To Cash Or Not To Cash? How To Handle A Payment In Full Check

Author:Mr Christopher Ng
Profession:Gibbs Giden Locher Turner Senet & Wittbrodt LLP

What should you do when you receive a check from a customer for an amount less than your total claim, but the check is marked with a "payment in full" or similar restrictive notation? Should you return the check to the debtor? Or can you simply cross out the "payment in full" language, deposit the check and pursue the unpaid balance? And what if you use a lockbox to handle the numerous checks you receive and those checks are deposited before you see them?

Short Answer

The answer to this question depends on what state law applies to your customer's account. In the vast majority of states, if you are not willing to accept the amount of a "payment in full" check, the only safe action is to return the unnegotiated check. If you have accidentally negotiated a restricted check, many state laws give you a period of time (e.g., 90 days) to return the funds to the debtor to avoid an "accord and satisfaction" (the acceptance of a certain sum as payment for the entire disputed amount) of the claim. Finally, even if you have negotiated a "payment in full" check, you may be able to avoid waiving your right to pursue the balance if the debt was undisputed, or if the debtor did not act in good faith.

Creditors that want to expansively address the problem of inadvertently accepting "payments in full," resulting in an unintended accord and satisfaction, can create and conspicuously designate a "debt dispute office" in credit agreements and invoices to customers. If such a debt dispute office procedure is appropriately implemented, an accord and satisfaction will not be established unless a person who is charged with the responsibility of dealing with such issues makes a knowing, affirmative decision to accept the partial payment. If such a procedure is not established, creditors should implement an alternative process to identify all partial payments made by a customer that could result in an inadvertent accord and satisfaction within 90 days from the date payment is received.

It goes without saying that it is imperative that you understand the applicable state law, consider including a favorable governing law provision in your credit and sales agreements and consult with an experienced commercial attorney regarding your particular situation. And if this topic has piqued your interest, please read on for more information and suggestions!

Some History and Context

The "full payment" check has an erratic history in different jurisdictions around the country. Prior to the original adoption of the Uniform Commercial Code ("UCC") by most states about 50 years ago, the majority common law rule in the United States followed general contract law principles: the tender of a "full payment" check was an offer, and the creditor had no power to unilaterally rewrite the terms of the offer by reserving rights while simultaneously accepting the payment. In other words, as long as it was clear that the check was tendered in full satisfaction of a disputed claim, the creditor's deposit of the...

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