Cashing a Check May Not be Accord and Satisfaction
By Scott E. Blakeley,
Esq.
By cashing the check, do you waive the right
to the balance you believe you are owed?
Consider the following scenario. A customer disputes
the amount of its delinquent account. They contend that $100,000
is owed; while you claim $125,000 is due. The customer mails a check
for $110,000 in an attempt to resolve the dispute. The customer writes
on the check ìPayment In Fullî.
What are the consequences if you cash the check?
By cashing the check, do you waive the right to the
balance you believe you are owed?
An opinion from the Court of Appeals for the Seventh
Circuit1, discusses the legal principle
of ìaccord and satisfactionî; how a debtor and creditor may rewrite
a contract to settle an account dispute without court intervention.
The opinion reminds parties that an accord and satisfaction may be
effected only where there is an honest dispute between the parties
as to the amount due at the time payment was tendered. The debtor
must make clear that issuing the check is intended to settle the
outstanding claim between the parties and that the creditor, by cashing
the check, accepts the settlement.
Accord And Satisfaction
Öis an agreement to accept less than is legally due
in order to discharge the matter. Once the accord and satisfaction
is made and the amount is paid (even though it is less than owed)
the debt is wiped out since the new agreement (accord) and the payment
(satisfaction) replaces the original obligation.
Creditors in a practical sense often accept it if a
customer is financially unstable and the creditor wants to receive
all it can but recognize they will not get 100% satisfaction. "A
bird in hand is worth two in the bush". However, it is sometimes
used by debtors as a method to short pay or deceive a creditor by
attempting to sneak a payment through the sellerís receivable system
for less than the amount owed.
Accord and satisfaction is generally defined as a substitute
contract between a debtor and creditor for the settlement of a debt
for a different amount than allegedly owed. Accord and satisfaction
has evolved from common law principles that encourage parties to
settle a disputed debt without judicial intervention.
Under the common law, if a creditor received a check
for less than the full amount owed and that check contained a conspicuous
notation that it was tendered as satisfaction of the entire debt,
the creditor had two options:
-
Reject the offer by returning or destroying the check; or
- Cash the check and accept the accord.
A creditor cannot avoid an accord and satisfaction by either:
(a) reserving his or her rights by writing on the check; or, (b)
by crossing out the full settlement language on the check.
The Uniform Commercial Code (UCC) codified the common law, with
some variations to reflect modern business practices. Section 3-311
of the UCC specifically deals with accord and satisfaction in the
commercial marketplace. Certain states, such as California, have
overlapping accord and satisfaction provisions in their UCC and state
statutes.
The ìaccordî is the agreement between parties to
accept something different from, or less than, the amount one party
contends is owed. The ìsatisfactionî is the execution
of the agreement, which extinguishes the obligation.
Under the UCC, before an accord and satisfaction can be established,
there must be a bona fide dispute between the parties. The test to
determine if a bona fide dispute exists is whether the dispute was
in good faith. Ordinarily, a party must prove that they acted in
good faith in tendering an instrument as full satisfaction of a claim.
Thus, there must be an honest dispute between the parties as to the
amount due at the time payment was tendered. When a party is acting
dishonestly as to the dispute, they will not meet the good faith
test. For example, the customer notes on the check that ìacceptance
of this check is payment in fullî, but there is really no dispute
creating an accord. The presumption then is that the customer is
acting dishonestly in an attempt to not pay the full obligation to
the creditor.
Before a check can create an accord and satisfaction, the party
who presents the check must make clear -- by appropriate and conspicuous
wording -- that cashing the check will be construed as settlement
of all outstanding claims between the parties. Such notation can
take the form of a debtor writing on the check, or accompanying voucher: ìPayment
in full settlement of the stated accountsî or ìEndorsement of the
check constitutes a complete settlement of your claimî in conspicuous
letters.
Under the UCC, a party may avoid an accord and satisfaction by returning
the money within ninety days. If a dispute exists, a partyís bid
to prevent a satisfaction by accepting the check but scratching out
the restrictive endorsement and adding the words ìwithout prejudiceî is
of no avail. Under the UCC, words of protest cannot change the
legal effect of an accord and satisfaction once a check has been
cashed.
The UCC provides for prevention of an accord and satisfaction mistakenly
taking place. Sometimes checks are sent to an automated collection
center or bank lock box and are cashed without inspection. A creditor
may require that, to be effective, any attempted accord and satisfaction
must be sent to a particular office.
Accord And Satisfaction In Action
The court in McMahon Food Corp. v. Burger Dairy Co. considered
accord and satisfaction. A creditor regularly sold milk products
to the debtor, a distributor of dairy products. The creditor invoiced
the customer weekly. A dispute arose between the parties as to unauthorized
deductions taken by the customer for product shipped, as well as
unauthorized credits taken by the customer for empty milk cases returned.
The parties met to resolve the dispute. They examined the invoices
and payment practices. No agreement was reached as to the delinquent
account; according to the creditor who continued to bill the customer
the amount it claimed was in arrears. The debtor alleged that the
creditor agreed to take less than the amount owed.
The debtor had attempted to resolve the account dispute by paying
less than the amount contended by the creditor. The debtor remitted
checks to the creditor dated June 17 and August 18. Tendered with
the checks were vouchers stating, ìPaid in fullî through particular
dates. The creditor, however, contended it was still owed $58,000.
The debtor met with a new employee of the creditor. The debtor reported
that the two parties had, in a previous meeting with a former employee
reached agreement to settle the delinquent account. After holding
the June 17 check for several months, the creditor cashed the check,
crossing out the words ìPayment in fullî and ìFull statement of account
to follow.î The creditor added the notation ìWithout prejudice.î The
creditor cashed the August 18 check in the ordinary course of its
operations. The creditorís accounting manager contended that she
did not notice the ìPaid in fullî notation on the voucher. The creditor
demanded the balance due from the debtor.
The debtor sued the creditor for declaratory relief contending that
it effected an accord and satisfaction of its debt by tendering the
checks with the vouchers. The creditor counter-sued seeking payment
for the balance owed. The trial court ruled in favor of the creditor,
finding that the debtor owed the arrearages. The debtor appealed.
The General Rule
The court analyzed the checks. The debtorís contention was that
notations on the checks implying full satisfaction of the debt were
conspicuous. The debtor also contended that the creditor understood
that the checks were meant to fully satisfy the debt. Accordingly,
the debtor argued, there was an accord and satisfaction of the debts.
The court cited the general rule:
ìWhere [an] amount due is in dispute, and the debtor sends [a] check
for less than the amount claimed, clearly expressing that it is sent
as settlement in full . . . [the] cashing of the check is almost
always held to be an acceptance of the offer operating as full satisfaction.î2
Good Faith Dispute
A good faith dispute between the parties is a prerequisite to an
accord and satisfaction. In other words, the party seeking to establish
an accord and satisfaction by tendering a check must do so in good
faith. Under the UCC good faith is defined as honesty in fact. The
court observed the nature of a good faith dispute:
ìThe debtorís mere refusal to pay the full claim does not make it
a disputed claim. Where the refusal is arbitrary and the debtor knows
it has no basis, the payment of less than the full amount claimed
does not operate as an accord and satisfaction even though it is
tendered and received as such.î3
The court found that in this case, there was no honest dispute between
the debtor and the creditor when the debtor tendered a check to the
creditor. A debtorís open refusal to pay a debt is not enough to
establish a good faith dispute. The debtor must demonstrate a just
basis for refusing to pay. The court ruled that the debtor had purposefully
misled a new employee of the creditor who met with the debtor. At
that meeting, the debtor represented that the account had been settled.
Because the debtor was taking advantage of the creditor at the time
of tendering payment, the debtor failed to meet the good faith requirement
of the UCC and, thus, there was no accord and satisfaction.
Clearly Intend to Settle Dispute
Before a check can manifest an accord and satisfaction, the party
who presents the check must make it clear that cashing the check
is intended to settle all outstanding accounts between the parties.
While the debtorís August 18 check bore the notation ìPaid in fullî,
the restrictive note was the last of several lines of information
inscribed on the voucher accompanying the check. The voucher referenced
three invoices. The court ruled that the debtor had failed to make
it sufficiently clear that depositing the check would settle all
outstanding disputes. It was not clear that the check was not intended
merely to settle the invoices referenced in the voucher.
The creditorís accounting clerk stated that she did not see the ìPaid
in fullî reference before the cashing the check. The court determined
that even if the ìPaid in fullî language was clear, the accounting
clerk for the creditor was never advised by the debtor of the significance
of the phrase, ìPaid in full.î Nor was there evidence that the accounting
clerk had responsibility to any accord and satisfaction that the
creditor might reach with its debtors. The UCC is intended to prevent
an accord and satisfaction from mistakenly taking place when a check
is sent to a collection center or lock box and is cashed without
inspection. A debtor cannot unilaterally create an accordand
satisfaction.
Words of Protest
It should be noted that had there been a good faith dispute,
the creditorís cashing of the check would have served as an accord
and satisfaction:
ìAssuming there was an accord, [creditorís] bid to prevent a satisfaction
by accepting the check, but scratching out the restrictive endorsement
and adding the words ìwithout prejudiceî before he cashed the check
was to no avail, for under the revised version of the UCC, words
of protest cannot change the legal effect of an accord and satisfaction.î4
On the other hand, a check given in payment of an account and marked ìIn
full of account,î that does not, as a matter of fact pay the entire
account, presents a different consequence. If a claim is liquidated
and there is no dispute as to the amount due, a check for a lesser
amount than the claim, even though marked ìPayment in full of accountî,
does not settle the account and the creditor may keep the check and
sue for the balance. If however as stated above, there is a bona
fide dispute as to the amount of the claim, and the same is not liquidated,
a check sent and marked ì In full of accountî is payment in full
and the creditor must either return the check and sue for the amount
claimed or accept the check in complete payment. Whether a bona fide
dispute exists can be a matter of dispute in itself and obviously
a debtor wishing to pay a lesser sum can very easily make such a
claim.
Lesson Learned
Before a check can create an accord and satisfaction, the party
who presents the check must make clear -- by appropriate and conspicuous
wording -- that cashing the check will be construed as settlement
of all outstanding claims between the parties; and a bona fide dispute
must exist. Such notation can take the form of a debtor writing on
the check, or accompanying voucher: ìPayment in full settlement of
the stated accountsî or ìEndorsement of the check constitutes a complete
settlement of your claimî in conspicuous letters.
The UCC provides for prevention of an accord and satisfaction mistakenly
taking place. Sometimes checks are sent to an automated collection
center and are cashed without inspection. A creditor may require
that, to be effective, any attempted accord and satisfaction must
be sent to a particular office. Vendors should be mindful that certain
states might have adopted variations of the UCC that would impact
the outcome of such cases.
One last point
What about checks that are received by a creditor after a discount
period has passed with the discount deducted and the check marked ìIn
full payment of accountî? Can such checks be properly deposited and
claim made for cash discount? The answer is that they obviously fall
under the abovementioned guidelines and a claim can be made for the
cash discount so deducted in cases where there is no dispute as to
the terms. The practical effect of the matter is, however, that each
single transaction represents, in most instances of this type, a
comparatively small sum, for which it would be impractical, either
on account of expense or distance, to sue, and the chances are that
a debtor accustomed to ìstealingî discounts would be even less likely
to pay such discount after they had in their possession a cancelled
check voucher marked ìIn full of accountî.
1. McMahon Food Corp. v. Burger Dairy Co., 103 F.3d 1307(7th Cir.
1997)
2. McMahon Food Corp. v. Burger Dairy Co., 103 F.3d 1315.
3. McMahon Food Corp. v. Burger Dairy Co., 103 F.3d 1317.
4. McMahon Food Corp. v. Burger Dairy Co., 103 F.3d 13012.
Reprinted by permission from Trade Vendor Quarterly Blakeley & Blakeley
LLP Fall 04 |