Being Sued, Liable or Not. PLEASE RESPOND

What is the name of your state? WI
In 1999 my husband got involved with a gifting game in WI. It was were you gifted a person $2000 and then down the road you would be gifted $16000. A good friend of mine wanted in on it and she had a credit card check overnight mailed to her and she wrote me a check to cash so she could do this. About six months later we found out it was not legal and we gave all of our money back to people who asked. My friend didn't ask because she was now receiving. Couple of months later when it hit the papers she filed amnesity. In late 2001 she sent a certified letter stating she wanted her money. I said I don't have any we gave it all back to people who wanted out. They now are sueing us in Small Claims court. What can I do legally to get out of this? How can I win this case? I tried setting up a payment plan for $2000 with her, but she now wants $4500. Please help me.
WI girl being sued.

My response:

You have, and must inform the judge of, the "equitable defense" of "unclean hands."

The Plaintiff cannot win a lawsuit when the Plaintiff was also culpable for engaging in an illegal activity. The law will NOT protect a person for damages suffered while engaging in an illegal activity.

Look at it like this - - most States outlaw gambling. Let's say you and she were in a friendly game of poker where you pledged your car as part of your bet. Then, you lose the hand, and supposedly lose your car as a result. However, you tell her, "I'm not giving you my car - - sue me." So, she sues you. But, the judge knows that gambling is illegal in your State. So, even though she thought a "friendly game of poker" wasn't illegal, that's just tough. The court cannot help someone who was damaged as the result of an illegal acitivity.

The plaintiff's protestations that "she didn't know" it was an illegal activity will not help her either. "Ignorance of the law is not an excuse" and engaging in a "Ponzi Scheme" (the "gifting" scam), whether or not she knew it was illegal is NOT an excuse.

So, when she's done telling her side of the story in court, you inform the judge that "she cannot prevail in this matter because she knew, or should and could have known, that the Ponzi Scheme was an illegal activity. Therefore, your Honor, she cannot profit from engaging in such an activity due to her Unclean Hands."

Once you defend on the ground of "Unclean Hands", the court MUST dismiss her complaint.

IAAL