If a customer pays a North Carolina retail merchant with a check that bounces, can the merchant tack on a $5 (or similar) service fee for processing the returned check? And if so, can a collection agency that takes over the account collect that service fee from the customer?

Plain-English summary

The Deputy Commissioner of the Department of Insurance, who supervised collection agencies under Chapter 66, asked the AG a pair of practical consumer-protection questions about returned-check service fees. Many North Carolina retail merchants in 1978 wanted to charge a $5 or similar fee when a customer's check bounced. The questions: was that lawful at all, and if so, could a collection agency take over the account and pursue the fee?

The 1978 AG's answer is layered.

The pre-suit fee under G.S. 6-21.3. The statute provides a $5 fee, but only at the conclusion of a successful collection lawsuit. The judge or magistrate adds the $5 to the amount due "upon a determination that the plaintiff has prevailed," to defray "the costs of processing the returned check." There is also a fee-shifting provision for reasonable attorney's fees, conditioned on (i) at least 10 days' pre-suit written notice mailed to the defendant at the last known address, and (ii) failure of the defendant to deliver payment or evidence of bank error within 10 days of mailing. The opinion is clear that G.S. 6-21.3 does not authorize a fee unless a lawsuit is actually filed.

Pre-suit fees on contract theory. Outside of G.S. 6-21.3, a merchant can recover a returned-check fee only on a contract theory. The AG works through four possibilities:

1. Implied contract (restitution). No. Restitution recovers the amount by which the defendant has been unjustly enriched (citing 66 Am. Jur. 2d, Restitution and Implied Contracts § 166). The customer would owe the amount of the check but no additional penalty.

2. Breach of the sale contract. Yes, possibly. When the customer pays for goods with a worthless check, the customer has breached the contract and is liable for damages. The damages measure is what would put the merchant in the position he would have occupied if the contract had been performed (citing Perfecting Service Co. v. Product Development & Sales Co., 259 N.C. 400, 131 S.E.2d 9 (1963)). The merchant can recover actual expenses from accepting the worthless check. But the amount is uncertain in advance.

3. Liquidated damages via posted sign. Yes, conditionally. A conspicuously posted "$5 returned check fee" sign, seen and assented to by the customer, can function as a liquidated-damages provision of the sales contract. The customer's act of accepting the goods knowing the sign becomes assent to the liquidated damages.

4. Separate contract via posted sign. Yes, conditionally. The sign, seen and assented to by the customer, can also constitute a separate contract: the merchant agrees to accept the check in exchange for the customer's promise to pay $5 if the check turns out to be worthless.

The conditionality is critical. The two posted-sign theories require that the customer have actually seen the sign and manifested assent (orally or in writing). A sign hanging on the wall, by itself, does not create an express agreement.

The collection agency overlay. Even where a merchant might lawfully recover a fee on one of these theories, the collection agency is subject to additional federal restrictions:

• 15 U.S.C. § 807(2)(A) prohibits the false representation of the character, amount, or legal status of any debt. A collection agency that bills for a fee whose legal basis is questionable misrepresents the legal status of the debt.
• 15 U.S.C. § 808(1) prohibits collecting any amount (interest, fee, charge, or expense incidental to the principal obligation) unless "expressly authorized by the agreement creating the debt or permitted by law."

The first contract theory (pure breach-of-contract damages) does not "expressly authorize" the fee in the agreement. The posted-sign theories require manifested assent to amount to an express agreement; a sign alone does not.

Bottom line for collection agencies. A collection agency can pursue a returned-check fee only if there is an express agreement between the merchant and customer authorizing the fee. Whether such an express agreement exists depends on the facts of each transaction. The Department of Insurance has rulemaking authority under G.S. 66-46 to establish criteria for what counts as an express agreement.

Currency note

This opinion was issued in 1978. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. G.S. 6-21.3 has been amended multiple times since 1978, including increases to the processing fee. The federal Fair Debt Collection Practices Act (now codified at 15 U.S.C. §§ 1692-1692p) has been amended significantly. State and federal courts have continued to develop the law on bad-check fees and collection practices. Anyone advising a merchant or collection agency today should consult current statutory text, current Fair Debt Collection Practices Act provisions, and recent State court decisions on contract formation through posted signs.

Historical context: what the AG concluded

The opinion's value is in working through the basis for a returned-check fee that many merchants had treated as automatic. The AG drew bright lines:

G.S. 6-21.3 is a post-judgment fee, not a pre-suit charge. The statute attaches the $5 fee to a successful lawsuit. A merchant who tries to collect $5 without filing suit is not invoking G.S. 6-21.3; the merchant must rely on contract law.

Implied contract does not authorize the fee. Implied contracts in North Carolina law are restitution claims, which recover unjust enrichment but not penalties. A returned check does not unjustly enrich the customer beyond the price of the goods. So implied contract recovers the check amount only, not a fee.

Breach of contract gives actual damages, not a fixed fee. Under Perfecting Service Co., breach damages put the injured party in the position he would have occupied if the contract had been performed. The merchant's actual expenses (bank charges, postage, staff time) are recoverable, but the amount has to be proven in each case. A merchant cannot simply pick $5 as the number.

Posted signs work only with assent. The opinion is structurally important here. North Carolina contract law requires assent. A sign hanging on the wall of a store is an offer for liquidated damages or a separate sub-contract; the customer has to accept that offer for it to bind. The AG would not treat the mere existence of a sign as creating an enforceable agreement. There has to be some manifestation of assent (orally or in writing).

Collection agencies face heightened federal restrictions. A collection agency that pursues a doubtful fee triggers 15 U.S.C. § 807(2)(A) (false representation of legal status) and § 808(1) (collection without express authorization). The federal Fair Debt Collection statute was relatively new in 1978 and was beginning to constrain industry practices that had been routine.

The rulemaking path. G.S. 66-46 gives the Department of Insurance rulemaking authority over collection agencies. The AG points to that authority as the proper vehicle for establishing what counts as an express agreement under the federal statute. The Department could, for example, require that the customer's signature appear on a notice of the returned-check fee at the point of sale.

For a small-business merchant in 1978, the practical takeaway was: charging a $5 returned-check fee was lawful if (and only if) the merchant could prove the customer agreed to it, either by signing a notice, initialing a sign, or otherwise manifesting assent. A unilateral sign was not enough. For a collection agency, the practical takeaway was even sharper: do not pursue a returned-check fee unless the merchant can document an express agreement, or face federal liability under the Consumer Credit Protection Act.

Common questions

Is a $5 bad-check fee automatically lawful in North Carolina?

No, not under the 1978 reading. G.S. 6-21.3 attaches the $5 to a successful lawsuit, not to a pre-suit invoice. Any pre-suit fee has to rest on a contract theory between the merchant and the customer.

Does a sign at the register saying "$5 charge for returned checks" make the fee enforceable?

Only if the customer has seen the sign and assented to it. The AG was explicit: "a posted sign cannot fairly be said to create an express agreement unless some manifestation of assent, either orally or in writing, is made by the customer."

Can a collection agency add a $5 fee when collecting on a bad check?

Only if the merchant and customer have an express agreement authorizing the fee. Without an express agreement, the collection agency risks violating 15 U.S.C. § 807(2)(A) (false representation of legal status of debt) and § 808(1) (collection of unauthorized amount).

What does an express agreement look like?

The AG left specifics to Department of Insurance rulemaking under G.S. 66-46. A signed point-of-sale notice or an initialed disclosure would be safer than a hanging sign. The criterion is a "manifestation of assent" from the customer.

What if the merchant just sues the customer?

Then G.S. 6-21.3 applies. On a successful suit the court adds $5 for returned-check processing, and (with proper pre-suit notice and 10-day default) a reasonable attorney's fee can be taxed against the defendant.

Why does federal law matter for a North Carolina collection agency?

Title VII of the Consumer Credit Protection Act (now generally the Fair Debt Collection Practices Act) applies to collection agencies operating in North Carolina. 15 U.S.C. § 807(2)(A) and § 808(1) restrict what a collection agency can claim and collect. The federal restrictions operate independently of state law and create their own liability exposure.

Background and statutory framework

The state statute. G.S. 6-21.3 authorizes a $5 returned-check processing fee and reasonable attorney's fee after a successful collection lawsuit, subject to specific notice and default conditions.

The state collection agency framework. Chapter 66 governs collection agencies in North Carolina, with the Department of Insurance as the supervisory authority. G.S. 66-46 provides the Department's rulemaking authority.

The federal collection statute. Title VII of the Consumer Credit Protection Act, 15 U.S.C. § 1601 et seq. (now generally the Fair Debt Collection Practices Act). 15 U.S.C. § 807(2)(A) prohibits false representations of debt status; § 808(1) prohibits unauthorized collections.

Contract doctrines. The AG draws on three doctrines: restitution (66 Am. Jur. 2d, § 166); breach of contract damages (Perfecting Service Co. v. Product Development & Sales Co., 259 N.C. 400 (1963)); and posted-sign / liquidated damages theory (a general contract principle requiring assent for offer acceptance).

Citations

• G.S. 6-21.3
• G.S. 66-46
• 15 U.S.C. § 1601 et seq.
• 15 U.S.C. § 807(2)(A)
• 15 U.S.C. § 808(1)
• Perfecting Service Co. v. Product Development & Sales Co., 259 N.C. 400, 131 S.E.2d 9 (1963)
• 66 Am. Jur. 2d, Restitution and Implied Contracts, § 166

Source

• Landing page: https://ncdoj.gov/opinions/consumer-protection-collection-agencies-service-charges-for-returned-checks/

Original opinion text

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