Collection of Bank Items

California’s Commercial Code, in Division 2, Chapter 3, deals with the collection of items for payor banks. Section 4301 states that, if a payor bank settles for a demand item other than a documentary draft presented otherwise than for immediate payment over the counter before midnight of the banking day of receipt, the payor bank may revoke the settlement and recover the settlement if, before it has made final payment and before its midnight deadline, it either returns the item or sends written notice of dishonor or nonpayment.

If a demand item is received by a payor bank for credit on its books, it may return the item or send notice of dishonor and may revoke any credit given or recover the amount thereof withdrawn by its customer, if it acts within the time limit and in the manner specified. Unless previous notice of dishonor has been sent an item is dishonored at the time when for purposes of dishonor it is returned or notice sent in accordance with this section. “An item is returned” is defined.

Section 4302 provides that, if an item is presented to and received by a payor bank, the bank is accountable for the amount of either a demand item or any other properly payable item. The liability of a payor bank to pay an item is subject to defenses based on breach of a presentment warranty or proof that the person seeking enforcement of the liability presented or transferred the item for the purpose of defrauding the payor bank.

Section 4303 specifies that any knowledge, notice, or stop-payment order received by, legal process served upon, or setoff exercised by a payor bank comes too late to terminate, suspend, or modify the bank’s right or duty to pay an item or to charge its customer’s account for the item if the knowledge, notice, stop-payment order, or legal process is received or served and a reasonable time for the bank to act thereon expires or the setoff is exercised after the earliest of five specified bank actions.