Dishonored Check Leads to Battle Over Attorney’s Fees


Any check casher who has had to go to court to collect on a dishonored check knows that sometimes the cost of the court action can exceed the potential loss on the dishonored check.
So recently when a check casher sued over a dishonored check, the check casher also asked the court to award it attorney’s fee.
As part of an insurance agreement, an automobile insurance company, the check’s drawer, issued a check for $1,288.64 payable to a couple and a car dealer. The couple and the car dealer endorsed the check, and the couple cashed the check at a Texas check casher, at which point the check casher became the holder of the check.
The check casher endorsed the check and deposited it with its own bank. When its bank presented the check to the insurance company’s bank for acceptance, the bank dishonored the check by refusing payment, and the check was returned to the check casher marked “Refer to Maker.”
The insurance company’s bank appeared to have dishonored the check because the signature of the car dealer’s representative was partially covered by the check casher’s stamp.
The check casher notified the insurance company of its claim and requested payment, but the company denied liability and refused to pay.
Files Suit
The check casher brought suit in justice court, asserting breach of contract on the basis of the obligation owed by the drawer of a check under the Texas version of the Uniform Commercial Code section 3.414.
The check casher further requested attorney’s fees, contending that its claim was contractual under Texas Civil Practice and Remedies Code section 38.001(8). The justice court granted the check casher a summary judgment for the amount of the check, statutory returned check fees, and attorney’s fees.
The insurance company appealed to the county court, and the check casher again was granted a summary judgment. The county court awarded the check casher damages of $1,279.98, court costs of $97, attorney’s fees of $2,995, and set postjudgment interest at 5 percent.
The insurance company appealed the attorney’s fees issue to the Texas Court of Appeals, which reversed the county court ruling on that issue, but affirmed the court’s judgment in all other respects.
The Court of Appeals concluded that section 38.001(8) did not apply to an action on a dishonored check under section 3.414 because such a claim was “purely statutory” and was not a contractural claim.
Goes to State Supreme Court
The check casher appealed to the Texas Supreme Court for review of the attorney’s fees issue. The Supreme Court agreed to determine whether a claim by a check’s holder against the drawer under section 3.414 was a contractual claim to which section 38.001(8) applied.
The Texas Supreme Court pointed out that Article 3 of the UCC establishes a comprehensive scheme governing the procedures, liabilities, and remedies pertaining to negotiable instruments, including checks.
As part of that scheme, when a bank dishonors a check, the drawer of the check is obligated to pay the amount of the check to the check’s holder according to its terms at the time it was issued.
The Supreme Court noted that Texas adheres to the American Rule for the award of attorney’s fees, under which attorney’s fees are recoverable in a suit only if permitted by statute or by contract.
The TCPRC section 38.001 is one of several statutes modifying the American Rule. That section provides, in part, that:
A person may recover reasonable attorney’s fees from an individual or corporation, in addition to the amount of a valid claim and costs, if the claim is for: … (8) an oral or written contract.
The Texas Legislature instructs the courts to construe section 38.001 “liberally … to promote its underlying purposes.”
Two Reasons
Although Chapter 38 does not explain its “underlying purposes,” there are at least two reasons, said the court, for allowing a claimant to recover attorney’s fees on a contract suit.
First, wronged claimants may recover the full amount of their damages — including costs in having to litigate the suit — from the wrongdoer, so that they are made whole.
Second, a party with a small but valid contract claim is more likely to risk bringing suit because the claimant may recover attorney’s fees if successful, even if the potential amount of attorney’s fees are greater than the amount of the contract.
Section 38.001’s establishment of a one-way fee shift means that a claimant does not risk having to pay the company’s attorney’s fees if the suit is unsuccessful.
To recover attorney’s fees under section 38.001, a claimant must meet several prerequisites. The claimant must: (1) plead and prevail on a claim for which attorney’s fees are permitted under section 38.001, (2) be represented by an attorney, (3) present the claim to the opposing party, and (4) demonstrate that the opposing party did not tender payment within 30 days after the claim was presented.
Some Exclusions
In addition, Chapter 38 excludes various types of contracts from its reach — specifically, certain contracts issued by insurers. Here, the check casher was represented by an attorney, presented its claim to the insurance company, and established that the company did not tender payment within 30 days.
Further, noted the court, the check casher was not suing on an excluded insurance contract. Thus, the court said its sole inquiry in determining if the check casher could collect attorney’s fees was whether its suit was a claim on a contract to which section 38.001(8) applied.
As a threshold matter, said the court, it must decide whether a check is a contract. The court noted that it was settled law that a check — as a type of negotiable instrument — is a formal contract, a rule established not only in treatises but also in the common law of Texas and other states.
Obligation to Pay
A negotiable instrument is “an unconditional promise or order to pay a fixed amount of money,” a definition that fits squarely within the meaning of a contract as “a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.”
The drawer of a check has a clear obligation to pay the holder of a dishonored check under section UCC 3.414.
The court noted that the parties disputed whether a claim by an endorsee holder of a check against a drawer under section 3.414 was a contractual claim. The insurance company contended that although a suit by a payee against a check’s drawer was undoubtably contractual in nature, a suit by a holder like the check casher was merely a statutory claim inasmuch as the holder and drawer never entered into a contract with each other.
The premise for the insurance company’s distinction was that a drawer (as the person writing the check) and a payee (as the person named as the recipient of the check) were both parties to the contract, whereas a holder is not identified anywhere within the four corners of the check and must instead seek relief under section 3.414 rather than the common law of contracts.
Different Decisions
Whether a suit on a check is contractual, thus allowing for the recovery of attorney’s fees under section 38.001(8), has recently divided the Texas courts of appeals.
The courts of appeals that had examined the issue held that such a suit was contractual in nature. But in 2005, the Dallas Court of Appeals held that a claim under section 3.414 was statutory rather than contractual, and thus the holder was not entitled to attorney’s fees under section 38.001(8).
In reaching this ruling, the Dallas Appeals Court concluded that a check did not meet the requirements for the formation of a contract under the common law.
The court further distinguished previous court of appeals’ opinions that had approved section 38.001(8) attorney’s fees for claims on checks, observing that the case before it involved an ordinary, rather than a cashier’s check, and the claimant had sued the drawer rather than the payee.
The insurance company implicitly conceded that some of the reasoning in the 2005 case was flawed, specifically (1) the court’s rationale that a formal contract must meet the same formation requirements as a simple contract in order to be considered a contract, and (2) the court’s attempt to distinguish a cashier’s check from an ordinary check.
However, the insurance company continued to argue that a suit by a holder against a drawer under section 3.414 lacks a contractual basis, although on grounds that the holder is not explicitly identified within the four corners of the check.
Supreme Court Disagrees
The Supreme Court said it disagreed and concluded that a suit on a check under section 3.414 was a suit on a contract, whether it was brought by a holder or a payee.
Contrary to the insurance company’s assertion, said the court, the drawer of a check enters into a contract in which the drawer unconditionally promises to pay not only the payee, but also a subsequent holder of the instrument.
Because the check itself is the contract, it embodies the full agreement between the parties, as manifested by the drawer’s signature on the check; in signing the check, the drawer contractually obligates itself to pay the amount of the instrument to the instrument’s holder.
When a check is appropriately transferred to another person by endorsement, the transfer vests in the transferee any right of the transferor to enforce the check.
Thus, the drawer’s obligation extends not just to the payee, but also to any downstream holder of the instrument.
The crux of a claim under section 3.414 — whether brought by a payee or holder — is that the drawer possesses an obligation to pay the check according to its terms in the event the drawer’s bank dishonors the instrument.
And when a drawer does not honor that obligation, said the court, and the holder sues the drawer, the suit is on the instrument — and thus the contract — itself.
Article 3, noted the court, has identical remedies for payee and holder when the drawer for a dishonored instrument is sued, which further shows the flaws of the insurance company’s distinction.
Common Law Principle
A holder’s ability to sue on the instrument is equally a common law principle. As early as 1758, in the seminal English commercial paper case, Miller v. Race, a holder could sue and recover for the amount of a dishonored instrument.
The UCC explicitly provides that it is to be supplemented by principles of law, unless displaced by the UCC’s specific provisions. Thus, section 3.414 does not convert what is a common law contractual obligation into a purely statutory one.
As a tool of commerce, a check would be meaningless if, in the absence of a statute, a drawer was burdened with no contractual obligation to pay the amount of a dishonored check to the holder of the instrument.
Further, under the economic loss rule, this court had previously held that a claim is based in contract when the only injury is economic loss to the subject of the contract itself.
Here, the check casher’s damages were solely based on its economic loss due to the insurance company’s failure to pay the amount of the dishonored check — the fact that the check casher sued pursuant to a statutory provision did not negate the reality that its damages were based in contract.
Question of Application
The Supreme Court said that because it concluded that a holder’s suit against a drawer under section 3.414 was contractual, the remaining question was whether section 38.001(8) applied to such a suit. Section 38.001 applies to a claim for “an oral or written contract,” and a check is a formal contract.
Importantly, section 38.001(8) does not distinguish between formal contracts and other types of contracts. Section 38.001(8) does not narrow its scope to claims for breach of contract, nor differentiate between different types of contracts: it merely applies to claims on written or oral contracts. Chapter 38 provides an express exclusion for certain insurance contracts, but not for contracts involving financial instruments.
Finally, said the court, the legislature had instructed the courts to construe section 38.001 liberally, not strictly, to promote its underlying purposes.
Applying section 38.001 here would do just that — it would allow a plaintiff with a small but valid contract claim to recoup its full amount of damages, a principle in line with the UCC’s direction to “liberally” administer the remedies in the Code so that “the aggrieved party may be put in as good a position as if the other party had fully performed.”
Here, the check casher conclusively proved the insurance company’s contractual liability on the check as a matter of law, as well as its claim for attorney’s fees.
By its plain terms, the Supreme Court said that section 38.001(8) did apply to the check casher’s contract claim brought pursuant to section 3.414.
Article 3’s Statutory Scheme
The insurance company next argued that even if the plain language of section 38.001(8) applied to a holder’s claim under section 3.414, the court should decline to apply it here to avoid disrupting the statutory scheme of UCC article 3.
The company correctly contended that the resolution of this issue was governed by the intersection of the court’s opinions in three cases that concerned the propriety of importing external statutory provisions into the UCC.
The court said these three cases established the rule that it is legitimate to apply a non-UCC statutory provision to a claim brought under the UCC, so long as doing so does not “ignore the UCC itself and thwart its underlying purpose.”
The insurance company argued that applying section 38.001(8) would violate this rule, that it would disrupt article 3’s comprehensive and carefully considered allocation of responsibility among parties to banking relationships. The Supreme Court said it disagreed.
Additional Remedy
Attorney’s fees, said the court, do not dictate fault or liability; they are awarded as a remedy after a party has been determined liable on a contract claim.
Attorney’s fees under section 38.001(8) are, in essence, an additional remedy so that a prevailing plaintiff may recoup the cost of trying a case and do not generally interrupt the measure of damages for a particular claim; thus, said the court, to permit the recovery of attorney’s fees here, did not disrupt the relevant remedies provisions of the UCC.
Second, the cause of action in this case touched on provisions of the UCC that were silent about attorney’s fees.
Here, said the court, the relevant statutory provision was silent on the issue of attorney’s fees, and so to import section 38.001(8) would not disrupt any element of that provision.
Thus, to be clear, said the Supreme Court, it was not holding section 38.001(8) may always apply to a UCC contract claim.
If, for example, a provision allowed for the recovery of attorney’s fees, but in a manner more restrictive than section 38.001(8), a plaintiff could not circumvent that limitation by recovering attorney’s fees under section 38.001(8).
The question to be answered in each instance is whether allowing a plaintiff to recover attorney’s fees under section 38.001(8) would do violence to a particular UCC article’s statutory scheme.

Posted in Fall 2011.