Chapter 12- Settlement OF Claims- Unliquidated AND Liquidated Debts PDF

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CHAPTER 12- CONSIDERATION I. SETTLEMENT OF CLAIMS A. SETTLEMENT OF A LIQUIDATED DEBT (Undisputed Debt) – a liquidated debt is a debt in which neither the existence nor the amount is disputed by either party. **General Rule – a fully matured (the debt is past due) liquidated debt cannot be discharged by any amount less than what was originally agreed upon by the parties, even if the creditor orally discharges the debt, because it is a pre-existing legal obligation of the debtor to the creditor. EXCEPTIONS 1) The creditor accepts some new or different consideration to discharge the debt ( either a lesser amount of cash plus something else or something other than cash) OR 2) The debtor gets in a signed writing from the creditor the promise to discharge the balance of the debt (NY LAW) OR 3) The debt is not due yet and therefore is not fully mature. EXAMPLES: #1. A owes B $100 which was due yesterday. A gives B $50 in consideration for B’s promise to discharge the debt in full. B accepts the $50 but later decides to sue for the remaining $50. B wins. A must pay the remaining $50 because A had a preexisting legal obligation to pay B $100, not $50. (Example of General Rule) #2.A gets B to put in writing his promise to discharge $50 of the $100 debt. A gives B $50. B later sues for the remaining $50. A wins. NOTE: The creditor’s signature endorsing a check sent to him by the debtor which was offered by the debtor in full payment of the debt – IS NOT SUCH AN ACCEPTABLE SEPARATE WRITING #3. A gives B a book in consideration for B’s promise of discharge. B accepts the book and discharges the debt. B later sues for the $100. A wins because A is under no legal obligation to give B the book. This is new and different consideration.

#4. A owes B $100 which is not due until next week. A gives B $50 today in consideration for B’s promise of discharge. B accepts but later sues for the balance of $50. A wins because the debt was not fully matured. A is not legally obligated to pay anything before the due date.

B. SETTLEMENT OF AN UNLIQUIDATED DEBT (Disputed Debt) – a debt that is disputed as to either its existence or its amount. An unliquidated debt is discharged if an accord and satisfaction has occurred. 1) REQUIREMENTS FOR AN ACCORD AND SATISFACTION – An accord and satisfaction can occur under two different situations: SITUATION #1 1) There is an unliquidated debt AND 2) The debtor decides on his own to send a check to the creditor (without any prior negotiation, discussion or agreement with the creditor), in full payment of the debt a lesser amount than is claimed by the creditor. The debtor writes on the check that payment is being offered in “full satisfaction” of the debt AND 3) The creditor upon receipt of this check endorses it and deposits it into his bank account. If this occurs, an accord and satisfaction occurs and if the creditor wants to sue for the remaining balance of the debt he will lose his case because he already accepted the debtor’s check in “full satisfaction” of the debt by endorsing and depositing it. 4) EXCEPTION: New York Law allows the creditor to legally prevent this accord and satisfaction if the creditor, before he endorses and deposits the check, also writes on the back of the check, either of the two following words; “under protest” or “without prejudice”. By writing either of these two phrases on the back of the check,along with his endorsement, the creditor prevents the accord and satisfaction and reserves his right to later sue for the remaining balance of the debt he claims is due from the debtor.

SITUATION #2 1) There is an unliquidated debt AND 2) The debt is settled when the parties negotiate and come to a mutual agreement on the amount that is now due. The debtor then sends the agreed upon amount accompanied by a notice of the agreement AND 3) The creditor accepts the payment upon receipt of the check, by endorsing and depositing the check. An accord and satisfaction has occurred which means that if the creditor later sues for the balance he claims is due, the creditor will lose because he already negotiated and settled with the debtor. Even if the creditor wrote “under protest” or “without prejudice” on the back of the check he would still lose. NY law only applies to Situation #1, not Situation #2...