you have a dispute with someone who owes you money and you accept a check
for partial payment marked "payment in full," you might be agreeing to
wipe out the rest of the debt.
A financial services company
owed Sam $5,000 for designing its logo and a brochure. When a dispute arose
about the amount due, the company sent a $3,000 check marked "payment in
full." Sam cashed the check, then asked the company for the rest of the
money. The company told him it didn't owe him another dime. Sam consulted
a lawyer, who told him the company was right.
A newsstand distribution
company owed Amanda, publisher of a financial newsletter, $20,000 for its
purchase of the April 1996 issue. The distribution company disputed the
amount owed. When it sent Amanda a check for $14,000 marked "payment in
full," Amanda consulted her lawyer. She wrote the words "without prejudice"
on the back of the check, then cashed it. Unlike Sam, she eventually recovered
the money she claimed was owed to her.
Both Sam and Amanda were
paid with checks marked "payment in full." The difference was Amanda was
savvy enough to know there were legal consequences to cashing a "payment
in full" check. With advice from her lawyer, she assessed her risks, made
a decision on what to do and defeated the distribution company's attempt
to wipe out the debt.
WHAT CASHING THE CHECK
As a general rule, if you
have a dispute with someone who owes you money and you accept a partial
payment check marked "payment in full," you're agreeing to wipe out
the balance of the debt. The theory is that a "payment in full" check is
treated as an offer from the person issuing the check to enter into a new
contract with the check's recipient. The terms of the new contract are
that you will be paid the amount of the check and no more to settle your
dispute. Your cashing of the check, having it certified by a bank or even
stuffing it into a drawer for a long period of time might be viewed by
the law as "satisfaction" of the debt.
Bear in mind that "payment
in full" checks aren't used exclusively by the underhanded to slime out
of their obligations. On the contrary, it's a long-established legal device
recognized by most courts as convenient and informal way to settle commercial
disputes. All one person has to do is send a settlement check marked "payment
in full." The recipient can either send back the check-rejecting the settlement
offer-or cash it and accept the settlement. The danger and abuse of the
partial payment check arise only when you cash it without knowing the consequences.
WHAT TO DO WHEN YOU RECEIVE
The effect of the "payment
in full" endorsement will vary depending on the facts of your case and
the specific law of your state. In most cases, however, you have three
One, return the check and
ask for one that doesn't say "payment in full."
Two, accept the check on
the condition that it was sent-as a final, compromised settlement of your
Three, write your protest
or "reservation of rights" on the back of the check, cash it and attempt
to recover the balance.
You might have a strong case
that your cashing of the check does not create a binding settlement if:
amount owed was not in dispute or the sender of the check never told you
the amount was disputed. Most courts hold that the "payment in full" check
must be an offer to resolve a known dispute. If there's no dispute, acceptance
of a "payment in full" check doesn't wipe out an undisputed claim.
check fails to say "payment in full" clearly or fails to use other words
that indicate the payment is being offered as full and final payment.
unclear which debt is to be paid in full. In one case, the court refused
to cancel the balance of the debt because it was unclear which of several
contracts was supposedly being paid in full. If the check you received
is an effective "payment in full" settlement offer, your lawyer can advise
you whether your state allows you to reserve your rights by properly protesting
in writing on the back of the check. All 50 states have, in one version
or another, a provision contained in the Uniform Commercial Code(UCC).
Some states interpret Section 1-207 of the UCC to permit you to reserve
your rights in writing and accept the check without losing the right to
sue for the remaining balance. Other states allow you to reserve this right
only under limited circumstances. Still other states have nixed this right
WHAT TO WRITE ON THE CHECK
How do you put your protest
of reservation and unequivocally. Write "under protest" or without prejudice"
on the back of the check. In one case, the court said a person who wrote
"without recourse" did not effectively reserve his right to sue. Consider
crossing out the "payment in full" language. (Some banks may not cash an
altered check.) After taking one more of these steps, you might consider
sending a letter to the person who sent the check to reinforce that you
have not accepted the "payment in full" offer.
In sum, be aware that when
you receive a check in partial payment of a disputed claim marked "payment
in full," the person sending the check is offering to compromise the claim.
You have to make a decision. Send the check back, and you may never see
that money again. Deposit the check as is, with no reservations of rights
or cash the check while clearly indicating a reservation of rights.
May I suggest a fourth option?
Call an attorney for advice on the law in your own state.
Source, Self Employed Professional