## Facts

- On August 29, 2001, Valley National Bank (Valley) received five checks totaling almost $500,000 from a depositor and gave the depositor provisional credit.
- The checks were drawn on the depositor’s account at Hudson United Bank (Hudson), the payor bank.
- On Thursday, August 30, 2001, Valley presented the checks to Hudson for payment, and Hudson quickly determined there were insufficient funds to pay them.
- The depositor was engaged in check kiting and absconded with the funds Valley had made available based on the provisional credit.
- September 3, 2001, was a bank holiday; the dispute focused on whether Hudson met UCC § 4-301’s requirement to return the items by the “midnight deadline” (midnight of the next banking day after receipt) to avoid accountability.
- At 1:13 p.m. on September 4, Hudson sent Valley a notice of return through the Electronic Advance Return Item Notification System (EARNS).
- At approximately 10:00 p.m. on September 4, Hudson sent the unpaid checks by courier to the Federal Reserve Bank’s East Rutherford Operations Center (EROC).
- EROC was open 24 hours a day, but it treated returned checks arriving after 2:00 p.m. as received the next day for processing purposes.
- Valley received the returned checks from EROC on September 5, and Valley first saw Hudson’s EARNS notice on September 5.
- Valley sued Hudson, arguing Hudson became accountable for the checks’ amounts because Hudson did not timely return the checks within UCC § 4-301’s midnight deadline.

## Issues

1. Whether Hudson met UCC § 4-301’s midnight-deadline requirement by sending EARNS notice on September 4 and delivering the checks to EROC late that evening, even though EROC treated the delivery as next-day receipt.
2. Whether Federal Reserve Regulation CC (12 C.F.R. pt. 229), including its notice-of-nonpayment provisions, extended or excused Hudson’s obligation to make a timely return under UCC § 4-301.

## Decision

- The court held Hudson did not make a timely return under UCC § 4-301 and was accountable for the amounts of the checks.
- Hudson’s EARNS electronic notice did not substitute for a timely return under Article 4 on these facts.
- Hudson could not rely on EROC’s internal processing cutoff (treating after-2:00-p.m. deliveries as next-day receipt) to satisfy the UCC midnight deadline.
- Regulation CC’s notice requirements did not displace or extend the UCC’s midnight-deadline accountability rule in this loss-allocation dispute between banks.
- Summary judgment was granted in Valley’s favor.

## Legal Principles

- Under UCC § 4-301, a payor bank that does not return an item (or take other action allowed by the statute) by midnight of the next banking day after receipt becomes accountable for the amount of the item.
- Sending an electronic notice of return under a Federal Reserve notification system does not, by itself, constitute a timely “return” of the item for UCC § 4-301 purposes when the item itself is available to be returned through normal channels.
- A payor bank’s use of a return path with known processing cutoffs does not extend the statutory midnight deadline for avoiding accountability under the UCC.
- Regulation CC’s expeditious return and notice-of-nonpayment duties operate alongside state-law UCC accountability rules; satisfying Regulation CC notice timing does not excuse a late return under UCC § 4-301.

## Conclusion

Valley National Bank v. Hudson United Bank held that Hudson was accountable under UCC § 4-301 because it did not complete a timely return by the midnight deadline, and neither Hudson’s EARNS notice nor Regulation CC (nor the Federal Reserve facility’s after-hours processing policy) avoided that UCC consequence.


Valley National Bank v. Hudson United Bank, 2002 WL 32068153 (2002)