With the change in the economy and the increasing number of homeowners that are delinquent on their assessments, more and more management companies and homeowners associations are having to deal with the problem of “restrictive endorsements” being placed upon checks that are written to pay assessments. This becomes an issue if a homeowner owes for additional amounts that may be set forth in the declarations, such as the right to collect late charges, interest and attorney’s fees that may be incurred if a homeowner becomes delinquent on their assessment payments. A restrictive endorsement is an indication 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 can be considered an offer and settlement. By cashing the check, this could be considered an acceptance of the offer. The ramifications of cashing a check with a restrictive endorsement is that the homeowners association may not be able to collect any additional funds that are due and owing from the owner.
 
Restrictive endorsements can be made in several different manners. 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 limited to being written on just the check itself. Often times, restrictive endorsements can be found in a letter or note that accompanies a check. If the letter is sent along with a check stating something such as “The amount enclosed represents settlement in full of all amounts due,” this is considered a restrictive endorsement. 
 
Should you receive a check with a restrictive endorsement, there are two choices that an association can make: (1) reject the tendered check and continue collecting on the amount due or (2) cash the check and waive any claim to the remaining balance. The question has arisen as to whether an association or management company has a third option of simply striking out the “payment in full” language, cashing the check and collecting on the amount still owed. This option was determined not to be viable in the case of Directors Guild of America v. Harmony Pictures, Inc.  In this case, the Court held that the plaintiff’s acceptance of the check marked “Full and final settlement .......” resulted in an accord and satisfaction even though the plaintiff crossed out that language and wrote a letter to the defendant stating that it was not payment in full before cashing the check. 
 
With the repercussion being an inability to collect payment in full if an association cashes a check containing a restrictive endorsement, the question then arises as to the what happens if a homeowner sends a check for less than the amount owed directly to the bank, or through a management company lockbox? These checks are usually cashed without anyone looking at them. Under the Uniform Commercial Code, the association should take the position that the payment was made without knowledge of the restrictive endorsement and the acceptance of said payment was by mistake.  According to C.R.S. Section 4-3-418, if this should happen, the association my revoke the acceptance of the instrument and the instrument is deemed not to have been paid or accepted. To revoke the acceptance, the association should immediately return the amount tendered to the homeowner upon discovering that there was a restrictive endorsement on the check. 
 
Our recommendation is that associations should not cash checks that are for less than the amount owed and contain the notation “payment in full” or similar language that restricts the association right to collect all delinquent assessments, including late charges, interest and attorney’s fees that are due.