Most anyone who has every been in business has had occasion to receive a "bad" check, returned by the bank due to insufficient funds or a stop payment order. Most states provide for a civil penalty to be paid by the person writing such a check, but only if the payee carefully complies with the statutory requirements for obtaining the penalty.
In California, Civil Code § 1719 sets forth the rules regarding sanctions imposed upon a person who passes a check on insufficient funds or stop payment on a check without a good faith dispute. This article will discuss each circumstance.
INSUFFICIENT FUNDS
The section initially provides that the check writer (drawer) shall be liable to the recipient (payee) for the amount of the check and a service charge not to exceed $25.00 for the first check, and an amount not to exceed $35.00 for each subsequent check to that particular payee passed on insufficient funds.
If, however, the payee provides a letter to the drawer, in conformity with the requirements of the statute, the drawer will be liable for damages equal to three times the amount of the check, which shall not be less than $100 and no more than $1,500. Once an individual becomes liable for treble damages for a check which is the subject of the demand, the drawer is no longer liable for nominal check service charges.
The written demand to be provided by the check payee to the drawer must be mailed by certified mail and the written demand must inform the drawer of the provisions of Civil Code § 1719. Since the statute only indicates that the demand must "inform the person" of the provisions of the section, its function is quite obviously to communicate all of the information that the drawer must have in order to avoid liability for the statutory penalty.
The written demand should therefore ordinarily provide a clear statement of each of the following: (1) the name and address of the drawer; (2) the name and address of the payee to which payment can be mailed or personally delivered; (3) the amount of the check; (4) a description of the drawer’s potential liability; and (5) what the drawer must do to avoid liability (pay the amount represented by the check and the applicable service and mailing charges)The drawer should be advised that he has thirty days from the date the written demand is mailed to pay the amount of the check, the amount of the service charge, and the cost to mail the written demand. If the drawer fails to pay these sums in full within this thirty day period, the drawer then becomes liable for the amount of the check (minus any partial payments made) and damages equal to treble that amount, which shall not be less than $100 and no more than $1,500.
STOP PAYMENT ORDER
If the drawer stops payment in order to resolve a good faith dispute with the payee, the payee is entitled to service charges or treble damages only upon proving "by clear and convincing evidence that there was no good faith dispute." The code section indicates the grounds for a good faith dispute will include, but is not necessarily limited to, the following: "Services were not rendered, goods were not delivered, goods or service purchased are faulty, not as promised, or otherwise unsatisfactory, or there was an overcharge."
In the case of nonpayment due to a stop payment order, Civil Code § 1719 actually provides a sample notice to be used in advising the drawer.
In one interesting stop payment situation, defendants in a lawsuit were required to pay the plaintiffs $961,000 by a certain date and if they missed the scheduled payment date, the plaintiffs would be entitled to judgment against the defendants for $1.3 million, less any partial payments. The defendants provided checks to their attorney checks totaling $100,100 which he deposited into his client trust account. Although the attorney confirmed with the bank of his clients that their account held sufficient funds, he apparently did not contemplate that his clients would issue a stop payment upon the check. He therefore delivered his trust account check for $100,100 to the plaintiffs’ attorney before his clients’ check cleared.
You know what happened next! The defendants stopped payment on their checks to the attorney, leaving him with insufficient funds in his trust account to cover the check that he had delivered to the plaintiffs’ attorney. His trust account check therefore bounced. The defendants thereafter declared bankruptcy, and the plaintiffs served a statutory demand upon the defendants’ attorney for the amount of the check, plus the statutory penalty authorized under Civil Code § 1719.
The trial court reasoned that the attorney should not be liable on the check because he was a mere conduit or agent for transferring money from the defendants to the plaintiffs. In the Court of Appeal, the plaintiffs argued that this code section imposes strict liability against the maker of a check drawn on an account lacking sufficient funds and that the attorney’s representative status or motivation for transferring the funds were irrelevant.
The Court of Appeal agreed with the trial court and determined that the code section could not impose liability on the attorney since he was not subject to an underlying enforceable obligation to pay the check.
Since the bankruptcy filing of the defendants halted any meaningful recourse against the defendants, the plaintiffs apparently thought that they could use this code section to extract the money from the attorney who was not liable for the debt represented by the check. The plaintiffs obviously misjudged the situation and wound up paying the costs of litigation incurred by the attorney who wrote the check, as well as their own attorney’s fees.
The moral of the story? There are times when a "bad" check remains "bad," and is usable only as wallpaper in el baño!
