By Charles Tatelbaum | Tripp Scott
Imagine this: you receive a check from a customer as payment for goods or services rendered. On the back, there’s an endorsement reading “payment in full.” You don’t compare it carefully against the outstanding balance - and the check turns out to be for less than what’s owed. You deposit it anyway. By doing so, you may have just forfeited your right to collect the remainder.
This situation, while not new, is becoming increasingly common, particularly as economic pressures mount. The tactic involves what’s known as a restrictive endorsement. A debtor who owes money disputes the amount due and sends a check for less than the full balance, marking it “paid in full.” Under a law that has been on the books since 1966, depositing that check may legally constitute “accord and satisfaction” - meaning the creditor has accepted the reduced payment as full and final settlement of the debt.
The problem is especially acute for businesses that use a lockbox system or other third-party processing service. In such settings, checks are received, endorsed and deposited in bulk, often by agents who have no knowledge of any disputes or the amounts actually owed. Once that “paid in full” check is deposited, the law typically views the debt as settled, even if the payment was only partial. The result? The creditor loses the remaining balance and may have no legal recourse.
This deceptive practice is on the rise, particularly targeting small and medium-sized businesses. As vendor-issued credit for the holiday season comes due in early 2026 - and with many economists forecasting an economic slowdown - the frequency of these schemes is expected to increase. Taking preventive steps now is critical.
To protect your business, every client or customer contract should clearly state in the initial sales agreement that any restrictive endorsements on checks or other payment instruments will be considered invalid and unenforceable. Review all existing agreements to ensure they include such protective language.
Emphasize diligence within your accounts receivable or treasury operations. If your company processes high volumes of payments, it’s easy for restrictive endorsements to go unnoticed. Establish procedures for reviewing checks, training staff, and flagging any suspicious endorsements before deposit.
Finally, when resolving a large, disputed debt, always consult with qualified legal counsel. Attorneys can help draft settlement communications that include specific disclaimers - preventing counterparties from later claiming that a partial payment was accepted as full satisfaction.
Vigilance and sound legal preparation can make the difference between protecting your rights and inadvertently waiving them. By strengthening contract language and monitoring payment practices, your business can stay one step ahead of this growing financial trap.
For more than 50 years, Tripp Scott has played a leadership role in issues that impact business. Learn more at TrippScott.com.
Charles Tatelbaum is a director at Tripp Scott and chairman of the creditors’ rights and bankruptcy practice group. He also practices in the areas of complex business litigation, Uniform Commercial Code transactions, and lender liability litigation.