While parties may discuss the terms of a business arrangement, absent definite agreement on all material terms or a definite promise, these arrangements are generally unenforceable. However, as the Court of Chancery held in its post-trial decision in Schaeffer v. Lockwood, C.A. No. 2018-0926-MTZ (Del. Ch. Nov. 30, 2021), where an unformed arrangement results in a benefit to one party, at the expense of the other, the quasi-contract theory of unjust enrichment steps in to compensate the party who provided the benefit.
Background and The Court of Chancery’s Decision
Plaintiff Mark G. Schaeffer (“Schaeffer”) and Defendant Donald Lockwood (“Lockwood”) had a longstanding history of collaborating on real estate ventures both locally in Delaware and in other states. Schaeffer specializes in what is called “bird-dogging” – locating undervalued, attractive real estate properties and passing them along to motivated investors. In return, a bird dog earns a percentage or a fee. Schaeffer located such a property near the Delaware beaches that was in foreclosure and brought the opportunity to Lockwood and a third individual, John O’Brien (“O’Brien). The parties began negotiating a purchase with the foreclosing bank and discussed among themselves how to structure their collective investments in the property, including through the formation of a limited liability company. Their internal discussions never led to a formalized arrangement and, in need of funding to close the deal with the bank, Lockwood turned to a fourth individual, Constantine Malmberg, with whom he formed a new entity and ultimately purchased the property. Lockwood and Malmberg then began subdividing the property and selling lots to developers.
While there was no formalized arrangement with Schaeffer, he remained involved and obtained necessary regulatory approvals for the project. Based on these efforts and his initial bird-dogging, Schaeffer asked for his share of the profits from Lockwood. When Lockwood refused, Schaeffer filed a lawsuit asserting claims for breach of contract, promissory estoppel and unjust enrichment. After a trial on the merits, the Court found that Schaeffer had not met his evidentiary burden to prove either an enforceable agreement for his breach of contract claim, or a definite promise to support his promissory estoppel claim. Although Lockwood and Schaeffer had discussed the terms of a potential business arrangement, including how profits would be shared, and although there was evidence that Lockwood recognized Schaeffer was owed something, this “fluid” and “informal” arrangement was not definite enough in its terms to support an enforceable agreement or a definite promise that Schaeffer would be compensated and in what amount. However, the evidence in the record did show (1) Lockwood had been enriched by Schaeffer’s bird dogging and regulatory efforts; (2) Schaeffer had been impoverished by not receiving compensation for providing this benefit; (3) Lockwood had no justification as he had, on several occasions, acknowledged Schaeffer was owed something; and (4) Schaeffer had no adequate remedy at law. Accordingly, the Court held that Schaeffer had met his burden to prove his unjust enrichment claim and was entitled to compensation in the form of a percentage of the proceeds from the property sale.
The Court of Chancery’s decision recognizes that, in certain limited circumstances, equity will compensate a party to an informal and fluid business arrangement, even where the terms of the arrangement are too indefinite to support a contract or definite promise. Critical for the Court here, was that the plaintiff had provided true benefits to the defendant – indeed, he found the property the defendant ultimately profited from – and that the defendant had admitted the plaintiff was owed something for his efforts. The quasi-contract theory of unjust enrichment provided an avenue for relief and compensation, where a breach of contract or promissory estoppel claim could not.
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