Commercial Division Holds that Reliance and Inducement are Not Required Elements of Unjust Enrichment

When the funds invested by one victim of a Ponzi scheme are used to pay the scheme’s debts to an earlier investor, can the later investor recover those funds from the earlier investor through an unjust enrichment claim?  Yes, if there is a sufficient connection between the parties, according to Commercial Division Justice Andrea Masley’s recent decision in JHAC LLC v. Advance Entertainment LLC.[1]  In JHAC, Justice Masley allowed unjust enrichment claims by one Ponzi scheme victim against other victims to proceed by holding that reliance and inducement are not elements of unjust enrichment in New York.  All that is required to sustain the claim is a “connection” between the victims, and Justice Masley held that JHAC adequately pled such a connection.

Background

The dispute in JHAC arose from the fall-out of a $100-million Ponzi scheme.  Defendant Joseph Meli was the co-CEO and a Director of DTI Management, a leading player in the live event ticket industry.[2]  Under the auspices of Defendant Advance Entertainment LLC (“Advance”), he allegedly solicited a $2 million investment from Plaintiff JHAC LLC to purchase large blocks of tickets to concerts of the heavy metal band Metallica during the 2017-2018 season.[3]  In reality, the funds received from JHAC were wired to Defendants Reset Partners, LLC (“Reset”), Mostly Dune Holdings, LLC (“MDH”), Jason Liebman and others to cover debts within a massive Ponzi scheme involving dozens of parties.[4]  Meli pleaded guilty to federal securities fraud and was ultimately sentenced to six and a half years in prison and ordered to forfeit more than $100 million in proceeds from the scheme.[5]

To recover its losses from the scheme, JHAC sued Meli, Advance, Reset, MDH, Liebman and others for, inter alia, conversion and unjust enrichment.  Meli defaulted,[6] but the other defendants moved to dismiss the claims.  The Court dismissed the conversion claims, but allowed the unjust enrichment claims to proceed in an order following oral argument in August 2019.  JHAC sought re-argument regarding the conversion claim, and Reset, MDH, and Liebman (the “Moving Defendants”) sought re-argument on the unjust enrichment claim.[7]  Justice Masley denied re-argument to both sides and issued a decision in June 2020 reaffirming her original ruling.[8]

Unjust Enrichment

The Moving Defendants argued that New York unjust enrichment law requires a connection between plaintiffs and defendants that could give rise to reliance or inducement, citing Georgia Malone & Co. v. Rieder[9] and Mandarin Trading Ltd. v. Wildenstein.[10]  Justice Masley rejected that reading of the case law.  She concluded that although, in rejecting an unjust enrichment claim in Mandarin Trading, the Court of Appeals alluded to a lack of “a relationship between the parties that could have caused reliance or inducement,” the Court’s reference was dicta because it was simply describing the context in that case.[11]

Justice Masley also looked to Chief Judge Lippman’s dissent in Georgia Malone to explain her reading of the precedent.[12]  In that opinion, Chief Judge Lippman wrote that “[t]he language describing the connection [between the parties in Mandarin Trading] as not a ‘relationship . . . caus[ing] reliance or inducement’ was merely for illustrative purposes and was dicta alluding back to how Mandarin also failed to meet the standard for negligent misrepresentation.”[13]  He clarified that “it was not a statement of the standard for unjust enrichment actions and the majority here [in Georgia Malone] likewise correctly refrains from applying the heightened reliance/inducement standard.”[14]

Justice Masley agreed with Chief Judge Lippman’s explanation of the law.  In her view, the Court in Georgia Malone simply “determined that the complaint lacked sufficient allegations to show dealings for contact amongst the parties.”[15]  And Justice Masley noted that the Court in Mandarin Trading rejected the unjust enrichment claim because the complaint lacked allegations of any “relationship between the parties” or even “an awareness of the plaintiff’s existence by the defendant.”[16]  Neither of these cases applied a heightened standard; rather, both rejected claims because the ties between the parties were, factually speaking, “too attenuated.”[17]

Applying the fact-specific “connection” test, Justice Masley concluded that JHAC’s complaint sufficiently alleged “enough of a connection” between JHAC and the Moving Defendants to support an unjust enrichment claim.  Specifically, JHAC alleged that (1) JHAC and the Moving Defendants were victims in the same Ponzi scheme; (2) the Moving Defendants were transferred stolen funds belonging to JHAC; and (3) the Moving Defendants had contact with JHAC regarding the return of those funds.[18]  Given these contacts, the claim was allowed to proceed.

Conversion

In its attempt to revise its conversion claim, JHAC argued that it had retained a superior possessory interest in the funds even after investing them with Meli.  Justice Masley disagreed, finding that relinquishing the funds to Meli gave up JHAC’s superior possessory interest and foreclosed a conversion claim.[19]

Conclusion

The Commercial Division decision in JHAC demonstrates that the claim for unjust enrichment may provide an avenue for relief to victims of a Ponzi scheme.  If, as in JHAC, a later investor can trace its lost investment to the repayment of the scheme’s debts to another investor, the later investor may, in some circumstances, be able to recover those funds directly from the other investor.  The later investor must, however, show “connection” to the earlier one.

By A. Robert Quirk and Muhammad U. Faridi