May 28, 2009 By Loral Narayanan

The following article originally appeared in the May 2009 issue of ABC-Amega's free client newsletter, "Credit-to-Cash Advisor".

In the United States, laws dealing with bad checks fall under the jurisdiction of its fifty states. Every state has its own statutes outlining potential remedies, civil and/or criminal, for sellers that have been issued bad checks.

Although these statutes often differ from state to state, there are similarities among them. This article focuses on some similarities.

What is a bad check?

The first thing to understand about "bad" checks is that they fall into two categories under the law. There are bad checks, for which there are generally only civil remedies. And, there are BAD checks that fall under statutes providing both civil and criminal remedies.

Let me explain.

According to Uniform Commercial Code (UCC) § 3-104(f), a "check" is defined as a "draft … payable on demand and drawn on a bank …."

This has been interpreted by many states to mean that a post-dated check, which is actually a promise to pay in the future, does not fall under bad check laws that allow criminal remedies, as it is not payable "on demand".

Many states have also chosen to consider bounced checks in payment of pre-existing debt -- such as payment of a sale on open account -- as not falling under the bad check laws providing criminal penalties.

Below is one rationale for this determination, taken from an article on bad checks posted on CreditManagementWorld.com:

“Since the debt is preexisting, the maker of the check did not deprive the payee of any right; procure anything of value from the payee or wrongfully appropriate anything belonging to the payee.”

Most creditors would take issue with the fact that bouncing a check in payment of a net 30 invoice did not "deprive them of any right", or "procure anything of value". However, such is the state of the law.

Thus, in many states, neither post-dated nor NSF checks in payment of a preexisting debt, fall under state bad check laws that carry the potential for criminal remedies.

What type of NSF check, then, does fall under state bad check laws providing both civil and criminal remedies?

1. Bounced checks in payment of C.O.D. (cash on demand) sales, which meet the "payable on demand" definition of UCC § 3-104(f)
2. Bounced checks where there is proof of intent to defraud.

(Caveat: Every state also has statutes that relate to remedies for non-C.O.D. and post-dated checks. These bad check statutes don't generally provide for criminal action. However, in some states, criminal action may be allowed and, in others, only civil action for payment of the face value of the check and/or "additional" penalties (damages, etc.) are allowed.)

Civil and Criminal Remedies for Bounced (NSF) Checks under Bad Check Laws

This section deals with bounced checks that meet the UCC definition of "payable on demand" and that are not for preexisting debt.

There are both civil and criminal penalties for intentionally writing a bad check.

Of course, it's much more costly for the payee to pursue criminal penalties. In most localities, it's necessary to file a complaint with the appropriate criminal justice officer in order to initiate a criminal action. These officers (district attorney or sheriff, for instance) are generally busy with more serious crimes and do not have the time to pursue such actions. Thus, unless the check is for a very large amount, or you have a very strong desire to somehow punish the debtor, you'll likely have better results pursuing the matter under civil law.

The principle of "intentional deception" is important in determining whether civil or criminal penalties are available. In other words, did the buyer purposely deceive the creditor, causing him to believe that payment was made by writing the bad check? Generally, the payee is required to establish the buyer's intent to defraud and his knowledge of insufficient funds in order to access criminal penalties. Most states, however, do provide that it is prima facie evidence of intent to defraud if (1) the check was not honored, and (2) the buyer did not "make good" on the check after receiving written notice that it was not honored by their bank.

Criminal penalties can include possible jail time and payment of damages/fees. The courts generally discourage using criminal actions as a vehicle for collecting on a bounced check. Therefore, payees are, again, generally best served by sticking to civil proceedings.

Civil penalties differ from state to state. However, most states allow the creditor to at least sue for the amount of the check that was dishonored, plus reasonable bounced check fees. In some states, civil penalties can include payment of the face value of the check,damages of up to 3 times the amount of the check, plus attorney's fees and costs.

Liability under Bad Check Laws

Under the Uniform Commercial Code (UCC), an authorized representative of a company signing a bad check is not personally liable. However, one state court of appeals has taken the position that, if the corporate signer was aware that there were insufficient funds and intended to defraud, he could be held responsible. The determining factor for liability is, here again, intentional deception.

Statutes for Bounced Checks

It's important to clearly understand the difference between bounced checks that fall under bad check laws with criminal penalties, and bounced checks that are in payment of pre-existing debt, (or were unintentional ), which generally can only be sued in civil court (with some exceptions).

In most states, receivers of bad checks can claim additional amounts, over the actual face value of the check itself. And, if the payee signed a credit application (or contract) outlining a fee for bounced checks, collection of that fee is generally legal without filing a suit.

However, if there is no such document, and you are considering a civil action to obtain additional amounts over and above the face value of the check, it is key to have followed the requirements of the relevant state's statutes exactly. (Note: the law relating to enforcement of rights when you have received an NSF check are not necessarily the laws of the state in which you are located, but rather the state where the check was actually tendered.)

Every state has its own statutory amount that the creditor is allowed to sue for, as well as a grace period by which the debtor should make good on the check after receiving notice that it has bounced. In addition, each state has specific language (a Notice of Dishonored Check Form) that should be used when notifying the debtor of the bounced check.

Sources of Information on Each State's Bad Check Laws

There are any number of resources on state bad check laws, including software (for sale and free) available on the Worldwide Web. You can also reduce your risk of taking a bad check by using a check guarantee service, which acts as a kind of insurance for the seller/payee.

One excellent resource is the Credit Research Foundation's (CRF's) publication, Bad Check Laws: A 50 State Guide of Rights & Remedies, which was just updated in 2009 and can be purchased at Credit Today's Online Store.

No matter what resource you select, before relying on its information, you should contact an attorney familiar with the laws of the state where the check was tendered to determine if the information is still accurate.

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We thank ABC-Amega Inc. for the above information, which was originally published in their client newsletter "Credit-to-Cash Advisor". ABC-Amega Inc. provides 1st and 3rd party commercial collection services since 1929, and collecting in more than 200 countries worldwide. For further information, contact info@abc-amega.com.