Allenby v. Credit Suisse, Index No. 652491/2013, 7/9/2014 (Ramos, J.)

Unjust Enrichment; Dividend Recapitalization Loans.

 By: Alexa Lofaro | Senior Staff Writer

Defendant is an international investment bank that marketed hotel resort Dividend Recapitalization Loans to third parties for Plaintiff lenders. A Dividend Recapitalization Loan allows real estate developers to take out large, non-recourse loans based on the purported value of their project. The developers can then immediately distribute a substantial portion of the loan proceeds to themselves as dividends.

Defendant served many roles in these transactions, including administrative agent, collateral agent, and sole bookkeeper. For these roles, defendant would receive fees typically equal to 2 to 3 percent of the total amount of each loan. Plaintiffs allege that defendant created a scheme to circumvent various regulations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”). The alleged scheme involved overstating value through use of improper comparables, projecting unrealistic growth, applying artificial rates, and manipulating and pressuring appraisers to provide false reports. As a result, plaintiffs claimed they relied on defendant’s falsified appraisals and invested hundreds of millions of dollars in investments that would later be revealed to be under-collateralized.

Plaintiffs commenced this action, asserting several causes of action. Defendants moved to dismiss the second through sixth causes of action.

Plaintiffs alleged defendant breached the implied covenant of good faith and fair dealing by defendants’ failure to perform obligations pursuant to the terms of the contract. The court dismissed this cause of action with prejudice, as it was identical damages and was based on the same contractual provisions as the first cause of action for breach of contract.

The court dismissed the cause of action for fraudulent omission without prejudice because plaintiffs did not plead this claim with the requisite specificity required by CPLR 3016(b).  The court dismissed the cause of action for fraudulent omission without prejudice because plaintiffs did not plead this claim with the requisite specificity required by CPLR 3016(b). Under 3016(b) the circumstances constituting the wrong must be stated in detail, and the court held this was not done, and too much had been pleaded on information and belief.

The court also dismissed the claims for aiding and abetting fraud and conspiracy without prejudice because the plaintiffs cannot allege an underlying fraud, which is necessary to support this cause of action.

Finally, the court dismissed the claim for unjust enrichment. Unjust enrichment requires (1) Defendant was enriched, (2) at the expense of Plaintiffs, and (3) it is against equity and good conscience to permit defendant to retain what is sought to be recovered. Here, the developers who paid the fees to defendants pursuant to engagement letters were not a party to this action, nor were plaintiffs a party to those engagement letters . Consequently, the court held the defendants were not enriched at the plaintiffs’ expense, , and dismissed this claim with prejudice.

 Allenby v. Credit Suisse, Index No. 652491/2013, 7/9/2014 (Ramos, J.).

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