Recently we were asked by a client:“I received a check, and the person wrote paid in full on it, but the check is less than the amount that we have shown is owed? What should I do?”
This is a common question that many different industries face. This falls under what is called Accord and Satisfaction.
Accord and Satisfaction is defined as a “substitute contract between a referral and creditor for the settlement of a debt for a different amount than allegedly owed.”
It is a way for both parties to settle a disputed debt without judicial intervention. However, there are several conditions that must be met for the debt to be “settled in full” via a payment.
1) Under the Uniform Commercial Code (UCC), before an accord and satisfaction can be established, there must be a bona fide dispute between the parties.
a. To determine where a bona fide dispute exists, the test is whether the dispute was in good faith. In other words, the amount due is not disputed simply because a debtor refuses to pay in full.
2) 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.
3. The creditor must receive the payment.
a. The UCC provides for prevention of an accord and satisfaction mistakenly taking place. Under the UCC, a party may avoid an accord and satisfaction by returning money within 90 days.
“So, what does this mean to you?” There are essentially two different options for a creditor to choose from:
Reject the offer by returning or destroying the check.
Cash the check and accept the accord.
A creditor cannot 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. If you did not
know or have reason to know the debt was disputed, you can cross off the
payment in full and cash the check. You can still pursue the referral for the
balance remaining.
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