Jordan Ramis pc. Attorneys at law
New Rules for Restrictive Endorsements
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This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.
You open the mail and find two checks from people that owe you money. The amount of each check is less the amount you believe you are owed for work you performed. One is marked "PAYMENT IN FULL" on the memo line on the front of the check. The other has an endorsement on the back that reads —
"PAYEE'S ENDORSEMENT REQUIRED
"Endorsement of this check acknowledges payment in full for labor, equipment, services, and/or materials supplied by Payee, and release and satisfaction of any and all claims of Payee arising out of the referenced Project, and Payee receives and collects under this instrument under the condition that THERE IS NO RESERVATION OF RIGHTS of any nature on the part of Payee."
What do you do? Can you safely cash either of these two checks and still have the right to pursue your customer for the remaining balance?

The situation described above is all too common. It becomes increasingly difficult in the construction industry at the end of the season when profit margins are slipping, lines of credit are low, and business failures are soaring. To make matters worse, the rules governing such checks have changed dramatically over the past four years, and effective October 4, 1997 we have a whole new way that such transactions must be analyzed.

The 1993 legislature amended Article 3 of the Oregon version of the Uniform Commercial Code (which deals with checks) to avoid inadvertent discharge of a debt when a check is tendered in full satisfaction of that debt. In short, in order to overcome language like the endorsement quoted in the second example above, the 1993 law required the creditor (the person receiving the check) to prove that it sent the payor debtor a conspicuous statement notifying that debtor that communications concerning the debt must be sent to a designated person, the tender was not sent to that person, and the amount received was repaid within 90 days. This procedure was very burdensome in practice (especially for companies that receive a large volume of checks), and required a factual hearing in each contested case to be able to rebut the presumption that the check extinguished the debt.

The 1997 legislature abolished this procedure and went back to older law. ORS 73.0311 now reads as follows:
The negotiation of an instrument marked "paid in full," "payment in full," "full payment of a claim" or words of similar meaning, or the negotiation of an instrument accompanied by a statement containing such words or words of similar meaning, does not establish an accord and satisfaction that binds the payee or prevents the collection of any remaining amount owed upon the underlying obligation unless the payee personally, or by an officer or employee with actual authority to settle claims, agrees in writing to accept the amount stated in the instrument as full payment of the obligation.
These new rules apply to checks and other instruments tendered or negotiated after October 4, 1997.

In our examples, then, negotiation of the first check with the memo line marked "PAYMENT IN FULL" will not extinguish the debt. The company receiving the check can safely cash the check and proceed as appropriate to collect the remaining amount due.

The second check is a more interesting case. If the check with the restrictive language on the back is endorsed by a person with authority to settle claims the debtor payor could argue that this is a writing agreeing to accept the amount of the check in full payment. But what if the check is not endorsed, but simply sent to the payee's bank for deposit? What if the endorsement is made by an accounts receivable clerk without authority to compromise amounts due? What if the endorsement is made by a stamp rather than a personal signature? And what if the restrictive endorsement is crossed out? In these cases one would expect a court to find that no agreement to diminish or discharge the debt was made by signature and so the check does not extinguish all claims, regardless of what the endorsement says.

Therefore, after October 4, 1997, if you want to get someone to whom you owe money to accept less than the face amount of the debt, you'd better get a signed agreement to that effect. Simply using a memo, restrictive endorsement, or cover letter will not do the trick. If you are a creditor, you now have more latitude in your ability to cash checks that are tendered for less than the amount owed. Be cautious, however, if you cash a check in the face of a clear cover letter that makes your right to endorse the check contingent on acceptance of the reduced amount in full payment, or otherwise says that if you cash it you agree to reduce the debt. Even in the face of a clear statutory mandate, courts have been willing to find against those who unfairly snap up another party's attempt to negotiate in good faith.