Q- I was sued, but I settled the matter, now the creditor is coming back, wanting more. What can I do?

Today’s subject as used by Texas collection attorneys is the defense of accord and satisfaction. Accord and satisfaction is an affirmative defense and rests on a new contract which is a new written express contract or an implied contract, in which the parties agree to discharge the existing obligation. In this sense, the term “accord” is a new contract which discharges the existing old obligation.

Also, the “satisfaction” means the performance of that new contract to which the parties agree to. Importantly, because an accord is essentially a new separate agreement or contract, all of the elements which are necessary to establish the formation of a contract, such as offer, acceptance, and consideration, must also exist and be proven. For example, if a check is tendered, in an effort to discharge a disputed obligation, the acceptance of the check constitutes an accord and satisfaction. Harris v. Rowe 593 SW3d 303 (Tex. 1979); also see TransAmerican v. Finkelstein 933 SW2d 591 (San Antonio 1996).

Here are the elements that a defendant must establish to prove accord and satisfaction:

  1. The parties have a legitimate dispute about the underlying obligation.
  2. The parties intentionally and specifically agree to discharge such obligation.
  3. Debtor’s payment to the creditor was intended to be full satisfaction of the entire claim
  4. The parties had a “meeting of the minds”.
  5. There exists an unmistakable communication to the creditor, that the tender of the sum which is less than the contract price, was made on the condition that creditor’s acceptance of such sum constitutes full satisfaction of the underlying obligation.
  6. The condition made, was plain, definite, and certain.
  7. The statement accompanying the tender of the lesser sum was so clear, full, and explicit, that it is not susceptible to any other interpretation.
  8. The offer was accompanied by declarations that the creditor was certain to understand.

Honeycutt v. Billingsley 992 SW2d 570 (Houston 1st, 1999).

In the situation in Texas factoring or debt collection matters, when a debtor pays a creditor with a check or draft, or which purports to satisfy the creditor’s entire claim, then the creditor must return the tendered check or draft to the debtor in order to repudiate the transaction. It is not permissible for the creditor, in that situation, to simply strike out or cross out the debtor’s conditions on the face of the check or draft and then insert the creditors own provisions, for instance, that the check is only in partial payment, or “under protest”.

Checks often have a restrictive endorsement, and if creditor cashes the check, which is for less than full payment, but strikes the check maker’s restrictive endorsement, and inserts some different notation, then the courts will hold that the full accord and satisfaction has occurred. Metromarketing v. HTT Headwear 15 SW3d 190 (Houston 14th 2000).

Another available defense in factoring in collection matters is where a Defendant asserts the defense of novation. Essentially, a novation is a substitution that either replaces an existing obligation with a new obligation or replaces one of the original parties with a new party. To establish a novation, the Defendant will show the earlier valid contract, and a mutual agreement to a new contract, together with the express extinguishment of the earlier contract, plus a new, valid contract.

Obviously, if a novation is shown, it discharges the original contractual obligation, and only the new obligation will be enforceable. Novation is also an affirmative defense, and it must be pleaded by the Defendant or it is waived. Fulcrum v. AutoTester 102 SW3d 274 (Dallas 2003).

Another defense available to the Defendant in addition to accord and satisfaction, or novation, is the defense of modification. In this case, Defendant alleges that the original contract between the parties was modified and that the Defendant has complied with the terms of the modified contract. Modification in this sense means the introduction of a new or different element into the contract, that the general purpose and effect of the original contract is unchanged. Obviously, whether the contract has been modified is a question of fact that depends on the parties intentions.

The elements of “modification” are as follows:

  1. Mutual assent-there must be a meeting of the minds between all parties, on the new terms of the modification.
  2. Consideration-a modification to the contract must be supported by new consideration.
  3. Oral modifications-a written contract can be modified, by subsequent oral agreement. The contract as modified, however, must also comply with the statute of frauds. This defense was discussed in our earlier blog. If the terms of said oral modification “materially change” the original contract, so that it becomes subject to the statute of frauds, such modification must be in writing to be enforceable. On the other hand, if such modification is not subject to the statute of frauds, and does not change contract terms material to the original contract, in that case, the oral modification is enforceable.

Arthur J. Gallagher v. Dieterich 270 SW3d 695 (Dallas 2008).

In addition to the above defenses, Defendants may want to allege that they are entitled to an offset, or that a contractual damage provision is actually an unenforceable penalty. If a contract has a liquidated damages provision, if it is a penalty, it is, therefore, an unenforceable penalty whether such provision is unenforceable is a question of law, not fact.   The defense of “penalty” must be pleaded or else it is waived.