When is a Bad Check Non-Dischargeable?

The business community relies on checks to effect payment for goods and services and for financing such transactions. This law is ancient: it arose as part of the law merchant (lex mercatoria) in the Middle Ages to facilitate the business transactions of merchants and mariners in the commercial countries of the world. See, e.g., BLACK’S LAW DICTIONARY 893 (7th ed.1999).

A check typically involves three parties, (1) the “drawer” who writes the check,7 (2) the “payee” to whose order the check is made out, and (3) the “drawee” or “payor bank”, the bank which has the drawer’s checking account from which the check is to be paid. In form, a check is an order to the drawee bank to pay the face amount of the check “to the order of” the payee. After receiving the check, the payee typically indorses it on the back, and then deposits it in the payee’s account in a different bank, the “depositary bank”. The depositary bank credits the check to the payee’s account, and sends the check through the check clearing system to the payor bank for ultimate payment from the drawer’s account. See generally Roy Supply, Inc. v. Wells Fargo Bank, 39 Cal.App.4th 1051, 1058–59, 46 Cal.Rptr.2d 309, 313–15 (1995).

A check is a species of documents called “commercial paper,” “instruments” or “negotiable instruments.” See UCC § 3–104. With exceptions not here relevant, a “negotiable instrument” means: an unconditional promise or order to pay a fixed amount of money … 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 …. UCC § 3–104(a). Where Article 3 refers to an “instrument”, it means such a negotiable instrument. See id. § 3–104(b).

The United States Supreme Court explained the nature of a check in Williams v. United States, 458 U.S. 279, 284–85, 102 S. Ct. 3088, 3091–92, 73 L.Ed.2d 767 (1982), a case involving a criminal prosecution under 18 U.S.C. § 1014 for check kiting. In the Court’s analysis, “a check is simply a draft drawn on a bank and payable on demand which contains an unconditional … order to pay a sum certain in money.” Id. (internal citations and quotations omitted)

Non-Dischargeability under 11 U.S.C. 523(a)(2)(A)

The central purpose of the bankruptcy code, according to the Supreme Court, is to permit insolvent debtors to reorder their affairs, make peace with their creditors and enjoy a new opportunity in life with a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt. See Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 659, 112 L.Ed.2d 755 (1991)(quotations omitted). The bankruptcy discharge provides this fresh start. Inconsequence, any exceptions to the discharge must be construed narrowly in favor of the debtor. See, e.g., Su v. Carrillo (In re Su), 259 B.R. 909, 912 (9th Cir. BAP 2001), aff’d 290 F.3d 1140 (9th Cir.2002); Snoke v. Riso (In re Riso), 978 F.2d 1151, 1154 (9th Cir.1992).

In order to find a debt non-dischargeable under 11 U.S.C. Sec. 523(a)(2)(A), a creditor must prove that (1) the debtor obtained money, property or services through a material misrepresentation; (2) the debtor, at the time, knew the representation was false or made with gross recklessness as to its truth; (3) the debtor intended to deceive the creditor; (4) the creditor reasonably relied on the false representation; and (5) the creditor sustained a loss and damages as a proximate result of the debtor’s materially false representations. Coman v. Phillips (In re Phillips), 804 F.2d 930, 932 (6th Cir.1986). A creditor seeking an exception from discharge under Sec. 523(a)(2) must sustain this burden by clear and convincing evidence. Knoxville Teachers’ Credit Union v. Parkey, 790 F.2d 490, 491 (6th Cir.1986). Clear and convincing evidence is an intermediate standard of proof in which the evidence establishes a fact to a lesser degree than beyond a reasonable doubt, but establishes a fact to a greater degree than by a mere preponderance of the evidence. In other words, clear and convincing evidence consists of evidence which establishes in the mind of the trier of fact “a firm belief or conviction as to the allegation sought to be established.” Hagedorn v. First National Bank of Cincinnati (In re Hagedorn), 25 B.R. 666, 668 (Bank.S.D.Ohio 1982); Hobson v. Eaton, 399 F.2d 781, 784 n. 2 (6th Cir.1968), cert. denied 394 U.S. 928, 89 S.Ct. 1189, 22 L.Ed.2d 459 (1969).

Actual fraud must be proven.

In enacting the Bankruptcy Code in 1978 (and § 523(a)(2)(A) thereof), Congress added “actual fraud” as a ground for the non-dischargeability of a debt. In the legislative history, Congress explained that the entire phrase, “false pretenses, a false representation, or actual fraud” was “intended to codify current case law e.g., Neal v. Clark, 95 U.S. 704, 24 L.Ed. 586 (1877) [applying fraud provision of 1867 Act], which interprets ‘fraud’ to mean actual or positive fraud rather than fraud implied in law.” 124 Cong. Rec. H11,095–6 (daily ed. Sept. 28, 1978); 124 Cong. Rec. S17,412 (daily ed. Oct. 6, 1978). (underlined emphasis added).

The issuance of a check upon insufficient funds is not, standing alone, a fraudulent misrepresentation sufficient to sustain a non-dischargeable claim under Sec. 523(a)(2)(A). Heinold Commodities & Securities, Inc. v. Hunt (In re Hunt), 30 B.R. 425 (D.Tenn.1983); Miami Citizens National Bank & Trust Co. v. Weitzel (In re Weitzel), 85 B.R. 753, 756 (Bankr.N.D.Ohio 1988); Tosco Corp. v. Tuggle (In re Tuggle), 86 B.R. 612, 614 (Bankr.E.D.Mo.1988); City Wholesale Grocery Co. v. Pike (In re Pike), 79 B.R. 41, 43 (Bankr.N.D.Ala.1987). In fact, the uttering of insufficient funds’ checks is, according to the United States Supreme Court, an unremarkable feature of everyday commerce and, thus, is not a false pretense or misrepresentation. See, e.g., Williams v. United States, 458 U.S. 279, 102 S.Ct. 3088, 73 L.Ed.2d 767 (1982). As defined in the Uniform Commercial Code, a check is simply “a draft drawn on a bank and payable on demand, “ which “contain (s) an unconditional promise or oeder to pay a certain sum of mney.” Wiliams, 458 U.S. at 284-85, 102 S.Ct. at 3091-92 (citations omitted). It is simply a promise on the part of the drawer to pay the check in the event it is dishonored by the bank. A.G. Edwards & Sons, Inc. v. Paulk (In re Paulk), 25 B.R. 913 (Bankr.M.D.Ga.1982). Thus, in order to establish the initial element of fraud, the plaintiff must prove that the debtor made a representation that the check was good. Hunt, 30 B.R. at 438, Pike, 79 B.R. at 44.

As Judge Mitchell wrote: (A)llowing the use of an insufficient funds check to automatically transform an otherwise innocent transaction into a fraudulent one would ignore commercial and consumer realities; honest people often write checks knowing that their funds are lacking, but do so with the honest belief that they will be able to make up the deficit before the check is presented.

In re Mahinske, 155 B.R. 547 (Bankr. N.D. Alabama, 1992) Here, Plaintiff argues that debtor committed actual fraud by issuing a check that was returned for insufficient funds. And, as a result, the debt to plaintiff is non-dischargeable under 11 U.S.C. § 523(a)(2)(A). Bankruptcy Code § 523(a)(2)(A) provides in pertinent part: (a) A discharge … does not discharge an individual debtor from any debt … (2) for money, property, services … to the extent obtained by… (A) false pretenses, a false representation, or actual fraud … In order for the Plaintiffs to prevail under this section, they must prove that: 1) The debtor obtained property through representations which the debtor either knew to be false or were made with such reckless disregard for the truth as to constitute willful misrepresentation; 2) The debtor possessed an intent to deceive; and 3) The creditor actually relied upon the false representation and that its reliance was reasonable.

In re Levitsky, 137 B.R. 288, 290 (Bankr.E.D.Wis.1992), citing In re Kimzey, 761 F.2d 421, 423 (7th Cir.1985). The plaintiff must establish the elements in a non-dischargeability action by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). Moreover, the creditor must prove “positive fraud, not merely fraud implied by law.” In re Anderson, 10 B.R. 296, 29 (Bankr.W.D.Wis.1981). 1. Plaintiffs must prove that Debtor made a “representation” as required by § 523(a)(2)(A). A check is not a representation of any kind. Williams v. U.S., 458 U.S. 279, 285–86, 102 S.Ct. 3088, 73 L.Ed.2d 767 (1982); In re Scarlata, 979 F.2d 521, 525 (7th Cir.1992); U.S. v. Doherty, 969 F.2d 425, 427 (7th Cir.1992). A check is simply the maker’s instruction to the bank to pay the face amount of the check to the bearer, and a promise on the part of the maker to pay the check in the event that it is dishonored by the bank. Williams, 458 U.S. at 285, 102 S.Ct. 3088.

Presentation of an NSF check alone simply does not constitute Non-dischargeable false representation, false pretenses or fraud under § 523(a)(2)(A). Many bankruptcy courts have so held. “The fact that a debtor knowingly issues an NSF check does not establish a misrepresentation.” In re Pokrandt, 54 B.R. 691, 692 (Bankr.W.D.Wis.1985). Thus, in an NSF check case, the plaintiff must prove that the debtor made an express representation that the check was good, other than the issued check itself. In re Hunter, 83 B.R. 803, 804 (M.D.Fla.1988); In re Horwitz, 100 B.R. 395, 399–400 (Bankr.N.D.Ill.1989) (“Debtor’s issuance of checks to Plaintiff, without more, does not constitute a false representation within the meaning of the Bankruptcy Code § 523(a)(2)(A).”)

Plaintiffs must offer evidence of a misrepresentation made by the Debtor at the time the checks were presented, other than the issuance of the NSF check itself. § 523(a)(2)(A).

2. Plaintiffs must demonstrate that Debtor had the requisite intent to defraud the Plaintiffs at the time of the issuance of the NSF checks.

Even if proof of an actual misrepresentation, arguendo, is not necessary to find a debt non-dischargeable, fraudulent intent on the debtor’s part must be shown in order to establish the requisite fraud under § 523(a). McClellan v. Cantrell, 217 F.3d 890, 894 (7th Cir.2000). If there is room for an inference of honest intent, the issue of intent must be resolved in favor of the debtor. Rembert v. Citibank South Dakota, N.A., 219 B.R. 763, 767 (E.D.Mich.1996), aff’d, 141 F.3d 277 (6th Cir.1998), cert. denied, 525 U.S. 978, 119 S. Ct. 438, 142 L.Ed.2d 357 (1998).

In order for the Court to find an intent to deceive, Plaintiff must establish actual, as opposed to constructive, intent. Wilson v. Mettetal (In re Mettetal), 41 B.R. 80 (Bankr.E.D.Tenn.1984). Where there is room for an inference of honest intent, the question of fraudulent intent must be resolved in favor of the debtor. Id.; Norwest Plumbing & Heating v. Constantino (In re Constantino), 72 B.R. 231, 235 (Bankr. N.D. Ohio 1987). Here, Plaintiff has failed to present any evidence of fraudulent intent. See Hunt, 30 B.R. at 443; Save–On Oil Co., Inc. v. Wise (In re Wise), 6 B.R. 867, 870 (Bankr.M.D.Fla.1980).

Proof of intent for purposes of § 523(a)(2)(A) must be measured by a debtor’s subjective intention at the time of the transaction in which the debtor obtained the money, property or services. In re Iaquinta, 95 B.R. 576, 578 (Bankr.N.D.Ill.1989). Therefore, subsequent acts of fraud or omission do not establish that the debtor had the requisite intent at the time the representations were made. Citibank (S.D.) v. Harris (In re Harris), 203 B.R. 117, 121 (Bankr.N.D.Ill.1996). This is because the debtor may have had the appropriate intention at the time of the transaction, but failed to act because of a change in the debtor’s circumstances. Id.

3. Plaintiffs must prove that they justifiably relied on a misrepresentation.

The bankruptcy court’s analysis in the case of Wise, 6 B.R. at 870, in which Chief Judge Paskay stated as follows in finding a debt non-dischargeable: The record further reveals that the method of payment utilized in this case, to wit: a check, was always written to cover deliveries actually made during the previous week and it is, therefore, difficult to fathom the role, if any, the particular NSF checks in question played in the [plaintiff’s] decision making process to deliver gasoline to the station. Under such circumstances, this court is satisfied that [the plaintiff] has not demonstrated sufficiently, within the meaning of Sec. 523(a)(2), that it reasonably relied on the representation made by the debtor when the debtor signed the NSF check. (underlined emphasis).

4. Conclusion

Plaintiffs must meet their burden under Rule 7056 to present any evidence on the material necessary factual issues required under a claim of a fraud exception to discharge under 11 U,S,C, 523(a)(2). They must establish by clear and convincing evidence an entitlement to non-dischargeability.