A Customer Sent a Check Marked “Paid in Full” for Less Than They Owe. Don’t Deposit It Yet.

The envelope is from a customer who has not returned a call in six weeks. Inside is a check. The number is wrong — it is a fraction of what the account is carrying. And somewhere on it, in the memo line, above the endorsement block, or in a two-sentence letter paper-clipped to the front, are four words: payment in full.

Every instinct says take it. It is real money, it is in your hand today, and the rest can be argued about later. Your controller thinks the same thing. The mobile deposit app is already open.

Under Texas Business and Commerce Code § 3.311, obtaining payment of a check tendered in good faith as full satisfaction of a disputed claim can discharge the entire claim — including the part the check does not cover. Not weaken it. Discharge it. And the workaround everyone repeats — strike the notation, write “under protest,” deposit it anyway — is the one move the Code specifically forecloses.

This is a decision you make once, and it is not reversible by regret. Here is what the statute actually provides, in the order the questions arise.

The folk wisdom, and exactly where it breaks

The advice circulating on forums and in a lot of AP departments goes like this: the Uniform Commercial Code lets you accept performance while reserving your rights, so cross out “paid in full,” write “under protest” or “without prejudice” next to your endorsement, and you keep the balance alive.

The first half is true. Texas Bus. & Com. Code § 1.308(a) is a real provision. It says a party that performs “with explicit reservation of rights” does not thereby prejudice the rights reserved, and that “[s]uch words as ‘without prejudice,’ ‘under protest,’ or the like are sufficient.”

The second half is where it collapses. Section 1.308(b) says, in one sentence and without qualification: “Subsection (a) does not apply to an accord and satisfaction.”

That is the whole point. The reservation-of-rights rule and the accord-and-satisfaction rule sit in the same code, and the Legislature wrote the carve-out into the text rather than leaving it to argument. A reservation scribbled next to your endorsement is aimed squarely at the one situation the statute takes it out of. Chapter 1 is not a general aside, either: under § 1.102 it “applies to a transaction to the extent that it is governed by another chapter of this title,” and negotiable instruments are Chapter 3 of that same title.

The four gates in § 3.311

The debtor does not get discharge automatically. Section 3.311(a) provides that subsections (b) through (d) apply “if a person against whom a claim is asserted proves” three things, and § 3.311(b) adds a fourth. Every one of them is the debtor’s burden.

Read gate 3 again. The statute is triggered by obtaining payment — not by receiving the check, not by holding it, not by putting it in a drawer. An undeposited check is a decision you still get to make. That single fact is why the useful advice is “not yet” rather than “never.”

On gate 4, the Code supplies its own definition. Under § 1.201(b)(10), “conspicuous” means so written, displayed, or presented that a reasonable person against which it is to operate ought to have noticed it, and whether a term is conspicuous is a decision for the court. The section gives examples — headings in capitals, or body language in larger or contrasting type, or set off by symbols that call attention to it. A bold line in a cover letter and a faint note squeezed into a memo field are not obviously the same thing, but do not build a plan on the guess that a court will find the notation too small.

The decision tree

Work through these in order. The honest answer at the end of it is usually “this needs counsel before anything is deposited,” and that is not a dodge — the elements are fact questions, and the facts are yours.

1. Is the amount unliquidated or genuinely disputed?

If there was never a bona fide dispute, gate 2 fails and § 3.311 does not discharge anything. But be rigorous rather than optimistic. Chapter 3 never defines “bona fide dispute” — the phrase appears in the chapter exactly once, in § 3.311(a)(2) — so there is no checklist in the statute for you to fail the debtor on. It gets decided on the record, and a debtor will point to the back-charge conversation, the punch list, the shortage claim, the email you considered noise. Pull the file before you decide the dispute is imaginary. If the customer has been objecting to the invoice for months, expect the debtor to argue this gate is met.

Gate 1 has a defined term behind it. “Good faith” is not left to intuition: under § 1.201(b)(20) it “means honesty in fact and the observance of reasonable commercial standards of fair dealing.” That is the debtor’s burden too, and it is a place where a customer who invented a dispute the week the check went out has something to answer for.

2. Is the full-satisfaction statement conspicuous — and where is it?

Photograph the check, both sides, and the envelope, and keep the cover letter with it. Whether the statement is conspicuous under § 1.201(b)(10), and whether it says what § 3.311(b) requires, is a question someone will litigate from those images. Do not deposit the only clean copy of the evidence.

3. Are you an organization that sent a designated-place notice?

This is the escape hatch most creditors have never set up, and it is the reason to read this article before you are holding a check rather than after.

Section 3.311(c)(1) preserves the claim if the claimant, being an organization, proves both that (A) within a reasonable time before the tender, it sent a conspicuous statement to the debtor that communications concerning disputed debts — including an instrument tendered as full satisfaction of a debt — are to be sent to a designated person, office, or place, and (B) the instrument or accompanying communication was not received by that designated person, office, or place.

Both halves matter. The notice has to predate the tender, and the check has to have landed somewhere other than the designated place. A notice you send this afternoon does nothing about the check that arrived Tuesday.

4. If it has already been deposited, what day was it paid?

Section 3.311(c)(2) is the general cure: the claim is not discharged if the claimant proves that within 90 days after payment of the instrument, the claimant tendered repayment of the amount of the instrument to the person against whom the claim is asserted.

Then comes the sentence that surprises people. That paragraph “does not apply if the claimant is an organization that sent a statement complying with Subdivision (1)(A).” The two exceptions are alternatives, not layers. An organization that took the trouble to send the designated-place notice trades away the 90-day repayment route. Know which one you are relying on before you rely on it.

Calendar the 90 days from payment of the instrument, and calendar it today.

5. Who at your company knew?

Subsection (c) begins “Subject to Subsection (d).” Section 3.311(d) discharges the claim if the debtor proves that within a reasonable time before collection of the instrument was initiated, the claimant — or an agent of the claimant having direct responsibility with respect to the disputed obligation — knew the instrument was tendered in full satisfaction.

So the internal question is not only where the mail went. It is what your controller, your credit manager, or whoever owns the dispute actually knew before the deposit was initiated. Knowledge sitting in the right person’s inbox is part of the statutory test.

What to do with the next 24 hours

Do not deposit. Do not endorse. Put the check, the envelope, and any cover letter in one folder, scan all of it, and note the date received. Then get the file in front of counsel, because whether these elements are met is fact-specific and the wrong call is permanent.

Separately — and this is the part creditors skip — respond in writing that the amount remains disputed and that the tender is not accepted as full satisfaction. That letter is not a magic reservation of rights under § 1.308, because § 1.308(b) took that away. It is evidence about good faith, about the state of the dispute, and about what you communicated. A formal written demand does more work here than a scribble on an endorsement line ever will.

Then look at the economics honestly. Accepting a discounted short-pay is a settlement decision, and it should be priced like one — against the debtor’s ability to pay, the cost of pursuing the balance, and how much time is left on the claim under Texas’s limitations rules. Sometimes taking the money and closing the file is the right business answer. It should be a choice you made, not one a memo line made for you.

Fix this before the next one arrives

The most valuable paragraph in this article is § 3.311(c)(1)(A), and it only works in advance. Put a conspicuous line on your invoices, statements, and credit terms designating the person, office, or place to which communications about disputed debts — including any instrument tendered as full satisfaction — must be sent. Then train the people who open mail and the people who run remote deposit capture to stop on any notation resembling “paid in full,” “full and final,” or “settlement in full,” and route it, unendorsed, to that designated place.

That single control turns a permanent loss into a routed exception. It also fits neatly with the rest of the discipline described in how to collect unpaid invoices and the broader rules covered in our guide to Texas commercial debt collection law.

If the balance survives and the account is still an unpaid invoice going nowhere, that is the point where third-party commercial collection becomes worth a conversation. A customer who short-pays with a notation has stopped negotiating and started structuring, and that is usually the point where the file needs pressure applied from outside the relationship.

One last thing worth saying plainly: the check on your desk is an offer with a trigger attached, and the trigger is the deposit. Leave it untriggered for one more day.

General information for commercial creditors, not legal advice. Laws and deadlines change and depend on the facts — confirm specifics with qualified counsel.