MEMORANDUM OPINION AND ORDER
This matter is before the court on the motion for judgment on the pleadings of defendant Standard Bank and Trust Company ("Standard"). For the reasons set forth below, the motion is denied.
This action arises out of a check kiting scheme allegedly first discovered by plaintiff NBD Bank ("NBD"). NBD alleges that on Thursday, November 18, 1993, the individual behind the check kiting scheme ("the perpetrator") presented for deposit into customer accounts at NBD checks in the aggregate amount of $ 3,997,406.75 drawn on various customer accounts maintained at Standard. First Amended Complaint for Declaratory Judgment and Other Relief ("Cmplt."), P 10. On Friday, November 19, 1993, by 8:00 a.m., NBD caused these checks to be presented to Standard. La Salle National Bank ("La Salle"), in its capacity as collecting bank, charged Standard's account and provisionally credited NBD with these amounts. Cmplt., P 11; First Amended Counterclaims ("Cntrclm."), P 8.
On the same day as did NBD, Standard also transacted business with the perpetrator or a related individual. Thus, on Thursday, November 18, 1993, the perpetrator caused to be presented to Standard for deposit into customer accounts at Standard checks in the aggregate amount of $ 4,025,000 drawn on customer accounts maintained at NBD. Cmplt., P 8. On Friday, November 19, 1993, Standard caused the checks to be presented to NBD for payment. La Salle, in its capacity as collecting bank, charged NBD and provisionally credited Standard with the amount of the checks. Cmplt., P 9; Cntrclm., P 9.
NBD alleges that on Monday, November 22, 1993, NBD discovered that the perpetrator had been signing all or almost all the checks drawn on the NBD customer accounts in question, and that those accounts showed repeated large transfers of funds indicative of a potential check kiting scheme. NBD therefore caused the checks to be stamped "Return to Maker" and did not honor them. It is undisputed that NBD caused the checks to be returned to Standard on that same Monday, November 22, 1993. Cmplt., P 9. As NBD interprets applicable law, return of the checks came before the midnight deadline for that transaction under Article 4 of the Uniform Commercial Code ("UCC"), 810 ILCS 5/4-302.
The central issue in this suit is whether Standard may dishonor the set of checks drawn on its customer accounts that were used in the kiting scheme. Significantly, Standard did not return the checks drawn on the Standard accounts by midnight on Monday, November 22, 1993. Cmplt., P 12. According to Standard, its first notice of the check kiting scheme came at approximately 8:12 a.m. on Tuesday, November 23, 1993, when it received NBD's notice of non-payment of checks in the aggregate amount of $ 4,025,000 drawn on deposit accounts at NBD. Cntrclm., P 10. That same day, Standard sent three of its officers to NBD's operations processing center, where the officers returned or attempted to return checks drawn on Standard in the aggregate amount of $ 3,785,441.35. The Standard officers did so at or before 3:58 p.m. Central Standard Time on Tuesday, November 22, 1993. Cmplt., P 13; Cntrclm., P 11.
NBD states that it took the documentation presented, but made no payment or agreement to pay Standard the amount of the checks brought by the officers. The following day, on Wednesday, November 24, 1993, NBD returned the disputed items to Standard, contemporaneously notifying Standard that, because Standard had failed to act by the midnight deadline under UCC § 4-302, NBD was returning the items. Cmplt., P 14; Cntrclm., P 13. The checks having been presented to Standard on Friday, November 19, NBD contends that the midnight deadline for return was midnight on Monday, November 22.
Standard, for its part, maintains that because its officers properly and timely returned checks in the aggregate amount of $ 3,785,441.35 on Tuesday, November 23, 1993, NBD was required to pay Standard such amount prior to the close of business on that same day, Cntrclm., P 14. As the basis for its argument, Standard looks to Federal Reserve Regulation CC ("Regulation CC"), which implements the Expedited Funds Availability Act, 12 U.S.C. § 4001 et seq.
Section 229.30(a)(1)(i) of Regulation CC, dealing with a paying bank's
responsibility for return of checks, provides as follows:
(a) Return of checks. If a paying bank determines not to pay a check, it shall return the check in an expeditious manner . . .
(1) Two-day/four-day test. A paying bank returns a check in an expeditious manner if it sends the returned check in a manner such that the check would normally be received by the depository bank not later than 4:00 p.m. (Local time of the depository bank) of--