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The Appellate Division, Second Department, Addresses Economic Duress and the Voluntary Payment Doctrine

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  • Posted on: Jul 10 2020

This Blog has previously addressed “economic duress” and the “voluntary payment doctrine.” [HERE], [HERE] and [HERE]

“Economic duress” is a theory upon which a “complaining party [seeks] to void a contract and recover damages when it establishes that it was compelled to agree to the contract terms because of a wrongful threat by the other party which precluded the exercise of its free will.”  805 Third Ave. Co. v. M.W. Realty Assoc., 58 N.Y.2d 447, 451 (1983) (citations omitted).  However, “a party cannot be guilty of economic duress for refusing to do that which it is not legally required to do.”  805 Third Ave., 58 N.Y.2d at 453.  In Fruchthandler v. Green, 233 A.D.2d 214 (1996), the First Department affirmed the dismissal of a complaint alleging that economic duress should operate to void a release executed by plaintiff that “relieved defendant from liability under two promissory notes.”  The Fruchthandler Court stated that in order to succeed, “plaintiff would have to show he was compelled to agree to the terms of the release by means of a wrongful threat which precluded the exercise of his free will.”  Fruchthandler, 233 A.D.2d at 214 (citations omitted).  The Fruchthandler Court, however, found that the record precluded a finding of economic duress because “the release resulted from vigorous bargaining tactics which do not amount to economic duress.”  Fruchthandler,233 A.D.2d at 214 (citations omitted).  The Fruchthandler Court also found that “at the time the release was entered into, defendant surrendered his partnership interest in certain properties to plaintiff [and, therefore, h]aving accepted the benefits of the agreement before commencing this action, plaintiff, in effect, ratified the release and is therefore barred from alleging economic duress in its execution.”  Fruchthandler,233 A.D.2d at 215 (citations omitted).  Finally, the Fruchthandler Court also found that plaintiff waived its right to assert an economic duress claim as a result of the “inordinate length of time which passed between the alleged duress and the assertion of the claim.”  Fruchthandler,233 A.D.2d at 215 (citations omitted).  

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.  Dubrow v. Herman & Beinin, 157 A.D.3d 620 (1st Dep’t 2018) (citation and quotation marks omitted).

On July 8, 2020, the Appellate Division, Second Department, decided Overbay, LLC v. Berkman, Henoch, Peterson, Peddy & Fenchel, P.C., in which the Court addressed both economic duress and the voluntary payment doctrine.  The facts of Overbay are straight forward.  Overbay owned property (the “Property”) that it intended to develop.  Defendant Harbour Trio Management, LLC (Harbour) was a lender that held a mortgage on the Property.  When Overbay defaulted under its loan, Harbour commenced a mortgage foreclosure proceeding.  Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. (“Berkman”) was Harbour’s counsel in the foreclosure proceeding.

As expected, the mortgage provided that Harbour was entitled to recoup its legal fees from Overbay in the event foreclosure proceedings were commenced.  While the motion court granted Harbour’s motion for a judgment of foreclosure and sale, the quantum of legal fees to which Harbour was entitled was to be determined at a hearing.  Prior to the legal fees 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, Harbour sent a payoff letter that included $82,561.92 in legal fees from the Berkman firm.  Harbor delivered a satisfaction of mortgage to Overbay after Overbay paid, “without raising a contemporaneous objection”, the full sum demanded in the pay-off letter.

Thereafter, Overbay commenced litigation against Harbour and Berkman in which they sought reimbursement of the attorney’s fees “alleging that they were forced to pay those fees involuntarily under economic duress in order to close on [its] refinancing loan.”  The Second Department affirmed the dismissal of Overbay’s complaint.  The Court, after noting the law on economic duress as set forth herein, found that “Harbour demonstrated, prima facie, that its exercise of its legal right to the subject attorney’s fees pursuant to the explicit terms of the underlying mortgage loan agreement did not rise to the level of actionable economic duress.”

As to the application of the voluntary payment doctrine, the Overbay Court said:

Further, “the voluntary payment doctrine bars recovery of payments voluntarily made with full knowledge of the facts, and in the absence of fraud or mistake of material fact or law” (Dillon v U-A Columbia Cablevision of Westchester, 100 NY2d 525, 526). There is a presumption that payments are voluntary (see 82 NY Jur 2d, Payment and Tender, § 82). Additionally, in order for a protest of payment to be characterized as appropriate, it must be in writing and made at the time of payment (see Nunner v Newburgh City School Dist., 92 AD2d 888). Here, Harbour demonstrated, prima facie, that the voluntary payment doctrine bars recovery by the plaintiffs of their payment of the full amount of attorney’s fees, which was not contemporaneously protested at the time of payment. In opposition, the plaintiffs failed to raise a triable issue of fact.

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