The “midnight deadline,” with respect to a bank, is the Uniform Commercial Code’s (UCC) adaptation of the adage, “Nothing good happens after midnight.” The midnight deadline rule imposes strict liability on a bank to return dishonored checks by or before midnight of the day after the item was presented for payment.
When a bank customer deposits a check into her account, her bank then presents the check to the payor bank for payment or return. If the payor bank dishonors the check, it then has until midnight on the next day to return it. Failure to return the dishonored check by midnight places absolute liability on the payor bank to settle it in full.
Virginia adopted this rule in Va. Code Ann. § 8.4-302, which states:
If an item is presented and received by a payor bank, the bank is accountable for the amount [of] . . . 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.
The rule seems straightforward, and, for the most part, it is. However, the Virginia Supreme Court considered a unique aspect of this rule in Sheree Stahl v. Carole Stitt, et al., 301 Va. 1 (2022). There, the Court considered who has standing to enforce the midnight deadline rule if something happens to the account holder during the presentment process.
In 2016, an elderly lady, Ivory Markus, lived with her niece, Sheree Stahl. Ms. Markus held two bank accounts: one, through MCNB Bank and Trust Company (“MCNB”); and the second, at Branch Banking and Trust Company (BB&T). Ms. Markus designated Stahl to be the pay-on-death (POD) designee on the BB&T account.
At some point, Ms. Markus desired to transfer the balance of the MCNB account to BB&T; and, to that end, she requested that MCNB issue a check for the entire account balance to be deposited at BB&T. MCNB promptly issued a check payable to the BB&T account, and upon receipt of the check, BB&T entered a provisional credit to Ms. Markus’s account.
BB&T then presented the check to MCNB for payment; however, MCNB declined to honor it. The dishonor likely was the result of Ms. Markus’s sister (the defendant, Carole Stitt) having reported that the transaction was fraudulent.
According to the midnight deadline rule, MCNB should have returned the dishonored check no later than midnight the day after presentment, but it did not. The next day, Ms. Markus died and her accounts were frozen. MCNB, admittedly, did not return the dishonored check until three days later.
A week after Ms. Markus’s death, and even though her accounts remained frozen, BB&T presented the check a second time to MCNB for payment, and MCNB again dishonored it. This time, MCNB did not return the check until five days after presentment, again violating the midnight rule. Sometime later, Stitt qualified as Ms. Markus’s estate administrator and was able to withdraw the entire balance of the MCNB account.
Stahl, as the POD beneficiary of the BB&T account, brought suit to obtain the funds, maintaining that she was entitled to them because MCNB failed to meet the midnight deadline, placing strict liability on MCNB to pay the funds into the BB&T account. MCNB defended itself, claiming that Stahl had no standing to enforce the midnight rule, because she was not the holder of the account at the time of the first presentment. The Circuit Court agreed with MCNB, finding that Stahl, as the POD beneficiary, did not have a vested interest in the funds until after Markus’s death; therefore, she had no standing to enforce the rule against the first presentment.
Stahl amended her complaint to include allegations relating to the second presentment of the check, and attempted to enforce the midnight deadline rule as to the second presentment; however, she was not successful in this attempt, either. The Circuit Court determined that Stahl could not have reasonably relied on the availability of the funds in the frozen account when the check was presented a second time, and therefore she did not have standing to enforce the midnight deadline as to the second presentment.
The Court relied on one guiding case (see footnote) in reaching its conclusion that Stahl was never in a position of reliance on the funds. On the first presentment, Stahl had only a “contingent” or transient interest; and, at the second presentment, the funds were frozen and she could not have relied upon them. At each presentment, “Stahl was too remote from the transaction at issue to have standing to enforce the midnight deadline rule…. Stahl could not have relied on the immediate availability of any funds that may have ultimately been deposited…” even though she later became the account holder.
The bank that fails to observe the stroke of midnight on the day after dishonoring presentment of a check is strictly liable to settle the transaction in favor of the payee. However, the party seeking payment must first have standing to enforce the midnight deadline rule against the dishonoring bank. Under the ruling in Stahl, standing is determined on the enforcing party’s reliance on the immediate availability of funds at the time a check is presented.
If you have questions about this article, please contact Denise Reverski (dreverski@setlifflaw.com) at 804-377-1272 or Steve Setliff (ssetlif@setlifflaw.com) at 804-377-1261.
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- American Title Ins. Co. v. Burke & Herbert Bank & Trust Co., 1994 U.S. App. LEXIS 12457, 1994 WL 224210, at *1 (4th Cir. 1994).
