Section 4302 provides: "In the absence of a valid defense such as breach of a presentment warranty (subdivision (1) of Section 4207), 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 its midnight deadline. ..." (Italics added.)fn. 4
In Toronto-Dominion Bank v. Cent. Nat. Bank & Trust (8th Cir. 1985) 753 F.2d 66, the plaintiff depositary bank brought an action to recover the face amount of checks which the defendant payor bank had dishonored and failed to return by the midnight deadline. The defendant asserted in defense that one of the plaintiff's employees had participated in a check-kiting scheme with the perpetrator of the fraud and therefore the plaintiff had acted in bad faith. The court ruled that unless the activities of the plaintiff's employee induced the defendant to return the checks after expiration of its deadline and thereby breach its obligation pursuant to section 554.4302 (the [229 Cal. App. 3d 1278] State of Iowa's version of 4302), the defendant could not assert this as an affirmative defense. (753 F.2d at p. 70.)
Breach Clear: Deadline Game
In addition, despite whatever respondent communicated to Ms. Pou San Au, it has not been clearly established that respondent's oral notification satisfied the statutory definition of "notice of dishonor." Section 4302 provides that a payor bank either must return the item or "send notice of dishonor" prior to expiration of its midnight deadline. It is obvious from the wording of the statute that written notice is contemplated. We reject the conclusion urged by respondent that appellant must establish that it relied upon respondent's failure to transmit "notice of dishonor" before the midnight deadline in order to recover for breach of the liability created by section 4302 where, as here, appellant had no knowledge, at the time the checks were deposited or funds were released, that the checks were uncollectible.
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