Issues of Fact Prevent Application of The Voluntary Payment Doctrine, Says The First Department

• Posted on: Oct 17 2022

By: Jeffrey M. Haber

The voluntary payment doctrine bars recovery of payments voluntarily made with full knowledge of the facts, and in the absence of fraud or material mistake of fact or law.¹ Notably, there is a presumption that payments are voluntary.² Thus, to rebut the presumption, the plaintiff must show that he/she protested the payment. In order for a protest to be effective, it must be in writing and (with some exceptions, as discussed below) made at the time of payment.³ 

The doctrine was first introduced in Lesster v. City of New York, 33 A.D. 350 (1st Dept. 1898). There, the Court recognized that “[a] voluntary payment of money under a claim of right cannot in general be recovered back.” “To warrant such recovery”, explained the Court, “there must be a compulsion, — actual, present, potential, — and the demand must be illegal.” Thus, “[i]n the absence of such compulsion a mere protest is not sufficient. The element of coercion is essential to the right.” From that discussion, the Court established the rule that forms the basis for the doctrine: “[i]f a party, with full knowledge of all the facts, voluntarily pays money in satisfaction of a demand made upon him, he cannot afterwards allege such payment to have been unjustly demanded, and recover back the money.”

The plaintiff in Lesster was a property owner in New York City who paid real property taxes without knowing that the subject property had been condemned and acquired by the City for a street widening project. When the City refused to return the tax payment, Lesster sued and prevailed in light of the mistake.

In Gimbel Brothers, Inc. v. Brook Shopping Centers, Inc., 118 A.D.2d 532 (2d Dept. 1986), the plaintiff leased a retail store from the defendant. The lease was drafted when New York’s “Sunday Blue Laws” prohibited businesses from operating on Sunday. After the “Blue Laws” were declared unconstitutional, defendant started invoicing Gimbel Brothers $10.00 per week as a “Sunday charge”.  The charge was later increased to $825.00 and Gimbel Brothers paid a total of $19,800.00 in such charges before stopping payment. The lease did not provide for “Sunday charges”. Gimbel Brothers commenced suit against its landlord seeking, inter alia, a declaration that it could offset the previously made “Sunday charges” against future rents.

Relying on the voluntary payment doctrine, the Court held that the “Sunday charges” should not be returned, stating:

Indeed, we find that the weight of the evidence supports the conclusion that Gimbels was not operating under an actual mistake of law but, instead, made the subject payments voluntarily, as a matter of convenience, without having made any effort to learn what its legal obligations were….When a party intends to resort to litigation in order to resist paying an unjust demand, that party should take its position at the time of the demand, and litigate the issue before, rather than after, payment is made.  Gimbels displayed a marked lack of diligence in determining what its contractual rights were, and is therefore not entitled to the equitable relief of restitution. [Citations omitted.]

In Dillon v. U-A Columbia Cablevision, 100 N.Y.2d 525 (2003), plaintiff brought a putative class action lawsuit against her cable provider alleging that a $5 late fee/administrative fee was an impermissible penalty and that she would not have made the payments “had she known the true facts”.  Agreeing with “both lower courts that the voluntary payment doctrine bar[red] plaintiff’s complaint,” the Court of Appeals found:

Here, no fraud or mistake is alleged in that, according to the complaint, plaintiff knew she would be charged a $5 late fee if she did not make timely payment.  Alleged mischaracterization of a $5 late fee as an administrative fee does not overcome application of the voluntary payment doctrine.

More recently, in Overbay, LLC v. Berkman, Henoch, Peterson, Peddy & Fenchel, P.C., 185 A.D.3d 707 (2d Dept. 2020), the Appellate Division, Second Department affirmed the dismissal of a complaint under the doctrine. Overbay owned property that it intended to develop.  The defendant was a lender that held a mortgage on the property. When Overbay defaulted under its loan, defendant commenced a mortgage foreclosure proceeding. The mortgage provided that the defendant was entitled to recoup its legal fees from Overbay in the event foreclosure proceedings were commenced. While the motion court granted the defendant’s motion for a judgment of foreclosure and sale, the quantum of legal fees to which the defendant was entitled had to be determined at a hearing. Prior to the hearing, Overbay exercised its right of redemption (the right to pay off the debt prior to the foreclosure sale). Overbay demanded a pay-off letter in order to “satisfy the judgment with the proceeds of a construction loan, upon which they had to close before the date of the [attorney’s fees] hearing; the loan commitments would otherwise have expired by that point in time.” Ultimately, the defendant sent a payoff letter that included $82,561.92 in legal fees. The defendant delivered a satisfaction of mortgage to Overbay after Overbay paid, “without raising a contemporaneous objection” to the full sum demanded in the pay-off letter.

Thereafter, Overbay commenced litigation seeking reimbursement of the attorney’s fees it paid. The Court held, inter alia, that the voluntary payment doctrine barred recovery by Overbay of the payment of attorney’s fees because such payment had not been contemporaneously protested at the time of payment.

[Ed. Note: this Blog has written about the voluntary payment doctrine and the cases discussed above, here, here, and here.]

Last Thursday, the First Department decided Tantallon Austin Hotel, LLC v. Wilmington Trust, N.A., 2022 N.Y. Slip Op. 05778 (1st Dept. Oct. 13, 2022) (here), wherein it reinstated a breach of contract claim on the basis that, among other things, there were issues of fact as to whether the voluntary payment doctrine applied.  

[Ed. Note: the background discussion that follows comes from the appellate briefing in Tantallon.]

Tantallon involved an overpayment of money paid by a borrower to pay off a mortgage. The borrower claimed that the lender refused to return the excess portion of the payment.

Plaintiff entered into a loan agreement on March 1, 2017 with Morgan Stanley Bank, N.A. to refinance the hotel it runs (“the Loan Agreement”). Plaintiff gave Morgan Stanley a Deed of Trust that was secured by the hotel (the “Mortgage”). Thereafter, ownership of the Mortgage eventually passed to a trust (the “Trust”) pursuant to a pooling and servicing agreement dated May 1, 2017 (the “Pooling and Servicing Agreement” or “PSA”). Plaintiff was not a party to the PSA. 

Due to the Covid-19 pandemic, the hotel experienced material financial pressures. Plaintiff missed an interest payment for the Mortgage, triggering a “Default” under the Mortgage. 

In March 2021, Plaintiff sold the hotel (the “Sale”) so it could pay off the Mortgage and loan without entering into a liquidation, bankruptcy, or insolvency proceeding. 

On or about the eve of the closing for the Sale (the “Closing”), Defendant gave Plaintiff two “Preliminary Payoff Quotes” that (i) listed the “Estimated” amounts required to pay off the Mortgage and (ii) represented that “All Overages Will Be Refunded.” Plaintiff paid the amounts identified to pay off the Mortgage ($120,972,935.96). The “Estimated” payoff amount included a charge of $1,030,000 as a “Liquidation Fee”. The Mortgage Loan had not been liquidated. Plaintiff maintained that it was not apparent that the “Liquidation Fee” was a charge included in the Loan Agreement that it signed.

According to Plaintiff, time was of the essence with respect to the Closing.

On March 15, 2021, Plaintiff advanced the “Estimated” fee to Defendant, which included the “Liquidation Fee”. When advancing those funds, Plaintiff allegedly relied on the written representations in the Preliminary Payoff Quotes that it was entitled to a reconciliation of any overpayment. 

On April 5, 2021, three weeks after the payoff, Plaintiff’s attorney wrote a letter to Defendant Midland Loan Services requesting a refund of the “Liquidation Fee” on grounds that: (i) the Loan Agreement did not authorize a payment of 1% of the principal loan amount as a liquidation fee; and (ii) there had been no liquidation, restructuring, workout, insolvency or bankruptcy proceeding associated with Plaintiff paying off the Loan. The letter stated that although Plaintiff asserted its right to a refund of the “Liquidation Fee,” Plaintiff was not challenging any other component of its March 15, 2021 payoff payment. 

Defendant declined to refund the “Liquidation Fee” based on the ground that the Loan Agreement and the PSA (to which Plaintiff was not a party) allowed for the payment of liquidation fees generally. Based on that refusal, Plaintiff commenced the action to recover its overpayment. 

Defendants moved to dismiss the complaint, arguing, among other things, that Plaintiff was not entitled to a return of the Liquidation Fee it had paid to Defendant.

The motion court granted the motion, holding that, among other things, the voluntary payment doctrine barred any recovery of the Liquidation Fee. The motion court found that the doctrine applied because Plaintiff paid the Liquidation Fee “without any contemporaneous objections or reservation of rights.” “If plaintiff had any fee-related doubts, questions, concerns or objections,” said the motion court, “it could and should have raised them at that time.” “Instead”, observed the motion court, “plaintiff paid in full and only later, on April 5, 2021, first objected to having paid the Liquidation Fee and requested a refund.” “By then”, concluded the motion court, “it was too late….”⁴ 

Plaintiff appealed.

The First Department modified the motion court’s order, on the law, to, inter alia, reinstate Plaintiff’s breach of contract claim against the Trust and to vacate the motion court’s declaration that Plaintiff was not entitled to a return of the liquidation fee. The Court otherwise affirmed the order.

First, the Court held that “Plaintiff sufficiently stated a claim for breach of contract against the trust by alleging that the trust [was] an assignee of the loan agreement and that it breached the agreement by charging, and then failing to reimburse, a liquidation fee that was never incurred.”⁵ However, said the Court “plaintiff failed to state a cause of action for breach of contract against defendant Midland Loan Services given plaintiff’s concession that it enjoy[ed] no contractual relationship with Midland, as Midland could not have breached a contract to which it was not a party.”⁶

Second, the Court held that there were issues of fact surrounding application of the voluntary payment doctrine that prevented dismissal of Plaintiff’s contract claim. The Court explained that since Plaintiff was not a party to the PSA, there were issues of fact as to its awareness “of the factors triggering a ‘liquidation fee,’ a penalty that was lumped in with various other costs and fees that plaintiff was required to pay in connection with defaulting on the loan.”⁷ Moreover, said the Court, “the timing and circumstances of the sale, which required the loan to be fully paid off before the sale could go through, meant that time was of the essence, and thus plaintiff, even if it was aware that it was being charged an improper ‘liquidation fee,’ had a limited time to discern the issue before closing.”⁸ Further, the Court pointed to “the disclaimer in the preliminary payoff quotes”, which “stated that all overages would be subject to a refund”, as a basis to modify the motion court’s order.⁹ The Court concluded, stating: “Given that there remain factual issues whether plaintiff paid the liquidation fee with ‘full knowledge of the facts’ or that it ‘perceive[d] that an improper demand for money’ before paying the amount due, the breach of contract claim should not have been dismissed based on this doctrine.”¹⁰

[Ed. Note: although this article is devoted to the voluntary payment doctrine, the Court also ruled on the motion court’s order dismissing Plaintiff’s unjust enrichment claims as duplicative of Plaintiff’s breach of contract claims.¹¹ The Court explained that “[a]t this early stage of the litigation, the [motion] court should not have found that the unjust enrichment claim was duplicative, as there is no contract between plaintiff and Midland … and … the particular subject matter of the enrichment claim — namely, the liquidation fee — has not been established to be encompassed by plaintiff’s loan agreement.”¹²]

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.

References

1. Dubrow v. Herman & Beinin, 157 A.D.3d 620 (1st Dept. 2018) (citation and quotation marks omitted).
2. See 82 N.Y. Jur. 2d, Payment and Tender, § 82.
3. See Nunner v. Newburgh City School Dist., 92 A.D.2d 888 (2d Dept. 1983).
4. Citations omitted.
5. Slip Op. at *1.
6. Id. (citing, Harris v. Seward Park Hous. Corp., 79 A.D.3d 425, 426 (1st Dept. 2010)).
7. Id.
8. Id. at *1-*2.
9. Id. at *2 (citing, 208-234 Falls St. v. New York Cent. R.R. Co., 21 N.Y.2d 172, 179 (1967)).
10. Id. (citations omitted).
11. In New York, an unjust enrichment claim will not lie when it is duplicative of an independent contract or tort claim. See, e.g., Corsello v. Verizon New York, Inc., 18 N.Y.3d 777, 790-91 (2012); Clark-Fitzpatrick, Inc. v. Long Island R. Co., 70 N.Y.2d 382, 389 (1987).   
12. Id. (citations omitted).