Writing Paid In Full On Check

Having a dispute with a creditor? One way to win it (and fast) is to send that creditor a "payment in full" check [hereafter "PIFC"] and end it things in your favor. How does this bit of legal magic work? Read on.

It's always been the law that if you and I have an existing contract, either one of us can propose a modification to that contract, and if we both agree, the contract changes accordingly. There are technical names for this. Say, for instance, that I owe you an undisputed amount of $500. I send you an email and ask if you would take my horse Dobbins is settlement of the debt, and you reply in the affirmative. My offer of something different than what was originally owed (the horse for the money) is called the offer of an "accord." Your agreement to take Dobbins is the "satisfaction." Thus an "accord and satisfaction" in our law is nothing more than a fancy name for a modification agreement. I no longer owe you $500; I owe you a horse. Only if I fail to deliver the horse can you choose to return to the monetary debt.

A "payment in full" check is an accord and satisfaction. To illustrate, let's suppose we have a contract (no matter whether oral or written) and are in dispute as to whether one of us has broken that contract or, if uncertain ("unliquidated") what amount is truly owed. I'm the party who owes the money, so I sit down and write you a letter explaining our disagreement, and enclosing a check for the amount I think I owe, marking both the letter and on the check as "payment in full" of my debt. This is the offer of an accord. If you cash that check satisfaction occurs. It's all over.

The law here is codified as part of a much larger statute (in effect in all jurisdictions in the United States) called "The Uniform Commercial Code." I've taught it for over 40 years. The important section is in Article 3 of the UCC, which I reprint, in relevant part, below. Let me walk you through it.

§ 3-311. ACCORD AND SATISFACTION BY USE OF INSTRUMENT

(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 . . .
[Note: Oregon did not adopt this section and instead reaches the opposite result in this language:

"The negotiation of an instrument marked 'paid in full,' 'payment in full,' 'full payment of a claim' or words of similar meaning, or the negotiation of an instrument accompanied by a statement containing such words or words of similar meaning, does not establish an accord and satisfaction that binds the payee or prevents the collection of any remaining amount owed upon the underlying obligation unless the payee personally, or by an officer or employee with actual authority to settle claims, agrees in writing to accept the amount stated in the instrument as full payment of the obligation." New York never adopted this section either, and in that state a payee who cashes the PIFC has settled the debt unless the payee's indorsement is accompanied by language like "all rights reserved" or "cashed under protest," making it clear no settlement is happening. Other states may have variations too; check by Googling your state's name plus "UCC 3-311."]

In the Official version of the statute quoted above, there are some interesting bells and whistles. One is that the accord and satisfaction won't occur until the check clears. Another says that if your creditor has written on the bill or otherwise informed you that notices of a dispute must be sent to a particular office, you must send the PIFC there or it will not operate as an accord, nor trigger the modification (unless it happens to reach the right hands anyway).

Another complication has to do with this following difficulty.

Decades ago, I bought a new washer and dryer from Sears, and after I'd used the dryer a number of times it coughed up a lot of gunk which stopped up my basement drain and caused a minor mess. I brought in a plumber, who unstopped the drain, and told me the dryer was dumping detritus into the pipes where it caught and clogged. He advised me to buy a nylon stocking, put it on the end of the dryer hose, and clean it out once a week (which worked). I phoned Sears and asked what was going on, and the cheerful person on the other end of the phone told me it was their new "self-cleaning" feature, which worked by ejecting the gunk into the pipes. I told him it didn't sound like a "feature," but instead like a "breach of warranty" (I'd just started teaching law). He said, alas, he couldn't help me. That same day I received Sears's bill for the new machines, so I wrote out a PIFC, explaining in the covering letter what had happened and that I was deducting from my payment both the plumber's bill and the cost of the stocking. I then received a reply from Sears saying they would refer my complaint to their Customer Relations Department, and would let me know how it came out. By this time they'd cashed the check, so I wrote another note to them telling them I already knew how it came out. I thanked them for their accord and satisfaction. To their credit, Sears gave up.

But, consider for a moment, just how hard it is for a bureaucracy like Sears to stop themselves from cashing checks. How fast they can do that and access the funds is what keeps them afloat. The use of a PIFC causes them no end of trouble. Professors White and Summers (two famous Commercial Law experts) once called the PIFC "an exquisite form of commercial torture." The statute mentioned above therefore has an escape valve for creditors: if they return the amount of money represented by the check within 90 of receiving it, no accord and satisfaction occurs, and the debt is still in dispute.

Can the creditor just cross off the "payment in full" language, and, say, write "cashed under protect, all rights reserved"? Nope. There was some disagreement as to this legal issue once, but the statute has now clearly settled it . No matter what the creditor writes on the check, if the check is actually cashed, nothing more is due. Nor should the wise creditor keep the check too long. Another doctrine of the law says that where there is a duty to speak, silence is acceptance. I tell my law students that if they are representing a creditor who has received such a check, the only thing to do is send it back. However, doing that, so goes against human nature ("SEND THE CHECK BACK???") I also tell my students (as I'm telling you now) that even if the other side isn't expecting to receive a PIFC, go ahead and try it. Send them the check and just wait—see what happens. Really, it's fascinating what often occurs. The creditor sees the check, his name is on the payee line, his attorney tells him sternly to send it back, and, by golly, he means to do that—but then his eyes swim, the room darkens, he passes out, and when he comes to the check has mysteriously been deposited in his bank account and is on its way to collection. This happens a lot.

Once last, very important thing. There's a legal maxim saying "the law favors a compromise," and that thought is the pedestal of a PIFC. But the statute quoted above begins by requiring both good faith and a bona fide dispute before the check is sent. It must be emphasized that a PIFC can only be used where both of those two factual things coalesce. A PIFC is not a blanket permission for misuse of the law. No matter how bad your current financial situation, you can't just pay all your creditors half, and have a good month. If the person sending the PIFC is the bad guy, the debt will still be owed and a PIFC offers no relief.

Printed below is the complete text of section 3-111 and its Official Comment. The Official Comments are not the law, but they were written by the drafters of the statute to explain what the statute means, so they are persuasive. An "accord and satisfaction," mentioned in the title is a legal term meaning a compromise agreement.

Uniform Commercial Code § 3-311. Accord and Satisfaction by Use of Instrument.

(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.

OFFICIAL COMMENT

1. This section deals with an informal method of dispute resolution carried out by use of a negotiable instrument. In the typical case there is a dispute concerning the amount that is owed on a claim.

Case #1. The claim is for the price of goods or services sold to a consumer who asserts that he or she is not obliged to pay the full price for which the consumer was billed because of a defect or breach of warranty with respect to the goods or services.
Case #2. A claim is made on an insurance policy. The insurance company alleges that it is not liable under the policy for the amount of the claim.

In either case the person against whom the claim is asserted may attempt an accord and satisfaction of the disputed claim by tendering a check to the claimant for some amount less than the full amount claimed by the claimant. A statement will be included on the check or in a communication accompanying the check to the effect that the check is offered as full payment or full satisfaction of the claim. Frequently, there is also a statement to the effect that obtaining payment of the check is an agreement by the claimant to a settlement of the dispute for the amount tendered. Before enactment of revised Article 3, the case law was in conflict over the question of whether obtaining payment of the check had the effect of an agreement to the settlement proposed by the debtor. This issue was governed by a common law rule, but some courts hold that the common law was modified by former Section 1-207 which they interpreted as applying to full settlement checks.

2. Comment d. to Restatement of Contracts, Section 281 discusses the full satisfaction check and the applicable common law rule. In a case like Case #1, the buyer can propose a settlement of the disputed bill by a clear notation on the check indicating that the check is tendered as full satisfaction of the bill. Under the common law rule the seller, by obtaining payment of the check accepts the offer of compromise by the buyer. The result is the same if the seller adds a notation to the check indicating that the check is accepted under protest or in only partial satisfaction of the claim. Under the common law rule the seller can refuse the check or can accept it subject to the condition stated by the buyer, but the seller can't accept the check and refuse to be bound by the condition. The rule applies only to an unliquidated claim or a claim disputed in good faith by the buyer. The dispute in the courts was whether Section 1-207 changed the common law rule. The Restatement states that section "need not be read as changing this well-established rule."

3. As part of the revision of Article 3, Section 1-207 has been amended to add subsection (2) stating that Section 1-207 "does not apply to an accord and satisfaction." Because of that amendment and revised Article 3, Section 3-311 governs full satisfaction checks. Section 3-311 follows the common law rule with some minor variations to reflect modern business conditions. In cases covered by Section 3-311 there will often be an individual on one side of the dispute and a business organization on the other. This section is not designed to favor either the individual or the business organization. In Case #1 the person seeking the accord and satisfaction is an individual. In Case #2 the person seeking the accord and satisfaction is an insurance company. Section 3-311 is based on a belief that the common law rule produces a fair result and that informal dispute resolution by full satisfaction checks should be encouraged.

4. Subsection (a) states three requirements for application of Section 3-311. "Good faith" in subsection (a)(i) is defined in Section 3-103(a)(6) as not only honesty in fact, but the observance of reasonable commercial standards of fair dealing. The meaning of "fair dealing" will depend upon the facts in the particular case. For example, suppose an insurer tenders a check in settlement of a claim for personal injury in an accident clearly covered by the insurance policy. The claimant is necessitous and the amount of the check is very small in relationship to the extent of the injury and the amount recoverable under the policy. If the trier of fact determines that the insurer was taking unfair advantage of the claimant, an accord and satisfaction would not result from payment of the check because of the absence of good faith by the insurer in making the tender. Another example of lack of good faith is found in the practice of some business debtors in routinely printing full satisfaction language on their check stocks so that all or a large part of the debts of the debtor are paid by checks bearing the full satisfaction language, whether or not there is any dispute with the creditor. Under such a practice the claimant cannot be sure whether a tender in full satisfaction is or is not being made. Use of a check on which full satisfaction language was affixed routinely pursuant to such a business practice may prevent an accord and satisfaction on the ground that the check was not tendered in good faith under subsection (a)(i).
Section 3-311 does not apply to cases in which the debt is a liquidated amount and not subject to a bona fide dispute. Subsection (a)(ii). Other law applies to cases in which a debtor is seeking discharge of such a debt by paying less than the amount owed. For the purpose of subsection (a)(iii) obtaining acceptance of a check is considered to be obtaining payment of the check.
The person seeking the accord and satisfaction must prove that the requirements of subsection (a) are met. If that person also proves that the statement required by subsection (b) was given, the claim is discharged unless subsection (c) applies. Normally the statement required by subsection (b) is written on the check. Thus, the canceled check can be used to prove the statement as well as the fact that the claimant obtained payment of the check. Subsection (b) requires a "conspicuous" statement that the instrument was tendered in full satisfaction of the claim. "Conspicuous" is defined in Section 1-201(10). The statement is conspicuous if "it is so written that a reasonable person against whom it is to operate ought to have noticed it." If the claimant can reasonably be expected to examine the check, almost any statement on the check should be noticed and is therefore conspicuous. In cases in which the claimant is an individual the claimant will receive the check and will normally indorse it. Since the statement concerning tender in full satisfaction normally will appear above the space provided for the claimant's indorsement of the check, the claimant "ought to have noticed" the statement.

5. Subsection (c)(1) is a limitation on subsection (b) in cases in which the claimant is an organization. It is designed to protect the claimant against inadvertent accord and satisfaction. If the claimant is an organization payment of the check might be obtained without notice to the personnel of the organization concerned with the disputed claim. Some business organizations have claims against very large numbers of customers. Examples are department stores, public utilities and the like. These claims are normally paid by checks sent by customers to a designated office at which clerks employed by the claimant or a bank acting for the claimant process the checks and record the amounts paid. If the processing office is not designed to deal with communications extraneous to recording the amount of the check and the account number of the customer, payment of a full satisfaction check can easily be obtained without knowledge by the claimant of the existence of the full satisfaction statement. This is particularly true if the statement is written on the reverse side of the check in the area in which indorsements are usually written. Normally, the clerks of the claimant have no reason to look at the reverse side of checks. Indorsement by the claimant normally is done by mechanical means or there may be no indorsement at all. Section 4-205(a). 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 statement must be given to the customer within a reasonable time before the tender is made. This requirement is designed to assure that the customer has reasonable notice that the full satisfaction check must be sent to a particular place. The reasonable time requirement could be satisfied by a notice on the billing statement sent to the customer. If the full satisfaction check is sent to the designated destination and the check is paid, the claim is discharged. If the claimant proves that the check was not received at the designated destination the claim is not discharged unless subsection (d) applies.

6. Subsection (c)(2) is also designed to prevent inadvertent accord and satisfaction. It can be used by a claimant other than an organization or by a claimant as an alternative to subsection (c)(1). Some organizations may be reluctant to use subsection (c)(1) because it may result in confusion of customers that causes checks to be routinely sent to the special designated person, office, or place. Thus, much of the benefit of rapid processing of checks may be lost. An organization that chooses not to send a notice complying with subsection (c)(1)(i) may prevent an inadvertent accord and satisfaction by complying with subsection (c)(2). If the claimant discovers that it has obtained payment of 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.

7. Subsection (c) is subject to subsection (d). If a person against whom a claim is asserted proves that the claimant obtained payment of a check known to have been tendered in full satisfaction of the claim by "the claimant or an agent of the claimant having direct responsibility with respect to the disputed obligation," the claim is discharged even if (i) the check was not sent to the person, office, or place required by a notice complying with subsection (c)(1), or (ii) the claimant tendered repayment of the amount of the check in compliance with subsection (c)(2).
A claimant knows that a check was tendered in full satisfaction of a claim when the claimant "has actual knowledge" of that fact. Section 1-201(25). Under Section 1-201(27), if the claimant is an organization, it has knowledge that a check was tendered in full satisfaction of the claim when that fact is "brought to the attention of the individual conducting that transaction, and in any event when it would have been brought to his attention if the organization had exercised due diligence. An organization exercises due diligence if it maintains reasonable routines for communicating significant information to the person conducting the transaction and there is reasonable compliance with the routines. Due diligence does not require an individual acting for the organization to communicate information unless such communication is part of his regular duties or unless he has reason to know of the transaction and that the transaction would be materially affected by the information."
With respect to an attempted accord and satisfaction the "individual conducting that transaction" is an employee or other agent of the organization having direct responsibility with respect to the dispute. For example, if the check and communication are received by a collection agency acting for the claimant to collect the disputed claim, obtaining payment of the check will result in an accord and satisfaction even if the claimant gave notice, pursuant to subsection (c)(1), that full satisfaction checks be sent to some other office. Similarly, if a customer asserting a claim for breach of warranty with respect to defective goods purchased in a retail outlet of a large chain store delivers the full satisfaction check to the manager of the retail outlet at which the goods were purchased, obtaining payment of the check will also result in an accord and satisfaction. On the other hand, if the check is mailed to the chief executive officer of the chain store subsection (d) would probably not be satisfied. The chief executive officer of a large corporation may have general responsibility for operations of the company, but does not normally have direct responsibility for resolving a small disputed bill to a customer. A check for a relatively small amount mailed to a high executive officer of a large organization is not likely to receive the executive's personal attention. Rather, the check would normally be routinely sent to the appropriate office for deposit and credit to the customer's account. If the check does receive the personal attention of the high executive officer and the officer is aware of the full-satisfaction language, collection of the check will result in an accord and satisfaction because subsection (d) applies. In this case the officer has assumed direct responsibility with respect to the disputed transaction.
If a full satisfaction check is sent to a lock box or other office processing checks sent to the claimant, it is irrelevant whether the clerk processing the check did or did not see the statement that the check was tendered as full satisfaction of the claim. Knowledge of the clerk is not imputed to the organization because the clerk has no responsibility with respect to an accord and satisfaction. Moreover, there is no failure of "due diligence" under Section 1-201(27) if the claimant does not require its clerks to look for full satisfaction statements on checks or accompanying communications. Nor is there any duty of the claimant to assign that duty to its clerks. Section 3-311(c) is intended to allow a claimant to avoid an 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.

8. In some cases the disputed claim may have been assigned to a finance company or bank as part of a financing arrangement with respect to accounts receivable. If the account debtor was notified of the assignment, the claimant is the assignee of the account receivable and the "agent of the claimant" in subsection (d) refers to an agent of the assignee.

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