It is not uncommon for produce buyers to issue payment checks to sellers for amounts less than the invoiced total, accompanied by restrictive endorsement language. This practice raises critical decisions for sellers, as accepting such checks may impact their ability to collect any remaining balance. Understanding the legal implications is crucial, and this blog aims to shed light on the considerations involved.

Buyers often include language on the back or front memo section of the check, stating, for instance, “This check is full and final satisfaction of all amounts due on invoice number 12345.” The pivotal decision for sellers lies in determining whether this language is legally binding. If the short-pay check amount is close to the invoiced total and the difference is negligible, depositing the check may be a practical choice. Additionally, if the buyer has a history of late payments or financial instability, accepting the check and writing off the remaining balance could be a sound business decision.

In cases where California law applies, certain factors come into play:

1. Good Faith Payment: The buyer must prove that the payment was tendered in “good faith” as full satisfaction of the claim.
2. Bona Fide Dispute: There must be a genuine dispute over the amount claimed by the buyer.
3. Cash or Deposit: The seller must actually cash or deposit the check.
4. Conspicuous Statement: The check or accompanying communication must contain a conspicuous statement indicating that the payment is intended as full satisfaction of the claim.

There are two exceptions that exist:

1. Seller Communication: If the seller had previously communicated or memorialized that all disputes must be directed to a specific person or office, and the buyer disregards this, the short-pay check may not satisfy the entire amount.
2. 90-Day Window: The claimant has 90 days after receiving the payment to return the check, indicating non-acceptance as full payment.

Deposit of a payment check with restrictive endorsement language carries risks, as it may be considered acceptance of the full debt. Sellers should exercise caution, especially when a significant balance is at stake, and consider consulting with an attorney to navigate the legal intricacies involved in these situations. If you have any questions about payments received, including short payments, please don’t hesitate to contact me at 949.885.4808 or [email protected].