Check Collections
After representing numerous check cashing clients for over 20 years, I have found the following information helpful. The information below is a brief summary of the position my clients take in check cashing cases. It is not intended to provide legal advice to anyone.
The law regarding checks.
The law in Texas (and most of the 50 states) protects a person or entity who provides cash for a check. If you or your store cash a check in good faith and without knowledge of any defenses good against the check, then you have certain rights regarding that check. You are considered a “holder in due course.” See Chapter 3 of the Texas Business and Commerce Code Section 3.302. http://www.statutes.legis.state.tx.us/SOTWDocs/BC/htm/BC.3.htm
Limited defenses.
There are only a limited number of defenses that are considered good against a holder in due course. These defenses are listed in Section 3.305(a)(1): infancy, duress, lack of legal capacity, illegality of the transaction, a certain type of fraud (see below), and discharge in bankruptcy. All the other defenses that might be good against a person in a contract case are not good against a holder in due course.
The reason for the law.
Holders in due course are a protected class because the legislature has determined that it wants to make sure checks can be used as negotiable instruments. In other words, the legislature wanted to make sure that entities (businesses and individuals) would provide cash for checks, so laws have been enacted to protect entities when they provide cash for checks.
Without this protection, it would not be safe for a grocery store or check cashing company or anybody else to take a check that was written to the individual trying to cash the check. There are many legitimate reasons why the person who wrote the check (the “drawer”) might put a stop payment on a check: the person receiving the check might have lied about the reason for needing the check, or might not have returned to complete the job, or might have done the job poorly, or might have broken a window, or taken a ladder, or any one of a number of other reasons that would make a person want to stop the check.
If a grocery store or check cashing company or anybody else has to take the check subject to all of these defenses against the check, then they simply would not accept the check. If nobody accepts checks, then checks could no longer be used as a form of payment because nobody could get cash for the checks. The painter, for example, would insist on cash for his down payment to go buy paint because he would not be able to get cash from a check given to him.
Who is liable?
If the check is returned dishonored (for example stamped “Stop Payment,” “Refer to Maker,” or “NSF”), you will generally have the right to enforce the check. You will generally be able to enforce the check against the person who wrote the check even if they had a very good reason for putting a stop payment on the check. Section 3.414.
You will also generally be able to enforce the check against the person who presented the check for cash based on their indorsement of the back of the check (the “indorser”). Section 3.415.
The liability of the drawer and the indorser are considered “joint and several” meaning that you are able to go after both the drawer and indorser at the same time until you have collected the amount you are owed in full.
Attorney’s fees.
You are entitled to collect the amount of the check plus a returned check charge fee. In addition, if you hire an attorney, you are entitled to collect attorney’s fees in most circumstances. Chapter 38 of the Texas Civil Practice and Remedies Code. http://www.statutes.legis.state.tx.us/Docs/CP/htm/CP.38.htm
The right to collect attorney’s fees in check cashing cases was confirmed by the Texas Supreme Court in ½ Price Checks Cashed v. United Automobile Insurance Company, 344 S.W.3d 378 (Tex. 2011).
If you have to file a lawsuit, you are also generally entitled to collect court costs.
Does the entity have to call to confirm the check?
The law does not require a grocery store, check casher, or anybody else to call the bank or the drawer before cashing the check. Many check cashing companies will attempt to verify a check before cashing a check in certain circumstances. But there are good reasons why the law does not require a phone call in every instance. One example is that many banks are becoming “non-verifying” banks, which means that they will no longer take phone calls from entities trying to confirm whether a check is good and will not confirm whether there are funds in the account sufficient to cover the check. Another example is that many drawers are hard to reach, so a law requiring a phone call to verify the check with the drawer would make many checks not cashable. In addition, my clients have experienced a number of instances when they actually verified a check with the drawer and then still had the check returned dishonored because the drawer put a stop payment on the check or depleted the funds in the account prior to the check clearing the bank.
Each entity will develop its own standards for when to call to verify a check. Often the procedures will rely on the judgment of the trained employees to determine when a check should be verified. It is never in the best interest of an entity to give cash for a bad check. Since most entities are in business to make money, not lose money, they will generally adopt procedures that will balance between protecting the entity from cashing bad checks and still allow the entity to cash checks. Grocery stores, check cashing businesses, and banks all will adopt different types of procedures because they will balance the level of protection verses profitability in different ways. One cannot compare the procedures of one type of business to another, because grocery stores and banks are cashing checks as a convenience for their customers and do not have to make a profit from cashing checks to stay in business. For this reason, grocery stores and banks can adopt much more conservative procedures for cashing checks. These conservative procedures are not required by the law and are not the standards by which check cashing companies are judged in determining whether a check cashing entity has acted in good faith.
Two types of fraud.
There is one limited type of fraud that is considered a valid defense against a holder in due course. It is not, however, the typical garden variety fraud in the inducement. This fraud is described in Section 3.305(a)(1)(C) as “fraud that induced the obligor to sign the instrument with neither knowledge nor reasonable opportunity to learn of its character or its essential terms.” In other words, if a person does not realize that they are signing a check, then this defense might apply. The official comments to Section 3.305 go into greater detail on when this defense might apply, but it is rarely found in check cashing cases. The classic example is when a little old lady is talked into signing what she thinks is an estimate for the door-to-door salesman to trim her trees, but it is actually a promissory note.
The more common type of fraud, commonly known as fraud in the inducement, is not a defense good against a holder in due course. So if a drawer is induced into signing a check based on the fraudulent statement that “the work is done” or “I will return after lunch to finish” or “the car works” or “I lost the first check” or “I am selling to you the Brooklyn Bridge,” these are all classic examples of fraud in the inducement and are not valid defenses against a holder in due course.
Don’t I have a right to stop payment on a check?
The right of a person to place a stop payment on a check is a contractual right granted to you by your bank. This is simply a contract in which your bank agrees that if you ask them to stop payment on a check, they will stop payment on the check. What the bank will not tell you is that there are numerous situations in which you might still be liable on the check.
Most bankers are not familiar with Chapter 3 of the Texas Business & Commerce Code. The laws that govern checks in banking situations are mostly found in Chapter 4 of the Texas Business & Commerce Code. If you call your banker, he/she will most likely tell you that you absolutely have a right to stop payment on the check and that you are no longer liable on the check. You might want to press them a little further by asking them whether their answer changes if the check was cashed by a holder in due course under 3.302 of the Texas Business & Commerce Code and whether your defense is one of the few defenses that are good against that holder in due course as listed in 3.305(a) of the Texas Business & Commerce Code. If your banker can list for you the few defenses that are good against a holder in due course as found in Section 3.305(a), then you will have very knowledgeable banker indeed. If you want good legal advice, it is best to ask a lawyer who practices in the area of commercial transactions.
Potential check cashing clients.
Please contact me if you would like sample letters you can use when sending notices to drawers or payees when you have a dishonored check returned to you.
Disclaimer: Nothing in this website is intended to provide you with legal advice, nor is it intended to create an attorney-client relationship. Before I represent any client, the client and I will sign a written retainer agreement. If you do not have a signed, written retainer agreement with me, I am not representing you and I will not be taking any action on your behalf.
