What Are Your Rights as a Vendor Under the Bad-Check Laws?

Your credit analysis concludes that a new corporate customer may be too much of a credit risk, so you insist on a C.O.D. sale. You authorize shipment with your delivery driver to pick up a corporate check from your customer with delivery of the goods. The goods are delivered, but when the corporate check from your customer is presented, it is returned "NSF." Your customer files for bankruptcy.

What are the vendor's rights against the corporation for the bounced check? Does the vendor have rights against the corporation's controller who signed the check, which had been expressly authorized by the company's president and sole shareholder? Is there criminal liability?

Overview of Bad-Check Laws

State law, not federal legislation, governs bad-check law. All states have bad-check laws. Each state may have different statutory provisions as to whether a party may be guilty of a crime and may be subject to civil penalties. Bad-check law combats the principle of deception: the buyer of goods or services deceives the vendor into believing that payment is made, and the vendor releases the goods in reliance on such representation.

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.

Vendor's Claims

When the check is dishonored, a vendor has a claim for breach of contract. The vendor may also have a claim for fraud and check deception. If the supposed buyer of goods purchased them without the intent to pay, it may constitute fraud. The purported purchaser's silence on this fact may constitute fraud, if such information is not reasonably available to the vendor.