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84-3-307. Notice of breach of fiduciary duty. (a) In this section:

(1) "Fiduciary" means an agent, trustee, partner, corporate officer or director, or other representative owing a fiduciary duty with respect to an instrument.

(2) "Represented person" means the principal, beneficiary, partnership, corporation, or other person to whom the duty stated in paragraph (1) is owed.

(b) If (1) an instrument is taken from a fiduciary for payment or collection or for value, (2) the taker has knowledge of the fiduciary status of the fiduciary, and (3) the represented person makes a claim to the instrument or its proceeds on the basis that the transaction of the fiduciary is a breach of fiduciary duty, the following rules apply:

(A) Notice of breach of fiduciary duty by the fiduciary is notice of the claim of the represented person.

(B) In the case of an instrument payable to the represented person or the fiduciary as such, the taker has notice of the breach of fiduciary duty if the instrument is (i) taken in payment of or as security for a debt known by the taker to be the personal debt of the fiduciary, (ii) taken in a transaction known by the taker to be for the personal benefit of the fiduciary, or (iii) deposited to an account other than an account of the fiduciary, as such, or an account of the represented person.

(C) If an instrument is issued by the represented person or the fiduciary as such, and made payable to the fiduciary personally, the taker does not have notice of the breach of fiduciary duty unless the taker knows of the breach of fiduciary duty.

(D) If an instrument is issued by the represented person or the fiduciary as such, to the taker as payee, the taker has notice of the breach of fiduciary duty if the instrument is (i) taken in payment of or as security for a debt known by the taker to be the personal debt of the fiduciary, (ii) taken in a transaction known by the taker to be for the personal benefit of the fiduciary, or (iii) deposited to an account other than an account of the fiduciary, as such, or an account of the represented person.

History: L. 1991, ch. 296, § 33; February 1, 1992.

KANSAS COMMENT, 1996

This section is identical to the 1995 Official text except that lower case Roman numerals have been replaced by capital letters in subsection (b). It is derived from, and a complete rewriting of the former 84-3-304(4)(e). Historical case and statutory references may be obtained from the 1965 or 1983 bound Volume 7 of the Kansas Statutes Annotated.

This section should be read with 84-3-206 and 84-3-420, dealing with restrictive indorsements and conversion, respectively.

Subsection b. Paragraph (A) provides that if a person has notice that a fiduciary is dealing with an instrument contrary to that person's fiduciary duty, it is also notice of a claim by the person represented by that fiduciary. This will also prevent holder in due course status. 84-3-302(a)(2). Paragraph (B) deals with instruments payable to the fiduciary or represented person, while paragraphs (C) and (D) deal with instruments issued by the fiduciary.

Paragraph (B) deals with the fiduciary using an instrument for the fiduciary's individual benefit or obligation, which is consistent with prior law. All three subparagraphs, but especially (iii), however, effectively provide that if a transferee permits a fiduciary to directly reimburse himself or herself from instruments coming to the represented person, the transferee will be a mere holder on notice of a possible claim of the represented person, and takes subject to any claims the person represented may have. In addition, because the transferee would have notice, the transferee would be a mere holder, apparently taking subject to any claims or defenses. To be protected, the transferee must insist that the fiduciary deposit the incoming item in the fiduciary account and then write a check from that account to fiduciary in the fiduciary's individual capacity, the proper way to conduct a fiduciary account. Thus, if an inter vivos trust owes the trustee $500 for expenses, and the trustee receives a dividend check for $250, the depository bank (or any other transferee) will "have notice of the claim of the represented person" (84-3-307(b)(A)) if the trustee deposits the check in a personal account or uses it for his benefit.

Paragraph (D) creates a similar rule for instruments issued by the fiduciary as a fiduciary or by the represented person to the payee as taker. If the instrument is either used for a personal debt of the fiduciary, or is used in a transaction benefitting the fiduciary personally, either to acquire some personal benefit or is deposited in the fiduciary's personal account, the taker has notice and can not be a holder in due course. The result is that banks and businesses dealing with a fiduciary, and taking a check from the person represented by the fiduciary or from the fiduciary, will be on notice if the transaction is, or could be for the benefit of the fiduciary, a fact pattern which could cover many transactions. Applying such an instrument to the fiduciary's personal debt, such as a mortgage, is an obvious example. It could also cover many normal transactions, such as travel, support, or supplies, which might be for the represented person, or might not, and might be for the personal benefit of the fiduciary. The first two subparagraphs, (i) and (ii), require that the transaction is "known" to be for the personal benefit of the fiduciary, and 84-1-201(25) requires actual knowledge. Under subparagraph (iii), however, any deposit in the fiduciary's personal account is knowledge of a breach.

Paragraph (C) represents the safe harbor for any person dealing with the fiduciary, requiring customary bookkeeping methods. It effectively requires third parties to require the fiduciary to deposit all incoming items in the fiduciary account and to issue instruments to the fiduciary in her or his personal capacity. This will make it much easier for the represented person to discover malfeasance.

Revisor's Note:

Former section 84-3-307 was repealed by L. 1991, ch. 296, § 111 and the number reassigned to the current text.

CASE ANNOTATIONS

1. UCC held inapplicable, but if so, bank required to have actual knowledge of trustee's misconduct to be liable. Wetherill v. Bank IV Kansas, N.A., 145 F.3d 1187, 1193 (1998).


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