Contracts
Class Notes
More on accord and
satisfaction
We
were talking about some problems last time relating to a debtor using pressure
on a creditor using what’s known as a “full payment check”. The debtor tenders a check for less than he
really owes, but he writes on the check “payment in full”. The debtor is trying to get the creditor to
take the money and discharge the rest of the debt claimed against the
debtor. When can a debtor get away with
this?
What
about when there is a full payment check tendered to satisfy an unliquidated
debt? That will be effective to kill the
debt. There are three factors required:
1. Good faith tender of an
instrument to satisfy the claim in full
2. An unliquidated claim or one
subject to good faith dispute
3. The instrument is cashed
So
in this case, the creditor will lose his suit.
But
what if the words “payment in full” are scratched out and the words “payment on
account” are written? What will happen
when the creditor sues? The creditor
loses. We like having the debtor be able
to tender these “paid in full” checks.
The
debtor has made an offer to fully settle the claim. The creditor either accepts the offer or
rejects it and sends it back. We like
the fact that the debtor can try that and we don’t want to discourage it.
Also,
what is said is overridden by what is
done.
When you accept an offer with your actions, we’re not going to pay
attention to your protestations in words.
So
that’s how we went at things in common law.
But we have some problems in some places like
Most
courts thought UCC § 1-207 was never intended to apply to accord and
satisfaction, but other courts “screwed it up” according to
Say
a debtor is exerting pressure on a creditor.
That pressure can get super strong when the creditor is having
difficulties.
Say
we have a car accident involving plaintiff and defendant. Plaintiff asserts a $500,000 claim against
the defendant for negligence. The defendant
denies liability on the basis that he was not negligent, that the accident was
caused by the plaintiff’s negligence, and even if he is responsible, he should
only be liable for $25,000 tops. Say
both sides act in good faith. The defendant
tenders a $10,000 full payment check. If
the plaintiff cashes the check, can the plaintiff sue? If we don’t know anything else about the
situation, it’s probably going to be considered an OK settlement.
But
further assume that the plaintiff is in bad financial shape and the defendant
knows it. Say the defendant decides to
take advantage of the plaintiff’s situation by settling for cheap. Can the plaintiff still sue?
Say
an insurer tenders a check in satisfaction of a personal injury claim that is
covered under the insurance policy. If
the insurance company takes unfair advantage of the plaintiff, this may be
considered bad faith and accord and satisfaction would not result.
What
about the situation with a single defendant?
The question is whether there has been too much pressure. If a creditor badly needs money, how much advantage of that circumstance
can you take while still being within the bounds of fair dealing? That’s a tough question that doesn’t have an
objective answer.
Let’s
think about another kind of bad faith.
Suppose Ben went to a self-help seminar to disgruntled consumers. The purpose of the seminar was how to make
trouble for the business community. It
was suggested that every time he gets a bill, he should write a check for 60%
of the amount with a full payment legend.
He is told that the businesses will be too busy to notice the legend and
will cash the checks. This won’t
work! How come?
These
debts are actually unliquidated. Ben
knows that these debts are unliquidated.
He’s also tendering these checks in bad faith. There is no bona fide dispute over the amount
of the debts.
Businesses
like having more than one way to win (“belt and suspenders”), and a more
mechanical way to win is found in § 3-311 (c), which provides some help for
creditors (“organizations”). The
creditor can send a conspicuous notice to Ben that any disputes about debts
must be sent to a particular location (such as a P.O. box).
In
reality, most bills are paid really fast by people who don’t pay any attention
to legends. That kind of organizational
creditor will not get any notice of an attempt to settle a claim for less than
100% unless something special is done to notify them. At the special P.O. box, you have someone who
is capable of dealing with this issue.
Another
approach an organization can take is found in § 3-311 (c)(2). If you prove that you return the payment
within 90 days once you realize it’s not really full payment, you can pursue
the debtor for the full amount.
But
all of subsection (c) is subject to subsection (d). Subsection (d) says that the claim will be
discharged if, more or less, the creditor has no actual knowledge that the
debtor is going to try to tender a check in full satisfaction of the claim.
So
Ben has lots of ways to lose, which
Executory accords
Say
J has been in default on a debt for two years.
P says he’ll forgive the debt in return for a tractor to be tendered in
three months. J agrees. What does this mean? At common law, there were some things you
just could not do. These parties can do whatever they want as a matter of figuring out what they intended to do. But figuring out what they intended to do,
while it may be easy when you have a lawyer-drafted writing, it may be
difficult with an informal, oral agreement between two individuals.
One
meaning to put on this is an offer made by the creditor. The offer is: “I’ll discharge your debt if
you give me the tractor on or before July 1.”
If it is an offer, it can be revoked at any time. One method of revocation would be to sue the
debtor before July 1. That would tell
the debtor that the creditor has changed his mind. The offer could be revoked at any point, and
if it is, we’re back to the creditor’s claim for the debt.
If
the debtor accepts before there is a
revocation, in other words, if the debtor tenders the tractor in satisfaction
of the claim, then you have a Petterson v. Pattburg kind of
situation. If the offer is accepted
before it is revoked, then there is a contract and the debt is discharged. If the offer is revoked first, there’s no
deal.
So
if you look at this situation as an offer made by the creditor that removes
some of the ambiguity and it’s favorable to the creditor. You don’t want to punish the creditor for
proposing a lenient solution. Why might
the creditor change his mind? The debtor
might suggest that the tractor is not forthcoming.
On
the other hand, there is a second approach.
You say that there is a contract, not just an offer. The contract is bilateral. The creditor has promised that he will take
the tractor in full satisfaction of the debt if tendered by July 1. The debtor has promised to tender the tractor
by July 1. In this view, this should
suspend the creditor’s opportunity to change his mind and sue before July
1. This treats the creditor more
harshly.
Suppose
the debtor doesn’t come up with the tractor on July 1. What can the creditor do? On this approach, that breach would enable
the creditor to go back to the original contract. That would be beneficial to the creditor,
assuming that the creditor has been lenient to the debtor and the tractor is
actually worth less than the debt at issue.
A
third approach is to say that the debt is dead.
The parties have agreed to abandon it and turn it into an exchange of a
debt for a tractor.
All
three of these things can be done, but which of them has been done? The old law
said you couldn’t do the latter two things.
Why did the law persist in this way?
The difficulty was that a creditor who has been lenient without thinking
things through doesn’t deserve to incur much harm. The old law would protect creditors but also
prevent agreements that might be beneficial.
The
Restatement says you ought to be slow in concluding that the creditor has
decided to abandon the claim on the debt.
On the other hand, the restaters suggest that when you have a vigorously
disputed claim, then it may make a good deal of sense to say that in a
settlement agreement the plaintiff has given up the underlying claim in
exchange for the promised settlement.
This
is more about the preexisting legal duty rule and consideration in a different
context. Robbers steal money! A reward is posted for information leading to
their arrest! They are arrested and
convicted and the loot is recovered. The
bank pays the reward into court, but there are many claimants arguing with each
other.
We
find out that the bank workers get nothing because they had a preexisting duty
to their employer to, apparently, act like heroes. If they really acted like heroes, shouldn’t
they get a shot at the reward?
Who
else was going for the reward? There are
some people who failed to give notice to the banks.
Then
there are these three cops. Two of the
cops can’t claim the reward because they were acting within the scope of their
duties as cops. However, Reppert was
outside his jurisdiction and wasn’t acting within the scope of his duty, so he
gets all the money.
So
just what is important here? There’s a
public policy against allowing policemen and other public officials to solicit
bribes for doing their duty.
Board of Comm’rs
of
Johnson
and Bible were about to kill each other.
The cops came and stopped the scuffle.
The cops could get the reward because it related to a crime committed in
a different state. However, they didn’t
know that. They had a duty to break up a
scuffle occurring in their own state.
In re Estate
of Lord v. Lord
A preexisting
legal duty arising from the marriage relationship won’t get you a contract. It may be argued that there is no consideration,
or it may be argued that it goes against public policy because we want to
encourage married people to do for each other what they ought to do for each
other.
Lord
agrees to marry a sick, dying lady who will die in three years in exchange of
leaving him most of her estate. Maybe he
is agreeing to go above and beyond the call of marriage. But there’s a fact in the case that goes
against that theory. A day after the
wedding, Mrs. Lord writes a will that leaves almost everything to her sister.
We’re
going to get into mistake and fraud tomorrow.
We’ll also deal with warranties and nondisclosure. Nondisclosure can sometimes amount to a lie.