Use of the Words “Payment
in Full” on a Check for less than
Money Owed Has Limitations
01/01/06
Dear
Mr.
Duman:
I
recently
received a refund check from a contractor, who owes me money. On the check are the words
“payment in full of all amounts owed”. This
check was not for the full amount owed.
What
is the
significance of the words “payment in full”?
D.
G., Burlingame
Dear
D. G.:
The use of
the words “payment in full” implements the legal concept of "Accord and
Satisfaction”, which is specifically addressed within the provisions of
California Civil Code Section 1526.
By
definition, an "Accord and Satisfaction” occurs, when a creditor is
deemed
to have accepted an amount, which is less than that which was
originally owed,
having the effect of extinguishing the debt for the lesser amount.
A valid
“Accord and Satisfaction” may be created by virtue of an express
agreement, or
may be implied from the parties’ words and conduct.
Civil Code
Section 1526 provides that an “Accord and Satisfaction” can be implied
from a
creditor’s acceptance, without objection, of a check or draft upon
which the
payor has made a notation indicating that the payment is intended to be
“payment in full” of the entire underlying obligation.
In order for Civil Code Section 1526 to
apply, the creditor’s “acceptance” requires the actual cashing of the check, in order for an “Accord and
Satisfaction” to be effective.
Civil Code
Section 1526, however, also provides that a creditor may avoid the
effect of
the statute, when cashing a check with the word “paid in full” or the
like, by
crossing the notation out on the check or by otherwise manifesting a
written
objection to the notation “paid in full” upon the check, before cashing
it.
Moreover,
the
statute expressly precludes the formation of an “Accord and
Satisfaction”,
where the creditor can show that the check was cashed inadvertently
without
knowledge of the restriction (although a creditor’s foreknowledge of
the “paid
in full” notation will be presumed, when written notice is received by
the
creditor indicating the debtor’s intent to create an “Accord and
Satisfaction”,
in the time and manner set forth under the statute).
A creditor’s
right to object to an “Accord and Satisfaction” under this statute is
limited
to situations where the underlying claim is disputed or unliquidated.
Furthermore, creditors may not object to a check tendered
pursuant to a compromise or extension
agreement between a debtor and the creditors, where all creditors of
the same
class are accorded similar treatment, and where the creditor accepts
the check
with knowledge of the restriction.
Additionally,
a creditor may not avoid an “Accord and Satisfaction”, when there is a
separate
agreement between the parties, which provides that the reduced payment
is
intended by both the payor and payee to constitute full payment of the
underlying debt.
The
provisions of Commercial Code Section 3311 provide some additional
independent
grounds upon which a creditor may oppose a debtor’s attempts to create
an
“Accord and Satisfaction”. This statute
states that, where the recipient is an organization, which previously
sent the
debtor a notice directing the debtor to send all communications
concerning
disputed debts to a designated person or place, the debtor’s subsequent
delivery of an instrument purporting to be an “Accord and Satisfaction”
will
not be successful when the instrument is sent to an address different
than the
one designated by the organization.
Commercial Code
Section 3311(c)(2) provides that a debtor’s unilateral attempt to
create an
“Accord and Satisfaction” will not succeed, if within ninety days after payment of the instrument, the
creditor tenders repayment of the amount of the check to the debtor.
Our readers
with questions regarding the concept of “Accord and Satisfaction”
should
consult directly with their own attorneys, for specific guidance.
FD778 12/23/05
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Readers may address their
questions to The Real Estate
Lawyer, Fred M. Duman, 2807 Castro Valley Boulevard, Castro Valley, California
94546. Mr. Duman will answer those of
general
interest in his column. He reserves the
right to edit the letter for brevity and clarity.
Each real estate problem
usually has its own distinct
circumstances, and frequently is more complicated than realized by a
layperson. Readers are also encouraged
to consult with their own lawyers to obtain guidance concerning their
problems
when they first arise.
Readers are cautioned that
these answers are not intended
to be the basis for any action or reliance by the reader.
You are welcome to
visit our web site at “www.dumanlaw.com”.
© 2006, Fred M. Duman All Rights Reserved. Please see our disclaimer.
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