I. INTRODUCTION
The NBA often fields questions regarding the issue of holding checks for collection purposes. Although there are no state or federal statutes or rules that define a bank’s responsibilities in this regard, there is plenty of case law on the subject. There are two general issues: (1) establishing the hold as a collection transaction; and (2) establishing the terms of the collection agreement.
II. ESTABLISHING THE HOLD AS A COLLECTION TRANSACTION
Generally, a review of caselaw indicates that when a bank establishes a check hold for the purposes of collection, courts have recognized that such a transaction is not subject to the normal check processing rules as outlined in Articles 3 and 4 of the Uniform Commercial Code (UCC). Specifically, the hold for collection transaction, if established properly, is not subject the UCC’s rules regarding presentment, dishonor and the midnight deadline. Conversely, if a check hold for collection is not established, the courts have found banks to be liable for such checks in that they were held past the midnight deadline. Ideally, a bank should obtain a written agreement (e.g., a receipt for the collection item stating that the party requesting the hold agrees that the bank may hold the item over a period longer than normal for returning checks and that the party is not making a “presentment” of the item) with the party that is asking the bank to hold the check for collection. A written agreement provides the bank with evidence that the check is being held by the bank, upon request, for collection purposes.
III. ESTABLISHING THE TERMS OF THE COLLECTION AGREEMENT
Absent both statutory and regulatory guidance, a bank’s responsibilities in regard to holding an item for collection purposes is confined to the terms of agreement between the bank and the party requesting that the bank hold the check for collection purposes. Once again, it would be ideal if the bank could obtain a written agreement between the party requesting the hold for collection and the bank. A written agreement serves to provide certainty for many potential issues, such as: How long should the bank hold the check for collection purposes; Should the bank pay the collection item before or after other checks are drawn on the account? In what manner should the bank pay the party requesting the item be held for collection?
A leading decision, WB Farms v. Fremont National Bank, 756 F2d 663 (8th Cir. 1985) held that a bank has the freedom to enter into a contract that varies the general rules of Article 4 of the UCC. In this case, a bank teller orally agreed that a check would be held for collection and paid “whenever funds come into the account.” The facts of the case reveal that on November 15 the account of the drawer had a balance (after all other checks were paid on that date) to cover the check held for collection. Even though the bank had the right to pay other checks before paying the check held for collection [See, § 4-303(2), UCC], it had obligated itself, by oral agreement, to pay the check held for collection. The bank exercised its right of setoff on November 15, depleting the account. The court held that the bank teller’s oral statement was an agreement conditioned on funds being in the account and that bank had a duty to pay the check when such event occurred during the time the bank agreed to hold the check for collection.