The Uniform Commercial Code’s (UCC) midnight deadline rule imposes an obligation on payor banks to return dishonored checks before midnight of the next business day after the date of receipt of the item. The midnight deadline rule 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.” Va. Code § 8.4-302. The purpose of the rule is to provide finality and certainty to the financial institutions and parties involved in check and payment processes.

In Stahl v. Stitt, et al., the Virginia Supreme Court unanimously held that a party must have rights to the funds at issue in order to have standing to enforce the midnight deadline rule. Stahl’s aunt held two checking accounts. One account was at Branch Banking and Trust Company (BB&T) and the other was an account held at MCNB Bank and Trust Company (MCNB). Stahl was the payable-on-death beneficiary of the BB&T account. In 2016, Stahl’s aunt moved in with Stahl while she was receiving hospice care.

While her aunt was still alive, Stahl made an electronic request for a check, transferring her aunt’s MCNB account balance to her aunt’s BB&T account. On March 18, 2016, MCNB’s online banking system issued a check for funds in an amount of more than $245,000 for a “mail-in” deposit into the aunt’s BB&T account. BB&T provisionally credited the account in the amount of the check on the day it received the check.

On March 22, 2016, the check was electronically presented to MCNB for payment. MCNB decided to dishonor the check and returned it to BB&T, but did not return the check before midnight. Instead, the check was returned by first-class mail on March 25, 2016.

On March 26, 2016, Stahl’s aunt died intestate. Before her death, other relatives learned of the transaction and promptly contacted BB&T and MCNB to report the transaction as fraudulent. BB&T froze the account.

On April 1, 2016, BB&T presented the check to MCNB for a second time and, again, MCNB dishonored the check. MCNB returned the check by first-class mail on April 5, 2016.

On April 14, 2016, the funds from the check were removed from the BB&T account and recredited to the MCNB account. Subsequently, on April 28, 2016, Stahl’s other aunt, who had qualified as administrator of the deceased’s estate, obtained the funds from the MCNB account.

Stahl filed suit against MCNB and other relatives in the circuit court for the city of Lynchburg, arguing that she owned the funds that were deposited in the BB&T account at the time of her aunt’s death because she was the payable-on-death beneficiary of the BB&T account. Stahl claimed that she was entitled to the funds that were credited to the BB&T account on March 26, 2016. Stahl alleged that MCNB violated the midnight deadline rule because MCNB retained the check beyond the midnight deadline without paying or returning it, and without sending notice of dishonor. Stahl concluded that, as a result, MCNB was strictly liable for the payment of the check. MCNB argued that Stahl did not have standing to enforce the midnight deadline rule.

The circuit court agreed with MCNB that Stahl lacked standing. The circuit court noted that Stahl’s aunt was still alive when the check was presented to MCNB on March 22, 2016, and thus on this date, Stahl was not the customer or party entitled to the funds on deposit; she was only the payable-on-death beneficiary of the BB&T account. The circuit court denied Stahl’s motion for summary judgment, concluding that Stahl did not have any vested interest in the check or funds at issue when the check was initially presented for payment.

Stahl appealed and argued that the circuit court erred by granting MCNB’s motion for summary judgment based on the alleged lack of standing to enforce the midnight deadline rule. The Virginia Supreme Court looked to American Title Ins. Co. v. Burke & Herbert Bank & Trust Co., 813 F. Supp. 423 (E.D. Va. 1993), aff’d, 25 F.3d 1038 (4th Cir. 1994), for guidance. In American Title, the plaintiff’s agent embezzled funds that he received during real estate closings. The agent’s embezzlement caused a trust account to become overdrawn. The defendant bank subsequently returned three checks written by the agent because the trust account held insufficient funds. The bank did not return the checks until after the midnight deadline had passed. The plaintiff had to reimburse the payees of the checks under the terms of certain closing letters and the reimbursed payees assigned their rights to payment under the checks to the plaintiff. The plaintiff attempted to enforce the midnight deadline rule against the defendant bank. Citing Va. Code § 8.4-302, the plaintiff argued that the defendant bank was strictly liable for the payment of the checks. In response, the defendant bank asserted that the plaintiff lacked standing to enforce Va. Code § 8.4-302. The district court concluded that Va. Code § 8.4-302 confers standing upon a “limited class comprised of those involved in the collection and payment of the check at issue who may be directly harmed (but are not necessarily actually harmed) by the failure of the payor bank to adhere to the … midnight deadline.” Id. at 428. The district court emphasized that “it is the potential reliance on payor bank action that arises once a check is actually presented that provides the basis for standing to sue under [Va. Code] § [8.4]-302.”

The Supreme Court, applying American Title, found that Stahl lacked standing to enforce the midnight deadline rule against MCNB. Although Stahl eventually became the owner of the BB&T account, the undisputed facts of this case established that Stahl could not have relied on the prompt payment of the check as a matter of law. The Supreme Court also found that Stahl’s interest in the funds at issue was contingent. On the other hand, Stahl’s aunt was the party who presented the check for payment and, therefore, Stahl’s aunt could have relied on the prompt payment of the check and the resulting availability of the funds at issue.

The Supreme Court also determined that Stahl did not have standing to enforce the midnight deadline rule after the second presentment of the check because it was unlikely that MCNB would promptly honor the check. The relatives had informed both MCNB and BB&T that the transaction was fraudulent, and the relatives had taken steps to prevent the funds from being transferred to the BB&T account. Additionally, the funds in the BB&T account were frozen on the day of Stahl’s aunt’s death and thus were not available to Stahl. The Supreme Court found that Stahl could not have relied on the immediate availability of any funds that may have been deposited.

The outcome of Stahl is consistent with the principles of privity manifest throughout the UCC. The UCC is intended to govern the rights and liabilities of the parties directly involved in the bank collection process. A party outside of that process with contingent rights should not be able to sue to recover damages from a bank that allegedly failed to comply with the midnight deadline rule. The ruling reinforces the need to examine the issue of standing in every UCC case and underscores the import of identifying the proper deposit account customer in cases brought under the UCC.

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Photo of Elizabeth Briones Elizabeth Briones

Elizabeth Briones is an associate in the firm’s Consumer Financial Services practice with a focus on complex litigation, professional liability, and product liability. 

Photo of Mary C. Zinsner Mary C. Zinsner

Mary Zinsner is a partner in Troutman Pepper’s Washington, D.C. office who handles high stakes matters for banks nationwide. Mary focuses her practice on litigation and strategy in lender liability, check and bank operation, class action, consumer finance, fiduciary matters, and creditor’s rights…

Mary Zinsner is a partner in Troutman Pepper’s Washington, D.C. office who handles high stakes matters for banks nationwide. Mary focuses her practice on litigation and strategy in lender liability, check and bank operation, class action, consumer finance, fiduciary matters, and creditor’s rights disputes. She has also been accepted into the American Arbitration Association’s (AAA) Roster of Arbitrators. Viewed as leaders in the practice of alternative dispute resolution (ADR), AAA arbitrators are required to receive ongoing education in the art and science of arbitration and demonstrate knowledge, prowess, mastery, and proficiency in a particular field.

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Photo of Andrew Buxbaum Andrew Buxbaum

Andrew specializes in representing clients in the financial services industry (including banks, lenders, mortgage companies, debt collection firms and loan servicers) in consumer litigation, bankruptcy, and regulatory compliance matters.

Photo of Sarah Siu Sarah Siu

Sarah represents clients in consumer law, business disputes, and commercial litigation as a member of the firm’s Consumer Financial Services practice. The nationally ranked Consumer Financial Services practice assists clients in navigating consumer finance and privacy laws, including fair lending and fair credit…

Sarah represents clients in consumer law, business disputes, and commercial litigation as a member of the firm’s Consumer Financial Services practice. The nationally ranked Consumer Financial Services practice assists clients in navigating consumer finance and privacy laws, including fair lending and fair credit reporting, debt collection, auto finance, and mortgage servicing issues.