District Court Misapplied the Clean Hands Doctrine in Farm Case
On October 11, 2023, the Iowa Court of Appeals found that one brother failed to properly account to his brothers for the farming proceeds received while marketing organic crops. The two brothers lost their organic certification in 2015 and for the next two seasons enlisted their brother, Dietrich, to obtain the required certifications and market the crops. Eventually the two brothers sued Dietrich for an accounting and payment due, claiming their brother had a fiduciary duty to them. The district court found that Dietrich was unable to account for over $200,000 of crop proceeds, but that he did not have a fiduciary duty to his brothers. The trial court also found the two brothers had “unclean hands” when they enlisted Dietrich to sell the organic crops so the court ordered Dietrich to pay back only a third of the unaccounted-for proceeds. On appeal, the court of appeals overturned the application of the clean hands doctrine and ordered Dietrich to pay the full amount of unaccounted-for proceeds to the other two brothers.
The plaintiffs and the defendant are brothers who were involved in an organic farming operation in 2016 and 2017. Plaintiffs Reinhold and Milton organically farmed from 2000-2015 and in 2015 lost their license to sell and market organic crops. They enlisted their brother Dietrich, the defendant, to help them. Under an oral contract the three agreed that Dietrich would become certified to sell organic crops. He then would market and sell the organic crops that Reinhold and Milton grew. Additionally, Dietrich would not charge a fee for his services.
In 2016, Milton’s health deteriorated and his involvement in the farm declined. In many ways, Dietrich took his place and he visited the farm multiple times to help. This arrangement continued in 2017. In early 2018, Milton died. As part of the probate for his estate, the executor asked Dietrich for an accounting for the organic farming arrangement. Dietrich did not provide the accounting. Milton’s estate and Reinhold then sued Dietrich for an accounting in a separate lawsuit. In the lawsuit, they claimed Dietrich had a fiduciary duty to Milton and Reinhold. Dietrich answered with a counterclaim asking for compensation for the additional duties he undertook in 2016 and 2017.
After a trial, the district court found that there was no fiduciary relationship between Dietrich and his brothers. However, the court also found that Dietrich was unable to account for $212,417.25 out of the total $445,641.93 crop proceeds. The trial court did not allow the admission of several of Dietrich’s financial exhibits as a sanction for failing to turn the documents over prior to a court-imposed deadline after a motion to compel. The court did not award the full $212,417.25 to Milton and Reinhold. Instead, the court found that the two brothers had acted to “scam the system” by continuing to market organic crops after losing their certification and therefore were not entitled to the full amount under the clean hands doctrine. The court reduced the award to Milton and Reinhold to $74,164.25. Finally, the district court found that Dietrich was entitled to $9,000 for the additional farming activities he undertook due to Milton’s declining health.
The plaintiffs appealed the district court’s determination that no fiduciary duty existed and the application of the clean hands doctrine to reduce the award amount. Dietrich appealed the district court’s exclusion of financial records as a discovery sanction.
The court of appeals agreed with the district court’s finding that there was no fiduciary duty between Dietrich and his brothers. The court found that Dietrich did not control his brothers’ farming activities or actions, did not influence or control his brothers, and there was no evidence of dependence among the brothers. Further, much of the farm labor was done by hired help and Dietrich’s main role was “as a middleman” to market and sell Milton and Reinhold’s organic crops. Therefore, Dietrich only needed prove the validity of an expense under the “preponderance of the evidence” standard in his accounting of proceeds.
The court of appeals overturned the district court’s application of the clean hands doctrine. The clean hands doctrine requires that plaintiffs are “fair, equitable, and honest as to the particular controversy in issue.” The court noted that the doctrine is allowed to be applied by the court, even if neither party asks for its application. However, the doctrine can only be applied “to the relation between the parties” and not to the situation as a whole. The court of appeals found that Milton and Reinhold did not act inappropriately within the farming arrangement toward Dietrich and therefore the clean hands doctrine was improperly applied. As a result, Dietrich owes the full amount of unaccounted-for proceeds to his brothers.
Finally, the court of appeals upheld the district court’s discovery sanction that disallowed financial records from entering the record. Dietrich failed to comply with discovery requests, even after a motion to compel. Additionally, he provided some responses after a court-imposed deadline and “just shortly before trial[.]” Therefore the court of appeals found the district court properly acted under the authority of Iowa Rule of Civil Procedure 1.517 in crafting its sanction.
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