Chapter 3Collection of Items: Payor Banks

Section § 4301

Explanation

This law explains how a bank can handle a demand item, like a check, that it receives but decides not to pay. A payor bank can cancel the settlement of the item if it's done before the deadline, either by returning the item or by sending a notice that it won't pay. If the item was credited to an account, the bank can take back the credit or recover the withdrawn amount. The item is considered dishonored when the bank returns it or sends a notice that it won't pay. Returns can be made through a clearinghouse or directly to the customer or bank that transferred the item. Timing and proper procedure are essential for these actions.

(a)CA Commercial Law Code § 4301(a) 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:
(1)CA Commercial Law Code § 4301(a)(1) Returns the item.
(2)CA Commercial Law Code § 4301(a)(2) Sends written notice of dishonor or nonpayment if the item is unavailable for return.
(b)CA Commercial Law Code § 4301(b) 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books, it may return the item or send notice of dishonor and may revoke any credit given or recover the amount thereof withdrawn by its customer, if it acts within the time limit and in the manner specified in subdivision (a).
(c)CA Commercial Law Code § 4301(c) 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.
(d)CA Commercial Law Code § 4301(d) An item is returned either:
(1)CA Commercial Law Code § 4301(d)(1) As to an item presented through a clearing house, when it is delivered to the presenting or last collecting bank or to the clearing house or is sent or delivered in accordance with clearing house rules.
(2)CA Commercial Law Code § 4301(d)(2) In all other cases, when it is sent or delivered to the bank’s customer or transferor or pursuant to his instructions.
payor bank demand item dishonor notice item settlement midnight deadline final payment credit revocation clearinghouse rules item return written notice banking day customer withdrawal last collecting bank transferor instructions nonpayment recovery
(Amended by Stats. 1992, Ch. 914, Sec. 37. Effective January 1, 1993.)

Section § 4302

Explanation

If a bank receives a check or similar item, it must quickly decide to pay, return, or communicate if there's an issue. If the bank keeps the item beyond a set timeframe (known as the midnight deadline) without action, it's generally responsible for paying it. However, if there's evidence of deception or other legal defenses, the bank might not have to pay.

(a)CA Commercial Law Code § 4302(a) If an item is presented to and received by a payor bank, the bank is accountable for the amount of either:
(1)CA Commercial Law Code § 4302(a)(1) A demand item, other than a documentary draft, whether properly payable or not, if the bank, in any case in which it is not also the depositary bank, retains the item beyond midnight of the banking day of receipt without settling for it or, whether or not it is also the depositary bank, does not pay or return the item or send notice of dishonor until after its midnight deadline.
(2)CA Commercial Law Code § 4302(a)(2) Any other properly payable item unless, within the time allowed for acceptance or payment of that item, the bank either accepts or pays the item or returns it and accompanying documents.
(b)CA Commercial Law Code § 4302(b) The liability of a payor bank to pay an item pursuant to subdivision (a) is subject to defenses based on breach of a presentment warranty (Section 4208) or proof that the person seeking enforcement of the liability presented or transferred the item for the purpose of defrauding the payor bank.
payor bank responsibility midnight deadline demand item documentary draft notice of dishonor settling an item liability of payor bank return of item presentment warranty fraudulent presentment
(Amended by Stats. 1992, Ch. 914, Sec. 38. Effective January 1, 1993.)

Section § 4303

Explanation

This section explains that if a bank receives notice or an order to stop payment, or becomes involved in legal action, it's often too late to act on these instructions if the bank has already processed the transaction. This means the bank can go ahead with paying or settling the item if actions like accepting, certifying, cash payment, or becoming accountable have already happened. For checks, there's a specific timing rule about when banks must handle stop-orders on them, related to banking hours on the next business day. Additionally, banks can handle these transactions in any order as long as they comply with the rules outlined.

(a)CA Commercial Law Code § 4303(a) 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 the following:
(1)CA Commercial Law Code § 4303(a)(1) The bank accepts or certifies the item.
(2)CA Commercial Law Code § 4303(a)(2) The bank pays the item in cash.
(3)CA Commercial Law Code § 4303(a)(3) The bank settles for the item without having a right to revoke the settlement under statute, clearing house rule, or agreement.
(4)CA Commercial Law Code § 4303(a)(4) The bank becomes accountable for the amount of the item under Section 4302 dealing with the payor bank’s responsibility for late return of items.
(5)CA Commercial Law Code § 4303(a)(5) With respect to checks, a cutoff hour no earlier than one hour after the opening of the next banking day after the banking day on which the bank received the check and no later than the close of that next banking day or, if no cutoff hour is fixed, the close of the next banking day after the banking day on which the bank received the check.
(b)CA Commercial Law Code § 4303(b) Subject to subdivision (a), items may be accepted, paid, certified, or charged to the indicated account of its customer in any order.
payor bank stop-payment order legal process setoff cutoff hour account settlement late return of items check processing bank accountability transaction timing
(Amended by Stats. 1992, Ch. 914, Sec. 39. Effective January 1, 1993.)