Further Refining Unjust Enrichment Claims

By: Leo K. Barnes Jr.*

*Mr. Barnes, a member of Barnes & Barnes, P.C. in Melville,

can be reached at lkb@barnespc.com

 

Approximately a year and a half after issuing Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173 (2011), the New York Court of Appeals has revisited the pleading requirements for unjust enrichment claims.  In Georgia Malone & Co. v. Rieder, 19 N.Y.3d 511 (2012), the Court of Appeals specifically addressed the requirement that a sufficiently close nexus exist between the parties to substantiate an unjust enrichment claim.

 

The litigation stemmed from plaintiff’s, Georgia Malone & Co., a licensed real estate broker and consulting firm, representation of defendant CenterRock Realty, LLC, a real estate developer.  Plaintiff introduced CenterRock to sellers of residential apartment properties in midtown Manhattan.  Soon thereafter, CenterRock and plaintiff entered into a contract where plaintiff agreed to produce due diligence reports relating to the residential apartment properties that CenterRock was interested in acquiring.  The contract provided that CenterRock would keep the due diligence reports confidential, and it was agreed that CenterRock would pay plaintiff a commission of 1.25% of the total purchase price of the properties in exchange for plaintiff’s brokerage services.

 

Plaintiff then prepared various due diligence reports relating the properties.  In December 2007, CenterRock executed a contract of sale to purchase the properties for $70 million.  However, CenterRock later validly terminated the contract of sale.  One week prior to CenterRock’s termination of the contract, CenterRock’s managing member Ralph Rieder sent an email to plaintiff stating:  “See what you can do about finding [another] buyer for [the properties]. If it falls flat I am prepared to do whatever you think is fair including making up your entire fee. Ideally, I would like to tack it on to our next deal.”   Thereafter, plaintiff demanded that CenterRock pay its $875,000 commission on the sale, but CenterRock refused.

 

After CenterRock terminated the contract of sale, plaintiff alleged that Elie Rieder (an officer of CenterRock) provided the due diligence reports to a third party for the purpose of selling the documentation to defendant Rosewood Realty Group Inc., another real estate brokerage firm.  In exchange for the reports, Rosewood paid Ralph and Elie Rieder $150,000.  Using the materials, Rosewood found another buyer for the properties and eventually received a $500,000 commission for brokering the sale.

 

Plaintiff filed suit alleging various causes of action, including an unjust enrichment claim against Rosewood, alleging that the rival brokerage firm, which obtained a commission from the sale of residential apartment properties, was unjustly enriched when it acquired due diligence reports prepared by plaintiff relating to the properties.  Upon motion, the Supreme Court dismissed all claims except those against CenterRock.  Plaintiff appealed and the Appellate Division, First Department modified the Supreme Court’s decision by reinstating the unjust enrichment claims against the Rieders.  Thereafter, the Appellate Division granted plaintiff’s motion for leave to appeal.

 

On appeal, plaintiff sought reinstatement of the unjust enrichment claim against Rosewood arguing that Rosewood unfairly profited and benefitted at plaintiff’s expense by collecting a commission on the sale of the properties, without any compensation to plaintiff, notwithstanding that Rosewood knew that plaintiff produced the reports.  In opposition, Rosewood argued (1) “that [plaintiff’s] complaint fails to make out an unjust enrichment claim against it because there was no business relationship or connection between them,” (2) that the complaint was inadequate because it did not assert that Rosewood was aware that the information was confidential, and (3) the complaint did not allege that Rosewood knew that CenterRock had not paid plaintiff for the due diligence reports.

 

Based on the allegations set forth in the complaint, the Court of Appeals held that the relationship between plaintiff and Rosewood was too attenuated, and thus plaintiff failed to state a cause of action for unjust enrichment against Rosewood.  Citing to Mandarin Trading Ltd., supra, and Sperry v. Crompton Corp., 8 N.Y.3d 204 (2007), the court found that plaintiff did not have a sufficient relationship with Rosewood because the two parties “simply had no dealings with each other.”  The court stated that Rosewood’s “mere knowledge that another entity created the documents is insufficient to support a claim for unjust enrichment under the facts of this case,” and that the court’s mention of “awareness” in Mandarin was meant to underscore the complete lack of a connection between the parties in that case.

 

In addition, the court specifically noted that:  (i) the complaint did not assert that Rosewood and plaintiff had any contact regarding the purchase transaction, (ii) the complaint did not state that Rosewood was aware that plaintiff and CenterRock had agreed to keep the due diligence reports confidential, (iii) the complaint did not allege that Rosewood knew that CenterRock had failed to pay plaintiff before the reports were conveyed to Rosewood, and (iv) contrary to plaintiff’s assertions, there was no “claim that Rosewood had anything other than arms-length business interactions with CenterRock or the Rieders.”  Furthermore, the court found plaintiff’s argument that Rosewood profited without doing any work was without merit because Rosewood in fact paid the Rieders $150,000 for the due diligence reports and plaintiff did not assert that Rosewood had anything to do with the Rieders’ alleged wrongdoing.

 

The Court of Appeals provided valuable insight:

 

The rule urged by [plaintiff] would require parties to probe the underlying relationships between the businesses with whom they contract and other entities tangentially involved but with whom they have no direct connection. This would impose a burdensome obligation in commercial transactions.

 

Despite the fact that the Court affirmed the dismissal of the plaintiff’s unjust enrichment claim against Rosewood, the Court observed that plaintiff was not without recourse in that it can still pursue its pending claims against CenterRock and the Rieders.  The Georgia Malone decision confirms that, to state a viable claim for unjust enrichment,  a claimant must allege a sufficient nexus between the parties in order to survive a motion to dismiss, requiring counsel to probe all aspects of the client’s transaction and analyze whether a sufficient nexus exists between the client and the target defendant.

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