The Rhode Island Superior Court has held that a bank that foreclosed on its secured interest in an office building is not liable for unjust enrichment to unsecured contractors that had improved the property.
The bank had financed the purchase and improvements to the building by its borrower in a total amount of $4.7 million. Plaintiffs were contractors hired by the borrower to do HVAC and roofing work on the building. The borrower paid the contractors for part of their work before its principal was arrested on unrelated criminal charges. The bank declared the borrower in default and obtained Superior Court permission to take control of the property.
The contractors commenced mechanic’s lien proceedings which were stayed when the borrower filed for bankruptcy. The bank obtained permission from the bankruptcy and Superior courts to foreclose on its second mortgage on the property and it purchased the property at the auction for $1 million subject to its own first mortgage. Plaintiffs then filed suit alleging the bank had been unjustly enriched by the value of the improvements they had made in the property and for which they had not been paid, totalling over $500,000.
The court noted the elements of unjust enrichment: a benefit was conferred upon the defendant by the plaintiff; the defendant appreciated the benefit; and the acceptance of the benefit by the defendant under the circumstances would be inequitable unless the defendant pays for the value of the benefit. The court said the first element is met when improvements are made to property without payment. The second element is met when the defendant profited from the benefit. The court indicated that the third element-retention of the benefit would be inequitable-was the crux of the case.
The court said the issue was whether, under the facts of this case, equitable principles like unjust enrichment should overcome the creditor priority system set forth in the Uniform Commercial Code. Under the UCC, an earlier, secured creditor generally has priority over later creditors. The court observed that if it were to hold that later, unsecured creditors could assert unjust enrichment claims over an earlier, secured creditor this would undermine the secured creditor’s priority status under the UCC. The court distinguished cases from other jurisdictions involving secured creditors that had a hand in bringing about the unjust enrichment or where the secured creditor was aware of a general contractor’s financial difficulties but did not inform subcontractors of those issues.
Emond Plumbing and Heating Inc. v. BankNewport, 2013 WL 2403617 (R.I. Super. May 29, 2013).