Legal Update: Fifth Circuit holds Contractor’s Default Judgment does not Preclude Unclean Hands Defense in Construction Bankruptcy Dispute
Authors: Christopher K. LeMieux and Jennifer Mura.
Case: Matter of Adair, — F.4th —-, 2025 WL 1439450 (5th Cir. May 20, 2025)
Following the 2016 floods in Baton Rouge, homeowner Ross Shaun Adair (“Adair”) hired Stutsman Construction, LLC (“Strutsman”), a Louisiana construction company licensed to perform home repairs up to $75,000. The total repair project exceeded $150,000 but Adair withheld the final installment payment, claiming defective work performed by Stutsman. Stutsman sued for breach of contract and obtained a default judgment in state court for the amount of the check plus cost, fees, and general damages.
Adair later filed for Chapter 13 bankruptcy. Stutsman sought to have the judgment declared nondischargeable under 11 U.S.C. § 523(a)(6) arguing that withholding payment was a “willful and malicious injury.” In response, Adair raised the equitable defense of “unclean hands” to bar relief, pointing to Stutsman’s licensing violations and substandard work. The bankruptcy court held the defense was precluded by the state court judgment.
The Fifth Circuit vacated and remanded. Applying Louisiana law, the Court held that issue preclusion only applies to issues that were actually litigated and essential to the prior judgment. In Louisiana a ‘’judgment in favor of either [party] is conclusive, in any subsequent action between them, with respect to any issue actually litigated and determined if its determination was essential to that judgment.”[1] The default judgment contained no factual findings or conclusions of law supporting that the unclean hands issue was raised or actually litigated. Further, the Court emphasized that Louisiana law does not permit the equitable “unclean hands” defense in the original breach-of-contract proceeding. Instead, only a narrow statutory defense of “clean hands” is available under La. Civil Code Articles 2030 and 2033, which serves to nullify contracts violating public policy (e.g., for unlicensed work). Since the defense was unavailable and not litigated at the state court level, the Court ruled issue preclusion did not apply and the unclean hands defense could be considered for the first time in bankruptcy court.
Judge Willett dissented, arguing that res judicata should apply because Adair could have raised the license violation issue as an excuse for nonpayment but chose not to. He argued that since the issue could have been adjudicated, allowing the defense now amounts to “a second bite at the apple.”
Takeaway:
A final state court judgment does not automatically preclude an equitable defense in bankruptcy if the defense was unavailable or not actually litigated in the earlier action. This is especially relevant in construction disputes governed by Louisiana law, as there is a key distinction between the statutory clean hands defense which can void an unlawful contract, while the equitable unclean hands defense can bar recovery and prevent one from collecting without invalidating the contract.
For contractors, this is important because when licensing violations are at issue, not only do they risk the contract being invalidated in state court but also risk being barred from any equitable recovery in bankruptcy due to unclean hands even after receiving a state court judgment in their favor.
[1] LA. R. S. § 13:4231(3).
