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KANSAS COMMENT, 1996

This section is identical to the 1995 Official Text. The section is derived from, and is very similar to the former 84-4-302. The introductory clause has been clarified and moved to subsection (b) to ratify the results in several recent cases. The other amendments are stylistic and are not meant to change the substantive law.

This section provides the sanction to effectuate deferred posting under the previous section. Under the Code, a check is not normally an assignment of the drawer's funds (84-3-408), and the drawee bank is not liable to the holder of the check unless it issues its own check (84-3-412) or certifies the item (84-3-413). However, the drawee bank can also become directly accountable to the one entitled to enforce the instrument (normally the holder) by retaining it beyond midnight of the day of receipt without settling for it, or retaining it beyond the midnight deadline. Accountability for late return of an item arises even though the item is not properly payable as a charge against the customer's account (e.g., it creates an overdraft or violates a stop order).

Subsection (b) creates an exception to the foregoing rule. If there is a breach of a presentment warranty (84-4-208), such as a forged indorsement, a material alteration, or knowledge that the drawer's signature is unauthorized, the drawee may recover for breach of warranty. Subsection (b) also creates an exception where the person seeking to enforce the instrument was trying to defraud the payor. This codifies several recent decisions discussed in Official Comment 3.

What is the extent of this accountability? In the leading case, Rock Island Auction Sales, Inc. v. Empire Packing Co., 204 N.E.2d 721 (Ill. 1965), the drawee bank held an item seven days after presentment, with the worthy motive of protecting its customer's credit on assurances that further funds would be deposited. The check was finally bounced for insufficient funds and the drawer's bankruptcy caused the payee to sue the drawee bank directly under this section. The court held that "accountability" means "liability," that no negligence need be shown beyond the bare fact of retention after the midnight deadline, and that the extent of the bank's liability under this section is always the face amount of the item. The court rejected the bank's argument that actual loss must be proved under § 4-103(5). In short, liability under this section is absolute.

A leading Kansas decision which takes some of the sting out of this section for the drawee bank is Leaderbrand v. Central State Bank, 202 K. 450, 450 P.2d 1 (1969). In that case, the payee of a check twice presented the item for payment over the counter, and was twice rebuffed by the oral dishonor of the drawee bank. On the third time round, the payee deposited the check in its own account and the item went through the collection process. This time the drawee bank retained the item beyond its midnight deadline, without sending notice of a third dishonor or returning the check. The drawee bank was let off the hook by the Kansas supreme court, in spite of 84-4-302. The court held that timely notice of dishonor or return of the item on the third go-round was "excused" in light of the purpose underlying this section, which makes the drawee bank accountable for retention of an item to the extent the bank "deliberately aligned itself with its customer in order to protect that customer's credit," so that the payee relies at his detriment on this retention, sacrificing his right to go directly against the drawer.

The court felt that the two prior dishonors showed an intention on the part of the bank not to "align itself" with its customer. The previous dishonors also meant that there was no reliance on the part of the payee:

The sanctions imposed by the provisions of [84-4-302] were designed to compel compliance with the statutory duties imposed upon the payor bank, but once these duties have been discharged by the payor bank the statutory scheme which emphasizes the importance of speed in the collection process, and the prompt settlement of some items because of the chain of credit dependent thereon has been fulfilled, and the reason for the sanction imposed dissipates. It was not the intention of the legislature to arbitrarily impose liability upon the payor bank under the facts and circumstances here confronting the court. 202 K. at 460.

The court in Leaderbrand also relied upon former 84-3-511(4) which provided that: "Where a draft has been dishonored by nonacceptance a later presentment for payment and any notice of dishonor and protest for nonpayment are excused unless in the meantime the instrument has been accepted." Although this section seems to say nothing more than dishonor by nonacceptance excuses notice of dishonor by nonpayment, the court used it to excuse retention beyond the midnight deadline.

Leaderbrand was controversial when it was decided and it is uncertain whether the rationale of Leaderbrand survives the current requirement in 84-4-301(a) that the bank must send written notice of dishonor.

CASE ANNOTATIONS

1. On certified question (K.S.A. 60-3201 et seq.) whether article 4 of Kansas U.C.C. applies to electronic fund transfers examined. Sinclair Oil Corp. v. Sylvan State Bank, 254 Kan. 836, 843, 869 P.2d 675 (1994).

2. Whether seller had standing to assert that buyer's bank had not made timely return of electronic debit examined. Sinclair Oil Corp. v. Sylvan State Bank, 894 F. Supp. 1470, 1473 (1995).