What do you do when you receive a check from a delinquent owner with a restrictive endorsement on it?  Do you cash it?  Do you return it?  Do you call the attorney?

A restrictive endorsement is a written statement sent with a payment that either defines what the check is written for (such as “Assessments for April, May and June”) or specifically states that it resolves all outstanding amounts owed.  A restrictive endorsement may be considered an offer and settlement. By cashing a check with a restrictive endorsement, the casher may be viewed as accepting the offer.

Restrictive endorsements can take several forms. The most common form of a restrictive endorsement is a “payment in full” notation written on the front of the check, usually on the memo line. Some endorsements are written on the back of the check, such as “cashing this check represents payment in full of all amounts due”.   Restrictive endorsements, however, are not required to be directly on a check.  Restrictive endorsements may be contained in a letter or note that accompanies a check.

Should an association receive a check with a restrictive endorsement, it essentially has two options:  1) reject the check and continue collecting on the amount due; or 2) cash the check and run the risk of being held to the terms of the endorsement.   Sometimes people try to strike through the restrictive endorsement and cash the check anyway.  However, there is case law indicating that a strike through will not invalidate a restrictive endorsement, so we do not recommend associations take this approach.

But what happens if checks are delivered to a lock box and cashed before anyone has a chance to review them?  Under the Uniform Commercial Code, an association should take the position that payment was made without knowledge of the restrictive endorsement and the acceptance of said payment was in error.  According to Colorado law, an association may revoke the acceptance of the check and the check will be deemed as not being paid or accepted. To revoke the acceptance, Colorado law requires the association to immediately return the amount tendered to the homeowner as soon as it discovers existence of a restrictive endorsement.

Overall, associations should be very careful with restrictive endorsements and should shy away from cashing checks containing such endorsements.

Please do not hesitate to contact an Altitude Community Law attorney at 303.432.9999 if you have any additional questions concerning restrictive endorsements.