“Paid in Full” and Accord and Satisfaction

paid in full

Have you ever received a check in the mail with the notation “paid in full” or “payment in full?” Sometimes, if a check is not written “paid in full,” the business or person paying might send a letter with the check stating that the payment is for the full amount of the account or debt.

As a business litigation attorney Memphis, TN trusts with its important business matters, we’d like to warn you about the potential consequences of cashing checks with such notations, or which come along with correspondence indicating full payment. Under the laws of some states, if you cash a check marked “paid in full” or with other similar language, or if you cash a check sent with a letter stating that the payment was in full satisfaction of the debt, you might be prohibited from collecting any additional money, even if you are really owed more.

In breach of contract cases, a person who proves an “accord and satisfaction” is relieved of further liability to the creditor. To prove an accord and satisfaction, the person paying must prove that the amount owed to the creditor was disputed; that a check was sent which was clearly marked “paid in full,” or with other language establishing that the payment was in full satisfaction of the debt, or was sent with a letter saying that the payment was in full satisfaction of the debt; and, that the creditor cashed the check.

Here is an example of a breach of contract case where an accord and satisfaction defense was successful.

  • Creditor agreed to do certain grading and other work on Debtor’s property.
  • The parties orally agreed that Creditor would be paid $2,500 total, and the Creditor was paid $1,000 up front.
  • Creditor ended up performing additional work beyond the work to which the parties had agreed, but the parties never discussed what Creditor would be paid for the additional work.
  • After the job was complete, Creditor sent Debtor a bill for over $9,000.
  • Debtor told Creditor that he did not believe he owed more than the $1,500 he still owed for the total job cost of $2,500 as initially agreed.
  • Debtor sent Creditor a check for $1,500 with the notation “pd. in full.”
  • Creditor marked through the “pd. in full” notation on the check and cashed it.

The trial judge found in favor of Creditor, finding that Debtor was liable for breach of contract and had not proven accord and satisfaction.  But, the Court of Appeals reversed the trial judge, and held that the fact that Creditor had marked through the notation before cashing the check made no difference. The court stated that Creditor’s act of marking through the notation would have prevented an accord and satisfaction only if Creditor had notified Debtor of that fact beforehand and Debtor had agreed that he was willing to allow Creditor to cash the check and to still claim the balance owed.

One important point is that a debtor’s expression that the payment is in full and final satisfaction of the debt cannot be ambiguous. If this is not clear, then the accord and satisfaction defense will not be successful. It is also important to keep in mind that there may be state specific rules or statutes which can affect the analysis and end result of accord and satisfaction cases.  For example, in the state of Tennessee, if a creditor pays back the amount paid by the debtor within 90 days, the creditor can avoid an accord and satisfaction defense. Likewise, creditors are allowed in certain states to designate to whom exactly any check marked “paid in full” must be directed in order to be effective.

If you need help with any business litigation matter, contact the trusted a business litigation attorney.

Wiseman Bray PLLCThanks to our friends and contributors at Wiseman Bray PLLC who have significant experience in business formation and organization and litigation.