debtor – Paul Porvaznik – Business Litigator

Appeals Court Gives Teeth to “Good Faith” Requirement of Accord and Satisfaction Defense

A common cautionary tale recounted in 1L contracts classes involves the crafty debtor who secretly short-pays a creditor by noting “payment in full” on his check. According to the classic “gotcha” vignette, the debtor’s devious conduct forever bars the unwitting creditor from suing the debtor.

Whether apocryphal or not (like the one about the newly minted lawyer who accidentally brought weed into the courthouse and forever lost his license after less than 3 hours of practice) the fact pattern neatly illustrates the accord and satisfaction rule.

Accord and satisfaction applies where a creditor and debtor have a legitimate dispute over amounts owed on a note (or other payment document) and the parties agree on an amount (the “accord”) the debtor can pay (the “satisfaction”) to resolve the disputed claim.

Piney Ridge Associates v. Ellington, 2017 IL App (3d) 160764-U reads like a first year contracts “hypo” come to life as it reflects the perils of creditor’s accepting partial payments where the payor recites “payment in full” on a check.

Piney Ridge’s plaintiff note buyer sued the defendant for defaulting on a 1993 promissory note. The defendant moved to dismiss because he wrote “payment in full” under the check endorsement line. The trial court agreed with the defendant that plaintiff’s acceptance of the check was an accord and satisfaction that defeated plaintiff’s suit.

The 3rd District appeals court reversed; it stressed that a debtor’s duplicitous conduct won’t support an accord and satisfaction defense.

Under Illinois law, an accord and satisfaction is a contractual method of discharging a debt: the accord is the parties’ agreement; the satisfaction is the execution of the agreement.

In deciding whether a transaction amounts to an accord and satisfaction, the court focuses on the parties’ intent.

Article 3 of the Uniform Commercial Code (which applies to negotiable instruments) a debtor who relies on the accord and satisfaction defense must prove (1) he/she tendered payment in good faith as full satisfaction of a claim, (2) the amount of the claim was unliquidated or subject to a bona fide dispute; and (3) the claimant obtained payment from the debtor. 810 ILCS 5/3-311(a).

Good faith means honesty in fact and observing “reasonable commercial standards of fair dealing.” The debtor must also provide the creditor with a conspicuous statement that the debtor’s payment is tendered in full satisfaction of a claim. (⁋12)(810 ILCS 5/3-311(a), (b)). Without an honest dispute, there is no accord and satisfaction. (⁋ 14)

A debtor who fails to act in good faith cannot bind a creditor to an accord and satisfaction. Case examples of a court refusing to find an accord and satisfaction include defendants who, despite clearly marking their payment as “in full”, paid less than 10% of a workers’ compensation lien in one case, and in another, paid less than half the plaintiff’s total invoice amount and lied to the plaintiff’s agent about past payments. (⁋⁋ 13, 14)(citing to Fremarek v. John Hancock Mutual Life Ins. Co., 272 Ill.App.3d 1067 (1995); and McMahon Food Corp. v. Burger Dairy Co., 103 F.3d 1307 (7th Cir. 1996).

Applying this good faith requirement, the Court noted that the defendant paid $354 to the plaintiff at the time the defendant admittedly owed over $10,000 (defendant sent a pre-suit letter to the prior noteholder conceding he owed $10,000 on the note). The Court held that this approximately $7,600 shortfall clearly did not meet accord and satisfaction’s good faith component.

Bullet-points:

Accord and satisfaction requires good faith on the payor’s part and a court won’t validate debtor subterfuge.
Where the amount paid “in full” is dwarfed by the uncontested claim amount, the Court won’t find an accord and satisfaction.
Where there is no legitimate dispute concerning a debt’s existence and amount, there can be no accord and satisfaction.

The (Ruthless?) Illinois Credit Agreements Act

The Illinois Credit Agreements Act, 815 ILCS 160/1, et seq. (the “ICAA”) and its requirement that credit agreements be in writing and signed by both creditor and debtor, recently doomed a borrower’s counterclaim in a multi-million dollar loan default case.

The plaintiff in Contractors Lien Services, Inc. v. The Kedzie Project, LLC, 2015 IL App (1^st) 130617-U, sued to foreclose on a commercial real estate loan and sued various guarantors along with the corporate borrower.

The borrower counterclaimed, arguing that a “side letter agreement” (“SLA”) signed by an officer of the lender established the parties’ intent for the lender to release additional funds to the borrower – funds the borrower claims would have gotten it current or “in balance” under the loan. The trial court disagreed and entered a $14M-plus judgment for the lender plaintiff. The corporate borrower and two guarantors appealed.

Held: Affirmed

Rules/Reasoning:

The ICAA provides that a debtor cannot maintain an action based on a “credit agreement” unless it’s (1) in writing, (2) expresses an agreement or commitment to lend money or extend credit or (2)(a) delay or forbear repayment of money and (3) is signed by the creditor and the debtor. 815 ILCS 160/2

An ICAA “credit agreement” expansively denotes “an agreement or commitment by a creditor to lend money or extend credit or delay or forbear repayment of money not primarily for personal, family or household purposes, and not in connection with the issuance of credit cards.” So, the ICAA does not apply to consumer transactions. It only governs business/commercial arrangements.

The ICAA covers and excludes claims that are premised on unwritten agreements that are even tangentially related to a credit agreement as defined by the ICAA.

The borrower argued that the court should construe the SLA with the underlying loan as a single transaction: an Illinois contract axiom provides that where two instruments are signed as part of the same transaction, they will be read and considered together as one instrument.

The court rejected this single transaction argument. It found the SLA was separate and unrelated to the loan documents. The SLA post-dated the loan documents as evidenced by the fact that the SLA specifically referenced the loan. Conversely, the loan made no mention of the SLA (since it didn’t exist when the loan documents were signed).

All these facts militated against the court finding the SLA was part-and-parcel of the underlying loan transaction.

Another key factor in the court’s analysis was the defendants admitting that the SLA post-dated the loan (and so was a separate and distinct writing). The court viewed this as a judicial admission – defined under the law as “deliberate, clear, unequivocal statement by a party about a concrete fact within that party’s knowledge.”

Here, since the SLA was not part of the loan modification, it stood or fell on whether it met the requirements of the ICAA. It did not since it wasn’t signed by both lender and borrower. The ICAA dictates that both creditor and debtor sign a credit agreement. Here, since the debtor didn’t sign the SLA (it was only signed by lender’s agent), the SLA agreement was unenforceable. As a consequence, the lender’s summary judgment on the counterclaim was proper.

Afterwords:

This case and others like it show that a commercially sophisticated borrower – be it a business entity or an individual – will likely be shown no mercy by a court. This is especially true where there is no fraud, duress or unequal bargaining power underlying a given loan transaction.

Contractor’s Lien Services also illustrates in stark relief that ICAA statutory signature requirement will be enforced to the letter. Since the borrower didn’t sign the SLA (which would have arguably cured the subject default), the borrower couldn’t rely on it and the lender’s multi-million dollar judgment was validated on appeal.

Creditor Rights To A Debtor’s Joint Bank Account Funds and Life Insurance Policies

(Photo credit: www.wisegeek.com: Google images)

In the perpetual cat-and-mouse game played out across the collection law landscape, an important recurring question is what rights a creditor has to a debtor’s joint bank account – an account with two or more account holders.

The creditor wants to attach as much of the account as possible to satisfy or pay down a judgment balance while the non-debtor account holder (who has nothing to do with the lawsuit or judgment against the debtor) wants to protect the account or at least the account funds that belong uniquely to her.

A joint bank account – like the name suggests – is an account with multiple account holders all of whom have equal account access. See (http://www.nerdwallet.com/blog/banking-faqs/personal-joint-checking/).

A 2002 Seventh Circuit case provides a snapshot of the operative rules that control a creditor’s attempt to garnish a debtor’s life insurance policy and joint checking account. In Society of Lloyd’s v. Collins, 284 F. 3d 727 (7th Cir. 2002), the plaintiff global insurance behemoth obtained a default judgment in a British court of almost $1,000,000 against two Illinois residents who were members of a Lloyd’s-controlled insurance syndicate.

After registering the judgment in Illinois, the plaintiff insurance giant tried to garnish defendant’s nine life insurance policy premiums (which named his wife as beneficiary) and the other defendant’s joint bank account. The District court quashed the garnishments against the insurance policy and the bank account and the Seventh Circuit affirmed.

Q: Why Did the Creditor Lose?

A: Insurance policies (either insuring the debtor or insuring someone whom the debtor is dependent) are normally exempt from a judgment creditor’s reach. 735 ILCS 5/12-1001 (judgment exemptions generally).

However, life insurance policies can be attached where (1) the life insurance policy was purchased with the intent of converting nonexempt property into exempt property; and (2) if the policy was purchased to defraud creditors.

The fraud exception applies where there is actual fraud or constructive fraud. A court will find a transfer constructively fraudulent where (1) an insolvent debtor pays insurance premiums instead of the debt to the creditor, and (2) where the debtor pays premiums without getting any consideration for the transfer. Id. at 730.

Here, neither exception applied. The plaintiff creditor couldn’t show that the defendant tried to convert nonexempt personal property to exempt property since defendant purchased the life insurance policies long before his involvement with plaintiff. There was also no evidence of fraud: the debtor was solvent at the time he made the life insurance premiums and he received consideration – life insurance coverage – for the premium payments. Based on this, the Court struck the creditor’s attempts to lien the insurance policies.

The Court also declared the other debtor defendant’s joint checking account exempt from the plaintiff’s judgment. The plaintiff had the initial burden of establishing that the joint checking account funds belonged to the debtor. Once the plaintiff met this burden, the burden shifted to the debtor’s wife – as joint account holder – to show that all or part of the joint account funds belonged to her. I’d. at 730.

The debtor’s wife satisfied this burden by proving that the joint account funds (totaling $12,000) consisted of rent monies received from properties she owned. She also proved that she for the most part controlled the joint account funds and the debtor’s involvement in the account was minimal. The only access debtor had to the account was to pay joint bills. Without any evidence that the debtor used the joint account funds for his personal use, the Court held that the joint checking account was exempt from creditor attachment.

Take-away: in situations where a debtor has joint bank account funds, a creditor needs to be tenacious in establishing which funds uniquely belong to the debtor as opposed to the joint holder.

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