Blake v. Woodford Bank & Trust Co.
| Decision Date | 11 March 1977 |
| Citation | 555 S.W.2d 589,21 U.C.C.Rep. 388 |
| Parties | 21 UCC Rep.Serv. 383 Wayne BLAKE, Appellant, v. WOODFORD BANK AND TRUST COMPANY, Appellee. WOODFORD BANK AND TRUST COMPANY, Cross-Appellant, v. Wayne BLAKE, Cross-Appellee. |
| Court | Kentucky Court of Appeals |
Tom H. Pierce and Victor Hellard, Jr., Rouse, Rouse & Hellard, Versailles, for appellant and cross-appellee.
W. Henry Graddy, IV and Gentry E. McCauley, Jr., McCauley & Elam, Versailles, for appellee and cross-appellant.
Before MARTIN, C. J., and PARK and VANCE, JJ.
This case involves the liability of the appellee and cross-appellant, Woodford Bank and Trust Company, on two checks drawn on the Woodford Bank and Trust Company and payable to the order of the appellant and cross-appellee, Wayne Blake. Following a trial without a jury, the Woodford Circuit Court found that the bank was excused from meeting its "midnight deadline" with respect to the two checks. Blake appeals from the judgment of the circuit court dismissing his complaint. The bank cross-appeals from that portion of the circuit court's opinion relating to the extent of the bank's liability on the two checks if it should be determined that the bank was not excused from meeting its midnight deadline.
The basic facts are not in dispute. On December 6, 1973, Blake deposited a check in the amount of $16,449.84 to his account at the Morristown Bank, of Morristown, Ohio. This check was payable to Blake's order and was drawn on the K & K Farm On December 19, 1973, Blake deposited a second check in the amount of $11,200.00 to his account in the Morristown Bank. The second check was also drawn on the K & K Farm Account at the Woodford Bank and Trust Company and made payable to Blake's order. The second check was dated December 17, 1973.
Account at the Woodford Bank and Trust Company. The check was dated December 3, 1973.
When Blake deposited the second check on December 19, he was informed by the Morristown Bank that the first check had been dishonored and returned because of insufficient funds. Blake instructed the Morristown Bank to re-present the first check along with the second check. Blake was a cattle trader, and the two checks represented the purchase price for cattle sold by Blake to James Knight who maintained the K & K Farm Account. Blake testified that he had been doing business with Knight for several years. On other occasions, checks had been returned for insufficient funds but had been paid when re-presented.
The two checks were forwarded for collection through the Cincinnati Branch of the Federal Reserve Bank of Cleveland. From the Federal Reserve Bank, the two checks were delivered to the Woodford Bank and Trust Company by means of the Purolator Courier Corp. The checks arrived at the Woodford Bank and Trust Company on Monday, December 24, 1973, shortly before the opening of the bank for business. The next day, Christmas, was not a banking day. The two checks were returned by the Woodford Bank and Trust Company to the Cincinnati Branch of the Federal Reserve Bank by means of Purolator on Thursday, December 27, 1973.
The two checks were received by the bank on Monday, December 24. The next banking day was Wednesday, December 26. Thus, the bank's "midnight deadline" was midnight on Wednesday, December 26. KRS 355.4-104(1)(h). 1 As the bank retained the two checks beyond its midnight deadline, Blake asserts that the bank is "accountable" for the amount of the two checks under KRS 355.4-302(1) (a). 2
Under the Uniform Negotiable Instruments Law a payor bank was not liable to the holder of a check drawn on the bank until the bank had accepted or certified the check. Ewing v. Citizens National Bank, 162 Ky. 551, 172 S.W. 955 (1915); W. Britton, Bills and Notes § 169 (1943). Because of the payor bank's basic nonliability on a check, it was essential that some time limit be placed upon the right of the payor bank to dishonor a check when presented for payment. If a payor bank could hold a check indefinitely without incurring liability, the entire process of collection and payment of checks would be intolerably slow. To avoid this problem, a majority of courts construing § 136 and § 137 of the Uniform Negotiable Instruments Law held that a payor bank was deemed to have accepted a check if it held the check for 24 hours after the check was presented for payment. Britton, op.cit. § 179. Thus, in a majority of jurisdictions, the payor bank had only 24 hours to determine whether to pay a check or return it. However, in Kentucky and a In order to bring uniformity to the check collection process, the Bank Collection Code was proposed by the American Bankers' Association. The Bank Collection Code was adopted by Kentucky in 1930. Under § 3 of the Bank Collection Code, a payor bank could give provisional credit when a check was received, and the credit could be revoked at any time before the end of that business day. The payor bank became liable on the check if it retained the item beyond the end of the business day received. 1930 Kentucky Acts, ch. 13, § 3 (former KRS 357.030).
few other jurisdictions, the courts held that § 136 and § 137 of the Uniform Negotiable Instruments Law applied only to checks which were presented for acceptance. In Kentucky Title Savings Bank and Trust Company v. Dunavan, 205 Ky. 801, 266 S.W. 667 (1924), the Court of Appeals held that § 136 and § 137 of the Uniform Negotiable Instruments Law had no application to a check which was presented for payment. Consequently, the payor bank would be liable on the check only if it held the check "for an unreasonable length of time" and could thus be deemed to have converted the check.
Banks had only a few hours to determine whether a check should be returned because of insufficient funds. Banks were required to "dribble post checks" by sorting and sending the checks to the appropriate bookkeepers as the checks were received. This led to an uneven workload during the course of a business day. At times, the bookkeeping personnel might have nothing to do while at other times they would be required to process a very large number of checks in a very short time. H. Bailey, The Law of Bank Checks (Brady on Bank Checks) § 10.4 (4th ed. 1969). Because of the increasingly large number of checks processed each day and the shortage of qualified bank personnel during World War II, it became impossible for banks to determine whether a check was "good" in only 24 hours. The banks were forced to resort to the procedure of "paying" for a check on the day it was presented without posting it to the customer's account until the following day. See First National Bank of Elwood v. Universal C.I.T. Credit Corporation, 132 Ind.App. 353, 170 N.E.2d 238, at 244 (1960). To meet this situation, the American Banking Association proposed a Model Deferred Posting Statute. The Model Deferred Posting Statute was not adopted in Kentucky until 1956. 1956 Kentucky Acts, ch. 47 (former KRS 357.125).
Under the Model Deferred Posting Statute, a payor bank could give provisional credit for a check on the business day it was received, and the credit could be revoked at any time before midnight of the bank's next business day following receipt. A provisional credit was revoked "by returning the item, or if the item is held for protest or at the time is lost or is not in the possession of the bank, by giving written notice of dishonor, nonpayment, or revocation; provided that such item or notice is dispatched in the mails or by other expeditious means not later than midnight of the bank's next business day after the item was received." 1956 Kentucky Acts, ch. 47, § 1(1) (former KRS 357.125). If the payor bank failed to take advantage of the provisions of the deferred posting statute by revoking the provisional credit and returning the check within the time and in the manner provided by the act, the payor bank was deemed to have paid the check and was liable thereon to the holder. First National Bank of Elwood v. Universal C.I.T. Credit Corporation, supra.
The Model Deferred Posting Statute was the basis for the provisions of the Uniform Commercial Code. Under § 4-301(1) of the Uniform Commercial Code (UCC) 3, a payor bank may revoke a provisional "settlement" Like the Model Deferred Posting Statute, the Uniform Commercial Code seeks to decrease, rather than increase, the risk of liability to payor banks. By permitting deferred posting, the Uniform Commercial Code extends the time within which a payor bank must determine whether it will pay a check drawn on the bank. Unlike the Bank Collection Code or the Uniform Negotiable Instruments Law as construed by most courts, the Uniform Commercial Code does not require the payor bank to act on the day of receipt or within 24 hours of receipt of a check. The payor bank is granted until midnight of the next business day following the business day on which it received the check.
if it does so before its "midnight deadline" which is midnight of the next banking day following the banking day on which it received the check. Under the Model Deferred Posting Statute, the payor bank's liability for failing to meet its midnight deadline was to be inferred rather than being spelled out in the statute. Under UCC § 4-302, the payor bank's liability for missing its midnight deadline is explicit. If the payor bank misses its midnight deadline, the bank is "accountable" for the face amount of the check. See Farmers Cooperative Livestock Market v. Second National Bank, Ky., 427 S.W.2d 247 (1968).
UCC § 4-108(2) (KRS 355.4-108(2)) provides:
"Delay by a * * * payor bank beyond time limits prescribed or permitted by this Act * * * is excused if caused by interruption of communications facilities, suspension of payments by another bank, war, emergency...
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