Gallet Dreyer & Berkey, LLP | Warning: Checks Marked "Payment in Full"
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Warning: Checks Marked "Payment in Full"

06/09/2010 | Summer 2010 Newsletter
A person who owes money sometimes sends a partial payment check, marked “Payment in Full,” hoping that the recipient will deposit the check and accept it as full payment. Clients often ask – can I cross out the words “Payment in Full,” deposit the check, and keep my right to collect the rest? The answer depends on what state’s law applies. In most states, crossing out the words will have no effect. The recipient must either reject the check or lose the remainder of the claim. New York is the odd man out. Here, if a recipient crosses out “Payment in Full” and writes “under protest”, “without prejudice”, or “with full reservation of rights” on the check, the recipient can deposit the check without losing its right to go after the remaining balance, so long as the recipient has not otherwise agreed to accept the check as full payment.

New York courts describe a partial payment check as an “exquisite form of commercial torture.” As a result, the courts allow the recipient to reserve rights by noting that on the check, but the recipient must be diligent. A conspicuous “Payment in Full” notation is ignored at the recipient’s peril. If that check is issued in good faith, and you deposit it without a reservation of rights, the remainder of the claim disappears once the check is collected.

But what if you owe money and you want to pay what you reasonably believe you owe, but the other party unfairly demands more? How do you pay without getting sued for more later? You must get an explicit agreement of the other party to accept the check as full payment before you send it, and you should get it in writing. The alternative is to conspicuously write “Payment in Full” on the check and hope that the recipient deposits the check without reserving his rights. (However, what is deemed commercial torture in New York is acceptable practice in most other states.) The current version the Uniform Commercial Code — a suggested model statute developed by legal scholars and adopted by most states to create a uniform national system of commercial law — gives the opposite result. In those states, a check given in good faith to satisfy a disputed claim satisfies the entire claim if the check or a writing accompanying the check conspicuously says it is offered as payment in full. The recipient cannot simply cross out the notation and write “under protest” or “with full reservation of rights.”

New Yorkers taking a partial payment check from an out-of-state payor, or as part of a transaction that could arguably be considered out-of-state, must be extremely careful before depositing the check. What law will apply depends upon the facts, and if it is the law of one of the other states which have adopted the model code, then the claim for the remainder of the claim may be lost, even if you cross out the notation.