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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 žPayment In FullÓ.

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 žaccord and satisfactionÓ; 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

÷is 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 sellerŪs 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:

  1. Reject the offer by returning or destroying the check; or

  2. 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 žaccordÓ is the agreement between parties to accept something different from, or less than, the amount one party contends is owed. The žsatisfactionÓ 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 žacceptance of this check is payment in fullÓ, 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: žPayment in full settlement of the stated accountsÓ or žEndorsement of the check constitutes a complete settlement of your claimÓ 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 partyŪs bid to prevent a satisfaction by accepting the check but scratching out the restrictive endorsement and adding the words žwithout prejudiceÓ 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, žPaid in fullÓ 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 žPayment in fullÓ and žFull statement of account to follow.Ó The creditor added the notation žWithout prejudice.Ó The creditor cashed the August 18 check in the ordinary course of its operations. The creditorŪs accounting manager contended that she did not notice the žPaid in fullÓ 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 debtorŪs 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:

žWhere [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.Ó2

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:

žThe debtorŪs 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.Ó3

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 debtorŪs 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 debtorŪs August 18 check bore the notation žPaid in fullÓ, 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 creditorŪs accounting clerk stated that she did not see the žPaid in fullÓ reference before the cashing the check. The court determined that even if the žPaid in fullÓ language was clear, the accounting clerk for the creditor was never advised by the debtor of the significance of the phrase, žPaid in full.Ó 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 creditorŪs cashing of the check would have served as an accord and satisfaction:

žAssuming there was an accord, [creditorŪs] bid to prevent a satisfaction by accepting the check, but scratching out the restrictive endorsement and adding the words žwithout prejudiceÓ 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.Ó4

On the other hand, a check given in payment of an account and marked žIn full of account,Ó 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 žPayment in full of accountÓ, 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 ž In full of accountÓ 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: žPayment in full settlement of the stated accountsÓ or žEndorsement of the check constitutes a complete settlement of your claimÓ 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 žIn full payment of accountÓ? 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 žstealingÓ discounts would be even less likely to pay such discount after they had in their possession a cancelled check voucher marked žIn full of accountÓ.


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

 
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