Attorneys for Appellant Attorneys for AppelleeS
Scott D. Himsel Karl L. Mulvaney
Brent D. Taylor Nana Quay-Smith
Jennifer K. Bowman Candace L. Sage
David K. Herzog Bingham McHale LLP
Baker & Daniels Indianapolis, IN
Irwin B. Levin
Richard E. Shevitz
Scott D. Gilchrist
Cohen & Malad, P.C.
Appeal from the Marion Superior Court,
Nos. 49D11-9803-CP-420, 49D06-9803-CP-423
The Honorable John L. Price, Judge
On Petition To Transfer from the Indiana Court of Appeals, No. 49A02-9910-CV-719
February 3, 2004
Wilson signed her contract on August 29, 1992. It read in pertinent
Time Warner did in fact impose upon both Customers a late fee of
$4.40 (before Jan
uary, 1998) and $4.65 (after January, 1998) when payment had not
been received by the Date Due. In fact, Time Warner says that
such a fee was imposed on more than 20,000 of its 84,000 Indianapolis
subscribers each month.
The Customers originally filed separate lawsuits against Time Warner. In broad terms,
they sought to recover the late fees paid to Time Warner in excess
of Time Warners actual damages caused by late payment. Customers also sought
declaratory and injunctive relief to prevent Time Warner from charging excessive late fees
in the future.
For its part, Time Warner maintained that the late fee covered only a
portion of the costs it incurred as a result of subscribers late payments.
These costs include those of its in-house collection department (consisting of customer
service representatives who speak with delinquent subscribers and lobby personnel who accept payments
from late subscribers who are late); field collectors who visit subscribers at their
homes; and contract collection agencies that pursue unpaid balances.
On Time Warners motion, the two lawsuits were consolidated for purpose of discovery
and pre-trail proceedings. Time Warner subsequently filed a Motion to Dismiss and
for Summary Judgment on the basis that Indianas voluntary payment doctrine prohibits recovery
of funds voluntarily paid under the payors mistaken belief as to the legal
obligation of the payment. Time Warner also contended that none of the
customers claims for money damages states a cognizable claim under Indiana law because
the late payment provisions of the contracts constituted valid and enforceable liquidated damage
The trial court initially granted Time Warners Motion to Dismiss and Motion for
Summary Judgment, concluding that the Customers claims for money damages were barred by
the voluntary payment doctrine and that Time Warners late fee was a valid
liquidated damage assessment. But following a hearing on the Customers motion to
correct error, the trial court vacated its earlier ruling and permitted the action
to proceed on the merits.
The Court of Appeals affirmed in part and reversed in part. Time
Warner Entertainment Co. v. Whiteman, 741 N.E.2d 1265, 1275 (Ind. Ct. App. 2001).
It concluded that genuine issues of material fact existed with respect to
the cost basis for Time Warners late payment charges, and affirmed the trial
courts decision to reinstate the Customers claims for injunctive and declaratory relief.
However, the Court also determined that the Cu
stomers claims for money damages were
barred by the voluntary payment doctrine as a matter of law, and concluded
that the trial court abused its discretion by granting the Customers motion to
correct error as to this claim.
Hornbook law sets forth three propositions in this regard:
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
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.
23 I.L.E., Payment §§ 41, 42-43 (1970). See also C.J.S. §§ 113-114 (1987). Our court resolved a number of 19th century disputes using these principles. Three are representative.
In Bond v. Coats, 16 Ind. 202 (Ind. 1861), Coats sued Bond. Coats had rented a mule from Bond to work on a ferry-boat. While Coats had the mule, it died through no fault of Coats. Coats nevertheless paid Bond for the mule, thinking he was legally obligated to do so. When Coats discovered that he was not legally obligated to pay for the mule, he sued to get his money back. We held Coats unable to recover the amount paid. He had full knowledge of [the facts]; but alleges he was mistaken as to his rights, in a matter in which he had constituted himself a judge in his own cause, and decided against himself. We are of opinion that the weight of authority is that he can not be now heard to reverse his own judgment. Id. at 203.
In Downs v. Donnelly, 5 Ind. 496 (1854), Donnelly sued Downs. Donnelly
had paid Downs the amount of a debt owed to Downs by the
estate of a man named Ross. Ross was Donnellys wifes deceased former
husband and Downs had threatened to sue Donnelly for the amount of the
debt. Thinking he was legally obligated to pay the debt and not
wanting to be sued, Donnelly paid Downs. When Donnelly discovered that he
was not legally obligated to pay the estates debt, he sued to get
his money back. We held Donnelly unable to recover the amount paid.
His right of recovery is exclusively based upon an alleged mistake.
If that was a mistake of law, it is fully settled that proof
of such misapprehension will not enable the party to recover back money voluntarily
paid under a claim of right. The construction of law is open
to both parties and each is presumed to know it." Id. at
In Lafayette & I. R. Co. v. Pattison, 41 Ind. 312 (Ind. 1872),
Pattison sued a railway. Pattison had paid shippers freight charges on cattle
shipped from Chicago to Indianapolis. He then sued the shippers to recover
alleged overcharges. We held that Pattison was entitled to pursue recovery because
his payments were not voluntary. [W]here one person was in possession of the
goods or property of another, and refused to deliver the same up to
that other, unless the latter paid him a sum of money which he
had no right to receive, and the latter, in order to obtain possession
of his property, paid that sum, the money so paid was a payment
by compulsion, and may have been recovered back. Id. at 327, 328.
See also Chicago, St. L. & P.R. Co. v. Wolcott, 142 Ind.
267, 39 N.E. 451 (1895) (also holding alleged railway overcharges could be recovered).
To these interesting older cases, we add the one discussed by the Court
of Appeals, City of Evansville v. Walker, 162 Ind. App. 121, 318 N.E.2d
388, 389 (1974). The plaintiffs had paid fines to the city for
parking violations committed on federal property. When the plaintiffs discovered that the
city had no legal authority to impose fines for parking violations on federal
property, they sued to get their money back. The court held the
plaintiffs unable to recover, having chosen not to contest the legality of the
fines and voluntarily pay them instead. Id. at 123, 318 N.E.2d at
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. Time Warner, 741 N.E.2d at
1271-1272 (citing cases). 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 Wis.,
L.P., 649 N.W.2d 626 (Wis. 2002).
While we acknowledge the weight of authority favoring Time Warners position, we decline
to follow it.
First, looking to our own precedents, we think the Customers make a good
argument that they are far more like the plaintiffs in Pattison and Wolcott
than the plaintiffs in the other cases described. The Pattison and Wolcott
plaintiffs were put in the position by the respective railroad defendants of having
to pay in order to receive their property; the customers allege they were
put in the position by Time Warner of having to pay in order
to continue to receive cable service. The plaintiffs against whom the voluntary
payment doctrine was enforced faced no immediate deprivation of goods or services if
they did not pay.
Second, 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 Institutes 1937 Restatement of Restitution is frequently cited for the
See footnote the current tent
ative draft of a new Restatement of Restitution & Unjust
Enrichment (Third) eliminates it.
See footnote The tentative draft correctly, we think, limits
application of the voluntary payment doctrine to situ
ations where a party has voluntarily
paid a disputed amount:
Voluntary payment. 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 non-existent) 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 & Unjust Enrichment § 6 cmt. e (Tentative Draft No. 1, 2001) (emphasis in original). 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.
Third, while the weight of authority does favor Time Warner, it is not unanimous. TCI Cablevision of Dallas v. Owens, 8 S.W.3d 837 (Tex. Ct. App. 2000), discussed by the Court of Appeals, goes the other way. So does the dissent of Justice Bablitch, joined by Chief Justice Abrahamson, of the Wisconsin Supreme Court in Putnam. Justice Bablitch makes several interesting points. He argues that, as a general proposition, customers in a government created monopoly [i.e., cable] deserve special protection because they have nowhere else to go for cable services. Putnam, 649 N.W.2d at 642. He accurately observes that, for purposes of this case at this time in the proceedings, we must assume the truthfulness of all the [customers] allegations. Id. at 643. The same is true in our case. And he rightly asks, Why should a customer protest the payment of a fee if it has no reason at the time of payment to believe that it is unreasonable and/or unconscionable? If that is the law, and the majority says it is, then all payees of all late fees pursuant to prior agreements regarding late fee payments, whether to banks, credit cards, bills for services, and the like, must automatically protest at the time of payment or lose the right to contest it. That is, of course, absurd." Id.
Fourth, the principal policy justifications for applying the voluntary payment doctrine do not
seem to us to line up very well in this situation. These
justifications were aptly set forth by Justice Prosser for the majority in the
There are two primary reasons why courts have adopted the voluntary payment doctrine. First, the doctrine allows entities that receive payment for services to rely upon these funds and to use them unfettered in future activities. Second, the doctrine operates as a means to settle disputes without litigation by requiring the party contesting the payment to notify the payee of its concerns. After such notification, a payee who has acted wrongfully can react to rectify the situation.
Id. at 633 (citations omitted).
As to the first of these justifications, we do not believe that it is appropriate as a matter of policy for us to favor a private enterprise over private individuals in this respect. We believe the principle cited here was derived from cases like City of Evansville where the payee is a unit of government and presumably makes the unfettered use of the funds on behalf of all of the citizens of its jurisdiction. The same rationale does not apply to a private business. Judge Schudson of the Wisconsin Court of Appeals made this point with some force:
[I]t is undisputed that if the late fee (or a portion thereof) is unlawful, Time Warner never should have charged it. Why, then, should Time Warner be allowed to take financial advantage of its own wrongdoing? If the [reliance on funds received] rationale applies, the answer is clear, and Time Warner is in the clear. If, however, the [reliance on funds received] rationale (explaining why government is insulated against such a claim) does not apply to a private enterprise that, in our free-market economy, perhaps should be expected to suffer the consequences of its wrongdoing, then the customers' claim survives, notwithstanding the voluntary payment doctrine.
See Putnam v. Time Warner Cable of Southeastern Wis., L.P., 633 N.W.2d 254, 270 (Wis. Ct. App. 2001) (Schudson, J., concurring and dissenting), affd, 649 N.W.2d 626.
As to the second rationale that the doctrine operates as a dispute resolution mechanism we believe the comment set forth supra from the tentative draft of the new Restatement of Restitution properly limits the scope of this rationale to situations where money has been voluntarily paid in the face of a recognized uncertainty as to the existence or extent of the payor's obligation to the recipient. Restatement (Third) of Restitution & Unjust Enrichment § 6 cmt. e (Tentative Draft No. 1, 2001).
We hold that the voluntary payment doctrine does not bar Customers claims.
The term liquidated damages applies to a specific sum of money that has
been expressly stipulated by the parties to a contract as the amount of
damages to be recovered by one party for a breach of the agreement
by the other, whether it exceeds or falls short of actual damages.
Merrillville Conservancy Dist. v. Atlas Excavating, 764 N.E.2d 718, 724 (Ind. Ct. App.
2002) (citing George B. Swift Co. v. Dolle, 39 Ind.App. 653, 80 N.E.
678, 681 (1907)); Blacks Law Dictionary 395 (7th ed. 1999). A typical
liquidated damages provision provides for the forfeiture of a stated sum of money
upon breach without proof of damages. Gershin v. Demming, 685 N.E.2d 1125, 1127
(Ind. Ct. App. 1997).
The history of litigation of liquidated damage clauses suggests that their enforceability turned
on whether the nature of the parties agreement was such that in the
event of a breach, the damages resulting from the breach would have been
difficult to ascertain. If actual damages could be readily calculated and the
amount stipulated exceeded actual damages, then the contract provision was treated as a
penalty and only actual damages awarded.
Here is a sort of classic statement of the issue:
Where the sum named is declared to be fixed as liquidated damages, is not greatly disproportionate to the loss that may result from a breach, and the damages are not measurable by any exact pecuniary standard, the sum designated will be deemed to be stipulated damages.
Jaqua v. Headington, 114 Ind. 309, 310, 16 N.E. 527, 528 (1888). Nearly a half century later, we relied on Jaqua to hold a stipulated sum to be a penalty and not enforceable. Sterne v. Fletcher American Co., 204 Ind. 35, 181 N.E. 37 (Ind. 1932). Indeed, in that case we said that a stipulated sum will not be allowed as liquidated damages unless it may fairly be allowed as compensation for the breach. Id. at 49-50, 181 N.E. at 43.
This policy of skepticism toward the enforceability of liquidated damage clauses was grounded in equitable notions of equity and natural law:
It is the application, in a court of law, of that principle long recognized in courts of equity, which, disregarding the penalty of the bond, gives only the damages actually sustained.
Id., 204 Ind. at 50, 181 N.E. at 43, (quoting Jaquith v. Hudson, 5 Mich. 123, 133 (1858)).
Even as we turn from the 20th to the 21st century, when codification of commercial law have greatly reduced the role of equity in resolving business disputes, our case law maintains this skepticism. Recently, the Court of Appeals held a stipulated damages provision in a contract to be an unenforceable penalty. Its explication of the relevant law reflects much of current jurisprudence:
"In determining whether a stipulated sum payable on a breach of contract constitutes liquidated damages or a penalty, the facts, the intention of the parties and the reasonableness of the stipulation under the circumstances of the case are all to be considered." [Gershin v. Demming, 685 N.E.2d 1125, 1127 (Ind. Ct. App. 1997).] If the sum sought by a liquidated damages clause is grossly disproportionate to the loss that may result from a breach of contract, we should treat the sum as a penalty rather than liquidated damages. Rogers v. Lockard, 767 N.E.2d 982, 991 (Ind. Ct. App. 2002). "Liquidated damages provisions are generally enforceable where the nature of the agreement is such that when a breach occurs the resulting damages would be uncertain and difficult to ascertain." Gershin, 685 N.E.2d at 1127. However, to be enforceable the stipulated sum must fairly be allowed as compensation for the breach. Id. at 1127-28. Additionally, we construe any contract ambiguity against the party who drafted it. Rogers, 767 N.E.2d at 990. If there is uncertainty as to the meaning of a liquidated damages clause, classification as a penalty is favored. Id. at 992.
Olcott Int'l & Co. v. Micro Data Base Sys., 793 N.E.2d 1063, 1077 (Ind. Ct. App. 2003), transfer denied,2003 Ind. LEXIS 1094.
Unlike our colleagues on the Court of Appeals, we have not had much opportunity to wrestle with these issues in recent years. But some of our most important cases have been consistent with the principles enunciated in Olcott. Compare Raymundo v. Hammond Clinic Assn., 449 N.E.2d 276, 284 (Ind. 1983) (holding valid as liquidated damages payment of $25,000 for violation of a restrictive covenant not to compete, largely because of the uncertainty in determining the amount of actual damages) with Skendzel v. Marshall, 261 Ind. 226, 233-234, 301 N.E.2d 641, 645-646 (Ind. 1973) (holding invalid as a penalty a land contract vendees forfeiture of $ 21,000, well over one-half the original contract price).
Despite the longstanding principles represented by these cases of ours and the Court
of Appeals, we are left with some unease over any decision where what
appears to be the freely bargained agreements of the parties are set aside.
Fixing the respective rights and expectations of the parties as to damages
makes economic and commercial sense. Enforcing such provisions would seem to conform
to this Courts longstanding recognition of the freedom of parties to enter into
contracts and our presumption that contracts represent the freely bargained agreement of the
parties. Fresh Cut, Inc. v. Fazli, 650 N.E.2d 1126, 1129 (Ind. 1995).
However, both sides in this lawsuit seem quite content to litigate this
issue based on these principles as set forth and so we will decide
it on this basis.
As noted under part II, supra, Time Warner asserted that the late fee
provisions of both contracts constituted valid and enforceable liquidated damage clauses because the
undisputed facts established that amount of the late fees were less than the
estimated average cost that Time Warner incurs because of late payment.
See footnote (Br.
of Appellant at 24.) Time Warner said it was entitled to summary
gment because these undisputed facts showed that its late fees met the relevant
legal standard of not being grossly proportionate to its losses due to late
payments. (Id. at 26.)
Summary judgment is appropriate where the evidence shows there is no genuine issue
of material fact and the moving party is entitled to a judgment as
a matter of law. Butler v. City of Peru, 733 N.E.2d 912, 915
(Ind. 2000); see Ind. Trial Rule 56(C); Shell Oil Co. v. Lovold Co.,
705 N.E.2d 981, 983-84 (Ind. 1998). But the burden here is on Time
Warner as the party seeking summary judgment to negate the existence of any
genuine issue of material fact. Winkler v. V.G. Reed & Sons, 638
N.E.2d 1228, 1235 (Ind. 1994). And all facts and reasonable inferences drawn
from those facts are construed in favor of the nonmoving party. Butler,
733 N.E.2d at 915.
The Customers responded that the late fees they were charged were indeed grossly
disproportionate to the damages actually suffered by Time Warner when the Customers did
not pay their bills on time. They offered as evidence affidavits of
two experts that dispute the methodology used by Time Warner in the cost
Andrea C. Crane, described as a regulatory rate-setting consultant and former Ratepayer Advocate
for the State of New Jersey, reviewed Time Warners cost study and testified
that the methodology employed was flawed because it included many costs in excess
of those incremental costs directly related to collection of late payments. For
example, she found that (1) costs included in the study for non-collection were
not properly attributable to customers who simply pay late, (2) costs for salary
and wage categories included in the study are not incrementally related to late
payments and Time Warner would not experienced lower costs for these positions all
customers made timely payments, and (3) costs included in the study such as
general insurance, utilities, property taxes, and appreciation should not be included in a
late fee since the level of such costs does not change as a
result of late payments.
John F. Lehman, described as a certified public accountant and former partner with
the accounting firm of Deloitte & Touche who has testified against at least
15 cable television providers in late fee litigation, also reviewed Time Warners cost
study and also identified what he described as a number of fundamental flaws
in the basic methodology. His findings were quite similar to Ms. Cranes.
In addition, he estimated that the maximum damage caused to Time Warner
by a customer who pays late is no more than 36 cents.
We think the Crane and Lehman affidavits are sufficient to create a genuine
issue of material fact as to whether the late fee provisions were valid
and enforceable liquidated damage clauses. We hold that Time Warners motion for
summary judgment was properly denied.
Were Wilson litigating this case alone, we might have expected her to argue
that summary judgment was inappropriate because, in the absence of a specific dollar
amount, the contract was ambiguous as to whether she was to pay actual
damages or liquidated damages in the event of a late payment. See
Fresh Cut v. Fazli, 650 N.E.2d 1126, 1133 (Ind. 1995) (where contract was
ambiguous, summary judgment was inappropriate). But because Whitemans contract contained a specific
dollar amount, the Customers together could not make this argument with respect to
Customers in Whitemans situation.
On the other hand, were Whiteman litigating this case alone, we might have
expected Time Warner to argue for summary judgment on the straightforward proposition that
Whiteman agreed to pay a specific amount in the event her payment was
late and the freely bargained agreement of the parties should not be set
aside. Trimble v. Ameritech Publ'g, 700 N.E.2d 1128, 1129 (Ind. 1998) (Courts
in Indiana have long recognized the freedom of parties to enter into contracts
and have presumed that contracts represent the freely bargained agreement of the parties.).
But because of the ambiguity of Wilsons contract, Time Warner could not
make this argument with respect to Customers in Wilsons situation.
None of these arguments have been advanced. Instead, as will be discussed
infra, the parties debate whether the voluntary payment doctrine was applicable and whether
the late fees constituted liquidated damages or penalties. We limit our review
to the contentions raised by the parties.