What to do with checks marked ‘payment in full’

  • By Patrick Hussey Business of Law
  • Tuesday, April 30, 2013 10:28am

If a business receives a check with the notation “payment in full” from a customer with a disputed account, and strikes out the “payment in full” notation, or endorses the check “reserving all rights,” does this legally preserve the right to collect the unpaid disputed balance? The answer is, “No!”

Contrary to popular belief, under Washington state law, the general rule is that all liability on the whole account balance is discharged, unless certain steps are taken by the business.

Exception to discharge if funds are returned. If the amount deposited is returned within 90 days of accepting the check, then the discharge rule does not apply and the business can collect the full amount. Even if a “payment in full” check is cashed, and the mistake is not discovered within 90 days, there may still be some recourse if any of the following have occurred:

1. The customer tendered the “payment in full” check in bad faith. This depends upon the facts. For example, a buyer continues to fully use goods he claims are defective. It is “bad faith” to tender a check for less than the full price.

2. There is no real or genuine dispute over the amount owed. This depends upon what the customer did before sending the “payment in full” check. If the customer had previously lodged a complaint about the goods or services this tends to show a dispute. If nothing had been said or done prior to sending the “payment in full” check, this tends to show the absence of a real dispute.

3. The “payment in full” language was not “conspicuous.” If the notation “payment in full” is in the memo section of the check, that is “conspicuous.” If it is buried in a long complaint letter, that probably is not legally “conspicuous.”

Warn customers that “payment in full” checks will not discharge a debt. A business can avoid this problem by including in its contracts or billing invoices a conspicuous statement that “payment in full” checks will not discharge liability unless sent to a specially designated person, office or address. To be “conspicuous” the statement cannot be buried in fine print. It must stand out. This rule helps where checks are processed electronically. If a “payment in full” check is sent to the specially designated recipient, then it can be returned or a decision can be made to accept it as full payment. If the “payment in full” check is not sent to the specially designated recipient and cashed, the debt balance is not discharged.

A variation on this rule is to put a conspicuous statement in the contract or invoices that no “payment in full” checks will discharge liability unless both parties agree in writing by a separately signed agreement. Note, however, that not all courts agree with this particular variation on the rule.

Actual knowledge. The above exceptions to the discharge rule do not apply if the business, or any agent of the business having direct responsibility for the disputed account, has actual knowledge that a customer tendered the check in full satisfaction of a disputed claim.

Sometimes it makes common sense to cash and keep the “payment in full” check even if there is an outstanding debt that may not be legally collectible. It simply may not be worth the time and expense to collect the unpaid balance if the amount is small or the customer is unlikely to ever pay the outstanding balance.

Patrick Hussey is a partner at the Anderson Hunter Law Firm, P.S., in Everett practicing in the areas of commercial transactions and business insolvency. The law firm provides representation in all civil matters. He may be reached at 425-252-5161 or phussey@andersonhunterlaw.com.

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