Steinman v. Malamed, (June 28, 2010) 185 Cal. App. 4th
1550, 111 Cal. Rptr. 3d 304.
This case suggests that UCC § 1-308 (allowing payment
"under protest") may not be interpreted broadly to allow a party to reserve
rights when making a disputed payment.
This blog entry is longer than usual. That's because the court's opinion
seems is suspect in analysis and perhaps result.
It is not too often that the court of appeal lets a party who admittedly is
not owed $300,000 keep that money just because the rightful owner of money made
a mistake paying it--and reverses the trial court to make that happen. What do
In Steinman, the defendant financial advisor lost a bench trial and
signed a $6,500,000 settlement agreement after the judge issued a proposed
statement of decision concluding the defendant had breached its fiduciary duty.
The settlement agreement provided for a reduced settlement amount if paid
early. The defendant was anxious to meet the early payment deadline, but a
dispute arose as to the how to calculate the payoff amount.
The defendant tried to hedge against losing the early payment discount by
paying the greater amount demanded plaintiff "under protest." The plaintiff
stated that it would not accept a payment made "under protest." The defendant
made the payment by wire transfer. The defendant subsequently sought to recover
The trial court found that the defendant was correct and that there was
in fact an overpayment and ordered the return of the money. But the appellate
court reversed. It did not overturn the finding of an overpayment. Rather, it
concluded that because the defendant's overpayment was voluntary, it
could not be recovered. The appellate court found that the defendant had not
properly protected itself because the plaintiff had announced it would not accept
a payment under protest and the defendant had paid anyway.
UCC § 1-308 (California Commercial Code Section 1308) would, on its face,
provide a different result. Section 1-308(a) specifies that if a party performs
under an explicit reservation of rights in response to a demand by the other
side, then the performing party will not waive its rights. The Steinman
court found that the UCC rule did not apply to this situation.
Since the disputed payment was made under a settlement agreement, not a typical
commercial transaction, that result might not seem unusual. However, at least
one prong of the court's analysis missed a major point, and other portions of
the opinion seemed to be guided by the intended decision rather than the
The court first stated that the UCC should not apply because payment was by
wire transfer not check. (185 Cal. App. 4th at 1561).
• This is a questionable reason to refuse application of UCC § 1-308.
California has enacted UCC Article 4A, which is designed to deal with commercial
wire transfers. (California Commercial Code §11101 et seq.) UCC § 1-102
(California Commercial Code 1102) states that this division (Division 1,
"General Provisions," which includes § 1-308) applies to a transaction governed
by another division, such as Division 11, "Funds Transfers" (UCC Article 4A.)
So the method of payment (wire transfer not check) should not disqualify
application of the UCC.
The appellant attempted to come under the UCC by arguing that the payment was
made under a "negotiable instrument," (the promissory note being paid as part
of the settlement agreement).
• UCC § 3-104 does cover negotiable instruments. Without any description of the
factual record, the court of appeal merely noted that the lower court "did not
make" a determination that the promissory note was negotiable. The court of
appeal did not make an independent analysis of whether the settlement note was
a negotiable instrument.
The determinative factor for the court was UCC § 1-103(b) (California
Commercial Code Section 1103(b).). Section 1-103(b) provides that common law
principles concerning contract, duress, coercion and other matters continue to
apply, unless the UCC specifically displaces them.
• The court cited Connecticut Printers, Inc. v. Gus Kroesen, Inc. (1982)
134 Cal. App. 3d 54 [the enhanced version of this opinion is available to lexis.com
subscribers]. Connecticut Printers held that UCC § 1-308
(then known as 1-207) did not displace common law principles which allowed a
party to offer an "accord and satisfaction" on a disputed account by tendering
a check "in full payment" of the account. This is a different situation than
the one facing the Steinman court. The Steinman court did not
discuss the factual differing fact patterns. The court of appeal was unwilling
to find that the UCC "explicitly displaced" common law principles of "economic
duress" and "involuntary payment" in a transaction involving wire payment of an
obligation arising under a settlement agreement. (185 Cal. App. 4th at 1562.)
Because the factual circumstances of the dispute were not explicitly within
1-308, the court of appeal chose to rely on common law.
The case, which sits at the intersection of common law and the UCC, could
probably spawn some law review articles. In the meantime, for day-to-day
lawyers, one must proceed carefully in order to protect a performing party's
rights in an ongoing contract.
Read more commentary on the Uniform Commercial
Code Litigation Blog, focusing on new developments in litigation
involving the Uniform Commercial Code. Hosted by Robinson & Robinson, LLP,
the blog is a resource for lawyers who litigate issues involving the UCC. The
blog hosts invite others to share tips, strategies, legal theories, successful
rulings, and recent developments in lawsuits concerning any aspect of the UCC.
For more information about LexisNexis
products and solutions connect with us through our corporate site.