Frangiosa v. Kapoukranidis

FRANGIOSA_V_KAPOUKRANIDIS.92-345; 160 Vt. 237; 627 A.2d 351


 NOTICE:  This opinion is subject to motions for reargument under V.R.A.P.
 40 as well as formal revision before publication in the Vermont Reports.
 Readers are requested to notify the Reporter of Decisions, Vermont Supreme
 Court, 109 State Street, Montpelier, Vermont 05609-0801 of any errors in
 order that corrections may be made before this opinion goes to press.

                                 No. 92-345


 Joe Frangiosa                                Supreme Court

                                              On Appeal from
      v.                                      Caledonia Superior Court

 Dimitrios Kapoukranidis                      January Term, 1993



 Alan W. Cheever, J.

 Robert R. Bent of Zuccaro, Willis & Bent, St. Johnsbury, for plaintiff-
    appellant

 William P. Neylon of Swainbank, Morrissette & Neylon, St. Johnsbury, for
    defendant-appellee


 PRESENT:  Allen, C.J., Gibson, Dooley, Morse and Johnson, JJ.


      GIBSON, J.   Plaintiff appeals from a summary judgment of the Caledonia
 Superior Court, which held that a check tendered by defendant bearing the
 statement "Paid in Full" constituted an accord and satisfaction upon its
 being cashed by plaintiff.  Because plaintiff clearly reserved his rights
 when he endorsed the check, we reverse.
      Plaintiff provided electrical services to defendant at his restaurant
 business in Lancaster, New Hampshire.  He began work before he offered an
 estimate of its total cost.  After one day at the job, plaintiff estimated
 that the project would cost from $3,000 to $4,000, exclusive of materials.
 A week later, plaintiff advised defendant that the scope of the work was
 growing, and upon its completion he tendered a bill for $8,014.74.
 Defendant told plaintiff he thought the bill should be between $4,000 and
 $5,000, and after an exchange of demands, defendant wrote plaintiff that he
 believed the correct amount was $4,000.  He tendered a check in that amount
 inscribed with the words "Paid in Full."  Plaintiff endorsed the check,
 adding to his endorsement the words "Catamount Electric Endorsed under
 Protest With all Rights and Remedies Reserved."
      Plaintiff brought suit for the unpaid portion of the total bill.  The
 trial court concluded that there was a clear dispute as to the amount of the
 debt, and that the principles enunciated in Gallagher Lumber Co. v. Shapiro,
 137 Vt. 139, 400 A.2d 984 (1979) required granting defendant's motion for
 summary judgment.  The present appeal followed.
      In Gallagher Lumber, we held that a check bearing a statement that it
 was intended in full payment of a disputed claim constituted an accord and
 satisfaction as a matter of law, notwithstanding the fact that prior to
 negotiation the payee crossed out the terms on which the check had been
 tendered.  Id. at 142, 400 A.2d  at 986.  Although we specifically stated
 that the result was not affected by the Uniform Commercial Code (UCC), we
 did not discuss the text of 9A V.S.A. { 1-207, which provides:
             A party who with explicit reservation of rights per-
           forms 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 premise in Gallagher Lumber was that the language of 9A V.S.A. { 1-207
 did not clearly supersede the common-law principles of accord and satis-
 faction.  Id. at 141, 400 A.2d  at 985; see 1 V.S.A. { 271 (common law "not
 repugnant to the constitution or laws shall be laws in this state"); Langle
 v. Kurkul, 146 Vt. 513, 516, 510 A.2d 1301, 1303 (1986) (statute changes
 common law only if its intention to do so is stated "in clear and
 unambiguous language, or if statute is clearly inconsistent with common law"
 or attempts to cover entire subject matter).
      Since 1979 when we decided Gallagher Lumber, there has been extensive
 debate among scholars and jurists over whether UCC { 1-207 should supersede
 the common-law doctrine of accord and satisfaction with respect to accept-
 ance "under protest" (or similar language of reservation) of payments
 purporting to be "payments in full."  Courts are split on the question.(FN1)
      With the benefit of more than a decade of analysis of the issue in
 other jurisdictions, we are now convinced that a conditional statement on a
 check, followed by an endorsement clearly reserving rights, should not con-
 tinue to be recognized as an accord and satisfaction.  This conclusion is
 based on the plain language of { 1-207, the need for consistency with the
 balance of the UCC, and increasing evidence that the common-law outcome is
 harsh and arbitrary and does not comport with modern commercial needs and
 realities.  We hold that this interpretation is sufficiently clear to meet
 the test of Langle v. Kurkul, 146 Vt. at 516, 510 A.2d  at 1303 and 1 V.S.A.
 { 271.
                                     I.
      Initially, we must decide whether the Uniform Commercial Code applies
 at all to the facts underlying the present case, as the check was issued in
 payment of personal services, which the Code does not cover.  Some courts
 have declined to apply { 1-207 to payments by check for personal services,
 despite the fact that UCC Article 3 (commercial paper) applies to checks.
 See, e.g., Hixson v. Cox, 633 S.W.2d 330, 331 (Tex. Ct. App. 1982).  But the
 Hixson view radically constricts the application of the UCC, allowing it to
 govern some checks but not others, depending on the reason the check was
 issued.  This approach results in confusion and a lack of uniformity,
 directly contrary to the purposes of the UCC.  See 9A V.S.A. { 1-102(2)
 (purposes of UCC include simplifying and clarifying the law of commercial
 transactions and making it uniform); Robinson v. Garcia, 804 S.W.2d 238, 243
 (Tex. Ct. App. 1991) (expressly disagreeing with Hixson).
      The better rule is that the UCC should apply to all checks, regardless
 of the purpose for which they are issued.  Air Van Lines, Inc. v. Buster,
 673 P.2d 774, 779 n.4 (Alaska 1983) (court expressly declined to limit { 1-
 207 to sale of goods); Horn Waterproofing Corp. v. Bushwick Iron & Steel
 Co., 488 N.E.2d 56, 61, 497 N.Y.S.2d 310, 315 (1985).
                                     II.
      Because we hold that { 1-207 applies to the instant transaction, we
 must decide whether the language of this statute allows a creditor to
 negate the issuer's intent on a full-payment check by means of a clear
 reservation of rights.  The text of { 1-207 appears to pursue the "obvious
 policy . . . that a party be permitted to accept non-conforming performance
 while reserving its rights under the contract."  Robinson, 804 S.W.2d  at
 246; see Walter, The Rise and Fall of U.C.C. Section 1-207 and the Full
 Payment Check -- Checkmate?, 21 Loy. L.A.L. Rev. 81, 98-99 (1987).  As one
 commentator has stated:
           We are persuaded that 1-207 should and does apply to
           this transaction for several reasons.  First, that is
           the most obvious reading of the language of 1-207. . .
           .  It is also the position that has been adopted by a
           number of states in local commentary added to 1-207 and,
           in our view, it is the interpretation that at least
           mildly inclines toward the most sensible outcome.

 1 J. White & R. Summers, Uniform Commercial Code { 13-24, at 691 (3d ed.
 1988) (footnote omitted).
      Several state statute commentaries address the issue.  The Delaware
 comment speaks of the "harsh effect of cases holding that a debt is dis-
 charged in its entirety by acceptance of part payment which the debtor
 tenders as full payment of an unliquidated claim."  Del. Code Ann. tit. 6,
 { 1-207 comment (1974).  The New Hampshire comment states that "the section
 would, in code-covered situations, permit acceptance of a part performance
 or payment tendered in full settlement without the acceptor gambling with
 his legal right to demand the remainder of the performance or payment . . .
 ."   N.H. Rev. Stat. Ann. { 382-A:1-207 comment (1961).  The comment to New
 York's version of { 1-207 is similar to that in New Hampshire.  See N.Y.
 U.C.C. { 1-207 comment (McKinney 1964).
      The New York Court of Appeals articulated the same general rationale in
 Horn Waterproofing:
           [T]he common-law doctrine of accord and satisfaction
           creates a cruel dilemma for the good-faith creditor in
           possession of a full payment check.  Under that rule,
           the creditor would have no other choice but to surrender
           the partial payment or forfeit his right to the
           remainder.  We are persuaded, however, that the common
           law was changed with the adoption of section 1-207
           pursuant to which a fairer rule now prevails.

 488 N.E.2d  at 59, 497 N.Y.S.2d  at 313 (citation omitted).  The court relied
 on the Report of the State of New York Commission on Uniform State Laws,
 which took the position that the common-law doctrine was changed by the
 Code:
             "This section permits a party involved in a Code-
           covered transaction to accept whatever he can get by way
           of payment, performance, etc., without losing his rights
           to demand the remainder of the goods, to set-off a
           failure of quality, or to sue for the balance of the
           payment, so long as he explicitly reserves his rights.

             . . . .

           "The Code rule would permit, in Code-covered trans-
           actions, the acceptance of a part performance or
           payment tendered in full settlement without requiring
           the acceptor to gamble with his legal right to demand
           the balance of the performance or payment."

 Id. at 60, 497 N.Y.S.2d  at 314 (quoting Report of the State of N.Y. Comm'n
 on Uniform State Laws, at 19-20 (1961)).
      The New York Commission's report and the other state commentaries
 describe a rule far more suited to promoting accord and satisfaction between
 parties than the common-law rule.  An important element in achieving settle-
 ment of a dispute is for each of the parties to have full knowledge of the
 issues, the law, and the interests and positions of the adversary.  The
 common-law rule on full-payment checks is a debtor's ultimatum.  It tends
 to obscure the line between a true dispute as to the amount of a debt and a
 dispute arising solely because a debtor seeks to pressure a creditor into
 choosing between an inadequate, but immediate, payment and litigation.
      In sum, applying { 1-207 to clear reservations of right inscribed on
 full-payment instruments will discourage tactical gamesmanship between
 litigants, will balance the power between negotiating parties appropriately,
 and will leave untouched the debtor's option of negotiating an effective
 accord and satisfaction.
      The rationale of the cases upholding the common-law rule on full-
 payment checks against the UCC, and the principal argument of appellee in
 the present case, is that applying { 1-207 would undermine the principles
 of offer and acceptance, which are the essence of contract formation.  It
 is, however, no defense of the common-law rule to state that { 1-207 alters
 it.  Statutory amendments of common-law rules are routinely enacted and now
 commonplace.  The UCC itself is an excellent example of a statute that
 displaces much of the common law.  Indeed, one of its basic purposes was to
 replace common law variations by jurisdiction and achieve national
 uniformity in commercial law.(FN2)
      It is true that under this interpretation of { 1-207, a debtor's
 attempt to end a dispute with a creditor by tendering a check with a
 conditional legend will be thwarted.  As one commentator stated:
             Besides operating as an unnecessary destruction of a
           valuable common law doctrine, the expansive inter-
           pretation of U.C.C. { 1-207 . . . conflicts with
           another basic principle of the Uniform Commercial Code,
           the duty of good faith imposed by { 1-203, certainly the
           more fundamental concept. . . .  It is unfair to the
           party who writes the check thinking that he will be
           spending his money only if the whole dispute will be
           over, to allow the other party, knowing of that reason-
           able expectation, to weasel around the deal by putting
           his own markings on the other person's checks.
 6 Corbin on Contracts { 1279, at 69 (Supp. 1992).  We do not agree that our
 interpretation of { 1-207 is unfair.  The debtor's fair expectations will
 not be thwarted, any more than they would be if the debtor relied on any
 other common-law rule overridden by statute.
      It has been suggested that our reading of { 1-207 will result in
 greater numbers of unresolved disputes, with a consequent increase in cases
 coming to the courts.  The ability of the parties to reach an accord and
 satisfaction is in no way limited by this reading of the Code.  All that is
 eliminated is the ability of the debtor to incorporate a binding take-it-or-
 leave-it offer within a partial payment.  We are confident that our holding
 will result in less, not more, litigation.  It may well improve the likeli-
 hood of settlement by focusing parties on the question of what is owed,
 rather than the subsidiary issue of whose language on a check should be
 deemed legally binding.  Cases that do reach the courts will focus on the
 underlying legal issues, and not the ancillary and unnecessary questions
 spawned by debtor-creditor gamesmanship, particularly the question of
 whether a debtor and creditor have a bona fide dispute.  See Note, Role of
 the Check in Accord and Satisfaction: Weapon of the Overreaching Debtor, 97
 U. Pa. L. Rev. 99, 100-09 (1948) (discussing debtor's tactic of economically
 exploiting creditor's need for payment).  It is clear that this outcome most
 closely fulfills the legislative policies underlying adoption of 9A V.S.A. {
 1-207.
      We hold that where a debtor tenders a check to a creditor as payment in
 full for less than the amount alleged to be owing on the debt, the creditor
 may accept the check as partial payment, so long as the creditor makes a
 reservation of rights in a manner that clearly and explicitly notifies the
 debtor that the check is not accepted as full payment on the debt and that
 no accord and satisfaction has been effected.
      Reversed and remanded.


                                     FOR THE COURT:


                                     ______________________________
                                     Associate Justice




FN1.    The following are examples of cases holding that UCC { 1-207 has
 altered the doctrine of accord and satisfaction by permitting the creditor
 to reserve rights when negotiating an instrument, or that have questioned
 the continuing validity of the common-law rule: Bivins v. White Dairy, 378 So. 2d 1122, 1124 (Ala. Civ. App. 1980); American Food Purveyors, Inc. v.
 Lindsay Meats, Inc., 265 S.E.2d 325, 327 (Ga. Ct. App. 1980); Ditch Witch
 Trenching Co. v. C & S Carpentry Serv., Inc., 812 S.W.2d 171, 173 (Ky. Ct.
 App. 1991); Horn Waterproofing Corp. v. Bushwick Iron & Steel Co., 488 N.E.2d 56, 59, 497 N.Y.S.2d 310, 313 (1985); AFC Interiors v. DiCello, 544 N.E.2d 869, 873 (Ohio 1989); Scholl v. Tallman, 247 N.W.2d 490, 492 (S.D.
 1976).
     A greater number of jurisdictions have sustained the common-law rule
 of accord and satisfaction against a claim under UCC { 1-207.  The following
 are examples of such cases: Milgram Food Stores, Inc. v. Gelco Corp., 550 F. Supp. 992, 997 (W.D. Mo. 1982) (interpreting Missouri law); Air Van Lines,
 Inc. v. Buster, 673 P.2d 774, 779 (Alaska 1983); R.A. Reither Constr., Inc.
 v. Wheatland Rural Elec. Ass'n, 680 P.2d 1342, 1344 (Colo. Ct. App. 1984);
 County Fire Door Corp. v. C.F. Wooding Co., 520 A.2d 1028, 1035 (Conn.
 1987); Cass Constr. Co. v. Brennan, 382 N.W.2d 313, 320 (Neb. 1986); Sharpe
 v. Nationwide Mut. Fire Ins. Co., 302 S.E.2d 893, 894 (N.C. Ct. App. 1983);
 Marton Remodeling v. Jensen, 706 P.2d 607, 610 (Utah 1985); Flambeau Prods.
 Corp. v. Honeywell Information Sys., Inc., 341 N.W.2d 655, 664 (Wis. 1984).
 
FN2.    9A V.S.A. { 1-102 states, in relevant part:
     { 1-102. Purposes; rules of construction; variation by agreement
     (1) This title shall be liberally construed and applied to promote its
     underlying purposes and policies.
     (2) Underlying purposes and policies of this title are
         (a) to simplify, clarify and modernize the law governing
     commercial transactions;
         (b) to permit the continued expansion of commercial practices
     through custom, usage and agreement of the parties;
         (c) to make uniform the law among the various jurisdictions.