Contracts Class Notes 2/16/04


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 Ohio.  UCC § 1-207 (1) used to be the whole thing.  In 1990, subsection (2) was added.  Before subsection (2) was added, some people argued that this section changes the common law.


Most courts thought UCC § 1-207 was never intended to apply to accord and satisfaction, but other courts “screwed it up” according to Clovis, such as Ohio.  When the amendment to § 1-207 was adopted in Ohio in 1994, the 1989 Ohio Supreme Court ruling was overturned.  So you can’t scratch out “paid in full” and write “under protest” or anything like that anymore when we’re talking about an accord and satisfaction.  However, you can use language like this to reserve your right to sue down the line on other matters.  This section generally deals with goods contracts on an installment plan and long-term, sizable deals where the buyer wants to take and use what is offered even though the contract was broken in some way.


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 Clovis says is what he ought to do under these circumstances.


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.


Denney v. Reppert


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 Montgomery County v. Johnson


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.


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