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Heartland State Bank v. American Bank & Trust

October 27, 2010

HEARTLAND STATE BANK, A SOUTH DAKOTA BANKING CORPORATION, PLAINTIFF AND APPELLANT,
v.
AMERICAN BANK & TRUST, A SOUTH DAKOTA BANKING CORPORATION F/K/A HAND COUNTY STATE BANK, DEFENDANT AND APPELLEE.



APPEAL FROM THE CIRCUIT COURT OF THE THIRD JUDICIAL CIRCUIT HAND COUNTY, SOUTH DAKOTA HONORABLE TIM D. TUCKER Judge.

The opinion of the court was delivered by: Konenkamp, Justice

CONSIDERED ON BRIEFS ON AUGUST 24, 2010

[¶1.] When a bank returned a series of checks for insufficient funds, the returns were challenged as untimely. Under the Uniform Commercial Code midnight-deadline rule for check processing, a payor bank must, after receipt of a check presented for payment, pay the check, return it, or send notice of dishonor by midnight of the next banking day. Otherwise, the payor bank becomes "accountable" for the amount of the check. Because, here, the bank returned the checks by midnight after receiving them the day before by postal delivery, the return was timely. We affirm the circuit court's grant of summary judgment.

Background

[¶2.] Highmore Auction Sales wrote eight checks on its account with American Bank & Trust payable to HS Cattle. HS Cattle deposited three checks with Heartland State Bank on April 4, 2002, and five checks on April 8, 2002, all totaling $799,159.47. Heartland gave HS Cattle credit for the checks when they were deposited.

[¶3.] Heartland, as the "depositary bank," routed the checks to a "collecting bank," the Federal Reserve Bank, in Minneapolis, Minnesota. See

SDCL 57A-4-105(2) and (3). The Federal Reserve Bank received three checks on April 8 and the remaining five checks on April 9, 2002. It processed the checks on the same days they were received, made provisional settlements, and bundled them in two cash letters. See SDCL 57A-4-104(a)(11) (defining settle). Due to delays in the U.S. Postal Service, both cash letters along with the checks were delivered to American, the "payor bank," at its mailing address on April 10, 2002. See

SDCL 57A-4-105(5).

American picked the checks up the same day. It then returned the checks for insufficient funds before midnight on April 11, 2002. By the time Heartland received the returned checks, it lost its ability to recover the $799,159.47 because Highmore Auction Sales was "broke" and HS Cattle had already spent the money.

[¶4.] When a payor bank receives a check, it is considered "presented," meaning a demand for payment has been made upon the party obligated to pay the check. SDCL 57A-3-501(a). Once a check has been provisionally settled through a Federal Reserve Bank, a payor bank upon receipt can effect final payment in several ways. SDCL 57A-4-215(a)(1) - (3). But the payor bank may also revoke a provisional settlement and return the check, if the payor bank has not made final payment and returns the check before the midnight deadline. SDCL 57A-4-301(a)(1); SDCL 57A-4-302(a)(1). The "midnight deadline" is the "next banking day following the banking day on which [the bank] receives the relevant item or notice or from which the time for taking action commences to run, whichever is later[.]" SDCL 57A-4-104(a)(10) (emphasis added). If the midnight deadline is not met, the payor bank becomes "accountable" - strictly liable - for the amount of the check regardless of whether there were sufficient funds in the customer's account to cover payment.*fn1 SDCL 57A-4-302; see also SDCL 57A-4-215(a)(3).

[¶5.] Heartland brought suit to recover the amount of the eight checks, contending that the returns were untimely. Both banks moved for summary judgment. Heartland asserted that American failed to meet the midnight deadline because American received the checks when they were made available for pickup, not when they were physically delivered. See Federal Reserve Operating Circular No. 3, Section 9.2 (2002 version).

[¶6.] After a hearing, the circuit court granted summary judgment in favor of American. The court interpreted South Dakota's version of the Uniform Commercial Code (UCC) and federal regulations to conclude that American did not receive the checks until the U.S. Postal Service delivered them to American's mailing address on April 10, 2002. Heartland appeals on the ground that the court erred when it held that American did not receive the checks earlier than April 10, 2002. We review the circuit court's summary judgment de novo. Horne v. Crozier, 1997 S.D. 65, ¶ 5, 565 N.W.2d 50, 52.

Analysis and Decision

[ΒΆ7.] Under the UCC rules governing check processing, the midnight deadline for a bank is "midnight on its next banking day following the banking day on which [the bank] receives" the check. SDCL 57A-4-104(a)(10). Because the midnight deadline clock could not start until American received ...


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