AFC Interiors v. DiCello

• Decision Date: 04 October 1989
• Docket Number: No. 88-1541,88-1541
• Citation: 544 N.E.2d 869,46 Ohio St.3d 1
• Parties: , 9 UCC Rep.Serv.2d 1181 AFC INTERIORS, Appellant, v. DiCELLO, d.b.a. Ohio State Home Services, Appellee.
• Court: Ohio Supreme Court

Page 1

46 Ohio St.3d 1

544 N.E.2d 869, 9 UCC Rep.Serv.2d 1181

AFC INTERIORS, Appellant, v. DiCELLO, d.b.a. Ohio State Home Services, Appellee.

No. 88-1541.

Supreme Court of Ohio.

Submitted June 6, 1989.

Decided Oct. 4, 1989.

Syllabus by the Court

1. R.C. 1301.13, which embodies Section 1-207 of the Uniform Commercial Code, supersedes the common-law doctrine of accord and satisfaction in the "full payment" or "conditional check" situation.

2. Pursuant to R.C. 1301.13, where a debtor tenders a check to a creditor as payment in full for 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. (Seeds, Grain & Hay Co. v. Conger [1910], 83 Ohio St. 169, 93 N.E. 892, overruled.)

In June 1984, plaintiff-appellant, AFC Interiors ("AFC"), and defendant-appellee, Nicholas DiCello, d.b.a. Ohio State Home Services ("DiCello"), entered into an oral contract whereby AFC would perform certain interior decorating services for DiCello. These services were performed by AFC, and furnishings were thereafter purchased by AFC and delivered to DiCello. Invoices reflecting the amount due on the furnishings were sent to DiCello. However, payment from DiCello was not forthcoming. Subsequently, on or about November 7, 1984, AFC filed this action against DiCello in the court of common pleas alleging breach of contract on the amount due for the furnishings. AFC thereafter filed a motion for summary judgment to which defendant responded that it should be denied. Thereafter, the matter was referred to arbitration, and on October 28, 1986, the arbitrators found in favor of AFC in the amount of $15,421, and further found that defendant was entitled to the return of the goods, except for a desk.

Meanwhile, on or about July 3, 1985, DiCello sent a letter to AFC stating that he was returning the specific items that he no longer wanted pursuant to their oral contract, and enclosed a check containing a notation on the back, "[p]ayment in full for any and all claims against Nick DiCello." Kenneth Henderson, Vice-President of AFC, testified that he received the merchandise and the check, but that he crossed out the notation on the back of the check and inserted the words "Payment on Account." Henderson thereafter negotiated the check.

On October 22, 1987, DiCello filed a motion for summary judgment with the trial court on the ground that AFC's negotiation of the check amounted to an accord and satisfaction of the underlying debt. After due consideration, the trial court agreed, and granted DiCello's motion for summary judgment.

Upon appeal, the court of appeals affirmed, finding that the trial court was correct in finding that an accord and satisfaction had taken place under Ohio law. In response to AFC's argument that R.C. 1301.13 permits a creditor to reserve its rights when cashing a payment-in-full check, the appellate court opined that " * * * R.C. 1301.13 applies to the sale of goods and not payment in full checks."

The cause is now before this court pursuant to the allowance of a motion to certify the record.

Ruport Co., L.P.A., Scott H. Ruport and Mary Beth Green, Akron, for appellant.

Robert V. Housel, Twinsburg, for appellee.

SWEENEY, Justice.

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 ("UCC"), should supersede 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. See Grosse & Goggin, Accord and Satisfaction and the 1-207 Dilemma (1984), 89 Comm.L.J. 537. Satisfaction takes place when the creditor accepts the accord. Id.; see, also, State, ex rel. Shady Acres Nursing Home, Inc., v. Rhodes (1983), 7 Ohio St.3d 7, 7 OBR 318, 455 N.E.2d 489.

In the cause sub judice, DiCello tendered a check for an amount apparently less than what AFC expected. The check carried the notation that it constituted payment in full for any and all claims that AFC may have against DiCello. AFC crossed out the notation and inserted the words "Payment on Account" and further negotiated the check. Under Ohio law, it has been held that in such a situation the creditor had " * * * but one alternative; he must accept the amount tendered upon the terms of the condition, unless the condition be waived, or he must reject it entirely, or if he has received the amount by check in a letter, he must return it." Seeds, Grain & Hay Co. v. Conger (1910), 83 Ohio St. 169, 93 N.E. 892, paragraph one of the syllabus. See, also, Inger Interiors v. Peralta (1986), 30 Ohio App.3d 94, 30 OBR 193, 506 N.E.2d 1199. Thus, the precise question before this court is whether the special endorsement of the check by AFC 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 AFC 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.

R.C. 1301.13 (UCC 1-207) 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."

The Official Comment to this section provides in part:

"1. This section provides machinery for the continuation of performance along the lines contemplated by the contract despite a pending dispute, by adopting the mercantile device of going ahead with delivery, acceptance, or payment 'without prejudice,' 'under protest,' 'under reserve,' 'with reservation of all our rights,' and the like. All of these phrases completely reserve all rights within the meaning of this section. The section therefore contemplates that limited as well as general reservations and acceptance by a party may be made 'subject to satisfaction of our purchaser,' 'subject to acceptance by our customers,' or the like." (Emphasis added.)

The issue of whether UCC 1-207 should apply to supersede 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. See, e.g., White & Summers, Uniform Commercial Code (3 Ed.1988) 689-692, Section 13-24; Note, Contracts--Section 1-207 of the Uniform Commercial Code Not Intended to Apply to Doctrine of Accord & Satisfaction (1980), 15 Land &amp Water Review 737-748; and Hawkland, The Effect of UCC Section 1-207 on the Doctrine of Accord and Satisfaction by Conditional Check (1969), 74 Comm.L.J. 329.

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 supersede the common-law doctrine of accord and satisfaction in "full payment" or "conditional check" situations. Subsequent to the adoption of the UCC, at least two other jurisdictions dealt with the subject, albeit in dicta. See Hanna v. Perkins (N.Y.Cty.Ct.1965), 2 UCC Rep.Serv. 1044; Baillie Lumber Co. v. Kincaid Carolina Corp. (1969), 4 N.C.App. 342, 167 S.E.2d 85. In Baillie, supra, the court stated that its version of UCC 1-207 would prevent an accord and satisfaction where a conditional check was endorsed "With reservation of all our rights." Id. at 353, 167 S.E.2d at 93. In Hanna, supra, the court did not rely on UCC 1-207 because it found no accord and satisfaction based on the fact that there was a triable issue therein. However, the court cited UCC 1-207 and opined that "[i]f it were not that this court finds that triable issues of fact are present, this court would deny the motion by holding this particular section of the code would seem to favor plaintiff's overriding indorsement of 'Deposited under protest' as a reservation of his right to collect payment of [the] balance." Id. at 1046.

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...