Philip W. Boyko Commercial Law Blog on Lawyers.com

Businesses lose hundreds of thousands of dollars annually because of NSF (insufficient or non-sufficient funds) checks when those instruments are not honored by the banks the're written on. The business owners must factor in the additional time, frustration, and resources to go after the offenders and their fraud. The business owner could pursue a criminal action, but it's much more costly to pursue criminal penalties. In most jurisdictions, it's necessary to file a complaint with the appropriate criminal justice officer in order to initiate a criminal action. These officers (usually with the district attorney's office) are generally busy with more serious crimes and simply do not have the time to pursue such actions.  Bottom line?  Unless the check is for a very large amount, or you have a very strong desire to punish the buyer, you'll get better results pursuing the matter under civil law.

Under Texas law as it existed before February 3, 2011, the business owner was lacking in one respect. If he hired an attorney to sue on the dishonored check, chances were good the business owner would not collect attorney's fees.  What good would it do to hire an attorney to sue on a $1,000 check if the fee charged by the attorney exceeded the amount recovered (almost certainly to be the case in every instance)?  So what, you ask, changed on the aforementioned date? Read on.

Texas law (TEX. CIV. PRAC. & REM. CODE, Sec. 38.001(8)) provides for the recovery of attorney's fees to the prevailing party in a breach of contract lawsuit, if certain procedures are followed. The problem with Texas law prior to February 3, 2011?  An attorney defending the dishonored check lawsuit took the position that the buisness owner's suit to collect a dishonored check was not a contract claim under section 38.001(8).  That argument will no longer fly because of the Texas Supreme Court's decision on February 3, 2011 in 1/2 Price Checks Cashed v. United Automobile Insurance Company. There, the defense attorney took the standard position that suit on the check was not contractual, but "purely statutory" (i.e., a claim under section 3.414 of the Uniform Commercial Code, which section does not provide for recovery of attorney's fees). The crux of a claim inder section 3.414 - whether brought by the payee of the check or the holder - is that the drawer (person that signed the check) possesses an obligation to pay the check according to its terms in the event the drawer's bank dishonors the instrument. The defense attorney basically said the business owner is suing under a statute, not on a contract. The Supreme Court was not impressed with that argument, holding that "it is settled law that a check - as a type of negotiable instrument - is a formal contract."  The court reasoned that when a drawer does not honor the obligation to pay and the holder sues the drawer, the suit is on the instrument - and thus the contract - itself.  The court concluded that a holder of the dishonored check who prevails on a section 3.414 contract claim against the drawer is entitled, as the prevailing party, to recover attorney's fees under section 38.001(8). 

A business owner can now hire an attorney to file suit on the dishonored check and recover not only the amount of the check, but the reasonable and necessary attorney's fees for having to do so. Check writing scofflaws beware.  Should your bank dishonor your check, you will now pay the attorney's fee of the payee/holder of the check should it prevail in the lawsuit. 

Nothing in this post should be considered legal advice.  Let's face it, chances are good that we don't know each other.  My aim is simple - to provide the reader with some useful, but general, information about the topic. You should not rely on any information in this post without some assurance that the material is still current and applicable at the time it is read. If you want a legal opinion that has teeth, consult your personal lawyer about your particular circumstances. If you don't have a lawyer and like what you see here, perhaps you should contact my law office to determine if I might be a good fit for you. To do so, simply click on my name above and you will be directed to my website, or you can reach me by telephone at (713) 626-2221 (messages left during non-business hours will be returned the next business day).  When responding, please refer to Blog No. 44.