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Breach of Fiduciary Duty Claim Subsumed by Breach of Contract Claim

April 13, 2016
Thomas E. Hanson, Jr.
Delaware Business Court Insider

Defendants are often faced with complaints that assert multiple causes of action arising from the same set of facts and circumstances. A prime example of such a complaint is presented in CIM Urban Lending v. Cantor Commercial Real Estate Sponsor, L.P. C.A. No. 11060-VCN (Del. Ch. Feb. 26, 2016). In an effort to recover for a general partner's alleged improper payments to an affiliate, the plaintiffs in CIM asserted claims for breach of contract, breach of fiduciary duty, aiding and abetting breach of fiduciary duty and unjust enrichment. On the defendant's motion to dismiss, the court found that only the breach of contract claim could stand. The remaining claims, including for breach of fiduciary duty, were dismissed as duplicative of the core claim for breach of the limited partnership agreement.

Analysis

The plaintiffs—limited partners in Cantor Commercial Real Estate Co. (CCRE)—alleged that the defendant, CCRE's general partner, paid improper underwriting fees to one of its affiliates in breach of the LP agreement. According to the plaintiffs, the defendant breached provisions of the LP agreement that restricted the compensation payable to affiliates of the general partner that provided services to CCRE. CCRE was a Delaware-limited partnership that originated and purchased mortgage loans secured by commercial real estate and securitized those loans in commercial mortgage-backed securities. The defendant engaged its affiliate to provide necessary underwriting services, and the plaintiffs alleged the defendant paid that affiliate "blatantly improper" fees for its services.

As noted, the plaintiffs' complaint asserted claims for breach of contract, breach of fiduciary duty, aiding and abetting breach of fiduciary duty and unjust enrichment. On the defendant's motion to dismiss, the court found that the claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duty and unjust enrichment were properly dismissed. Beginning with the plaintiffs' unjust enrichment claim, the court found it was "based upon the same conduct as the breach of contract claim" and even included an allegation that the underwriting fees violated the LP agreement. Citing the Nemec v. Shrader,3878-CC, 3934-CC (Del. Ch. Apr. 30, 2009), aff'd, 991 A.2d 1120 (Del. 2010), decision, the court found that Delaware courts have consistently refused to allow a claim for unjust enrichment to proceed "when the alleged wrong arises from a relationship governed by contract." Similarly, the court found that, "when the standard is set by contract," contract remedies are the "sole remedies" available.

With respect to the breach of fiduciary duty claim, the court found that it existed in "parallel" with the breach of contract claim and, therefore, could not stand unless there was an "'independent basis for the fiduciary duty claims apart from the contractual claims,'" citing Renco Group v. MacAndrews AMG Holdings, C.A. No. 7668-VCN (Del. Ch., Jan. 29, 2015). The court found no independent basis existed where the fiduciary duty claim depended upon the LP agreement and duplicated the fact allegations of the contract claim. In so finding, the court noted that a contrary result would "'undermine the primacy of contract law over fiduciary law in matters involving ... contractual rights and obligation,'" citing Grayson v. Imagination Station, C.A. No. 5051-CC (Del. Ch. Aug. 16, 2010). Likewise, as the plaintiffs were unable to state a claim for breach of fiduciary duty, its claims for aiding and abetting such breach was also dismissed, leaving only the breach of contract claim.

Lesson Learned

The decision in CIM provides helpful guidance to defendants seeking to narrow the claims arising from what is primarily a relationship governed by contract. The court found that duplicative claims arising from the same set of facts may be dismissed. Dismissal of such claims presumably will allow the parties to focus their litigation efforts and resources on the key question in the case—whether the defendant breached the applicable agreement.

Delaware Business Court Insider  |  April 13, 2016