04/23/2013 02:49 pm ET Updated Jun 23, 2013

The Unclean Hands Doctrine Prevents Foreclosure Challenges

The unclean hands doctrine dates to a time when one might petition the king to order a remedy to right a wrong. The respondent could challenge the granting of the remedy because the petitioner had acted improperly or unfairly, hence "unclean hands." Modern courts have broadly applied the unclean hands doctrine to numerous situations including, for example, the granting of an injunction against patent infringement. Very recently the unclean hands doctrine is being applied to borrowers in situations in which a lender's conduct concerning a real estate mortgage is challenged by the borrower. This comment will briefly note four federal district court decisions. On March 19, 2013, a federal magistrate for a district court in Michigan considered numerous challenges to foreclosure. He wrote:

Where, as here, Plaintiff received $135,000, failed to pay the debt as agreed and then 'sought judicial assistance in avoiding [his] contractual obligations[,]' the doctrine of unclean hands applies to close the doors to equitable relief, such as quiet title.

On March 20, 2013, a federal district court in Minnesota considered a borrower's challenge to a Sheriff's sale and other actions related to a foreclosure. The court wrote:

As a threshold for this equitable relief, the law requires a plaintiff have "clean hands" to have standing. It is undisputed Plaintiffs defaulted on their mortgage loan over four years ago. They seek to declare their mortgage invalid after defaulting; as such, they come to the present case with unclean hands.

On April 10, 2013, a federal district court in Oregon addressed a condominium developer's complaint concerning the FDIC's failure to honor a change in terms agreement related to mortgaged properties. In dismissing the developer's unclean hands argument, the court stated:

The Court has not found any Oregon case, and Defendants have cited none, in which the court found unclean hands by a foreclosing entity precluded a foreclosure when the borrower was in default in its loan payments and the default in the loan payments was not caused by any action taken by the lender.

The next day, April 11, 2013 a federal district court in California dismissed a borrower's complaint concerning a failed attempt to secure a mortgage modification by, in part, noting:

As to Plaintiff's allegedly misreported income, Plaintiff alleges she signed the loan application knowing her income was misreported. Thus, not only did Plaintiff know of that fact at the time she executed the re-finance loan documents, but she failed to exercise any diligence. Indeed, Plaintiff's admittedly unclean hands bar any fraud claim based on the misreporting of her income.

It should be noted that these opinions are trial court decisions and are subject to being overturned on appeal. Nevertheless, it appears that improper conduct by a borrower, including defaulting on mortgage payments, creates a major barrier to challenging the lender's actions. Of course, not all foreclosure challenges might be subject to an unclean hands defense. However, as a generalization one may say that the unclean hands doctrine prevents foreclosure challenges.