A customer owes you money but is disputing the amount that should be paid. To your surprise, you receive a check for half of the amount in question. On the back, the customer has written “Payment in Full”. If you deposit the check, will you give up the right to ask for the other half of the disputed amount?
The answer depends on which state’s law governs the transaction. I will provide an answer based on California law.
“Payment in Full” or a similar legend is referred to as a restrictive endorsement. Enacted in 1987, California Civil Code Section 1526 at one time allowed the recipient, under certain circumstances, to strike out the restrictive endorsement, deposit the check, and seek payment of the rest of the disputed amount.
However, in 1992 that statute was superseded by Commercial Code Section 3311, which states that, generally, if there is a bona fide dispute and the check bears a prominent restrictive legend specifying payment in full, then by depositing the check the recipient accepts the check as full payment and gives up the right to ask for the rest of the disputed amount.
The bottom line: In California, a restrictive endorsement on a check generally will be enforced.
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.