A Cautionary Tale: $24,000 “Paid In Full” Check Settles $2 Million Disputed Claim

June 27, 2024

Accord and Satisfaction Under The UCC

Article Three of the Uniform Commercial Code (“UCC”) applies to negotiable instruments, which includes transactions involving checks. Section 3-311 of the Uniform Commercial Code (in Wisconsin, found at Wis. Stat. § 403.311) codified the common law rule of accord and satisfaction. The purpose of the doctrine is to encourage informal resolution of disputes. The general rule of accord and satisfaction says that (a) if a debtor tenders, in good faith, an instrument (i.e., a check) in full satisfaction of a claim; (b) the final amount of the claim is undetermined or is subject to a bone fide dispute; (c) the creditor obtains payment of the check; and (d) the check or an accompanying communication contains a conspicuous statement that the check was tendered in full satisfaction of the claim, then the debtor’s obligation is satisfied, and the debtor has no remaining obligation to the creditor.

It is important to note that if the debtor has not engaged the creditor in a good-faith dispute of the debt before tendering the “payment in full” check, an accord and satisfaction will likely not occur, even if the creditor cashes the check. In addition, the “conspicuous statement” required by the UCC can take many forms; phrases such as “full and final payment,” “payment in full,” “payment in settlement,” “payment in satisfaction,” or similar language could all be sufficient. Further, the “conspicuous statement” might be placed on the check tendered to the creditor, or the check might be accompanied by a letter to the creditor stating that the enclosed check is “payment in full” of the claim. The UCC does not specify any particular magic words, but only a conspicuous statement that the check is intended as full satisfaction of the dispute will qualify.

The UCC includes two exceptions to the operation of an accord and satisfaction. Under one exception, for an organization creditor, if (a) a prior conspicuous communication by the creditor directs the debtor to send communications concerning the debt, including a “paid in full” check or communication, to a particular person, office, or place, and (b) the check or communication is not received at the designated office, then the cashed check does not act as a settlement. The second exception provides that an organization or individual creditor can avoid an inadvertent accord and satisfaction by tendering repayment of the amount of the instrument that was cashed back to the debtor. Note, however, that an organization creditor that has directed payments or communications to a particular address and has received the payment at that address and cashed the check, cannot thereafter avoid the settlement by refunding the amount of the cashed check to the debtor.

Finally, the statute has a further “exception-to-the-exceptions” provision, and this provision proved to be the downfall of the creditor in the Texas case. Under this final statutory provision, if the debtor proves that, within a reasonable period before the settlement check was cashed, the creditor or an agent with direct responsibility with respect to the dispute knew (or should have known) that the payment was tendered in full satisfaction, and the check was cashed anyway, then the two exceptions above are not available, the settlement payment is binding, and the dispute is resolved.

The Texas Case

In United Healthcare of Texas v. Low-T Physicians Services, 660 S.W.3d 545 (2023), United Healthcare notified Low-T in December 2017 that it had audited its submitted claims and determined that it had made overpayments to Low-T totaling more than $2.4 million. Not surprisingly, United Healthcare wanted that $2.4 million back. Counsel for United Healthcare (located in Minnesota) sent a letter to Low-T seeking the refund, but directed Low-T to follow an appeal process and communicate with a United Healthcare appeal claim processing agent via a Georgia address. Subsequent communications over many months ensued, including email and telephone communications between Low-T’s counsel and United Healthcare’s Minnesota counsel, and also involving United Healthcare’s appeal claim processing agent. Some communications from United Healthcare representatives referenced the Georgia address, and others included the Minnesota address. At one point in the communications, United Healthcare advised Low-T to send payments to a separate lockbox address at a second Georgia address. As is relatively common with many creditors, the lockbox address was managed by United Healthcare’s bank, whose personnel would collect and deposit all checks received and scan copies into United Healthcare’s document-tracking system. The day after payments were deposited, the bank would send notice of the payments to the United Healthcare individuals responsible for the matter.

In late August 2018, Low-T sent a settlement letter to seven (7) different United Healthcare addresses, including the Georgia claim-processor address, counsel’s address in Minnesota, and several other corporate addresses. The seventh letter went to the Georgia lockbox address with a settlement check for just $24,665, which was marked “Full and Final Payment” and included the assigned United Healthcare claim number. The letter to the claim processor was sent via certified mail and the other letters were sent by first class mail, and each of the settlement letters not sent to the payment lockbox included a photocopy of the check. The settlement letter explained Low-T’s offer to settle the dispute for the amount of the tendered check.

United Healthcare admitted receiving several of the letters on September 5, and the tracking information for the certified letter showed it was received at the processor’s Georgia address on September 5 as well. The lockbox received the check six days later, on September 11. Consistent with the usual lockbox procedure, the check was deposited on the 11th, and on September 12, notice of the deposit and the letter were sent to the claim processor. Once the claim processor received notice of the deposit on the 12th, she wrote to Low-T’s counsel and attempted to reject the settlement. United Healthcare also promptly attempted to refund the $24,000 payment, but Low-T never accepted or cashed the refund payment.

Low-T filed an action for a court declaration that the claim was settled by its $24,000 check, under the Texas’ version of the Accord and Satisfaction statute. Both United Healthcare’s Minnesota counsel and the claims-processor representative with the Georgia mailing address testified that they never saw the settlement letter. But the Texas trial court agreed with Low-T that the claim was settled, and the Texas Court of Appeals affirmed the trial court’s judgment.

Both courts rejected United Healthcare’s claims that their responsible individuals lacked actual knowledge of the check before it was received and cashed. The courts determined that any failure of their employees to know timely about the check and letter was due to United Healthcare’s failure either to have, or to follow, reasonable procedures for the processing of mail and timely notifying the responsible individuals. Because the letters with photocopies of the check were sent a full six days before the check was received and cashed, the courts determined that it was reasonable to bind United Healthcare to the settlement. The courts also found that United Healthcare could not refund the payment to avoid the accord and satisfaction doctrine because the creditor had notice that the check was being presented as full payment prior to the check being cashed, and failed to take reasonable steps to prevent acceptance of the check in full satisfaction. Once the check was cashed, the courts agreed that the claim was conclusively resolved. As a result, United Healthcare was out more than $2 million.

United Healthcare could have preserved its rights if it had clearly designated one person, at one address, to receive all settlement communications and any proposed settlement payments. It was also undone by the apparent breakdown in the handling of mail, both at the Minnesota counsel’s office, and at the office in Georgia that the claim processor used as a mailing address. Particularly in these days of remote and hybrid work arrangements, clear instructions on a main point of contact, and ensuring that the main contact’s mail is promptly processed, can make all the difference in a potential accord and satisfaction situation. Moreover, while there are many advantages to lockbox-payment processing, creditors that use lockboxes for regular payments should strongly consider, in a disputed-claim scenario, to instruct debtors to send settlement communications and payment to a non-lockbox address, to ensure that any accord-and-satisfaction proposal is properly considered and knowingly accepted or rejected. Taking that extra time can make all the difference.

If you have received a check marked “paid in full” or have questions about how the accord and satisfaction doctrine might impact your business and your default account collections, please contact KMK Attorney Samuel C. Wisotzkey at swisotzkey@kmksc.com or (414) 961-4831.