United States: The Voluntary Payment Rule: A Powerful Defense Tool In An Appropriate Case

Last Updated: October 28 2004
Article by Diane A. Bettino

In December 2003, a New Jersey trial court granted summary judgment based on the Voluntary Payment Rule to the defendant, BMW Financial Services, NA, LLC, in a putative class action: William Paness v. BMW Financial Services, NA, LLC, N.J. Sup. Ct. Docket L-1182-002 (Dec. 5, 2003). In that case, the plaintiff alleged that the fee he paid to terminate his BMW lease early—10 months into the 36-month lease—was an unreasonable penalty in violation of Article 2A of the Uniform Commercial Code. BMW Financial Services argued that the claim was barred by the plaintiff’s voluntary payment of the early termination charge. The trial court agreed, finding that the plaintiff had knowledge of the necessary facts for application of the Voluntary Payment Rule. Plaintiff did not appeal the dismissal of the case.

The Voluntary Payment Rule is an equitable defense based on the general common law rule that a person cannot recover money which he has voluntarily paid with full knowledge of the facts. The Rule charges the claimant with knowledge of the law, even arcane law such as tax law. In fact, the Rule has its origins in tax law, under the rationale that the government must be able to rely upon retention of previously collected funds for budgeting purposes.

A claimant may raise several defenses to the Rule. Although mistake of law will not prevent application of the Rules, mistake of fact will. In addition to mistake of fact, payments made under fraud, deception, duress or compulsion to prevent injury to one’s person, property or business will prevent application of the Rule. Such defenses—if proved—undermine the voluntariness of the payment.

The defense of duress has been used in various contexts to try to bar the Rule. In some jurisdictions, the Rule will not bar an action seeking to recover amounts paid for a necessity, under the rationale that such payments were made under duress. Compare Getto v. City of Chicago, 426 N.E.2d 844 (Ill. 1981) (telephone service in the home considered to be a necessity) with Dreyfus v. Ameritech Mobile Communications, Inc., 700 N.E.2d 162 (Ill. App. Ct. 1998) (cell phone service not considered to be a necessity). Threats of a lawsuit or damage to credit unless the disputed amount is paid have been held not to constitute duress. Cotton v. Med-Cor Health Information Solutions, 472 S.E.2d 92 (Ga. App. Ct. 1996). In the franchisor/franchisee context, the Rule did not bar claims for overcharges paid by a franchisee with knowledge of the unfounded nature of the overcharges under the rationale that the payments were made under business compulsion by a franchisee with inferior bargaining power. See Ross Systems v. Linden Dari-Delite, Inc., 173 A.2d 258 (N.J. 1961).

There is a distinction between mistake of law and mistake of fact. However, in some cases involving the Rule, the line between the two issues is blurred, and what is a mistake of law is sometimes argued and/or construed to be a mistake of fact. For example, in Putnam v. Time Warner Cable of Southeastern Wisconsin, LP, 649 N.W.2d 626 (Wisc. 2002), the plaintiff argued that he paid the cable late-fee under a mistake of fact because when he paid the fee, he did not know that it was not based on the actual cost incurred by the cable company for late payments. The Supreme Court of Wis- consin rejected that argument, calling it a "conflation" of mistake of fact and mistake of law. See also Horne v. Time Warner Operations, Inc., 119 F.Supp.2d 264 (S.D. Miss. 1999) (rejecting the claim that the plaintiff was under a mistake of fact and noting that ignorance of the facts is not a mistake of fact).

However, other courts have accepted the argument that the lack of knowledge that the disputed fee or charge was not related to actual harm is a mistake of fact sufficient to avoid application of the Rule. See TCI Cablevision of Dallas, Inc. v. Owens, 8 S.W.2d 837 (Tex. App. Ct. 2000); Durant v. Servicemaster Co., 159 F.Supp.2d 977 (E.D. Mich. 2001).

The Rule has been applied in recent years to matters between private parties, including financial services matters on issues such as cable television services, automobile leases, loans and mortgages. However, the Rule is generally not applicable or has more limited application in cases involving usury claims. See Luebke v. Moser, 598 N.E.2d 760 (Ohio App. Ct. 1991).

The Rule has been applied to claims for breach of contract, breach of the covenant of good faith and fair dealing, state deceptive practices acts, the Uniform Commercial Code, and unjust enrichment. The Rule has limited or no application to certain statutory claims. See, e.g., Scott v. Fairbanks Capital Corp., 284 F.Supp.2d 880 (S.D. Ohio 2003) (Rule does not apply to bar claims under the Fair Debt Collection Practices Act); Harper v. AT&T, 54 F.Supp.2d 1371 (S.D. Ga. 1999) (Rule does not bar claims under federal RICO); Lawson v. First Union Mortgage Company, 786 N.E.2d 279 (Ind. App. Ct. 2003) (Rule does not bar claims under state statutory law).

Depending on the facts pled, the development of the case, and an evaluation of various factors, including the court before which you find yourself and the characteristics and situation of the claimant, the Rule can be used at the motion-to-dismiss stage or the summary judgment stage. See, e.g., Horne v. Time Warner Communications, 119 F.Supp.2d 624 (S.D. Miss. 1999) (Rule applied to bar case on motion to dismiss); Hill v. Galaxy Telecom, L.P., 2000 U.S. Dist. LEXIS 2404 (N.D. Miss. 2000) (Rule applied to bar case on summary judgment motion). In some cases, full development of the facts on the merits of the individual plaintiff’s claim may be advisable before seeking to invoke application of the Rule. See Bova v. Cox Communications, Inc., 2002 U.S. Dist. LEXIS 4084 (W.D. Va. March 12, 2002) (Application of the Rule premature on a motion to dismiss as voluntariness of payment not apparent on the face of the complaint); Crain v. Lucent Technologies, 739 N.E.2d 639 (Ill. App. Ct. 2000) (Application of Rule denied at motion-to-dismiss stage because plaintiffs alleged the payment was not voluntary).

In addition to obtaining an outright dismissal of a case, the Rule has also been used as a tool to defeat class certification, thereby creating a tension for the plaintiff between defending against the application of the Rule and effectively representing the class. That is, a plaintiff must try to defend against application of the Rule by raising issues of fraud, duress, compulsion or mistake of fact, each of which may preclude class certification because of the highly individualized nature of the defenses. See Voyager Insurance Companies v. Whitson, 2003 Ala. LEXIS 143 (Alabama 2003) (class certification order vacated because individual issues predominate over common claims); Munsey v. Cox Communications, 814 So. 2d 633 (La. App. Ct. 2002) (Rule did not bar class certification and issue can be determined at trial).

The Rule is not appropriate in all cases and is not welcomed by all courts. However, in the appropriate case, with the appropriate facts, the Rule may serve to be a powerful defense tool, as demonstrated in the BMW case mentioned at the outset of this article. The trial court in the BMW case succinctly summarized the purpose and application of the rule:

The idea is, it’s a stop, look and listen. The plaintiff listened but he didn’t stop and he didn’t take any other action. And I don’t want to say shame on the plaintiff, but the voluntary payment rule does disqualify plaintiff’s claim.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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