## Facts

- Shelley International Marketing opened a checking account at First National Bank.
- World Commodities, Inc. opened a checking account at Colonial Bank; the same individuals controlled both entities.
- The common principals operated a check-kiting scheme by depositing checks between the two banks drawn on insufficient funds to create artificial balances.
- On February 10, 1992, Shelley deposited at First National checks drawn on Colonial totaling about $1.5 million; the same day, World Commodities deposited at Colonial checks drawn on First National totaling about $1.5 million.
- On February 11, 1992, the checks were presented through the collection process to the respective payor banks.
- First National became suspicious, froze Shelley’s account, and returned the checks drawn on First National that had been deposited at Colonial on February 12, 1992.
- Colonial learned on February 12 that First National had returned the First National checks and understood it needed to return the checks drawn on Colonial by its “midnight deadline” to avoid liability.
- Colonial contacted its customer, received assurances that the checks were good, and chose not to return the Colonial-drawn checks that day, delaying return until the following day for customer-relations reasons.
- Colonial did not return the Colonial-drawn checks by its midnight deadline on February 12 and returned them on February 13.
- The principals absconded; First National sustained a loss roughly equal to the amount of the Colonial-drawn checks (about $1.4–$1.5 million).

## Issues

1. Whether Colonial, as payor bank, returned or dishonored the Colonial-drawn checks within its U.C.C. § 4-302 “midnight deadline.”
2. If Colonial missed the deadline, whether it was “accountable” to First National for the amount of the checks notwithstanding that both banks were victims of the check-kiting scheme.

## Decision

- The court held Colonial did not return the Colonial-drawn checks by its midnight deadline.
- The court held that, under U.C.C. § 4-302 (as adopted in Illinois), Colonial became accountable for the amount of the items it failed to timely return.
- The court granted First National’s motion for summary judgment on the § 4-302 claim and denied Colonial’s motion.
- Judgment was entered for First National for approximately $1.4 million (reflecting the loss tied to the late-returned items).

## Legal Principles

- Under U.C.C. § 4-302, a payor bank that settles for a demand item must return the item or send timely notice of dishonor before its midnight deadline or become accountable for the item’s amount.
- “Midnight deadline” functions as a firm temporal cutoff allocating interbank loss; once missed, accountability follows without an equitable rebalancing based on fault.
- § 4-302 liability is treated as strict in operation: a payor bank’s business reasons for delay, including reliance on customer assurances, do not excuse noncompliance.
- In disputes between innocent banks harmed by a kite, the bank that fails to meet the statutory return deadline bears the loss as between the banks.

## Conclusion

The court imposed § 4-302 accountability on Colonial because it consciously failed to return the Colonial-drawn checks by its midnight deadline, shifting the loss to Colonial even though both banks were victims of the same check-kiting scheme.


First Nat’l Bank v. Colonial Bank, 898 F. Supp. 1220 (N.D. Ill. 1995)