|Business Credit Law and Regulations|
Overview of Bad Check Laws
You conclude that a new corporate customer is too much credit risk and you insist on COD. You authorize shipment with your delivery driver to pick up a corporate check from your customer. The goods are delivered, but the corporate check is returned "NSF". May you recover the value of the check from the signer, the corporation's controller?
Bad check law is governed by state law and all states have such laws. Bad check law combats fraud: the buyer of goods or services deceives the vendor into believing that payment is made, and the vendor releases the goods in reliance on this.
Generally, a vendor is required to establish the buyer's intent to defraud and knowledge of insufficient funds for a valid claim under the bad check laws. Most states provide that it is prima facie evidence of insufficient funds if: (a) the check was not honored, and (b) the buyer did not pay the check after written notice of dishonor of the check. Under the bad check laws, a vendor may have claims against the buyer on a civil basis (collection of the debt) and a criminal basis. But what of personal liability with corporate checks?
Personal Liability Of Signer Of Check
Does an individual signing a corporation's check commit the individual to personal liability, should the check be returned NSF?
Article 3 of the Uniform Commercial Code deals with checks. Revised Article 3 provides that a party with authority to sign a corporate check no longer has to indicate his or her representative capacity on the check. Revised Article 3 recognizes that the party signing the check in a representative capacity, such as a controller for the company, is not personally liable for the NSF check. However, a vendor may have a separate claim for fraud against against the signer, depending on the jurisdiction. Under a fraud claim, the vendor must establish that the individual signed the corporate checks aware that they would not clear as there were insufficient funds on deposit in the corporate account to cover the checks.
A state court of appeals recently considered a vendor's fraud claim against a corporate bookkeeper for signing checks when there was insufficient funds. In that case, bookkeeper signed two checks for payment to a vendor that later bounced. The vendor sued the bookkeeper for fraud. The court recognized that corporate signers of checks who sign checks when they know the corporate accounts contain insufficient funds may be liable:
The court noted that key for the vendor is whether
the corporate signer intended to defraud the vendor. The court found
there was no evidence to show that the bookkeeper knew there were
insufficient funds in the account when she signed the checks. The
court also noted that the vendor's reliance on the bookkeeper's signature
was reasonable. The court noted that the bookkeeper was not an officer
or director. The court also noted that the bookkeeper as a low-level
ranking employee of the debtor was unaware the debtor's available
A vendor that has received an NSF check from a corporate customer should consider
whether the signer of the check may be a second pocket for payment. In certain
jurisdictions, the vendor that has received the NSF check from the corporate
customer may have a claim against the signer of the check.
Reprinted by permission from Trade Vendor Quarterly Blakeley & Blakeley LLP