HRS 0490-0004-0207 ANNOTATIONS

Prior Uniform Statutory Provision: None; but see American Bankers Association Bank Collection Code, Section 4.

1. Subject to certain exceptions peculiar to the bank collection process and except that they apply only to customers and collecting banks, the warranties and engagements to honor in this section are identical in substance with those provided in the Article on Commercial Paper (Article 3). See Sections 3-414, 3-417. For a more complete explanation of the purposes of these warranties and engagements see the Comments to Sections 3-414 and 3-417.

2. In addition to imposing upon customers and collecting banks the warranties and engagements imposed by the original Sections 65 and 66 of the Uniform Negotiable Instruments Law and those of Sections 3-414 and 3-417 of Article 3, with some variations, this Section 4-207 is intended to give the effect presently obtained in bank collections by the words "prior indorsements guaranteed" in collection transfers and presentments between banks. The warranties and engagements arise automatically as a part of the bank collection process. Receipt of a settlement or other consideration by a customer or collecting bank is a requirement but any settlement is sufficient regardless of whether the settlement is concurrent with the transfer, as in the case of a cash item, or delayed, as in the case of a non-cash straight collection item. Further, the warranties and engagements run with the item with the result that a collecting bank may sue a remote prior collecting bank or a remote customer and thus avoid multiplicity of suits. This section is also intended to make it clear that the so-called equitable defense of "payment over" does not apply to a collecting bank and that no statute of frauds provision will defeat recovery. Subsections (2) and (3) indicate that these results are intended notwithstanding the absence of indorsement or words of guarantee or warranty in a transfer or presentment. Consequently, if for purposes of simplification or the speeding up of the bank collection process, banks desire to cut down the length or size of indorsements (Section 4-206), they may do so and the standard warranties and engagements to honor still apply.

3. With respect to the exceptions to the warranties in favor of a holder in due course specified in sub-paragraphs (b) and (c) of subsection (1), collecting banks usually have holder in due course status (Sections 4-208, 4-209). However, if in any case there is a holder in due course but a subsequent collecting bank does not have holder in due course status (e.g., in a straight non-cash collection where no settlement of any kind is made until the bank itself receives final settlement) the bank still has the benefit of the exceptions (if it acts in good faith) under the shelter provisions of Section 3-201. It is to be noted that these shelter provisions, by virtue of successive transfers, benefit not only the immediate transferee from a holder in due course but also subsequent transferees.

4. In this section as in Section 3-417, the (a), (b) and (c) warranties to transferees and collecting banks under subsection (2) are in general similar to the (a), (b) and (c) warranties to payors under subsection (1); but the warranties to payors are less inclusive because of exceptions reflecting the rule of Price v. Neal, 3 Burr. 1354 (1762), and related principles. See Comment to Section 3-417. Thus collecting banks are given not only all the warranties given to payors by subsection (1), without those exceptions, but also the (d) and (e) warranties of subsection (2).

5. The last sentence of subsection (3) provides that damages for breach of warranties or the engagement to honor shall not exceed the consideration received by the customer or collecting bank responsible "plus finance charges and expenses related to the item, if any". The "expenses" referred to in this phrase may be ordinary collecting expenses and in appropriate cases could also include such expenses as attorneys fees. "Finance charges" are also referred to because in some cases interest or a finance charge is charged by the collecting bank for the time that the bank's advance on the item is outstanding prior to receipt of proceeds of collection. An example of this type of case would be where a bank undertakes a foreign collection in South America or Europe and makes an advance on the item at the time of receipt but may not receive proceeds of the foreign collection for three months or more.

Sections 3-201, 3-414, 3-417, 3-418, 4-206, 4-208, 4-209 and 4-406.

"Collecting bank". Section 4-105.

"Customer". Section 4-104.

"Draft". Section 3-104.

"Genuine". Section 1-201.

"Good faith". Section 1-201.

"Holder". Section 1-201.

"Holder in due course". Section 3-302.

"Insolvency proceedings". Section 1-201.

"Item". Section 4-104.

"Party". Section 1-201.

"Payor bank". Section 4-105.

"Person". Section 1-201.

"Presentment". Section 3-504.

"Protest". Section 3-509.

"Unauthorized signature". Section 1-201.