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Faraldi v. Lawrence

A-3907-09T1 (N.J. Super. App. Div. 2011) (Unpublished)

LOANS — When a borrower is receiving loan money from one party, but knows that party is only an intermediary for the actual lender, it cannot disclaim liability to the actual lender on the theory that paying the actual lender directly would unjustly enrich that lender.

A borrower and a lender shared a mutual accountant. The accountant approached the lender to lend money to expand the borrower’s business. Interest rates were attractive and the lender agreed to do so. Under the arrangement, the lender would forward the money to the accountant who would deposit the funds into escrow and forward the money to the borrower as needed. Unknown to anyone else, the accountant was charging the borrower a much higher interest rate on the loans than was the lender. The lender regularly received the interest payments. Along the way, the accountant informed the lender that the borrower was forming a new business and needed to borrow more money. The lender agreed and forwarded more money to the accountant who was to remit it to the borrower. Eventually, the interest payments became irregular and then stopped entirely. The lender sued to collect its money.

In the first suit it filed, the lender named the accountant, the borrower, and the borrower’s new business as defendants. However, by the time the matter went to trial, the accountant consented to entry of judgment against him. Furthermore, the matter was heard solely as to the claim of unjust enrichment. The lower court found the lender to be credible and entered a judgment against the borrower and the borrower’s new business.

The borrower appealed, arguing that the lower court erred in its finding of unjust enrichment, erred in enforcing usurious agreements, and erred in its calculation of damages. The Appellate Division rejected the first two arguments but agreed with the third.

To show unjust enrichment, it must be shown that a party received a benefit and that retention of that benefit without payment would be unjust. In this case, the Court agreed with the lower court that the transaction in issue completely fit the concept of unjust enrichment. The borrower had argued that unjust enrichment was inapplicable because the lender failed to prove that the borrower received a benefit from it. However, receipt of the money alone was clearly a benefit. The borrower also argued that the doctrine of unjust enrichment was inapplicable because the lender expected to be repaid by the accountant and not by the borrower. However, the lower court’s findings showed that the lender knew its money was going to the borrower and expected to be repaid by it.

The Court found no validity to the borrower’s usury argument because the lower court had already limited the lender’s recovery to the principal amount of the loans. It did not award the interest that the lender anticipated receiving, and thus it did not enforce the usurious contracts.

Lastly, the Court addressed the lower court’s computation of damages where it was alleged that the lower court had failed to credit the borrower for payments it made to the accountant and the payments made by the accountant to the lender; wrongly entered judgment against borrower’s principal; and included monies for which only the accountant signed the promissory note. The Court did not dispute any of the amounts used by the lower court, but disagreed as to the extent of the liability of the borrower’s new business. It stated if the money was lent prior to the formation of the new business, there was no basis to impose a judgment against the new business for those earlier advanced funds. As a result, the Court remanded the matter for further proceedings with respect to the new business and affirmed all the judgments with respect to the original borrower.

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