US Commodity Futures Trading Commission v. US Bank, NA

Filing 31

ORDER granting in part and denying in part 20 Motion to Strike 19 Answer to Complaint (First and Third Affirmative Defenses). The court grants the Motion to the extent it requests the court to strike U.S. Bank's first affirmative defense in its Answer. The court denies the Motion to the extent it requests the court to strike U.S. Bank's third affirmative defense in its Answer (see text of Order). Signed by Chief Judge Linda R Reade on 1/27/2014. (skm)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF IOWA
EASTERN DIVISION
UNITED STATES COMMODITY
FUTURES TRADING COMMISSION,
Plaintiff,

13-CV-2041-LRR

vs.

ORDER

U.S. BANK, N.A.,
Defendant.
____________________

I.

TABLE OF CONTENTS
INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

II.

PROCEDURAL HISTORY.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

III.

SUBJECT MATTER JURISDICTION. . . . . . . . . . . . . . . . . . . . . . . . . . 3

IV.

FACTUAL BACKGROUND. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
A.
B.
C.

V.

The 1845 Account. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Loans to the Wasendorfs and Wasendorf Construction, L.L.C.. . . . . .6
Transfers from the 1845 Account .. . . . . . . . . . . . . . . . . . . . . . . . .8

ANALYSIS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
A.
B.

C.

Motion to Strike Standard. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
First Affirmative Defense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.
Parties’ arguments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.
Applicable law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.
Application. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Third Affirmative Defense.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
1.
Asserting an unclean hands defense
against a government agency. . . . . . . . . . . . . . . . . . . . . . 12
a.
Parties’ arguments. . . . . . . . . . . . . . . . . . . . . . . . . 12
b.
Applicable law.. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
c.
Application. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.
Pleading of affirmative defense. . . . . . . . . . . . . . . . . . . . . 18
a.
Parties’ arguments. . . . . . . . . . . . . . . . . . . . . . . . . 18
b.
Applicable law.. . . . . . . . . . . . . . . . . . . . . . . . . . . 19

3.

VI.

c.
Application. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unfair prejudice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
a.
Parties’ arguments. . . . . . . . . . . . . . . . . . . . . . . . .
b.
Application. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21
22
22
23

CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
I. INTRODUCTION
The matter before the court is Plaintiff United States Commodity Futures Trading

Commission’s (“Commission”) “Motion to Strike Defendant’s First and Third Affirmative
Defenses” (“Motion”) (docket no. 20).
II. PROCEDURAL HISTORY
On June 5, 2013, the Commission filed a Complaint (docket no. 2) alleging that
Defendant U.S. Bank, N.A. (“U.S. Bank”) improperly used (Count I) and held (Count II)
customer funds in violation of: (1) Section 4d(b) of the Commodity Exchange Act (“Act”)
(codified as amended at 7 U.S.C. § 6d(b)); and (2) 17 C.F.R. § 1.20(a). On August 5,
2013, U.S. Bank filed a “Motion to Dismiss Complaint Seeking Permanent Injunction,
Civil Monetary Penalties, and Other Equitable Relief” (“Motion to Dismiss”) (docket no.
10). On November 5, 2013, the court denied U.S. Bank’s Motion to Dismiss. November
5, 2013 Order (docket no. 18).
On November 19, 2013, U.S. Bank filed an Answer (docket no. 19). On December
3, 2013, the Commission filed the Motion. On December 20, 2013, U.S. Bank filed a
“Resistance to Plaintiff’s Motion to Strike Affirmative Defenses” (“Resistance”) (docket
no. 21). On December 27, 2013, the Commission filed a “Reply in Support of Motion to
Strike Defendant’s First and Third Affirmative Defenses” (“Reply”) (docket no. 24).
In the Resistance, U.S. Bank requests the opportunity to present oral argument.
The court finds that oral argument is unnecessary. The Motion is fully submitted and
ready for decision.

2

III. SUBJECT MATTER JURISDICTION
The court has federal question jurisdiction over the Commission’s claims against
U.S. Bank, which arise under 7 U.S.C. § 6d(b) and 17 C.F.R. § 1.20(a). See 28 U.S.C.
§ 1331 (“The district courts shall have original jurisdiction of all civil actions arising under
the Constitution, laws, or treaties of the United States.”).
IV. FACTUAL BACKGROUND
The Commission is “an independent federal regulatory agency charged by Congress
with the administration and enforcement of the Act and the Regulations thereunder.”
Complaint ¶ 7.
U.S. Bank “is a nationally chartered bank with its principal place of business in
Minneapolis, Minnesota.” Id. ¶ 8. U.S. Bank has several branches in the Northern
District of Iowa, including in Cedar Falls, Iowa. U.S. Bank is a wholly owned subsidiary
of U.S. Bancorp.
A. The 1845 Account
Russell Wasendorf, Sr.1 incorporated Peregrine Financial Group, Inc. (“Peregrine”)
in 1990.

In January 1992, Peregrine registered as a futures commission merchant

(“FCM”) with the Commission. Wasendorf, who was the Chief Executive Officer of
Peregrine from its inception, registered with the Commission as an associated person
(“AP”) of Peregrine in 1992.
An FCM is an entity “that . . . is . . . engaged in soliciting or in accepting orders
for . . . the purchase or sale of a commodity for future delivery . . . [and] in connection
with [such activities], accepts any money, securities, or property (or extends credit in lieu
thereof) to margin, guarantee, or secure any trades or contracts that result or may result

1

For ease of reading, the court will refer to Russell Wasendorf, Sr. as
“Wasendorf.” The court will retain the full names of other members of Wasendorf’s
family.
3

therefrom . . . or . . . that is registered with the Commission as a [FCM].” 7 U.S.C.
§ 1a(28). As an FCM, Peregrine was required to keep its customers’ funds in a customer
segregated account (“CSA”), which “[is] designed to ensure that customer funds are
protected and available for immediate withdrawal or transfer, even if [Peregrine]
experiences financial distress or enters into bankruptcy.” Complaint ¶ 15.
In August 1992, Wasendorf, as Peregrine’s AP, placed one of Peregrine’s CSAs,
the 1845 Account,2 with a depository bank, Firstar Corporation (“Firstar”). Firstar acted
as the depository for the 1845 Account until it merged with U.S. Bancorp in 2001, after
which U.S. Bank acted as the depository for the 1845 Account. When U.S. Bank took
control of the 1845 Account, Peregrine notified U.S. Bank that the 1845 Account was a
Commodity Exchange Act CSA. In addition, bank records and related documents referred
to the 1845 Account as Customer Segregated Funds or something similar.3 While U.S.
Bank was the depository of the 1845 Account, Banker A, an Assistant Relationship
Manager, was the employee with primary responsibility of managing U.S. Bank’s
relationship with Wasendorf and Peregrine.
In the course of its business, Peregrine instructed its customers to send checks to
fund CSAs to an Iowa or Illinois address. The checks that customers sent to Peregrine in
Iowa were usually deposited in U.S. Bank’s Cedar Falls branch and personally processed
by Banker A. Such checks were labeled “Peregrine Financial Group, Inc. Customer
Segregated Account.” Id. ¶ 27.

2

The account number ended with 1845 and, therefore, the court shall refer to it as
the “1845 Account” for ease of reading.
3

For example, the account was titled: “CEA Customer Segregated Accounts” on
the bank’s internal computer systems; “Peregrine Financial Group, Inc. Segregated Funds
Account” on a August 2000 bank statement; “Firstar/U.S. Bank Customer Seg Account”
on a August 2004 financial statement; and “PFG Customer Segregated Funds Account”
in bank correspondence in August 1999. See Complaint ¶¶ 37-40.
4

Among Peregrine employees, Wasendorf made certain he alone had access to and
information about the 1845 Account. In fact, Wasendorf told U.S. Bank that he alone
should receive communications regarding the 1845 Account. To fulfill Wasendorf’s
request, U.S. Bank noted in its internal computer system that no account balance
confirmations on the 1845 Account were allowed and that any inquiries about the 1845
Account had to be directed to Banker A or the Relationship Manager.
Over the course of two decades, Wasendorf defrauded over 24,000 of Peregrine’s
customers by misappropriating over $215 million in customer funds from the 1845
Account. He accomplished this by renting a post office box in Cedar Falls, which he set
up to appear to be a U.S. Bank address. At the post office, Wasendorf intercepted mail
that the National Futures Association (“NFA”)4 and Peregrine’s auditor intended to send
to U.S. Bank. After receiving the mail, Wasendorf used Photoshop and inkjet printers to
alter the bank statements for the 1845 Account and then sent the altered bank statements
to the NFA and Peregrine’s auditor. In so doing, Wasendorf was able to temporarily
conceal his fraud from the NFA, Peregrine’s auditor and federal regulators.
Aside from the 1845 Account, U.S. Bank maintained over thirty additional accounts
with entities and individuals affiliated with Wasendorf and Peregrine. Among these
accounts were accounts for Wasendorf’s other companies, including: Wasendorf Air,
L.L.C. (company created to hold title to Wasendorf’s private airplane), Wasendorf &
Associates, Inc. (research and publishing firm), My Verona, L.L.C. (Cedar Falls
restaurant) and Traders Press, Inc. (publishing company).
In May 2011, U.S. Bank received a balance confirmation request from the NFA and
confirmed that the 1845 Account only held $7.1 million. After returning the form to the
NFA, Banker A informed Wasendorf of the confirmation form and provided Wasendorf
with a copy of the form. Wasendorf then sent a falsified form to the NFA that stated that
4

The NFA is the self-regulatory agency for the United States’ derivatives industry.
5

the balance of the 1845 Account was $218,650,550.

On July 9, 2012, as federal

authorities were about to discover his fraud, Wasendorf attempted suicide and left a note
admitting his fraudulent behavior.
On September 14, 2012, the government filed an Information charging Wasendorf
with mail fraud (Count I), embezzlement of customer funds (Count II), making false
statements to the Commission (Count III) and making false statements to the NFA (Count
IV). See United States v. Wasendorf, No. 12-CR-2021-LRR (N.D. Iowa Sept. 14, 2012),
Information (docket no. 18). On September 17, 2012, Wasendorf pled guilty before
United States Chief Magistrate Judge Jon S. Scoles to each count in the Information. See
id., Minute Entry (docket no. 28). On October 3, 2012, the undersigned accepted
Wasendorf’s guilty plea. See id., Order (docket no. 35). On January 31, 2013, the court
sentenced Wasendorf to fifty years in prison and ordered that he pay over $215 million in
restitution. See id., Judgment (docket no. 70).
B. Loans to the Wasendorfs and Wasendorf Construction, L.L.C.
On September 9, 2008, U.S. Bank issued Wasendorf and his wife, Connie
Wasendorf, a $3 million loan (“Wasendorfs’ loan”). On that same day, Wasendorf, on
Peregrine’s behalf, guaranteed the Wasendorfs’ loan (“2008 Guaranty”). The 2008
Guaranty stated, inter alia:
[Peregrine] grants to [U.S. Bank] a security interest in all
property in which [Peregrine] has an ownership interest which
is now or in the future in possession of [U.S. Bank] to secure
payment under [the 2008 Guaranty]. [Peregrine] hereby
authorizes [U.S. Bank], without further notice to anyone, to
charge any account of [Peregrine] for the amount of any and
all Obligations due under [the 2008 Guaranty], and grants
[U.S. Bank] a contractual right to set off . . . amounts due
hereunder against all depository account balances, cash and
other property now or hereafter in the possession of [U.S.
Bank] and the right to refuse to allow withdrawals from any
account . . . .
6

2008 Guaranty (docket no. 10-3) at 4. Among Peregrine’s accounts at U.S. Bank, the
1845 Account had the largest balance. In January 2010, the Wasendorfs and U.S. Bank
agreed to extend the maturity date of the Wasendorfs’ loan. Wasendorf signed an amended
agreement on behalf of Peregrine and, in doing so, Peregrine guaranteed the Wasendorfs’
loan. Peregrine served as the guarantor on the Wasendorfs’ loan from September 9, 2008
until the loan was paid off in February 2010. During this period, U.S. Bank collected
approximately $29,000 in interest on the Wasendorfs’ loan.
On September 10, 2008, U.S. Bank issued Wasendorf Construction, L.L.C.
(“Construction”), a company formed on July 18, 2007 and owned by Wasendorf and his
son, Russell Wasendorf, Jr., a loan for $6.4 million dollars (“Construction loan”).
Construction applied for the loan to build an office building in Cedar Falls, Iowa, with
Peregrine to be the building’s primary tenant. On August 5, 2011, Wasendorf, on behalf
of Peregrine, guaranteed the Construction loan (“2011 Guaranty”). The 2011 Guaranty
stated, inter alia:
[Peregrine] grants to [U.S. Bank] a security interest in all
property in which [Peregrine] has an ownership interest which
is now or in the future in possession of [U.S. Bank] to secure
payment under [the 2011 Guaranty]. [Peregrine] hereby
authorizes [U.S. Bank], without further notice to anyone, to
charge any account of [the Guarantor] for the amount of any
and all Obligations due under [the 2011 Guaranty], and grants
[U.S. Bank] a contractual right to set off . . . amounts due
hereunder against all depository account balances, cash and
other property now or hereafter in the possession of [U.S.
Bank] and the right to refuse to allow withdrawals from any
account . . . .
2011 Guaranty (docket no. 10-4) at 3-4. Peregrine served as the guarantor on the
Construction loan from August 2011 to July 2012. During this period, U.S. Bank
collected approximately $290,000 in interest on the Construction loan. On December 13,

7

2012, U.S. Bank filed a claim in Peregrine’s bankruptcy proceedings for the
$6,662,505.38 outstanding on the Construction loan.
C. Transfers from the 1845 Account
From June 2008 to June 2012, approximately $118 million was deposited into the
1845 Account and approximately 94% of this money was from Peregrine’s customers.5
In this same period, Wasendorf transferred approximately $35 million from the 1845
Account to himself, his companies and Connie Wasendorf, including approximately $10.5
million to Construction; $13.5 million to Wasendorf & Associates, Inc.; $5 million to My
Verona, L.L.C.; $1.1 million to Wasendorf Air, L.L.C.; $2.5 million to Wasendorf
personally; and $2.5 million to Connie Wasendorf as part of a divorce settlement.
V. ANALYSIS
In the Motion, the Commission argues that the court should strike U.S. Bank’s first
affirmative defense—that the Commission failed to state a claim upon which relief may be
granted—and third affirmative defense—that the Commission’s claims are barred in whole
or in part by the doctrine of unclean hands.
A. Motion to Strike Standard
Federal Rule of Civil Procedure 12(f) provides that “[t]he court may strike from a
pleading an insufficient defense or any redundant, immaterial, impertinent, or scandalous
matter.” Fed. R. Civ. P. 12(f). The court has “broad discretion” in determining whether
to strike matters from pleadings. Stanbury Law Firm, P.A. v. IRS, 221 F.3d 1059, 1063
(8th Cir. 2000); see also BJC Health Sys. v. Columbia Cas. Co., 478 F.3d 908, 917 (8th
Cir. 2007) (“Judges enjoy liberal discretion to strike pleadings under Rule 12(f).”).
“Striking a party’s pleading, however, is an extreme and disfavored measure.” BJC
Health Sys., 478 F.3d at 917. The court should deny a motion to strike a defense “if the

5

Federal regulations also permitted Peregrine to deposit its own funds into the CSA.
Peregrine’s funds accounted for the remaining 6% of the funds in the 1845 Account.
8

defense is sufficient as a matter of law or if it fairly presents a question of law or fact
which the court ought to hear.” Lunsford v. United States, 570 F.2d 221, 229 (8th Cir.
1977) (quoting 2A Moore’s Federal Practice ¶ 12.21 at 2437 (2d ed. 1975)). An appellate
court reviews a district court’s ruling on a motion to strike pursuant to Rule 12(f) for abuse
of discretion. See BJS Health Sys., 478 F.3d at 917.
B. First Affirmative Defense
1.

Parties’ arguments

The Commission contends that the court should strike U.S. Bank’s affirmative
defense that the Commission failed to state a claim upon which relief may be granted
because it is improper and moot. In support of its position that the affirmative defense is
improper, the Commission argues that an allegation that a complaint fails to state a claim
upon which relief may be granted should be made in a motion to dismiss and not as an
affirmative defense in an answer. In support of its position that the affirmative defense is
moot, the Commission notes that the court denied U.S. Bank’s Motion to Dismiss for
failure to state a claim in its November 5, 2013 Order.
In its Resistance, U.S. Bank argues that district courts across the country vary in
whether they permit defendants to plead the defense of failure to state a claim as an
affirmative defense. U.S. Bank points out that the courts that permit the defense of failure
to state a claim in an answer often do so, in part, because Form 30 of the Federal Rules
of Civil Procedure indicates that a defendant may present this defense in an answer.
U.S. Bank also notes that some courts acknowledge that “an assertion that the
complaint fails to state a claim is technically a denial rather than an ‘affirmative’ defense,”
Brief in Support of Resistance (docket no. 21-1) at 3, but these courts still do not strike the
assertion because doing so does not serve any purpose when “[t]he Federal Rules of Civil
Procedure provide that failure to state a claim may be raised in a responsive pleading (such
as an Answer), by a Motion for Judgment on the Pleadings, or as late as trial.”

9

Id. (alteration in original) (quoting U.S. Bank Nat’l Ass’n v. Educ. Loans Inc., 2011 WL
5520437, at *7 (D. Minn. Nov. 14, 2011) (internal quotation marks omitted)). U.S. Bank
states that “[s]uch courts deny motions to strike even after an initial Rule 12(b)(6) motion
has been made and denied.” Id. at 4.
2.

Applicable law

The Eighth Circuit Court of Appeals has not explicitly addressed whether a
defendant may plead as an affirmative defense that a plaintiff failed to state a claim upon
which relief may be granted. Federal district courts across the country come to different
conclusions on this issue. For example, in Boldstar Technical, LLC v. Home Depot, Inc.,
517 F. Supp. 2d 1283 (S.D. Fla. 2007), the court stated:
Failure to state a claim is a defect in the plaintiff’s claim; it is
not an additional set of facts that bars recovery notwithstanding
the plaintiff’s valid prima facie case. Therefore, it is not
properly asserted as an affirmative defense.
Id. at 1292. On the other hand, some courts hold that “the failure-to-state-a-claim defense
is a perfectly appropriate affirmative defense to include in an answer.” SEC v. Toomey,
866 F. Supp. 719, 723 (S.D.N.Y. 1992).
Other courts treat what they consider a mispleaded affirmative defense as a denial.
See Bluewater Trading LLC v. Willmar USA, Inc., 2008 WL 4179861, at *2 (S.D. Fla.
Sept. 9, 2008) (“The foregoing statement, although labeled an affirmative defense, alleges
a defect in Plaintiff’s prima facie case. In other words, the assertion in Defendant’s
Answer is a denial of Plaintiff’s claim rather than an affirmative defense.”); U.S. Bank
Nat. Ass’n, 2011 WL 5520437, at *6 (“In this [c]ourt’s view, failure to state a claim is not
technically an affirmative defense; however, striking the defense at this juncture would
serve no real purpose. The Federal Rules of Civil Procedure provide that failure to state
a claim may be raised in a responsive pleading (such as an Answer), by a Motion for
Judgment on the Pleadings, or as late as trial.” (citing Fed. R. Civ. P. 12(h)(2))). If

10

considered a denial, the contention that a plaintiff failed to state a claim is permissible in
an answer pursuant to Federal Rule of Civil Procedure 12(h)(2). See Fed. R. Civ. P.
12(h)(2) (“Failure to state a claim upon which relief can be granted . . . may be raised . . .
in any pleading allowed or ordered under Rule 7(a).”).
3.

Application

Although the court agrees with the Commission that U.S. Bank improperly pleaded
its allegation that the Commission failed to state a claim by pleading it as an affirmative
defense,6 the court is not prepared to strike U.S. Bank’s allegation that the Commission
failed to state a claim based on this formalistic distinction. However, the court shall
exercise its broad discretion by striking U.S. Bank’s allegation that the Commission failed
to state a claim because the court has already ruled on this issue. Since the court has
already addressed U.S. Bank’s claim on the merits, U.S. Bank’s identical claim in its
Answer is an insufficient defense as a matter of law and is now redundant and
impertinent.7 See November 5, 2013 Order (docket no. 18) (denying U.S. Bank’s motion
to dismiss); see also Fed. R. Civ. P. 12(f) (“The court may strike from a pleading an

6

The court notes that although Form 30 allows a defendant to allege that a plaintiff
failed to state a claim in an answer, it does not categorize failure to state a claim as an
affirmative defense. In fact, “Failure to State a Claim” is listed before Form 30’s example
of an affirmative defense—statute of limitations. See Fed. R. Civ. P. Form 30.
7

To the extent that U.S. Bank argues that Federal Rule of Civil Procedure 12(h)(2)
allows a defendant to assert that a plaintiff failed to state a claim in an answer, the court
notes that the Rule was designed to make a distinction between defenses that are waived
if not made in an initial motion or pleading and those that are preserved if not made in an
initial motion or pleading. Of course, a defendant may assert that a plaintiff failed to state
a claim even if a defendant did not do so in their initial motion or pleading in any of the
ways that Rule 12(h)(2)(A)-(C) provides. However, this Rule is not designed to give a
defendant a second bite of the apple after the court already determined that its assertion
that a plaintiff failed to state a claim is without merit.
11

insufficient defense or any redundant, immaterial, impertinent, or scandalous matter.”).
Accordingly, the court shall strike U.S. Bank’s first affirmative defense.
B. Third Affirmative Defense
The Commission contends that the court should strike U.S. Bank’s affirmative
defense that the Commission’s claims are barred in whole or in part by the doctrine of
unclean hands because: (1) this defense cannot be asserted against a government agency
in an enforcement action; (2) U.S. Bank’s pleading of the defense is insufficient; and (3)
permitting the defense to go forward would prejudice the Commission and unnecessarily
complicate or delay the enforcement action.
1.

Asserting an unclean hands defense against a government agency
a.

Parties’ arguments

The Commission acknowledges that the Eighth Circuit Court of Appeals “has not
definitively addressed whether the affirmative defense of unclean hands may be asserted
against a government agency in an enforcement action.” Brief in Support of Motion
(docket no. 20-1) at 3. However, the Commission contends that this court should follow
the Fifth Circuit Court of Appeals and other district courts, which have granted motions
to strike the unclean hands defense as to a government agency and “held that a defendant
cannot assert an equitable defense, like unclean hands, against a government agency when
that agency is operating pursuant to its congressional mandate in enforcing laws to serve
the public interest.” Id. (citing United States v. Second Nat. Bank of N. Miami, 502 F.2d
535, 548 (5th Cir. 1974)). The Commission argues that the unclean hands defense is
unavailable to U.S. Bank because the Commission “is acting in the public interest to
enforce a Congressional mandate by prosecuting U.S. Bank for its violations of the
Commodity Exchange Act and Regulations.” Id. at 4. Accordingly, the Commission
asserts that the court should strike U.S. Bank’s unclean hands defense.

12

U.S. Bank argues that courts have a wide range of discretion in deciding whether
to refuse to aid a plaintiff who itself has engaged in willful misconduct, even if that
plaintiff is the government. U.S. Bank notes that the Eighth Circuit Court of Appeals has
not held as a matter of law that defendants cannot assert the unclean hands defense against
the government in an enforcement action. U.S. Bank also asserts that, contrary to the
Commission’s characterization of other district courts’ decisions, district courts across the
country have come to different conclusions on whether defendants may assert the unclean
hands defense against the government in an enforcement action. Since the Commission
has not established that the unclean hands defense is unavailable as a matter of law in the
Eighth Circuit, U.S. Bank argues that the court should deny the Commission’s Motion.
b.

Applicable law

“One who seeks equitable relief must approach the court with clean hands.” Earle
A. Hanson & Assocs. v. Farmers Coop. Creamery Co., 403 F.2d 65, 70 (8th Cir. 1968).
If one comes to court “tainted with inequitableness or bad faith relative to the matter in
which he [or she] seeks relief, however improper may have been the behavior of the
defendant,” the court may decline to provide relief. Precision Instrument Mfg. Co. v.
Auto. Maint. Mach. Co., 324 U.S. 806, 814 (1945). The unclean litigant’s conduct “need
not necessarily have been of such a nature as to be punishable as a crime or as to justify
legal proceedings of any character.” Id. at 815. Instead, “[a]ny willful act concerning the
cause of action which rightfully can be said to transgress equitable standards of conduct
is sufficient cause” for the court to deny relief based on a litigant’s unclean hands. Id.
However, the court has a “wide range” of discretion when considering whether to deny
relief to a litigant with unclean hands. Id.
“It is well established that the United States is subject to general principles of equity
when seeking an equitable remedy.” United States v. Wilson, 707 F.2d 304, 312 (8th Cir.
1982) (per curiam); see also Second Nat’l Bank of N. Miami, 502 F.2d at 548 (“Certainly

13

when seeking an equitable remedy the United States is no more immune to the general
principles of equity than any other litigant.”). Although the United States is subject to the
general principles of equity, the Supreme Court has stated that equitable principles “will
not be applied to frustrate the purpose of [the United States’] laws or to thwart public
policy.” Pan-Am. Petroleum & Transp. Co. v. United States, 273 U.S. 456, 506 (1927).
In announcing this principle, the Supreme Court cited numerous cases that forgave a
mistake by the government—for example, failing to join a necessary party, Heckman v.
United States, 224 U.S. 413 (1912),8 or failing to offer to return the consideration from
an allegedly unlawful contract, Causey v. United States, 240 U.S. 399 (1916)—because
not doing so would frustrate congressional policy. Pan-Am. Petroleum & Transp. Co.,
273 U.S. at 506-10. These cases, however, did not specifically address the application of
the equitable principle of unclean hands to a government enforcement action. That is,
8

In Heckman, the United States brought an action to cancel the conveyances of land
that had been allotted to members of the Cherokee Nation because the “conveyances were
made in violation of restrictions upon alienation.” Id. at 446. The party who received the
land from the Cherokee Nation argued that since members of the Cherokee Nation had
received consideration for their conveyances, they should have been made a party to the
suit so that the parties could be made whole if the conveyance was canceled. The Supreme
Court stated:
Where, however, conveyance has been made in violation of
the restrictions, it is plain that the return of the consideration
cannot be regarded as an essential prerequisite to a decree of
cancelation. . . . The restrictions were set forth in public
laws, and were matters of general knowledge. Those who
dealt with the [Cherokee Nation] contrary to these provisions
are not entitled to insist that they should keep the land if the
purchase price is not repaid, and thus frustrate the policy of
the statute.
Id. at 446-47. In essence, the Supreme Court made an exception to general rules of equity
because not doing so would thwart the public policy to keep land in the ownership of the
Cherokee Nation.
14

these cases, and the holding in Pan-American Petroleum & Transportation, Co. itself, did
not consider whether the United States, acting in the public interest, was immune to an
affirmative defense that it had unclean hands in relation to the dispute.
The court is aware of only one Circuit Court of Appeals—the Fifth Circuit—that has
addressed whether a defendant may assert the affirmative defense of unclean hands against
the government in an enforcement action in support of the public interest. In Second
National Bank of North Miami—a case to which both parties cite—the defendant asserted
that the United States was not entitled to relief because the IRS agents involved in the case
had unclean hands. Second Nat’l Bank of N. Miami, 502 F.2d at 547-48. The Fifth
Circuit Court of Appeals acknowledged the principles of Pan-American Transport Co. and
cited with approval the Tenth Circuit’s “good faith” standard,9 concluding that “‘unless
the Government did something which in good conscience it should not have done, or failed
to do something fair dealing required it to do, it comes into court with clean hands and is
entitled to . . . equitable relief.’” Id. at 548 (quoting Deseret Apartments, Inc., 250 F.2d
at 458). The Fifth Circuit held that the “United States acted with sufficient good faith”

9

In Deseret Apartments, Inc. v. United States, 250 F.2d 457 (10th Cir. 1957), the
United States, acting on behalf of the Federal Housing Commissioner, brought suit to
foreclose the mortgage of Deseret Apartments, Inc. (“Deseret”). Id. at 458. The district
court granted the United States a deficiency judgment, and Deseret appealed, arguing that
the Tenth Circuit should overturn the district court’s judgment because the government
came into court with unclean hands. Deseret argued that it relied on a certificate of
necessity issued by the Secretary of the Army in determining whether to construct the units
and that, in fact, there was no need for the units. The Tenth Circuit concluded that “[t]he
record is devoid of any facts showing bad faith on the part of the Government officials in
executing the certificate or facts which would support a conclusion that the Government
failed to do anything it should not have done.” Id. at 459. Accordingly, the Tenth Circuit
concluded that because the Government acted in good faith, it is “absolve[d] [from] all
conduct which would sully the Government’s hands and prevent it from coming into a
court of equity to seek an enforcement of its rights.” Id.
15

and that its “conduct [was] insufficiently malignant” and, consequently, granted the United
States equitable relief.10
Several federal district courts have addressed whether a party may assert the
affirmative defense of unclean hands against the government in an enforcement action
pursuant to the public interest, including in the Eighth Circuit. In United States ex rel.
Zissler v. Regents of the University of Minnesota, 992 F. Supp. 1097 (D. Minn. 1998), the
court suggested that an unclean hands defense may be available but stated that the
government’s actions, in that case, did not “‘transgress equitable standards.’” Id. at 1114
(quoting Precision Instruments Mfg. Co., 324 U.S. at 815). In EEOC v. Hibbing Taconite
Co., 266 F.R.D. 260 (D. Minn. 2009), the Equal Employment Opportunity Commission
(“EEOC”) alleged that Hibbing Taconite Co. (“Hibbing”) discriminated against an
employee and requested, among other things, that the court require that Hibbing “carry
out policies, practices, and programs[] for equal employment opportunities, so as to
eradicate the effects of any past or present unlawful employment practices.” Id. at 263.
The court declined to “determine whether a defense of unclean hands should be
unavailable, as a matter of law, against the EEOC in its public capacity,” because Hibbing
did not adequately plead the elements of an unclean hands defense.

Id. at 270.

Accordingly, the court is not aware of any federal court in the Eighth Circuit that has
concluded, as a matter of law, that an unclean hands defense is unavailable against the
government in an enforcement action pursuant to the public interest.

10

The First Circuit Court of Appeals also equates unclean hands to bad faith and,
accordingly, requires litigants to show the government acted with bad faith when asserting
the unclean hands defense. Texaco Puerto Rico, Inc. v. Dep’t of Consumer Affairs, 60
F.3d 867, 880 (1st Cir. 1995). However, Texaco Puerto Rico, Inc., as with Deseret
Apartments, Inc., was not in the context of a government enforcement action pursuant to
a congressional mandate to serve the public interest and, therefore, these cases are less
persuasive than Second National Bank of North Miami.
16

However, other federal district courts across the country are divided on the issue.
Some courts cite Pan-American Petroleum & Transportation Co. and Second National
Bank of North Miami for the proposition that a litigant can never invoke an unclean hands
defense against the government in an enforcement action. Other courts deny motions to
strike an unclean hands defense and allow the factual record to develop. Compare, e.g.,
United States v. Philip Morris Inc., 300 F. Supp. 2d 61, 75 (D.D.C. 2004) (“When, as
here, the Government acts in the public interest the unclean hands doctrine is unavailable
as a matter of law.”), and United States v. Am. Elec. Power Serv. Corp., 218 F. Supp. 2d
931, 938 (S.D. Ohio 2002) (granting the United States’ motion to strike an unclean hands
defense because this defense “may not be used against the United States to prevent it from
enforcing its laws to protect the public interest”), and SEC v. Hayes, 1991 WL 236846,
at *2 (N.D. Tex. July 25, 1991) (striking an unclean hands defense because it was “clearly
without merit because it may not be invoked against a governmental agency which is
attempting to enforce a congressional mandate in the public interest”), with SEC v.
Nacchio, 438 F. Supp. 2d 1266, 1287-88 (D. Colo. 2006) (concluding that whether the
facts in the case justify an unclean hands defense “cannot be adjudicated on the face of the
pleadings, and must therefore await development of a more complete factual record”), and
SEC v. Downe, 1994 WL 67826, at *1-2 (S.D.N.Y. Mar. 3, 1994) (same).
c.

Application

Since there is no controlling precedent and courts across the country differ in how
they dispose of motions to strike an unclean hands defense asserted against a government
in an enforcement proceeding, the court declines to strike the Commission’s unclean hands
defense on the grounds that an unclean hands defense is impermissible, as a matter of law,
when asserted against the government in an enforcement proceeding pursuant to the public
interest. See BJC Health Sys., 478 F.3d at 917 (“Striking a party’s pleading, however,
is an extreme and disfavored measure.”). Rather, U.S. Bank’s third affirmative defense

17

“presents a question of law . . . which the court ought to hear,” Lunsford, 570 F.2d at
229 (citation omitted), on a more complete factual record, provided it was adequately
pleaded.
2.

Pleading of affirmative defense
a.

Parties’ arguments

The Commission argues that even if the affirmative defense of unclean hands is
available against a government agency in an enforcement action, “U.S. Bank has not
satisfied the Eighth Circuit’s affirmative defenses pleading requirements.” Brief in
Support of Motion at 5. Specifically, the Commission contends that U.S. Bank did not
give the Commission fair notice of the nature of the defense, which, according to the
Commission, is required under Eighth Circuit law.
The Commission also asserts that “[t]he defense of unclean hands invoked against
the government requires, at a minimum, that a defendant alleges that the government acted
in bad faith or inequitably in its dealings, and that it prejudiced the defendant.” Id.
Moreover, the Commission points out that “courts only permit an unclean hands defense
where the government’s alleged misconduct is ‘egregious’ and results in ‘extreme
prejudice’ that rises to the ‘constitutional level’ and is ‘established through a direct nexus
between the misconduct and the constitutional injury.’” Id. at 6 (quoting SEC v. Cuban,
798 F. Supp. 2d 783, 792-95 (N.D. Texas 2011)). According to the Commission, U.S.
Bank failed to allege that the Commission engaged in egregious conduct, that there is a
nexus between such conduct and U.S. Bank’s constitutional injury and that U.S. Bank
suffered any prejudice. Accordingly, the Commission argues that the court should strike
U.S. Bank’s unclean hands defense.
U.S. Bank argues that the Eighth Circuit only requires that the Commission have
notice that the affirmative defense is applicable and that affirmative defenses are properly

18

pleaded by their bare assertion. U.S. Bank asserts that under Eighth Circuit law, there is
no requirement that a party provide evidence or facts in support of an affirmative defense.
b.

Applicable law

Pursuant to Federal Rule of Civil Procedure 8(c), “a party must affirmatively state
any . . . affirmative defense.” Fed. R. Civ. P. 8(c). “The rules do not require a party to
plead every step of legal reasoning that may be raised in support of its affirmative defense;
they only require a defendant to state in short and plain terms its defenses to a plaintiff’s
claims.” Wisland v. Admiral Beverage Corp., 119 F.3d 733, 737 (8th Cir. 1997). When
stating a claim for relief, however, Federal Rule of Civil Procedure 8(a)(2) requires “a
short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.
R. Civ. P. 8(a)(2). Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft
v. Iqbal, 556 U.S. 662 (2009), held that a plaintiff adequately states a claim for relief
pursuant to Federal Rule of Civil Procedure 8(a)(2) “‘when the plaintiff pleads factual
content that allows the court to draw the reasonable inference that the defendant is liable
for the misconduct alleged.” Hamilton v. Palm, 621 F.3d 816, 817 (8th Cir. 2010)
(quoting Iqbal, 556 U.S. at 678). The Eighth Circuit, however, has not addressed whether
the pleading standards of Twombly and Iqbal apply to the pleading of affirmative defenses.
In other words, the Eighth Circuit has not determined whether defendants, when pleading
affirmative defenses, must also plead factual content that, if true, would allow the court
to draw the reasonable inference that the affirmative defense is applicable. See Hibbing
Taconite Co., 266 F.R.D. at 267 (“The Eighth Circuit has not specifically ruled on
whether affirmative defenses must meet the same pleading requirements as claims, and a
survey of decisions in the [d]istrict [c]ourts of this Circuit reveals somewhat murky waters
in the [c]ourts’ varying approaches.”); Strauss v. Centennial Precious Metals, Inc., 291
F.R.D 338, 342-43 (D. Neb. 2013) (“The parties admit that the Eighth Circuit . . . has not

19

addressed whether the Iqbal/Twombly standard applies to the pleading of affirmative
defenses, and the Iqbal and Twombly cases themselves are silent on the issue.”).
Federal district courts across the country have not come to a consensus about
whether affirmative defenses are subject to heightened pleading standards of Twombly and
Iqbal. No Circuit Court of Appeals has addressed this issue, and the district courts are
divided.

See Godson v. Eltman, Eltman & Cooper, P.C., 285 F.R.D. 255, 257

(W.D.N.Y. 2012) (“Indeed, as the parties acknowledge, not one court of appeals has
considered this issue.” (footnotes omitted)); see also Stephen Mayer, Note, An Implausible
Standard for Affirmative Defenses, 112 Mich. L. Rev. 275, 276 (2013) (“More than one
hundred federal cases have contemplated whether the plausibility standard outlined in Bell
Atlantic Corp. v. Twombly and Ashcroft v. Iqbal applies to affirmative defenses, yet the
districts remain divided, and no court of appeals has yet addressed the issue.”). At first,
the majority of district courts extended the pleading standard articulated in Twombly and
Iqbal to affirmative defenses, but this is now the minority position. See Hansen v. Rhode
Island’s Only 24 Hour Truck & Auto Plaza, Inc., 287 F.R.D. 119, 122 (D. Mass. 2012).11
Within the Eighth Circuit, the district courts have arrived at different positions. Compare
Strauss, 291 F.R.D. at 343 (“In light of the lack of binding authority, the Eighth Circuit
Court of Appeals’ holdings12 that a minimal pleading standard applies to affirmative

11

For an extensive discussion of the history of this development and the reasons that
courts have taken different positions, see Mayer, supra.
12

The U.S. District Court for the District of Nebraska cites four cases—Barnwell
& Hays, Inc. v. Sloan, 564 F.2d 254 (8th Cir. 1977); Zotos v. Lindbergh School Dist., 121
F.3d 356 (8th Cir. 1997); Wisland, 119 F.3d at 733; and Holway v. Negro Leagues
Baseball Museum, 263 Fed. App’x. 538 (8th Cir. 2008)—for the proposition that the
Eighth Circuit has minimal pleading standards for affirmative defenses. See Strauss, 121
F.3d at 341-42. The court notes, however, that the Eighth Circuit decided three of these
cases before Twombly and Iqbal and the only case decided post-Twombly (but before Iqbal)
(continued...)
20

defenses . . . and the fact that these rulings do not appear to have been changed by Iqbal
and Twombly, I find . . . the Iqbal/Twombly pleading standard to be inapplicable to those
affirmative defenses.” (footnote added)), with Hibbing Taconite Co., 266 F.R.D. at 268
(“We . . . require the defendant to plead an adequate factual basis for affirmative defenses,
where the basis is not apparent by the defense’s bare assertion. As a consequence, we
evaluate [the] Answer for futility with the Twombly pleading standards in mind . . . .”).
c.

Application

Since neither the Supreme Court nor the Eighth Circuit Court of Appeals has
provided guidance on whether the pleading standards articulated in Iqbal/Twombly extend
to affirmative defenses and the Eighth Circuit has liberally construed arguably deficient
affirmative defenses, the court shall not strike U.S. Bank’s affirmative defense that the
Commission had unclean hands and is not entitled to relief. The court is also persuaded
by the text of Federal Rule of Civil Procedure 8. Rule 8(a) states that a “claim for relief
must contain . . . a short and plain statement of the claim showing that the pleader is
entitled to relief.” Fed. R. Civ. P. 8(a). However, Rule 8(c) only requires that a
defendant “affirmatively state any . . . affirmative defense.” Fed. R. Civ. P. 8(c).
Nowhere in Rule 8(c) is there a requirement for the party pleading an affirmative defense
to “show[] that the pleader is entitled to relief,” or, in the case of a defendant, that the
affirmative defense, if the facts articulated were true, absolves the pleader of liability.
Moreover, it is unfair to require a defendant to plead facts supporting an affirmative

12

(...continued)
considered whether a defendant adequately pleaded a statute of limitations affirmative
defense despite failing to cite the relevant statute. The court does not believe that these
cases are controlling precedent with respect to the issue at hand because three of the cases
were decided pre-Twombly and Iqbal and the other considered a statute of limitations
defense, which does not present the same notice issues as an affirmative defense such as
unclean hands. However, the court does note that, at times, the Eighth Circuit has
liberally construed affirmative defenses, which is persuasive for the issue at hand.
21

defense with the same particularity required in a complaint when the party filing the
complaint has the entire statute of limitations period to find facts supporting its claim,
while the party asserting an affirmative defense has twenty-one days. See Fed. R. Civ. P.
12(a)(1)(A).13 Finally, the court concludes that the procedural posture in this case and the
nature of U.S. Bank’s affirmative defense do not warrant striking the affirmative defense
of unclean hands. In its Motion to Dismiss, U.S. Bank provided a basis for its unclean
hands defense that put the Commission on notice that U.S. bank might assert this defense,
and the nature of the defense is not so foreign or unusual that the Commission would not
have fair notice of what it is up against. Accordingly, the court shall not strike U.S.
Bank’s third affirmative defense.
3.

Unfair prejudice
a.

Parties’ arguments

The Commission contends that if the court were to permit U.S. Bank’s unclean
hands defense to move forward, it would unfairly prejudice the Commission in terms of
the time and resources required to litigate irrelevant issues. The Commission contends that
“it is highly improbable that any ‘unclean hands’ allegations will relate to the main issue
in this enforcement action, which is whether U.S. Bank violated the Commodity Exchange
Act and Regulations.” Brief in Support of Motion at 7.
U.S. Bank argues that it is entitled to discovery on the unclean hands defense and
that the burden of additional discovery is not an appropriate reason to strike an affirmative
defense.

13

The court is aware that a defendant may have more time to find facts that support
its defense if it has waived service or filed a motion, as is the case here, but nonetheless,
the time is far less than period provided by the applicable statute of limitations.
22

b.

Application

At this stage of litigation, and especially in a case of first impression, the court is
reluctant to utilize its discretion to strike an affirmative defense without clear guidance
from the Eighth Circuit. The court concludes that U.S. Bank’s unclean hands defense is,
at this stage of litigation, a potentially valid defense and, therefore, U.S. Bank is entitled
to discovery. Although the defense may be “highly improbable,” as the Commission
contends, this does not prevent U.S. Bank from pursuing the defense if it believes such
pursuit is warranted.
VI. CONCLUSION
In light of the foregoing, IT IS ORDERED THAT Plaintiff United States
Commodity Futures Trading Commission’s Motion (docket no. 20) is GRANTED IN
PART and DENIED IN PART.
(1)

The court GRANTS the Motion to the extent it requests the court to

strike U.S. Bank’s first affirmative defense in its Answer.
(2)

The court DENIES the Motion to the extent it requests the court to strike

U.S. Bank’s third affirmative defense in its Answer.
DATED this 27th day of January, 2014.

23