When is disgorgement an appropriate remedy under New York law?

Plaintiff seeks to recover as damages the revenues defendants earned from the erection, maintenance and operation of the billboard. Although characterized as damages, plaintiff is actually seeking the "disgorgement of improper profits" a restitutionary remedy that is appropriate only where there has been a showing of unjust enrichment. The purpose of damages is to compensate a plaintiff for legally recognized losses, without permitting the recovery of any windfall. Restitution is the remedy for unjust enrichment, and is not a separate basis for liability. A plaintiff who establishes a prima facie case of unjust enrichment is entitled to the equitable remedy of restitution. A party seeking to recover on the theory of unjust enrichment must allege and prove that (1) defendant was enriched, (2) such enrichment was at the plaintiff's expense, and (3) in equity and good conscience the defendant should be required to return the money or property to the plaintiff. The object of restitution is to restore the status quo ante-to put the parties back into the position they were in before the unjust enrichment occurred. Restitution requires that a benefit must have passed from the plaintiff to the defendant for which the plaintiff should be compensated in equity and good conscience. An injured party who has not conferred a benefit may not obtain restitution. (22A NY Jur 2d Contracts § 515.)

“The essential inquiry in any action for unjust enrichment ... is whether it is against equity and good conscience to permit the defendant to retain what is sought to be recovered” (Paramount Film Distrib. Corp. v. State of New York, 30 N.Y.2d 415, 421, 334 N.Y.S.2d 388, 285 N.E.2d 695 [1972]). A plaintiff must show “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’ ” (Citibank, N.A. v. Walker, 12 A.D.3d 480, 481, 787 N.Y.S.2d 48 [2d Dept.2004]; Baron v. Pfizer, Inc., 42 A.D.3d 627, 629–630, 840 N.Y.S.2d 445 [3d Dept.2007]).

Mandarin's unjust enrichment claim fails for the same deficiency as its

[944 N.E.2d 1111 , 919 N.Y.S.2d 472]

other claims—the lack of allegations that would indicate a relationship between the parties, or at least an awareness by Wildenstein of Mandarin's existence. Although privity is not required for an unjust enrichment claim, a claim will not be supported if the connection between the parties is too attenuated (see Sperry v. Crompton Corp., 8 N.Y.3d 204, 215, 831 N.Y.S.2d 760, 863 N.E.2d 1012 [2007] ).

Moreover, under the facts alleged, there are no indicia of an enrichment that was unjust where the pleadings failed to indicate a relationship between the parties that could have caused reliance or inducement. Without further allegations, the [16 N.Y.3d 183] mere existence of a letter that happens to find a path to a prospective purchaser does not render this transaction one of equitable injustice requiring a remedy to balance a wrong. Without sufficient facts, conclusory allegations that fail to establish that a defendant was unjustly enriched at the expense of a plaintiff warrant dismissal (see North Salem Psychiatric Servs., P.C. v. Medco Health Solutions, Inc., 50 A.D.3d 986, 854 N.Y.S.2d 905 [2d Dept.2008]; Vassel v. Vassel, 40 A.D.2d 713, 336 N.Y.S.2d 887 [2d Dept.1972], aff'd 33 N.Y.2d 533, 347 N.Y.S.2d 434, 301 N.E.2d 422 [1973]ny sli).

Plaintiffs' motion for summary judgment for its fourth cause of action for misappropriation of a business opportunity is denied. Summary judgment will be granted when a party has shown the misappropriation of corporate assets. See Kurtzman v. Bergstol, 40 A.D.3d 588 (2d Dept 2007). As discussed supra, plaintiffs' reliance on the First Department's holding in Landes that this was a corporate opportunity belonging to plaintiffs' is misplaced. As plaintiffs' have not given any

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further evidence showing that this was a corporate opportunity, their motion for summary judgment is denied.

Plaintiffs' motion for summary judgment for its fifth cause of action for unjust enrichment and disgorgement is denied. As discussed immediately above, plaintiffs' have failed to adequately allege that this was a misappropriated asset and mistakenly rely on Landes. See Mobarak v. Mowad, 117 A.D.3d 998 (2d Dept 2014) (allowing for a claim of unjust enrichment where a member of an LLC improperly and personally obtains a benefit as a result of any benefits conferred through an improper transaction.)

That said, the court dismisses the unjust enrichment claim pleaded against the Weston Parties as duplicative. The fraud and breach of fiduciary duty claims are sufficient to ensure Wimbledon's recovery for the same conduct. To the extent Wimbledon separately seeks disgorgement of any illicit profits, such damages fall within the scope of well settled breach of fiduciary duty damages. See Excelsior 57th Corp. v Lerner, 160 AD2d 407, 408 (1st Dept 1990) ("where claims of self-dealing and divided loyalty are presented, a fiduciary may be required to disgorge any ill-gotten gain.").

Defendant further contends that the court erred in the amount of damages awarded in connection with the derivative breach of fiduciary duty cause of action, on which liability had previously been imposed, because there was no showing that the LLC was harmed by his misconduct. We reject that contention. Disgorgement of profit is an appropriate remedy for a breach of fiduciary duty even where the corporation has not been damaged directly by the misconduct (see Diamond v. Oreamuno, 24 N.Y.2d 494, 498, 301 N.Y.S.2d 78, 248 N.E.2d 910 [1969]; Excelsior 57th Corp. v. Lerner, 160 A.D.2d 407, 408-409, 553 N.Y.S.2d 763 [1st Dept. 1990]). Further, we see no reason to disturb the court's credibility determination to give more weight to plaintiffs' expert construction consultant on overpayments rather than defendant's expert (see generally Cianchetti, 145 A.D.3d at 1540-1541, 44 N.Y.S.3d 293).

We differ with IAS only insofar as it found the fifth cause of action against Lerner and the Abrams firm, for fraudulent concealment, insufficient on the asserted grounds that damages were not shown, and the allegations of fraud were too vague and conclusory. Whether the fee of the tax certiorari attorneys would have remained the same, or have been subject to reduction but for the intervention of Lerner and the Abrams firm, cannot be ascertained on this record. Here, where claims of self-dealing and divided loyalty are presented, a fiduciary may be required to disgorge any ill-gotten gain [160 A.D.2d 409] even where the plaintiff has sustained no direct economic

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loss. In Diamond v. Oreamuno, 24 N.Y.2d 494, 498, 301 N.Y.S.2d 78, 248 N.E.2d 910, the Court of Appeals stated the applicable rule as follows:

It is true that the complaint before us does not contain any allegation of damages to the corporation but this has never been considered to be an essential requirement for a cause of action founded on a breach of fiduciary duty. [citations omitted] This is because the function of such an action, unlike an ordinary tort or contract case, is not merely to compensate the plaintiff for wrongs committed by the defendant but, as this court declared many years ago (Dutton v. Willner, 52 N.Y. 312, 319, supra), "to prevent them, by removing from agents and trustees all inducement to attempt dealing for their own benefit in matters which they have undertaken for others, or to which their agency or trust relates." (Underscoring in original)

Years ago, in a comparable situation of a breach of fiduciary duty by way of trading on insider information, Chief Judge Fuld taught us that the remedy for breach of fiduciary duty is not only to compensate for the wrongs but to prevent them (see

[302 A.D.2d 114]

Diamond v Oreamuno, 24 NY2d 494, 498). The remedy, not unlike applying a constructive trust, is disgorgement for breach of the loyalty an employee owes to the employer (see Western Elec. Co. v Brenner, supra). This is not to say that other methods of calculating an employer's damages are unavailable. As an alternative to an accounting of the disloyal employee's gain, a calculation of what the employer would have made of the diverted corporate opportunity is an available measure of damages (see Harry R. Defler Corp. v Kleeman, 19 AD2d 396, 403-404, affd 19 NY2d 694). The choice of remedy belongs to the employer (see Western Elec. Co. v Brenner, supra at 295, citing Restatement [Second] of Agency § 421A, Comment on Clause [c]).

It is in this choice that the distinction becomes obscured between the measure of damages for breach of a covenant not to compete and for breach of the duty of loyalty. For the contractual damages of breach of the noncompetition obligation, an employer must prove its own loss of profits, not what the employee's profits were (see Michel Cosmetics v Tsirkas, 282 NY 195, 200; Pencom Sys. v Shapiro, 193 AD2d 561; Borne Chem. Co. v Dictrow, 85 AD2d 646, 650; Weinrauch v Kashkin, 64 AD2d 897, 898; McRoberts Protective Agency v Lansdell Protective Agency, 61 AD2d 652, 655; Santa's Workshop v Sterling, 2 AD2d 262, 267, affd 3 NY2d 757). Once a party wronged by a violation of a restrictive covenant has proven its net loss of profits, the wrongdoer may rebut by "showing with reasonable certainty the proportion of the loss of profits attributable to the wrongful act of the defendant and recoverable as damages as opposed to the proportion due to other causes" (Borne Chem. Co. v Dictrow, supra at 651). Also involved in the calculation of an employer's net profits in this context is consideration of its own generalized expenses of administration and overhead (see 342 Holding Corp. v Carlyle Constr. Corp., 31 AD2d 605, 606; American Elecs. v Neptune Meter Co., 30 AD2d 117, 119, vacated and republished 30 AD2d 529; but cf. Lenobel, Inc. v Senif, 252 App Div 533, 536; Vitex Mfg. Corp. v Caribtex Corp., 377 F2d 795, 798 [3d Cir]; Resolute Ins. Co. v Percy Jones, Inc., 198 F2d 309, 312 [10th Cir]; see also Sayer v Wilstrop, 200 App Div 364, 377 [concurring opinion]).

None of these details supported BAS's counterclaim alleging breach of the noncompete clause. However, none was required to support the counterclaim for damages for breach of the duty of loyalty. For disgorgement of Gomez's profits stemming from disloyalty, all BAS needed to show was the gross fee Gomez

[302 A.D.2d 115]

received. We conclude that BAS met the prima facie burden of showing damages by simply proving the $353,000 gross fee that Gomez was paid. The burden then shifted to Gomez to demonstrate the amount of his direct costs in generating this gross income because he is in exclusive possession of that information. BAS would then have the opportunity to question the reasonableness of any deduction (cf. Support Sys. Assoc. v Tavolacci, 135 AD2d 704, 707; Borne Chem. Co. v Dictrow, supra at 651; Pickering v El Jay Equip. Co., Inc., 108 Idaho 512, 517-518, 700 P2d 134, 139-140; but see E.W. Bruno Co. v Friedberg, 28 AD2d 91; Matter of Cohen (Four Way Features), 168 Misc 2d 91, affd 240 AD2d 225; Westwood Chem. Co., Inc. v Kulick, supra at 1038 n 3).

The measure of damages for breach of fiduciary duty depends upon whether the trustee "simply acted imprudently" or whether he "violated an integral condition of the trust" (Matter of Rothko, 43 NY2d 305, 321, 1977). If the trustee acts imprudently by selling trust property for an inadequate price, he is liable for the difference between the amount he should have received and the amount he did receive. The trustee is not liable for any subsequent rise in the value of the property(Id at 320-21). However, if the trustee engages in deliberate self-dealing, the beneficiary may recover the "lost profit," or appreciation in value of the trust property (Matter of Janes, 90 NY2d 41, 55, 1997). Similarly, if an employee breaches his duty of loyalty by converting a corporate opportunity, the remedy is disgorgement of the employee's profit (Gomez v. Bricknell, 302 AD2d 107, 115, 2^nd Dept., 2002).

As to Conneally's second claim for breach of the duty of loyalty,³ the Court finds in favor of Finneran. "It is well settled that an employee owes a duty of good faith and loyalty to an employer in the performance of the employee's duties" (Wallack Frgt. Lines, Inc. v Next Day Express, Inc., 273 AD2d 462, 463 [2d Dept 2000]). An employer bringing a claim for a breach of this duty may seek damages by way of profit disgorgement or as "a calculation of what the employer would have made of the diverted corporate opportunity is an available measure of damages" (see Gomez v Bicknell, 302 AD2d 107, 114 [2d Dept 2002]). The latter remedy is limited to situations where the employer has a "tangible expectancy" in the opportunity, which is something less than ownership, but something

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more than mere desire or hope (see Morales v Galeazzi, 72 AD3d 765, 766 [2d Dept 2010]; Alexander & Alexander of New York, Inc. v Fritzen, 147 AD2d 241, 247-48 [1st Dept 1989]).

Here, whether Conneally is seeking profit disgorgement or diversion of corporate opportunity (a fact not clear from the complaint), Conneally has failed to establish by a preponderance of the evidence that he is entitled to recover under either theory. Conneally failed to present any evidence that Finneran profited in any way from the alleged breach of his duty of loyalty. Conneally also failed to demonstrate that he possessed a tangible expectancy in acquiring the Initial Parcels or the Kwan Parcel or the Movie Theater Parcel. The Court finds that, by the time of the signing of the NDA and the Consulting Agreement and certainly by the date of the Foreclosure Sale, Conneally had nothing more than the mere desire to acquire the parcels necessary to complete the Project.