Clouse v. Myers
1988 WL 63709, 1988 Mo. App. LEXIS 885, 753 S.W.2d 316 (1988)
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Rule of Law:
Parties who knowingly enter into an agreement that constitutes a violation of the law cannot invoke the law or equity to recover damages or enforce the terms of that agreement.
Facts:
- In January 1987, Patricia Myers operated the Green Door tavern under a three-year lease from John Hurn, Jr., and possessed a sole owner 5% beer by-the-drink liquor license.
- Jerry Myers, Patricia's husband, asked J. Todd Clouse (a tavern patron) if he would be interested in purchasing an interest in the Green Door tavern.
- On January 28, 1987, Clouse and the Myers executed an agreement titled “Employment/Management Contract,” which stipulated Clouse would manage the business, receive 60 percent of net profit, and pay $15,000 to the Myers for a 60 percent ownership interest at the agreement's termination or when a lease option was exercised.
- Clouse paid $7,500 to Patricia Myers and subsequently began operating the tavern.
- Approximately two weeks later, Larry Fuhr, an agent with the Missouri Division of Liquor Control, instructed Patricia Myers to surrender her liquor license, citing that the contract was fraudulent because Jerry Myers (a convicted felon) was involved, and that Patricia Myers failed to report the change in ownership within ten days.
- Clouse admitted at trial that he knew the liquor license was solely in Patricia Myers’ name before signing the agreement, and that the contract was for him to purchase 60 percent of the business, not an employment/management contract, and was labeled as such to operate under Patricia’s license.
- Clouse later applied for and received a liquor license in his own name to operate the tavern and renegotiated the lease for the premises with John Hurn, Jr.
Procedural Posture:
- J. Todd Clouse filed a lawsuit against Patricia and Jerry Myers in a court of first instance (trial court) for breach of contract, alleging he was induced by false representations and that their actions led to the loss of the liquor license, seeking the return of his $7,500.
- Patricia and Jerry Myers filed a counterclaim, denying breach and asserting that Clouse still owed them the remaining $7,500 on the contract.
- The trial court entered judgment for Clouse on his petition (awarding him $7,500) and against the Myers on their counterclaim.
- Patricia and Jerry Myers appealed the judgment to the Missouri Court of Appeals.
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Issue:
Does a party to a knowingly illegal contract have a right to recover money paid under that contract or enforce its terms, particularly when the party fails to prove all essential elements of actionable fraud?
Opinions:
Majority - GREENE, Presiding Judge
No, the trial court erred in granting judgment for Clouse on his petition for damages and was correct in denying the Myers' counterclaim. The court found that Clouse failed to prove all essential elements of actionable fraud, specifically reliance and damages. Clouse knew that the liquor license was solely in Patricia Myers' name and that the contract was a disguised partnership agreement intended to circumvent liquor licensing laws, allowing them to operate under Patricia’s existing license. This constituted a knowing violation of § 311.050, which requires a license to sell intoxicating liquor. Because Clouse, as well as Patricia Myers, knowingly engaged in this unlawful 'subterfuge,' neither law nor equity can be invoked to redress a wrong that resulted from the injured party’s own wrongful and illegal conduct, citing De Mayo v. Lyons. This principle also applies to the Myers' counterclaim, as they should not be permitted to recover further on an agreement they knew, or should have known, was illegal.
Analysis:
This case underscores the principle that courts will not grant relief to parties who knowingly participate in illegal transactions, effectively applying the 'clean hands' doctrine. It reinforces the stringent burden of proof required for fraud claims, particularly demonstrating that a party cannot claim reliance on misrepresentation when they had knowledge of the true, illegal nature of the agreement. The ruling also clarifies that illegality can serve as an affirmative defense against both claims for recovery and counterclaims seeking enforcement of the same void contract, preventing any party from benefiting from their illicit conduct.
