeal.
FYBEL, J. WE CONCUR: MOORE, ACTING P. J. THOMPSON, J.