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84-4-402. Bank's liability to customer for wrongful dishonor; time of determining insufficiency of account. (a) Except as otherwise provided in this Article, a payor bank wrongfully dishonors an item if it dishonors an item that is properly payable, but a bank may dishonor an item that would create an overdraft unless it has agreed to pay the overdraft.

(b) A payor bank is liable to its customer for damages proximately caused by the wrongful dishonor of an item. Liability is limited to actual damages proved and may include damages for an arrest or prosecution of the customer or other consequential damages. Whether any consequential damages are proximately caused by the wrongful dishonor is a question of fact to be determined in each case.

(c) A payor bank's determination of the customer's account balance on which a decision to dishonor for insufficiency of available funds is based may be made at any time between the time the item is received by the payor bank and the time that the payor bank returns the item or gives notice in lieu of return, and no more than one determination need be made. If, at the election of the payor bank, a subsequent balance determination is made for the purpose of reevaluating the bank's decision to dishonor the item, the account balance at that time is determinative of whether a dishonor for insufficiency of available funds is wrongful.

History: L. 1965, ch. 564, § 228; L. 1991, ch. 296, § 102; February 1, 1992.

KANSAS COMMENT, 1996

This section is identical to the 1995 Official Text. Subsections (a) and (c) are new and subsection (b), derived from the former 84-4-402, has been clarified.

Subsection (a) defines wrongful dishonor and specifically permits a bank to dishonor a check which would create an overdraft, unless the bank agrees to honor overdrafts.

Subsection (b) has been clarified. If the drawee bank wrongfully dishonors an item, it is liable to its customer for any damages proximately caused by the dishonor. This cause of action, a mixture of tort and contract, can trigger damages exceeding the face amount of the instrument. For example, if a bank's computer error caused the wrongful dishonor of a check for which funds were available in the account, or if the bank's improper exercise of setoff depleted the account and caused subsequent checks to bounce, the bank would be responsible for any loss caused. If the wrongfully dishonored check was earnest money on a large contract or payment for an insurance policy which lapsed due to dishonor of the check, the damages could be substantial. Nor could the bank's liability for wrongful dishonor be disclaimed by contract under 84-4-103(1), since a bank cannot exculpate itself from its own lack of ordinary care. Pre-UCC Kansas decisional law is in accord. Meinhart v. Farmers State Bank, 119 K. 321, 239 P. 769 (1925); Winkler v. Citizens State Bank, 89 K. 279, 131 P. 597 (1913).

The definition of "dishonor" is found in 84-3-502. Certain actions by the drawee bank do not constitute dishonor, and thus would not trigger a wrongful dishonor action. For example, refusal to certify a check does not constitute dishonor. See 84-3-409(2)(d), which provides that a bank is under no obligation to certify a customer's check. Nor can there be dishonor when the holder fails to make a necessary presentment. For other examples of actions which are or are not dishonors see 1996 Kansas Comment to 84-3-502.

It should be emphasized that a cause of action for wrongful dishonor belongs only to the bank's "customer." The courts have generally read that term literally, to mean the "person" (including a partnership or corporation as a separate legal entity) who carries the account with the bank. For example, in Loucks v. Albuquerque National Bank, 418 P.2d 191 (N.M. 1966), the court held that there could be no wrongful dishonor action by a shareholder or partner in his personal capacity whose personal reputation was tarnished because of the bank's wrongful dishonor of a corporate or partnership check. The "customer" was the entity, not the individual. For definitions of "customer" see 84-4-104(a)(5), of "organization" see 84-1-201(28) and for "person" see 84-1-201(30). A similar restricted reading of "customer" was made in Farmers Bank v. Sinwellan Corp., 367 A.2d 180 (Del. 1976). But for a decision where the court does some veil-piercing, see Kendall Yacht Corp. v. United California Bank, 123 Cal. Rptr. 848 (Cal. App. 1975).

The reference to wrongful dishonor through mistake has been deleted, with its negative implication that a showing of malice would justify punitive damages. The case law, together with the text and Official Comments to this section, suggests the following rules with respect to damages for wrongful dishonor. If the dishonor is caused by clerical or computer error, the customer should be required to prove actual damages with precision and no punitive damages should be allowed. If the dishonor is intentional in the sense of a conscious freezing of the account triggered by an error of fact or law (even if in good faith), as with improper exercise of setoff, and is wrongful, the bank may be liable for punitive damages if other laws so provide. An intentional dishonor should not invoke the common-law "trader rule," which presumed damages without the business customer having to present any proof of loss. Punitive damages should be available in some cases going beyond mere mistake, as when the bank dishonors the customer's checks with reckless disregard for the circumstances. See 84-4-103(e) regarding other damages.

Subsection (c) is new and makes it clear the bank has no duty to double check to make sure that the insufficient balance has been corrected before dishonoring the check. It also makes it clear that the bank may double check the account if it so chooses.


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