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What do you do with a check marked "paid in full," "payment in full," "full satisfaction," or (or words to similar effect)? Do you cross out the "paid in full" language and cash the check, or return the check to the maker? Unfortunately, there is no easy answer. Currently, California has two conflicting statutes on its books: (1) California Civil Code §1526 enacted in 1987 and California Commercial Code §3311 enacted in 1992. Under California Civil Code §1526, a creditor who receives a check marked “paid in full” may cross out the "full and final payment" language, cash the check, and bring a claim for the balance owed. Under California Commercial Code §3311, however, if a creditor accepts such a check marked "paid in full," or words of similar effect, strikes out the language and then cashes the check the entire debt is discharged and the creditor is prohibited from seeking the balance owed. California Commercial Code §3311 basically reinstated the common law rule that a check from a debtor with a notation of "payment in full," or similar words, is an offer, and the creditor has two choices: (1) either reject the check and continue to pursue a claim for the full amount owed; or (2) accept the check and waive any claimed balance.
The California courts have not yet addressed this conflict in a published citable opinion. However, a Federal Court reviewing the two statutes held that they were irreconcilable and that since California Commercial Code §3311 was enacted after California Civil Code §1526, the Commercial Code controls. See, Directors Guild of America v. Harmon Pictures, Inc. 32 F.Supp.2d 1184 (CD Cal. 1998), in which the Court ruled that when a creditor cashes a checked marked "full and final settlement," even though the creditor crossed out this language, the creditor was barred from pursuing a claim for additional monies. That said, for California Commercial Code §3311 to apply, a good faith tender in an attempt to settle a disputed debt is required. If a debtor admits that he knows a check is not a full and final settlement of the entire debt, arguably he cannot offer a good faith tender as required by the statute, thereby excluding him from the protections of § 3311.
California Civil Code §1526(a), passed in 1987, states:
"Where a claim is disputed or unliquidated and a check or draft is tendered by the debtor in settlement thereof in full discharge of the claim, and the words "payment in full" or other words of similar meaning are notated on the check or draft, the acceptance of the check or draft does not constitute an accord and satisfaction if the creditor protests against accepting the tender in full payment by striking out or otherwise deleting that notation or if the acceptance of the check or draft was inadvertent or without knowledge of the notation."
California Commercial Code §3311, enacted in 1992 contradicts California Civil Code § 1526 in that it states:
"(a) If a person against whom a claim is asserted proves that (1) that person in good faith tendered an instrument to the claimant as full satisfaction of the claim, (2) the amount of the claim was unliquidated or subject to a bona fide dispute, and (3) the claimant obtained payment of the instrument, the following subdivisions apply.
(b) Unless subdivision (c) applies, the claim is discharged if the person against whom the claim is asserted proves that the instrument or an accompanying written communication contained a conspicuous statement to the effect that the instrument was tendered as full satisfaction of the claim.
(c) Subject to subdivision (d), a claim is not discharged under subdivision (b) if either of the following applies:
(1) The claimant, if an organization, proves that (A) within a reasonable time before the tender, the claimant sent a conspicuous statement to the person against whom the claim is asserted that communications concerning disputed debts, including an instrument tendered as full satisfaction of a debt, are to be sent to a designated person, office, or place, and (B) the instrument or accompanying communication was not received by that designated person, office, or place.
(2) The claimant, whether or not an organization, proves that within 90 days after payment of the instrument, the claimant tendered repayment of the amount of the instrument to the person against whom the claim is asserted. This paragraph does not apply if the claimant is an organization that sent a statement complying with subparagraph (A) of paragraph (1).
(d) A claim is discharged if the person against whom the claim is asserted proves that within a reasonable time before collection of the instrument was initiated, the claimant, or an agent of the claimant having direct responsibility with respect to the disputed obligation, knew that the instrument was tendered in full satisfaction of the claim."
In short, pursuant to California Commercial Code §3311, if a check is marked "paid in full," "final settlement," or words of similar effect and you cash it, you may be precluded from seeking the balance of what you believe is owed even if you strike out the “paid in full” language.
Given the conflict, checks marked "paid-in-full," or words of similar effect, should only be deposited after careful consideration as cashing the check could, and probably will, effectuate a waiver of claims to additional funds. So what are the options? First, regardless of the option selected below, copy both the front and back of the check as it may serve as an admission of at least partial liability. Then you can choose to:
1. Return the check and request another check without the Paid in Full language.
This is the safest approach. It is very important that the check be returned to its maker within 90 days, as holding onto the check (even if not cashed) may be viewed by the Court as an implied acceptance under both California Civil Code §1526 and California Commercial Code §3311.
In the landlord tenant matter involving the return of a security deposit, this option is best if you can afford not to cash the check. The check should be returned to the landlord along with a demand letter asking for replacement check without the notation, a detailed paragraph of what you believe is owed (inappropriate deductions claimed), and a final statement that if a proper replacement check is not received within 7 days, you will sue for three time the full amount of the security deposit for its bad faith retention exacerbated by the landlord’s attempt to effectuate an underhanded discharge of your claim.
2. Reject the check in its entirety and return it to its sender within 90 days.
Obviously this is another safe approach, and like Option No. 1 preserves the creditor's ability to collect on the balance owed.
3. Accept the check, strike the paid in full wording, and before cashing the check get a signed agreement from the debtor acknowledging that he agrees the check is not intended as full and final payment.
This option is not quite as safe as the first two in that a court may still hold that, under California Commercial Code §3311, any acceptance of a check marked "paid in full" eliminates the entire underlying debt.
4. Accept the check, strike the paid in full wording, and cash it.
This is the most risky option, but having a portion of what you are owed may be better than the possibility of recovering nothing, or expending time and money on litigation.
Obviously options number 1 and 2 are the safest choices if you want to preserve your claim. See, Church v. Jamison, 143 Cal.App.4th 1568 (2006): "Reliance on [Civil Code § 1526] has been suspect since . . . Directors Guild of America v. Harmony Pictures, 32 F.Supp.2d 1184 (C.D.Cal. 1998).". . . and the controlling California statute on the issue is now California Commercial Code §3311.
If, on the other hand, a check does not contain a notation on its face or back and there is no other "offer" accompanying the check, then you can cash it and still go to Small Claims Court for the balance you believe to be owed.
© 2012 Melissa C. Marsh. All Rights Reserved.
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Located in Los Angeles, California, the Law Office of Melissa C. Marsh handles business law and corporation law matters as a lawyer for clients throughout Los Angeles including Burbank, Sherman Oaks, Studio City, Valley Village, North Hollywood, Woodland Hills, Hollywood, West LA as well as Riverside County, San Fernando, Ventura County, and Santa Clarita. Attorney Melissa C. Marsh has considerable experience handling business matters both nationally and internationally. We routinely assist our clients with incorporation, forming a California corporation, forming a California llc, partnership, annual minutes, shareholder meetings, director meetings, getting a taxpayer ID number (EIN), buying a business, selling a business, commercial lease review, employee disputes, independent contractors, construction, and personal matters such as preparing a will, living trust, power of attorney, health care directive, and more.