California Checks Marked Payment in Full; If you Cash It, Is the Debt Cancelled? The Rules of Accord and Satisfaction

Sometimes a debt may be disputed between the parties. In the early days of my practice I heard stories of people sending a check to their creditor for less then it was due, marked “payment in full” with the hope that the creditor would not notice, cash it and be tricked into accepting less than was due. The rules then were thought to be clear, but they turn out not to be so obvious, so anyone with the situation who is not sure of the consequences should consult with an experienced Sacramento, El Dorado, or Yolo Business Lawyer.

“Accord and Satisfaction” is a legal term for an agreement to accept something different from what a contract provides for in order to satisfy the requirements of the contract. Something different can be less money than due, or it can be different in kind, such a bushel of apples instead of a peck of peppers. The creditors acceptance of something different than required extinguishes the contract (or ‘satisfies’ it). Civil Code section1521, 1523.

Regarding checks, in 1987 the California legislature enacted Civil Code section 1526. It provides that for a a check mark “payment in full,” acceptance does not create an accord and satisfaction if the creditor protests by deleting the notation, or accepts the check inadvertently or without knowledge of the notation. There are exceptions to this rule where the check is tendered in conjunction with a release of a claim, or under a composition or extension agreement with creditors.

However, the Uniform Commercial Code section 3311 is in direct conflict with Civil 1526. The UCC provides that if the check is tendered in a way that the creditor knows that it is to be accepted in full satisfaction of the debt, the retention and use of the check constitutes an accord and satisfaction. Section 3311 was enacted more recently that Civil 1526, and there are federal and California decisions that state that since it was enacted later, 3311 controls. This means that, no matter whether or not the creditor deletes the notation, use of the check satisfies the debt, working an accord and satisfaction.

For there to be a true accord and satisfaction, there must be a bona fide dispute as to what is due. If the amount is undisputed, there can not be an accord and satisfaction, An accord and satisfaction requires all the elements of a contract; there must be an offer, knowing acceptance, and consideration. In the check situation, the check marked ‘payment in full’ is the debtor’s offer. Cashing the check is the creditors acceptance, and the money exchanged is the consideration. Crossing out the notation of payment in full is merely a counteroffer, which must be first presented to the writer of the check for their acceptance. Although the Commercial Code is frustrating to creditors, who have SOME cash in hand and want it now, Commercial Code section 3311 more closely follows the common law of accord and satisfaction.