Clearing the Decks: Can Issuing a Conditional Payment Effect Accord and Satisfaction?

CLEARING THE DECKS: CAN ISSUING A CONDITIONAL PAYMENT EFFECT ACCORD AND SATISFACTION?

By: Robert S. Tanner, Esq.

About the Author: Larry Leiby, Esq. was the founder and first chairman of the Florida Bar Construction Law Committee in 1976. He is the author of the Florida Construction Law Manual. He is Board Certified in Construction Law and was on the Construction Law Certification Committee that creates and grades the tests for construction law board certification. He was awarded the lifetime achievement award by the Florida Bar Construction Law Committee and teaches construction law at the Florida International University College of Law. He can be reached at [email protected]. For more information, please visit www.mkpalaw.com.

If you issue payment to your creditor with a statement that acceptance of the payment constitutes full and final settlement of all sums owed, and the creditor accepts that payment, would the law acknowledge an “accord and satisfaction” of the debt? The answer unfortunately is a resounding “maybe.”

First, we need to look at the “elements” of accord and satisfaction that a party asserting it must prove: (1) an existing dispute between the parties regarding the proper amount owed from one party to the other; (2) a mutual intent to effect a settlement of the existing dispute by a superseding agreement; (3) the debtor’s tender and the creditor’s acceptance of performance of the new agreement in full satisfaction and discharge of the prior disputed obligation.

Now, let’s look at two examples. In Burke Co. v. Hilton Development Co., 802 F. Supp. 434 (N.D. Fla. 1992), an equipment rental company (“Supplier”) provided Hilton Development Company (“Contractor” with construction equipment for use in a construction project. Supplier asserted that Contractor failed to pay the full rental amount due and that the equipment was damaged or lost. Contractor issued a check to Supplier which, on the back had the following:

• By acknowledgment and endorsement of this check the payee acknowledges receipt of the balance of all rent due on the [Project].

About 30 days later, Contractor did the same thing: it sent a check to Supplier in an amount less than the amount claimed by Supplier and the back of the check had the restrictive endorsement on it. Supplier also informed Contractor that it was going to strike the restrictive endorsement before cashing the check, which Supplier did while also adding “With Reservation Under Protest” beneath the crossed-out restrictive endorsement. Contractor demanded return of the check, which Supplier ignored after cashing the check. Supplier sued for the amount it claimed was owed. Contractor asserted “accord and satisfaction” as a defense. In that case, the court ruled in favor of Contractor, noting “the injustice which would result from permitting a party to accept another’s check on the express condition that it discharge a prior debt, and then later turn around and sue the first party for the remainder due under the original debt.”

However, in Vitality Systems, Inc. v. Sogeval Laboratories, Inc., 2009 WL 2147005 (M.D. Fla. 2009), the debtor sent a letter to the creditor stating the amount that it believed was due and that it would be transmitting that amount to the creditor via electronic fund transfer “in full satisfaction” of debtor’s liability. The debtor transferred that amount and the creditor received it. In subsequent correspondence, however, the creditor objected to the amount of the payment and delivered the payment to its lawyer to be held in trust. The debtor demanded return of the funds, which the creditor refused. Upon reviewing the debtor’s accord and satisfaction defense, the court stated that, “An accord and satisfaction, like any contract, must contain an offer, acceptance, and consideration.” The court found that the debtor’s letter and funds transfer was in the nature of an offer but that there was insufficient evidence to find that the creditor had accepted it. Importantly, the court also found that the in receiving the wire transfer, the creditor “was not required to take any affirmative action, similar to the cashing of a check . . . .” Accordingly, the court did not find an effective accord and satisfaction.

The decks can be cleared by making payment on a disputed debt by using a restrictive endorsement . But, like most things in the law, there are nuances, exceptions to the rule, and exceptions to the exceptions that can trip up the unwary.