Unjust Enrichment Claim Fails Because of the Lack of a Relationship Among Parties

August 29, 2012

Even without a written contract, equity and fairness can sometimes provide for an enforceable oral agreement between two parties. One such basis is called "unjust enrichment." This approach allows for a party's recovery based on fairness, where one party confers a benefit on another without a written agreement, compensation may be permitted to avoid the recipient from being unjustly enriched.. One of the requirements for this to work is that the parties must have some relationship between them. The extent of that relationship is the subject of a case before New York State's highest court, the Court of Appeals, which recently decided that even where one party clearly benefits from another, and is aware that it received those benefits from the other, the lack of a direct relationship between the two defeats the provider's recovery from the recipient.

In Georgia Malone & Co., Inc. v. Rieder, Malone & Co. provided brokerage and property information to parties considering the purchase of real estate in exchange for a set fee plus a percentage of the sales proceeds. In this case, CenterRock Realty hired Malone to investigate a particular property. CenterRock agreed to keep the information provided by Malone confidential. CenterRock opted not to buy the property, but sold Malone's property and research information to Rosewood Realty Group without informing Malone. Rosewood eventually found a buyer for the property, using and benefitting from Malone's work, and earned a fee. Malone did not receive its percentage fee from the sale.

Malone sued Rosewood and CenterRock, alleging that they were both unjustly enriched by Malone. The trial court dismissed the unjust enrichment claim, but on appeal to the Appellate Division, the State's intermediary appellate court, it was reinstated against CenterRock. The Appellate Division, in a split decision, found that the relationship between Malone and Rosewood was "too attenuated" to provide the necessary connection between the two even though Rosewood benefitted from Malone's information.

Malone appealed higher, to the Court of Appeals, arguing that because Rosewood knew it was using Malone's work-product, and because "Rosewood unfairly profited at Malone's expense by collecting a commission on the sale of the properties," Rosewood was liable to Malone. The Court of Appeals disagreed and affirmed the Appellate Court's decision, finding that although an unjust enrichment claim was grounded in "'an obligation imposed by equity to prevent injustice[] in the absence of an actual agreement between the parties'" the relationship between the parties must support "a relationship or connection between [them] that is not 'too attenuated.'" Rosewood's relationship with Malone here was "too attenuated" to allow recovery "because they simply had no dealings with each other." That Rosewood knew the materials it had purchased from CenterRock were prepared by Malone did not, standing alone, create a relationship between them. Finding differently, held the court, would add an unreasonable level of complexity to any commercial transaction, requiring each party to research what parties had earlier agreed to with others, which could create liability for parties that are only tangentially involved in the transaction.

Because this decision seemed at odds with prior decisions of the Court of Appeals involving similar facts, the court felt it necessary to discuss those prior cases which found a sufficient relationship based only on the parties knowledge of each other. Ultimately, the court differentiated this case from the earlier cases because (i) Malone did not claim that it had a relationship with Rosewood, and it did not, and (ii) because Rosewood paid CenterRock for Malone's materials so that Rosewood paid something for what it received so that it was not truly unjustly enriched.

In a strongly worded dissent, two justices argued that Rosewood's knowledge of Malone's work was sufficient to establish the requisite relationship to support liability, especially under a theory grounded on fairness. Adopting the majority's approach would force parties pursuing an unjust enrichment claim to show a much closer relationship, which should not be necessary under this theory of recovery. The dissent felt that "[t]he majority ruling would appear to simply condone willful ignorance."

While Malone's arguments in this case did not persuade the majority of the Court of Appeals, unjust enrichment and similar claims are often asserted where there is no written agreement between the parties. Often, a party is unaware that recovery can be pursued without a written agreement in place, based on an oral representation or unjust enrichment-type claims. In light of this decision, and especially in today's virtual marketplace, a thorough examination of the facts and innovative application of the law, can be necessary to achieve success.