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Accord and Satisfaction – Effectiveness of Writing “Payment in Full” on a Check

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Accord and Satisfaction – Effectiveness of Writing “Payment in Full” on a Check

Author: Daniel T. Cronin, Esq.,Thrasher, Dinsmore & Dolan, a Legal Professional Association

The doctrine of accord and satisfaction was recently revisited by both the Seventh and the Eighth District Courts of Appeals. In M & T Electric Co., Inc. v. LLLJ, Ltd., 8th Dist. Cuyahoga No. 99479, 2014-Ohio-5678, the Eight District held that the use of the language “940-72 Paid in Full” in the memo section of a check was sufficient to extinguish a subcontractor’s right to additional payment, once the subcontractor negotiated the check. In Maine v. Leonard Truck & Trailer, Inc., 7th Dist. Mahoning No. 13MA156, 2014-Ohio-5722, on the other hand, the Seventh District held that the use of the language “Full Payment For Trailer” in the memo section of a check, as well as its use in an accompanying letter which stated “Enclosed is my check for full payment for repairs…,” was not sufficient to constitute an accord and satisfaction after the check was negotiated.

The Ohio Supreme Court has stated that “[a]ccord and satisfaction is an affirmative defense to a claim for money damages. If a party against whom a claim for damages is made can prove accord and satisfaction, that party’s debt is discharged by operation of law.” Allen v. R.G. Indus. Supply, 66 Ohio St.3d 229, 231 (1993). Further, “[a]n accord is a contract between a debtor and a creditor in which the creditor’s claim is settled in exchange for a sum of money other than that which is allegedly due. Satisfaction is the performance of that contract. Id. (citations omitted). Accord and satisfaction arises “[w]here there is a bona fide dispute over an unliquidated demand and the debtor tenders an amount less than the amount in dispute, upon the express condition that it shall be in full [satisfaction] of the disputed claim, the creditor has but one alternative; he must accept the amount tendered upon the terms of the condition, unless the condition be waived, or he must reject it entirely, or if he has received the amount by check in a letter, he must return it.” Id. (citation omitted). Practically speaking, how are these rules interpreted by the courts?

The Seventh District’s and the Eighth District’s differing treatment of two superficially identical cases highlights the importance of notice when making effective use of the doctrine of accord and satisfaction.

In M & T Electric Co., Inc. (discussed above), the electrical subcontractor submitted a “final” invoice for $28,129. Months later, the subcontractor submitted another invoice for $23,384 for additional work, despite the fact that no written change order had been signed. The evidence showed that some additional work had been orally authorized, but the subcontractor apparently greatly exceeded the scope and price estimate for the additional work. The property owner and the subcontractor discussed the overage, and the property owner ultimately issued a check for $28,129, with a memo annotation of “940-72 Paid in Full.” The subcontractor then deposited the check. The court found that the doctrine of accord and satisfaction protected the property owner from additional claims by the subcontractor. There was a bona fide dispute about the amount due, and the subcontractor had reasonable notice that the check was intended to fully satisfy the debt.

In Maine (discussed above), on the other hand, the customer brought his boat and trailer to a repair shop. Once the repairs to the trailer were finished, the customer paid the shop in full. However, before the repair shop deposited the check, the customer stopped payment. He then mailed a letter and a second check for a smaller amount to the repair shop, which reflected an offset for alleged damage to the boat. The letter and the memo on the check both indicated “Full Payment for trailer.” The repair shop negotiated the second check and considered the matter settled.

Subsequently, the customer filed suit, claiming that faulty parts had been installed, which caused damage to his trailer. The repair shop sought to assert the affirmative defense of accord and satisfaction, arguing that the check was payment in full and the matter was concluded. The Seventh District disagreed, finding that the language on the memo line (while perhaps sufficient to alert the repair shop that the check applied to the damage done to the boat during the repairs), did not clearly state that the check also applied to damage to the trailer that arose subsequent to the negotiation of the check.

Interestingly, the court also referenced explicit language handed down from the Ohio Supreme Court, which stated that language in a memo line may be insufficient to create an accord and satisfaction, and instead, the check must contain “express references to the date of the alleged tort, an explicit statement that it is the final payment to be made by the tortfeasor, and a reference to the terms appearing on the front of the check printed above the signature line(s) on the back of the check.” Maine, at ¶28, citing Allen, 66 Ohio St.3d at 235.

The takeaway from these two cases is that accord and satisfaction can only settle a disputed debt when both parties have knowledge of the outstanding issues to which the debt pertains, and the party negotiating the check has reasonable notice that by depositing the check the dispute is completely settled for the amount of the check. Another possible explanation for these differing outcomes is that courts more freely apply accord and satisfaction in the commercial context (M & T Electric Co., Inc.), whereas they are more reluctant to apply it against a consumer (Maine). Regardless, when work has been completed and there is a dispute as to the amount owed, both parties should consider how accord and satisfaction may impact the other party’s ability to recover additional funds.

Please keep in mind, the foregoing is general information, is not intended to be used as legal advice, and is no substitute for qualified counsel. If you would like some assistance with a business dispute, or would like to discuss any other legal matter, please contact the author at dcronin@tddlaw.com, or by telephone at (440) 285-2242.