I. INTRODUCTION
In order to facilitate the processing of volumes of checks, the drafters of the Uniform Commercial Code (UCC) decided that all checks are assumed to be paid and are treated as such if a certain period of time expires. This period of time is referred to as the “midnight deadline.” The payor bank has a precise period of time to decide whether an item (e.g., a check) is to be settled (i.e., paid or not paid). Upon expiration of this period, if the payor bank has not made its decision, the bank becomes “accountable” for the payment of the item. The purpose of the “midnight deadline” rule is to reduce paperwork and promote fast and efficient check collection procedures. As with many rules, there are several exceptions that must be considered.
II. THE MIDNIGHT DEADLINE RULE
A payor bank has until the expiration of its “midnight deadline” to act. The term “midnight deadline” is defined in U.C.C. § 4-104(10), with respect to a bank as “midnight on its next banking day following the banking day on which it receives the relevant item or notice or from which the time for taking action commences to run, whichever is later”. The “midnight deadline” rule is set forth in U.C.C.§ 4-302:
(a) If an item is presented to and received by a payor bank, the bank is accountable for the amount of:
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; or
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) The liability of a payor bank to pay an item pursuant to subsection (a) is subject to defenses based on breach of a presentment warranty (§ 4-208) or proof that the person seeking enforcement of the liability presented or transferred the item for the purpose of defrauding the payor bank.
A payor bank may practice deferred posting (See, U.C.C.§ 4-301) which allows the bank to make provisional settlement for an item on the day of receipt and to revoke such settlement by returning the item on the next day, prior to the expiration of its “midnight deadline.” Where a payor bank is also the depositary bank (i.e., involving “on us” items) the payor bank is accountable if it retains the item beyond its midnight deadline without settling for it. The previous statement should be distinguished from a situation involving a payor bank that is not the depositary bank, for then the payor bank is accountable for the item if it retains it beyond midnight of the banking day of receipt. In this case, the payor bank may avoid accountability either by settling for the item on the day of receipt and returning the item prior to its “midnight deadline” or returning the item on the day of receipt. Note that in the case of checks, Regulation CC [§ 229.36(d)] states that settlements between banks for forward collection of checks are final when made.
A payor bank may also agree to delay presentment of an item and hold it for collection according to the terms and conditions of the agreement. In such case, presentment may be contingent on other events (e.g., when there are sufficient funds in the account to pay the check) and only upon the occurrence of such events will presentment be made and the “midnight deadline” rule come into play.
III. EXCEPTIONS TO THE “MIDNIGHT DEADLINE” RULE
As shown above, § 4-302(b) provides for express exceptions to the “midnight deadline” rule, namely, breach of presentment warranty or proof that the person seeking enforcement either presented or transferred the item for the purpose of defrauding the payor bank. In addition, some courts have recognized “common law” defenses, such as mistake of fact, unjust enrichment and principal-agent liability [See, Lombardo v. Mellon Bank, N.A., 454 Pa.Super. 403, 685 A.2d 595, 33 U.C.C.Rep.2d 154 (1996)] or involved check kiting schemes [See, In re Spring Grove Livestock Exchange, Inc., 205 B.R. 149, 33 U.C.C. Rep2d 160 (Bankr.Minn. 1997].
The “midnight deadline” rule may also be varied by:
Clearinghouse rules, federal regulations, Federal Reserve operating letters may alter (by generally reducing) the time period in which a bank must settle an item. The UCC allows a bank to establish a cut-off hour for the processing of items so that deposits received after such time are treated as being received at the opening of the next banking day. Excused delays encompass interruptions of communication facilities, war, emergency conditions or other circumstances beyond the bank’s control.