Checks Returned for Non-Sufficient Funds Term Paper

Excerpt from Term Paper :

UCC and NSF Checks

L. Jones

UCC and the Returned Check little wonton money, which burned out the bottom of his purse.

Sir Thomas More (1478-1535), Works

If one thing is sure in this financial world of ours, writing a check sure to bounce is a very bad thing. Apart from the messy ideas of morality and the duties of the upstanding citizen, it is a dangerous business, indeed, should one indulge in the practice either, willfully, or even mistakenly, yet with noticeable frequency.

In all states, knowingly writing a check with insufficient funds, or, in bank terminology, an NSF check, is a crime. Indeed, over 450 million so called "bounced checks" are written every year (in fact, some check recovery agencies put the number at closer to 700 million), and are the bane of commercial traders and service providers. For this reason, district attorneys countrywide are ready and able to prosecute unscrupulous check writers.

Even if one writes a check with insufficient funds to back it up, and honestly fails to hear the sound of the proverbial bucket scraping the bottom of the personal financial well that is their checking account, non-criminal judgments may apply. For example, one may be charged a "bad check" processing fee by their financial institution, be required to pay the full amount to the creditor, and, if a certain amount of time passes without payment, that creditor can sue for damages that vary from state to state.

In the state of Connecticut, a creditor is allowed to sue for "maximum damages" that amount to $750. Other states are higher (California is $1,500), some lower (Vermont is $50), and some assess fines based on the decision of the presiding judge. These matters, as well as all of the other matters covering such things as the sale of goods, credit, and bank transactions (in other words, commercial transactions), are covered by the model statute known as the Uniform Commercial Code, or "UCC."

The UCC occupies a formerly chaotic place in the American commercial law system, for, before its inception in the 1950's:

Contract and commercial law then was largely judge-made, common law, not statutory or codified law...The Constitution gives congress jurisdiction over interstate an international commerce, but the pattern was established that most commercial law rules were predominantly part of state law, although the role of national law vastly expanded in other aspects of economic affairs during the Roosevelt New Deal. When the need to harmonize the law of sales and other commercial subjects was recognized late in the 19th century, therefore, the effort was to reform and coordinate state law on these subjects.

It is this code that is the primary source of law (adopted and adapted by all states except Louisiana -- which only adopted parts of it) regarding the policy states can pursue regarding the non-sufficient funds check.

Although the UCC is, by definition, uniform, each state may adapt its articles to suit its unique needs. Regardless, the UCC has become the basic framework for commercial law throughout the country.

The UCC contains nine specific articles dealing with many of the aspects of commercial trade within the United States. They are:

Article 1 -- General Provisions

Article 2 -- Sales

Article 2A -- Leases

Article 3 -- Negotiable Instruments

Article 4 -- Bank Deposit

Article 4a -- Funds Transfers

Article 5 -- Letters of Credit

Article 6 -- Bulk Transfers and [Revised]-Bulk Sales

Article 7 -- Warehouse Receipts, Bills of Lading and other Documents of Title

Article 8 -- Investment Securities

Article 9 -- Secured Transactions

Within the UCC, it is the information found in the third and fourth articles that relate to the NSF check issue. In addition, the adaptations of the individual states have some impact on the application of said articles.

The Fourth Article specifically deals with the item known as the "negotiable instrument." This does not include cash money, or many other forms of payment, but it does include checks. According to the UCC, the definition of a negotiable instrument includes:

a) Except as provided in subsections - and (d), "negotiable instrument" means an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if it:

1) is payable to bearer or to order at the time it is issued or first comes into possession of a holder;

2) is payable on demand or at a definite time; and 3) does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money, but the promise or order may contain (i) an undertaking or power to give, maintain, or protect collateral to secure payment, (ii) an authorization or power to the holder to confess judgment or realize on or dispose of collateral, or (iii) a waiver of the benefit of any law intended for the advantage or protection of an obligor.

In the state of Connecticut, the particular areas of concern with regard to the NSF check (the negotiable instrument) of the UCC are included in Article three, sections 42a-3-101 to 421-3-805, under the title Negotiable Instruments, and in Article Four, sections 42a-4-101 to 41a-4-504, under Bank Deposits and Collections.

An excellent example of how these articles might apply in a real life example within the state of Connecticut is contained in the 1998 United States Court of Appeals for the Second Circuit case, Docket no. 98-9462.

In this case, the Plaintiff, Danny Tuttle, alleged that the defendant's service charge violated parts of the Fair Debt Collection Practices Act, as well as the law of the state of Connecticut. The details were as follows:

On February 9, 1997, Danny Tuttle wrote a $57.26 check payable to a Richlin hardware store in Seymour, Connecticut to cover the cost of his purchase. At this store, customers may pay by check only at a single designated sales counter. A sign displayed at that counter warns: "Returned checks are subject to a service charge of $20 or the maximum allowed by law. Collection cost and all penalties permitted by law will also be assessed." Another, much larger sign prominently displayed on the wall behind that counter similarly gives notice that a service charge applies to dishonored checks....Equifax [a check authorizing company] authorized Tuttle's check, and Richlin accepted it as payment. When Tuttle's check was dishonored, Equifax purchased it from Richlin for $57.26 face value. Equifax send dunning letters to Tuttle seeking payment on the check plus a $20 service charge that Equifax assesses to defray its collection costs. Tuttle ultimately paid both the check and the service charge.

At issue were the Connecticut statutes relevant to the collection of service charges and the Uniform Commercial Code as adopted in the state.

Specifically, section 52-565a of the Connecticut General Statutes provides that the drawer of a dishonored check is liable to the payee for damages as the court determines, plus the value of the original check -- but only if the payee follows required steps at the time of the check's issuance (including notice of damages at the point of tender). Further, Article 2 of the Uniform Commercial Code in the State of Connecticut states that:

when a buyer of goods has failed to "pay the price as it becomes due," a seller -- or "person in the position of a seller," id. 42A-2-707 -- may recover "incidental damages," id.42A-2-709, including "any commercially reasonable charges, expenses or commissions...otherwise resulting from the breach." Id. 42A-2-710.

In short, Tuttle complained that Equifax violated the statute 52-565a. Equifax responded that it did not have to satisfy said statute because 42A-2-709 allows it to add a service chare as "incidental damages." In addition, it argued that Tuttle agreed to the condition when he wrote his check to the merchant (due to the posted signs alerting him to this policy).

At the conclusion of the trial, the jury was informed on the state statutes allowance of the imposition of service charges if "the agreement creating the debt expressly authorizes such a charge or if another law permits it." In addition, the court also instructed the jury "in a clear reference to the UCC...that Connecticut law permits collection of incidental damages, which could include service charges." It said:

In determining whether a service charge is permitted by law, I charge you that the law of this state at the time in question allows a party who has been a party of a dishonored check to recover the amount of the check in addition to any incidental damages. Incidental damages can include any commercially reasonable charges, expenses or commissions. In determining whether the service charge assessed by Equifax was commercially reasonable, you may consider that Equifax is entitled to recover an amount that would...put it in at least as good a position as if the plaintiff had fully paid his debt in the first place.

In consideration of the above instruction, the jury in…

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