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Posted: November 19, 2018

Allegations of Duress Insufficient to Overcome Voluntary Payment Doctrine

On November 15, 2018, the First Department issued a decision in Beltway 7 & Props., Ltd. v. Blackrock Realty Advisers, Inc., 2018 NY Slip Op. 07844, holding that allegations of duress were insufficient to overcome the voluntary payment doctrine, explaining:

In seeking to avoid application of the voluntary payment doctrine, plaintiff first contends on appeal that it made clear to Blackrock that its payment was not voluntary at all. The doctrine bars recovery of payments voluntarily made with full knowledge of the facts, in the absence of fraud or mistake of material fact or law. The onus is on a party that receives what it perceives as an improper demand for money to take its position at the time of the demand, and litigate the issue before, rather than after, payment is made.

. . .

Plaintiff asserts that, even if it did not lodge a proper protest at the time of the payment, it can still recover the payment if it can establish that it was made under economic duress or as the result of a mistake. . . . .

The relative sophistication of the parties is not a factor to be considered in assessing a claim of economic duress. Economic duress exists where a party is compelled to agree to terms set by another party because of a wrongful threat by the other party that prevents it from exercising its free will. Accordingly, our analysis consists of two prongs: first, whether Blackrock’s decision to demand the late charge and extra interest payment was lawful, that is, based on rights enumerated in the agreement; and second, if it was not, whether the demand placed plaintiff in a position such that it had no other choice but to accede. With respect to the first prong, Blackrock relies on M.W. Realty in arguing that, because the mezzanine loan agreement is part of the record, we can decide, even at this procedural posture, that, as a matter of law, the charges were not wrongful. In that case, plaintiff, a developer, claimed duress when the defendant, from which the plaintiff had contracted to purchase air rights so it could build a 31-story building, sought to extract more favorable terms from the plaintiff after the plaintiff had begun construction. The Court rejected the duress claim because after reviewing the contract, which was annexed to the complaint, it concluded that the defendant’s obligation to transfer the air rights had not yet been triggered when it sought the modification. The Court affirmed dismissal of the complaint because a party cannot be guilty of economic duress for refusing to do that which it is not legally required to do. Defendant argues that, here too, the agreement plainly establishes that it had the right to make the demand it did. Plaintiff, in contrast, asserts that the late charge provision is, at the very least, ambiguous with respect to how Blackrock was to calculate the charge, and that, even if the calculation was correct, it constitutes an unenforceable penalty.

We agree that the relevant contractual provisions are ambiguous, as they are each susceptible to more than one reasonable interpretation. As plaintiff notes, the 5% rate is expressly stated to apply to the unpaid sum. However, whether the Maximum Legal Rate is to be applied to the unpaid sum or something else is unclear. Plaintiff suggests that it was intended to apply to the length of time that payment was outstanding, which was seven days. Blackrock counters by, inter alia, characterizing the Maximum Legal Rate as a standard savings provision designed to ensure that it not be deprived of any recourse at all if payment is tardy. Each of these arguments has merit, and neither is susceptible of resolution at the pleading stage.

There is similar uncertainty concerning whether Blackrock was justified in charging interest for the November to December period. . . . Similarly, we are unwilling at this stage to declare that the amount charged by Blackrock was not an unenforceable penalty. . . . .

This is not to say that a garden variety dispute over the meaning of contractual terms will serve as the basis of a viable duress claim. It is necessary that the second prong of the duress analysis, which involves the deprivation of meaningful choice on the duress victim’s part, also be present. Thus, the possibility, or even the fear, of litigation is insufficient to establish duress. In Oleet, the defendant lender represented to the plaintiff borrowers, who were seeking a three-year loan, that it could only issue notes for 90 days at a time, but that it would continually extend such notes for the desired three years. However, when the first note became due, the lender told the plaintiffs that it would only extend the note if the plaintiffs, inter alia, paid certain charges to it. This Court rejected the plaintiffs’ duress claim, stating:

At the time the extension agreement was executed, the bank had no interest in or control over plaintiffs’ business or property. All the bank had was a claim for repayment of a loan, represented by ninety-day notes. Despite their financial distress, the borrowers could have refused to honor the fraudulently induced notes, thereby compelling the bank to institute suit, in which event the defense of fraud and, perhaps, equitable estoppel would have been available to them. Fear of financial embarrassment not created by the bank or the stress that might follow from a lawsuit brought to enforce the notes, is not sufficient to constitute such duress as will excuse or invalidate an agreement made to avoid such consequences. An impending suit, without more, does not create the cognizable impulsion of duress.

Here, plaintiff’s duress claim derives not from a fear it had that, should it demur from Blackrock’s insistence that it pay the late charges and extra interest, thus foregoing its ability to refinance, Blackrock would merely sue to recover the mezzanine loan. Rather, plaintiff claims that it feared that Blackrock would foreclose on plaintiff’s very valuable portfolio of properties. For this reason, it asserts, it was placed in a position where, even though it doubted Blackrock’s entitlement to the charges, it had no choice but to comply with Blackrock’s demand. Indeed, economic duress is established when the facts show that breach of a contractual obligation will result in an irreparable injury or harm. Furthermore, as this Court observed in Oleet, a demand can be characterized as improper when it is based on a claim insignificant when contrasted with the demands. Here, plaintiff contends that there is a gross disproportionality between the claim (a payment that was one week late) and the demand (nearly $850,000).

That plaintiff may have established a question whether Blackrock may have had a right to extract the late charge from it does not compel a decision upholding the complaint, for while there is a question whether Blackrock acted reasonably in imposing the penalty, we must also consider the consequence of plaintiff’s failure to seek recovery of the payment after the threat of foreclosure had passed. One who would recover moneys allegedly paid under duress must act promptly to make his claim known. That is because a contract procured by duress is not void, but merely voidable, such that the duress victim’s failure to act can be viewed as a ratification of the contract. Plaintiff dismisses this principle as inapplicable here because Blackrock did not procure a contract by duress, but rather a payment concomitant with an already existing contract. This appears to be a distinction without a difference. Plaintiff does not explain why a payment like the one at issue is void (not simply voidable), nor does it offer any authority to support that contention. Indeed, in Austin Instrument, a party was held to have procured price increases on an already existing contract through economic duress, and the Court still weighed whether the victim of that duress had ratified the price increase by waiting too long to seek recovery.

Plaintiff further asserts that the proper analysis where a party fails to promptly seek recovery of a payment made under duress is whether it is guilty of laches. It argues that because a showing of laches requires prejudice on the part of the party asserting the defense, it must prevail here, because Blackrock was not prejudiced. We disagree. Plaintiff has not cited any authority to support its theory that prejudice enters the analysis. Indeed, decisions by this Court declaring that a party has waived a duress claim have not even suggested that prejudice is a relevant factor. This is not to say that a lengthy wait to recover funds paid under duress bars the claim absolutely. In Austin Instrument, for example, the victim of the duress faced an imminent threat of wrongful compulsion long after it was placed in a position of duress, excusing its delay. Here, however, plaintiff fails to allege any set of facts justifying its decision to wait nearly two years to invoke duress, and then only after defendant invoked the voluntary payment doctrine. For that reason, its complaint was properly dismissed.

(Internal quotations and citations omitted).

As this decisions discusses, a claim of duress can relate to economic duress, and not just the paradigm case of someone being forced to sign a contract with a gun to their head. But, as this decision also shows, the standards for pleading duress are demanding. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a contract entered into under duress.

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