The Midnight-Deadline Rule

Another rule that you must keep in mind when thinking about your return-check procedures is the midnight-deadline rule. This rule comes from the Uniform Commercial Code and Regulation J (which is a Federal Reserve Board Regulation governing the collection of checks routed through Federal Reserve Banks [12 CFR 210.1 et seq.]). The UCC says that you must settle for or return a check by midnight of the banking day it is presented to you for payment. [UCC, Section 4-301(a) and Section 4-104(a)(10)] (The Regulation J deadline for settlement or return is earlier in the day.) If you settle for a check before the deadline, you have until midnight of the following banking day to return the check and revoke the settlement. If you miss these deadlines, you become “accountable” for, or liable for, the check and you may no longer return it. The second deadline—midnight of the banking day following the banking day you receive the check—is generally called the “midnight deadline.” This is because the usual practice is to automatically settle for a check on the day of receipt, examine it after the close of business that day, and, if necessary, return it the next day. [You “settle” for a check by making the funds represented by the check available to the party from whom you receive it. See UCC, Section 4-104(a)(11).]

Remember that a “business day” is any calendar day other than Saturdays, Sundays, and federal legal holidays. [12 CFR 229.2(g)] A “banking day” is that part of any business day on which an office of an institution is open to the public for carrying on substantially all of its banking functions. [12 CFR 229.2(f)] Since Federal Reserve Banks operate 24 hours a day, the entire 24 hours of a business day is also a banking day for them. [See Oak Brook Bank v. Northern Trust Company, 256 F.3d 638, (7th Cir. July 2001).]

With the exception of two circumstances we’ll discuss below, the midnight-deadline rule is not preempted or superseded by the rules of Subpart C. This means that whether you are planning to comply with the expeditious-return requirement of Regulation CC by way of the two-day/four-day test or the forward-collection test, you must also make your return by the midnight deadline. If you don’t, it won’t be very important whether you met the expeditious-return requirement because the depositary bank can argue that because you missed the midnight deadline, you can’t return the check at all.

Now let’s look at the two exceptions to the midnight-deadline rule. Regulation CC says that you can miss the midnight deadline without losing your ability to return the check if you miss the deadline in order to use a more rapid means of transporting the check to wherever it is you’re sending it, be that the depositary bank or a returning bank, so that the check would normally be delivered to its destination on the receiving bank’s next banking day (by the earlier of the close of the banking day or the bank’s cut-off hour of 2:00 p.m. or later) following the expiration of the midnight deadline. And, the first exception goes on, if you use a “highly expeditious” means of transportation, the deadline is extended even if the check does not arrive on the banking day following the expiration of the deadline. (This first exception does not extend any deadlines that fall on a Saturday; the second exception, described below, applies to Saturday deadlines.) [12 CFR 229.30(c)(1)]

For example, suppose a check is presented for payment to you on Tuesday. If you settle for the check on Tuesday, your midnight deadline is midnight Wednesday. The midnight-deadline rule would say that you have to return the check by midnight Wednesday or lose your ability to return it at all. Concern about meeting your midnight deadline might cause you to mail your return checks before midnight Wednesday, even though you might have a courier leaving after midnight with forward-collection checks headed to the same bank. The Regulation CC exception to the midnight-deadline rule says that you can miss the midnight deadline and send the return checks by courier rather than by mail, so long as the return checks would normally reach their destinations on Thursday (by the earlier of the close of the banking day or the bank’s cut-off hour of 2:00 p.m. or later), which is the receiving bank’s next banking day following the expiration of the midnight deadline. The idea is that although you’re missing the midnight deadline, the return check will actually be arriving at its destination sooner than it would have had you met the deadline but used a slower means of sending the check. Since the midnight-deadline rule is intended to assure early notice of return checks, the objectives of the rule are still being met, even though you are missing the deadline. If you use a “highly expeditious” means of transportation in returning the check, you can safely miss the midnight deadline even if the check does not arrive at its destination on the next banking day. An example of the operation of this rule is when a West Coast bank decides to miss the midnight deadline in order to send return checks to an East Coast bank by air. Even though the checks may arrive at the East Coast bank after the close of its banking day, the West Coast bank fits within this exception because it used a “highly expeditious” means of transportation. Unfortunately, the term “highly expeditious” is not defined in Regulation CC, meaning that this aspect of the exception to the midnight-deadline rule is a little vague.

The second exception to the midnight deadline rule exists to help banks that operate on Saturdays. For such banks, a Saturday may be a “banking day” as defined under the Uniform Commercial Code (though not under Regulation CC). [UCC, Section 4-104(a)(3) and 12 CFR 229.2(f)] Therefore, a check presented on Friday would have a midnight deadline falling on Saturday night. Prior to Regulation CC, banks would meet the deadline by mailing the return checks before midnight on Saturday. But the expeditious return requirements of Regulation CC now, in many cases, preclude the mailing of the return checks. To meet both the midnight deadline and the expeditious-return requirements, an institution would have to create a special courier run on Saturday evenings. This Saturday evening run would be in addition to the normal Sunday run to the same institutions with forward-collection checks.

In 1990, the Board created an exception to the midnight-deadline rule to accommodate these institutions. The exception says that a Saturday midnight deadline is extended if the institution uses a means of transporting the return check which would ordinarily result in the check being received by the bank to which it is sent within certain time frames. If the bank to which the check is sent is a returning bank (as opposed to the depositary bank), the check must be sent so it would normally arrive prior to the returning bank’s cutoff hour for the next processing cycle after midnight Saturday night. If the bank is the depositary bank, the check must be sent so it would ordinarily arrive before the depositary bank’s cutoff hour on the next banking day after midnight Saturday night. [12 CFR 229.30(c)(2)]