## Facts

- John Karpinski was a small dairyman in California’s Santa Clara Valley.
- Before April 1962, Karpinski sold milk under a Grade B contract that paid about 60% of the Grade A price; he testified that operating on Grade B was financially impossible for a dairyman in that area.
- Gene Collins, president of the Santa Clara Creamery, contacted Karpinski and offered him a Grade A milk contract only if Karpinski agreed to pay Collins a secret rebate (“kickback”) of 4.5 cents per gallon during the contract term.
- Secret rebates were prohibited by California’s Milk Stabilization Act.
- Karpinski accepted because no other Grade A contracts were available to him.
- On April 1, 1962, Karpinski and the creamery entered a written contract for Karpinski to sell 51,600 pounds of Grade A milk per month at the Grade A price; either party could terminate on 30 days’ notice.
- After Karpinski delivered milk and was paid the contract price, Collins billed Karpinski monthly “feeding charges” equal to the 4.5-cent-per-gallon rebate amount, although no feeding services were performed.
- About a year later, Collins told Karpinski he needed $6,500 to pay a debt and threatened to terminate Karpinski’s contract and replace him if Karpinski did not provide the money.
- Karpinski obtained $6,500 and gave it to Collins in exchange for a promissory note dated April 16, 1963, signed by Gene Collins and Ruth Collins.
- Collins promised to repay the loan by reducing the rebate by 1.5 cents per gallon, lowering it to 3 cents per gallon for the remainder of the contract.
- By October 1963, Karpinski could no longer continue paying the rebate; Collins terminated the milk contract.
- Karpinski sued Gene Collins, Ruth Collins, and the Santa Clara Creamery to recover $6,500 on the note and $4,177.72 in secret rebates.
- The trial court entered judgment for Karpinski for $10,677.72 total; defendants appealed, arguing Karpinski’s participation in an illegal rebate scheme barred recovery because he was in pari delicto.

## Issues

1. Whether a milk producer who paid illegal secret rebates under the Milk Stabilization Act is barred from recovery because the producer is in pari delicto with the buyer who demanded the rebates.
2. Whether public policy permits restitution of the rebates (and recovery on the related promissory note) when the producer entered and continued the arrangement due to economic compulsion and unequal bargaining power.

## Decision

- The Court of Appeal affirmed the judgment for Karpinski.
- The court held that Karpinski was not in pari delicto with defendants, given the economic pressure and unequal position that led him to agree to and continue the illegal payments.
- The court allowed Karpinski to recover both the rebates he paid and the $6,500 due on the promissory note.

## Legal Principles

- Courts generally will not grant relief based on an illegal agreement, but that rule is not applied mechanically.
- The in pari delicto bar applies when the parties are substantially equal in fault; when fault is not equal, the less blameworthy party may obtain relief.
- Economic compulsion and a marked imbalance in bargaining power can support a finding that the plaintiff was not equally at fault, even if the plaintiff technically participated in prohibited conduct.
- When a regulatory statute aims to curb abusive practices by the party demanding the unlawful payment, allowing that party to keep the proceeds can conflict with the statute’s purpose; restitution may be allowed to avoid that result.
- A promissory note connected to the unlawful course of dealing may still be enforced in favor of the coerced party when the borrower used threats tied to the illegal arrangement to obtain the loan.

## Conclusion

*Karpinski v. Collins* held that a small dairyman could recover secret rebates paid under an arrangement forbidden by the Milk Stabilization Act and could also recover on a $6,500 promissory note obtained through threats to terminate his milk contract, because the dairyman’s participation resulted from economic pressure and unequal bargaining power, so he was not in pari delicto with the defendants.


Karpinski v. Collins, 60 Cal. Rptr. 846 (1967)