Accord & Satisfaction
A very common question we get from clients involves the receipt of a check from a customer that only partially pays an account, but is marked "Final Payment" or "Payment of Account in Full." Can the creditor collect the balance due on the account if this check is cashed? Does deposit of the check release the debtor? Can the creditor mark though or cross out the words "Payment of Account in Full" and preserve the right to full payment?
There is a Uniform Commercial Code (UCC) statute on this subject. The UCC was intended as a Uniform Model Code that could be adopted by every state legislature. Many business people, lawmakers and academics saw a need for a uniform set of laws covering commercial transactions to facilitate interstate commerce. A national conference of lawmakers, lawyers and college professors worked for years studying the various state commercial laws, debating the pros and cons of these variations and drafting what they viewed as the best "Uniform Commercial Code."
The "Uniform Commercial Code" is a model. It is not law in any state unless and until a state legislature adopts it as the law of that state. Any state can decide to revise the code. Nonetheless, the UCC has facilitated much greater uniformity of commercial laws. The model UCC has been largely adopted in the Mid-Atlantic states of Virginia, Maryland, Pennsylvania and in the District of Columbia.
A look at the Uniform Commercial Code (UCC) Table of Contents tells us that this subject is very broad. This law firm is most commonly concerned with UCC Article 2 on the Sale of Goods, likely to impact a supplier or purchaser of construction materials, or UCC Article 9 on Secured Transactions. However, the UCC also contains very important law on financial transitions in Article 3, Commercial Paper, which provides law on negotiable instruments, such as promissory notes and bank checks.
UCC Section 3-311: Accord & Satisfaction by Use of Instrument
UCC Section 3-311 entitled Accord & Satisfaction by Use of Instrument states that a debt is discharged if a debtor gives a check to a creditor "in good faith," the amount of the debt is "unliquidated or subject to a bona fide dispute" and the markings on the check or transmittal letter contain a "conspicuous statement" that the check is in tendered as full satisfaction of the claim.[1] A debtor is entirely discharged from the remaining balance if a creditor deposits a check that is marked "Final Payment" or "Payment of Account in Full" in the memorandum line or in the endorsement space.[2]
UCC Section 3-311 does state that the amount of the claim must be unliquidated or subject to a bona fide dispute. A debtor cannot discharge an undisputed debt by simply making annotation on the check. The debtor must tender the check to the creditor "in good faith."
This UCC code section also states that a person does not act in good faith if the check is tendered to a person without knowledge of a dispute concerning the loan.[3] This may help a creditor if the payment is sent directly to a blind bank box. A person does not act in good faith if the check is for less than the amount due under the terms of the loan agreement.[4] In other words, a debtor could not avoid the terms of a clear promissory note by marking a check in partial payment.
A creditor can protect itself by regularly sending all account debtors a conspicuous statement that communications concerning disputed debts must be sent to a designated person, office, or place. There would be no discharge if that designated person, office, or place did not receive the marked check or accompanying transmittal.
Note that if a Creditor accidently deposits a check with a restrictive endorsement, it has 90 days in accordance with UCC 3-311(c)(2) to return the payment to the debtor and preserve its rights to full collection of the debt.
Scratching out the "Final Payment" language
Striking out the "Final Payment" or "Payment of Account in Full" language on a check will not prevent the debtor's discharge.[5] The only safe way to ensure that a creditor will not be barred from recovering a balance remaining on an account upon receipt of a check marked "payment in full" from a debtor under UCC §3-311 is to not deposit the check. The best course of action is to respond to the debtor in writing, stating that a new check without the restrictive endorsement is required to avoid further collection action.
See the actual Virginia UCC Section 3-311 statute here:
https://law.lis.virginia.gov/vacode/title8.3A/part3/section8.3A-311/
[1] UCC Section 3-311; Va. Code Anno. §8.3A-311 (Michie 1950); Maryland Commercial Law Code Section 3-311; 13 P.S. §3311; DC Code Section 28:3-311. In older legal parlance, an "accord" is an agreement or contract. A promissory note or bank check is a "negotiable instrument." There is an agreement and then satisfaction of that agreement, using the bank check.
[2] Helton v. Phillip A Glick Plumbing, Inc., 277 Va. 352, 672 S.E.2d 842 (2009) [Debtor crossed out and altered the memo line to read "No" and "Balance Due $1,686.51" of a cashier's check originally reading "Paid in Full" along with a letter informing creditor of the grounds for the disputed costs. The debtor's demonstrable dispute of the amount shows he tendered the check in good faith to settle the disputed claim. When the creditor accepts an instrument with a statement that the amount is in full satisfaction of the claim, with knowledge of that condition, accord and satisfaction results]; Gelles & Sons General Contracting, Inc. v. Jeffrey Stack, Inc., T/A JSI Paving & Construction 264 Va. 285, 569 S.E.2d 406 (2002)[Cashing of check resulted in discharge when check accompanied by a letter stating that the check was in full satisfaction of the account]; Weston Builders & Developers, Inc. v. McBerry, LLC, 167 Md. App. 24, 891 A.2d 430 (2006)[$50,000 check accompanied by a letter stating intent to terminate the contract. The check itself did not indicate full satisfaction of the amount in dispute. The letter stated "($50,000) payable . . . representing the deposit paid on the contract." This was not an unequivocal and unambiguous statement of an offer to reach an accord and satisfaction. The check represented an amount debtor agreed he owed]; So v. 514 10th Street Associates, L.P., 834 A.2d 910 (D.C. 2003) [Check cashed by landlord not an accord and satisfaction under DC Code § 28:3-311, where check did not bear "paid in full" or any similar language].
[3] Johnson v. First Union Nat. Bank 271 Va. 239, 624 S.E.2d 10 (2006) [Debtor disputed various interest and late fees applied to her balance and met several times with the manager of the bank. Debtor produced checks with the notation "Acc't Paid in full" and told a teller at the bank she intended the checks to satisfy the outstanding balance. Furnishing the check to the teller instead of the bank manager did not show the debtor did not act in good faith. The debtor regularly made mortgage payments to the teller].
[4] Anderson v. M & T Bank, 2018 Md. App. LEXIS 1077, 97 U.C.C. Rep Serv.2d (Callaghan) 303 (Md. Ct. App. 2018) [Debtor financed a truck then immediately requested and disputed a payoff statement. Debtor sent in first payment by money order marked "tendered as full satisfaction of claim" in the memo line. An accord and satisfaction creates a new contract supported by new consideration. Debtor made no indication one monthly payment of $800 represented a full offer for the truck. A payment in the agreed-upon monthly installment amount does not create a bona fide dispute under § 3-311.
[5] Omni Alarm Sys. V. MCI Elec. Co., 58 Va. Cir. 264 (Warren County 2002)[Electrical contractor's check marked payment "in full" was sufficient to discharge any remaining debt and the creditor's negotiation of that check meant the debtor had no further obligation even though the creditor marked through the "in full" notation and put "Amount in Dispute" beside it]; Laganas v. Installation, 291 A.2d 187 (D.C. 1972) [Accord and satisfaction despite the payee removing "paid in full" language from the check under the common law of D.C. The contractor creditor "scratched out" the notation and cashed the check. The fact that the contractor removed the language from the instrument is inconsequential because the actions of the contractor operated to accept the offer by the terms provided by the debtor].