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It means that the bank's right to negotiate the check on your behalf has been cancelled. This could be due to the bank believing that the endorsement is fraudulent, so I wouldn't necessarily jump to the conclusion that the tenant has stopped payment on the check.
If it turns out that the check was stopped, that doesn't make the tenant criminally liable for passing a bad check, unless there is evidence that the account had insufficient funds at the time that the check was tendered to you.
Regardless, if the tenant doesn't pay rent on time, then you have the right to give three-day's notice in writing and then commence an unlawful detainer action.
Hope this helps.
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Why was it returned unpaid?
A: Either because the payor stopped payment or because the bank thinks that your endorsement is forged.
Would not passing a fraudulent check be criminal?
A: Under Penal Code 476a, the payee must have the specific intent to pass a bad check, based on that person's advance knowledge that there is insufficient funds in the account upon which the check is drawn. An NSF report from a bank is presumptive evidence of specific intent to pass a bad check, but the presumption is not conclusive. A jury must still determine from the facts of the case that the payor intended to pass a bad check. The bare fact that the check was drawn on an NSF account does not automatically prove guilt.
Probably more info than you wanted to know, but that's the legal theory.
Who handles bad checks?
A: Local police/sheriff. You can certainly report it, and law enforcement will investigate.