(a) Except as otherwise provided in this article, a payor bank wrongfully dishonors an item if it dishonors an item that is properly payable, but a bank may dishonor an item that would create an overdraft unless it has agreed to pay the overdraft.

(b) A payor bank is liable to its customer for damages proximately caused by the wrongful dishonor of an item. Liability is limited to actual damages proved and may include damages for an arrest or prosecution of the customer or other consequential damages. Whether any consequential damages are proximately caused by the wrongful dishonor is a question of fact to be determined in each case.

(c) A payor bank's determination of the customer's account balance on which a decision to dishonor for insufficiency of available funds is based may be made at any time between the time the item is received by the payor bank and the time that the payor bank returns the item or gives notice in lieu of return, and no more than one determination need be made. If, at the election of the payor bank, a subsequent balance determination is made for the purpose of reevaluating the bank's decision to dishonor the item, the account balance at that time is determinative of whether a dishonor for insufficiency of available funds is wrongful.

History: 1953 Comp., § 50A-4-402, enacted by Laws 1961, ch. 96, § 4-402; 1992, ch. 114, § 187.

OFFICIAL COMMENTS

UCC Official Comments by ALI & the NCCUSL. Reproduced with permission of the PEB for the UCC. All rights reserved.

1. Subsection (a) states positively what has been assumed under the original Article: that if a bank fails to honor a properly payable item it may be liable to its customer for wrongful dishonor. Under Subsection (b) the payor bank's wrongful dishonor of an item gives rise to a statutory cause of action. Damages may include consequential damages. Confusion has resulted from the attempts of courts to reconcile the first and second sentences of former Section 4-402. The second sentence implied that the bank was liable for some form of damages other than those proximately caused by the dishonor if the dishonor was other than by mistake. But nothing in the section described what these noncompensatory damages might be. Some courts have held that in distinguishing between mistaken dishonors and nonmistaken dishonors, the so-called "trader" rule has been retained that allowed a "merchant or trader" to recover substantial damages for wrongful dishonor without proof of damages actually suffered. Comment 3 to former Section 4-402 indicated that this was not the intent of the drafters. White & Summers, Uniform Commercial Code, Section 18-4 (1988), states: "The negative implication is that when wrongful dishonors occur not 'through mistake' but willfully, the court may impose damages greater than 'actual damages' . . . . Certainly the reference to 'mistake' in the second sentece of 4-402 [55-4-402 NMSA 1978] invites a court to adopt the relevant pre-Code distinction." Subsection (b) by deleting the reference to mistake in the second sentence precludes any inference that Section 4-402 [55-4-402 NMSA 1978] retains the "trader" rule. Whether a bank is liable for noncompensatory damages, such as punitive damages, must be decided by Section 1-103 and Section 1-106 [55-1-103 and 55-1-106 NMSA 1978, respectively] ("by other rule of law").

2. Wrongful dishonor is different from "failure to exercise ordinary care in handling an item," and the measure of damages is that stated in this section, not that stated in Section 4-103(e) [55-4-103 NMSA 1978]. By the same token, if a dishonor comes within this section, the measure of damages of this section applies and not another measure of damages. If the wrongful refusal of the beneficiary's bank to make funds available from a funds transfer causes the beneficiary's check to be dishonored, no specific guidance is given as to whether recovery is under this section or Article 4A. In each case this issue must be viewed in its factual context, and it was thought unwise to seek to establish certainty at the cost of fairness.

3. The second and third sentences of the subsection (b) reject decisions holding that as a matter of law the dishonor of a check is not the "proximate cause" of the arrest and prosecution of the customer and leave to determination in each case as a question of fact whether the dishonor is or may be the "proximate cause."

4. Banks commonly determine whether there are sufficient funds in an account to pay an item after the close of banking hours on the day of presentment when they post debit and credit items to the account. The determination is made on the basis of credits available for withdrawal as of right or made available for withdrawal by the bank as an accommodation to its customer. When it is determined that payment of the item would overdraw the account, the item may be returned at any time before the bank's midnight deadline the following day. Before the item is returned new credits that are withdrawable as of right may have been added to the account. Subsection (c) eliminates uncertainty under Article 4 as to whether the failure to make a second determination before the item is returned on the day following presentment is a wrongful dishonor if new credits were added to the account on that day that would have covered the amount of the check.

5. Section 4-402 [55-4-402 NMSA 1978] has been construed to preclude an action for wrongful dishonor by a plaintiff other than the bank's customer. Loucks v. Albuquerque National Bank, 418 P.2d 191 (N.Mex. 1966). Some courts have allowed a plaintiff other than the customer to sue when the customer is a business entity that is one and the same with the individual or individuals operating it. Murdaugh Volkswagen, Inc. v. First National Bank, 801 F.2d 719 (4th Cir. 1986) and Karsh v. American City Bank, 113 Cal.App.3d 419, 169 Cal.Rptr. 851 (1980). However, where the wrongful dishonor impugns the reputation of an operator of the business, the issue is not merely, as the court in Koger v. East First National Bank, 443 So.2d 141 (Fla.App. 1983), put it, one of a literal versus a liberal interpretation of Section 4-402 [55-4-402 NMSA 1978]. Rather the issue is whether the statutory cause of action in Section 4-402 [55-4-402 NMSA 1978] displaces, in accordance with Section 1-103 [55-1-103 NMSA 1978], any cause of action that existed at common law in a person who is not the customer whose reputation was damaged. See Marcum v. Security Trust and Savings Co., 221 Ala. 419, 129 So. 74 (1930). While Section 4-402 should not be interpreted to displace the latter cause of action, the section itself gives no cause of action to other than a "customer," however that definition is construed, and thus confers no cause of action on the holder of a dishonored item. First American National Bank v. Commerce Union Bank, 692 S.W.2d 642 (Tenn.App. 1985).

The 1992 amendment, effective July 1, 1992, added "time of determining insufficiency of account" at the end of the section catchline; designated the formerly undesignated provisions as Subsection (b), while adding Subsections (a) and (c); and rewrote the former second and third sentences of Subsection (b) so as to constitute the present second sentence of that subsection.

I. CUSTOMER.

Partnership deemed customer through contract with bank. — The relationship between a bank and its depositor is a contractual relationship of debtor and creditor and a partnership can enter into the contractual relationship of debtor and creditor, as a customer of the bank, in accordance with the express provisions of the Code. Loucks v. Albuquerque Nat'l Bank, 76 N.M. 735, 1966-NMSC-176, 418 P.2d 191.

Partnership deemed customer not individual partners. — Although tortious conduct may be tortious as to two or more persons, and these persons may be a partnership and one or more of the individual partners, where the relationship, in connection with which the wrongful conduct of the bank arose, was the relationship between the bank and the partnership, the partnership was the customer and any damages arising from the dishonor belonged to the partnership and not to the partners individually. Loucks v. Albuquerque Nat'l Bank, 1966-NMSC-176, 76 N.M. 735, 418 P.2d 191.

Action on injury to partner properly dismissed. — Claim for loss of income in the amount allegedly sustained by the partnership as a result of the illness and disability of a partner by reason of his ulcer was properly dismissed even if the court were to assume that a tortious act had been committed by defendants, because the right to recover for the injuries would be in the partner alone, not in the partnership. Loucks v. Albuquerque Nat'l Bank, 1966-NMSC-176, 76 N.M. 735, 418 P.2d 191.

II. DISHONOR.

"Wrongful dishonor" means a dishonor done in a wrong manner, unjustly, unfair, in a manner contrary to justice. Allison v. First Nat'l Bank, 1973-NMCA-083, 85 N.M. 283, 511 P.2d 769, rev'd on other grounds, 1973-NMSC-089, 85 N.M. 511, 514 P.2d 30.

"Mistaken dishonor" means a dishonor done erroneously, unintentionally, a state of mind that is not in accord with the facts. Allison v. First Nat'l Bank, 1973-NMCA-083, 85 N.M. 283, 511 P.2d 769, rev'd on other grounds, 1973-NMSC-089, 85 N.M. 511, 514 P.2d 30.

III. DAMAGES.

Damages recoverable by customer. — The provisions of this section limit the damages of a customer, whose checks are wrongfully dishonored, to those proximately caused by the wrongful dishonor, and such includes any consequential damages so proximately caused. Loucks v. Albuquerque Nat'l Bank, 1966-NMSC-176, 76 N.M. 735, 418 P.2d 191.

"Consequential damage" is defined as such damage, loss or injury as does not flow directly and immediately from the act of the party, but only from the consequences or results of such act and it includes injuries to credit as a result of wrongful dishonor. Allison v. First Nat'l Bank, 1973-NMCA-083, 85 N.M. 283, 511 P.2d 769, rev'd on other grounds, 1973-NMSC-089, 85 N.M. 511, 514 P.2d 30.

Damages recoverable for injury to credit compensatory. — Damages recoverable for injuries to credit as a result of a wrongful dishonor are more than mere nominal damages and are referred to as compensatory, general, substantial, moderate or temperate, damages as would be fair and reasonable compensation for the injury which the depositor must have sustained, but not harsh or inordinate damages. Loucks v. Albuquerque Nat'l Bank, 1966-NMSC-176, 76 N.M. 735, 418 P.2d 191.

If dishonor occurs through mistake, damages are limited to actual damages proved. Loucks v. Albuquerque Nat'l Bank, 1966-NMSC-176, 76 N.M. 735, 418 P.2d 191.

Willful dishonor permits punitive damages. — This section does not deal with intentional or willful or malicious dishonor; however, intentional, willful or malicious dishonor permits an award of punitive damages. Allison v. First Nat'l Bank, 1973-NMCA-083, 85 N.M. 283, 511 P.2d 769, rev'd on other grounds, 1973-NMSC-089, 85 N.M. 511, 514 P.2d 30.

Law reviews. — For article, "New Mexico's Uniform Commercial Code: Who Is the Beneficiary of Stop Payment Provisions of Article 4?" see 4 Nat. Resources J. 69 (1964).

For comment on Loucks v. Albuquerque Nat'l Bank, 1966-NMSC-176, 76 N.M. 735, 418 P.2d 191 (1966), see 8 Nat. Resources J. 169 (1968).

Am. Jur. 2d, A.L.R. and C.J.S. references. — 10 Am. Jur. 2d Banks §§ 567, 575, 576.

Necessity of pleading that maker or drawer was given notice of dishonor of check, 6 A.L.R.2d 985.

Liability for negligently causing arrest or prosecution of another, 99 A.L.R.3d 1113.

Liability of check printer for errors in identification or routing codes printed on check, 18 A.L.R.4th 923.

What constitutes wrongful dishonor of check rendering payor bank liable to drawer under UCC § 4-402, 88 A.L.R.4th 568.

Who may recover for wrongful dishonor of check under UCC § 4-402, 88 A.L.R.4th 613.

Damages recoverable for wrongful dishonor of check under UCC § 4-402, 88 A.L.R.4th 644.

9 C.J.S. Banks and Banking §§ 341, 380.