Printable Format84-4-207. Transfer warranties. (a) A customer or collecting bank that transfers an item and receives a settlement or other consideration warrants to the transferee and to any subsequent collecting bank that:
(1) The warrantor is a person entitled to enforce the item;
(2) all signatures on the item are authentic and authorized;
(3) the item has not been altered;
(4) the item is not subject to a defense or claim in recoupment (K.S.A. 84-3-305(a)) of any party that can be asserted against the warrantor;
(5) the warrantor has no knowledge of any insolvency proceeding commenced with respect to the maker or acceptor or, in the case of an unaccepted draft, the drawer; and
(6) if the item is a demand draft, creation of the item according to the terms on its face was authorized by the person identified as drawer.
(b) If an item is dishonored, a customer or collecting bank transferring the item and receiving settlement or other consideration is obliged to pay the amount due on the item (1) according to the terms of the item at the time it was transferred, or (2) if the transfer was of an incomplete item, according to its terms when completed as stated in K.S.A. 84-3-115 and 84-3-407, and amendments thereto. The obligation of a transferor is owed to the transferee and to any subsequent collecting bank that takes the item in good faith. A transferor cannot disclaim its obligation under this subsection by an endorsement stating that it is made "without recourse" or otherwise disclaiming liability.
(c) A person to whom the warranties under subsection (a) are made and who took the item in good faith may recover from the warrantor as damages for breach of warranty an amount equal to the loss suffered as a result of the breach, but not more than the amount of the item plus expenses and loss of interest incurred as a result of the breach.
(d) The warranties stated in subsection (a) cannot be disclaimed with respect to checks. Unless notice of a claim for breach of warranty is given to the warrantor within 30 days after the claimant has reason to know of the breach and the identity of the warrantor, the warrantor is discharged to the extent of any loss caused by the delay in giving notice of the claim.
(e) A cause of action for breach of warranty under this section accrues when the claimant has reason to know of the breach.
(f) If the warranty in subsection (a)(6) is not given by a transferor or collecting bank under applicable conflict of law rules, then the warranty is not given to that transferor when that transferor is a transferee nor to any prior collecting bank of that transferee.
History: L. 1991, ch. 296, § 88; L. 2005, ch. 58, § 6; July 1.
KANSAS COMMENT, 1996
This section is identical to the 1995 Official Text except that the lower case roman numerals in the text were replaced by arabic numbers. This is a new section derived from the transfer warranties in the former 84-4-207. The presentment warranties have been moved to the current 84-4-208.
These sections, 84-4-207 and 84-4-208, are vital in working out the liabilities in check forgery cases. They are very close to 84-3-416 and 84-3-417, and it is often useful to examine the comments and cases under those sections. 84-4-207 and 84-4-208 differ from Article 3 in that they are limited to "customers and collecting banks" and they cover "items," a broader category than the "instruments" governed by Article 3.
If the drawer's signature is forged on a check, a collecting bank which forwards the instrument for payment will be liable for breach of warranty, unless the drawer's negligence (84-3-406) facilitates the forgery. 84-4-207(a)(2).
By contrast, if a check is materially altered (e.g., raised from $58.20 to $8658.20), and the drawer is not negligent under 84-3-406 or 84-4-406, each collecting bank which forwards the item for collection will have breached its transferor warranty of 84-4-207(a)(3) that the item has not been altered. Each collecting bank can then sue prior transferors upstream in the collection process (84-4-207(a)(3)), and transferors prior to the collection process, if they transferred by indorsement and for consideration (84-3-416(a)(3)), on the warranty that the instrument has not been altered. These latter two sections provide that the transferor warrants to all the transferees (except the drawee bank, which is protected by 84-4-408 and 84-3-417) the lack of any material alteration with respect to each item flowing through the bank collection system. Thus each collecting bank can shift the loss upstream to its transferor, until the loss rests with the depositary bank or other party which took the item from the alterer. 84-4-207(2)(c).
Finally, if a check carries a forged indorsement, each collecting bank will be liable to the intended payee in conversion (84-3-420(a)), but can sue its transferor and their transferors, each of which warrants to its transferee that it is entitled to enforce the check. A forged indorsement breaches this warranty under 84-4-207(a)(1) and 84-3-216(a)(1). In summary, the warranties under this section allow the collecting banks to shift liability for forged drawer's signatures, forged indorsements and material alterations to prior collecting banks and to transferors by indorsement and for consideration before the check is deposited.
The Official Comment to this section refers to 84-3-416, which is nearly identical to this section. Official Comment 6 clearly contemplates recovery of attorney fees as part of a breach of warranty claim against prior collecting banks. The courts have generally upheld recovery of attorney fees even though the language appears in the Official Comment rather than in the text itself. See, e.g., Guaranty Bank & Trust Co. v. Federal Reserve Bank of Kansas City, 454 F. Supp. 488 (W.D. Okla. 1977).
Revisor's Note:
In 1991 former section 84-4-207 was repealed and the number reassigned to a new section.