Maryland & District of Columbia Contractors Beware – “Final Payment” Notation Marked in Memo Line on Client Checks
Selzer Gurvitch Rabin Wertheimer & Polott, P.C.
Our contractor clients often ask whether they should cash checks from a client that includes a notation of “Full Payment,” “Final Payment,” or something similar on the memorandum line. Contractors ask if they can simply cross out the offending notation and then deposit the checks. The answer to each question is an emphatic “NO.” Contractors should not deposit these checks, whether they cross out the notations or not. Depositing a check such as this could result in an unintended release of the debt, particularly if the contractor is in a dispute with the client over the amount owed. We wrote in an Ahead of the Curve article earlier this year about the negative consequences of Virginia contractors depositing client checks with these notations, even if stricken. This newsletter addresses the matter in Maryland and the District of Columbia. The conclusion is the same in all three jurisdictions: contractors should not deposit these checks and should instead return the checks, requesting replacements without the notation.
Although both Maryland and the District of Columbia have various cases that address this issue, both jurisdictions have adopted UCC Section 3-311, Accord & Satisfaction by Use of Instrument (the Maryland codification simply titles the section “Tender”), which provides clear guidance to contractors who receive checks with these notations. Section 3-311 contains a few requirements, including that the debtor is acting in good faith and the debt is subject to a bona fide dispute. If a billing dispute ends up in court, these requirements may help the contractor win the dispute. However, to avoid court, contractors should focus on one provision in UCC Section 3-311 that states if there is a “conspicuous statement” on the instrument (the check), it is given in full satisfaction of the claim. For example, if the notation on a check’s memo line reads “Full Payment,” contractors should instruct their staff who receive the check that it should not be deposited under any circumstances!
If these checks are inadvertently deposited, UCC Section 3-311 does provide potential remedies to overcome the deposit being deemed full payment of a debt. First, the contractor should refund the amount to the client within 90 days of depositing it. Second, as part of their invoices to clients (or in some other written communication, such as the original contract), contractors should include a “conspicuous statement” that any communications about disputed debts and any checks purporting to pay such debts are only to be sent to a designated person, office, or place. If the contractor can then prove that the communication or check was not sent to the specified person, office, or place, then the debt is not treated as paid in full. However, proof may still require a trip to court. Therefore, although we do recommend that the “conspicuous statement” about disputed debts be included on invoices and in contracts, contractors should rely on the simplest approach to avoid court. Repeating the guidance of the preceding paragraph: train staff who receive checks with these notations to not deposit them and to instead return them to the client with a demand for payment without the notation.
In conclusion, in the District of Columbia, Maryland, and Virginia, contractors need to be aware of clients who attempt to pay less than they owe by sending in checks with notations of “Full Payment”, “Final Payment,” “Payment in Full,” or something similar. Contractors should not deposit those checks even if they cross out the notations.
Please contact attorneys in Selzer Gurvitch’s Commercial Litigation, Construction, and Corporate/Business practice groups to assist you with your contractual matters.
Research by Karechia Wallace-Warthon, Selzer Gurvitch Law Clerk, 3rd year law student at The George Washington University Law School.