Does the Voluntary Payment Doctrine Trump State Unclaimed Property Laws?
By Stanley R. Kaminski and David I. Curkovic
August 3, 2009
State Tax Notes
As everyone familiar with unclaimed property law knows, amounts owed to a person—such as overpayments made by that person—that are not returned to that person are usually considered unclaimed property.1 The person owed these funds is commonly called the owner, while the person in possession of funds belonging to another is commonly called the holder. The holder of that unclaimed property is required by law to remit that property to the state after a specified holding or abandonment period is reached. In this regard, states are merely the custodians of the funds for the true owner.2 In deciding which state is entitled to the money, the state of last known address of the owner has first dibs on the property, while the state of incorporation of the holder has second dibs if no last known address can be found.3
Unclaimed property laws normally transcend statutes of limitations, private termination or waiver clauses on amounts owed (that is, private escheat provisions), and some other contract provisions that may limit or prevent an owner from getting his money back directly.4 Hence, those obstacles generally will not stop the state from declaring those funds unclaimed and requiring the holder to remit them to the state. The owner is then able to claim those funds directly from the state as the custodian.
But what if the owner of the funds is no longer deemed the owner under some common-law doctrine? Rather, what if the holder now is deemed the owner of the funds under common law? In Alvarez v. Pappas,5 that issue was addressed in the context of overpayments of tax money to the treasurer of Cook County. In Alvarez, the Illinois Supreme Court found that because the taxes were knowingly paid to Cook County, the county became the owner of the property. The court also found that the voluntary payment doctrine eliminated any obligation of Cook County to return those funds to the original owner. Under the voluntary payment doctrine, absent some explicit contractual or statutory provision that requires the return of voluntarily but erroneously paid funds—that is, money paid with available knowledge of the facts and without duress—those funds are not required to be returned to the payer.6 Consequently, because Cook County was now the owner of the overpayment (and did not have to return it), the Illinois Uniform Disposition of Unclaimed Property Act (Illinois Unclaimed Property Act) did not apply.7
The Illinois Supreme Court's ruling in Alvarez acknowledges that in a voluntary payment situation, a person making a voluntary but erroneous payment of money to another loses ownership of those funds as well as the right to their return, and thus those funds cannot be deemed unclaimed property remittable to the state. No doubt, that ruling has far-reaching implications because the voluntary payment doctrine is not limited to taxes alone, but has been applied to public and private transactions in many states.8
Alvarez v. Pappas
Alvarez was a class action brought by owners of real estate in Cook County who claimed that they had made duplicate payments of their real estate taxes and sought a return of those payments. Beginning in 1990, the plaintiffs had paid taxes in escrow to their lenders; however, when plaintiffs received their tax bills, they too paid the taxes, apparently unaware that their lenders were also paying the same bills.9
The plaintiffs brought suit in 2005 against the treasurer of Cook County, allegedly "the only county treasurer in the state who refused to refund duplicate tax payments when the refunds were requested more than five years after the payment had been made."10 The complaint contained a number of causes of action, including:
- violation of equal protection and due process;
- unlawful taking without just compensation;
- unjust enrichment;
- violation of the Illinois Unclaimed Property Act; and
- violation of state pensioners' rights.11
The defendant filed a motion to dismiss the complaint on the grounds that the five-year statute of limitations contained in the Property Tax Code (35 ILCS 200/20-175) had expired.12 The circuit court agreed and dismissed the complaint; the appellate court and Illinois Supreme Court both affirmed that dismissal.14
On appeal and before the Illinois Supreme Court, the plaintiffs argued that their duplicative payments were subject to the Illinois Unclaimed Property Act and thus the return of those overpayments was not limited by the Property Tax Code's five-year statute of limitations. In essence, the plaintiffs asserted that those overpayments constituted personal property that was required to be turned over to the state—and thereafter returnable to the plaintiffs—under the Illinois Unclaimed Property Act. The appellate court and the Illinois Supreme Court in Alvarez rejected that argument.14 In doing so, the Illinois Supreme Court made two important determinations. First, it held that an owner who makes a voluntary payment has effectively transferred ownership to the holder. In other words, contrary to the normal mechanics of unclaimed property law, the holder has become the owner as a result of the voluntary payment:
Here, plaintiffs did not retain ownership of their funds; they transferred ownership to defendant. Plaintiffs' payments of the taxes were made pursuant to tax bills sent to them by defendant. They did not just leave money on a counter somewhere. Plaintiffs intended to pay the amounts they did, they intended to pass title to the funds to defendant, and they intended those payments to be applied to the tax bills they had received. That plaintiffs were mistaken in believing that the tax bills had not otherwise been paid does not change the character of the payments.15
But that still left open the issue of whether the plaintiffs were entitled to their money back (that is, whether they had a legal right to such money or were owed that money). Regarding that issue, the Illinois Supreme Court concluded that the statute of limitations on refunds had expired and the voluntary payment doctrine eliminated any obligation to return the funds.16 As a result, the court held that the county did not have to refund or return any of the overpaid taxes to the plaintiffs, and since the county now owned those funds, those overpaid taxes were not required to be turned over to the state under the Illinois Unclaimed Property Act.
Alvarez plainly stands for the proposition that under a state's voluntary payment doctrine, money considered voluntarily paid should not be subject to a state's unclaimed property law. Even though the court in Alvarez applied this doctrine to tax overpayments, that the voluntary payment doctrine is also equally applicable to private business transactions makes this ruling significant. Therefore, this ruling surely acknowledges that there is a sizable wall between a state's unclaimed property law and voluntarily paid funds, and a state may find it hard to climb that wall.
- See, e.g., Uniform Unclaimed Property Act, section 1 (1981).
- See, e.g., Canel v. Topinka, 212 Ill. 2d 311, 818 N.E.2d 311 (2004); Presley v. City of Memphis, 769 S.W.2d 221 (Tenn. App. 1988).
- See, e.g., Texas v. New Jersey, 380 U.S. 518 (1965); Delaware v. New York, 507 U.S. 490 (1993).
- See, e.g., Uniform Unclaimed Property Act, section 29 (1981); People v. Marshall Field and Co., 83 Ill. App. 3d 811 (5th Dist. 1980); Benson v. Simon Property Group, Inc., 281 Ga. 744 (2007).
- Alvarez v. Pappas, 229 Ill. 2d 217, 890 N.E.2d 434 (2008). (For the decision, see Doc 2008-9429 or 2008 STT 85-7.)
- See, e.g., Getto v. City of Chicago, 86 Ill. 2d 39 (1981); Putnam v. Time Warner Cable of SE Wis., 255 Wis. 2d 447 (2002).
- 765 ILCS 1025/1 et seq.
- See, e.g., Kanter and Eisenberg v. Madison Associates, 116 Ill. 2d 506, 512 (1987) (the voluntary payment doc-trine was applied to a landlord/tenant situation, with the court explaining that "the voluntary-payment doctrine provides that money paid under a claim of right by one who has knowledge of the relevant facts cannot be recovered on the ground that the claim was illegal unless the payment was made under compulsion"); Putnam, supra note 6 (voluntary payment doctrine barred plaintiffs' claim against a cable TV company); Tyler v. Tyler, 742 S.W.2d 740, 743 (Tex. App. 1987, writ denied) (in a loan repayment matter, the court explained that "Money voluntarily paid with full knowledge of all the facts and without fraud, deception, duress or coercion cannot be received back although it was paid on a void or illegal demand or on a claim that had no foundation in fact and was paid without consideration"); Carter v. Montgomery Ward & Co., 413 So. 2d 309, 314 (La. Ct. App. 1982) (the voluntary payment doctrine precluded the employer from recovering workers' compensation overpayments); Gimbel Bros., Inc. v. Block Shopping Centers, Inc., 499 N.Y.S.2d 435 (2d Dept. 1986) (extra "Sunday charges" paid by lessee to landlord were not recoverable under voluntary payment doctrine).
- 229 Ill. 2d at 218-219.
- Id. at 219.
- Id. at 220.
- Id. at 226.
- Id. at 227 (emphasis supplied).
- 229 Ill. 2d at 234; see also Getto, supra note 6 (under the voluntary payment doctrine, "a taxpayer may not recover taxes that are voluntarily paid, even if the taxing body imposed or assessed the taxes illegally. Such taxes may be recovered only if the recovery is authorized by statute").
Stanley R. Kaminski is a partner and David I. Curkovic is an associate at the Chicago office of the international law firm of Duane Morris LLP. Kaminski concentrates his practice in the areas of state and local tax and unclaimed property law.
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