By Mark T. Guithues, Esq. (originally published in Fall 2001)

Associations regularly face underhanded dealings by owners. Unfortunately, owners often attempt to try “every trick in the books” to avoid paying assessments. One method which is somewhat regularly attempted is to send in a partial payment (e.g. assessments only, without late fees or legal fees) and write “payment in full” on the check.

If you receive a check from someone which is not payment in full, and they have written “payment in full” upon the check, the check should NOT be cashed. Previously, the law allowed associations to cash a check written for less than the total amount due by striking out the “paid in full” language, and continuing collections on the balance due. However, a 1998 Federal case in California, Directors Guild of America v. Harmony Pictures, Inc., determined that writing “payment in full” results in an “accord and satisfaction” for the less-than-full amount if the check is cashed.

“Accord and satisfaction” is a method of discharging a claim whereby the parties agree to give and accept something less than the full amount outstanding. The “accord” being the agreement on a new amount owing and the “satisfaction” being payment on the newly agreed amount. The new contract is substituted for the old contract (i.e. full amount) which is thereby discharged.

In Directors Guild, the plaintiff negotiated a check marked “Full and Final Settlement For the Audit Period 6/1/90 to 5/31/94.” Prior to depositing the check, plaintiff crossed out the language referring to the “full and final settlement.” The plaintiff argued that California Civil Code Section 1526 (enacted in 1987) allowed a creditor to keep the amount offered in a “payment in full” check and to later sue for the remainder of the balance due. Specifically, this code section allowed a creditor to protest against accepting the “payment in full” by striking out or otherwise deleting the notation or by arguing that acceptance of the check or draft was inadvertent or without knowledge of the notation.

However, in 1992, California Commercial Code Section 3311 was enacted and provides that cashing a check that contains a conspicuous statement of the full satisfaction terms or if the claimant had actual knowledge of the full satisfaction term within a reasonable time before initiating collection of the instrument was sufficient to discharge the claim. Upon its enactment, Commercial Code Section 3311 conflicted directly with Civil Code Section 1526, and left only the question of whether striking out the “payment in full” language was a viable option for collecting on the entire debt.

In Directors Guild, the court agreed that the two statutes were in direct conflict. The court held that plaintiff’s acceptance of the modified check resulted in an accord and satisfaction even though plaintiff had crossed out the language prior to cashing the check, and even though plaintiff followed-up on the debt with a letter to defendants stating the payment was not a full settlement.

The court’s reasoning was as follows: (1) the two statutes are in direct conflict; (2) the two statutes cannot be reconciled; (3) therefore, the later-enacted section (Commercial Code section 3311) must prevail. Unfortunately, this means that Associations may no longer cross out language on a negotiable instrument for less than the full amount owing which indicates that it is “payment in full.”

While the Directors Guild case squarely addresses the issue, it is a Federal Case applying California law. Unfortunately there are no California state cases which directly deal with the conflict between the two statutes. This means that the Directors Guild case is not necessarily controlling but can be used by litigants in California as persuasive authority. Hopefully the California legislature will address this conflict and determine how best to reconcile the two sections.

Based on the Directors Guild case, accounts receivable professionals should no longer cross out “payment in full” language to negotiate checks and continue collection actions on the balance. Instead, the check should be returned to the owner with a statement indicating that no checks containing the “payment in full” language will be negotiated for less than the full amount.