As a business lawyer running my own small firm, I appreciate colleagues who introduce me to interesting and useful legal theories that I haven’t seen in my own practice. A few years ago, a friend introduced me to the common law “voluntary payment doctrine.” I appreciate the favor – and the doctrine. If you haven’t heard of it before, I hope you’ll find it interesting and useful in the right cases too.
The voluntary payment doctrine can be stated as follows: a payor cannot recover payments that were voluntarily made, with knowledge of the facts, unless the payee defrauded or wrongfully inflicted economic distress on the payor. See Steinman v. Malamed (2010) 185 Cal. App. 4th 1550, 1557-59. The doctrine has been applied to alleged overpayments and wrongfully demanded payments, and sometimes even when a payor has attempted to reserve its rights to seek repayment. See generally id.
The voluntary payment doctrine was recognized as long ago as 1861 by the Supreme Court of California in Brumagim v. Tillinghast (1861) 18 Cal. 265:
[M]oneys voluntarily paid upon a claim of right, with full knowledge of all the facts, cannot be recovered back merely because the party at the time of payment was ignorant of or mistook the law as to his liability. The illegality of the demand paid constitutes of itself no ground for relief. There must be, in addition, some compulsion or coercion attending its assertion, which controls the conduct of the party making the payment.
Id. at 270-71. Under Brumagim, anyone who pays “an illegal demand, knowing it to be illegal ... is of course entitled to no consideration.” Id. at 271. Likewise, the Brumagim court held that ignorance of the law is no excuse: anyone who pays an illegal demand voluntarily “in ignorance or misapprehension of the law respecting its validity” is “in no better position.” Id. Everyone “must be taken to be cognizant of the law; otherwise, there is no saying to what extent the excuse of ignorance might be carried. It would be urged in almost every case.” Id. (quotation and citations omitted.)
Over time, the voluntary payment doctrine has been relaxed, and in some cases its reach has been limited by statute. But in cases where common law applies, it lives on.
A fairly recent case applying the voluntary payment doctrine, Steinman v. Malamed, affirmed that “[p]ayments voluntarily made, with knowledge of the facts, cannot be recovered.” Steinman, supra, 185 Cal. App. 4th at 1557 (quotation omitted.) In Steinman, the payor attempted to pay under protest, believing that the payment demand might be overstated. Id. at 1557-58. While the Steinman court cast doubt on whether the payment was truly “under protest,” it reasoned that even if it were, “ that would not necessarily make the payment involuntary.” Id. at 1558. Quoting precedent, the Steinman court held that “[p]ayments of illegal claims enforced by duress, coercion, or compulsion, when the payor has no other adequate remedy to avoid it, will be deemed to have been made involuntarily and may be recovered, but the payment must have been enforced by coercion and there must have been no other adequate means available to prevent the loss.” Id. (quotation omitted). Duress, for purposes of the voluntary payment doctrine, requires a showing that a “reasonably prudent” person would find it “necessary to make a payment of money” in order to preserve property or protect business interests, which the payor “does not owe and which in equity and good conscience the receiver should not retain.” Id. A finding of economic duress, according to Steinman, also requires that “the party insisting on payment must act wrongfully, with the knowledge that the claim asserted is false.” Id. at 1559.
It’s not possible within the scope of this short article to address all the wrinkles of the voluntary payment doctrine. (Likewise, an analysis of the federal cases applying the doctrine under California law is beyond the scope of this article.) While other arguments may be at hand, depending on the particular facts of the case, if the matter involves a voluntary payment, with knowledge of the facts, it may worth arguing the applicability of the voluntary payment doctrine.
Owen J. Rescher is the principal attorney at Rescher Law, P.C. Owen focuses his practice on business law, representing clients in business transactions and civil litigation. Owen has lived and practiced law in San Francisco since 2002.