One's hands should always be washed before eating, before performing surgery, and, now, before banking.
That's something your mother never taught you, isn't it? But it's true: You have to have "clean hands" if you want to get anywhere in life as a banker. Or a debtor. Or a banker that foolishly lent money to a debtor.
I'm talking about a doctrine in the law called the "
doctrine of clean hands," or, sometimes, the "
doctrine of unclean hands." Both mean the same thing -- it's just whose hands you're talking about, and what they look like.
I'll call it the
Clean Hands Doctrine. This doctrine, the
Clean Hands Doctrine, is what lawyers and judges call an "equitable" rule. That requires a little explanation that will bore you, probably, but stick with it.
See, way way back when, during the time when "law" was becoming something more than a group of people stoning witches, the English people set up the first courts, and they set up, for some reason,
two systems: The law courts, and the "Chancery" courts. The law courts would rule on claims based on the laws (i.e.,
stoning witches is okay) while the "Chancery" courts would rule in "equity," which can be summarized as "
what a particular judge thinks is fair."
The two systems, when they came to the United States, were merged into one court system; we no longer have "law" courts and "equity" courts. Instead, we have
legal (or
law) claims and
equitable (or
equity) claims, and they're all heard by one court system.
A
legal claim is one based on a law. If you make a
legal claim, you can generally point to some statute in some statute book somewhere that says something.
An
equitable claim is based on squishy principles of fairness, and also based on the "common law." The "common law" is that law that's been developed over, quite literally,
centuries. It's been developed by
courts, not legislatures, and it's not written anywhere outside of the legal books and court opinions that are collected in legal books.
Things like
negligence are common law, or began as "common law." The concept of
negligence began as one that was slowly built, over time, by judges who simply made up the law as they went, and by judges later in time who followed what the earlier judges had written. Over centuries, the "common law" developed so that
negligence included rules about when someone can be sued over whether a diving platform in a swim competition is too low. There's few, if any,
laws about things like that. It's all judge-made.
(As an aside, keep that in mind when the debate rages this summer over "activist" judges and "strict constructionist" judges.
All judges at one point or another are called on to simply create law out of whole cloth.)
Anyway, the "
Clean Hands Doctrine" is one of those equitable rules that was developed over time. It's a rule that says this:
You can't ask a judge for an equitable ruling in your favor unless you have... "clean hands."
Put more simply, it says that if you've done something wrong, a court won't reward you for that by giving you what you want.
Let's put this all into the context of a lender. Consider the case of
Bank of New York vs. Johnson, a recently decided Wisconsin Court of Appeals' case.
Johnson was a real estate developer who, as developers do, borrowed a lot of money from a lot of banks for a lot of projects. He "secured" those loans by giving the lenders mortgages on various properties he owned, including his house.
This case arose, then, when Johnson (as developers do) defaulted on his loans and the lenders, who already knew his situation was complicated, found out it was
more complicated.
See, Johnson had borrowed money from a company called "Central States Mortgage" and given Central States a mortgage on his house. That mortgage, the Central States Mortgage, was in "first position." That is, it was the first such lien on Johnson's house.
Johnson then borrowed
more money, this time from a company called "Shorecrest." He gave Shorecrest a lien on his house, too. Shorecrest was in
second position; they wouldn't get paid, if Johnson's house sold, until Central States was paid in full.
Johnson then borrowed
more money, this time from a company that eventually became "Bank of New York." (It's complicated.)
Wisconsin follows what's called a "first in time" rule, meaning that mortgages are held in the order they're recorded. If I give three banks mortgages, then the order in which the banks record those mortgages is the order they'll get paid.
So in Johnson's case, the
Bank of New York mortgage should be third, right? Because they were
third in time.Wrong!
Johnson had a deal with Bank of New York; he used Bank of New York's
th
ird-place money to pay off Central States'
first-place mortgage. Bank of New York then said that
they, not Central States, were
first.Leaving Shorecrest still second.
Ordinarily, what Johnson and Bank of New York did could easily be accomplished by simply having Bank of New York take what is called an "assignment" of Central States' mortgage. But for some reason, Johnson and Bank of New York didn't bother to do that.
("
For some reason, that wasn't done" is among the chief reasons that lawyers are still in business.)
Johnson then defaulted and Bank of New York foreclosed and the property was sold -- at which point Shorecrest got mad, and said, more or less,
Hey, what the heck, Bank of New York? You're not ahead of us. Give us our money.To which Bank of New York said, more or less,
No.(Note: I'm just imagining that dialogue.)
So Shorecrest sued and said that Bank of New York should
not be in first position and should not get the money and that Shorecrest
should get the money, to which Bank of New York responded, more or less,
No.
(Note: I'm not really making that last one up.)
Bank of New York's position was that
equity (see? All that history had a point) put them in first position because
equity -- i.e.,
general fairness -- said that Bank of New York paid off that first position loan, and
equity-- i.e.,
general fairness -- said that Shorecrest wasn't any
worse off: they'd been second before, they were second now.
That's when Shorecrest came up with the "Clean Hands Doctrine." Shorecrest said
Bank of New York doesn't have clean hands, and made some vague claims about Bank of New York's interest rates and things like that, all in the hopes that the court would refuse Bank of New York's request to do
equity and would instead give the money to Shorecrest.
Shorecrest lost, despite Bank of New York's best efforts to
not win. (Seriously; the Court of Appeals noted that Bank of New York really didn't try very hard to win this case.) The reason why they lost is more complicated than it's worth going into here, but the rule remains the same:
If you have dirty hands, you can't win in a court of equity.
If you think your lender has dirty hands, contact a lawyer and see what you can do.
Click here to read more banking issues.
Click here to read more mortgage issues.
Finally, the Obamadministration tackles the REAL problem -- my student loans: A 2007 law, the "College Cost Reduction And Access Act" goes into effect July 1, 2009 -- allowing many people to reduce their monthly student loan payments based on a percentage of their income, and allowing some lucky ones to get forgiveness of their loan.
I'm sure this right is somewhere in the Constitution: The U.S. Supreme Court just struck a giant blow in favor of your right to watch MASH reruns whenever you want without commercials. By refusing to do anything, the Supremes cleared the way for "Cablevision" to begin offering a service that would let people record shows using Cablevision's computers, rather than a DVR they buy themselves.
This just in: Business Ethics Hurt Deals -- Something Must Be Done, Deal-Makers Say! Are you still troubled by the way refinancings and too-high appraisals and questionable mortgage marketing crippled our economy and nearly destroyed US society? Geez, get over it, man! You're standing in the way of profits!
