How many of the 450 million
bad checks written this year in the United States have you
received? No doubt you have seen your fair share and know
the drill … file a civil action to collect or initiate
criminal prosecution under your state’s statutes. You
probably also know that the Fair Debt Collection Practices
Act specifically prohibits the “threat” of criminal action
against an individual if you do not intend to pursue the
criminal action or do not have the ability to do so. Civil
and criminal remedies are effective, but what happens if a
bad check issuer files bankruptcy?
Does The Automatic
Stay Apply To “Bad Check Prosecution?”
The filing of a bankruptcy petition imposes an “automatic
stay” on all collection actions to prohibit any further
efforts to collect debt that arose prior to the bankruptcy
filing. However, the “automatic stay” does not extend to
proceedings by the state pursuant to its police powers.
Thus, prosecutions to enforce criminal laws are not subject
to the automatic stay. In the eyes of the bankruptcy court,
“bad check prosecutions” are not attempts to collect the
debts so long as the real purpose of the prosecution is to
enforce the criminal bad check laws rather than to pressure
the debtor into paying a debt that might otherwise be
discharged during bankruptcy.
What Is Your Real
Purpose In Bad Check Prosecution? What Do Your Policies Say?
Your behavior will determine how the bankruptcy
court will view whether your “bad check prosecution” is
really intended to enforce criminal law. Quite simply, you
should take a “hands off” approach to the prosecution. The
government prosecuting attorney will be your attorney in
this matter. Neither you nor your counsel can have any
communication whatsoever with the debtor or debtor’s counsel
pertaining to the bad check. The criminal prosecution should
be allowed to take its course. If you abide by these simple
rules, even though the penalty for passing a bad check ends
up being restitution to you (on a debt that otherwise might
be dischargeable in bankruptcy), the bad check prosecution
can go forward notwithstanding the filing of the bankruptcy
petition.
Also critical to your “real
purpose” is whether this prosecution is being handled
consistently with your company’s written policy regarding
prosecution of bad checks. Your credit manual should
clearly set out the circumstances under which you will
prosecute. In order to avoid sanctions for violation of the
automatic stay, the decision to prosecute bad check issuers
should be consistent with your policies and history of
handling similar matters.
Dischargeability Of
Bad Check In Bankruptcy
What about the bad check debt being discharged
during bankruptcy? Bankruptcy Code Section 547 provides
that a bankruptcy discharge does not relieve an individual
debtor from any debt for money, property, services or an
extension, renewal or refinancing of credit to the extent
obtained by false pretenses, false representation or means
of actual fraud. Therefore, when an irate creditor comes to
bankruptcy court in a chapter 7, 13 or 11 case where the
creditor is holding the check issued by the debtor that was
dishonored, the expectation may be that the debt is not
dischargeable. Unfortunately, debt based on a bad check is
not automatically and not even usually held to be
non-dischargeable.
The bankruptcy courts have
split on whether delivery of a bad check constitutes a
representation to pay. The majority of courts have held
that issuing a bad check alone without more evidence of
misrepresentation or bad faith does not constitute grounds
to deny dischargeability of the debt. Another line of cases
holds that the mere tendering of a bad check for goods and
services constitutes implied or actual representation that
the issuer has good funds to cover the check and that if the
check is bad it should be a non-dischargeable debt on the
basis of fraud and misrepresentation. To succeed in getting
a bankruptcy court to find a bad check debt is
non-dischargeable, the creditor has the burden of proof to
show fraud or false representation by the debtor.
What is Fraudulent
Intent?
The bankruptcy court will not look to state bad
check statutes for guidance on what is evidence of
fraudulent intent whenever a bad check is issued. The
bankruptcy court will instead look at whether the issuance
of the bad check constitutes a representation of a material
fact or an intent to pay the amount of the check and whether
such representation is fraudulent. Factors that courts have
looked at to determine whether a bad check debt should be
dischargeable are: (1) whether there is an agreement between
the parties to hold a post-dated check; (2) the time between
delivery of the check and the bankruptcy filing; (3) whether
prior to delivery of the check the issuer consulted an
attorney about bankruptcy; (4) the number of bad checks; (5)
the amount; (6) the debtor’s financial condition at delivery
of the check; (7) whether multiple checks were delivered the
same day; (8) whether the debtor was employed at the time
the check was written; (9) whether the check was written on
a closed account; (10) the debtor’s financial
sophistication; and (11) whether luxuries or necessities
were purchased.
How Much Debt Is
Non-Dischargeable?
Even assuming the creditor succeeds in having a bad check
determined to be non-dischargeable, the question remains of
how much of the debt is non-dischargeable. Bankruptcy cases
have held that, in addition to the actual amount of the
check, the amount of interest, court costs, check service
charges, bank charges and other actual damages and attorney
fees which arose due to the issuance of the bad check, would
also not be dischargeable.
Court Ordered Restitution Or Fines Dischargeable?
If criminal restitution or fines from a bad check criminal
prosecution have been ordered by a court, such restitution
or fines are not dischargeable in bankruptcy. Under the
Criminal Victims Protection Act of 1990, any restitution
awards or criminal fines included in a sentence for
conviction of a crime are exempted from a Chapter 13
discharge. Also, a U.S. Supreme Court case upholding
exempting from Chapter 7 discharge any condition a state
criminal court imposes as part of a criminal sentence has
been interpreted by various bankruptcy courts and circuit
courts to include restitution or fines for bad checks.
Objection To Discharge
Remember also that even to get to the issue of whether a bad
check is dischargeable in the bankruptcy, the creditor must
be vigilant in the case and must object to the discharge of
the bad check debt within a specified period of time in the
case or the debt will be discharged. An adversary
proceeding is required and there may be substantial costs in
pursuing non-dischargeability. The bad check prosecution
with its possibility of a restitution order (which is never
dischargeable) may be more cost efficient.
For information on bad check prosecution requirements in
the various states, contact
Diane P. Furr
at 301 South College Street, Suite 2300, Charlotte, NC
28202, (704) 342-5338 or
dfurr@poynerspruill.com.
