• Concerns Surrounding Lockbox Payment Systems
  • February 18, 2015 | Author: Timothy K. Spencer
  • Law Firm: Weltman, Weinberg & Reis Co., L.P.A. - Brooklyn Heights Office
  • Prior to the implementation of recent updates to the Uniform Commercial Code (UCC), businesses utilizing lockbox services for the acceptance and processing of inbound checks struggled with the growing difficulty of accepting check payments notated as an accord and satisfaction check. With the sheer volume of checks received, reviewing each check for any indication that the check's purpose was to settle a balance for an amount less than what was owed was, practically speaking, impossible for a creditor. As a result, creditors often unknowingly accepted for deposit checks marked as "payment in full", "paid in full", or "in full satisfaction", ultimately creating an accord and satisfaction unbeknownst to the creditor. Under common law, this practice was for the most part acceptable, but updates to the UCC provide two safeguards for creditors in this situation, and creditors ought to use at least one of these safeguard methods in order to avoid unintentionally accepting an accord and satisfaction.

    An accord and satisfaction is a regular occurrence in the financial arena. At a basic level, an accord and satisfaction is created when a creditor promises to accept a substituted performance in satisfaction of the original duty of the debtor.1 In the debtor-creditor world, an accord and satisfaction occurs when a creditor agrees to accept a sum of money less than what is owed to the creditor from the debtor. Under the UCC, to qualify as an accord and satisfaction, the following must exist: (1) a person in good faith must tender an instrument to the creditor as full satisfaction of the claim; (2) the amount of the claim must be unliquidated or subject to a bona fide dispute2; and (3) the creditor must accept payment of the instrument.3 In other words, prior to UCC amendments, if a debtor who believes a dispute as to the balance exists sends a creditor a check for an amount less than what is owed and marks on the check some variation of "settled in full", an accord and satisfaction exists if the creditor accepts the payment. Prior to UCC amendments, whether an accord and satisfaction was created in the context of a lockbox payment system created difficulties for creditors.

    A critical element of an accord and satisfaction is the acceptance of the accord by the creditor. Prior to recent UCC amendments, the mere deposit of a check marked with some variation of "settlement in full" amounted to an acceptance of the accord by the creditor. With major banks receiving and processing more than 10 million checks each month on behalf of lockbox clients, the likelihood a creditor would unknowingly accept an accord was high.4 More problematic, a creditor could not accept the settlement funds under an enumerated condition (e.g., "accepted under protest" or "partial satisfaction") and then attempt to collect the remaining balance; the creditor's acceptance, even if unknowing, amounted to an accord and satisfaction.5 Fortunately, 1990 UCC revisions provided creditors with two safeguards to avoid an unintentional accord and satisfaction scenario.

    Under the 1990 UCC revisions, creditors can safeguard themselves in two ways. The first practical approach for avoiding an inadvertent acceptance of full payment involves a creditor creating what the UCC titles a "Debt Dispute Office Solution."6 Under this approach, a creditor must, before the tender of a payment purporting to be a full payment, send "a conspicuous statement to the person against whom the claim is asserted that communications concerning disputed debts, including an instrument tendered as full satisfaction of the debt, are to be sent to a designated person, office, or place...."7 Put another way, a creditor must establish a location for receiving disputes and inform the debtor of that location. To achieve this end, creditors ought to send this conspicuous statement along with monthly statements to the debtor once an account is opened. Should a creditor choose not to set such a location, the creditor has one other approach to guard itself against accidentally accepting an accord.

    To avoid a full satisfaction when a dispute office is not established, the creditor may simply return the full-satisfaction payment. To do this, the UCC requires the creditor return the payment within 90 days after payment of the instrument.8 A creditor can accomplish a return simply by sending the debtor a check in the same amount within the given time period. This method is only available to those entities that have not established a dispute office under UCC 3-311(c)(1). Unfortunately, neither of these safeguard approaches are applicable when a creditor knowingly accepts a check sent as a full-payment check.

    The UCC provides that a creditor that accepts a check knowing that the check was sent as a full-payment is bound to the accord and satisfaction created. Under UCC 3-311(d), if a creditor or "an agent of the [creditor] having direct responsibility with respect to the disputed obligation" knowingly accepts a full-payment check, that the creditor maintained a debt dispute office or returned the check within 90 days is immaterial.9 In the context of the collection arena, a collection agency's acceptance of a full-payment check likely rises to the standard of "an agent of the creditor having direct responsibility" given the collection agency's role for collecting on the debt.10 Consequently, a creditor must pay mind to the UCC's guidance on accord and satisfaction as it applies to lockbox scenarios in order to avoid inadvertently accepting the same.

    The foregoing briefly illustrates some of the complexities involved in accords and satisfactions. A creditor wishing to utilize a lockbox payment system ought to use one of the aforementioned safeguard approaches to avoid inadvertently accepting a full-payment check as an accord and satisfaction. To do this, a creditor may send a conspicuous notice instructing the debtor to send all disputes to a specific location in each of the monthly statements it sends a debtor; the creditor must then outfit that location with sturdy procedures to ensure all communications are appropriately handled. In the alternative, a credit may impalement procedures that trigger a specific review of any check received marked with as payment or settlement in full. Where the creditor uses agents with direct responsibility of the creditor's debts, that agent must be careful to not accidentally accept a check marked as full payment on behalf of the creditor. If a creditor is able to adequately take these steps, an accord and satisfaction should only occur with the creditor's complete awareness and assent.


    1 Scipio v. Sony Music Entm't, 173 Fed. Appx. 385 (6th Cir. 2006) ("An accord is an agreement whereby one of the parties undertakes to give or perform, and the other to accept in satisfaction of a claim, liquidated or in dispute, and arising either from contract or from tort, something other than or different from what he is or considers himself entitled to; and a satisfaction is the execution of such agreement.").
    2 The debtor alleging to send the payment in satisfaction of the debt must honestly dispute the amount allegedly owed.
    3 U.C.C. § 3-311(a).
    4 Gary P. Hunt, "Managing Payment Disputes in Lockbox Collection Operations," https://www.pnc.com/content/dam/pnc-com/pdf/corporateandinstitutional/Treasury%20Management/White&under;Paper&under;Managing&under;Payment&under;Disputes.pdf (lsat visited Nov. 10, 2014).
    5 Id.
    6 UCC § 3-311(c)(1).
    7 Id.
    8 U.C.C. § 3-311(c)(2).
    9 U.C.C. § 3-113(d).
    10 Hunt, supra note 4, at 4.