Indianapolis Litigation

Your friendly Indianapolis attorney at Alerding Castor Hewitt LLP here with an issue for those of you who, from time to time, might find yourselves embroiled in collections litigation over business law, SaaS law, or technology law matters.  How often have you seen a debtor issue a check for payment and include on the memo line words to the effect of “as full satisfaction of claim,” “final payment in full of debt,” or some similar words despite the fact that the debtor owes you more than the face amount of the check?  How many of you would go ahead and cash the check, or worse yet not even notice the memo line because you routinely cash every check you receive or utilize an automated system to process checks?

The questions I pose are more than mere hypotheticals.  The savvy debtor, or more likely the debtor relying on the advice of savvy counsel, realizes that by including such words on the memo line of a check he or she could create a potential issue regarding an accord and satisfaction of the debt he or she owes to you if you have to file suit to collect on the debt.  If nothing else, the debtor knows that you will either have to negotiate with them or spend money litigating the issue.  Either way, when it’s all said and done, you will likely lose money collecting on the debt.

The applicable Indiana statute here is Indiana Code § 26-1-3.1-311.  I encourage you to read the provision for yourself; however, in a nutshell, it gives the debtor who utilizes the memo line a possible “out” on the debt.  For instance, the debt can be considered as discharged if you knew that the check was tendered in full satisfaction of the debt and either (a) before tender of the check did not send a conspicuous statement to the debtor that communications regarding disputed debts or instruments tendered as full satisfaction must be sent to a designated person, office or place, or (b) did not tender repayment to the debtor within 90 days.  Those of you who take the time to read the statute might also notice that, technically speaking, the debtor is required to prove that he or she tendered the payment in good faith as full satisfaction and prove that the amount “was unliquidated or subject to a bona fide dispute.”  In practice, however, it has been our experience at ACH that courts either do not enforce the technical requirements or, more often, are reluctant to resolve them because they see the issue as a factual dispute (a case of “he/she says v. what you say”) that requires a trial to resolve.          

So what should you do when faced with this scenario?  The best solution harkens back to the old saw about an ounce of prevention being worth a pound of cure:  we at ACH recommend that you implement some process or system to monitor payment checks and, if you find that a debtor is trying to slip by on what they owe you by utilizing the memo line as I’ve described, do NOT cash the check.  Instead, notify the debtor immediately of the dispute and non-conforming payment.  While the risk is that you might lose out on a payment from a debtor who intends to stop paying you anyway, the benefit of such a practice is that you do not give the debtor a potential defense argument that results in greater collection costs and could result in you being unable to collect on the full debt owed to you.