Cashing Check May Not Be Accord And Satisfaction

Scott E. Blakeley, Esq.

Consider the following common situation. A debtor disputes the amount of its delinquent account. The debtor contends that $100,000 is owed, while you claim $125,000 is due. The debtor mails a check for $110,000 in an attempt to resolve the dispute. The debtor writes on the check “payment in full.” 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?

A recent opinion from the Court of Appeals for the Seventh Circuit[i], discusses the legal principle of Accord and satisfaction; 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

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 can not avoid an accord and satisfaction by either reserving his or her rights by writing on the check or 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 accord is the agreement between parties to accept something different from, or less than, the amount one party contends is owed. The satisfaction 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. To determine whether a bona fide dispute exists, the test is whether the dispute was in good faith. Ordinarily, a party must ordinarily 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. 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: Payment in full settlement of the stated accounts or Endorsement of the check constitutes a complete settlement of your claim in conspicuous letters.

Under the UCC, a party may avoid an accord and satisfaction by returning the money within ninety days. A party’s bid to prevent a satisfaction by accepting the check but scratching out the restrictive endorsement and adding the words without prejudice 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 of a large organization 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 vendor regularly sold milk products to the debtor, a distributor of dairy products. The vendor invoiced the debtor weekly. A dispute arose between the parties as to unauthorized deductions taken by the debtor for product shipped, as well as unauthorized credits taken by the debtor 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 vendor who continued to bill the debtor the amount it claimed was in arrears. The debtor alleged that the vendor 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 vendor. The debtor remitted checks to the vendor dated June 17 and August 18. Tendered with the checks were vouchers stating Paid in full through particular dates. The vendor, however, contended it was still owed $58,000.

The debtor met with a new employee of the vendor. 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 vendor cashed the check, crossing out the words Payment in full and Full statement of account to follow. The vendor added the notation Without prejudice. The vendor cashed the August 18 check in the ordinary course of its operations. The vendor’s accounting manager contended that she did not notice the Paid in full notation on the voucher. The vendor demanded the balance due from the debtor.

The debtor sued the vendor for declaratory relief contending that it effected an accord and satisfaction of its debt by tendering the checks with the vouchers. The vendor countersued seeking payment for the balance owed. The trial court ruled in favor of the vendor, finding that the debtor owed the arreages. The debtor appealed.

The General Rule

The court analyzed the checks. The debtor’s contention was that notations on the checks implying full satisfaction of the debt were conspicuous. The debtor also contended that the vendor 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:

where [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.[ii]

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:

The debtor’s 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.[iii]

The court found that in this case, there no honest dispute between the debtor and the vendor when the debtor tendered a check to the vendor. A debtor’s open refusal to pay a debt is not enough to establish a god 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 vendor 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 vendor 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 debtor’s August 18 check bore the notation Paid in full, 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 vendor’s accounting clerk stated that she did not see the Paid in full reference before the cashing the check. The court determined that even if the Paid in full language was clear, the accounting clerk for the vendor was never advised by the debtor of the significance of the phrase, Paid in full. Nor was there evidence that the accounting clerk had responsibility to any accord and satisfaction which the vendor 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 for a large organization and is cashed without inspection. A debtor cannot unilaterally create an accord and satisfaction.

Words of Protest

It should be noted that had there been a good faith dispute, the vendor’s cashing the check would have served as an accord and satisfaction:

Assuming there was an accord, [vendor's] bid to prevent a satisfaction by accepting the check but scratching out the restrictive endorsement and adding the words “without prejudice” before he cashed the check was to no avail, for under the revised version of the U.C.C., words of protest cannot change the legal effect of an accord and satisfaction.[iv]

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. Such notation can take the form of a debtor writing on the check, or accompanying voucher: Payment in full settlement of the stated accounts or Endorsement of the check constitutes a complete settlement of your claim in conspicuous letters. Under the UCC, a party may avoid an accord and satisfaction by returning the money within ninety days. A party’s bid to prevent a satisfaction by accepting the check but scratching out the restrictive endorsement and adding the words without prejudice 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 of a large organization 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 may have adopted variations of the UCC which would impact the outcome of such cases.

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

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