Problems in Consideration - Bargain Promises and the Legal Duty Rule Part II
Full Payment Check:
In the previous chapter, we mentioned that the legal duty rule is found in two different kinds of pre-existing contractual duty cases. The first kind of case is that in which one party is under a contractual duty to perform and the other party promises to pay more money for the same performance.
The second kind of case in which the legal duty rule is found is one in which a debtor owes money to a creditor and the creditor agrees to accept less money in full discharge of the debtor’s obligation.
Under the legal duty rule, the debtor’s payment of a lesser amount is not consideration for the promise to accept the money in full discharge of the debt because, in paying the creditor a lesser amount of money, the debtor is doing only what he has a pre-existing legal duty to do. As a result, after the debtor has paid the lesser amount, the creditor can sue for the rest of the money, despite the agreement to accept less money in full discharge of the debtor’s obligation.
Thelma owes Louise $100,000 which was due on April 1st. On April 15th, Thelma offers to pay Louise $75,000 if Louise will agree to accept the $75,000 in full satisfaction of the debt. Louise agrees, and Thelma pays $75,000. Louise then sues Thelma for the remaining $25,000. Thelma defends on the ground that the debt has been discharged. In this case, Louise wins. Since Thelma owed $100,000, her payment of $75,000 does not constitute consideration for Louise’s promise to accept that amount in full satisfaction because Thelma had a pre-existing legal duty to pay back the money. Therefore, Louise’s promise to discharge the debt is not binding.
There are some exceptions to this rule as well:
The first exception is where different performance is promised. In other words, if the debtor does something different from that which he is obligated to do, the creditor’s promise will be considered enforceable. For example:
Thelma owes Louise $100,000 due on April 1st. Thelma offers to pay Louise $75,000 on March 1st if Louise agrees to accept the $75,000 as full payment of the debt. Louise agrees. Thelma pays Louise the money on March 1st. Louise accepts the $75,000 and sues Thelma for the remaining $25,000. In this case, Thelma would win. Thelma’s pre-existing duty was to pay $100,000 on April 1st. She was not required to pay anything on March 1st. Therefore, by offering to pay on March 1st, she is doing something different than what she is obligated to do. Therefore, Louise’s promise to accept the $75,000 in full satisfaction of the debt is binding.
The second exception is where there is an honest dispute as to whether or not the debtor actually owes the creditor any money. In these situations, payment by the debtor of a lesser amount than what the creditor claims he is owed, is consideration for a promise to discharge in full. For example:
Louise claims that she lent Thelma $100,000 for six months. Thelma claims that Louise gave her $100,000 as a gift. In this case, there is an honest dispute as to whether Thelma owes Louise anything. In such a situation, if Thelma were to offer to pay Louise $50,000 in return for Louise’s promise to accept the $50,000 in full discharge of her $100,000 claim, the promise is binding. Therefore, if Thelma gives Louise the $50,000, Louise cannot then sue Thelma for the other $50,000 of her claim.
The third exception is where it is clear that the debtor owes the creditor something but there is an honest dispute as to how much money is owed. In these situations, payment of an amount that is less than the creditor’s claim is consideration for a discharge of the debt in full. For example:
Louise claims that she lent Thelma $100,000 for six months. Thelma agrees that Louise lent her money, but she claims that Louise only lent her $50,000 for six months. Thelma offers to pay Louise $75,000 if Louise promises to accept the $75,000 in full discharge of her claim against Thelma. Louise agrees. Thelma pays Louise the $75,000 and Louise then sues Thelma for the remaining $25,000 of her claim. In this situation, Louise would lose because payment of an amount that is less than Louise’s claim is consideration for discharge of the debt in full.
A special problem arises where a debtor owes a creditor a disputed amount of money and writes out a check to the creditor that is for an amount less than what the creditor claims but that is supposed to be in full payment of the debtor’s obligation. For example:
Both Thelma and Louise agree that Thelma owes Louise some money. Louise claims that Thelma owes her $100,000 and Thelma claims that she only owes Louise $80,000. Thelma writes an $80,000 check to Louise, but she writes the words “in full payment of the debt” on the check. Such a check is known as a “full payment” check. Suppose that Louise cashes the check and then sues Thelma for the remaining $20,000 of her claim.
Under the common law, the general rule was that if Louise cashed the full payment check, the entire debt was discharged so long as there was a good faith dispute concerning how much money Thelma actually owed Louise and Louise had reasonable notice that the check was a “full payment” check.
The U.C.C. expands on this somewhat and holds that if Louise cashed the “full payment” check, the entire claim is discharged provided that:
- the check is given in good faith and as full satisfaction of the claim
- the check either says on it or comes with an accompanying writing that says that the check is a “full payment” check, and
- the amount of the claim is the subject of an honest dispute.