The following is a common business occurrence: Party A demands payment from Party B to perform work on a project in which the two are engaged. Party B is not obligated to make the payment under the parties’ agreement, but does so anyway – albeit under protest and with a reservation of rights to sue for recovery of the payment later – in order to keep the project moving along While it would seem that Party B has acted prudently, that is not necessarily the case as illustrated by the recent decision of the Virginia Supreme Court in D.R. Horton, Inc. v. Board of Supervisors For The County of Warren. In Horton the Court applied Virginia’s “voluntary payment doctrine” to bar a real estate developer from recovering payment under the above scenario.
The defendant in Horton, a county board of supervisors, had charged the plaintiff, a real estate developer, some $200,000 in water and sewer hook-up fees as a condition of receiving building permits. The board asserted its entitlement to collect the fees pursuant to a zoning agreement with the developer. On several occasions the developer objected to the charge arguing that no agreement existed that obligated the payment. In the end, however, the developer paid the fees but had its counsel write to the county that it was doing so only “until this matter has been resolved” in order “‘to avoid further damage to [itself].’” Counsel’s letter further noted that the payment was being made “only under protest and with a full reservation of [the developer’s] rights and remedies.”
Eventually, the developer sued for a declaratory judgment that the defendant could not lawfully assess the hook-up fees and to recover, based on a claim of unjust enrichment the payments previously made. The trial court ruled in the developer’s favor on the declaratory judgment action, but then held that the developer “was nevertheless barred from being awarded reimbursement of the unlawful [hook-up] fees because it paid them ‘voluntarily’ within the meaning of the voluntary payment doctrine.”
The Virginia Supreme Court affirmed. Citing prior precedent, it held:
‘Where a party pays an illegal demand with a full knowledge of all the facts which render such demand illegal, [i] without an immediate and urgent necessity therefor, or [ii] unless to release his person or property from detention, or [iii] to prevent an immediate seizure of his person or property, such payment must be deemed voluntary, and cannot be recovered back. And the fact that the party at the time of making the payment, files a written protest, does not make the payment involuntary.’ [Emphasis added.]
The Court explained that “[a]ll payments are presumed to be voluntary until the contrary is made to appear.” Thus, the party seeking to recover the payments bears the burden “‘to show that its payment was not voluntary.’” The Court reasoned that the voluntary payment doctrine is to “advance[e] certainty and finality between parties in the resolution of their legal affairs; . . . without [this doctrine], ‘the payment of money would soon become but the parent of a suit, and the settlement of an account the harbinger of litigation.’”
Applying the voluntary payment doctrine, the Virginia Supreme Court rejected the developer’s arguments why the doctrine did not apply. Most notably, the Court rejected the developer’s argument that it had paid the hook-up fees involuntarily because it had an “immediate and urgent need” to pay those as it “faced an immediate and urgent necessity’ to ‘do what it could to build and sell houses,’ which included paying the [hook-up] fees to obtain the [building] permits authorizing their construction.” The Court explained that “[t]o establish the requisite necessity to pay an unlawful demand, a plaintiff must prove that it ‘did not have time and opportunity to relieve [itself] of [its] predicament by resorting to legal methods.’” The developer’s argument on this point failed because it had not shown that it did not have the time or opportunity to pursue an appropriate legal remedy such as obtaining an injunction prohibiting the county from collecting the fees. The Court also noted that the developer’s protests were of no import because “simply protesting an unlawful demand does not render payment of the demand involuntary under the voluntary payment doctrine[.]”
The takeaway from Horton: if you make a payment in response to a demand that you recognize to be wrongful, you may be foregoing your right to recover the payment in the future – even if you made the payment under protest and reserved your rights to seek recovery. In short: caveat payor.