The Voluntary Payment Doctrine Strikes Again

On May 1, 2013, mortgagee's counsel advised Klein that mortgagee would accept $3,536,580 in exchange for release of the mortgage lien. That amount included delinquent fees, assignment and release fees, and other charges and expenses. Klein postponed the closing and requested a new payoff letter from mortgagee, apparently after concluding that the initial payoff letter included unwarranted charges. On June 3, mortgagee sent another payoff letter with a similar amount. The letter indicated that mortgagee would only issue a satisfaction if Klein delivered a check for $18,000, representing the June interest payment. Klein paid the entire amount mortgagee had requested, and then brought this action contending that mortgagee had extorted unlawful interest and other charges in exchange for issuance of a satisfaction. Supreme Court dismissed the complaint, concluding that because Klein had voluntarily paid the amount demanded, Klein could not now recover the amount paid. Supreme Court also concluded that many of the amounts included in the payoff letter were entirely proper. Klein appealed.

A divided Appellate Division affirmed, relying on the voluntary payment doctrine. The court emphasized that Klein, a sophisticated real estate investor, had not alleged that his payment was made under duress and under protest. As a result, Supreme Court had properly dismissed Klein's complaint, even if mortgagee had not been entitled to the money Klein paid. Justice Acosta, dissenting, argued that the complaint sufficiently alleged that mortgagor had made the payment under duress. Justice Acosta emphasized that if Klein had been unable to obtain a satisfaction of the mortgage he would not have been able to preserve the closing and refinance the loan with another lender.

Kilpatrick

The difference between the majority and the dissent in Drmak turned on interpretation of a century-old Court of Appeals case, Kilpatrick v. Germania Life Ins. Co., 183 N.Y. 163. In Kilpatrick , mortgagee foreclosed after mortgagor had failed to make an interest payment. Mortgagor then contracted to refinance with another lender, but when mortgagor informed mortgagee of its intent to refinance, mortgagee informed mortgagor that it had withdrawn its foreclosure action and would not surrender its mortgage lien unless mortgagor made an additional payment. Mortgagor protested, but then made the payment and subsequently brought an action to recover it. The Court of Appeals reversed the Appellate Division's judgment that the complaint should be dismissed, holding that under the circumstances, the payment made by the mortgagor was not voluntary, but was made under duress.

Kilpatrick's complaint alleged facts similar to those in the Drmak complaint, with two exceptions: Kilpatrick's complaint apparently alleged that mortgagee's position deprived him of an economic choice, and also alleged that he had protested to mortgagee ' two allegations apparently missing from Klein's complaint in the Drmak case. The Drmak majority focused on those omissions in holding that Klein's complaint should be dismissed. The majority did not, however, explain why those distinctions should lead to a difference in outcome.

Other Exceptions

Inconsistent application of the doctrine is not limited to the judicial conclusions about duress. Courts early held that the doctrine would not be applied when the payment was made under a “mistake of fact,” but what constitutes a mistake of fact appears to be in the eyes of the judicial beholder. Compare Eighty Eight Bleecker Co., LLC v. 88 Bleecker St. Owners, Inc., 34 A.D.3d 244, with Rite Aid of New York, Inc. v. Chalfonte Realty Corp., 105 A.D.3d 470. Both cases involved commercial leases, and both leases included provisions that made tenant's rent dependent in part on tax calculations. In both cases, tenant paid the rent bills sent by landlord for many years without ever questioning or protesting the amounts on the bills. Eventually, the tenants in both cases discovered that landlords had billed tenants for more than the lease formula permitted. Tenants then brought suits to recover the balance. In Eighty Eight Bleecker, the First Department applied the voluntary payment doctrine, concluding that tenant had not been laboring under a mistake of fact, while in Rite Aid, the same court concluded that the tenant was operating under a mistake of fact, taking the case out of the scope of the voluntary payment doctrine. Moreover, in Rite Aid' the court did not see fit to cite or discuss its own Eighty Eight Bleecker decision, rendered only seven years earlier.

Although courts have rejected the supposed rule that only mistakes of fact ' not mistakes of law ' justify an exception to the voluntary payment doctrine, they have held that “a party is not automatically entitled to relief simply because that party acted under a mistake of law” (Gimbel Bros. Inc. v. Brook Shopping Centers, Inc., 118 A.D.2d 532, 535), suggesting instead that courts have discretion to determine whether the voluntary payment doctrine bars recovery by a person who makes a mistake of law. Id.

The Problem

The inconsistency in application of the doctrine reflects in part the fact that courts have, in recent decades, failed to recognize any coherent rationale for the doctrine. Neither in Gimbel nor in Eighty Eight Bleecker nor in Rite Aid nor in Drmak did the court make any effort to articulate a purpose behind the doctrine, or to reconcile its result with that purpose. The early cases did better ' suggesting that the doctrine was designed to protect payees against having to defend a lawsuit after evidence had become stale. See, e.g., Peyser v. City of New York, 70 N.Y. 497 (“The reason of this principle is, that a person shall not be permitted, with the knowledge that the demand made upon him is illegal and unfounded, to make payment without resistance, where resistance is lawful and possible, and afterwards to choose his own time to bring an action for restoration, when, perchance, his adversary has lost the evidence to sustain his side.”) In other words, the doctrine is an equitable doctrine that rests on the same foundation as laches and statutes of limitations. But if that is the foundation for the doctrine, one might wonder why courts could not protect payees more directly by applying other equitable doctrines like estoppel and laches. And in particular, applying the doctrine in cases where the suit is brought almost immediately after payment is made ' as in Drmak ' does nothing to advance the purpose of the doctrine.

In short, until New York courts rediscover the foundation for the voluntary payment doctrine, we should not be surprised by inconsistent application.

Stewart E. Sterk, Mack Professor of Law at Benjamin Cardozo School of Law, is the Editor-in-Chief of this newsletter. Esmeralda Daci provided research assistance in the preparation of this article.

The voluntary payment doctrine, which supposedly bars a party from recovering payments made erroneously but voluntarily, has reared its head once again in the real estate context, this time in Drmak Realty, LLC v. Progressive Credit Union (NYLJ 11/6/15, p. 22, col. 1). The court in Drmak did little to clarify the rationale for or scope of this peculiar doctrine (For an earlier discussion, see Stewart E. Sterk, When Does “Voluntary Payment” Preclude Recovery of Overcharges?, NY RELR, November 2014, available at http://bit.ly/1P4UJQ1.)

The Drmak Case

Alexander Klein, a real estate investor, borrowed $3,350,000 from mortgagee, secured by a condominium owned Drmak Realty, an LLC controlled by Klein. The loan carried a 7.5% interest rate, and provided that failure to make a payment within 10 days of the due date would constitute a default. Upon default, Klein would be liable for a late fee of 5% for each overdue payment. The agreement also entitled mortgagee to reasonable attorneys' fees and costs for foreclosing on the mortgage. Klein defaulted several times, prompting two foreclosure actions. After Klein paid the arrears, mortgagee discontinued the first foreclosure action. Klein contended that he was never served in the second action. Ultimately, in 2013, Klein sought to pay off the loan and obtain financing from another lender.

On May 1, 2013, mortgagee's counsel advised Klein that mortgagee would accept $3,536,580 in exchange for release of the mortgage lien. That amount included delinquent fees, assignment and release fees, and other charges and expenses. Klein postponed the closing and requested a new payoff letter from mortgagee, apparently after concluding that the initial payoff letter included unwarranted charges. On June 3, mortgagee sent another payoff letter with a similar amount. The letter indicated that mortgagee would only issue a satisfaction if Klein delivered a check for $18,000, representing the June interest payment. Klein paid the entire amount mortgagee had requested, and then brought this action contending that mortgagee had extorted unlawful interest and other charges in exchange for issuance of a satisfaction. Supreme Court dismissed the complaint, concluding that because Klein had voluntarily paid the amount demanded, Klein could not now recover the amount paid. Supreme Court also concluded that many of the amounts included in the payoff letter were entirely proper. Klein appealed.

A divided Appellate Division affirmed, relying on the voluntary payment doctrine. The court emphasized that Klein, a sophisticated real estate investor, had not alleged that his payment was made under duress and under protest. As a result, Supreme Court had properly dismissed Klein's complaint, even if mortgagee had not been entitled to the money Klein paid. Justice Acosta, dissenting, argued that the complaint sufficiently alleged that mortgagor had made the payment under duress. Justice Acosta emphasized that if Klein had been unable to obtain a satisfaction of the mortgage he would not have been able to preserve the closing and refinance the loan with another lender.

Kilpatrick

The difference between the majority and the dissent in Drmak turned on interpretation of a century-old Court of Appeals case, Kilpatrick v. Germania Life Ins. Co. , 183 N.Y. 163. In Kilpatrick , mortgagee foreclosed after mortgagor had failed to make an interest payment. Mortgagor then contracted to refinance with another lender, but when mortgagor informed mortgagee of its intent to refinance, mortgagee informed mortgagor that it had withdrawn its foreclosure action and would not surrender its mortgage lien unless mortgagor made an additional payment. Mortgagor protested, but then made the payment and subsequently brought an action to recover it. The Court of Appeals reversed the Appellate Division's judgment that the complaint should be dismissed, holding that under the circumstances, the payment made by the mortgagor was not voluntary, but was made under duress.

Kilpatrick's complaint alleged facts similar to those in the Drmak complaint, with two exceptions: Kilpatrick's complaint apparently alleged that mortgagee's position deprived him of an economic choice, and also alleged that he had protested to mortgagee ' two allegations apparently missing from Klein's complaint in the Drmak case. The Drmak majority focused on those omissions in holding that Klein's complaint should be dismissed. The majority did not, however, explain why those distinctions should lead to a difference in outcome.

Other Exceptions

Inconsistent application of the doctrine is not limited to the judicial conclusions about duress. Courts early held that the doctrine would not be applied when the payment was made under a “mistake of fact,” but what constitutes a mistake of fact appears to be in the eyes of the judicial beholder. Compare Eighty Eight Bleecker Co., LLC v. 88 Bleecker St. Owners, Inc. , 34 A.D.3d 244, with Rite Aid of New York, Inc. v. Chalfonte Realty Corp. , 105 A.D.3d 470. Both cases involved commercial leases, and both leases included provisions that made tenant's rent dependent in part on tax calculations. In both cases, tenant paid the rent bills sent by landlord for many years without ever questioning or protesting the amounts on the bills. Eventually, the tenants in both cases discovered that landlords had billed tenants for more than the lease formula permitted. Tenants then brought suits to recover the balance. In Eighty Eight Bleecker, the First Department applied the voluntary payment doctrine, concluding that tenant had not been laboring under a mistake of fact, while in Rite Aid, the same court concluded that the tenant was operating under a mistake of fact, taking the case out of the scope of the voluntary payment doctrine. Moreover, in Rite Aid' the court did not see fit to cite or discuss its own Eighty Eight Bleecker decision, rendered only seven years earlier.

Although courts have rejected the supposed rule that only mistakes of fact ' not mistakes of law ' justify an exception to the voluntary payment doctrine, they have held that “a party is not automatically entitled to relief simply because that party acted under a mistake of law” ( Gimbel Bros. Inc. v. Brook Shopping Centers, Inc. , 118 A.D.2d 532, 535), suggesting instead that courts have discretion to determine whether the voluntary payment doctrine bars recovery by a person who makes a mistake of law. Id.

The Problem

The inconsistency in application of the doctrine reflects in part the fact that courts have, in recent decades, failed to recognize any coherent rationale for the doctrine. Neither in Gimbel nor in Eighty Eight Bleecker nor in Rite Aid nor in Drmak did the court make any effort to articulate a purpose behind the doctrine, or to reconcile its result with that purpose. The early cases did better ' suggesting that the doctrine was designed to protect payees against having to defend a lawsuit after evidence had become stale. See, e.g., Peyser v. City of New York , 70 N.Y. 497 (“The reason of this principle is, that a person shall not be permitted, with the knowledge that the demand made upon him is illegal and unfounded, to make payment without resistance, where resistance is lawful and possible, and afterwards to choose his own time to bring an action for restoration, when, perchance, his adversary has lost the evidence to sustain his side.”) In other words, the doctrine is an equitable doctrine that rests on the same foundation as laches and statutes of limitations. But if that is the foundation for the doctrine, one might wonder why courts could not protect payees more directly by applying other equitable doctrines like estoppel and laches. And in particular, applying the doctrine in cases where the suit is brought almost immediately after payment is made ' as in Drmak ' does nothing to advance the purpose of the doctrine.

In short, until New York courts rediscover the foundation for the voluntary payment doctrine, we should not be surprised by inconsistent application.

Stewart E. Sterk, Mack Professor of Law at Benjamin Cardozo School of Law, is the Editor-in-Chief of this newsletter. Esmeralda Daci provided research assistance in the preparation of this article.