Consumer Protection; collection agencies; service charges for returned checks.

Subject:

Consumer Protection; collection agencies; service charges for returned checks.

Requested By:

W. Kenneth Brown, Deputy Commissioner and Director of Consumer Services North Carolina Department of Insurance

Questions:

(1)

May retail merchants charge a service fee for returned checks?

(2)

Does a collection agency have the right to collect such a service charge on behalf of a client?

Conclusions:

(1)

Under certain circumstances.

(2)

Only if there is an express agreement between the merchant and customer authorizing such a fee.

Retail merchants may charge a service fee for checks returned for insufficient funds only if there is some legal basis for that fee. There is no North Carolina statute which specifically permits the collection of such a fee. Indeed, the only statute that speaks to this question at all is G.S. 6-21.3, which provides as follows:

"In an action by a holder to recover the sum payable of a check drawn by the defendant on which payment has been refused by the payor bank because the drawer had no account or insufficient funds, upon a determination that the plaintiff has prevailed the presiding judge or magistrate shall add to the amount due to the plaintiff the sum of five dollars ($5.00) to defray the costs of processing the returned check, and the presiding judge or magistrate shall tax to the defendant, as part of the court cost payable, a reasonable attorney’s fee to the duly licensed attorney representing the plaintiff in such suit upon a finding (i) that a least 10 days prior to instituting the action the plaintiff mailed the defendant written notice at the defendant’s last known address of the intent to file such suit if payment for the check was not received, and (ii) that the defendant failed to deliver payment or evidence of bank error to the plaintiff within 10 days after mailing of such notice." (Emphasis added)

This statute provides for a service fee at the successful conclusion of a lawsuit. However, it provides no basis for a fee unless a lawsuit is actually filed. See 47 N.C.A.G. .

Therefore, if it is permissible for a merchant to charge this fee before a lawsuit is filed, it can only be on the basis of general contract law. In your letter requesting this opinion, you noted that some merchants believe they are entitled to collect a fee on the basis of an implied contract. This is not correct. Implied contracts (at least formally speaking) are part of the law of restitution. Essentially, this body of law allows a plaintiff to recover the amount by which the defendant has been unjustly enriched. See 66 Am. Jur. 2d, Restitution and Implied Contracts, § 166. In other words, the purchaser would be required to pay the merchant the amount of the returned check, but would not be required to pay an additional penalty or fee.

However, there are at least three theories of contract under which a collection charge could arguably be made. The first is based on the assumption that the merchant and customer contract for the sale of goods — the merchant promises to deliver the goods in return for the customer’s promise to pay a stated price. If the customer pays for the goods with a check that turns out to be worthless, he has failed to pay as promised. Therefore, he has breached the contract, and the merchant is entitled to damages.

"For a breach of contract the injured party is entitled as compensation therefore to be placed . . . in the same position he would have occupied if the contract had been performed. The amount that would have been received if the contract had been kept and which will completely indemnify the injured party is the true measure of damages for the breach. Where one violates his contract he is liable for such damages, including gains prevented as well as losses substained, which may fairly be supposed to have entered into the contemplation of the parties when they made the contract. Perfecting Service Co. v. Product Development & Sales Co., 259 NC 400, 131 S.E.2d 9 (1963).

Under this theory, the merchant would be entitled to recover, in addition to the amount of the check, the actual expenses which result from having accepted a worthless check.

The second theory assumes that the merchant posts a conspicuous sign indicating that a fee (say $5.00) will be charged for returned checks. If the customer sees the sign and assents to the condition, it becomes part of the contract for the sale of goods. In essence, the sign becomes a liquidated damages provision of the contract — an agreement that if the customer’s check turns out to be worthless, the customer will be liable to the merchant for $5.00, a reasonable estimate of the merchant’s damages.

The third theory also assumes a conspicuously posted sign, seen and assented to by the customer. In this theory, however, the sign becomes the basis of a separate contract with the customer — the merchant agrees to accept the customer’s check in return for the customer’s promise to pay $5.00 if the check turns out to be worthless.

While a merchant might arguably recover a fee on any of these theories, one of two problems is likely to arise in each case. First, if there is no sign posted, it is unclear how much the merchant is entitled to collect. Second, in those cases in which there is a sign, it is difficult to determine whether the customer has seen the sign and assented to it. These problems are important to the merchant, because they cause uncertainty. However, they are even more significant to collection agencies because of the various laws and regulations governing that industry.

For example, Title VII of the federal Consumer Credit Protection Act, 15 U.S.C. § 1601 et seq., imposes two restrictions on collection agencies that are applicable here. 15 U.S.C. § 807(2)(A) prohibits "(t)he false representation of the character, amount, or legal status of any debt." If the fee is questionable, (as it often is) and the collection agency sends a bill which implies that the customer is legally obligated to pay the additional fee, the agency misrepresents the legal status of the debt. 15 U.S.C. § 808(1) forbids "(t)he collection of any amount (including any interest, fee, charge, or expense incidental to the principle obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law." The first contract theory noted above fails to expressly authorize a fee. The theories which are premised on a posted sign fail to create any agreement, express or otherwise, unless the customer has seen and assented to the sign. We do not believe a posted sign can fairly be said to create an express agreement unless some manifestation of assent, either orally or in writing, is made by the customer.

While it is permissible for a merchant to charge and collect a fee if he can show a contract basis for such a fee, it is not permissible for a collection agency to seek to collect the fee unless there is an express agreement between the merchant and customer which calls for such a fee. Whether or not there is an express agreement depends upon the circumstances of each case. While we have noted our opinion that an express agreement requires some manifestation of assent, the criteria for determining whether there has been assent is a proper matter for rulemaking by the Department of Insurance, pursuant to G.S. 66-46.

Rufus L. Edmisten Attorney General

Alan Hirsch Assistant Attorney General