Membership Equity in a cooperative housing corporation is one of most fundamental characteristics, and benefits recognized in this unique form of housing and stock ownership. For housing cooperatives where members gain equity in their membership or stock certificate, whether or not based on increased value of the dwelling unit, improvements, or general trends in real estate markets, in instances where a member sells their membership, the return equity amounts frequently become issues of legal dispute. These disputes, if unresolved, can easily reach a point where a former member files a lawsuit against the Cooperative seeking money damages.
Depending on the cooperative’s bylaws, legal disputes over the return of a former member’s equity (or sale price) may arise due to disagreements over many factors. These disputes can involve questions over unit rehab and restoration costs, legal fees when a membership is terminated, or whether the former member owed any outstanding financial obligations to the cooperative.a. What is the Doctrine of Accord & Satisfaction?
In its legal sense, accord and satisfaction is an affirmative defense to certain causes of actions, or lawsuits. The defense is common over claims involving contracts. To analogize, imagine the following scenario:
“Person A owes $1,000 to Person B. However, Person A believes that they owe much less than $1,000 to Person B.
Accord and satisfaction is a legal method of resolving these types of disputes. The doctrine substitutes the original amount (take the $1,000 from the above scenario) and replaces it with an “agreed upon” alternative. Taking the above example, say Person A believed they only owed $500 to Person B. In some instances, the original contract, if for the above $1,000, may be amended. Consider the “accord” to be the substituted amount (i.e., payment of $500 instead of $1,000), and the “satisfaction” to be the payment of the substituted amount.
The “accord” also serves as an agreement between the parties, “to give and accept, in settlement of a claim or previous agreement, something other than that which is claimed to be due.” Nationwide Mut Ins Co v Quality Builders, Inc, 192 Mich App 643, 646; 482 NW2d 474, 476 (1992) (internal citation omitted). The “satisfaction” on the other hand, is the act of performance, or the execution of the new agreement between the parties to resolve the claim or dispute. Id. When looking at the defense of “accord and satisfaction” a court will look to whether the creditor (or party who is owed performance) accepted the condition that accompanied the tender, rather than whether the creditor accepted the new agreement (i.e., the “accord”). Id. As stated by the Michigan Supreme Court:
The applicable rule of law is, if the tender is in full satisfaction of an unliquidated claim, the amount of which is in good faith disputed by the debtor, and the creditor is fully informed of the condition accompanying acceptance, an accord and satisfaction is accomplished if the money tendered is retained; for there can be no severance of the condition from acceptance and it avails the creditor nothing to protest and notify the debtor that the amount tendered is credited on the claim and not accepted in full satisfaction. Shaw v United Motors Products Co, 239 Mich 194, 196; 214 NW 100 (1927).
In order to use accord and satisfaction, a party to a lawsuit must be able to show a contract (either express, written, or implied) to make a payment to discharge a disputed claim to an amount due and owing to another. As stated by the Michigan Supreme Court, “to have [an] accord and satisfaction, the claim must be disputed and then a substituted performance agreed upon and accomplished.” Gitre v Kessler Prods Co, 387 Mich 613, 623–624; 198 NW 2d 405 (1972). The doctrine of accord and satisfaction, at least in Michigan cases, applies to all types of disputes, ranging from contractual disputes and claims, to torts or personal injuries.
In a typical claim involving a debt owed to another, the “accord and satisfaction” defense, if involving a negotiable instrument, such as a check, is governed by the Uniform Commercial Code (“UCC”). Michigan, for example, codifies this in MCL § 440.3311. The Michigan statute states in pertinent part:
“(1) If a person against whom a claim is asserted proves that (i) that person in good faith tendered an instrument to the claimant as full satisfaction of the claim, (ii) the amount of the claim was unliquidated or subject to a bona fide dispute, and (iii) the claimant obtained payment of the instrument, the following subsections apply.
(2) Unless subsection (3) applies, the claim is discharged if the person against whom the claim is asserted proves that the instrument or an accompanying written communication contained a conspicuous statement to the effect that the instrument was tendered as full satisfaction of the claim.” MCL 440.3311(1)-(2) (emphasis added).
Therefore, the three important elements of the defense to be proven are (1) a good faith tender; (2) for full satisfaction of an unliquidated claim or bonafide dispute; and (3) payment was accepted and payment contained a conspicuous statement that the instrument was tendered as full satisfaction, or that the instrument so tendered was accompanied by a written communication stating so.
b. How Accord & Satisfaction can help Cooperatives in equity disputes.
A common legal dispute between Cooperatives and former members typically arise after the sale, transfer or termination of membership, and the cooperative withholds certain amounts from the former member. These amounts withheld, which are typically permissible and set forth in the Cooperative’s Bylaws or Occupancy Agreement, can be for things such as unit restoration and rehab costs, any unpaid carrying or occupancy charges, and attorneys fees and legal costs in the event a membership was terminated for cause that required a lawsuit.
To avoid, are at least strengthen the Cooperative’s affirmative defenses to a dispute or subsequent lawsuit by a former member over return equity amounts (whether in small claims court, or otherwise), there are some things that Cooperatives can do to give them the “accord and satisfaction” defense. First, when returning any equity to the former member, the Cooperative can include language, either on the check itself, or preferably in an accompanying written correspondence, that this check is for full and final satisfaction of the return membership equity. Such written statement must be conspicuous, and readily visible to the reader. Highlighting this language or writing it in bold font, can help prove this element.
The “accord and satisfaction” defense must also be based in “good faith.” This would suggest that a Cooperative should not use this defense as a sword to justify withholdings from the return of former members’ equity, or sales price. Any withholdings should be both authorized under the Cooperative’s governing documents and documented. Records of any expenses for unit rehab and restoration costs, labor, invoices, or unpaid carrying charges or any other amounts due to the Cooperative, should be preserved.
While taking these additional steps will not necessarily prevent a former member from challenging the amount of return equity or sale price, or prevent the former member from filing a lawsuit against the Cooperative, they will strengthen an affirmative defense that the Cooperative can use to quickly dispose of, or have the lawsuit dismissed.
By: Matthew T. Nicols, Esq.
Attorney at the Law Offices of Pentiuk, Couvreur & Kobiljak, P.C.