NEW RESTATEMENT REJECTS DICHOTOMY BETWEEN FACT, LAW FOR RESTITUTION

March 9, 2004

Steven P. Garmisa
Hoey & Farina Attorney
garmisa@hoeyfarina.com
1-888-425-1212

In the law of restitution, the long-standing distinction between mistakes of law and fact is under attack.

Going back to 1937, section 45 of the Restatement of Restitution provided that "a person who, induced thereto solely by a mistake of law, has conferred a benefit upon another to satisfy in whole or in part an honest claim of the other to the performance given, is not entitled to restitution."

Backing away from this traditional distinction, section 6(2) of the Restatement (Third) of Restitution and Unjust Enrichment (tentative draft No. 1, 2001) provides that, "Payment of money resulting from a mistake by the payor as to the existence or extent of the payor's obligation to an intended recipient gives the payor a claim in restitution against the recipient to the extent the payment was not due."

Rejecting the fact-law dichotomy, comment c explains that, "Relief is available ... without regard to whether the mistake might be characterized as ... a mistake of fact or a mistake of law."

Finding the tentative draft persuasive, the Indiana Supreme Court adopted this new approach to restitution in a class action seeking to recover late fees from a cable TV company. Time Warner Entertainment Company LP, 2004 WL 203444 (Ind., Feb 3).

Based on the "voluntary payment" doctrine, an Indiana appeals court ruled that the plaintiffs were not entitled to restitution. But the Supreme Court reversed, even though the "weight of authority" supported Time Warner's position. As the high court recounted:

"Hornbook law sets forth three propositions [on restitution]:

"As a general rule, money voluntarily paid with a full knowledge of all the facts, and without any fraud or imposition on the payor, cannot be recovered back, although it was not legally due.

"Generally a voluntary payment made under a mistake or in ignorance of law, but with a full knowledge of all the facts, and not induced by any fraud or improper conduct on the part of the payee, cannot be recovered back.

"In general money paid under a mistake of fact, and which the payor was under no legal obligation to make, may be recovered back, notwithstanding a failure to employ the means of knowledge which would disclose a mistake."

With late-fee litigation, the Supreme Court noted:

"It is clear that cable customers throughout the country (and, dare we say, their lawyers) have been aggressive in bringing claims similar to those asserted in this case against cable television operators. For their part, the cable operators (and their lawyers) have been successful in deploying the voluntary payment doctrine to block these claims. Indeed, it appears that the 'weight of authority from other jurisdictions' strongly influenced the Court of Appeals to apply the voluntary payment doctrine in behalf of Time Warner here.

"We note that since the decision of the Court of Appeals, our colleagues in Wisconsin have also decided this issue in favor of the cable operators. Putnam v. Time Warner Cable of Southeastern Wisconsin L.P., 255 Wis.2d 447 (Wis.2002)."

Nevertheless, concluding that the voluntary payment doctrine did not automatically bar a claim to recover late-payment fees, the Supreme Court explained:

"[W]e we are sympathetic to contemporary scholarly opinion that suggests the distinction between a mistake of law and a mistake of fact is artificial. While the American Law Institute's 1937 Restatement of Restitution is frequently cited for the distinction, the current tentative draft of a new Restatement of Restitution and Unjust Enrichment (Third) eliminates it.

"The tentative draft -- correctly, we think -- limits application of the voluntary payment doctrine to situations where a party has voluntarily paid a disputed amount."

Entitled "Voluntary Payment," comment e to section 6 of the draft states:

"The restitution claim to recover a payment in excess of an underlying liability -- a claim that is frequently described in terms of mistaken payment -- meets an important limitation in the so-called voluntary payment rule. The rule appears in frequent judicial statements to the effect that 'money voluntarily paid with knowledge of the facts cannot be recovered back.' Statements of this kind must be treated with caution.

"In a business setting, it is at least paradoxical to suppose that the overpayment of an asserted (or any payment of a nonexistent) liability could ever be 'voluntary,' and it is important to bear in mind that the proper operation of the voluntary payment rule must be realistic rather than artificial.

"The rule does not, for example, impute knowledge of relevant circumstances of which the payor is not in fact aware, describing as 'voluntary' a payment that was actually the consequence of negligence or inadvertence.

"When properly employed, a reference to 'voluntary payment' is judicial shorthand for a truth of common experience: that a person must often choose to act on the basis of imperfect knowledge, accepting the risk that further information (acquired with the benefit of hindsight) may reveal the choice to have been less than optimal.

"A more appropriate statement of the voluntary payment rule, therefore, is that money voluntarily paid in the face of a recognized uncertainty as to the existence or extent of the payor's obligation to the recipient may not be recovered, on the ground of 'mistake,' merely because the payment is subsequently revealed to have exceeded the true amount of the underlying obligation." Restatement (Third) of Restitution and Unjust Enrichment, section 6, comment e (tentative draft No. 1, 2001).

Applying this new version of the voluntary payment rule, the Supreme Court reversed, declaring, "We think it clear that at minimum there is a genuine issue of material fact as to whether customers voluntarily paid the late fees in the face of a recognized uncertainty as to the existence or extent of an obligation to Time Warner."

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