At Delancey Street, the owners we talk to often ask what happens after a creditor agrees to take less. How does the money actually reach them? Once we strike a deal, we want to make sure the money gets to the creditor. And whether it’s a signed settlement agreement or a check marked “paid in full,” what’s written on that check can make all the difference in the world.
Accord and Satisfaction
The legal idea behind it is called accord and satisfaction: an agreement to settle a legal claim (the “accord”) which is carried out through some form of payment by the party owing the debt (the “satisfaction”), discharges the claim. In legal terms, the “accord” is the “settlement agreement or promise to settle a pre-existing disputed claim,” and “satisfaction” is the performance of that agreement or promise.
For it to work, three things are needed. First, there must be a pre-existing obligation. Second, there must be an agreement to settle the claim. And finally, there must be performance of that agreement. Based on that accord and satisfaction, the entire claim is discharged, even though the amount is usually less than what was originally owed.
Say your business owes a supplier $50,000 but sends a check for $30,000 marked “paid in full.” In many jurisdictions, if the supplier cashes that check without protest, you may have satisfied the obligation because both parties agreed to a new payment term of $30,000 for the original $50,000 obligation. This new agreement is the accord and the payment of the check was the satisfaction. The supplier may lose the other $20,000.
Payment disputes are common, and you should always make sure that a payment will satisfy your debt and extinguish the amount you owe. A written settlement is typically the best route. Here’s the Delancey Street stance: Prepare a written settlement agreement before you send any payment. We’re not just trying to be stubborn, but a settlement agreement provides clarity and both parties know exactly what they are agreeing to. If you send a check for “paid in full,” you’re running the risk that the other party will try to fight it and the debt may not be settled at all.
How the check is handled matters too. In New York and New Jersey, three conditions apply. First, the debt is disputed. That means one of the parties has a bona fide (or honest) doubt about the amount of the debt. Second, the payor (the person writing the check) communicates the fact that the payment is being made in complete satisfaction of the debt. It is also advisable to put “paid in full” on the check, and to send a cover letter with the check. The letter should also clearly state that the payment is not just for the outstanding invoice amount, but to settle the disputed matters. Third, the creditor must cash the check knowing all that. If the creditor cashes the check but doesn’t know that the check is sent in “full satisfaction,” the accord and satisfaction doctrine doesn’t apply. Or, they can cash the check and immediately send the money back. So even if your check says “paid in full,” that doesn’t mean the debt is extinguished.
The Uniform Commercial Code, which governs most commercial transactions, addresses this in Section 3-311. Under it, the check must be accompanied by a conspicuous statement to the effect that the instrument is tendered in full satisfaction of the claim. If the creditor cashes it knowing that, the claim is discharged. But this only applies to “bona fide” (i.e., honestly offered) disputes. If you just offer less without a real dispute, the code won’t cover you. A creditor can avoid discharge by refunding the payment within 90 days. But under the UCC it can’t cash it, put “under protest” on it, and come back later for the rest, because reserving its rights under Section 1-308 doesn’t prevent the accord once the conditions are met.
Large corporations have one more protection. A company can adopt a policy naming a specific office or department for settlements. If one of their other employees cashes the “paid in full” check, it may not bind the company to accept the accord and satisfaction because the settlement department was not involved in the transaction. Under Section 3-311(c)(1), that designation only counts if three things are true. First, the designation must be “conspicuous.” That means easy to spot. Second, it has to be communicated. In other words, it has to come before you send the check. And finally, the designation must be clear that it applies to payments made in full satisfaction of a disputed claim. That means check your contract, your invoices, your billing statements, to see if the language is on there. If it is, don’t send a “paid in full” check to anyone other than the department designated for settlements.
Get a Written Agreement Before You Pay Anything
So where does that leave an owner trying to settle? First, do your best to get a written agreement before you pay anything. Second, if you don’t have an agreement, send a check for “paid in full” accompanied by a letter explaining that this is to settle a disputed matter. Put simply, the Delancey Street opinion is that ”paid in full” is not a magic wand. It only works if a good-faith dispute exists, and even then the rules can vary from state to state.
It can all get pretty confusing, but at the end of the day, if the deal is done, you want to make sure the debt is extinguished. Otherwise, it can pop back up like Godzilla. When in doubt, or if the rules vary in your state, you should seek legal advice to make sure you understand how accord and satisfaction works in your area. Delancey Street is not a law firm; when legal work is the right call, we refer owners to a vetted independent attorney.
Bottom line: It’s never just a check. Always think about what happens with that payment. If you don’t prepare a written settlement agreement, that payment might be less final than you think.
