84-4-210. Security interest of collecting bank in items, accompanying documents and proceeds. (a) A collecting bank has a security interest in an item and any accompanying documents or the proceeds of either:
(1) In case of an item deposited in an account, to the extent to which credit given for the item has been withdrawn or applied;
(2) in case of an item for which it has given credit available for withdrawal as of right, to the extent of the credit given, whether or not the credit is drawn upon or there is a right of charge-back; or
(3) if it makes an advance on or against the item.
(b) If credit given for several items received at one time or pursuant to a single agreement is withdrawn or applied in part the security interest remains upon all the items, any accompanying documents or the proceeds of either. For the purpose of this section, credits first given are first withdrawn.
(c) Receipt by a collecting bank of a final settlement for an item is a realization on its security interest in the item, accompanying documents and proceeds. So long as the bank does not receive final settlement for the item or give up possession of the item or possession or control of the accompanying documents for purposes other than collection, the security interest continues to that extent and is subject to article 9, but:
(1) No security agreement is necessary to make the security interest enforceable (K.S.A. 2024 Supp. 84-9-203(b)(3)(A), and amendments thereto);
(2) no filing is required to perfect the security interest; and
(3) the security interest has priority over conflicting perfected security interests in the item, accompanying documents, or proceeds.
History: L. 1965, ch. 564, § 217; L. 1991, ch. 296, § 91; L. 2000, ch. 142, § 146; L. 2007, ch. 90, § 63; July 1, 2008.
KANSAS COMMENT, 1996
This section is identical to the 1995 Official Text. This section is a very slightly modified version of the former 84-4-208. The word "collecting" was added at the beginning of subsection (a) for clarification. The other amendments are stylistic and are not meant to change the substantive law.
This section, along with 84-4-211, provides that a depositary bank gives value for holder in due course status when it allows its customer to draw against uncollected funds. Under this section, the bank has a security interest to the extent that the funds are withdrawn, and under the next section it has given "value" to the extent of its security interest. If the other elements of holder in due course are satisfied, the depositary bank can enforce the check despite the drawer's personal defenses. 84-4-205 now provides that the bank is a holder, even without indorsement, if it took the instrument from a holder. As a holder in due course the bank becomes more than a mere collection agent, its normal status under 84-4-201.
To illustrate the operation 84-4-210 and 84-4-211 and the new provisions of 84-4-205, assume that a buyer signs and delivers a check for $1500 for goods sold by the seller. The seller mails it without indorsement to the depositary bank and later withdraws the uncollected funds, as allowed by the bank. When the buyer discovers that the goods are defective she stops payment, and the drawee bank returns the dishonored check to the depository bank. The depositary bank is unable to charge the item back to the seller, who has left or is insolvent. This section, read in conjunction with the next section, provides that the depositary bank has given "value" for holder in due course purposes to the extent of the full $1500 which was withdrawn by the seller. The bank is a holder by virtue of 84-4-205. If the depositary bank can also prove that it took the check in good faith and without notice, it can qualify as a holder in due course of a negotiable instrument under 84-3-302, and enforce the check against the hapless drawee free from the defense of fraud or failure of consideration "claims in recoupment" under the provisions of the new 84-3-305(b). The bank has the protected status of a holder in due course even if the underlying sales transaction involved a consumer-drawer, since the Kansas Uniform Consumer Credit Code does not cover bank checks. See K.S.A. 16a-3-404, 16a-1-301(10), 16a-1-301(11) and 16a-1-301(13). Although this rule is harsh on the innocent drawer of the check, and in effect rewards the depositary bank for allowing its customer to draw against uncollected funds, it is consistent with the ancient doctrine of negotiability. For representative cases supporting the depositary bank's status as holder in due course, see Washington Trust Co. v. Fatone, 244 A.2d 848 (R.I. 1968) (value given even though withdrawal made by joint depositor who was not payee of check); Universal C.I.T. Credit Corp. v. Guaranty Bank & Trust Co., 161 F. Supp. 790 (D. Mass. 1958); Frantz v. First National Bank of Anchorage, 584 P.2d 1125 (Alaska 1978) (depositary bank can qualify as holder in due course even though it has knowledge of financial reverses of its depositor).
Subsection (b) contains two rules, the simultaneous credit rule and a codification of the "first-in-first-out" rule, which Kansas decisional law followed prior to enactment of the UCC. State Savings Bank v. Krug, 108 K. 108, 193 P. 899 (1920). The simultaneous credit rule provides that if several items are received together and a partial credit against them is taken, there is a security interest in all the items. The FIFO rule is straightforward. If a depositor has $500 in his account, deposits a $200 check, and then withdraws $200, no value has been given for the deposited check because the credit drawn upon ($500) existed before the $200 check was deposited. To vary the facts somewhat, if a depositor has $500 in his account, deposits one check for $700 and another for $300, and then withdraws $1200, the depositary bank could be a holder in due course only with respect to the $700 check.
Subsection (c) provides that the "security interest" is statutory, there is no need to perfect under Article 9 and it is self-liquidating, but subject to Article 9.
Revisor's Note:
In 1991 former section 84-4-210 was transferred to 84-4-212 as a conforming amendment in the revision of article 3 of the code and the number reassigned to former section 84-4-208.
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