Are Restrictive Statements on Checks Enforceable?

A person may put a restrictive endorsement on a check if the amount owed is in dispute. Often the restriction will say "Payment in Full" or something similar, indicating that if the check is cashed, the debt will be settled. If you receive a check containing restrictive language be aware of the consequences of cashing it.

Offer and Acceptance

• The basic definition of the formation of a contract is an offer by one person that is accepted by another. Under the common law a check is an offer of payment that is accepted when it is cashed or deposited. If there is a note on the check stating that is full payment for all obligations, this language is a part of the offer and may be enforced by the court if cashed or deposited because the person cashing it is deemed to have accepted the payment as offered.

Attempts to Avoid

• You cannot avoid a restrictive endorsement by simply scratching it out, but there are some other actions that may allow you to deposit of cash the check while rendering the endorsement ineffective.

  Section 1-207 of the Uniform Commercial Code (UCC) allows a person to reserve rights while complying with demands from another party by using phrases such as "without prejudice" or "under protest." Some judges apply this section to checks with restrictive endorsements and some do not. You will need to consult an attorney to find out how judges in your area apply this law. Note that UCC 1-207 does not apply to an accord and satisfaction. This means that if you have made an agreement to accept partial payment on an account you cannot reserve rights to future payment on that account.

  UCC Article 1, Section 207 has not been adopted by every state, has been repealed by Alabama and is not always applied to checks with restrictive endorsements. Do not rely on this section to reserve you right to payment unless you are willing to risk having to accept the amount offered as payment in full.

Refusing Payment

• It is hard to refuse payment, especially of a past due account, but if you are not prepared to accept the restrictive terms, you should return the check to the sender as soon as possible. If the check is substantial payment of what is owed and you are willing to accept it you may do so, but be aware that you are likely giving up any right to future payment on that account.

  Section 3-311 of the UCC is a safe harbor law that allows a payment that includes restrictive endorsements to be returned within 90 days. This protects entities that may have payments processed by a third party, such as a bank, that is not in a position to make a decision regarding restrictive endorsements. It is often preferable to return payments under this section rather than attempting to reserve rights under UCC 1-207 because most, if not all, states have adopted UCC 3-311 and many judges prefer this course of action.

Protecting Yourself

• If, having received a check with a restrictive endorsement, you wish to continue negotiations with the debtor, make a notation that you are only holding the check temporarily while negotiations are in progress. This will make it less likely that the debtor could later argue that the offer was accepted when the check was not promptly returned. Keep in mind the 90-day window provided by UCC 3-311.

  If you have a business that receives a large number of checks be sure to have someone look at all checks before depositing them to be sure there is no restrictive language. Uniform Commercial Code Article 3, Section 311, provides that an organization may require payments tendered as full satisfaction of a debt to be sent to a particular person, office or place. If a payment is not sent to the specified place, it will not discharge the full amount of the debt.

  You may also consider inserting a clause into contracts with customers that prohibits partial payment of debt and the use of restrictive endorsements.

  Be aware of where checks are coming from. If you receive checks from out-of-state customers the law of the state where the check originated may apply. State laws may differ so you must be aware of the laws in any state where you have customers in order to protect yourself from enforcement of restrictive endorsements.

Using Restrictive Endorsements

• You may be considering using a restrictive endorsement to quickly settle your debt. It is not as simple as it seems. Before using restrictive language on a check be sure that you are familiar with your state's version of the Uniform Commercial Code, so you know if the language will be enforced. Some judges will not enforce restrictions if there were no prior negotiations and it appears that the restrictive language was used to simply try to trick the creditor into accepting partial payment for an undisputed debt.

  Many companies include language in their contracts that prohibits debtors from using restrictive language. If you have signed such a contract, any attempt to use a restrictive endorsement will be unsuccessful. A company may also require that all financial instruments bearing restrictive endorsements be sent to a specific person or address. If you do not comply with such a requirement the endorsement will not be effective under UCC 3-311.

Disclaimer

• This article is not intended as legal advice and should not be considered as a substitute for legal advice. You should consult an attorney is you need specific legal advice regarding restrictive endorsements and checks.