“Payment in Full” – Counseling Business Clients on Accord and Satisfaction

By Ronald B. Kowalczyk

Businesses should be aware their accounts receivable procedures and staff could be waiving claims for outstanding debt without knowing it. While most businesses are conscious of the fact that they may be sued on account of their employees’ actions, what many fail to realize is that they may also lose the option to recover monies owed them when clients dispute their debt.  This occurs under the theory of accord and satisfaction.

Accord and satisfaction is the legal theory by which the full amount of a debt may be discharged through the creditor’s acceptance of payment of a lesser amount. Businesses who accept checks in payment of debts should be made aware of Illinois Uniform Commercial Code 5/3-311.1

Section 3-331 provides that:

(a) If a person against whom a claim is asserted proves that (i) that person in good faith tendered an instrument to the claimant as full satisfaction of the claim, (ii) the amount of the claim was unliquidated or subject to a bona fide dispute, and (iii) the claimant obtained payment of the instrument, the following subsections apply.

(b) Unless subsection (c) applies, the claim is discharged if the person against whom the claim is asserted proves that the instrument or an accompanying written communication contained a conspicuous statement to the effect that the instrument was tendered as full satisfaction of the claim.
(c) Subject to subsection (d), a claim is not discharged under subsection (b) if either of the following applies:

(1) The claimant, if an organization, proves that (i) within a reasonable time before the tender, the claimant sent a conspicuous statement to the person against whom the claim is asserted that communications concerning disputed debts, including an instrument tendered as full satisfaction of a debt, are to be sent to a designated person, office, or place, and (ii) the instrument or accompanying communication was not received by that designated person, office, or place.

(2) The claimant, whether or not an organization, proves that within 90 days after payment of the instrument, the claimant tendered repayment of the amount of the instrument to the person against whom the claim is asserted. This paragraph does not apply if the claimant is an organization that sent a statement complying with paragraph (1)(i).

(d) A claim is discharged if the person against whom the claim is asserted proves that within a reasonable time before collection of the instrument was initiated, the claimant or an agent of the claimant having direct responsibility with respect to the disputed obligation knew that the instrument was tendered in full satisfaction of the claim.2

This section of the Illinois UCC provides a comprehensive framework for dealing with accord and satisfaction issues. First, §3-331(a) requires the debt in question must be subject to a bona fide dispute and must be unliquidated in amount. In other words, if there is not an honest dispute as to the whether the debt is owed or the amount that may be owed, tender of a full payment check will not work an accord and satisfaction. For example, if a debtor admits owing $10,000, a tender of a check in the amount of $5,000 marked “payment in full” will not operate as an accord and satisfaction, even if the check is accepted. On the other hand, if the debtor honestly contends that he only properly owes $5,000, the tender of a check in this amount, if accepted, could establish an accord and satisfaction.

Second, the check in question must be tendered in good faith. “Good faith” in subsection (a)(i) is defined in Section 3-103(a)(4) as not only honesty in fact, but the observance of reasonable commercial standards of fair dealing.  Using the preceding example, if there was no dispute over the amount due, and the debtor was simply making the “offer” in the hope that no one would pick up the full payment language on the check, the tender of the check would not be a good faith tender, and could not establish an accord and satisfaction.

Another example of lack of good faith can be found where businesses routinely print full satisfaction language on all of their check stocks irrespective of whether there exists any dispute with the creditor.  Such practices may also prevent an accord and satisfaction due to lack of good faith under section (a)(i).3

Third, the check must be “conspicuously” marked as a full payment check, or it must be accompanied by a written communication indicating that it is intended to be a full payment check. UCC §1-201(10) provides that a term or clause is “conspicuous” when “it is so written that a reasonable person against whom it is to operate ought to have noticed it.”4  Thus, if the recipient of the check can reasonably be expected to examine the check, almost any statement on the check should be noticed and therefore conspicuous.5

However, an exception exists if the check is sent to a lock box or other office processing checks on behalf of the creditor.  In this situation, it is irrelevant whether the clerk processing the check did or didn’t see the full payment message. “Knowledge of the clerk is not imputed to the organization because the clerk has no responsibility with respect to an accord and satisfaction…. Section 3-311(c) is intended to allow a claimant to avoid inadvertent accord and satisfaction by complying with either subsection (c)(1) or (2) without burdening the check-processing operation with extraneous and wasteful additional duties.”6  These subsections are discussed in greater detail below.

The fourth and final requirement, as codified at subsection (d), is that the check must be “accepted.” In this context, a check is clearly “accepted” if it is processed for payment. It is insufficient for the creditor to object to the final settlement language and cash the check.  “The creditor must either accept the payment with the condition or refuse it, and it makes no difference that the creditor protests or states that he does not accept the amount proffered in full satisfaction. Under these conditions, a creditor has no right to cash the check and thereby obtain the benefit of such an offer without its accompanying burden of compromise.”7

While it is important to understand the requirements of an accord and satisfaction discussed above, when counseling a business client it is equally important that the client understand how to avoid inadvertent accord and satisfaction to ensure that a disputed sum is not improperly discharged. The means for doing this are found in §3-331(c).

Subsection (c)(1) allows the claimant to protect itself by advising customers by a conspicuous statement that communications regarding disputed debts must be sent to a particular person, office, or place.  The claimant must provide this information to the customer within a reasonable time before the tender is made.

By way of example, many businesses like utility companies have an extremely large number of customers.  Utility bills are normally paid by check to a certain designated office, and the checks are processed and the amounts paid are recorded.  It would be extremely easy in this situation for a full satisfaction check to be processed by a clerk without any knowledge whatsoever by the utility company of the full satisfaction statement.  This is particularly true in the automated and computerized world that we live in today, where the claimants endorse checks through mechanical means.  However, by advising the customer by a conspicuous statement that full satisfaction checks must be mailed to a particular person, office or place, it segregates these checks from normal payments, thus allowing them to be individually reviewed before endorsement.

If a claimant unknowingly endorses a full settlement check, subsection (c)(2) provides a potential remedy.  If the claimant learns that it has inadvertently deposited a full satisfaction check, it may prevent an accord and satisfaction if, within 90 days of the payment of the check, the claimant tenders repayment of the amount of the check to the person against whom the claim is asserted.  A business’ failure to follow the procedures set forth in subsection (c) could result in any claims for the larger amount being barred.

This very situation recently arose in MKL Pre-Pres Electronics v. La Crosse Litho Supply.8  There, after the cancellation of a distributorship agreement, MKL Pre-Press Electronics demanded $26,453.31 from La Crosse Litho Supply.  Randall Peters, President of La Crosse, sent a letter to Bill Landwer, MKL’s vice president of sales, objecting to the amount alleged in the demand and insisting that the amount due totaled only $2,392.16.  A check in the amount of $2,392.16 marked “FINAL PAYM” in the voucher portion accompanied the letter which closed with the statement: “With this correspondence, we consider all open issues between La Crosse Litho Supply and MKL Pre-Press closed.”  MKL’s office manger received the correspondence and cashed the check.  Then, MKL sued for the balance of $24,756.84 plus court costs, attorney’s fees, and interest.  La Crosse filed a motion to dismiss pursuant to section 2-619.1 of the Code of Civil Procedure contending that the check and subsequent deposit thereof by MKL constituted an accord and satisfaction.  The Circuit Court granted the motion to dismiss and MKL appealed.9

The First District Appellate Court upheld a long line of common-law precedent when it ruled that the cashing of a check marked “final payment” barred a claim for a larger amount based on accord and satisfaction.10 The Court began its analysis by defining an accord and satisfaction. “An accord and satisfaction is a contractual method of discharging debts or claims between the parties to such an agreement. In order for such an arrangement to exist, there must be: (1) a bona fide dispute as to the claims pending between the parties; (2) an unliquidated sum owed; (3) consideration, (4) a shared mutual intent to compromise the claims; and (5) execution of the agreement. The accord is the actual agreement between the parties, while the satisfaction is its execution or performance. Because the concept is grounded on contract law, courts focus on the intent of the parties when discerning whether an accord and satisfaction has been reached and subsequently executed.”11

  The Court went on to state that “Where there is an honest dispute as to the amount owed and due between the parties and the debtor tenders an amount with the explicit understanding that it is full payment of all demands, the creditor’s acceptance and negotiation of that amount constitutes an accord and satisfaction. However, the partial payment of a fixed and certain demand due and not in dispute does not constitute satisfaction of the entire debt even where the creditor agrees to receive partial payment for the whole debt and gives a receipt for the whole demand.”12

The Court determined that the correspondence between the parties clearly demonstrated the existence of a bona fide dispute as to the claims pending between the parties and that an unliquidated sum was owed by La Crosse to MKL.   Further, the tender of the check by La Crosse and its subsequent deposit by MKL constituted consideration and execution. Thus, the only remaining element was the shared mutual intent by the parties to compromise the claims between them.

Citing to Illinois precedent, the Court observed that “Intent can be inferred from conduct; the act of knowingly accepting and depositing a check upon which conditional language has been added indicates the existence of an accord and satisfaction. Where creditor takes and keeps a debtor’s reduced payment with actual or constructive knowledge of the condition, the creditor has accepted the debtor’s offer, and the original debt is settled for the reduced amount.”13

Based on the foregoing, the Court found that La Crosse’s letter disputing the claim and the “FINAL PAYM” notation on the check clearly exhibited an explicit understanding on its part that the check constituted full payment of all sums owed to MKL.  Since MKL did not refuse the check or issue a receipt stating that it constituted partial payment, MKL’s deposit of the check could only be construed as acceptance and negotiation.14

MKL further argued that the deposit of the check by the office manager could not be imputed to MKL as an organization because the office manager had no responsibility to enter the organization into any sort of agreement like an accord and satisfaction.  The Court disagreed.

“An organization’s practice of authorizing its employee to endorse checks and deposit them into an account on its behalf cannot serve as a means of isolating the organization or its principals from the legal consequences that flow from the employee’s actions in the scope of his or her duties. An employee whose authority includes depositing a check upon which restrictive language appeared will be presumed to have acted on behalf of the organization, and his or her acts will be imputed to the organization as a matter of law.”15  As the evidenced showed that the office manager stated it was within the scope of her duties to process and deposit checks on behalf of MKL, her conduct was imputed to MKL.

Finally, MKL argued that La Crosse did not tender the check in the spirit of good faith and fair dealing in violation of Illinois Uniform Commercial Code section 3-311(a)(i) and that the “FINAL PAYM” language in the voucher area of the check was no conspicuous enough to indicate that it constituted to full satisfaction of all claims as required by section 3-311(b).  The Court again disagreed, relying on the UCC provisions discussed above.

“Section 3-311(b) reads, in relevant part, as follows: “the claim is discharged if the person against whom the claim is asserted proves that the instrument or an accompanying written communication contained a conspicuous statement to the effect that the instrument was tendered as full satisfaction of the claim.” (Emphasis added). Comment 4 to the provision explains that such a statement is conspicuous if “‘it is so written that a reasonable person against whom it is to operate ought to have noticed it.’” Comment 7 deals with situations such as this, where the claimant is an organization, and states that the organization has knowledge that a check was tendered in full satisfaction of an outstanding claim where that fact is brought to the attention of the individual conducting the transaction and when it would have been brought to that individual’s attention if the organization had exercised due diligence.”16

The Court found that La Crosse’s letter accompanied by the check clearly indicated that the sum tendered represented a final payment.  As the letter was addressed to MKL’s vice president of sales, the fact that the check represented full payment either came to his attention or should have been brought to his attention had MKL exercised due diligence.  However, according to the Court, it was apparent from the record that MKL failed to exercise due diligence in this instance.  Accordingly, the First District Appellate Court affirmed the judgment of the circuit court.17

As can be seen, it is important that business clients be counseled to instruct their accounts receivable personnel to carefully review and flag any and all checks accompanied by a letter or language on the check suggesting the check is in full satisfaction of a debt.  In such cases, it is highly recommended that prior to depositing the check, the employee apprise the appropriate personnel so that the matter may be handled in accordance with this statute.  Failure to do so could result in any claims for the full amount due being barred.

* Originally published in the DuPage County Bar Association Brief in February 2006.

1 Although outside the scope of this article, it is important to point out that inadvertent accord and satisfaction could result in a violation of the Fair Debt and Collections Practices Act if the creditor subsequently attempts to collect the full debt.

2 810 ILCS 5/3-311 (West 2005).

3 See, 810 ILCS 5/3-311, Uniform Commercial Code Comment #4 (West 2002).

4 810 ILCS 1-201(10) (West 2005).

5 See, 810 ILCS 5/3-311, Uniform Commercial Code Comment #4.

6 810 ILCS 5/3-311, Uniform Commercial Code Comment #7.

7 A.F.P. Enterprises v. Crescent Pork, Inc, 243 Ill.App.3d 905, 911, 611 N.E.2d 619, 624, 183 Ill.Dec. 356, 361 (2d Dist. 1993) (citations omitted).

8 2005 WL 2807421 (1st Dist., Oct. 27, 2005).

9 735 ILCS 5/2-619.1 (West 2002).

10 The Court noted that “[t]he law governing according and satisfaction has been codified under Illinois Uniform Commercial Code (810 ILCS 5/3-311 (West 2002)); however, cases decided subsequent to the provision’s enactment have consistently relied on common law for their analysis. [citation omitted].” Accordingly, the Court relied on the jurisprudence of the Illinois Courts in reaching its decision.  See, e.g., Koules v. Euro-American Arbitrage, Inc., 293 Ill.App.3d 823, 689 N.E.2d 411, 228 Ill.Dec. 539 (2d Dist. 1998) (holding that employer’s acceptance of offer of $100,000 severance payment, and employee’s acceptance of offer constituted an accord and satisfaction of a guaranteed salary dispute).  See alsoBankers Leasing Association, Inc. v. Pranno, 288 Ill.App.3d 255, 681 N.E.2d 28, 224 Ill.Dec. 46 (1st Dist. 1997) (holding that accord and satisfaction occurred when lessor tendered check stating it was full satisfaction of claim and broker cashed the check despite his knowledge of the dispute over the amount owed under an arbitration award); Nelson v. Fire Insurance Exchange, 156 Ill.App.3d 1017, 510 N.E.2d 137, 109 Ill.Dec. 516 (2d Dist. 1987) (insureds understood that check tendered by insurer was for full settlement of claim, and cashing the check constituted an accord and satisfaction, and that even if the provision of the Uniform Commercial Code applied to modify common-law doctrine of accord and satisfaction in the setting of full payment check, insureds were nonetheless not entitled to further payment where they merely struck out the conditional language on the check but did not write any language regarding their reservation of rights).

11 2005 WL 2807421, *4 (citations omitted).

12   Id. (citations omitted).

13 Id. citing Shea, Rogal & Associates, Ltd. v. Leslie Volkswagen, Inc., 216 Ill.App.3d 66, 71, 159 Ill.Dec. 540, 576 N.E.2d 209 (1st Dist. 1991).

14   Id. at *5 (citations omitted).

15   Id. (citations omitted).

16   Id. at *6 (citations omitted).

17   Id.

*** The contents of this newsletter are for informational purposes only. The material presented herein is not legal advice and you cannot rely upon it as legal advice. You should not act upon this information without consulting with an attorney for advice specific to your situation.