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84-3-420. Conversion of instrument. (a) The law applicable to conversion of personal property applies to instruments. An instrument is also converted if it is taken by transfer, other than a negotiation, from a person not entitled to enforce the instrument or a bank makes or obtains payment with respect to the instrument for a person not entitled to enforce the instrument or receive payment. An action for conversion of an instrument may not be brought by (1) the issuer or acceptor of the instrument or (2) a payee or endorsee who did not receive delivery of the instrument either directly or through delivery to an agent or a copayee.

(b) In an action under subsection (a), the measure of liability is presumed to be the amount payable on the instrument, but recovery may not exceed the amount of the plaintiff's interest in the instrument.

(c) A representative, other than a depository bank, who has in good faith dealt with an instrument or its proceeds on behalf of one who was not the person entitled to enforce the instrument is not liable in conversion to that person beyond the amount of any proceeds that it has not paid out.

History: L. 1991, ch. 296, ยง 57; February 1, 1992.

KANSAS COMMENT, 1996

This section is identical to the 1995 Official Text except that the lower case roman numerals have been replaced by arabic numbers. This section is derived from the former 84-3-419, which has been clarified. Historical case and statutory references can be obtained from the 1965 and 1983 bound volume 7 of the Kansas Statutes Annotated.

Under this section, the payee of a check who had received the check has a cause of action against all persons to whom the check was transferred after forged indorsement on a theory of conversion. The defendant could then move upstream against prior parties on a theory of breach of warranty of good title, and they in turn could sue prior parties. Thus, the loss will be left on the thief or the first solvent party downstream from the thief.

Subsection (a). A check is converted when it is taken over a forged indorsement (84-3-201(b)), where not all of the necessary persons have indorsed it (84-3-110) or where it is dealt with in violation of a restrictive indorsement (84-3-206).

The subsection now specifies who is the proper party to bring an action for conversion. Plaintiffs are generally restricted to the persons to whom the instrument is payable and who have received the instrument. The maker or drawer of the instrument is not a proper plaintiff, nor is the payee of an instrument which is not delivered. This is a codification of prior decisions.

Subsection (b). The damages are the face amount of the instrument. In a reversal of the majority of prior decisions, an owner can only recover the owner's interest in the instrument. This is a variation of the rule of 84-3-305(c) which would allow pleading the claims of others only if they are made a party to the action. The subsection does not discuss who has the burden of proof to prove ownership, and whether the question of ownership is part of the plaintiff's cause of action or an affirmative defense.

Subsection (c). This subsection is a clarification of the former 84-3-419(3) and makes clear the majority rule that depository banks can be held liable for conversion, lessening the number of suits which may be required to place the ultimate liability on the thief or the first solvent party downstream from the thief. The depository bank is liable to the drawee for breach of warranty of title if the owner sues the drawee. The depository bank must then sue its depositor.

Law Review and Bar Journal References:

"Education of Attorneys on Appeal and/or Cross Appeal," James Oliver, 78 J.K.B.A. No. 3, 21 (2009).

CASE ANNOTATIONS

1. Nonbank drawee treated as converter where attorney forged endorsement; attorney fees forfeited and recovery not reduced thereby. King v. White, 265 Kan. 627, 631, 638, 962 P.2d 475 (1998).

2. Drawer of check cashed nine years after drawn did not state conversion claim against bank. IBP, Inc. v. Mercantile Bank of Topeka, 6 F. Supp. 2d 1258, 1262 (1998).

3. Section bars an issuer from bringing suit for conversion of an instrument. Mid-Continent Specialists v. Capital Homes, 279 Kan. 178, 106 P.3d 483 (2005).

4. Cited in case upholding insurers denial of coverage for failure to disclose potential claim on application. American Special Risk Management Corp. v. Cahow, 286 Kan. 1134, 1136, 192 P.3d 614 (2008).


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