First American Bank et al v. RBS Citizens, N.A. et al

Filing 43

MEMORANDUM Opinion and Order Signed by the Honorable John Robert Blakey on 6/25/2015. Mailed notice(gel, )

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
FIRST AMERICAN BANK, et al.,
Plaintiffs,
v.
RBS CITIZENS, N.A.,
Defendants.

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Case No. 14 C 8120

Honorable John Robert Blakey

MEMORANDUM OPINION AND ORDER
Plaintiffs, First American Bank (individually and as subrogee of First Aid
Corporation d/b/a 1st Ayd Corporation) and Federal Insurance Company (as
subrogee and assignee of First American Bank), have sued defendants Federal
Reserve Bank of Atlanta, RBS Citizens, N.A. d/b/a Charter One (collectively, the
“bank defendants”), and David Goodson “to recover for the defendants’ participation
in the transfer and collection of a fraudulent check in the amount of $486,750.33
and for professional negligence.” Amended Complaint [6], ¶1. The bank defendants
have moved to dismiss the claims against them [21] for failure to state a claim. For
the reasons explained below, the motion is granted.
Background
In their amended complaint, the plaintiffs allege defendant David Goodson
received an email from “Fumiko Anderson” seeking his assistance in recovering
funds owed pursuant to a divorce proceeding.

Amended Complaint [6], ¶16.

Goodson then received a check, via UPS delivery from Ontario, Canada, in the

amount of $86,176.96; the check was made payable to the “Law Office of David M.
Goodson” and “drawn by” First Aid Corporation on its account at First American.
Id., ¶¶17-18.

Goodson endorsed the check and deposited it in his client trust

account at RBS Citizens. Id., ¶19. He then “caused RBS Citizens to wire some or
all of the funds . . . to Japan.” Id., ¶21. The plaintiffs further allege that RBS “took
an electronic image of the check, transferred the image through the Federal Reserve
System for payment by First American, and destroyed the original check.” Id., ¶22.
The Complaint does not seek damages or make any claims with respect to this
check.
The plaintiffs further allege in their amended complaint that Goodson
received a second check in November 2013; this check too arrived via UPS from
Ontario, Canada, was made payable to the “Law Office of David M. Goodson” and
was drawn by First Aid Corporation on its account at First American. Id., ¶23. As
before, Goodson endorsed the second check and deposited it into his client trust
account at RBS Citizens; that same day, he caused RBS to wire some or all of the
funds to Japan. Id., ¶¶24, 26.

Again, plaintiffs allege, RBS took an electronic

image of the check, transferred the image through the Federal Reserve System for
payment by First American, and destroyed the original check. Id., ¶25.
Both checks were fraudulent, as the parties later learned.
Complaint [6], ¶¶4, 20, 27.

Amended

As a result, First American re-credited First Aid

Corporation’s account for both amounts and then sought indemnity from RBS. RBS
indemnified First American for the first check, but not the second. Id., ¶¶27-28.

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First American and its insurer, Federal Insurance Company (which
indemnified First American for a portion of its losses with regard to the second
check), id., ¶29, sued RBS and the Federal Reserve Bank of Atlanta (according to
the amended complaint, RBS transferred the item through the Federal Reserve
System for payment by First American, and the Federal Reserve Bank of Atlanta
was the immediate transferor of the item to First American). Amended Complaint
[6], ¶5. They also sued Goodson for his part in the transaction. The amended
complaint includes four counts: Counts I and II assert claims of breach of warranty
under Regulation J, 12 C.F.R. §210.6, and restitution by mistake under 810 ILCS
5/3-418 against all defendants; Count III asserts a claim of negligent spoliation of
evidence against RBS; and Count IV asserts a claim of professional negligence
against Goodson. Goodson filed an answer to the amended complaint [19], claiming
that he had no idea the checks were fraudulent. The bank defendants moved to
dismiss the counts against them, arguing that none pleads a claim for which relief
may be granted.
Discussion
“To survive a motion to dismiss under Rule 12(b)(6), the complaint must
provide enough factual information to ‘state a claim to relief that is plausible on its
face’ and ‘raise a right to relief above the speculative level.’ ” Doe v. Village of
Arlington Heights, 782 F.3d 911, 914 (7th Cir. 2015)(quoting Bell Atlantic Corp. v.
Twombly, 550 U.S. 544, 555, 570 (2007)). “A claim has facial plausibility when the
plaintiff pleads factual content that allows the court to draw the reasonable

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inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal,
556 U.S. 662, 678 (2009).
When analyzing a motion under Rule 12(b)(6), the Court must construe the
allegations of the operative complaint in the light most favorable to the plaintiffs,
accepting as true all well-pleaded facts and drawing all reasonable inferences in
their favor. E.g., Yeftich v. Navistar, Inc., 722 F.3d 911, 915 (7th Cir. 2013)(citing
Fed. R. Civ. P. 12(b)(6); Tamayo v. Blagojevich, 526 F.3d 1074, 1081 (7th Cir. 2008)).
Additionally, Rule 12(b)(6) limits this Court’s consideration to “allegations set forth
in the complaint itself, documents that are attached to the complaint, documents
that are central to the complaint and are referred to in it, and information that is
properly subject to judicial notice.” Williamson v. Curran, 714 F.3d 432, 436 (7th
Cir. 2013).
As explained above, the bank defendants have moved to dismiss the claim for
breach of warranty in violation of Regulation J (Count I), the claim for restitution
for payment by mistake (Count II) and the spoliation claim (Count III) for failure to
state a claim.
A.

Plaintiffs’ Claim for Breach of Warranty in Violation of Regulation J
In Count I, the plaintiffs allege that the bank defendants breached the

warranty required in Regulation J that the electronic version of the check
accurately reflected all of the information on the original check.

The bank

defendants argue that Count I should be dismissed because plaintiffs have failed to
plead a plausible claim for breach of warranty in violation of Regulation J.

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Resolution of defendants’ motion turns on the construction of the language of
Regulation J. Applying basic rules of statutory construction, the Court begins with
the language of the regulation itself. E.g., U.S. v. Balint, 201 F.3d 928, 932 (7th
Cir. 2000)(“When we interpret a statute, we look first to its language.”) If the
language is plain, the Court’s job is simply to enforce it; it is where the language is
not plain, or where it is subject to conflicting interpretation, that the analysis get a
bit trickier. The Court’s interpretation “is guided not just by a single sentence or
sentence fragment, but by the language of the whole law, and its object and policy.”
Balint, 201 F.3d at 933 (citing Grammatico v. United States, 109 F.3d 1198, 1204
(7th Cir.1997)). The Federal Reserve Board’s commentary is also instructive as to
the meaning of a given word or phrase. E.g., Ford Motor Credit Co. v. Milhollin,
444 U.S. 555, 566 (1980); Fogle v. William Chevrolet/GEO, Inc., No. 99 C 5960,
2000 WL 1129983, at *3 (N.D. Ill. Aug. 9, 2000)(“considerable respect is due ‘the
interpretation given [a] statute by the officers or agency charged with its
administration.’ An agency's construction of its own regulations has been regarded
as especially due that respect.”)(quoting Zenith Radio Corp. v. United States, 437
U.S. 443, 450 (1978); Udall v. Tallman, 380 U.S. 1, 16 (1965)). See also U.S. v.
Vizcarra, 668 F.3d 516, 520 (7th Cir. 2012)(commentary in the guidelines manual
that interprets or explains a guideline is authoritative unless it is inconsistent with,
or a plainly erroneous reading of, that guideline.”); U.S. v. Mitchell, 353 F.3d 552,
(7th Cir. 2003)(treating the USSC’s commentary to the guideline as authoritative).
Thus, we turn first to the relevant statutory language, which is Regulation J.

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According to the Board of Governors of the Federal Reserve System (the governing
body of the Federal Reserve System and the agency charged with promulgating
rules and regulations governing the Federal Reserve System):
“Regulation J provides the legal framework for depository institutions
to collect checks and other items and to settle balances through the
Federal Reserve System. The regulation specifies terms and conditions
under which Federal Reserve Banks will receive items for collection
from and present items to depository institutions. In conjunction with
Regulation CC, Regulation J establishes rules under which depository
institutions may return unpaid checks through Reserve Banks.”
Board of Governors of the Federal Reserve System, Compliance Guide, Regulation J
(http://www.federalreserve.gov/bankinforeg/regjcg.htm).

Regulation J consists of

two subparts: Subpart A, which addresses the collection of checks and other items
by Federal Reserve Banks; and Subpart B, which deals with Funds Transfers
through Fedwire. For present purposes only Subpart A is relevant, and particularly
Section 210.6 of Subpart A, which addresses “[s]tatus, warranties, and liabilities of
Reserve Bank.” 12 C.F.R. §210.6.
Under Regulation J, when a Reserve Bank presents or sends an item, it
“warrants to a subsequent collecting bank and to the paying bank and any other
payor that—
(i) The Reserve Bank is a person entitled to enforce the item (or
is authorized to obtain payment of the item on behalf of a person that
is either entitled to enforce the item or authorized to obtain payment
on behalf of a person entitled to enforce the item);
(ii) The item has not been altered; and
(iii) The item bears all indorsements applied by parties that
previously handled the item, in paper or electronic form, for forward
collection or return. 12 C.F.R. §210.6(b).
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Additionally, with respect to “electronic items,” the “Reserve Bank makes all
the warranties set forth in and subject to the terms of 4–207 of the [Uniform
Commercial Code] for an electronic item as if it were an item subject to the U.C.C.
and makes the warranties set forth in and subject to the terms of § 229.34(c) and (d)
of this chapter for an electronic item as if it were a check subject to that section.” 12
C.F.R. § 210.6 (b)(2). For electronic items that are not representations of substitute
checks, the following applies:
(i) If the electronic item is not a representation of a substitute
check, the Reserve Bank warrants to the bank to which it transfers or
presents that item that—
(A) The electronic image portion of the item accurately
represents all of the information on the front and back of the original
check as of the time that the original check was truncated; the
information portion of the item contains a record of all MICR–line
information required for a substitute check under § 229.2(aaa) of this
chapter; and the item conforms to the technical standards for an
electronic item set forth in an operating circular; and
(B) No person will receive a transfer, presentment, or
return of, or otherwise be charged for, the electronic item, the original
item, or a paper or electronic representation of the original item such
that the person will be asked to make payment based on an item it
already has paid.
12 C.F.R. § 210.6 (b)(3).
Plaintiffs allege that the electronic image portion of the second check did not
accurately represent all of the information on the front and back of the original
check as of the time that the original check was truncated. Plaintiffs allege that
“Atlanta Fed, as agent of RBS Citizens and sub-agent of Goodson, warranted to
First American upon presenting electronic check no. 191435 for payment that ‘[t]he
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electronic image portion of the item accurately represents all of the information on
the front and back of the original check as of the time that the original check was
truncated.’” Amended Complaint [6], ¶35. In fact, they allege, the original check
stock “contained certain security features on each check, including ‘MicroPrint’ on
signature lines, an ‘Original Document’ watermark and a ‘Padlock’ icon.” Id., ¶36.
The check presented “was a poor image” and “did not accurately represent all of the
information on the front and back of the original check as of the time that the
original check was truncated.” Id., ¶37. Thus, under “12 C.F.R. §210.6(b)(3)(A), the
Atlanta Fed, as agent for RBS Citizens and sub-agent for Goodson, is liable to First
American and FIC for breach of warranty with regard to the presentment of
electronic check no. 191435.” Id., ¶38.
Plaintiffs’ complaint alleges that the defendants breached the Regulation J
warranty that the information on the front and back of the electronic image of the
check they transferred accurately reflected the information on the front and back of
the original check. At a status and motion hearing on March 31, 2015, counsel for
the plaintiffs represented that the check reflected an inaccurate copy of the security
image box on the back of the check.

Counsel could not articulate any other

inaccuracies or any other aspect in which the electronic image was different from
the original check.

Thus, as alleged, plaintiffs’ Regulation J claim is that the

electronic check did not accurately reflect the security features of the original check.
The defendants argue that the lack of security features does not amount to a
breach of the “all information” warranty. The plaintiffs dispute this assertion. The

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parties agree that Regulation J does not define what specific information falls
within the phrase “all of the information on the front and back of the original check
as of the time that the original check was truncated.”

Regulation J, however,

instructs that unless “the context otherwise requires . . . [t]he terms not defined
herein have the meanings set forth in §229.2 of this chapter applicable to subpart C
or subpart D of part 229 of this chapter, as appropriate . . .” 12 C.F.R. §210.2(s)(1).
This language refers to Regulation CC, also promulgated by the Federal Reserve
Board.
Regulation CC implements the Expedited Funds Availability Act, which
“addresses the issue of delayed availability of funds by banks. The EFAA requires
banks to: (1) make funds deposited in transaction accounts available to their
customers within specified time frames; (2) pay interest on interest-bearing
transaction accounts not later than the day the bank receives credit; and (3) disclose
their funds-availability policies to their customers.”
Federal

Reserve

System,

Compliance

Board of Governors of the
Guide,

Regulation

CC

(http://www.federalreserve.gov/bankinforeg/regcccg.htm). Regulation CC is divided
into four subparts: Subpart A defines terms and outlines enforcement authority;
Subpart B specifies schedules within which banks must make funds available for
withdrawal, exceptions to the schedules, disclosure of funds-availability policies,
and payment of interest; Subpart C contains rules to speed the collection and return
of checks; and Subpart D contains provisions that pertain to substitute checks. The

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Regulation also includes several appendices, including Appendix E to Part 229 –
Commentary.
Subpart D deals with substitute checks.

§229.51, entitled “General

provisions governing substitute checks” provides that a
substitute check for which a bank has provided the warranties
described in §229.52 is the legal equivalent of an original check for all
persons and all purposes, including any provision of federal or state
law, if the substitute check—
(1) Accurately represents all of the information on the
front and back of the original check as of the time the original
check was truncated; and
(2) Bears the legend, “This is a legal copy of your check. You can
use it the same way you would use the original check.”
12 C.F.R. §229.51 (emphasis added). Regulation CC uses the same language as
Regulation J. And, unlike Regulation J, Regulation CC also provides instructive
commentary concerning what the phrase “all of the information” means in the
context of a warranty concerning the accuracy of “all of the information on the front
and back of the original check as of the time the original check was truncated.” In
particular, the commentary makes clear that the warranty does not require that the
security features visible on the original check be included on the electronic item. By
way of example, the Federal Reserve Board instructs as follows:
3. To be the legal equivalent of the original check, a substitute
check must accurately represent all the information on the front and
back of the check as of the time the original check was truncated. An
accurate representation of information that was illegible on the
original check would satisfy this requirement. The payment
instructions placed on the check by, or as authorized by, the drawer,
such as the amount of the check, the payee, and the drawer's
signature, must be accurately represented, because that information is
an essential element of a negotiable instrument. Other information
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that must be accurately represented includes (1) the information
identifying the drawer and the paying bank that is preprinted on the
check, including the MICR line; and (2) other information placed on
the check prior to the time an image of the check is captured, such as
any required identification written on the front of the check and any
indorsements applied to the back of the check. A substitute check
need not capture other characteristics of the check, such as
watermarks, microprinting, or other physical security features
that cannot survive the imaging process or decorative images,
in order to meet the accuracy requirement. Conversely, some
security features that are latent on the original check might
become visible as a result of the check imaging process. For
example, the original check might have a faint representation
of the word “void” that will appear more clearly on a
photocopied or electronic image of the check. Provided the
inclusion of the clearer version of the word on the image used to create
a substitute check did not obscure the required information listed
above, a substitute check that contained such information could be the
legal equivalent of an original check under §229.51(a). However, if a
person suffered a loss due to receipt of such a substitute check instead
of the original check, that person could have an indemnity claim under
§229.53 and, in the case of a consumer, an expedited recredit claim
under §229.54.
12 C.F.R. Part 229, Appendix E, XXX. §229.51(a)(emphasis added). Based upon the
plain language of Regulation J, as interpreted using the authoritative commentary
from Regulation CC, the failure to include security features on an electronic check
cannot give rise to a breach of warranty claim. Accordingly, plaintiff’s claim for
breach of warranty under Regulation J – which relates solely to the lack of security
features – fails as a matter of law.
Plaintiffs have also emphasized that the security box on the back of the
electronic version of the check was illegible, as shown by the copy of the check that
is attached as Exhibit C to the Amended Complaint. Significantly, plaintiffs do not
allege that the security box was different on the original check. Again, the Federal

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Reserve Board’s commentary is instructive; it provides that an “accurate
representation of information that was illegible on the original check would satisfy
[the legal equivalence] requirement.” 12 C.F.R. §229.51(a), Part 229, Appendix E.
Thus, if the security box was illegible on the original check, there would be no
breach of warranty.
Finally, Regulation J is clear that the bank defendants may be liable only for
their lack of good faith or their failure to exercise ordinary care. 12 C.F.R. §210.6
(b)(1). Yet the plaintiffs do not allege either in connection with the Regulation J
claim. Thus, the plaintiffs’ claim would fail as a matter of law for this reason as
well.
B.

Plaintiffs’ Claim for Restitution
In Count II, plaintiff seeks restitution for payment by mistake under the

Illinois Uniform Commercial Code, 810 ILCS 5/3-418. In particular, plaintiffs allege
that “First American paid check no. 191435 to the Atlanta Fed, as agent for RBS
Citizens and sub-agent for Goodson under 12 C.F.R. §210.6(a)(1), for the benefit of
RBS Citizens and Goodson” and that when “First American paid check no. 191435,
it did so on the mistaken belief that the signature of the drawer of the check no.
191435, [First Aid Corporation], was authorized.” Amended Complaint, ¶¶41-41.
The Illinois UCC provision relating to restitution for payment or acceptance
by mistake provides:
(a) Except as provided in subsection (c), if the drawee of a draft pays or
accepts the draft and the drawee acted on the mistaken belief that (i)
payment of the draft had not been stopped under Section 4-403 or (ii)
the signature of the drawer of the draft was authorized, the drawee
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may recover the amount of the draft from the person to whom or for
whose benefit payment was made or, in the case of acceptance, may
revoke the acceptance. . . .
(b) Except as provided in subsection (c), if an instrument has been paid
or accepted by mistake and the case is not covered by subsection (a),
the person paying or accepting may, to the extent permitted by the law
governing mistake and restitution, (i) recover the payment from the
person to whom or for whose benefit payment was made or (ii) in the
case of acceptance, may revoke the acceptance. 810 ILCS 5/3-418(a),
(b).
Initially, although the amended complaint does allege that payment was
made for the benefit of RBS, it does not allege that payment was made for the
benefit of the Federal Reserve Bank of Atlanta. This is required under the statute.
Additionally, the statute itself provides that the remedies provided therein
“may not be asserted against a person who took the instrument in good faith and for
value or who in good faith changed position in reliance on the payment or
acceptance.” 810 ILCS 5/3-418(c). As noted above, there is no allegation of bad
faith on the part of RBS. Thus, as pled, it does not state a plausible claim under the
Illinois statute.
Finally, as discussed above, the Federal Reserve Board’s Regulation J
expressly limits a Reserve Bank’s liability.

Imposing liability under the facts

alleged here would conflict with those limits (as discussed above). “Where state and
federal law ‘directly conflict,’ state law must give way.” Hillman v. Maretta, 133
S.Ct. 1943, 1955 (2013)(quoting PLIVA, Inc. v. Mensing, 131 S.Ct. 2567, 2577, 180
L.Ed.2d 580 (2011); Wyeth v. Levine, 555 U.S. 555, 583 (2009)).

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C.

Plaintiffs’ Negligent Spoliation Claim
In Count III, plaintiffs allege negligent spoliation of evidence. They allege

that RBS destroyed check no. 191435 when it knew that the check was drawn on
First American, and it knew or should have known that the check was part of a
fraudulent scheme to steal funds on account at First American.
Complaint [6], ¶45.

Amended

“A spoliation plaintiff is required to prove the elements of

negligence, including that: (1) the spoliation defendant owed the plaintiff a duty to
preserve the evidence; (2) the spoliation defendant breached the duty by failing to
preserve the evidence; (3) the loss of the evidence proximately caused the spoliation
plaintiff to be unable to prove an underlying lawsuit; and (4) the spoliation plaintiff
suffered damages.” Jones v. UPR Products, Inc., No. 14 C 1248, 2015 WL 3463367,
at * 3 (N.D. Ill. May 29, 2015)(citing Martin v. Keeley & Sons, Inc., 979 N.E.2d 22,
27 (Ill.App.Ct.2012).
“A claim of spoliation of evidence is connected to the merits of the underlying
suit.” Borsellino v. Goldman Sachs Group, Inc., 477 F.3d 502, 510 (7th Cir. 2007)
(citing Gawley v. Ind. Univ., 276 F.3d 301, 316 (7th Cir. 2001)).

“If a plaintiff

cannot prevail in the underlying suit even with the allegedly lost or destroyed
evidence, then a claim for spoliation will fail because the plaintiff cannot prove
damages.” Id. As explained above, plaintiffs’ Regulation J claim fails because they
have not, and cannot, show that the defendants inaccurately represented the
original check. In light of this analysis, plaintiffs’ spoliation claim fails as well.

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Plaintiffs cannot show that the loss of the original check prevents them from
proving their claim.
Conclusion
For the reasons explained above, the motion to dismiss filed by defendants
Federal Reserve Bank of Atlanta and RBS Citizens, N.A. [21] is granted. Plaintiffs’
amended complaint is dismissed as to these defendants.
Dated: June 25, 2015
ENTERED:

________________________________
John Robert Blakey
United States District Judge

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