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84-4-216. Insolvency and preference. (a) If an item is in or comes into the possession of a payor or collecting bank that suspends payment and the item has not been finally paid, the item must be returned by the receiver, trustee, or agent in charge of the closed bank to the presenting bank or the closed bank's customer.

(b) If a payor bank finally pays an item and suspends payments without making a settlement for the item with its customer or the presenting bank which settlement is or becomes final, the owner of the item has a preferred claim against the payor bank.

(c) If a payor bank gives or a collecting bank gives or receives a provisional settlement for an item and thereafter suspends payments, the suspension does not prevent or interfere with the settlement's becoming final if the finality occurs automatically upon the lapse of certain time or the happening of certain events.

(d) If a collecting bank receives from subsequent parties settlement for an item, which settlement is or becomes final and the bank suspends payments without making a settlement for the item with its customer which settlement is or becomes final, the owner of the item has a preferred claim against the collecting bank.

History: L. 1965, ch. 564, § 223; L. 1991, ch. 296, § 97; February 1, 1992.


This section is identical to the 1995 Official Text. It is derived from and closely follows the former 84-4-213. The cross references in the former provision to former 84-4-211 and 84-4-213 (now 84-4-213 and 84-4-215) in subsection (c) have been deleted to avoid the impression that final settlement can occur only under those provisions. The other amendments are stylistic and are not meant to change the substantive law.

When a bank suspends payment, it will be in possession of items as to which it is a depositary bank for some items, an intermediary bank as to others, a presenting bank as to others and a payor bank as to still others. This section establishes a body of rules under which some items are stopped (subsection (a)) and others which have progressed further may continue to be processed (subsection (c)). It also provides preferential rights for various parties as to the items for which processing continues and as to items which have been finally paid, but for which there has not been a final settlement. (84-4-104(a)(11)). The "trust fund" theory of the old Bank Collection Code is abandoned by this section as is a similar theory, employed frequently in Kansas decisional law, which has been difficult to apply consistently. Compare, e.g., Goodyear Tire & Rubber Co. v. Hanover State Bank, 109 K. 772, 204 P. 992 (1921) with Amberg Schwab & Co. v. Commercial State Bank, 137 K. 902, 22 P.2d 442 (1933).

As the Official Comment 3 notes, this section will not apply to national banks, barring an amendment to the National Bank Act or an overruling of Jennings v. United States Fidelity & Guaranty Co., 294 U.S. 216 (1935), holding a comparable provision of the Indiana Bank Collection Code to be in conflict with Federal law.

Revisor's Note:

In 1991 former section 84-4-214 was transferred and reassigned to this number as a conforming amendment in the revision of article 3 of the code.

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