The debtor was indeed engaged in a cheque kiting scheme. It consistently took advantage of the fact that UMB and other banks allowed it to write cheques on uncollected deposits, although here only UMB was involved in the preference-avoidance litigation. The district noted that there was 'a strong evidence of a check kiting scheme.' So long as the 'kite' was still floating, all the kited cheques would be cleared and the negative collected funds balance had to be growing rapidly, which was exactly what happened.

To say that when a bank allows this no debt is created makes little sense. Certainly the banker takes a credit risk, and from the banker's point of view credit is being extended. Moreover, there is certainly consent on the banker's side when this is done; it knows very well that is taking a credit risk, since if the cheques do not clear the account will be overdrawn.

Indeed an implied contract term is a good suggestion. My concern, however, is whether banks really think they are voluntarily making loans to the customers when making the advances. Or are they simply taking a business risk (usually a small one because 99.9% of cheques are cleared, according to statistics), subscribing to the federal policy of expediting the availability of funds. Given a choice banks would rather place a hold on those cheques until they are cleared. In fact it was this holding delay that caused concern in the Congress and led to the enactment of Regulation CC in 1990 which inter alia provides that in the case of a local cheque, funds have to be available not later than the second business day following deposit.

In this case, the district court noted that UMB was following the "clearing house rules governing the timing of provisional credit and settlement of deposits. When the bank received checks from a depositor, it transferred the checks to the clearing house and received provisional credit for the face amount of the checks. This provisional credit was available at noon on the day the deposits were submitted to the clearing house. Final settlement occurred at midnight on the second business day following the grant of provisional credit."

Therefore I think there is a certain element of truth in the following statement of the 8th Circuit CA: "The bank is the depositor's agent during the collection process [which is true by reason of UCC]. The bank routinely makes uncollected funds available to the depositor, not as a loan, but in recognition of the bank's anticipated debt to the depositor. Because the vast majority of deposits are collected, banks do not see the decision to make advances on uncollected deposits as a credit decision. It is a service decision, driven by laws such as the Expedited Funds Availability Act, and by the financial demands of bank customers. True, a debt will arise if deposited checks are dishonoured. But until dishonour, a bank that advances funds in the expectation that deposits will routinely be collected acts as a conduit for the depositor's financial transactions, not as a creditor."

So even though the banks know very well that they will be owed a debt if the cheques are dishonoured because there'll be an overdraft, I think, it does not necessarily follow that banks see themselves as creditors at the point when they make the advances, because at that point there is no overdraft yet.

There is one factual point on which I am unclear. If the deposited cheques which created the negative collected funds balance did not clear, then to that extent surely there was a loan and a debt? But if they all cleared in the end, why would the bank resist paying the $4m? There would be a positive account balance of at least that much. Had the debtor already withdrawn it before filing?

This is a good question. There was no discussion on this point. But the district court judgment showed that before filing the debtor's account had a negative collected balance. I guess the debtor must have withdrawn all the deposit in order to prevent the kite from collapsing.

Look