New York Businesses Collecting the Money Customers Owe (Part II)

In our last entry, we spoke about a fairly common problem most New York Businesses have encountered: Where a customer/client makes a partial payment but tries to pass it off as payment in full for the money it owes. We also presented a way a business can protect itself: By placing a restrictive endorsement on the check, a business should be able to collect the partial payment and live to fight to recover the remainder of the debt another day.

The problem, in New York, is based on a legal concept known as “Accord and Satisfaction,” which sounds more complex than it actually is. To establish an Accord and Satisfaction, there must be a genuine dispute regarding an unliquidated claim. That could mean that the two parties to a sales contract have a dispute over how much the Buyer owes the Seller for the goods it purchased. For example, the Buyer claims it owes the Seller $700.00, but the Seller insists the Buyer owes it $1,000.00, because that is what they originally agreed to. Next, the parties must mutually resolve that dispute by entering into a new contract which discharges all or part of their obligations under the original contract. This could be an agreement by which the Seller agrees to accept the $700.00 for the goods the Buyer purchased, even though the original contract was for $1,000.00. If the Buyer pays the $700.00, and the Seller accepts the $700.00 without objection, then there is an Accord and Satisfaction, and, as a result, the Seller cannot recover the remaining $300.00 due it under the original sales agreement.

In New York, when one party accepts a check in full satisfaction of a disputed unliquidated claim, the claim is discharged, as an accord and satisfaction. (See, Horn Waterproofing Corp. v. Bushwick Iron & Steel Co., 66 N.Y.2d 321; Merrill Lynch Realty/Carll Burr v. Skinner, 63 N.Y.2d 590). As a result, if there is a dispute about the money a New York Business is owed, and it receives a check marked “payment in full”, it should make sure that it does not simply sign and deposit the check. Depositing a “Full Payment Check,” that way, is evidence that the business agrees to accept the lesser amount as payment in full. Instead, the business should clearly indicate that it does not accept the check as payment in full. One way to do this is to sign the check with the restrictive endorsement mentioned earlier.

The restrictive endorsement we are discussing is based on N.Y. UCC 1-207, which provides:

A party who with explicit reservation of rights performs or promises performance or assents to performance in a manner demanded or offered by the other party does not thereby prejudice the rights reserved. Such words as “without prejudice”, “under protest” or the like are sufficient.

It is important to understand that this gives you a procedural safeguard; it does not guarantee that you will win. It allows you to keep whatever rights you had before you sign the check. It does not give you new rights to the money; it just means that you will have as much of a chance to collect payment in full, after you cash the check for the partial payment as you had before you cashed it. The customer may still have a defense against your claims to what you consider to be payment in full. You still will have to establish the full amount you are entitled to. The bottom line, however, is that you will be able to keep the partial payment and your rights, too; and that’s not a bad thing.