The Voluntary Payment Doctrine Protects Lenders' Rights to Legal Fees in Mortgage Foreclosures, Per New York Case

By Bruce Bergman | Partner, Berkman, Henoch, Peterson, Peddy & Fenchel, P.C.

The Voluntary Payment Doctrine and Mortgage Foreclosures

In the real world of mortgage foreclosure, there are events which occur with some apparently increasing frequency: after a foreclosure action has begun, and typically when it has progressed through a number of stages, the borrower, recognizing that the case will be lost, seeks to sell the property, or refinance the mortgage.  To accomplish that the borrower requests a payoff letter which contains legal fee compensation to the plaintiff as a component.

There are then two variations on this theme. If the payoff is requested prior to issuance of the judgment of foreclosure and sale, the court has not computed those legal fees. Nonetheless, the plaintiff assesses the legal fees incurred.

The other alternative is that the judgment of foreclosure and sale has been entered, has recited legal fees at a certain sum, but by the time the payoff is requested, legal fees have increased so that the plaintiff’s demand is for a greater sum for legal fees than was provided in the judgment.

In either instance, plaintiff mortgage holder announces that it will be proceeding to a foreclosure sale unless it is paid the full sum due. Although disgruntled, the borrower pays the full sum, but upon satisfying the mortgage (inclusive of the legal fees requested) no written protest is made. (Notably if there was a protest or a reservation of rights, the plaintiff would have or would have been wise to reject the tender.)

After payment is made the borrower starts an action to recoup the legal fees it paid which it claims were excessive and were collected only under duress. The borrower’s maneuver could also be manifested in a cross-motion to plaintiff’s motion to discontinue the foreclosure. Is the formerly foreclosing plaintiff safe? The answer is yes because of the voluntary payment doctrine, even under these perhaps problematic circumstances.

New York Case Affirms Voluntary Payment Doctrine

The applicable law is rather neatly set out in a recent case [ECI Financial Corp. v. Resurrection Temple of Our Lord, Inc., 213 A.D.3d 735, 184 N.Y.S.3d 96 (2d Dept. 2023)].

The basis of the voluntary payment doctrine is to bar recovery of payments voluntarily made with full knowledge of the facts and in the absence of fraud or mistake of material fact or law – precisely the situation set forth in the example. Relating to this, observe the presumption that payments are voluntary. Where there is an objection, for a protest of payment to be deemed efficacious, it must be both in writing and made at the time of the payment.

Moreover, any typical claim of duress fails. The existence of economic duress arises only with proof that one party to a contract threatened to breach the agreement by withholding performance unless the other party agreed to some further demand. But there is no actionable duress where the supposed peril endangering the borrower was exercise a legal right, e.g., in this case, to proceed with the foreclosure and go to sale. Therefore, to the extent that the plaintiff threatened to execute on the foreclosure judgment and sell the property if the borrower did not satisfy the payoff demand, that menace was to pursue a legal right. Accordingly, any such threat cannot amount to actionable economic duress.

The principles recited in the new case are meaningful as an example of gathering all the axioms together for perhaps the first time – but none are new. But what is original is the ruling that attorney’s fees not previously awarded or adjudged by the court are protected by the voluntary payment doctrine. This is certainly logical but does not appear to have previously been expressed. This is especially important as a practical matter because in all foreclosures in which the judgment stage has not been reached, the legal fee expenditures will always be simply what the plaintiff has incurred, sans court blessing.

Likewise, it is hardly uncommon for the foreclosing plaintiff to expend legal fees after entry of the foreclosure judgment (usually elicited by borrower post-judgment activity). Since these additional sums are (obviously) not calculated and awarded in the judgment, there could be an issue as to whether they were collectible. This case declares that if demanded and paid, without protest (and presumably without fraud or mistake of material fact or law) the payment is encompassed by the voluntary payment doctrine. It cannot later be assaulted.

Borrowers are often upset at the legal fee component of a payoff, especially ironic when those legal fees were generated by the borrowers’ default and defensive tactics. If the borrower, however, protests the legal fees in writing, then the foreclosing party need not – indeed should not – accept the payment. If the plaintiff accepts the funds accompanied by objection or protest it will open itself to later motion or action seeking to recover some portion of the attorney fees. The plaintiff should accept the payment only when it is made voluntarily.

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About the Author 

Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender, is a partner with Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. in Garden City, New York. He is also a member of the USFN, The American College of Real Estate Lawyers, The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who in American Law and he has been for years listed in Best Lawyers in America and New York Super Lawyers.