Somerset Properties SPE, LLC

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NORTH CAROLINA
WESTERN DIVISION
NO: 5:12-CV-00362-BR
MGHC GROUP, LLC, 	)
)
v. 	) 	ORDER
)
SOMERSET PROPERTIES SPE, LLC 	)
Before the court is an appeal by MGHC Group, LLC (“MGHC”) from the 12 April 2012
order of United States Bankruptcy Judge Stephani Humrickhouse. In that order, the bankruptcy
court allowed the objection by the debtor, Somerset Properties SPE, LLC (“Somerset”), to
MGHC’s proof of claim. In sum, the court concluded that MGHC’s claims against Somerset fail
under New Jersey law. For the reasons set forth below, the decision is affirmed.
I. BACKGROUND1
In 2005, MGHC and Mill Ridge Farm IV, LLC (“Mill Ridge Farm”) entered into an
agreement pursuant to which Mill Ridge Farm agreed to construct a commercial building on
property in New Jersey (the “Property”) and sell it to MGHC. The agreement provided for a
purchase price of $4,500,000, with MGHC to advance to Mill Ridge Farm up to $3,200,000
against the purchase price pursuant to a promissory note secured by a mortgage on the Property.
MGHC ultimately advanced more than $3,500,000 during construction, but the project was not
fully completed.
In November 2007, MGHC initiated a foreclosure action in New Jersey, and in August
2008, the New Jersey state court found that Mill Ridge Farm was in default and directed that a
non-contested foreclosure proceed. MGHC purchased the Property at a foreclosure sale.
1The facts are taken primarily from the bankruptcy court’s 12 April 2012 order.
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Subsequently, MGHC filed a separate action in New Jersey state court against Somerset
and multiple other defendants, including Mill Ridge Farm. In its complaint, MGHC alleges that
the defendants conspired to convert its property and to defraud it. Specifically, MGHC contends
that money advanced to Mill Ridge Farm was diverted from the construction and development of
the Property to fund the purchase of Somerset’s property in North Carolina. This diversion of
funds was purportedly accomplished by way of fraudulent transfers by Mill Ridge Farm, through
its sole member, Kevin Wilk, and by Mill Ridge Group, Inc. (“Mill Ridge Group”) to MW
Holdings, LLC (of which Wilk is the managing member); which has an ownership interest in
Falls of Neuse Investments, LLC; which has an ownership interest in Somerset Associates, LLC;
which is the sole owner of Somerset. MGHC alleges the following causes of action against
Somerset: conversion, unjust enrichment, constructive fraud, actual fraud, and civil conspiracy.
On 8 November 2010, Somerset filed a voluntary petition for relief under Chapter 11 of
the Bankruptcy Code in this district. MGHC sought relief from the automatic stay to continue
the New Jersey litigation against Somerset. The bankruptcy court denied that request and
subsequently allowed MGHC to file its proof of claim, which, as amended, is for $481,000.
After Somerset objected to MGHC’s proof of claim and after an evidentiary hearing thereon, the
bankruptcy court allowed Somerset’s objection. MGHC appeals from this order.
II. DISCUSSION
“Under 28 U.S.C. § 158(a), United States District Courts have jurisdiction to hear
appeals of final judgments, orders, and decrees of Bankruptcy Courts. On appeal from the
Bankruptcy Court, the district court acts as an appellate court and reviews the Bankruptcy
Court’s findings of fact for clear error, while it reviews the conclusions of law de novo.”
2
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Singleton v. Countrywide Home Loan, Inc. (In re Singleton), 358 B.R. 253, 256 (D.S.C. 2006).
Pursuant to Federal Rule of Bankruptcy 8013, the district court “may affirm, modify, or reverse a
bankruptcy judge’s judgment, order, or decree or remand with instructions for further
proceedings.”
MGHC contends that the bankruptcy court erred in holding that no trust relationship
existed between MGHC and Mill Ridge Farm, and, independent of the existence of any trust
relationship, the court erred in rejecting MGHC’s claims of constructive fraud and unjust
enrichment. (See Br., DE # 17, at 6.2) The court addresses these contentions in turn.
A. Relationship between MGHC and Mill Ridge Farm
Central to the majority of the bankruptcy court’s analysis is its conclusion that a debtor-
creditor relationship, rather than a trust relationship, existed between MGHC and Mill Ridge
Farm. The nature of the relationship between these entities is critical to understanding the legal
rights and duties of each respective party vis-a-vis the funds advanced to Mill Ridge Farm by
MGHC. MGHC contends that the bankruptcy court’s analysis under New Jersey law3 is
incorrect and that a trust was established (1) by operation of statutory law, (2) by operation of
contract, and (3) based on the attendant circumstances.
1. Statute
Relying on N.J. Stat. Ann. §§ 2A:44A-1 et seq. (2011) and 2A:102-10 4 (repealed 1979),
2Docket entry page citations are to the page numbers generated by CM/ECF.
3As the bankruptcy court recognized, the parties agree that New Jersey law applies. (DE # 1-1, at 5.)
4MGHC actually cites to N.J. St. Ann. § 2A-102:11, (see Br., DE # 17, at 12-13), which was repealed at the
same time as § 2A-102:10 and applied to money received by a subcontractor. The statutory language MGHC quotes
was in § 2A-102:10.
3
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MGHC argues that, as a matter of law, Mill Ridge Farm was obligated to hold the money that
MGHC advanced to it in trust. Former § 2A:102-10 provided:
“All moneys received by a contractor from the owner or mortgagee
of real estate or any leasehold or other interest therein, for the
purpose of having a building erected, constructed, completed,
altered, repaired or added to, are trust funds in the hands of the
contractor to be applied to the amount of all claims due or to
become due and owing from the contractor to all persons
furnishing labor or materials to him for the erection, construction
or completion of the building or any alteration, repair or addition
thereto, and any other reasonable and necessary charge in
connection therewith. Any contractor or any officer, director or
agent of the contractor, who pays or consents to the appropriation
of such funds for any other purpose prior to the payment of all
claims and charges for the payment of which the funds constitute a
trust fund, is guilty of a misdemeanor.”
Plevy v. Schaedel, 130 A.2d 910, 911-12 (N.J. Super. Ct. Law Div. 1957) (quoting N.J. St. Ann.
§ 2A:102-10). This criminal statute was replaced by another criminal statute, N.J. St. Ann. §
2C:20-9. In re Cent. Piping Inc., 4 B.R. 298, 303 n.5 (Bankr. D.N.J. 1980). The current statute
“can be described as a shotgun approach to the situation where a person obtains or retains
property upon agreement or subject to a known legal obligation to make a specified payment or
other disposition thereof.” Id. “This section is not limited to contractors or subcontractors who
obtain money and states that the one who violates the section is ‘guilty of theft.’” Id.
Importantly, it does not “create a trust fund for civil purposes.” Id. The fact that the original
“trust fund” language was not carried through to the repealed statute’s successor establishes that
MGHC’s reliance on that repealed statute is misplaced.
MGHC fares no better under New Jersey’s current Construction Lien Law (“CLL”), N.J.
St. Ann. § 2A:44A-1 et seq. The relevant provision of the CLL provides that “[a]ny contractor,
subcontractor, or supplier who provides work, services, material, or equipment pursuant to a
4
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contract, shall be entitled to a lien for the value of the work or services performed, or materials
or equipment furnished in accordance with the contract and based upon the contract price[.]”
N.J. Stat. Ann. § 2A:44A-3. It “offers statutory protection to contractors, subcontractors or
suppliers who provide ‘work, services, material or equipment,’ pursuant to a written contract.”
Schadrack v. K.P. Burke Builder, LLC, 970 A.2d 368, 373 (N.J. Super. Ct. App. Div. 2009)
(citation omitted). Further, “[t]he statute is designed ‘to guarantee effective security to those
who furnish labor or materials used to enhance the value of the property of others.’” Id.
(citation omitted).
By its plain language, § 2A:44A-3 is inapplicable here because MGHC is not a
“contractor,” “subcontractor,” or “supplier” as used in the statute. See N.J. St. Ann. § 2A:44A-2
(defining those terms). Likewise, MGHC did not perform any work or services or furnish any
materials or equipment as the statute contemplates. Rather, MGHC was the purchaser of the
Property, who advanced funds to the seller, Mill Ridge Farm, to make improvements to the
Property. Most importantly, the statute contains no explicit language regarding the creation of a
trust.
MGHC relies on language from two cases to support its contention “that construction
funds are always held ‘in trust’ by [t]he developer or contractor as a matter of law.” (Br., DE #
17, at 18 (citation omitted) (emphasis in original).) In Gallo v. Sphere Constr. Corp., 681 A.2d
1237, 1238 (N.J. Super. Ct. Ch. Div. 1996), the court addressed the issue of “whether a general
contractor may file a lien against property under the [CLL] where the property owner terminated
negotiations prior to the execution of a written contract for construction.” The court looked to
legislative history to determine whether, despite the clear statutory language, contrary legislative
5
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intent exists to permit the filing of a valid lien claim in the absence of a written contract. Id. at
1239. The court recognized that the sponsoring senator’s statement does not address the issue,
but rather, it “details the anticipated results of the [CLL] as envisioned by its sponsor.” Id. The
court, in the concomitant footnote, states in part, “The bill requires that funds received by owners
in connection with the improvement of real property, or by contractors or subcontractors in
connection with a contract for improvement of real property, shall constitute assets of a trust.”
Id. at 1240 n.3. It is this language on which MGHC relies.
It is also relies on similar language from Craft v. Stevenson Lumber Yard, Inc., 843 A.2d
1076 (N.J. 2004). Pertinent to the instant case, in Craft, the New Jersey Supreme Court
considered “whether an innocent property owner is liable to a supplier when the owner has paid
his general contractor for supplies, which payments were transferred to the supplier without
being earmarked, and were not recognized by the supplier as satisfying that property owner's
account balance.” 843 A.2d at 1079-80. In reversing summary judgment entered in favor of the
supplier, the court examined the parties’ relationship in the construction industry and ultimately
concluded that “a supplier has a duty to determine which of a contractor's projects is the source
of its payment and to allocate the payment accordingly.” Id. at 1080.
[I]n the construction industry
business is customarily done on credit– the promise
the industry lives by. The prime contractor expects
to pay his subcontractor from installment payments
received from the owner and the materialman
depends on the subcontractor to make payment out
of the money the latter has received. Each party in
the chain fully realizes what business practice
requires of him and business stability depends on
conformity even when the going becomes rough.
The owner likewise has a right to expect that his payments
to the contractor will funnel down to those whose work or
6
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materials enhanced the value of his property. That is likely why
the Sponsor's Statement to the bill that became the CLL
characterized funds received by a contractor in connection with a
contract for an improvement of real property as assets of a “trust”
that are intended to
[i]nsure[ ] that construction funding actually ends
up going to suppliers, subcontractors and
contractors who work on the improvement;
provides for severe penalties and personal liability
upon anyone diverting these assets from their
proper construction purposes; eliminates the
age-old problem of “pyramiding” in which
construction monies from one project are used to
finance other jobs; reduces the possibility of fraud
by requiring separate record-keeping for each
construction project; and facilitates honesty and fair
dealing by allowing frequent examination and
copying of books and records dedicated to each
construction project.
[Sponsor's Statement to L. 1993, c. 318 (emphasis added).][5]
Just as [the general contractor] owed a duty to those below him in
the construction chain to pay them what [the property owner] had
remitted for their services, it likewise owed a duty to [the property
owner] to apply his payments to his bill. That duty was violated
when [the contractor] neglected to earmark [the owner’s] payments
for application by [the supplier]. However, that did not empower
[the supplier] to apply [the contractor’s] payments to advance its
own financial interests. . . . [I]t knew that those payments had to
be applied to reduce the property owners' particular
indebtednesses.
Id. at 1087 (most citations omitted) (some alterations in original).
The circumstances in both Gallo and Craft are different from those here. Gallo had
nothing to do with construction funds not being properly applied to a particular project.
Although Craft did, the court’s reasoning there rested not on the recognition of a trust
relationship, but on the knowledge of the recipient of construction funds (a supplier)– as one
5At the time of the sponsor’s statement, the bill included specific language pertaining to the creation of a
trust and the Act was to be entitled “Construction Lien and Trust Law.” S.B. 1394, 205th Leg. (N.J. 1992); S.B.
811, 205th Leg. (N.J. 1992). However, that language was not included in the CLL. See N.J. Pub. L. 1993, c. 318.
7
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further down in the “construction chain”– that those funds had to be applied to a certain project
to reduce the owner’s indebtedness. Without a more explicit holding from the New Jersey
appellate courts or express statutory authority, the court concludes a trust has not been created by
statute based on the transaction between MGHC and Mill Ridge Farm. Cf. Reliance Ins. Co. v.
The Lott Group, Inc., 851 A.2d 766, 774 (N.J. Super. Ct. App. Div. 2004) (holding that the trust
imposed by New Jersey’s Construction Trust Fund Act 6 extends throughout the contractual chain
to any recipient of government construction funds who has knowledge of the public source of
those funds).
2. Contract
Alternatively, MGHC contends that “Mill Ridge [Farm] was nevertheless contractually
obligated to hold [the construction loan funds] in trust to be used for the construction and
development of the [Property].” (Br., DE # 17, at 19.)
In New Jersey, an express trust is created by agreement of the
parties, oral or written. New Jersey law does not require the
parties to expressly use the word trust in an agreement, as there is
no magical phrase that creates a trust. New Jersey does, however,
rely to some extent on the Restatement (Third) of Trusts
(“Restatement”) for guidance.
Under the Restatement, a trust is a fiduciary relationship
over property, arising from a “manifestation of intention to create
that relationship” and held for the benefit of “one or more persons,
at least one of whom is not the sole trustee.” The Restatement also
6The Act provides:
All money paid by the state of New Jersey or by any agency, commission or
department thereof, or by any county, municipality or school district in the state,
to any person pursuant to the provisions of any contract for any public
improvement made between any such person and the state or any agency,
commission or department thereof, or any county, municipality or school district
in the state, shall constitute a trust fund in the hands of such person as such
contractor, until all claims for labor, materials and other charges incurred in
connection with the performance of such contract shall have been fully paid.
N.J. St. Ann. § 2A:44-148 (1932).
8
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provides that an enforceable inter vivos trust may be created by
declaration, transfer to another as trustee, or by contract. Thus,
New Jersey law finds the creation of a trust “when one party pays
money to another primarily [dependent] upon their intentions.”
[Flint Ink Corp. v. Calascibetta, No. 06–2517, 2007 WL 2687415,
at *6 (D.N.J. Sept. 10, 2007)] (citing State v. U.S. Steel Co., 12
N.J. 51, 58–59, 95 A.2d 740 (1953)); see Dierksen v. Albert, 106
N.J. Super. 220, 224, 254 A.2d 809 (N.J. App. Div. 1969) (“It is
true that no particular form of words is necessary to create a trust
so long as the intent to create the relationship [which] the law
denominates a trust is found to exists, in all the circumstances, and
the other legal requisites therefor are satisfied.”).
In re Ameripay, LLC, No. 09-27794, 2012 WL 246397, at *9 (Bankr. D.N.J. Jan. 25, 2012)
(some citations omitted) (alterations in original).
MGHC relies on several provisions of the loan documents to support its position that Mill
Ridge Farm had a contractual obligation to hold funds in trust. First, MGHC points to the
provision in the purchase and sale agreement setting forth how the purchase price shall be paid.
(Br., DE # 17, at 19.) In pertinent part, the agreement provides that MGHC’s initial payment
shall be used to pay off Mill Ridge Farm’s existing mortgage on the Property, with any funds
remaining to be paid to Mill Ridge Farm “for construction.” (DE # 17-1, at 26.) MGHC would
also make additional monthly payments to Mill Ridge Farm
provided Seller’s [i.e., Mill Ridge Farm’s] architect has certified in
writing to Buyer [i.e., MGHC] that the schedule of completion has
been met and all government inspections, as applicable at each
stage, have been passed or shall be provided for prior to the next
monthly payment as long as the architect certifies that the work for
which payment is sought is materially complete and any
outstanding inspections are outside the reasonable control of
Seller.
(Id. at 26-27.)
In addition, MGHC relies on language in Mill Ridge Farm’s mortgage setting forth its
9
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purpose of providing security for MGHC’s financing construction of the office building. (Br.,
DE # 17, at 19 (relying on DE # 17-1, at 68).) Finally, MGHC draws the court’s attention to the
promissory note Mill Ridge Farm executed. MGHC emphasizes that, “unlike a typical note,” the
note “contemplates construction-related delays” which might extend the note’s term, as
evidenced by reference to delays caused by “force majeure” and to additional time needed for
completion as provided in “change orders.” (Br., DE # 17, at 20 (relying on DE # 17-1, at 56).)
According to MGHC, “[t]aken together, the Loan Documents show that the parties meant
for the construction funds to be used to finance the construction of the [Property][,and] [a]s
result Mill Ridge [Farm] was . . . contractually obligated to hold those funds in trust for that
purpose.” (Id.) While the obvious intent of the parties was to fund the construction project,
these fairly typical loan documents do not thereby transform the parties’ relationship to that of
trustee and beneficiary. Stated another way, that the parties contemplated that the funds MGHC
paid were to be used for construction does not necessarily mean that they therefore intended to
impose a trust on those funds once in Mill Ridge Farm’s hands. The loan documents did not
require Mill Ridge Farm to hold the funds received from MGHC in trust.
3. Attendant Circumstances
Finally, MGHC argues that a trust was established by virtue of the circumstances
surrounding the loan documents and the development of the Property. (Id. at 20.) The thrust of
the bankruptcy court’s decision rests on its analysis of this issue and led the court to conclude
that MGHC and Mill Ridge Farm were in a debtor-creditor relationship.
“Absent a document definitively establishing a trust relationship, [the courts] look to the
language of the parties, their conduct, and other circumstances surrounding the transaction
10
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probative of their intent.” In re Columbia Gas Sys., 997 F.2d 1039, 1060 (3d Cir. 1993); see also
U.S. Steel, 95 A.2d at 744 (“The true test of the relationship arises from the nature of the
transaction itself and the intent of the parties involved.”); Kronisch v. The Howard Sav. Inst.,
392 A.2d 178, 180 (N.J. Super. Ct. App. Div. 1978) (“Whether a trust or a debt is created when
one party pays money to another depends primarily upon their intent[.]” (citations omitted)).
Specifically “[i]n determining whether the parties intended to create a trust or merely a debt,”
important considerations include:
“(1) the presence or absence of an agreement to pay interest on the money
paid; (2) the amount of money paid; (3) the time which is to elapse before the
payee is to be called upon to perform his agreement; (4) the relative financial
situation of the parties; (5) the relations between the parties; (6) their
respective callings; [and,] (7) the usage or custom in such or similar
transactions.”
Kronisch, 392 A.2d at 180 (quoting Restatement (Second) of Trusts § 12 cmt. g (1959)).
“Probably the most important determinative of whether a debtor-creditor, as opposed to
an informal trust, relationship is created lies in the provisions for the payment or nonpayment of
interest.” State v. Atlantic City Elec. Co., 128 A.2d 861, 865 (N.J. 1957). While certainly not
dispositive, “[w]hen a fixed rate of interest is paid, . . . there is a strong inference that the payee
is entitled to use the money to suit his own convenience.” Id. (citations omitted). Again while
not dispositive, the co-mingling of funds received from the payor with the payee’s general funds
is also indicative of a debtor-creditor relationship. See Columbia Gas Sys., 997 F.2d at 1060;
Kronisch, 392 A.2d at 185; Atlantic City Elec., 128 A.2d at 866.
The court agrees with the bankruptcy court’s analysis of this issue. In short, the
documents executed by and between MGHC and Mill Ridge Farm established a mortgagor-
mortgagee relationship, with the purpose of the mortgage to fund construction; interest accrued
11
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at a fixed rate on the amounts MGHC advanced to Mill Ridge Farm, with such interest to be
credited against the purchase price at closing; and, nothing in the loan documents prevented Mill
Ridge Farms from co-mingling funds it received from MGHC with any of its other funds. These
factors collectively indicate MGHC’s and Mill Ridge Farm’s intent to create not a trust, but a
debtor-creditor relationship. The parties’ actions were consistent with such a relationship.
That no trust relationship was created as a matter of statutory law, by contract, or through
the attendant circumstances means MGHC cannot trace the funds it advanced to Mill Ridge
Farm “down the construction chain” to Somerset. Such a conclusion does not mean, however,
that MGHC has no recourse against Mill Ridge Farm (or others). It means MGHC is limited to
pursuing other remedies, such as breach of contract and foreclosure. With this conclusion, the
court now examines whether any of MGHC’s claims against Somerset can be maintained.
B. Conversion, Civil Conspiracy, and Actual Fraud
As for the bankruptcy court’s rejection of MGHC’s claims for conversion and civil
conspiracy against Somerset, MGHC asserts no argument separate and apart from the court’s
purportedly erroneous analysis regarding the existence of a trust. (See Br., DE # 17, at 31.)
Because this court agrees with the bankruptcy court’s conclusion that there was no trust, the
court will not disturb the bankruptcy court’s ruling that the claims for conversion and civil
conspiracy fail. In rejecting MGHC’s claim for actual fraud, the bankruptcy court concluded
that “the facts belie the allegation that the parties made transfers ‘with actual intent to hinder,
delay, or defraud any creditor.’” (DE # 1-1, at 13 (quoting N.J. St. Ann. § 25:2-25(a).) MGHC
does not argue that the bankruptcy court’s conclusion on the fraud claim should be reversed.
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C. Constructive Fraud
MGHC’s claim for constructive fraud is based on the alleged violation of New Jersey’s
Fraudulent Transfer Act (“FTA”), N.J. St. Ann. § 25:2-20 et seq. Specifically, MGHC alleges
that Mill Ridge Farm and another entity of which Kevin Wilk is the principal, Mill Ridge Group,
made fraudulent transfers to Somerset and others. (Compl., DE # 17-1, at 5, 19-20.) The
relevant portion of the FTA deems a transfer fraudulent if the debtor made the transfer “[w]ithout
receiving a reasonably equivalent value in exchange for the transfer or obligation, and the
debtor[] [w]as engaged or was about to engage in a business or a transaction for which the
remaining assets of the debtor were unreasonably small in relation to the business or
transaction.” N.J. St. Ann. § 25:2-25(b)(1) (1989). 7
Underlying the Act is the notion that a debtor cannot deliberately
cheat a creditor by removing his property from “the jaws of
execution.” Fraudulent conveyance claims thus allow the creditor
to undo the wrongful transaction so as to bring the property within
the ambit of collection.
Gilchinsky v. National Westminster Bank N.J., 732 A.2d 482, 488 (N.J. 1999) (citations
omitted)).
The bankruptcy court found that MGHC had failed to establish a FTA claim because
“[t]he evidence . . . establishes the reasonable equivalency of the value of the transfers among
these parties in connection with the development of the New Jersey Property . . . .” (DE # 1-1, at
12.) The court explained:
From March 2006 to March 2007, Mill Ridge Farm transferred by
check $1,288,000 to Wilk and $1,636,100 to Mill Ridge Group.
7MGHC cites to N.J. Stat. Ann. § 25:2-26. (Br., DE # 17, at 31.) However, the language it quotes is
actually within § 25:2-25.
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(MGHC made payments to both Mill Ridge Farm and Mill Ridge
Group for the development of the New Jersey Property.) In the
years 2006 and 2007, Wilk transferred by check $52,000 to Mill
Ridge Farm and $1,243,000 to Mill Ridge Group. These
transactions do not indicate that MGHC’s advances were siphoned;
rather, they show that Mill Ridge Group, capitalized through Wilk,
managed the construction project for which Mill Ridge Farm had
contracted with MGHC. Mill Ridge Farm improved the New
Jersey Property as it agreed to do, failing to complete final
improvements only when its funding proved insufficient. MGHC
has failed to prove a lack of reasonable equivalency.
(Id. at 12-13 n.4.)
MGHC takes issue with the court’s findings that MGHC made payments to Mill Ridge
Group and that Wilk capitalized Mill Ridge Group, which managed the construction. (Br., DE #
17, at 32 & n.6; Reply Br., DE # 21, at 12 n.9.) Even if the bankruptcy court erroneously found
that MGHC had made its payments to both Mill Ridge Farm and Mill Ridge Group, rather than
solely to Mill Ridge Farm, given the undisputed transfers between the Mill Ridge entities and
Wilk, a logical inference can be drawn that construction was capitalized by Wilk through Mill
Ridge Group. Mill Ridge Farm made significant improvements to the Property. It substantially
completed the commercial building (which is now occupied with tenants) but did not finish the
landscaping and the parking lot. (Haskell Tr., DE # 413,8 at 14.) MGHC did have to spend
approximately $200,000 to $300,000 to finish some parts of the building, such as the heating and
sewer systems, and it anticipates having to spend $70,000 to $100,000 to finish landscaping. (Id.
at 15-17.) However, it is apparent that the bulk of the multi-million dollar project was completed
when Mill Ridge Farm defaulted. That project must have been capitalized somehow, and it is
reasonable to conclude that it was done through Wilk and Mill Ridge Group. Accordingly, the
8Testimony from the bankruptcy court’s evidentiary hearing was not filed as a part of the record in this
court. The referenced entry is to the bankruptcy court docket.
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court concludes that the bankruptcy court’s findings that Wilk capitalized the project through
Mill Ridge Group and, in turn, that the transfers were of reasonably equivalent value are not
clearly erroneous.
E. Unjust Enrichment
The bankruptcy court concluded that MGHC’s claim for unjust enrichment against
Somerset cannot stand because there is no evidence of a “direct relationship” between MGHC
and Somerset pursuant to which MGHC expected remuneration nor “clear proof that [Somerset]
acted wrongfully.” (DE # 1-1, at 11.) MGHC contends that the bankruptcy court misapplied the
law and argues that it can maintain an unjust enrichment claim against Somerset even in the
absence of an expectation of remuneration from Somerset.
In simple terms, “[t]o establish unjust enrichment, a plaintiff must show both that
defendant received a benefit and that retention of that benefit without payment would be unjust.”
VRG Corp. v. GKN Realty Corp., 641 A.2d 519, 526 (N.J. 1994) (citations omitted). A number
of cases applying New Jersey law do recite the requirement, as the bankruptcy court did here,
that to recover under a theory of unjust enrichment, the plaintiff must show “some direct
relationship” between the parties such that the plaintiff expected remuneration from the
defendant at the time of conferring the benefit. See, e.g., Stewart v. Beam Global Spirits &
Wine, Inc., No. 11-5149, 	F. Supp. 2d 	, 2012 WL 2523039, at * 5-7 (D.N.J. June 29, 2012);
In re Rezulin Prods. Liab. Litig., 390 F. Supp. 2d 319, 343-44 (S.D.N.Y. 2005); Callano v.
Oakwood Park Homes Corp., 219 A.2d 332, 334-35 (N.J. Super. Ct. App. Div. 1996). As one of
these courts has recently recognized,
that “some direct relationship” should exist between the parties to
an unjust enrichment claim simply reflects the need to curtail the
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reach of this equitable remedy— a so called “legal fiction”— to
prevent a finding of liability in cases where the defendant had
absolutely no course of dealings with, and no other demonstrated
connection to, the plaintiff. The notion that “some direct
relationship” exist between the parities is simply meant to preclude
a plaintiff from seeking recovery from a defendant whose
involvement is too far removed or too attenuated from the facts
and circumstances giving rise to the plaintiff's claims.
Stewart, 2012 WL 2523039, at *7.
Arguably an unjust enrichment claim does not rise or fall on the existence of “some direct
relationship.” See id. However, in the absence of such a relationship, at a minimum the plaintiff
must show some wrongful conduct on the part of the defendant such that it would be unjust to
allow the defendant to retain the benefit received. See id. at *8 (allowing consumers’ unjust
enrichment claim to proceed against manufacturer, even though consumers purchased product at
issue not directly from manufacturer, because consumers alleged that manufacturer engaged in
fraud and made misrepresentations); Callano, 219 A.2d at 335 (finding that plaintiffs are not
entitled to recover under theory of unjust enrichment where they had entered into contract with a
third-party, had no dealings with defendant, and expected remuneration from the third party at
the time the benefit was conferred; and distinguishing another case which allowed recovery for
unjust enrichment “because of fraud perpetrated by defendants”). Here, while MGHC may have
alleged wrongful conduct on the part of Somerset, the bankruptcy court, after hearing evidence
on the matter, concluded that MGHC, who has the burden, “offered no clear proof” of such
conduct. (DE # 1-1, at 11 (emphasis added).) Thus, it properly found that MGHC could not
pursue the unjust enrichment claim.
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III. CONCLUSION
For the foregoing reasons, the 12 April 2012 Order of the bankruptcy court is
AFFIRMED. The Clerk is DIRECTED to close this case.
This 18 December 2012.
__________________________________
W. Earl Britt
Senior U.S. District Judge
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