Restrictive Endorsements
By Michael C. Dennis, MBA, CBF

Occasionally a customer with a disputed balance will issue a check with a restrictive endorsement such as this:

"Payment In Full for All Obligations"

What should you do with that check? While case law on this issue is confusing and contradictory, creditors should make it a practice not to deposit a check with a restrictive endorsement before consulting with legal counsel. If you use a bank lockbox system, your bank should be notified in writing not to deposit any check with a restrictive endorsement. Instead, the bank should be told to send the check to you for inspection.

Sometimes checks with a restrictive endorsement such as "Payment in Full" are deposited in error. Under the Uniform Commercial Code [the UCC], a creditor generally can void the buyer's intent to create an "accord and satisfaction" by returning the money within 90 days. However, creditors should be aware that some States have modified the UCC and this may have an impact on the creditor's ability to void such a transaction.

If your attorney advises that the check be returned to the debtor, your cover letter should include language such as this:

"We are returning your check number ___ dated ___ for $___. You issued this check with a restrictive endorsement. As you know, the balance due $____. We are not prepared to accept $___ as full and final payment. Please re-issue the check without this endorsement - or at least pay the balance not in dispute."

One final note: Under the UCC, words of protest added to the check by the creditor; or action such as crossing out or whiting out of certain language does not change the legal effect of an accord and satisfaction once a check has been cashed. For example, notations such as "deposited under protest" or "deposited without inspection" do not invalidate an endorsement intended to create an accord and satisfaction if a bona fide dispute exists between buyer and seller, and if the buyer has conspicuously noted the check and/or the accompanying check voucher.

Reference: "Credit and Collection Forms and Procedures Manual"