                 IN THE COURT OF APPEALS OF TENNESSEE
                             AT NASHVILLE
                                   August 8, 2002 Session

                  FELIX M. WOODS, ET AL. v. JAMES N. FARIS

                Direct Appeal from the Chancery Court for Davidson County
                       No. 00-2240-III  Ellen Hobbs Lyle, Chancellor



                  No. M2001-02901-COA-R3-CV - Filed September 17, 2002


This appeal arises from an action brought by the plaintiff/seller to enforce an agreement made as an
addendum to a contract for sale of a home purporting to give a mortgage to the seller. We find that
both parties acted with unclean hands. Judgment of the trial court is affirmed in part, reversed in
part, and this case is remanded for further proceedings consistent with this opinion.

Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Affirmed in part;
                            Reversed in Part; and Remanded

DAVID R. FARMER , J., delivered the opinion of the court, in which W. FRANK CRAWFORD , P.J., W.S.,
and ALAN E. HIGHERS, J., joined.

Renard A. Hirsch, Sr., Nashville, Tennessee, for the appellants, Felix M. Woods and Agnes J.
Woods.

A Russell Willis and William B. Hawkins, Nashville, Tennessee, for the appellee, James N. Faris.

                                            OPINION

        Felix and Agnes Woods (Woods), the plaintiffs/sellers and James Faris (Faris), the
defendant/counter-claimant/buyer, entered into a contract for sale of a home in Nashville in August
of 1998. The listing price was $116,900, but the sales contract and deed of trust recited a selling
price of $147,500. The transaction between the parties also included an addendum giving Woods
a second mortgage on the property equal to twenty percent of the agreed upon sales price of
$147,500. The addendum provided, “the parties agree that in a timely manner following closing the
second mortgage will, in fact, be forgiven and the debt released.” Faris secured a first mortgage of
$118,000 from WMC Mortgage and executed a deed of trust note for $29,500 for the second
mortgage, which was secured by a deed of trust. Woods did not release the debt after closing, nor
did Faris make payment on the note. In February of 2000, Faris attempted to secure a release of the
lien by Woods in order to re-sell the property. Woods signed the release, but the parties dispute
whether it was delivered to Faris. The release could not be recorded, however, because it had not
been notarized. The lien thus resulted in a cloud on Faris’ title to the property, preventing him from
closing on the sale.

        In July of 2000, Woods filed a complaint to collect the unpaid balance on the promissory
note. Faris answered and counter-complained for breach of contract, intentional fraud,
misrepresentation and rescission of the contract. Both parties asserted, inter alia, the defense of
unclean hands. The trial court dismissed Woods’ complaint at the conclusion of Woods’ proof. The
court awarded Faris a judgment for consequential damages in the amount of $21,384, representing
$1,188 of interest per month from February 2000 through August of 2001, and reasonable attorney’s
fees and discretionary costs. The trial court rejected the defense of unclean hands, finding there was
no evidence to support the defense. This appeal followed.

                                          Issues Presented

       Woods presents the following issues for review by this Court:

                (1) Whether the sales contract merged into the deed, deed of trust note, deed
       of trust and settlement sheet, thereby rendering the sales contract inoperative.

               (2) Whether Faris comes into court with unclean hands with a contract that
       is a sham and is fraudulent as to [a] third party lender.

             (3) Whether the [trial] court erred in allowing counter-plaintiff to recover
       when he failed to mitigate damages and declar[ed] mitigation is a burden.

               (4) Whether the deed of trust note and deed of trust [were] released.

       Faris raises three additional issues:

              (1) Whether the trial court erred by denying Faris request for Rule 11
       sanctions based upon the actions of the Woods and their attorney.

               (2) Whether the trial court erred by not awarding post-judgment attorneys
       fees.

               (3) Whether the trial court erred by ruling that Woods did not commit fraud.

                                        Standard of Review

         In a nonjury trial, our standard of review is de novo. See Wright v. City of Knoxville, 898
S.W.2d 177, 181 (Tenn. 1995). There is a presumption of correctness as to the trial court’s findings
of fact, unless the preponderance of the evidence is otherwise. Tenn. R. App. P. 13(d). With respect



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to the trial court’s legal conclusions, however, there is no presumption of correctness. See Bowden
v. Ward, 275 S.W.3d 913, 916 (Tenn. 2000); Tenn. R. App. P. 13(d).

                                      Unclean Hands Defense

        The doctrine of unclean hands operates to prevent parties from using a court to enforce
agreements that “arise out of unconscionable, immoral or just plain ‘crooked’ conduct.” Farmers
& Merchants Bank v. Templeton, 646 S.W.2d 920, 924 (Tenn. Ct. App.1982). It is well settled that
a court will not enforce illegal transactions. Reaves Lumber Co. v. Cain-Hurley Lumber Co., 279
S.W. 257, 258 (Tenn. 1925). A transaction need not be punishable as a crime, however, to justify
application of the unclean hands doctrine by the court. See McDonnell Dyer, P.L.C. v. Select-O-
Hits, Inc., No. W2000-00044-COA-R3-CV, 2001 Tenn. App. Lexis 272, at *32 (Tenn. Ct. App.
Apr. 20, 2001) (no perm. app. filed). When a cause of action arises from a fraudulent collusion and
is designed to “gild over and conceal the truth ... [the court] will brush away the cobweb varnish and
show the transaction[] in [its] true light.” Reaves Lumber, 279 S.W. at 258. Such fraud “baffles
definition.” Knox-Tenn Rental Co. v. Jenkins Insurance, Inc., 755 S.W.2d 33, 40 (Tenn. 1988)
(quoting Smith v. Harrison, 49 Tenn. 230 (1871)). But when a cause of action arises out of a
transaction that the parties know to be fraudulent or “just plain crooked,” the court will not enforce
their agreement or give them relief. Reaves Lumber, 279 S.W. at 258.

       It is clear from the evidence in the record that the listed sales price for this property was
$116,900. It is also undisputed that the contract for sale recites a sales price of $147,500, that Faris
obtained a first mortgage from a lender in the amount of $118,000, and that he executed a second
mortgage to Woods in the amount of $29,500. The addendum agreement which the parties
voluntarily and knowingly executed and which is the crux of this lawsuit provides:

        This addendum is a part of the Contract for the Sale of Real Estate dated August 11,
        1998. The above parties agree and affirm that as part of the above contract, the
        sellers will hold a second mortgage equal to 20% of the agreed purchase price of
        $147,500. The above parties agree that in a timely manner, following closing this
        second mortgage will in fact, be forgiven and the debt released.

        Woods contends, in essence, that this addendum is without effect because the contract for
sale merged into the deed and the settlement sheet and warranty deed recite a sales price of $147,500.
Woods argues that the deed became the contract of the parties and that there is no mention of any
agreement to release the note or deed of trust in the closing documents. Woods further contends that
the inflated sales price allowed Faris to get 100% financing from the third party lender.

        Faris contends that the actual agreed upon sales price was $116,900. He submits that the
contract price was inflated because he could obtain financing of only 80% and thus the inflated price
permitted him to obtain financing of $118,000 and provide the Woods with cash at closing. He
argues that Woods breached the sales contract by refusing to release the second mortgage subsequent
to the closing.


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        In sum, it is clear to this Court that the parties agreed to a sales price of $116,900 and then
intentionally inflated the price in the sales contract to represent a selling price of $147,500. The
parties agreed in the addendum that the sellers would hold a second mortgage equal to twenty
percent of the inflated sales price of $147,500 which, following closing, was to be forgiven and the
deed of trust securing the same released. Faris signed an affidavit of consideration on the face of the
deed, under oath, that the value of the property or actual consideration, whichever was greater, was
$147,500. By inflating the sales price, Faris was able to obtain 100% financing from the lender and
Woods was able sell the property. 1 Regardless of which party benefitted more or who initiated the
transaction, the parties jointly conspired to misrepresent the value of this property. In short, the
parties agreed to one price and then “cooked the books” to reflect another. It is irrefutably this
conspiracy between the parties that gave rise to the present action.

        This transaction offends the sensibilities of this Court. We respectfully disagree with the trial
court’s conclusion that the evidence did not support a finding of unclean hands. We find that both
parties came into court with unclean hands. We accordingly hold that this transaction is untenable.
In light of the foregoing, we affirm the trial court’s order that Woods shall execute a release of the
second mortgage. Judgment for Faris is reversed, including amounts awarded for attorney’s fees and
discretionary costs. We affirm the trial court’s denial of Faris’ request for Rule 11 sanctions against
Woods. Other issues are pretermitted as non-dispositive in this case.

       This cause is remanded for further proceedings consistent with this opinion. Costs of this
appeal are divided equally, one-half to the Appellee, James N. Faris, and one-half to the Appellants,
Felix M. and Agnes J. Woods, and their surety, for which execution may issue if necessary.



                                                              ___________________________________
                                                              DAVID R. FARMER, JUDGE




        1
          W e do not agree with Wo ods assertion that this transaction perpetrated a fraud against the lender. It is
undisp uted that the lend er had notice that this addendum had b een executed prior to c losing.

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