BEWARE THE “IN FULL SETTLEMENT” (or similar language) check, or check and attached letter, as the court may just enforce it! Yes, although we thought we knew all the rules about this type of transaction, let’s double check just to be sure.
The “typical” full settlement payment is an attempt at an accord and satisfaction, which is legal jargon meaning, “Hey, I disputed the account, sent you payment for what I thought was actually owed, notified you of that fact, and you cashed my check … so the matter is concluded.”
While there are still some variations on this theme from state to state, most states have adopted UCC (Uniform Commercial Code) section 3-311, which deals specifically with negotiable instruments (checks, drafts, notes and the like) in situations where a debtor is trying to get the creditor to accept an amount of money (less than the amount owed) in full settlement of the debt.
Assuming the debtor operated in good faith, and that there was a legitimate dispute to the debt (flag those two assumptions for future discussion), then the debtor can create an accord and satisfaction by sending a check marked “in full” or similar words, OR … and this is IMPORTANT: a letter along with the check saying the payment is in full settlement or similar words (tip: the “in full” doesn’t have to be on the check, front or back, but may be on a separate writing, referred to in the UCC as an “accompanying written communication”!!). OK … one myth out of the way.
The remaining myth is our knee jerk reaction that the creditor/client receives checks in a lock box, therefore the lockbox exception applies. Well, that is ONLY true if, in the words of the UCC, the creditor: “sent a conspicuous statement to the person against whom the claim is asserted that communications concerning disputed debts, including an instrument tendered as full satisfaction of a debt, are to be sent to a designated person, office, or place, and (ii) the instrument or accompanying communication was not received by that designated person, office, or place.” Where was the letter and check actually sent?
Does your (the creditor’s) contract or credit application contain that language?
If not, don’t despair, but be prepared to rush, and I mean rush, the amount of the settlement payment back to the debtor if you don’t want to accept it in full settlement (again, assuming it was offered in full settlement, honestly, based upon a real dispute on the bill). You (client/ creditor) only have 90 days to do that. In the words of our UCC: “within 90 days after payment of the instrument, the claimant tendered repayment of the amount of the instrument to the person against whom the claim is asserted.”
So, (1) the check may go to a lock box, and (2) may have no settlement language on it (if accompanied by a letter with settlement language in it), but UCC 3-311 still requires us to pay attention to avoid a possible settlement being forced upon us as an accord and satisfaction.
Thank you to Muller, Muller, Richmond, Harms & Myers Law Firm in Michigan for contributing this article. C2C Resources uses the law firm exclusively for any debtor accounts that require suit in the state of Michigan.