LEGAL VIEW: Court dismisses unjust enrichment claim

Mary Jo S. Korona, The Daily Record Newswire

Unjust enrichment claims are frequently asserted in actions involving disputed contracts. This strategy evolved in response to the long-standing legal principle that a party to a contract cannot obtain recovery for unjust enrichment unless the contract is unenforceable. In cases involving rescindment of a written contract or allegation of fraud in the inducement, unjust enrichment may be a party’s only opportunity for recovery.

The potency of an unjust enrichment claim against a third (non-contracting) party has, until now, been unsettled. The recent Court of Appeals decision in Georgia Malone & Co. v. Ralph Rieder and Rosewood Realty Group, Inc. (June 28) establishes that the efficacy of such a claim depends upon the proponent’s ability to assert facts establishing a “sufficient connection” between the plaintiff and the third party.

Failure to plead such facts will result in dismissal of the claim, even in cases that present highly sophisticated commercial transactions and savvy players who wind up being handsomely enriched at the plaintiff’s expense.

Malone involved a real estate transaction that was consummated on the basis of due diligence work performed by plaintiff Georgia Malone & Company. At issue was a brokerage commission of $875,000. After the first deal fell through, Rosewood Realty Group acquired the due diligence information from the party who refused to compensate Malone, in exchange for $150,000.

Rosewood, in turn, used the due diligence information to broker a sale that yielded it a commission of $500,000. Malone, which had not received any compensation for the due diligence work, sued the entity with which it had originally contracted and it also asserted an unjust enrichment claim against Rosewood, as a third (non-contracting) party.

A divided Court of Appeals affirmed dismissal of Malone’s unjust enrichment claim against Rosewood, notwithstanding an allegation that the non-contracting party (Rosewood) “knew at all times that Malone had performed the aforementioned work, labor and services and had supplied the aforesaid information with the expectation that Malone would be compensated therefore in the event that an agreement was reached to purchase the property.” The court found that this allegation did not establish the “sufficient connection” needed to sustain an unjust enrichment claim against a third party.

What facts will satisfy the court’s prescriptive of a “sufficient connection”? The answer lies in the degree of attenuation. In a lengthy decision, the Malone court acknowledged that the proponent need not plead privity; however the claim will not survive a motion to dismiss unless there are allegations of a “relationship” based upon “dealings with each other.”

Malone establishes a difficult pleading burden for unjust enrichment claims in commercial actions. Malone directs that such claims should be dismissed if the plaintiff’s “relationship” allegations “impose a burdensome obligation in commercial transactions.” An unacceptable burden includes the requirement to “probe” underlying relationships.

The Malone court found that the third party’s alleged “awareness” of the plaintiff’s work and right to compensation was not sufficient to establish a “relationship,” even though the loss of compensation for the due diligence work “certainly appears unfair.”

Upon reading the decision, you may be tempted to conclude that asserting an unjust enrichment claim in a commercial case has become an exercise in futility. That conclusion was reached by the court’s chief judge, whose lengthy dissent declared that the majority departed from unjust enrichment precedent in favor of a rule that “appears to condone willful ignorance.” (“This court’s precedent on unjust enrichment has never required that there be a close relationship or dealings between the parties.”)

In declaring the majority’s “policy concerns to be unfounded,” the dissent urges courts and litigants to focus on the equities presented by the “realities” of the particular commercial transaction at bar.

Many legal commenters suggest that the lively debates created by the chief judge’s propensity for authoring dissenting opinions are helpful to practitioners and the lower courts. In the case of unjust enrichment claims, the Malone majority and dissenting opinions will likely encourage an increase in pre-answer motion practice that invites lower courts either to consider expert affidavits concerning the “realities” presented by the particular commercial transaction at bar, or take judicial notice of such matters.

If you represent the proponent of an unjust enrichment claim, you might postpone assertion of a third-party claim, mindful that unjust enrichment claims are subject to a six year statute of limitations, in favor of conducting discovery that produces information useful in establishing a “relationship” sound enough to support an unjust enrichment claim.

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Mary Jo S. Korona is a founding partner in the law firm of Leclair Korona Giordano Cole LLP. She concentrates her litigation practice in commercial matters in state and federal courts.

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