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Current Developments in the Commercial Divisions of the
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Posted: October 2, 2014

Unjust Enrichment Claim Survives When Defendants Allegedly Received Funds to Which Payor Had No Right

On September 11, 2014, Justice Bransten of the New York County Commercial Division issued a decision in Trade Expo Inc. v. Sterling Bancorp, 2014 NY Slip Op. 32408(U), declining to dismiss unjust enrichment claims.

In Trade Expo, the plaintiffs amended their complaint to assert “causes of action for unjust enrichment and theĀ imposition of a constructive trust” against factoring companies, alleging “that, by accepting the proceeds of theĀ sales of plaintiffs’ garments while knowing that such items were not in [the seller’s] inventory, defendants were unjustly enriched to the detriment of plaintiffs.” The court denied the defendants’ motion to dismiss the unjust enrichment claim, explaining:

The theory of unjust enrichment lies as a quasi-contract claim. It is an obligation imposed by equity to prevent injustice, in the absence of an actual agreement between the parties concerned. An unjust enrichment claim is rooted in “the equitable principle that a person shall not be allowed to enrich himself unjustly at the expense of another. To plead such a claim, the plaintiff must allege that (1) the other party was enriched, (2) at that party’s expense, and (3) that it is against equity and good conscience to permit the other party to retain what is sought to be recovered. Such a claim is undoubtedly equitable and depends upon broad considerations of equity and justice.

Where one party misappropriates property from another and uses that property to pay a debt to a third party, an action for unjust enrichment may lie against the party who ultimately received the money.

Sterling Factors argues that it was not unjustly enriched — that it is merely a secured creditor that was reimbursed for its own prior cash outlay to Superior pursuant to its written agreements to factor Superior’s accounts receivables. While defense counsel admits that Sterling Factors received borrowing base certificates from Superior which allow a factor to monitor the financial condition of its borrower, it argues that there is nothing in the Amended Complaint that asserts that the Defendants actively, or even tacitly, participated in Superior’s purported sale of Plaintiffs’ Garments.

Contrary to the arguments of defense counsel, the amended complaint alleges that Sterling Factors was aware of the fact that plaintiffs had not authorized the release of the garments by virtue of its receipt of monthly borrowing base documentation and that there were email communications between plaintiffs and defendants’ representatives alerting them to the situation. On a motion to dismiss the complaint, the court must accept these allegation as true and plaintiffs do not need to come forward with any supporting proof. Plaintiffs make the additional allegation that Sterling Factors collected the proceeds of the sales of the garments from the third-party buyer, with actual knowledge that Superior had no right to sell the goods.

Defense counsel argues that the facts of this case closely mirror Ultramar Energy v. Chase Manhattan Bank, 191 A.D.2d 86 (1st Dep’t 1993), where the court dismissed a claim for unjust enrichment by a crude oil supplier against Chase Manhattan Bank (“Chase”), the secured lender of its buyer, based on Chase’s collection of accounts receivables generated from the sale of the crude oil. In that case, the crude oil supplier had argued that its buyer did not and could not earn any right to any part of the proceeds of the sale unless and until it made full payment to the supplier. The First Department disagreed, concluding that nothing in the parties’ agreements conditioned the buyer’s right to be paid accounts receivable by its vendees on the buyer’s payment to the supplier and that the supplier has never argued that it had any right to or interest in the accounts receivable, assigned and paid to Chase, which are at issue in this proceeding.

Ultramar Energy is distinguishable from the facts alleged in the amended complaint in this very respect because, here, plaintiffs argue that they never gave up ownership rights to the collateral and allege that Sterling Factors knew that Superior was insolvent. Plaintiffs further allege that Sterling Factors knew it was receiving payments from third parties for sales of goods that Superior did not have the legal right to possess or sell.

As the First Department explained in Ultramar Energy, it is not unfair for the debtor arbitrarily to select the creditors whom he chooses to pay, although these favorites know that there will not be enough left to pay the others. This Court likewise is not suggesting that a factor has a duty or responsibility to monitor its customers’ borrowing base for the benefit of other creditors. However, if plaintiffs can prove their claim that Superior had converted approximately 35,000 of plaintiffs’ garments, which were then sold downstream to a third party and Sterling Factors accepted payment of the proceeds of the sale of the converted goods, with actual knowledge of their misappropriation by Superior, a claim for unjust enrichment may be established.

While a plaintiff need not be privity with the defendant to state a claim for unjust enrichment, there must exist a relationship or connection between the parties that is not too attenuated. This requirement is satisfied in this case since plaintiffs allege direct communications with defendants regarding the garments Superior was acquiring from plaintiffs.

(Internal quotations and citations omitted) (emphasis added).

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