What happens to the gun?

He stole your gun. The fact that he sent you a check for it is no defense. Intent to pay for or replace the property is no defense to larceny.

I would not cash the check and I would file a police report.

In my opinion the check is no different restitution paid to a crime victim.

It was your property and he wrongfully took it and converted it with the intent to permanently deprive you of its use.

If a thief steals your gun, sells it, and then sends you a check for the gun he is still guilty of stealing the gun.
 
If it can be determined that what this FFL dealer did was a crime of theft, I’d have a serious talk with him, and give him one more chance to pay you in full the original cost of the firearm. In some, maybe most states, theft of a firearm is an instant class 3 felony no matter the value of the firearm. I believe if a FFL holder commits a felony, he looses his license. Tell the guy that you plan to pursue charges of theft, and tell him he may loose his FFL. I would bet he’ll pay you everything back.
 
Don't worry about small claims court since the County Attorney may be able to help you for a small fee. Here it is around $10 to file a complaint to someone, and the county attorney will do all of the work for you.

Also, you can report the dealer to the ATF and he will get inspected. I have no patience for a dirty gun dealer.
 
It wasn't legally his property to sell. He may have had a case if it was considered "abandoned", but you were in contact with him so that wasn't the case. The worst case would have been a storage fee, and that would have to be clearly listed as part of his transfer process if something like this happened.
 
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