AFC INTERIORS v. DICELLO

46 Ohio St.3d 1 (1989)

[After the plaintiff-appellant in the case, AFC, performed interior decorating services for the defendant-appellee DiCello, a dispute developed over DiCello had the option to return furniture.]

SWEENEY, J. The dispositive question presented in this cause is whether an accord and satisfaction has taken

place with regard to the debt owed by DiCello to AFC. The appellee, DiCello, contends that an accord and satisfaction has taken place under the instant facts. The appellant, AFC, argues however that R.C. 1301.13, which embodies Section 1-207 of the Uniform Commercial Code ("UCW), should supercede the doctrine of accord and satisfaction in the "full payment" or "conditional check" situation where the payee reserves his or her rights to pursue the balance of the debt alleged to be owed.

Accord and satisfaction is a common-law doctrine where there is a contract between a creditor and debtor for

settlement of a claim by some performance other than that which is due. Satisfaction takes place when the creditor accepts the accord.

In the cause subjudice, DiCello tendered a check for an amount apparently less than what A17C expected. The

check carried the notation that it constituted payment in full for any and all claims that MC may have against DiCello. A17C crossed out the notation and inserted the words "Payment on Account" and further negotiated the check. . . . Thus, the precise question

before this court is whether the special endorsement of the check by AK with knowledge of a dispute as to the amount due, and with knowledge of the conditional statement on the check, constituted an acceptance of the conditional check, i.e., an accord and satisfaction. In light of the language of R.C. 1301.13, we do not believe that the special endorsement by AK reserving its rights and subsequent negotiation of the check should continue to be recognized as an accord and satisfaction. Therefore, we reverse the decision of the court of appeals below and remand the cause for further proceedings.

The issue of whether UCC 1-207 should apply to supercede the doctrine of accord and satisfaction has been the subject of much scholarly debate. Courts in different jurisdictions are split with regard to the effect of UCC 1-207 in this context.

We are of the opinion, however, that the drafters of the UCC, and Ohio's General Assembly, promulgated

UCC 1-207 in response to a perceived injustice to creditors that occurs where a creditor, under protest, deposits a check marked "paid in full" or the like, and later discovers that an accord and satisfaction has taken place which extinguished the right to demand further payment on the debt.

While this court has not applied R.C. 1301.13 (UCC 1-207) in factual situations similar to the case at bar, it appears that a discernible trend has developed whereby UCC 1-207 is used to supercede the common-law doctrine of accord and satisfaction in the "full payment" or "conditional check" situations.

As the debate concerning the scope of UCC 1-207 grew, courts around the country proceeded to make decisions concerning its application. In Scholl v. Tallman (S.D. 1976), 247 N.W. 2d 490, the South Dakota Supreme

Court faced a factual situation similar to the instant cause and held that UCC 1-207 applied to the "conditional check" situation. Therein, the creditor deposited, under protest, a check marked "Settlement in Full . . ." from a debtor by scratching out the debtor's full-settlement notation and writing

above his own endorsement, "Restriction of payment in full refused. $1,826.65 remains due and payable."

The court stated that the creditor effected "an explicit reservation of rights under [1-2071" and thereby did not Jeopardize his rights to the balance he maintained was due.

More recently, in Horn Waterproofing Corp. v. Bushuck Iron & Steel Co. Inc. (1985), 488 N.E. 2d 56, the debtor sent the creditor a check for less than

the amount owed with a "full payment" notation. The creditor endorsed the check and added the notation "Under Protest," and brought an action to recover the balance alleged to be due. The court applied the UCC and held that a creditor may preserve his right

to the balance of a disputed claim by explicit reservation in his endorsement of the check tendered by the debtor as full payment under UCC 1-207.

In addition to the above-cited precedents, it appears that four other jurisdictions (Delaware, Florida,

Massachusetts and New Hampshire) have embraced the view that the UCC 1-207 supersedes the common-law doctrine of accord and satisfaction in the local comments to their respective versions of UCC 1-207.

While the issue is far from settled in other jurisdictions, the competing viewpoints regarding the appropriateness of applying UCC 1-207 were best summarized by White & Summers, at 691-692:

« . . . Those arguing that 1-207 does not alter the common law rule typically start with the position, generally unassailable, that the offeror is 'master of his offer. » They point out that the drawer has made an offer, namely that of full payment, and they argue that allowing the payee to accept the money without the other terms of the offer is not only unfair, but also in direct conflict with the traditional notions of contract formation. Those who apply 1-207 and readily reject the common law outcome characterize the offeror as a chiseler [sic]. He knows that he owes $10,000 and hopes to get away with $9,000. While we have no empirical basis for concluding the typical offeror is a chiseler as opposed to a legitimately aggrieved debtor, we are inclined to that view."

While we disdain characterizing any of the parties to the instant action in such a manner, we believe that the framers of the UCC drafted Section I207 in order to balance the interests of debtors and creditors in a more equitable manner. In any event, we are persuaded that UCC 1-207 was intended to apply in the situation confronting us in the cause subjudice.

In applying the provisions of R.C. 1301.13 to the facts of the cause sub Mice, we find that appellant

explicitly reserved its rights by crossing out DiCello's notation on the back of the check and substituting its own notation, "Payment on Account." By putting, DiCello on notice in such a manner, AFC reserved its rights to collect the balance alleged to be due.

Therefore, based on the foregoing, we hold that R.C. 1301.13, which embodies UCC 1-207, supercedes the common-law doctrine of accord and satisfaction in the "full payment" or "conditional check" situation.

Moreover, we . . . further hold that pursuant to R.C. 1301.13, where a debtor tenders a check to a creditor as payment in full or less than the amount alleged to be owed on the debt, the creditor may accept the check as partial payment on the debt so long as the creditor explicitly reserves all rights by endorsing the check "under protest" or any legend sufficient to apprise the debtor that the check is not accepted as full payment on the debt. In so doing, the creditor does not thereby prejudice any rights reserved on the balance alleged to be due.

Accordingly, the judgment of the court of appeals is reversed, and the cause is remanded to the trial court for further proceedings not inconsistent with this opinion.