Unjust Enrichment Claim Dismissed Due to Lack of a Sufficient Relationship Between the Parties

In a Decision and Order, dated August 15, 2022, in Arel Capital Partners II LLC v. HFZ RES Portfolio Holdings LLC, Index No. 653727/2021, Justice Andrew Borrok of the New York County Commercial Division dismissed, among other claims, causes of action for unjust enrichment and constructive trust against JP Morgan Chase Bank N.A. based on repayment of a loan JPM made to parties who allegedly breached an agreement with plaintiff. The Court explained:

The core of the Complaint (NYSCEF Doc. No. 2) is that there was an approximately $26 million diversion of Surplus Proceeds in connection with a 2016 refinancing of certain residential buildings known as the Four Pack Properties by the defendants. This allegedly breached Section 5.1 of the Operating Agreement (the OA; NYSCEF Doc. No. 22) of HFZ RES Portfolio Holdings LLC (RES Portfolio), dated May 21, 2014, by and between HFZ RES Portfolio Investor LLC, HFZ Portfolio Manager LLC and the plaintiff. Section 5.1 of the OA provides that the plaintiff had priority as to Surplus Proceeds in connection with any refinancing up to its investment of $7,263,200.

The linchpin to the complaint's allegations as against JP Morgan Chase Bank N.A. (JPM) is that JPM knew or should have known that Surplus Proceeds belonged to the owners of the Four Pack Properties and more specifically the plaintiff such that Surplus Proceeds could not be used to fund/pay down an obligation on another property owned by the other defendants.

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The elements of a cause of action for unjust enrichment are (i) that a party was enriched, (ii) at another party's expense, and (iii) that it is against equity and good conscience to permit the party to retain what is sought to be recovered (Mandarin Trading Ltd. v Wildenstein, 16 NY3d 173, 182, 944 N.E.2d 1104, 919 N.Y.S.2d 465 [2011]). The elements necessary for the imposition of a constructive trust are (i) a confidential or fiduciary relationship, (ii) a promise, (iii) a transfer in reliance thereon, and (iv) unjust enrichment (Abacus Federal Savings Bank, 75 AD3d at 473-474).

As a general rule, the essential element of a cause of action for unjust enrichment is whether it is against equity and good conscience to permit the defendant to retain what is sought to be recovered (Sperry v Crompton Corp., 8 N.Y.3d 204, 215, 863 N.E.2d 1012, 831 N.Y.S.2d 760 [2007]). Privity is not required (id.). However, at a minimum, a plaintiff must allege facts that the defendant was aware of the alleged wrongfulness of its enrichment or that there was a sufficient relationship between the parties to form the basis for an unjust enrichment cause of action (Georgia Malone & Co., Inc. v Rieder, 19 NY3d 511, 518-519, 973 N.E.2d 743, 950 N.Y.S.2d 333 [2012]). JPM was a stranger to the deal between the non-JPM defendants and the plaintiff and there are simply no facts alleged to suggest that in the course of underwriting this loan that five tiers up in the capital structure, JPM would have had any reason to review the OA or would have been put on notice of this arrangement. Thus, as to the 2016 refinancing, JPM appears to be a good faith purchaser for value and no facts are alleged to suggest otherwise. JPM did not have a confidential or fiduciary relationship with the plaintiff. Indeed, it did not have any relationship at all. Thus, the constructive trust and unjust enrichment claims fail and must be dismissed without prejudice.

The attorneys at Schlam Stone & Dolan frequently litigate claims of breach of contract and unjust enrichment. Contact our attorneys at commercialdivisionblog@schlamstone.com if you or a client have questions regarding these issues.