Unjust Enrichment Claims Arising From Unenforceable Contracts

, New York Law Journal

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George Bundy Smith

Editor's Note: This column was originally published in The New York Law Journal on Oct. 18.

Claims for unjust enrichment generally will be dismissed in New York if a valid and enforceable contract governs the subject matter of the claim.1 A more difficult question arises, however, when the contract underlying a transaction is found to be unenforceable. In the past, New York state and federal courts have allowed unjust enrichment claims to proceed where the underlying contract that otherwise would cover the subject matter of the claim is found to be unenforceable.2 Recent decisions by the First Department and Commercial Division appear to have deviated from this decade-old approach.3

This column addresses those recent Commercial Division decisions that have followed the First Department's shift toward dismissing unjust enrichment claims even where a contract governing the transaction is unenforceable. Also addressed below are recent Commercial Division cases discussing the permissibility of alternative pleading of unjust enrichment and breach of contract claims arising from the same transaction.4

New York Precedent

Considerable precedent can be found in the New York courts refusing to dismiss unjust enrichment claims if the enforceability or terms of the underlying contract are in dispute. For example, in the First Department case Waldman v. Englishtown Sportswear, plaintiffs' claim for unjust enrichment survived summary judgment as it related to an oral contract as to which factual issues were found to exist.5 The alleged contract at issue was an oral employment agreement between a clothing manufacturer and its sales representative. The validity of that oral contract, which had been modified several times, was not in dispute, but factual issues existed regarding the compensation rate during a final portion of the sales representative's employment.

In affirming the denial of the motion for summary judgment dismissing plaintiffs' unjust enrichment claim, the Waldman court reasoned that "where an express contract has been rescinded, is unenforceable or abrogated, a recovery may be had on an implied promise to pay for benefits conferred thereunder."6 This reasoning adheres to the theory that an action for unjust enrichment is "based on equitable principles that a person shall not be allowed to enrich himself unjustly at the expense of another," and where "the express contract has been rescinded, is unenforceable or abrogated, a recovery may be had on an implied promise."7

New York courts have subsequently cited to Waldman and other precedent from the 1980s for the proposition that recovery under unjust enrichment is not precluded by a finding that the contract governing the transaction is unenforceable.8 For example, in 2002, a New York federal court in Clark v. Max Advisors denied a defendant's motion for summary judgment seeking dismissal of an unjust enrichment claim, finding that "a plaintiff is not precluded from asserting a claim in…unjust enrichment…if it is alleged that the underlying contract is invalidated by fraud or otherwise enforceable."9 Meanwhile, New York's Court of Appeals generally has not addressed this issue, though it has implied the permissibility of unjust enrichment claims where an underlying contract is unenforceable.10

First Department Shift

In 2011, the First Department in Meghan Beard v. Fadina affirmed the dismissal of an unjust enrichment claim as an attempt to recover in quasi-contract after the failure of the claim for breach of contract on which the unjust enrichment claim was based.11 The alleged contract at issue, an oral management agreement between the plaintiff, a model management agency, and the defendant, a freelance model, was found to be unenforceable because its non-compete provision was implied when New York law requires a non-compete agreement to be express, and otherwise was found to be unreasonable. The trial court denied plaintiff's motion for injunctive relief seeking to enforce this non-complete clause, and dismissed plaintiffs' claim for unjust enrichment.12 The First Department affirmed, finding that plaintiffs' unjust enrichment claims were properly dismissed to the extent that they related to the breach of the unenforceable management agreement.13

In 2012, the First Department in Ashwood Capital v. OTG Management made clear that unjust enrichment claims are barred where the alleged contract on which they rest is unenforceable due to non-compliance with the statute of frauds.14 The Ashwood court did, however, analyze whether the unjust enrichment claim rested entirely on the unenforceable contract. The court concluded that plaintiff's unjust enrichment claim should not be dismissed to the extent that it may relate to compensation outside the scope of the alleged oral agreement.15

Recent Decisions

In several recent cases, Justice Shirley Kornreich of New York County's Commercial Division, following the First Department's recent precedent, has dismissed claims for unjust enrichment as duplicative of breach of contract claims where the underlying contract was found to be unenforceable.

For example, in Basis Pac-Rim Opportunity Fund (Master) v. TCW Asset Management, plaintiffs' breach of contract and unjust enrichment claims arose when the defendant allegedly facilitated and encouraged plaintiffs to invest in a third-party CDO (a complex investment vehicle collateralized by securities).16 The plaintiffs' breach of contract claim, based on a third-party beneficiary theory, was dismissed as inadequately pleaded, with leave to replead. Without waiting for a determination of the viability of the contract claim based on repleadings, Kornreich dismissed plaintiffs' unjust enrichment claims because such claims are "governed by written contracts."17 The court noted that, regardless of whether plaintiffs repleaded a viable breach of contract claim, the unjust enrichment claim would have been dismissed because it was duplicative of plaintiffs' fraud claim.

Where the contract governing a transaction is an oral agreement unenforceable under the statute of frauds, which requires certain contracts to be in writing to be enforceable, recent case law indicates that a plaintiff's attempts to recover for the same damages under the theory of unjust enrichment will likely be dismissed. For example, in Holzer v. Mondadori, Kornreich dismissed plaintiffs' breach of contract claims for non-compliance with the statute of frauds.18 The court went on to dismiss plaintiffs' unjust enrichment claims because, in part, "one cannot maintain a quasi-contract claim where, as here, the statute of frauds bars the enforcement of the alleged oral agreement."19

In another case, Komolov v. Segal, a sales contract had been found to be unenforceable in an earlier action as plaintiff failed to provide a written copy of it.20 Plaintiffs then brought a new action asserting, in part, a claim for unjust enrichment. The court dismissed that claim despite the parties' acknowledgement that a written copy of the sale contract actually existed. The court reasoned that "[i]f one could use a quasi-contract claim to enforce an oral real estate contract, the statute of frauds would be pointless."21

In the Komolov decision, Kornreich emphasized that not all unjust enrichment claims should be dismissed where a breach of contract claim is barred due to non-compliance with the statute of frauds. "[T]he statute of frauds is not necessarily a bar to a cause of action for unjust enrichment," but only where "the claim for damages is indistinguishable from, and merely duplicative of, the breach of contract claim."22 Further, a seemingly duplicative unjust enrichment claim may still be allowed if "plaintiff actually performed services for which it is equitably entitled to compensation (e.g., a situation of detrimental reliance) or where it seeks to recover its related out-of-pocket expenses."23 Under this rationale, New York case law still leaves room for simultaneous unjust enrichment and breach of contract claims where the claims for damages are distinguishable, though such situations may be rare.

Alternative Pleading

While the Commercial Division has recently dismissed unjust enrichment claims where the underlying contract is found to be unenforceable, its decisions are divided on the issue of whether plaintiffs may plead claims for breach of contract and unjust enrichment in the alternative.

In a recent New York County Commercial Division case, alternative pleading of breach of contract and unjust enrichment was found to be permissible where "there [was] a dispute as to the existence of the oral agreement."24 The Kings County Commercial Division court, in Maimonides Medical Center v. First United American Life Insurance, decided just months prior, had dismissed plaintiff's alternative claim for unjust enrichment because plaintiff "pleads no alternative basis for its claim that defendant has been unjustly enriched" beyond the breach of contract claim.25 The Maimonides decision implied that, regardless of whether the contract is enforceable, the unjust enrichment claim should be dismissed unless it contains basis for recovery beyond what is alleged in the breach of contract claim.

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