Johnston v. First Union Nat. Bank

Present: Hassell, C.J., Lacy, Keenan, Koontz, Kinser, and
Lemons, JJ., and Russell, S.J.

WENDELL W. JOHNSTON, ET AL. OPINION BY
SENIOR JUSTICE CHARLES S. RUSSELL
v. Record No. 050376 January 13, 2006

FIRST UNION NATIONAL BANK,
n/k/a WACHOVIA BANK, NATIONAL ASSOCIATION, ET AL.

FROM THE CIRCUIT COURT OF GILES COUNTY
Brett L. Geisler, Judge

This appeal presents the question whether a debtor,

presenting a check marked “Acc’t. Paid in full” that was

accepted by the creditor and not refunded, accomplished a

discharge of the debt by an accord and satisfaction. It

involves the application of Code § 8.3A-311 to the facts of

the case.

Facts

The essential facts are undisputed. In 1985, Wendell W.

Johnston and Hallie M. Johnston, husband and wife, purchased

real property in Giles County. They executed a deed of trust

securing a loan in the amount of $32,385.20 with a fixed rate

of 13.75% interest, evidenced by a note payable to Dominion

Bank, National Association, the predecessor of First Union

National Bank, now known as Wachovia Bank (collectively, the

Bank). The note provided for repayment in 180 equal monthly

installments of $428.30. Wendell Johnston was “working . . .

two jobs” and Mrs. Johnston stayed at home to care for an
invalid grandson. She made the monthly payments due on the

Bank’s note, but sometimes the payments were late. The Bank

had given her a coupon book at the outset of the loan that she

relied on to keep track of her payments. Each coupon was

marked with the due date, the amount of the monthly payment

and the amount of a “late charge” that would fall due if the

payment were more than seven days late. She attached the

coupons to each payment she made. When a payment was late,

she added the “late charge” to her payment. She believed that

this kept her account current and that the principal was

declining as shown on the Bank’s amortization schedule.

In 1999, Mrs. Johnston noticed a discrepancy between the

principal balance remaining on the loan as shown on a

statement received from the Bank and the much lower balance

shown by her own records. Because she had made all payments

at the Pearisburg branch of the Bank, she brought the matter

to the attention of Lester Tickle, who was then the manager of

that branch. He requested the Bank’s office in Roanoke to

send the Johnstons a “history of her payments.” When Mrs.

Johnston received such a document from the Bank, it did

nothing to answer her questions. She testified that “there
1
was no explanation for that large amount.”

1
This document, captioned “Transaction History,” was made
an exhibit at trial. It is a computer-generated record only of

2
 Unable to understand the basis of the Bank’s claim, Mrs.

Johnston prevailed upon her sister, Laura Jane Cook, who had a

degree in accounting, to go to the Bank and discuss the matter

with Mr. Tickle. He told Mrs. Cook that the discrepancy was

due to “extra interest charges on her late payments, and two

extended payments.”2 Mrs. Cook testified: “There seemed to be

a lot of things that didn’t, I didn’t think matched up . . . .

It was very confusing the way the bank had . . . allotted her

payments.” Mrs. Johnston, who was unable to leave her

disabled grandchild, also asked her husband’s cousin, Marie

Johnston, who had worked at the Bank for 45 years and who knew

Mr. Tickle, to go to the Bank to try to resolve the problem.

Mr. Tickle told her that he would like to help but “it was out

of his hands.”

On April 28, 2000, Mrs. Johnston went to the Pearisburg

branch of the Bank in person and was waited on by Vickie

Lucas, a teller. At that time, the Johnstons had two

outstanding loans due the Bank, the mortgage loan that was the

subject of this dispute and an “equity loan.” Mrs. Johnston

told the teller: “I would like to pay my accounts off in full

payments on the loan received by the Bank from June 25, 1993
through April 28, 2000 and shows no principal balance
remaining on the loan at any time.
2
Mrs. Johnston denied that there were ever any extended
payments.

3
and I would have to pay . . . off the [equity loan] with a

credit card and the other one I would pay by check.” There

were two coupons remaining in her mortgage loan coupon book,

representing the last two payments due. Mrs. Johnston wrote

out a check for $856.60, the sum of the last two payments as

shown on the coupons and wrote the loan number on the check

followed by the notation: “Acc’t. Paid in full.” She laid

the coupon books for both loans on the counter before the

teller and gave the teller her check and her credit card. The

teller checked the account numbers for both loans, checked her

computer for the amount due on the equity loan, called the

credit card company to be sure a payment of the required

amount would be honored, and accepted both the credit card

payment and the check. The Bank never refunded the amount of

the check to the Johnstons. It was deposited to the Bank’s

account and returned to the Johnstons, cancelled.

From April until August 2000, the Bank did nothing to

inform the Johnstons that their mortgage loan had not been

repaid in full. A “Certificate of Satisfaction” was mailed to

them evidencing repayment of the equity loan, but no such

evidence of payment ever arrived with respect to the mortgage

loan. Instead, they received a “paper . . . saying that [we]

owed a large amount of money.” In October 2000 they received

in the mail a “Notice of Intention to Foreclose” from the

4
Bank’s office in Jacksonville, Florida. On December 29, 2000,

a vice-president of the Bank executed an affidavit in

Philadelphia, Pennsylvania, to the effect that the Johnstons’

original note had been lost or misplaced but that the

principal amount due the Bank on the loan was $5,612.05, plus

$521.15 in interest and $85.64 in late charges, with further

interest accruing at the rate of $2.11 per day from November

20, 2000. In March 2001, a substitute trustee appointed by

the Bank sold the Johnstons’ property at a foreclosure sale at

which the Bank became the successful bidder.3

Proceedings

The Johnstons brought this suit against the Bank seeking

a judicial determination that the mortgage loan had been fully

paid and discharged, and other relief. The circuit court

heard the evidence ore tenus.

Although the note had been lost, the Bank produced a

“Customer Loan and Security Agreement” at trial, which the

Johnstons had signed in 1985, stating that the number of

payments would be 180, that each payment would be $428.30, and

that the payments would be due “monthly beginning June 1,

3
The circuit court’s final decree in this case set aside
the sale and the trustee’s deed to the Bank because of
violations of duties owed by the Bank and by the trustee to
the Johnstons. By order entered this day, we have affirmed
that part of the circuit court’s decree.

5
1985.” The agreement further provided that the principal of

the loan was to be $32,385.20 and “[s]tarting on the date of

this Agreement, simple interest is charged on the unpaid part

of your loan at the yearly rate of 13.75% (the 'Note Rate').

Interest is figured counting the actual number of days in each

month and using a 365-day or 366-day (as applicable) year.”

The Bank also offered in evidence a loan recalculation,

showing receipt of all payments and how they had been applied

to principal, interest and “late payments.” There was no

contention, however, that these calculations had ever been

divulged to the Johnstons.

The circuit court, in a letter opinion, held that Mrs.

Johnston had not acted in good faith in tendering a “paid in

full” check to the Bank’s teller, and that as a result, no

accord and satisfaction had occurred. The court reasoned that

good faith would have required Mrs. Johnston to tender her

check directly to Mr. Tickle, the one person in the Bank she

knew to have knowledge of the dispute concerning the debt, or

to have informed the teller that the amount due was disputed.4

The court also found that the terms of the loan were

unambiguous, that the Bank’s recalculation was correct and

4
The U.C.C. defines "Good Faith" as "honesty in fact and
the observance of reasonable commercial standards of fair
dealing." Code § 8.3A-103(4).

6
that the unpaid balance was due as claimed by the Bank. The

court entered a final decree in accordance with that ruling

and we granted the Johnstons an appeal.

Analysis

In 1992, the General Assembly adopted amendments to the

Uniform Commercial Code that included Code § 8.3A-311, a

provision intended to govern the specific situation presented

by this appeal.5 That section provides:

§ 8.3A-311. Accord and satisfaction by use of
instrument. – (a) 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.
(b) Unless subsection (c) 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.

5
The circuit court's opinion relied, in part, on Code
§ 11-12, which provides, in pertinent part: "Part performance
of an obligation . . . when expressly accepted by the creditor
in satisfaction and rendered in pursuance of an agreement for
that purpose . . . shall extinguish such obligation . . . ."
We find that section inapplicable to the facts of this case
because it is premised upon an express acceptance of part
payment by the creditor, coupled with an agreement between the
parties that such acceptance will be in full satisfaction of
the obligation. The present case is governed entirely by the
provisions contained in the U.C.C., hereinafter stated, which
apply even in cases where an accord and satisfaction may arise
through inadvertence on the creditor's part.

7
 (c) Subject to subsection (d), a claim is not
discharged under subsection (b) if either of the
following applies:
(1) The claimant, if an organization, proves
that (i) within a reasonable time before the tender,
the claimant sent a conspicuous statement to the
person against whom the claim is asserted that
communications concerning disputed debts, including
an instrument tendered as full satisfaction of a
debt, are to be sent to a designated person, office,
or place, and (ii) the instrument or accompanying
communication was not received by that designated
person, office, or place.
(2) The claimant, whether or not an
organization, proves that within ninety days after
payment of the instrument, the claimant tendered
repayment of the amount of the instrument to the
person against whom the claim is asserted. This
paragraph does not apply if the claimant is an
organization that sent a statement complying with
paragraph (1)(i).
(d) A claim is discharged if the person against
whom the claim is asserted proves that within a
reasonable time before collection of the instrument
was initiated, the claimant, or an agent of the
claimant having direct responsibility with respect
to the disputed obligation, knew that the instrument
was tendered in full satisfaction of the claim.

The foregoing section is inapplicable if the debtor is

not acting in good faith when presenting the instrument or if

the claim is liquidated and not subject to a bona fide

dispute. If the requirements of sections (a) and (b) are met,

however, an accord and satisfaction is presumed. Gelles &

Sons Gen. Contr. v. Jeffrey Stack, Inc., 264 Va. 285, 290, 569

S.E.2d 406, 408 (2002).

We find no evidence in the record to support the circuit

court’s finding that Mrs. Johnston was not acting in good

8
faith when she presented her “paid in full” check. She

presented her check to a teller, to whom such payments were

regularly made, clearly informing her that she wished to pay

her loans in full, and laid her payment books before the

teller. Her check was plainly marked "paid in full." We find

no support in the evidence for the circuit court's conclusion

that, in dealing directly with the teller in this manner, she

failed to exercise good faith as defined by Code § 8.3A-

103(4). The circuit court's opinion stated: "[Mrs. Johnston]

tendered her check not to Mr. Tickle, the one person with an

intelligent appreciation of the possible consequences of the

pay off, but to a bank teller, Mrs. Lucas. . . . I find that

the teller did not have all the relevant facts regarding this

dispute. . . ." The circuit court's conclusion that the

teller lacked "the relevant facts" could only have been based

upon conjecture.

Further, the evidence fails to support the circuit

court's finding that Mr. Tickle was the "one person with an

intelligent appreciation" of the situation. Mr. Tickle's

testimony was that he had only one conversation with Mrs.

Johnston, that the facts relating to the balance due on the

loan were not available to him in the local branch, but that

he would ask the Bank's Roanoke office to mail a statement to

her. He said: "That is what I think I remember doing for

9
her." When he was shown at trial the confusing and incomplete

statement the Roanoke office actually sent to the Johnstons at

his request, he said, "I don't know that much about the form.

The only thing we do is request it." Mrs. Johnston firmly

believed that if she made 180 payments of $428.30 and added

the required “late charges” to any late payments, as shown by

the coupons in her payment book, the loan would be paid in

full. She testified to that belief at trial and informed the

Bank of it in her contacts with the branch manager. The

record contains no evidence to support an inference that she

knew better and was dissembling.6

The original note was lost and its precise language could

not be determined. The Bank’s claim was based entirely upon

the surmise that the note was worded in strict accordance with

the “Customer Loan and Security Agreement” that had preceded

the note. Mrs. Johnston may well have been mistaken as a

matter of law, as the circuit court found, but an error of law

is not equivalent to bad faith.7 It follows that the amount

6
In Gelles, the trial court found it significant that the
debtor believed that the amount of the check it tendered in
final payment of a disputed account represented the proper
accounting of the amount due. 264 Va. at 291, 569 S.E.2d at
408. We affirmed the trial court's judgment.
7
See DeChene v. Smallwood, 226 Va. 475, 480, 311 S.E.2d
749, 751 (1984) (police officer acting under a mistaken belief
as to the effect of a law nevertheless acted in good faith).

10
due was subject to a bona fide dispute, not a fraudulent or

frivolous one, even though the Bank might ultimately have

prevailed if it had sought to recover the balance without

accepting a “paid in full” check.

As we observed in Gelles, subsection (c) of the statute

is designed to protect a creditor from inadvertent acceptance

of an accord and satisfaction. It offers the creditor two

alternatives consistent with modern business practices. See

Code § 8.3A-311 cmts. 5-6. First, the creditor, if an

organization, may send a statement to the debtor to the effect

that any communication regarding a disputed debt be sent to a

designated person, office, or place. Code § 8.3A-311(c)(1).

The Bank failed to take advantage of that protection. Second,

the Bank might have avoided the risk of an accord and

satisfaction entirely if it had tendered repayment of the

amount of Mrs. Johnston’s check within 90 days of its payment.

Code § 8.3A-311(c)(2). By retaining her payment beyond 90

days, the Bank failed to avail itself of that protection.

Conclusion

Mrs. Johnston had the initial burden of producing

evidence that she acted in good faith when she presented her

"paid in full" check to the teller. We hold that she carried

that burden, that the burden then shifted to the Bank to go

forward with evidence to rebut her showing of good faith, and

11
that the Bank failed to do so. The evidence also showed that

the amount of the claim was subject to a bona fide dispute,

for the reasons stated above. As a result, the provisions of

subsection (b) of Code § 8.3A-311 took effect and the debt was

discharged. Accordingly, we will reverse that part of the

circuit court's decree that was the subject of this appeal and

enter final judgment here in favor of the Johnstons.

Reversed in part and final judgment.

JUSTICE KEENAN, with whom JUSTICE KOONTZ and JUSTICE LEMONS
join, dissenting.

I respectfully dissent. I would hold that the trial

court’s decision is not plainly wrong or without evidentiary

support under the standard of review set forth in Code § 8.01-

680, which governs our consideration of this appeal.

I think that the majority has reached a contrary result

for two reasons. First, in my view, the majority has confused

the requirement of a “good faith” tender in Code § 8.3A-311

with the separate statutory element of a “bona fide dispute.”

Second, I think that the majority has misapplied the burden of

proof in this case.

The statutory elements of a “good faith” tender and a

“bona fide dispute” are separate and distinct. Under the

plain language of the statute, the requirement of a “good

faith” tender addresses the method and manner in which payment

12
is offered in satisfaction of a debt, while the statutory

element of a “bona fide dispute” concerns the amount of the

debt itself. See Webb Bus. Promotions, Inc. v. American Elec.

& Entm’t Corp., 617 N.W.2d 67, 73 (Minn. 2000) (focus of “good

faith” inquiry under UCC is on offer of accord, not on

parties’ underlying contract); accord Ex parte Meztista, 845

So.2d 795, 799 (Ala. 2001). Despite the fact that these

statutory elements are entirely different components of an

accord and satisfaction under the Uniform Commercial Code, the

majority heavily relies on evidence of a “bona fide dispute”

in discarding the trial court’s finding that Mrs. Johnston did

not act in “good faith” when she tendered payment to the Bank.

Further, the majority rejects the trial court’s finding

without engaging in an analysis of the “good faith” tender

requirement under the UCC.

“Good faith” under the UCC is defined in Code § 8.3A-

103(a)(4) as “honesty in fact and the observance of reasonable

commercial standards of fair dealing.” The party alleging an

accord and satisfaction under the UCC bears the burden of

proving a “good faith” tender, as well as the other elements

necessary to support the claim. Code § 8.3A-311; McMahon Food

Corp. v. Burger Dairy Co., 103 F.3d 1307, 1313 (7th Cir.

1996); Webb Bus. Promotions, Inc., 617 N.W.2d at 74.

13
 A trial court’s finding on the issue of “good faith” is a

finding of fact. McMahon Food Corp., 103 F.3d at 1313. Thus,

that finding may not be disturbed on appeal unless it is

without evidence to support it. Code § 8.01-680.

“The meaning of ‘fair dealing’ will depend upon the facts

in the particular case.” Code § 8.3A-311, cmt. 4. Those

facts include the parties’ prior course of dealings. Sarah H.

Jenkins, 13 Corbin on Contracts § 70.8, at 354-55 (Joseph M.

Perillo, ed., rev. ed. 2003). Moreover, “fair dealing

excludes engaging in opportunistic behavior.” Id. at 356.

In the present case, the trial court found that Mrs.

Johnston had dealt exclusively with the Pearisburg branch

manager, Mr. Tickle, in contesting the amount of her loan

balance. The court further found that Mr. Tickle had “full

knowledge of the dispute,” and was the “one person” whom Mrs.

Johnston knew had “an intelligent appreciation of the possible

consequences of the pay off.” The court additionally found

that despite the many prior dealings with Mr. Tickle by Mrs.

Johnston and others acting at her request, she did not

approach Mr. Tickle with her check or inform the Bank’s

teller, Vickie Lucas, of the longstanding dispute with Mr.

Tickle concerning the loan balance.

Based on these factual findings, the trial court

concluded that the exercise of “good faith” would have

14
“required Mrs. Johnston to inform the teller of the dispute

and her [negotiations] with Lester Tickle or to have tendered

the final payment to Mr. Tickle himself.” I agree, and would

hold that the trial court’s factual findings support its

conclusion that reasonable commercial standards of fair

dealing required that Mrs. Johnston tender payment to a person

who was aware of her dispute with the Bank, rather than to a

person who lacked any information or appreciation of that

dispute.

The majority acknowledges Mrs. Johnston’s burden of

proving the statutory requirement of “good faith” but

ultimately misapplies that burden in its review of the

evidence. In doing so, the majority also fails to consider

one component of the “good faith” requirement, namely, whether

Mrs. Johnston met her burden of proving that her conduct was

commercially reasonable.

In its analysis, the majority instead characterizes the

circuit court’s finding that Vicki Lewis had no knowledge of

Mrs. Johnston’s ongoing dispute as conjecture. However, Mrs.

Johnston, not the Bank, bore the evidentiary burden on this

issue. Thus, the majority’s argument that there was an

absence of evidence to support the circuit court’s factual

findings is of no consequence here. The circuit court’s

ultimate conclusion that Mrs. Johnston did not prove she acted

15
in good faith is justified by the complete lack of evidence

that she acted in a commercially reasonable manner.

In addition, the majority’s analysis is devoid of any

explanation why Mrs. Johnston’s actions were commercially

reasonable when she failed to inform Vicki Lewis of her

unresolved dispute with the Bank. In my opinion, the facially

opportunistic nature of her tender, in conjunction with her

failure to prove the commercial reasonableness of her actions,

compels a conclusion that she did not prove that she made a

“good faith” tender.

Mrs. Johnston’s failure to prove that she acted in “good

faith” was fatal to her claim of accord and satisfaction. See

Code § 8.3A-311. Thus, it is irrelevant that the Bank could

have employed remedies provided in subsection (c) of the

statute to protect the Bank from an inadvertent acceptance of

an accord and satisfaction. Once Mrs. Johnston’s claim of

accord and satisfaction failed for lack of proof, there was no

accord and satisfaction that the Bank could have accepted,

inadvertently or otherwise.

Beyond the outcome of the present case, I also am

concerned that the majority’s holding weakens the statutory

requirement of “good faith.” The majority’s relaxed

application of the “good faith” tender requirement appears to

permit a court to base its judgment on subjective and

16
sympathetic considerations, such as a debtor’s “firm belief,”

instead of the objective test of “good faith” defined in Code

§ 8.3A-103(a)(4). Thus, under the majority’s approach, a

debtor may engage in opportunistic behavior in tendering

payment on a debt of a disputed amount, as long as she is not

manifestly dishonest and strongly believes that her position

regarding the underlying dispute is correct.

This type of analytical focus will certainly create

confusion in the resolution of disputes involving both

institutional and individual transactions. As a result,

debtors may be encouraged to try to “short-circuit” their

contractual obligations by asserting a “firm belief” in the

proper amount of their remaining debt and by tendering

“payment in full” to the person least likely to have knowledge

of a particular dispute. Such conduct will have a negative

impact on a very broad spectrum of commercial transactions in

this Commonwealth. Thus, in accordance with the trial court’s

factual findings and Mrs. Johnston’s failure to meet her

burden of proof under Code § 8.3A-311, I would affirm the

trial court’s judgment.

17