Small Businesses Beware: Accord and Satisfaction May Offer An Escape Hatch for Debtors And Leave You Unsatisfied

Times are tough and businesses all over Michigan are seeing their accounts receivable aging well beyond previous levels. For most, this means monitoring the file and keeping in contact with the debtor. Often a payment plan can be worked out and then collecting full payment becomes a matter of patience. However, some debtors may be convinced that your calculation of the amount owed is not correct. Worse yet, they may have ulterior motives. These debtors might simply disagree with the amount owed in order to take advantage of your desperation. Creditors should be wary of these debtors because they may try to unilaterally settle the account for what they want to pay instead of what is actually owed.

Exercise caution when depositing checks received from debtors. Anything written on a check or on any documents included with a check, stating “accord and satisfaction,” “final payment,” “last payment,” “payment in full,” or any similar terms indicating that the payment is being tendered as payment in full, may actually settle that account.

If you aren’t familiar with the term “accord and satisfaction,” accord means a contract; satisfaction means to satisfy, settle or resolve. The term “accord and satisfaction” describes a situation where an amount is in dispute and the creditor accepts a compromise amount in resolution of the dispute. A savvy debtor will sometimes write language on a check indicating final payment in order to try to escape payment of the full amount owed. Creditors, anxious to get any money they can from the debtor, often deposit the check. Under certain circumstances, this may constitute the creditor’s acceptance of the amount offered by the debtor. In other words, the debt will be considered fully paid because the parties reached an accord and satisfaction.

In March 2006, the Michigan Supreme Court clarified the issue of accord and satisfaction. In the case of Hoerstman General Contracting Inc. v. Hahn, a contractor brought suit against a homeowner to collect payment for work done on a home construction project. The homeowners, the Hahns, countersued the contractor for amounts which they believed were overpaid and asserted a defense of accord and satisfaction.

The contractor sent the Hahns a final bill for $16,910.79 for services rendered. However, the Hahns felt they had previously overpaid the contractor. The Hahns responded to the invoice with a detailed letter explaining their position. They enclosed a check for $5,144.79 as final payment for the contractor’s services. On the memo line of the check was written the term “final payment.”

After receiving the Hahn’s check, the contractor’s attorney advised him to simply cross out the words “final payment” and deposit the check. The contractor crossed out the words, deposited the check with his bank and credited the Hahn’s account for $5,144.79. When the Hahns failed to make any additional payments on the balance, the contractor filed suit.

Applying a section of Michigan statutory law commonly known as the Uniform Commercial Code (UCC), the Michigan Supreme Court decided that the Hahns had paid their debt in full. According to the statute, if a debt is truly in dispute, a debtor tenders payment of the debt in full, a debtor clearly indicates a payment in a disputed debt is being tendered in full satisfaction of the debt and the creditor accepts the payment, an accord and satisfaction will occur if the creditor deposits the check.

The Hahns tendered their check to the contractor in good faith as payment in full. The account was truly in dispute because the contractor performed work outside the original contract and the parties never agreed to that work in writing. The language on the check as well as the enclosed letter clearly gave the contractor notice that the payment was final. The contractor crossed out the words “final payment” and deposited the check, thereby accepting the Hahn’s final payment. Therefore, under the statute, the debt was considered fully discharged.

Moreover, the Court found that since the Hahns wrote FINAL PAYMENT in all caps on the check, it was conspicuous as required by the statute. The Court determined that even if the letter had not been included, the words on the check were sufficient to indicate that the check was given in final payment by the Hahns.

Aside from written language on checks and letters, other communications may be sufficient to evidence the debtor’s intent to unilaterally finalize the account. In addition to written statements on a check or in a letter, a debtor can introduce evidence that you or your company knew the check was tendered in full satisfaction of the debt prior to your acceptance in order to establish an accord and satisfaction. This evidence could be in the form of phone records, notes the debtor kept of conversations, or any other evidence showing that the debtor made you aware that the payment was intended as the final payment.

It is important to remember that the amount of the debt has to be the subject of a true dispute. It’s difficult to dispute a debt for something that was actually agreed to or received. If you’ve billed for something that both parties agreed upon and provided the services or the goods in full then there’s really nothing to dispute. However, when something in the agreement remains open, as in the example above, work performed outside the contract without signing a change order, then there may be a true dispute.

Remember the following:

  • Keep on top of your collections;
  • Develop a way to red flag debtors that dispute the amount they owe;
  • Keep notes of all phone conversations with debtors;
  • Keep copies of any and all communications with debtors;
  • Look for any language written on the check or instrument indicating that the check is in any way intended as a final payment;
  • Look for any documents included with a check indicating that the payment is a final payment or payment in full;
  • Do not cash or deposit any check or instrument with any such final payment language; and
  • Consult with an attorney before cashing any check or instrument with any such final payment language.