Opinion
06 Civ. 0392 (LAK) (KNF).
March 20, 2007
REPORT AND RECOMMENDATION
I. INTRODUCTION
Plaintiffs Teachers Insurance Annuity Association of America, Minnesota Life Insurance Company and Advantus Series Fund, Inc., Mortgage and Bond Portfolios bring this action against CRIIMI MAE Services Limited Partnership ("CMSLP"), CMSLP Management Company, Inc. ("CMSLPM") and CRIIMI MAE, Inc. ("CRIIMI") alleging: (1) breach of contract; (2) breach of fiduciary duty; (3) gross negligence; and (4) unjust enrichment. The plaintiffs seek: (a) compensatory damages; (b) disgorgement of CMSLP's fees; (c) punitive damages; (d) costs and attorneys' fees; and (e) such other relief as the court deems proper. Before the Court is the defendants' motion to dismiss the complaint, pursuant to Fed.R.Civ.P. 12(b)(6), with prejudice, for failure to state a claim upon which relief can be granted. The defendants contend: (i) this action is barred by a contractual "no-action" clause; (ii) the defendants do not owe a fiduciary duty to the plaintiffs independent of the relevant contract; (iii) New York law, which governs this action, does not allow the plaintiffs, in the circumstance of this case, to assert a separate tort claim(s) for conduct that gives rise to their breach of contract claim; and (iv) New York law does not allow the plaintiffs to assert an unjust enrichment claim in a case such as this, where a contract defines the relationship between the parties. The defendants also contend the plaintiffs' request for disgorgement should be dismissed, when the liability claims are dismissed and, furthermore, the plaintiffs have failed to plead facts that would warrant a recovery of punitive damages. The motion is addressed below.
II. BACKGROUND AND FACTS
The plaintiffs allege they own over 25 percent of the outstanding class A-CS2 certificates representing a beneficial interest in a trust fund, treated, for tax purposes, as two real estate mortgage investment conduits ("REMIC" or the "trust"). The REMIC at issue consists primarily of nine fixed-rate mortgage loans, made to separate borrowers, secured by first mortgage liens on various properties. These loans were pooled and securitized into certificates with different risk and benefit ratings. A Pooling and Servicing Agreement ("PSA") governs the rights and responsibilities of the parties associated with the REMIC loans. The holders of the certificates are parties to the PSA. The plaintiffs' certificates are interest-only certificates. They entitle their holders to receive distributions derived solely from the interest payments made by the borrowers of the REMIC loans. To protect the interest-only certificate holders from the risk that borrowers might prepay their loans in whole or in part and, thus, deprive the trust and the certificate holders of the opportunity to receive revenue based on interest payments, the borrowers' ability to prepay their loans voluntarily was restricted during designated periods. Interest-only certificate holders, like the plaintiffs, would benefit greatly if the REMIC loans were not voluntarily prepaid but, instead, were repaid over a long period of time. Long term loan repayments would maximize the revenue interest-only certificate holders would realize through the loans' interest payments. The plaintiffs allege they relied upon the prepayment restrictions placed on the borrowers when they purchased their certificates.
CRIIMI owns class B principal-only certificates, which entitles it to receive distributions derived solely from payments of principal made on the REMIC loans. The principal-only certificate holders have an interest in having the REMIC loans repaid as quickly as possible. This would accelerate and ensure their receipt of distributions from the loans. CRIIMI's certificates are "first-loss" certificates. This means that, if a borrower fails to pay the principal in full, under a REMIC loan, a class B certificate holder is the first to bear the loss. Class B certificate holders have the lowest payment priority and receive a distribution only when all classes with a superior priority have been paid in full.
CMSLP is a special servicer. It services and administers the mortgage loans on behalf of the trust, for the benefit of the certificate holders and the trustee, as an independent contractor. The plaintiffs allege CMSLP is a subsidiary of CRIIMI and that CMSLPM is CMLSP's general partner. The PSA permitted CMSLP and its affiliates, including CRIIMI, to own certificates. It required that CMSLP perform its loan service functions "in the best interest of and for the benefit of all of the Certificateholders" and without regard to "the ownership of any Certificate by the Servicer, the Special Servicer or any Affiliate." The plaintiffs assert they believed the PSA would protect them from the risk that CMSLP would favor its parent, CRIIMI, a holder of principal-only certificates, at the expense of the plaintiffs and other holders of interest-only certificates.
Hardage Hotels I, L.L.C. ("Hardage") was one of the REMIC loan recipients. Under the original terms of the Hardage loan, voluntary prepayment was prohibited throughout the loan term. However, upon acceleration of the repayment schedule by the lender, or under certain circumstances relating to casualty loss or condemnation, the loan was subject to an involuntary mandatory prepayment. Any mandatory prepayment was required to be accompanied by a premium equal to the amount that would be needed to enable the REMIC to continue to pay the loan as scheduled. This loan provision protected the interest-only certificate holders.
In 2002, Hardage experienced financial problems. During 2003, the Hardage loan was referred to CMSLP for special servicing. The plaintiffs allege that, on or about March 11, 2003, without conducting an appropriate investigation into Hardage's financial condition, CMSLP modified the Hardage loan agreement by waiving the prepayment period and prepayment penalties. According to the plaintiffs, CMSLP failed to explore alternatives to modifying Hardage's loan agreement and failed to provide timely and accurate notice to the trust and the certificate holders of Hardage's modified loan agreement. The plaintiffs contend they learned about Hardage's modified loan agreement in May 2003, when an entity known as Commercial Mortgage Alert reported that Hardage's loan prepayment restrictions had been waived by CMSLP and that Hardage was seeking refinancing to pay off its loan.
In July 2003, CMSLP sold the modified loan. The proceeds of the sale were treated as repayments of the loan's principal and were distributed accordingly. The plaintiffs assert that, by treating proceeds of the sale in this manner, CMSLP deprived them of their contractual protection from prepayment and caused the trust to forfeit their rights to recover interest payments. The plaintiffs allege that, in numerous public filings and press releases, the defendants admitted that CRIIMI had used CMSLP to increase the value of its own certificate holdings and to serve its own goals.
Section 10.02 of the PSA, which is labeled "Limitation on Rights of Certificateholders," contains a "no-action" clause that limits the rights of certificate holders to initiate litigation upon, under or with respect to the PSA. The no-action clause provides, in pertinent part, the following:
No Certificateholder shall have any right to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Agreement, unless such Holder previously shall have given to the Trustee a written notice of default and of the continuance thereof, as hereinbefore provided, and unless also the Holders of Certificates representing Percentage Interests of at least 25% of each affected Class of Certificates shall have made written request upon the Trustee to institute such action, suit or proceeding in its own name as Trustee hereunder and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee, for 30 days after its receipt of such notice, request and offer of indemnity, shall have neglected or refused to institute any such action, suit or proceeding.
On March 11, 2005, the plaintiffs sent a notice of default to CRIIMI, CMSLP, the trustee, the depositor of the REMIC loans, Asset Securitization Corporation, and the current loan servicer, GMAC Commercial Mortgage Corporation, as required by the PSA. On that same date, the plaintiffs sent a letter to the trustee demanding that the trustee take action against CRIIMI and CMSLP for breaching the PSA, breaching their fiduciary duty and, engaging in conduct to enrich themselves unjustly. The plaintiffs allege that counsel to the trustee initiated an investigation concerning the allegations in the plaintiffs' demand letter. The plaintiffs maintain they waited thirty days after making their demand, as required by the PSA, before they filed the instant action. As noted above, the instant motion followed.
III. DISCUSSION
Standard of Review for Motion to Dismiss
A court may dismiss an action pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief may be granted only if "it appears beyond doubt, even when the complaint is liberally construed, that the plaintiff can prove no set of facts which would entitle him to relief." Jaghory v. New York State Dep't of Educ., 131 F.3d 326, 329 (2d Cir. 1997) (quotingHoover v. Ronwin, 466 U.S. 558, 587, 104 S. Ct. 1989, 2005). In determining whether to dismiss the complaint, a court is "required to view all allegations raised in the complaint in the light most favorable to the non-moving party" and "must accept as true all factual allegations in the complaint." Newman Schwartz v. Asplundh Tree Expert Co., Inc., 102 F.3d 660, 662 (2d Cir. 1996) (quoting Leatherman v. Tarrant County Narcotics Unit, 507 U.S. 163, 164, 113 S. Ct. 1160, 1161) (internal citations omitted). "At the pleading stage, then, '[t]he issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims.'"Eternity Global Master Fund Ltd. v. Morgan Guar. Trust Co. of N.Y., 375 F.3d 168, 177 (2d Cir. 2004) (quoting York v. Ass'n of the Bar, 286 F.3d 122, 125 [2d Cir. 2002]).
Breach of Contract: No-Action Clause
Under New York law, a party asserting a breach of contract claim must allege: (1) the existence of a contract; (2) plaintiff's performance of the contract; (3) defendant's breach of the contract; and (4) damages caused by the breach. See Rexnord Holdings, Inc. v. Bidermann, 21 F.3d 522, 525 (2d Cir. 1994). Where the agreement contains a "no-action" clause with specific obligations that must be met before an action may be commenced, a plaintiff's failure to comply with conditions precedent to suit, set forth in that clause, will bar the plaintiff from prosecuting a claim for breach of contract. See Metro. West Asset Mgmt., LLC v. Magnus Funding, Ltd., No. 03 Civ. 5539, 2004 WL 1444868, at *5-6 (S.D.N.Y. June 25, 2004); Rossdeutscher v. Viacom, Inc., 768 A.2d 8, 22 (Del.Sup. 2001). A no-action clause should be strictly construed by a court. See Cruden v. Bank of New York, 957 F.2d 961, 968 (2d Cir. 1992).
The PSA provides that it will be construed in accordance with New York law.
The defendants contend the plaintiffs' complaint alleges their compliance with only two of the PSA's "no-action" clause conditions: (1) providing written notice of default to the trustee; and (2) waiting 30 days after giving notice to the trustee to act, before filing this action. However, the defendants also contend the plaintiffs' complaint fails to indicate, as required by the PSA's "no-action" clause, that the plaintiffs "are Holders 'of at least 25% of each affected Class of Certificates' [or] that a demand has been made [of the trustee] on behalf of holders of each affected class [of certificates]." For their part, the plaintiffs maintain they have satisfied the "no-action" clause's requirements in that their complaint alleges they hold collectively over 25 percent of the A-CS2 certificates and, further, they comprise an affected class of certificate holders whose rights may be impacted by the instant litigation.
Fed.R.Civ.P. 9(c) provides: "In pleading the performance or occurrence of conditions precedent, it is sufficient to aver generally that all conditions precedent have been performed or have occurred. A denial of performance or occurrence shall be made specifically and with particularity." Courts have recognized that a general averment of performance of a condition(s) precedent to suit is sufficient to withstand a motion to dismiss. See Ackerley Media Group v. Sharp Electronics Corp., 170 F. Supp. 2d 445, 453 (S.D.N.Y. 2001). However, "[o]nce the defendant has challenged the condition precedent specifically and with particularity, the burden is on the plaintiff to prove that the condition precedent was satisfied." Hill v. Citibank Corp., 312 F. Supp. 2d 464, 473-74 (S.D.N.Y. 2004).
Here, the plaintiffs satisfied the requirement of Fed.R.Civ.P. 9(c) by averring generally, in their complaint, that they had performed all the conditions precedent to suit. Fed.R.Civ.P. 9(c) does not require the plaintiffs to itemize the conditions precedent to suit and allege compliance with each, as the defendants seem to suggest. The burden of identifying all the conditions precedent to suit falls to the defendants, if they wish to challenge the plaintiffs' alleged performance of all those conditions and, in such a circumstance, the defendants must make their challenge with specificity and with particularity.
The PSA's "no action" clause, which is reproduced at page five of this writing, sets forth the conditions precedent to suit that must be met by a certificate holder before the certificate holder may properly commence a "suit, action or proceeding in equity or at law upon or under or with respect to" that agreement. This provision of the PSA states, among other things, that, no action may be commenced by a certificate holder who has given the trustee a written notice of default "unless also the Holders of Certificates representing Percentage Interests of at Least 25% of each affected Class of Certificates" also has made a written request of the trustee that he or she initiate such litigation in the trustee's own name. The defendants assert the plaintiffs alleged in their complaint that they own A-CS2 class certificates. According to the defendants, "three classes [of certificates] — A-CS1, A-CS2 and A-CS3 — are informally referred to as 'interest-only [certificates].'" The defendants assert that the plaintiffs failed to allege in the complaint that they own any class A-CSI and A-CS3 certificates. The defendants contend that, "even if the 'interest-only' [certificate] holders were the only 'affected' classes" of certificate holders, the plaintiffs failed, as required by the express language of the "no action" clause, to allege in their complaint that class A-CSI and A-CS3 certificate holders had made a written demand on the trustee that an action of like kind be initiated in the trustee's name. In addition, the defendants maintain the plaintiffs conceded "that the pre-payment of the [Hardage] loan affected each of the 12 classes [of certificates], including [classes of certificates] owned by CRIIMI, because the reduced interest payments caused by the waiver of the prepayment restrictions would affect all the certificateholders as it waterfalled from one class to another." However, the defendants contend no mention is made in the complaint that holders of the requisite percentage of classes of certificates so affected petitioned the trustee, in writing, to commence an action or other judicial proceeding. As a consequence of the alleged omissions from the complaint, the defendants maintain the plaintiffs have failed to satisfy all the conditions precedent to suit contained in the PSA's "no action" clause.
The plaintiffs contend the defendants are wrong. According to the plaintiffs, they have satisfied the conditions precedent to suit because, "[u]nder the most logical meaning of 'affected class,' the Plaintiffs have satisfied [the PSA's no-action clause since they own at least 25 percent of one class of affected certificates and ownership of that quantity of affected certificates is all that is required under the relevant contract provision], since any other reading of the words "affected class" would mean that "any suit would require the consent of all classes of Certificateholders, regardless of whether those Certificateholders have a cause of action."
It is clear from the parties' respective submissions that they have very different views of the meaning of the phrase "each affected class of certificate" found in PSA § 10.02. The phrase is not defined in the PSA, and PSA § 10.02 neither explains by what each class of certificates must be affected nor indicates the nature of the affection that is contemplated.
When the language of a contract is clear, a court may not alter or go beyond its express terms. Rather, the court must construe it according to general principles of contract law. See Red Ball Interior Demolition Corp. v. Palmadessa, 173 F.3d 481, 484 (2d Cir. 1999). Whether a contract's language is clear and unambiguous, is a threshold question of law for a court to decide. See Brass v. American Film Technologies, Inc., 987 F.2d 142, 149 (2d Cir 1993).
A contract's language is ambiguous when a "word or phrase [in the contract] is one capable of more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business."Walk-In Med. Centers, Inc. v. Breuer Capital Corp., 818 F.2d 260, 263 (2d Cir. 1987) (quoting Eskimo Pie Corp. v. Whitelawn Dairies, Inc., 284 F. Supp. 987, 994 [S.D.N.Y. 1968]). However, "[t]he language of a contract is not made ambiguous simply because the parties urge different interpretations." Seiden Associates, Inc. v. ANC Holdings, Inc., 959 F.2d 425, 428 (2d Cir. 1992).
After reading PSA § 10.02 closely, the Court finds that the phrase, "each affected class of certificate," as used in that provision of the contract, is ambiguous because it is reasonably susceptible to more than one meaning. For example, the phrase "each affected class of certificate" can mean: (a) each class of certificate that was negatively affected by an event of default, in a way the plaintiffs were affected; (b) each class of certificate that was affected by an event of default, in any way, regardless of the resulting detriment or benefit; (c) each class of certificate that was affected by an event of default, in a way the plaintiffs were affected, and that will also be affected by this litigation; (d) each class of certificate that was affected by an event of default, in any way, regardless of the resulting detriment or benefit, and that will also be affected by this litigation; or (e) each class of certificate that will be affected by the litigation, regardless of whether it was affected by the event of default.
In the Second Circuit, if a contract's language is found to be ambiguous, granting a motion to dismiss a breach of contract claim, for failure to state a claim upon which relief can be granted, is improper. See Peregrine Fixed Income Ltd. v. JP Morgan Chase Bank, No. 05 Civ. 4351, 2006 WL 196967, at *2 (S.D.N.Y. Jan. 26, 2006); On Bank Trust Co. v. Federal Deposit Ins. Corp., 967 F. Supp. 81, 90 (W.D.N.Y. 1997); see also Heyman v. Commerce Industry Ins. Co., 524 F.2d 1317, 1320 (2d Cir. 1975) ("Where contractual language is susceptible of at least two fairly reasonable interpretations, this presents a triable issue of fact, and summary judgment would be improper."). Therefore, since the phrase "each affected class of certificate" creates an ambiguity that is not susceptible to resolution at this stage of litigation, the Court finds that granting a motion to dismiss the plaintiffs' breach of contract claim is not warranted.
Tort and Quasi-Contractual Claims
The defendants contend the plaintiffs' tort and quasi-contractual claims should be dismissed because, under New York law, such claims cannot be made where an undisputed contract exists between the parties that governs the conduct at issue. The plaintiffs maintain that, under Fed.R.Civ.P. 8(a) and 8(e)(2), they are entitled to plead breach of contract and tort claims simultaneously or as separate and distinct theories under which they may recover damages.
Fed.R.Civ.P. 8(e)(2) provides, in pertinent part:
A party may set forth two or more statements of a claim or defense alternately or hypothetically, either in one count or defense or in separate counts or defenses. . . . A party may also state as many separate claims or defenses as the party has regardless of consistency and whether based on legal, equitable, or maritime grounds.
Under New York law, "a simple breach of contract is not to be considered a tort unless a legal duty independent of the contract itself has been violated. This legal duty must spring from circumstances extraneous to, and not constituting elements of, the contract, although it may be connected with and dependent upon the contract." Clark-Fitzpatrick v. Long Island Rail Road, 70 N.Y.2d 382, 389, 521 N.Y.S.2d 653, 656-57 (1987) (internal citations omitted); see New York Univ. v. Continental Ins. Co., 87 N.Y.2d 308, 315-16, 639 N.Y.S.2d 283, 287-88 (1995);Mandelblatt v. Devon Stores, Inc., 132 A.D.2d 162, 167-68, 521 N.Y.S.2d 672, 676 (App.Div. 1st Dep't 1987). However, both New York substantive law and federal procedural law, Fed.R.Civ.P. 8(e)(2), permit a party to plead contradictory claims alleging both breach of contract, or in the alternative, a tort because, for example, "[n]egligent performance of a contract may give rise to a claim sounding in tort as well as one for breach of contract." Ajax Hardware Mfg. Corp. v. Industrial Plants Corp., 569 F.2d 181, 185 (2d Cir. 1977). Similarly, "[w]hile the existence of an enforceable contract between the parties will prevent recovery in quasi-contract, as between those parties, the mere existence of a written contract governing the same subject matter does not preclude such recovery from non parties so long as the other requirements for quasi contracts are met." Seiden Associates, Inc. v. ANC Holdings, Inc., 754 F. Supp. 37, 40 (S.D.N.Y. 1991) (internal citations omitted).
Here, the plaintiffs asserted a claim for breach of the fiduciary duty of loyalty, care and candor against all the defendants. The plaintiffs' complaint alleges the defendants mishandled trust assets, in which the plaintiffs had a beneficial interest, by engaging in self-dealing and, thereby, benefitted themselves and entities affiliated with them, at the expense of the plaintiffs. The existence of the PSA does not prevent the plaintiffs from asserting, in this action, that a fiduciary duty was owed to them by the defendants. In addition, the plaintiffs have made a claim sounding in tort against CMSLP and CMSLPM. Specifically, the plaintiffs contend that, in performing the contract, CMSLP and CMSLPM were grossly negligent. As discussed above, such a claim may be made in an action such as this. Moreover, the plaintiffs' unjust enrichment claim, which is a quasi-contractual claim, may also be made because it is asserted against CRIIMI only — a party with whom the plaintiffs did not have an enforceable contract. In summary, the Court finds that the existence of the PSA does not preclude the plaintiffs from asserting tort and quasi-contractual claims in this action.
Breach of Fiduciary Duty
The defendants contend the plaintiffs have failed to assert any independent breach of fiduciary duty claim against CMSLPM other than that CMSLP was aided and abetted in its breach of its fiduciary duty by its general partner, CMSLPM. They also contend the various theories under which the plaintiffs allege breach of fiduciary duty should be rejected because: (i) CMSLP does not owe a fiduciary duty to the plaintiffs independent of the PSA; (ii) the plaintiffs' fiduciary duty claim(s) arises out of the same facts as their breach of contract claim; and (iii) CRIIMI does not owe a fiduciary duty to the plaintiffs because it is a co-investor in the REMIC. The plaintiffs assert they alleged sufficiently in their complaint that a fiduciary relationship exists between them and the defendants.
In order to establish a claim for breach of fiduciary duty, a plaintiff must establish that: (1) a fiduciary duty exists between the parties; (2) the defendant breached that duty; and (3) the breach of that duty was the proximate cause of the damages suffered by the plaintiff. See Metro. West Asset Mgmt. v. Magnus Funding, Ltd., No. 03 Civ. 5539, 2004 WL 1444868, at *8 (S.D.N.Y. June 25, 2004). In order to prevail on a claim that a party aided and abetted a breach of fiduciary duty, a plaintiff must show: (a) a breach by the fiduciary of obligations owed to another; (b) the defendant knowingly induced or participated in the breach; and (c) the plaintiff suffered damages as a result of the breach. See S K Sales Co. v. Nike, Inc., 816 F.2d 843, 847-48 (2d Cir. 1987).
In the case at bar, the plaintiffs allege that CMSLP managed the Hardage loan in a manner that was advantageous to its parent entity, CRIIMI, whose interests were in conflict with the plaintiffs' interests because the plaintiffs were "interest-only" certificate holders. As a consequence, the plaintiffs contend CMSLP breached the fiduciary duty of loyalty it owed to them. The plaintiffs also allege that CMSLPM, which, as CMSLP's general partner, controlled its actions, and CRIIMI, which reported in public filings and press releases that it used CMSLP to enhance the value of its commercial mortgage-backed securities, aided and abetted CMSLP's breach of its fiduciary duty. According to the plaintiffs, the fiduciary duty that was breached exists independent of the PSA and springs from circumstances extrinsic to the PSA and not contemplated by that contract, to wit, the self-dealing by CMSLP and CMSLPM that benefitted CRIIMI to the detriment of the plaintiffs.
Inasmuch as the conduct that may give rise to a breach of contract claim may also constitute "the breach of a duty arising out of the relationship created by contract but which is independent of the contract itself[,]" the Court finds that the plaintiffs have pleaded sufficiently a claim for breach of, and aiding and abetting the breach of, a fiduciary duty against the defendants. Mandelblatt, 132 A.D.2d at 168, 521 N.Y.S.2d at 676.
Gross Negligence
"Gross negligence is defined as 'conduct that evinces a reckless disregard for the rights of others or 'smacks' of intentional wrongdoing.' To constitute gross negligence, 'the act or omission must be of an aggravated character, as distinguished from the failure to exercise ordinary care.'" Travelers Indemnity Co. of Conn. v. Losco Group, Inc., 204 F. Supp. 2d 639, 644 (S.D.N.Y. 2002) (citations omitted).
The defendants contend the plaintiffs' claim for gross negligence, made against CMSLP and CMSLPM, should be dismissed because the claim "does little more than re-allege the same breach of contract allegations." The Court disagrees. The plaintiffs allege CMSLP and CMSLPM not only breached the contract, but also failed to exercise any care in their management of the Hardage loan. According to the plaintiffs, CMSLP and CMSLPM "acted with gross negligence in connection with their conflict of interest with respect to the Hardage Loan." The plaintiffs assert that the willful and knowing misconduct by these defendants "raises the presumption of conscious indifference to the consequences." The plaintiffs' complaint contains factual allegations concerning conduct by CMSLP and CMSLPM that went beyond a mere breach of contract. The allegations touch upon conduct that arguably evinces a reckless disregard for the plaintiffs' rights and, to the extent that self-dealing is alleged, smacks of intentional wrongdoing. Therefore, the Court finds a claim for gross negligence has been pleaded adequately.
Unjust Enrichment
Under New York law, in order to state a claim for unjust enrichment, a plaintiff must allege that: "(1) defendant was enriched; (2) the enrichment was at plaintiff's expense; and (3) the circumstances were such that equity and good conscience require defendants to make restitution." CBS Broadcasting Inc. v. Jones, 460 F. Supp. 2d 500, 505-06 (S.D.N.Y. 2006) (citations omitted). Generally, "[t]he existence of a valid and enforceable written contract governing a particular subject matter precludes recovery in quasi-contract or unjust enrichment for occurrences or transactions arising out of the same matter." Id. (citations omitted); see also Clark-Fitzgerald, 70 N.Y.2d at 388, 521 N.Y.S.2d at 656. However, a party is not precluded from proceeding on both theories "where there is a bona fide dispute as to the existence of a contract or where the contract does not cover the dispute in issue." CBS Broadcasting, 460 F. Supp. 2d at 506 (citations omitted).
The defendants contend that, because there is a valid and enforceable contract between the two parties, and there is no independent duty distinct from the parties' contractual relationship, the plaintiffs are barred from making an unjust enrichment claim together with a breach of contract claim in this action.
The plaintiffs' unjust enrichment claim has been asserted against CRIIMI. Although both the plaintiffs and CRIIMI are bound by the PSA as certificate holders, the plaintiffs have not alleged the PSA is a contract between them and CRIIMI. The plaintiffs contend that CRIIMI was unjustly enriched, at their expense, through the misconduct of CRIIMI's subsidiary, CMSLP. The plaintiffs maintain that, because CRIIMI received financial benefits improperly, as a result of CMSLP's misconduct, it would be inequitable to permit it to retain those benefits without making restitution.
It is uncontested that a valid and enforceable contract exists, the PSA. However, the PSA is not a contract between the plaintiffs and CRIIMI. The subject matter of that contract is the administration and servicing of certain mortgage loans by CMSLP. The plaintiffs' allegation, that CRIIMI was unjustly enriched to the plaintiffs' detriment by CMSLP's misconduct in administering and servicing the Hardage loan, in contravention of its obligation to refrain from acts that would be advantageous to an entity affiliated with it, is all that needed to be alleged to state a claim for unjust enrichment under New York law. See id., at 505-06. Therefore, in the circumstance of the instant case, the Court finds that the plaintiffs' unjust enrichment claim against CRIIMI can co-exist with the breach of contract claim they have made against all the defendants.
Disgorgement By CMSLP
Disgorgement is an equitable remedy which, [u]nlike damages, is a method of forcing a defendant to give up the amount by which he was unjustly enriched." S.E.C. v. Cavanagh, 445 F.3d 105, 117 (2d Cir. 2006). The plaintiffs allege that, because CMSLP acted in its own interest and the interest of its affiliates in connection with the Hardage loan, rather than in the best interest of all certificate holders, it should be required to disgorge all the fees it received based on that transaction. Although styled by the plaintiffs as a claim, "COUNT FIVE" in the complaint, the defendants note, correctly, that disgorgement is a remedy. They maintain the court should reject the plaintiffs' request for this remedy once it grants the defendants' motion and dismisses all the liability claims.
Since the Court is not persuaded that all the plaintiffs' claims ought to be dismissed, it would be inappropriate, at this stage of the litigation, to constrict the court's ability to exercise its discretion in fashioning an appropriate remedy should the plaintiffs prevail in this action. Accordingly, no reason exists to bar the plaintiffs from asking the court to consider the equitable remedy of disgorgement should it be determined that CMSLP's conduct permitted it to obtain fees it should not be allowed to retain.
Punitive Damages
The plaintiffs seek to recover punitive damages from all the defendants. The defendants contend punitive damages are recoverable in a breach of contract action only if they are necessary to vindicate a public right. They contend further that the plaintiffs have failed to allege the defendants engaged in conduct that would justify a request for punitive damages. The plaintiffs disagree.
"Punitive damages are not recoverable for an ordinary breach of contract as their purpose is not to remedy private wrongs but to vindicate public rights." Rocanova v. Equitable Life Assurance Soc'y of U.S., 83 N.Y.2d 603, 613, 612 N.Y.S.2d 339, 342 (1994). However, punitive damages, are available in the limited circumstance "where it is necessary to deter [a] defendant and others like it from engaging in conduct that may be characterized as 'gross' and 'morally reprehensible,' and of 'such wanton dishonesty as to imply a criminal indifference to civil obligations.'" New York University v. Continental Ins. Co., 87 N.Y.2d 308, 315-16, 639 N.Y.S.2d 283, 287 (1995). In the context of a claim arising from an alleged breach of contract, a request for punitive damages, as an additional and exemplary remedy, may be made by a plaintiff who alleges: (1) a defendant's conduct is actionable as an independent tort; (2) the tortious conduct is of an egregious nature, akin to conduct evincing a high degree of moral turpitude, see Walker v. Sheldon, 10 N.Y.2d 401, 404-405, 223 N.Y.S.2d 488, 490-491 (1961); (3) the conduct was directed at the plaintiff; and (4) the conduct is part of a pattern directed at the public generally. See New York University, supra at 316, 287.
The plaintiffs have satisfied the first pleading requirement for punitive damages. They have alleged a breach of fiduciary duty and gross negligence as independent claims in their complaint. However, while the plaintiffs have asserted the defendants' misconduct was directed at them and was "intentional, malicious, outrageous, and otherwise aggravated beyond mere negligence," they have failed to satisfy the last pleading requirement; they have not alleged the defendants' conduct was part of a pattern directed at the public generally. Therefore, the Court finds that, should the plaintiffs prevail in this action, their request for punitive damages need not be considered in determining the appropriate measure of damages.
IV. RECOMMENDATION
For the reasons set forth above, the defendants' motion to dismiss should be granted, in part, and denied, in part.
V. FILING OF OBJECTIONS TO THIS REPORT AND RECOMMENDATION
Pursuant to 28 U.S.C. § 636(b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure, the parties shall have ten (10) days from service of this Report to file written objections. See also, Fed.R.Civ.P. 6. Such objections, and any responses to objections, shall be filed with the Clerk of Court, with courtesy copies delivered to the chambers of the Honorable Lewis A. Kaplan, 500 Pearl Street, Room 1310, New York, New York, 10007, and to the chambers of the undersigned, 40 Foley Square, Room 540, New York, New York 10007. Any requests for an extension of time for filing objections must be directed to Judge Kaplan. FAILURE TO FILE OBJECTIONS WITHIN TEN (10) DAYS WILL RESULT IN A WAIVER OF OBJECTIONS AND WILL PRECLUDE APPELLATE REVIEW. See Thomas v. Am, 474 U.S. 140 (1985); IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1054 (2d Cir. 1993); Frank v. Johnson, 968 F.2d 298, 300 (2d Cir. 1992); Wesolek v. Canadair Ltd., 838 F.2d 55, 57-59 (2d Cir. 1988); McCarthy v. Manson, 714 F.2d 234, 237-38 (2d Cir. 1983).