Opinion ID: 1386600
Heading Depth: 1
Heading Rank: 1

Heading: Strict Liability of the Clovis Bank

Text: The Albuquerque Bank failed to read the entire instrument carefully, but apparently simply read the name of K & W Enterprises in the space following To on the form draft and decided that K & W Enterprises was the drawee. It then attached a collection letter stating that the attached draft was sent to the Clovis Bank for collection and that it was One envelope draft in the amount of $8685.00 drawn on K. $[sic] W. Enterprises and payable to us thru [sic] you for our customer Engine Parts, Inc. The words our customer and Inc. were left out on the other otherwise identical collection letter. The collection letter also contained the following instructions: 1. Return at once if not paid on maturity. 2. If unpaid give full reason. 3. Deliver documents only when paid. 4. Do not credit until paid. 5. No protest unless otherwise instructed. 6. Protest  none. 7. Date due  sight. The mere forwarding of an item to the bank upon which it was drawn accompanied by a letter stating the item was enclosed for collection and the treatment of the item by the drawee bank as a collection item does not establish that the bank upon which the item was drawn is a collecting bank. Farmers Coop. Livestock Mkt., supra. The words on the form envelope draft are printed on the outside of an envelope which is approximately the size of a regular business envelope. The attached collection letter is printed on a small form of about the same size. It barely covers the printed draft form and in no way prevents a quick inspection of the draft to determine such routine things as whether it is dated, whether it has matured, whether it has been properly completed, whether there appear to be any unauthorized changes or alterations, who the drawer and drawee are, and whether there are any apparent irregularities in the instrument, etc. Regarding the instruction to return at once if not paid on maturity, the Court of Appeals held since the drafts were dated September 15 and October 15 and were received by the Clovis Bank after those dates, that the drafts had already matured and that this instruction was a nullity. This is incorrect. The drafts were sight drafts. Sight instruments are demand instruments and mature, not on the date drawn, but any time after that date when demand for payment is made. § 50A-3-108, N.M.S.A. 1953 (Repl. 1962). The drafts were matured when they were presented to the Clovis Bank. Flintkote Company v. Grimes, 281 Ala. 707, 208 So.2d 87 (1968). Therefore when it learned that K & W Enterprises would not honor the draft it should have immediately sent the items back. Engine Parts argues that the Clovis Bank is liable to it for the full amount of both drafts because it was a payor bank and it held the drafts past its midnight deadline. Engine Parts relies on § 50A-4-302(a), N.M.S.A. 1953 (Repl. 1962) which states: In the absence of a valid defense such as breach of a presentment warranty (subsection (1) of section 4-207 [50A-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 the midnight deadline. Section 50A-4-105(a) defines depositary bank as the first bank to which an item is transferred for collection even though it is also the payor bank. The items in question here were first transferred to the Albuquerque Bank, therefore the Clovis Bank is not a depositary bank. Under § 50A-4-302(a) therefore it is liable as a payor bank for the amount of demand items presented for payment which it either fails to settle for before midnight of the banking day of receipt or which it fails to pay or return before its midnight deadline [which § 50A-4-104(1)(h), N.M.S.A. 1953 (Repl. 1962) defines as midnight on its next banking day following the banking day on which it receives the relevant item.] But to be liable, two other important conditions must be met. 1. The item must be presented for payment; 2. The payor bank must not have, or must fail to raise, any valid defenses including but not limited to breach of the warranties of presentment. The record in the instant case does not show whether any such valid defenses were raised at the trial court level, and their existence, if any, or validity was not raised on appeal. Thus we do not have to consider whether the Clovis Bank had any such valid defenses. The only remaining inquiry regarding the applicability of § 50A-4-302(a) is whether the items were properly presented on the Clovis Bank. Presentment is defined in § 50A-3-504 as: A demand for acceptance or payment made upon the... drawee or other payor by or on behalf of the holder [emphasis added]. The uncontroverted testimony and evidence in the record shows that the Albuquerque Bank, acting on behalf of its customer Engine Parts, sent the draft to the Clovis Bank, inadvertently stating the draft was payable through the Clovis Bank not by it. The Albuquerque Bank thought that the Clovis Bank was a mere collection conduit for payment, not the drawee and payor bank. It thought that K & W Enterprises was the drawee. Thus, since it thought incorrectly that the Clovis Bank was not the drawee, it did not intend by sending the drafts to the Clovis Bank, to make a demand for payment ... upon the ... drawee  as required by § 50A-3-504. The process of collection is, however, simply an attenuated demand for payment. Each collecting bank in the chain of collection becomes an agent for the owner of the item and acts for him to demand payment of the drawee. § 50A-4-201, N.M.S.A. 1953 (Repl. 1962). Thus every collecting bank aids in demanding payment of the drawee. Any item sent for collection is sent for eventual payment. That the Albuquerque Bank was mistaken as to who the drawee was does not change the fact that the Clovis Bank was the drawee. When the Albuquerque Bank sent the drafts to the Clovis Bank, even though it thought it was demanding payment through another collecting bank, it was in fact demanding payment upon ... the drawee. Thus it effectively presented the drafts upon the Clovis Bank as required by § 50A-3-504. The Clovis Bank is therefore accountable for the full amount of the two demand items here involved. The measure of damages herein is that provided in § 50A-4-302, namely the full value of the drafts which the Clovis Bank failed to promptly return, and not the measure of a bank's breach of it's duty of ordinary care set out in § 50A-4-103(5), N.M.S.A. 1953 (Repl. 1962). Rock Island Auction Sale, Inc. v. Empire Packing Co., 32 Ill.2d 269, 204 N.E.2d 721 (1965). The liability created by § 50A-4-302 is independent of negligence and is an absolute or strict liability for the full amount of the items which it fails to return. Bank of America Nat. T. & S. Ass'n v. Security Pac. Nat. Bank, 23 Cal. App.2d 638, 100 Cal. Rptr. 438 (1972); Central Bank and Trust Co. v. First Northwest Bank, 332 F. Supp. 1166 (E.D.Mo. 1971); See National City Bank of Rome v. Motor Contract Co., 119 Ga. App. 208, 166 S.E.2d 742 (1969). Even where a draft is arguably ambiguous as to whether the bank is the drawee or someone else is, where it handles the item which it in fact is obligated to pay, it takes the risk of loss if it fails to comply with § 50A-4-302. Farmers Coop. Livestock Mkt., supra. The fact that the drafts were sent for collection does not alter a payor bank's liability under this section. Kane v. American National Bank & Trust Company, 21 Ill. App.3d 1046, 316 N.E.2d 177 (1974). Moreover, we hold that since the Clovis Bank held the drafts for an unreasonable period, namely two and a half months beyond the time when it should have returned them, the petitioner Engine Parts is entitled to interest on its claim at the legal rate. Conn. v. Bank of Clarendon Hills, 133 Ill. App.2d 574, 273 N.E.2d 612 (1971), rev'd on other grounds, 53 Ill.2d 33, 289 N.E.2d 425 (1972); accord, Sun River Cattle Co. v. Miners' Bank of Montana, 164 Mont. 479, 525 P.2d 19 (1974). Not to award interest where there has been an unreasonable and unjustified delay would be an abuse of discretion.