Opinion ID: 2188463
Heading Depth: 1
Heading Rank: 6

Heading: payor bank's responsibility for late return of item

Text: Section 4-302 provides: In the absence of a valid defense such as breach of a presentment warranty (subsection (1) of Section 4-207), settlement effected or the like, if an item is presented on and received by a payor bank the bank is accountable for the amount of (a) a demand item other than a documentary draft whether properly payable or not if the bank, in any case where it is not also the depositary bank, retains the item beyond midnight of the banking day of receipt without settling for it or, regardless of whether it is also the depositary bank, does not pay or return the item or send notice of dishonor until after its midnight deadline.... A counterfeit check, as an instrument for the payment of money, is an item under § 4-104(g). Although a counterfeit check is not a valid instrument, the Greenwade check was, nevertheless, an instrument payable on demand in accordance with the Uniform Commercial Code. Since no other document, security, or paper accompanied the counterfeit check, that instrument was not a documentary draft under § 4-104(f). According to the parties' stipulation, after presentment of the counterfeit check, Southwest refused to pay the check and failed to return the check by the midnight deadline. A plaintiff establishes a prima facie case for liability of a payor bank when the plaintiff shows that a check which is the basis for the suit has been untimely dishonored, and the payor bank then has the burden to prove an excuse or defense for the untimely dishonor. First Wyo. Bank v. Cabinet Craft Distrib., 624 P.2d 227 (Wyo.1981). Therefore, in the absence of any valid defense, Southwest is accountable for the amount of the counterfeit check. See § 4-302. Neb.U.C.C. § 4-207 (Reissue 1980), in relevant part, provides: (1) Each customer or collecting bank who obtains payment or acceptance of an item and each prior customer and collecting bank warrants to the payor bank or other payor who in good faith pays or accepts the item that (a) he has a good title to the item or is authorized to obtain payment or acceptance on behalf of one who has a good title; and (b) he has no knowledge that the signature of the maker or drawer is unauthorized, except that this warranty is not given by any customer or collecting bank that is a holder in due course and acts in good faith (i) to a maker with respect to the maker's own signature; or (ii) to a drawer with respect to the drawer's own signature, whether or not the drawer is also the drawee; or (iii) to an acceptor of an item if the holder in due course took the item after the acceptance or obtained the acceptance without knowledge that the drawer's signature was unauthorized; and (c) the item has not been materially altered, except that this warranty is not given by any customer or collecting bank that is a holder in due course and acts in good faith (i) to the maker of a note; or (ii) to the drawer of a draft whether or not the drawer is also the drawee; or (iii) to the acceptor of an item with respect to an alteration made prior to the acceptance if the holder in due course took the item after the acceptance, even though the acceptance provided payable as originally drawn or equivalent terms; or (iv) to the acceptor of an item with respect to an alteration made after the acceptance. Neb.U.C.C. § 1-203 (Reissue 1980) provides that [e]very contract or duty within this act imposes an obligation of good faith in its performance or enforcement. Southwest claims that Citizens breached several presentment warranties under § 4-302 and its obligation of good faith under § 1-203, namely, concealment of information from Southwest, at a time when Southwest would have been in a position to act upon the information prior to the expiration of its midnight deadline, clearly evidences a lack of good faith on the part of Citizens, and information available to Citizens provided sufficient notice to it of the probable counterfeit ... check prior to Southwest's acceptance of that check so as to constitute a breach of Citizens' presentment warranties. Brief for appellant at 25. Neb.U.C.C. § 1-201(25) (Reissue 1980) provides in part that [a] person has notice of a fact when (a) he has actual knowledge of it; or (b) he has received a notice or notification of it; or (c) from all the facts and circumstances known to him at the time in question he has reason to know that it exists. Citizens knew that the Greenwade check bore the facsimile signature of Fulkerson, who was authorized to sign and issue checks on behalf of Country Wide and that the check appeared authentic. When Citizens learned that Greenwade had presented a large counterfeit check to Exchange Bank in Kentucky, Citizens alerted its tellers and instructed them to monitor the Greenwade account. Citizens immediately contacted Southwest, and Southwest told Citizens that the check had been paid and cleared; thus, Citizens believed it was unnecessary to inform Southwest that the Greenwade check might be counterfeit. Two days after Southwest's midnight deadline, Citizens gained actual knowledge that the Greenwade check was a counterfeit check. Clearly, before Southwest's midnight deadline Citizens had only a suspicion that the Greenwade check might be counterfeit. Since Citizens did not have actual knowledge or notice before Southwest's midnight deadline that the Greenwade check was counterfeit, the question is whether Citizens had reason to know that the check was counterfeit. A visual examination of the Greenwade check would not have disclosed that the check was counterfeit. Any suspicion that may have resulted from the conversation between Citizens and Exchange Bank was negated by Southwest's statement that the check had been paid and cleared. See Peoria S & L Ass'n v. Jefferson Tr. & Sav. Bk, 81 Ill.2d 461, 471, 43 Ill.Dec. 712, 717, 410 N.E.2d 845, 850 (1980): Facts and circumstances calculated to merely arouse or excite suspicion cannot be equated with knowledge, or a reason to know. The evidence, therefore, supports the district court's finding that Citizens did not breach presentment warranties or an obligation of good faith. Southwest next contends that Citizens has not proved that it suffered any damages from processing the Greenwade check. Southwest argues that since Greenwade had maintained a checking account at Citizens for 20 years, Citizens failed to establish whether any part of the $70,000 paid to Greenwade was paid from funds of the Country Wide check or from other funds currently on deposit for Greenwade at Citizens. Southwest insists that even if it is strictly liable under § 4-302, Citizens still must prove damages to recover on the counterfeit check. Southwest, however, misconstrues accountability under § 4-302. If § 4-302 is applicable, a payor bank is accountable for the full amount of the draft, even in the absence of actual damages. Union Bank of Benton v. First Nat. Bank, 621 F.2d 790 (5th Cir.1980) (failure of payor to timely pay or return items mandates strict liability for the face amount of any late items); First State Bank v. Twin City Bank, 290 Ark. 399, 720 S.W.2d 295 (1986) (since notification of dishonor was late, payor is accountable for the amount of the documentary drafts); Reynolds-Wilson Lumber v. Peoples Nat. Bank, 699 P.2d 146 (Okla. 1985) (accountable means strict liability for the amount of the draft with no requirement of actual damages); Northwestern Nat. Ins. v. Midland Nat. Bank, 96 Wis.2d 155, 292 N.W.2d 591 (1980) (if payor fails to give timely notification of dishonor, payor is liable for the amount of the checks without any showing of actual damages); Engine Parts v. Citizens Bank of Clovis, 92 N.M. 37, 582 P.2d 809 (1978) (payor is strictly liable for the amount of the items which it returned untimely); Farmers Coop. Livestock Mkt. v. Second Nat. Bank, 427 S.W.2d 247 (Ky.1968) (payor is liable for the face amount of the item without proof of damages); Rock Island Sales v. Empire Packing, 32 Ill.2d 269, 204 N.E.2d 721 (1965) (payor is liable for the face amount of the item after it fails to give timely notice of dishonor). Courts have consistently expressed that the primary reason for automatic or strict liability under § 4-302 is a need for finality and certainty in business transactions; accordingly, if a payor bank fails to fulfill its statutory duty to return or dishonor an item in a timely manner, the payor bank is subject to sanction for its tardiness under the Uniform Commercial Code. For example, First State Bank v. Twin City Bank, supra ; Town & Country State Bank v. First State Bank, 358 N.W.2d 387 (Minn. 1984); State & Sav. Bank of Monticello v. Meeker, 469 N.E.2d 55 (Ind.App.1984); Van Senus v. Mi Nat'l Bank, Wy, 116 Mich.App. 342, 323 N.W.2d 391 (1982). See, also, 6 W. Hawkland, Uniform Commercial Code Series § 4-302:01 at 61 (1984) (§ 4-302 provides the sanction of accountability for the full amount as a remedy for the protection of depositary banks based on a need to protect depositary banks who were making funds available for withdrawal to their customers on the basis of a lapse of time without notice of nonpayment). Hence, Citizens was not required to prove actual damages from the counterfeit check transaction. It is unnecessary to discuss Citizens' other theory of recovery because Citizens has established a right to recover under § 4-302. Accordingly, we affirm the district court's judgment for Citizens in the amount of $70,000. AFFIRMED.