By Paul Klemm, Esq.
What should a creditor do when it receives a check with a "payment-in-full" or a similar notation on it? Since 1992 there has been a conflict of law between California Commercial Code sections 3311 and 1207(b) on the one hand, and Civil Code section 1526(a) on the other.
With the enactment in 1987 of Civil Code section 1526, creditors were given the right to protest payment-in-full terms on a check. Section 1526 allowed a creditor to keep the amount offered and later sue for the remainder. Specifically, section 1526 states that cashing a check bearing the words "payment-in-full" does not result in an accord and satisfaction "if the creditor protests against accepting the tender in full payment by striking out or otherwise deleting" the notation. This right became questionable after 1992, when sections 3311 and 1207(b) of the California Commercial Code were enacted.
Commercial Code sections 3311 and 1207(b) set forth the majority common law rule regarding the acceptance of payment-in-full checks. In other words, the debtor is the master of his offer, and the claimant receiving such a check has only two choices: reject the tendered check and begin collection action or further negotiations, or cash the check and waive any claim to the remaining balance. The question of whether the third choice offered in section 1526, specifically strike the payment in full terms, cash the check, and sue for the balance, survived the enactment of Commercial Code sections 3311 and 1207(b) was addressed in a recently published decision.
In Directors Guild of America v. Harmony Pictures, Inc., 1998,32 F. Supp. 2d. 1184., the federal court held that the conflict between the statutes was irreconcilable and thus the later-enacted provisions of section 3311 should prevail. In light of this ruling, creditors should not rely on Civil Code section 1526(a). Creditors should be aware that they may be bound by payment-in-full notations even if those terms are stricken from the check before deposited.
The good news for creditors is that the courts still abide by the majority common law rule about cashing a check noted payment-in-full. That is to say an accord and satisfaction should only result when the claim is unliquidated or subject to a bona fide dispute. Further, the payment tendered by the debtor which gives rise to the accord must be made in good faith. Therefore, an accord and satisfaction should not be accomplished merely by sending a check to the creditor with the necessary notations included. The debtor is required to make a good faith payment on a claim which is subject to a bona fide dispute before an accord and satisfaction will result.
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