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Payment in Full--or Not

By Kari Santos | Jul. 2, 2011
News

Expert Advice

Jul. 2, 2011

Payment in Full--or Not

If you receive a check from a debtor marked "payment in full," be careful.


Suppose a debtor who owes $100,000 tenders a check for $80,000 and marks it "payment in full." What should a lawyer advise the recipient to do?

The answer is not completely clear, due to a conflict in California law discussed below. But a case brought by the Directors Guild of America against a motion picture company provides some guidance. As the plaintiff learned, cashing a check marked "payment in full" may well discharge the debtor's obligation entirely (Directors Guild of America v. Harmony Pictures Inc., 32 F. Supp. 2d 1184, 1192 (C.D. Cal. 1998)).

Accord and Satisfaction
When a debtor delivers a check marked "payment in full," the ancient contract doctrine of accord and satisfaction comes into play.

An accord is simply an agreement to accept, in extinction of an obligation, something different from (and in some cases, less than) that which the parties' contract calls for. (Cal. Civ. Code § 1521.) The creditor's acceptance of the tendered consideration extinguishes the obligation, hence the label "satisfaction." (Cal. Civ. Code § 1523.)

And for there to be a true accord and satisfaction, there must first be an existing dispute (Potter v. Pac. Coast Lumber Co., 37 Cal. 2d 592, 597 (1951)). If the amount in question is undisputed, there is no need for an accord to change the agreement.

As with any contract, an accord and satisfaction requires offer, acceptance, and consideration. In the above example, the check marked "payment in full" is the debtor's offer; the creditor's cashing of the check constitutes the acceptance, and the money exchanged is the consideration (Directors Guild, 32 F. Supp. 2d at 1188.)

To be effective, the words creating the accord must be clear and conspicuous. There must be no question that the offering party intends the amount tendered to resolve the dispute.

Striking Language
Can the creditor avoid accord and satisfaction by striking out the words "payment in full" before cashing the check? According to the Directors Guild ruling, the answer seems to be no (Directors Guild, 32 F. Supp. 2d at 1185).

However, California has statutes that conflict on this issue:

-- Civil Code section 1526 states that the creditor can simply strike through the "payment in full" language to render it ineffective.

-- Commercial Code section 3311 states that the "payment in full" condition is binding whether or not the creditor strikes the language.

In the Directors Guild case, the court resolved the statutory conflict by ruling that the more recent of the two statutory enactments, Commercial Code section 3311, would control. Thus, the court concluded, a party may not simply strike out the words on the check, cash it, and continue to press for the balance due. Rather, to avoid the application of accord and satisfaction, the creditor must return the check to the debtor (32 F. Supp. 2d at 119-192).

What if the check is cashed in error? Section 3311 provides that the creditor has 90 days to discover the error and return the proceeds to the debtor. If that is done, the debt is reinstated.

Factual issues
A state court ruling further clouds the issue by declaring that whether the parties reached an accord and satisfaction is a question of fact (Woolridge v. J.F.L. Elec. Inc., 96 Cal. App. 4th Supp. 52 (Cal. Super. 2002)). Thus, whereas the court in Directors Guild resolved the accord and satisfaction issue via summary judgment, the Woolridge decision--which came from the appellate department of the San Bernardino Superior Court--may make such a procedure impossible. "Whether an accord and satisfaction has been reached," wrote the Woolridge court, "is a question of fact." Accordingly, the parties in most cases must endure an expensive trial to determine factually whether an accord and satisfaction occurred.

Until a California appellate tribunal conclusively resolves these issues, uncertainty will be the guidepost. If a creditor cashes a check marked "payment in full" and later realizes that it did not cover the full debt, chaos may reign. Under Commercial Code section 3310(c)(2), the creditor in such a case must, upon realizing his or her mistake, return the money to the debtor. If that does not occur, debtors who become defendants will likely move for summary judgment on the ground that the debt has been extinguished. And a defendant raising the accord and satisfaction defense who wants to avoid the "Woolridge problem" of facing a full trial on the facts might consider removing the case to federal court and asking the judge to follow the Directors Guild decision, which upheld summary judgment on this very issue.

S. Michael Kernan is an adjunct professor of entertainment law at UC Hastings.

#245023

Kari Santos

Daily Journal Staff Writer

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