Recovery of Attorney’s Fees Available for Holders Suing on Dishonored Checks

In ½ Price Checks Cashed v. United Automobile Insurance Company, 344 S.W.3d 378 (Tex. 2011), the Texas Supreme Court decided that the holder of a dishonored check suing under Article 3 of the UCC 1 is allowed to recover attorney’s fees under Chapter 38 of the Texas Civil Practice and Remedies Code.2


1             Section 3.414(b) of the Texas Business & Commerce Code (UCC) specifically provides that if an unaccepted draft is dishonored, the drawer is obligated to pay the draft according to its terms at the time it was issued or, if not issued, at the time it came into possession of a holder—the obligation being owed to any person entitled to enforce the draft.


2           Section 38.001(8) of the Texas Civil Practice and Remedies Code allows a claimant to recover attorney’s fees in a suit on a contract.


In ½ Price Checks Cashed, the check’s holder successfully sued the drawer in justice court for the drawer’s breach of its obligation to pay a dishonored check and was awarded attorney’s fees.  The drawer appealed de novo to the County Court at Law and the County Court at law granted summary judgment for the holder. The drawer then appealed the issue of attorney’s fees to the Dallas Court of Appeals.  That appeals court reversed the County Court at Law, concluding that Chapter 38 of the Texas Civil Practice and Remedies Code does not apply to an action on a dishonored check because an action on a dishonored check is “purely statutory” and not a claim on a contract.  The Texas Supreme Court disagreed.3


3              An interesting aspect of this case is the question of jurisdiction.  The general rule is that the Texas Supreme Court lacks jurisdiction over a suit appealed from a county court or from a district court under which a county court would have original or appellate jurisdiction of the case.  An important exception to this rule, however, is when one court of appeals holds differently from a prior decision of another court of appeals or of the Texas Supreme Court itself.


            After providing a detailed history of Chapter 38’s underlying purpose, the Court addresses the question of whether a check is a contract.  First the Court cites to the UCC’s definition of a negotiable instrument: “A negotiable instrument is an unconditional promise or order to pay a fixed amount of money.”  Tex. Bus. & Com. Code § 3.104(a).  Second, the Court compares this definition with the Restatement of Contracts and observes how the UCC definition “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.’”4 In short, the Court concludes that a check is a contract because a check includes a drawer’s unconditional promise to pay the holder of the instrument, which promise is manifested by the drawer’s signature on the check. 


4          Citing Restatement (Second) of Contracts § 1 (1981).


            Relying on the above rationale, the Court then returns to the question whether a suit on a check under Article 3 of the UCC is itself a suit on a contract—thus allowing for the recovery of attorney’s fees under Chapter 38 of the Texas Civil Practice & Remedies Code.  In its analysis, the Court makes two additional points:  First, the Court cites the “economic loss rule,” characterizing the holder’s action as sounding in contract because the only injury is the “economic loss to the subject of the contract itself.”  Indeed, just because the holder of a dishonored check is suing under a statutory provision does not mean that the damages are not contractual in nature.  And, second, the Court notes that by allowing the recovery of the attorney’s fees in this context (which would otherwise available in any common law breach of contract action) it is not disrupting the UCC’s comprehensive statutory scheme, but merely supplementing it—which was expressly contemplated by the legislature.  E.g.Tex. Bus. & Com. Code § 1.103(b) (providing that the code is to be supplemented by principles of law unless otherwise displaced a specific provision in the code).