The midnight deadline requires a bank to dishonor a check before midnight on the next banking day following the banking day on which the bank receives the check. See UCC 4-301(a). If the bank fails to act before the deadline, the bank is liable for the amount of the check. The Expedited Funds Availability Act and accompanying Regulation CC, as well as clearinghouse rules, can alter the deadline for returning a dishonored check, however. A Utah decision illustrates.

On Thursday, August 2, 2001, HMA, a real estate development firm, deposited a $700,000 check drawn by Brent Woodson on Wells Fargo Bank into its account at U.S. Bank. That same day, HMA wrote a check for $662,147 to Barnes Bank. Had the Woodson check cleared, the HMA account would have had sufficient funds to cover the Barnes check. Woodson, however, stopped payment on the check, also on August 2, and Wells Fargo returned the check unpaid to U.S. Bank. This created an overdraft in the HMA account. U.S. Bank sued HMA to recover this overdraft.

In its defense to U.S. Bank’s claims, HMA argued that U.S. Bank could not charge back the Woodson check because Wells Fargo had failed to return the check to U.S. Bank in a timely manner. Thus, HMA argued that there was no overdraft in its account. A Utah trial court rejected HMA’s defense, and on appeal, the Utah Supreme Court affirmed.

The Travels of the Check

To analyze the treatment of the check at issue, the court undertook a detailed discussion of its travels. The Woodson check was drawn on Wells Fargo Bank. On August 2, 2001, the day the check was deposited, U.S. Bank sent the check to a Wells Fargo processing center. Wells Fargo processed the check in the late hours of August 2, and the Woodson check became part of the August 3 banking day.

After Wells Fargo processed the check, on August 3, the check was settled through the Boise Clearinghouse. Meanwhile, that same day, by paying the Barnes check, U.S. Bank made available to HMA the funds represented by the check. Woodson had asked Wells Fargo to stop payment on the check on the morning of August 2. Woodson’s stop payment order was transmitted from Wells Fargo to U.S. Bank’s operations center in Minnesota via the Primary Payment System early on the morning of Friday, August 3. The operations center transmitted this information to U.S. Bank’s Provo, Utah branch, where HMA had deposited the check before the opening of business on August 3. Given these facts, the court then analyzed whether Wells Fargo had met its midnight deadline.

Wells Fargo received the Woodson check on Friday, August 3. Thus, the midnight deadline for the bank would be midnight on the next banking day. HMA contended that because Idaho law designates Saturday as a banking day, Wells Fargo’s midnight deadline was midnight on Saturday. Under both the Utah law and the rules of the Boise Clearinghouse, however, Saturday is not a banking day. In the interest of bringing consistency to the many banks that use the clearinghouse, the court held that the clearinghouse rule would apply. Thus, Wells Fargo’s midnight deadline was Monday, August 6.

The Effect of Regulation CC

Thus, after the Woodson check was settled through the Boise Clearinghouse, Wells Fargo sent the check back, unpaid, to U.S. Bank via the Federal Reserve System. Wells Fargo did not return the dishonored check until Tuesday, August 7, past the midnight deadline. The court held, however, that Regulation CC extended the midnight deadline for Wells Fargo.

While Regulation CC does not do away with the midnight deadline, it does extend the deadline in two ways. First, a drawee bank may escape the midnight deadline by dispatching the check “in time to ordinarily reach the receiving bank . . . on or before the bank’s next banking day after the imposed midnight deadline” as long as the bank delivers the check in a way that “would ordinarily accomplish the safe arrival of the check at a returning or depositary bank on that day.” Second, Regulation CC extends the midnight deadline beyond the next banking day if the bank uses a “highly expeditious” method of delivering the check to the receiving bank. See 12 CFR 229.30(c).

In this case, Wells Fargo placed the Woodson check in the hands of a courier, who transported the check from Wells Fargo in Salt Lake City to the Federal Reserve Bank in Salt Lake City around midnight on August 6. The court found that this method of delivery was a “highly expeditious” method of delivery that would ordinarily result in the delivery of the check to the Federal Reserve by August 7. HMA argued that because the check did not reach U.S. Bank until August 8, under the Boise Clearinghouse rules, even allowing for the extension of the deadline by Regulation CC, Wells Fargo missed the deadline. The court found, however, that Regulation CC displaced the rules of the clearinghouse. Wells Fargo did not need to send the check directly to U.S. Bank; federal regulations specifically authorize return through the Federal Reserve. Moreover, prompt delivery of the check to the Federal Reserve satisfies the requirement that the bank use a “highly expeditious” method.

The court concluded that Wells Fargo met its midnight deadline here. Thus, U.S. Bank acted properly in charging back HMA’s account for the Woodson check and could recover the overdraft that the chargeback created. (U.S. Bank, N.A. v. HMA, L.C., 2007 WL 1452649 (Utah 2007).)

OBSERVATION: The court commented on the somewhat unusual procedural stance of the case. Normally, Wells Fargo, the payor bank, would be arguing that it met the deadline, but Wells Fargo was not a party to the case. HMA was hoping to take advantage of Wells Fargo’s alleged tardiness to avoid paying the overdraft in its account. Because both parties conceded that a decision finding that Wells Fargo missed the deadline would grant HMA the requested relief, the court did not consider the propriety of allowing HMA to raise this unusual defense to a suit to collect an overdraft.