Normally, parties become indebted to each other through an express contract. But you may become liable to pay a bill from a vendor simply because you failed to dispute that bill within a "reasonable" time. How? Through a little-discussed cause of action known as "account stated," whose continued viability is demonstrated by a recent litigation brought by the video game company Sega in Los Angeles.
On July 8, 2021, Sega of America, Inc., brought suit against Digital Gadgets, LLC, in the Superior Court of the State of California for the County of Los Angeles. Sega alleged that it had sold 5,340 SEGA Genesis Minis to Digital Gadgets in exchange for a promise that Digital Gadgets would pay $299,040.00.1 Sega alleged that it applied a credit of $80,070.00 to Digital Gadgets and that Digital Gadgets made a single installment payment for $25,000.00.2 This left a balance of $193,970.00. Sega alleged that it sent several bills to Digital Gadgets and its counsel for $193,970.00 and neither Digital Gadgets nor its counsel responded. After a few months, Sega demanded payment on the "outstanding balance" and counsel for Digital Gadgets wrote, "I will do my best."3
Sega raised five causes of action, including "account stated" for the $193,970.00 balance. What is "account stated?"
Under California law, "[a]n account stated is an agreement, based on prior transactions between the parties, that the items of an account are true and that the balance struck is due and owing."4 The three elements of the claim are 1) previous transactions between the parties establishing the relationship between debtor and creditor; 2) an agreement between the parties, express or implied, on the amount due from the debtor to the creditor; and 3) a promise by the debtor, express or implied, to pay the amount due.5 Essentially, an account stated is a new contract under which the parties to prior transactions agree to a new balance due.6 Thus, a claim for an account stated is based not on the original transactions between the parties, but on the new, agreed upon contractual balance.7
One obvious question arises: How could such an agreement be "implied" to satisfy the second element? One way a promise can be implied is when the debtor does not object within a reasonable period of time.8 "Reasonableness" may vary from case to case. In one century-old case, the California Supreme Court held that six months was a reasonable period of time for the debtor to have made an objection.9
This common-law cause of action for account stated is not unique to California. For instance, in New York, an account stated is an agreement between parties to an account based upon prior transactions between the parties, with respect to which the parties have come together and agreed upon the balance of indebtedness.10 To establish a cause of action for an account stated in New York, the plaintiff must plead that: 1) an account was presented; 2) the account was accepted as correct; and 3) the debtor promised to pay the amount stated.11 Whether there is an implied account stated—by silence or otherwise—is a question of fact.12
Under California law, an action for a written account stated has a four-year statute of limitations.13 New York applies the same statute of limitations on claims for account stated as it does for claims of breach of contract.14
Whether Sega can ultimately prove its claims or not, its case is an important reminder that disputed bills should not go unanswered.
Please do not hesitate to contact Eli Richlin for more information on contract disputes or any other member of the firm's commercial litigation practice. For more information about gaming companies generally, please contact any attorney of the firm's electronic gaming practice.
Katherine Brock, Conor Cannon, Christopher Paniewski, Eli Richlin, and Brian Levy contributed to the preparation of this alert.
[1] Compl. ¶ 1, Sega of Am., Inc. v. Digital Gadgets, LLC, No. 21STCV25205 (Cal. Sup. Ct. L.A. Cnty. July 8, 2021).
[4] Leighton v. Forster, 8 Cal. App. 5th 467, 491 (2017) (internal quotation mark omitted); Trafton v. Youngblood, 442 P.2d 648, 653 (Cal. 1968).
[5] Leighton, 8 Cal. App. 5th at 491 (citing Zinn v. Fred R. Bright Co., 271 Cal. App. 2d 597, 600 (1969)).
[6] Prof’l Collection Consultants v. Lauron, 8 Cal. App. 5th 958, 968 (2017) (citing Gardner v. Watson, 150 P. 994, 995 (Cal. 1915)).
[8] Id.; see also Stardom Brands, LLC v. S.K.I. Wholesale Beer Corp., 172 A.D.3d 1266, 1268 (2d Dep’t 2019); Interman Indus. Prods., Ltd. v. R.S.M. Electron Power, Inc., 332 N.E.2d 859, 861 (N.Y. 1975).
[9] Crane v. Stansbury, 161 P. 7, 9 (Cal. 1916).
[10] Ryan Graphics, Inc. v. Bailin, 833 N.Y.S.2d 448, 449 (1st Dep’t 2007); see also Newburger-Morris Co. v. Talcott, 114 N.E. 846, 848 (N.Y. 1916) (“[T]he very meaning of an account stated is that the parties have come together and agreed upon the balance of indebtedness . . . so that an action to recover the balance as upon an implied promise of payment may thenceforth be maintained.”).
[11] Nat’l Econ. Rsch. Assocs., Inc. v. Purolite C Corp., No. 08 Civ. 7600 (PGG), 2011 U.S. Dist. LEXIS 24458, at *6 (S.D.N.Y. Mar. 10, 2011) (citations omitted).
[12] Bowne of N.Y., Inc. v. Int’l 800 Telecom Corp., 178 A.D.2d 138, 139 (1st Dep’t. 1991) (fact issue as to whether an “objection [wa]s made within a reasonable time after receipt of the account”); see also Auburn Custom Millwork, Inc. v. Schmidt & Schmidt, Inc., 50 N.Y.S.3d 635, 640 (4th Dep’t 2017) (“[W]hile the mere silence and failure to object to an account stated cannot be construed as an agreement to the correctness of the account, the factual situation attending the particular transactions may be such that, in the absence of an objection made within a reasonable time, an implied account stated may be found.” (citation omitted)).
[13] Cal. Civ. Proc. Code § 337(b).
[14] Elie Int’l, Inc. v Macy's W. Inc., 965 N.Y.S.2d 52, 53 (1st Dep’t 2013) (“The statute of limitations for a cause of action for an account stated is also six years.” (citation omitted) (citing N.Y. C.P.L.R. § 213(2)).
