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To Cash or Not to Cash? How to Handle a Payment In Full Check

Wednesday, July 29, 2015
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 check was deemed a binding acceptance (notwithstanding any reservation of rights by the creditor) to the accord and satisfaction.

When states adopted the UCC in the 50’s and 60’s, a split developed among jurisdictions with respect to the consequences of negotiating a “payment in full” check. A minority rule emerged in some states, including commercially significant jurisdictions such as New York and Illinois, holding that UCC section 1-207 (as originally enacted) displaced the common law accord and satisfaction rule, permitting the creditor to negotiate the check while preserving its rights as to the disputed balance by simply striking the restrictive notation. Thereafter, some states enacted statutes (including California Civil Code section 1526) that effectively adopted the minority rule under which the creditor could negotiate the check without prejudicing its right to pursue the disputed balance by crossing out the “payment in full” notation or otherwise expressly reserving its rights. To make matters more confusing, some states have adopted various amendments to the UCC, including the 1990 Amendments to the Uniform Commercial Code which sought to bring jurisdictions back in conformity with the common law majority rule.

The Legal Roller Coaster in California

There is no better example of the pervasive see-saw legal interpretation of “payment in full” checks than in the Golden State. For decades, California followed the majority common law rule, including after its adoption of the UCC in 1963. In 1987, however, California enacted Civil Code section 1526 in an effort to counteract unscrupulous debtors that used the “payment in full” check to chisel down legitimate debts. By enacting section 1526, California effectively relegated itself to the minority rule under which a creditor could negotiate a “payment in full” check and by striking out any restrictive notation (or otherwise expressly reserving its rights), preserve its right to the disputed balance.

Just six years after enacting section 1526, California adopted the 1990 Amendments to the Uniform Commercial Code, including California Commercial Code section 3311. Section 3311 directly contradicts Civil Code section 1526 and generally provides that cashing a check with restrictive language acts to prevent the creditor from later attempting to collect any additional disputed amounts, even if the creditor strikes any “payment in full” or similar notations. Thus, the adoption of section 3311 should have returned California to the majority rule; the only problem is that the California legislature left Civil Code section 1526 on the books creating a irreconcilable conflict.


Commercial Code Section 3311 Wins the Statutory Tug of War in California.

For almost 10 years, no California appellate court opinion acknowledged the direct conflict between the Civil Code and Commercial Code. Two reported court decisions have now addressed the conflict of sections 1526 and 3311. Both courts (a California appellate court – Woolridge v. J.F.L. Electric, Inc. (2002) 96 Cal.App.4th. Supp. 52 and a federal district court – Directors Guild of Am. v. Harmony Pictures, Inc., 32 F. Supp. 2d 1184, 1192 (C.D. Cal. 1998)) applied the maxim of statutory construction that when two statutes governing the same subject matter cannot be reconciled, the latter in time prevails. As such, both courts, whose opinion provides persuasive authority to other California courts, held that the provisions of section 3311 prevail over section 1526. In effect, both courts’ rulings bring California back into the majority rule, meaning that the recipients of “payment in full” checks must refuse such payments or take great care before cashing them, or else forfeit the legal right to pursue any unpaid balance.

In Woolridge, the plaintiff was the owner of a BMW that had been damaged in an automobile collision. The insurance company for the defendant sent the plaintiff a check for less than the full amount of the damage claimed by the plaintiff. The face of the check contained a notation that the check was in “full and final settlement” of the plaintiff’s claim. The plaintiff tried to collect additional money from the insurance company after writing “partial payment” next to his endorsement and cashing the check. The trial court found that writing “partial payment” next to his endorsement was not sufficient to defeat the “full and final settlement” language put on the check by the insurance company.

The appellate court agreed that the plaintiff had accepted the check in full and final settlement of his claim and that he could not recover any further damages from the insurance company. In doing so, the appellate court noted the conflicting accord and satisfaction statutes in California and held the statute enacted later in time –Commercial Code section 3311 – prevailed. Reviewing the facts before it, the appellate court found that: (1) there was clearly a dispute between the plaintiff and the insurance company over the amount due, and (2) the plaintiff cashed a check that contained conspicuous statements indicating that it was tendered in full and final satisfaction of the claim. Accordingly, the appellate court concluded that the requirements of section 3311 were met and an accord and satisfaction had been reached barring any further claim by the plaintiff against the insurance company.

A Closer Look at UCC Section 3-311 (and California Commercial Code Section 3311) and the “Debt Dispute Office” Option

For those of you that love to read statutes, you can read UCC section 3-311 here, and the substantially similar California Commercial Code section 3311 here. (I’ll simply reference section 3311 hereafter). Pursuant to section 3311, depositing a check which purports to be “payment in full” may prevent the creditor from suing to collect any additional disputed amounts if several requirements are met.

First, under section 3311, there must be a “bona fide dispute” between the parties as to the balance owed. In other words, if there is not an honest dispute as to the amount of the debt (or that the debt is owed in the first place), tender of a “payment in full” check will not constitute an accord and satisfaction. For example, if it is undisputed that a debtor owes $500 on an open book account (because, for example, the debtor has admitted to the amount due), the debtor’s tender of a check in the amount of $100 marked “payment in full” will not operate as an accord and satisfaction. On the other hand, if the debtor genuinely contends that it did not order $400 worth of goods, the tender of such a check, if accepted, may establish an accord and satisfaction. Of course, in reality, a debtor sending a $100 payment will likely argue that there was a genuine dispute as to the balance owed.

Second,the check in question must be tendered in “good faith.” Using the above example, if the debtor was trying to sneak in a “payment in full” notation on a partial payment in the hope that the creditor would not pick up on the accord and satisfaction (because, for example, the debtor knows the creditor uses a lock box and rarely reviews the actual check or because it believes it can take advantage of a new and inexperienced credit manager), the tender of the check is not likely to constitute a “good faith” tender and will not establish an accord and satisfaction.

Third, the debtor must “conspicuously” disclose on the check or accompanying written communication that the partial payment is being tendered as full satisfaction of the claim. This requirement may be satisfied by simply writing “payment in full” on the check itself or by enclosing a letter or memorandum with the check which states that the payment is being made in full satisfaction of the claim. The UCC defines “conspicuous” as a “term or clause…so written that a reasonable person against whom it is to operate ought to have noticed it.” A printed heading in capitals is conspicuous (e.g., “PAYMENT IN FULL”), as is language in the body of an accompanying written communication if it is in larger type or contrasting type or color.

If the above three requirements are met, the customer must accept the payment in order for it to constitute an accord and satisfaction. Obviously, depositing the check constitutes acceptance, but so can endorsing the payment to a third party or even holding the check for an extended period of time. Therefore, it is wise for a creditor not only to hold or even destroy the check, but to return the check to the debtor with correspondence expressly refusing the payment. The payment should be returned via certified mail or express delivery with third party delivery confirmation.

Finally, section 3311 gives the creditor further protection by allowing the creditor to designate a particular person or office to which all communications regarding “disputed debts” (expressly including “payment in full” checks) are to be sent. In order to take advantage of this “debt dispute office” solution, the creditor must provide the debtor with a conspicuous statement that all “payment in full” checks must be sent to the designated person or office. Thus, if the creditor make such a conspicuous designation on account statements, credit or sales agreements and/or invoices, restrictive checks sent to any undesignated person or office (including a lockbox) rather than the debt dispute designee will generally protect the creditor from unintentionally establishing an accord and satisfaction.

Know Your Rights and Consider Establishing a Debt Dispute Office

In light of the foregoing, when there is a dispute between a debtor and creditor, and the debtor submits a “payment in full” check for less than the full amount owing to the creditor, the only true safe practice in jurisdictions such as California may be for the creditor to return the check to the debtor. Creditors must carefully scrutinize all checks and all written communications that accompany any checks for “payment in full” or similar language before making a deposit at the bank. If a lockbox is used and/or checks are deposited without inspecting each check or accompanying correspondence, the creditor should adopt a review procedure so that it can identify restricted checks within 90 days from deposit to utilize the statutorily authorized return process and avoid an accord and satisfaction of the claim. Even if you have negotiated a “payment in full” check and the 90 day safe harbor provision has passed, you may still 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. Finally, consider expansively addressing the problem of inadvertently accepting “payments in full” by creating and designating a “debt dispute office” as authorized by section 3311.

Every circumstance presents a unique set of facts. Moreover, as described above, some states have adopted a modified version of UCC section 3-311 or have enacted statutes that conflict with section 3-311. In developing a particular approach to dealing with the accord and satisfaction problem for your organization, you should consult with your general counsel or experienced commercial attorney.


For more information contact:

Christopher E. Ng, Esq.
Gibbs Giden Locher Turner Senet & Wittbrodt LLP
1880 Century Park East, 12th Floor
Los Angeles, California 90067
Phone: (310) 552-3400
email: cng@gibbsgiden.com
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