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

Filing 68

MEMORANDUM Opinion and Order Signed by the Honorable John Robert Blakey on 12/22/2015. 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
Plaintiff First American Bank (individually and as subrogee of First Aid
Corporation d/b/a 1st Ayd Corporation), filed a Second Amended Complaint [48]
against defendants Federal Reserve Bank of Atlanta, RBS Citizens, N.A. d/b/a
Charter One (individually, “RBS Citizens” and collectively, the “bank defendants”)
and David Goodson, alleging breach of warranty under Regulation J, 12 C.F.R §
210.6 (Count I), implied indemnity against the bank defendants (Count II),
restitution for payment by mistake under 810 ILCS 5/3-418 (Count III), negligent
spoliation of evidence against RBS Citizens (Count IV) and professional negligence
against Goodson (Count V). The defendants have moved to dismiss for failure to
state a claim [52], [57]. For the reasons explained below, the motions are granted.
Background
Plaintiff filed this lawsuit “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.” Second Amended Complaint (“SAC”) [48], ¶1. Plaintiff,

along with Federal Insurance Company, filed an initial complaint on October 16,
2014 [1], and an amended complaint [6] on November 12, 2014. On June 25, 2015,
this Court dismissed the amended complaint as to the bank defendants [43].
Plaintiff then filed the SAC on August 3, 2015. The bank defendants again moved
to dismiss [52]. Goodson has also moved to dismiss [57].
In the SAC, Plaintiff alleges that defendant Goodson received an email from
“Fumiko Anderson” seeking his assistance in recovering funds purportedly owed
pursuant to a divorce proceeding. SAC [6], ¶17. 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., ¶¶18-19. Goodson endorsed the
check and deposited it in his client trust account at RBS Citizens. Id., ¶20. He then
“caused RBS Citizens to wire some or all of the funds . . . to Japan.” Id., ¶22.
Plaintiff further alleges 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., ¶23. The Complaint does not seek damages or
make any claims with respect to this check.
Plaintiff further alleges in the SAC 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. SAC [48], ¶24. As before, Goodson
endorsed the second check and deposited it into his client trust account at RBS

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Citizens; that same day, he caused RBS Citizens to wire some or all of the funds to
Japan. Id., ¶¶25, 27.

Again, Plaintiff alleges, RBS Citizens 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., ¶26. This second
check is designated No. 191435. Id., ¶24.
Both checks were fraudulent, as the parties later learned. SAC [48], ¶6. As a
result, First American re-credited First Aid Corporation’s account for both amounts
and then sought indemnity from RBS Citizens.

Id., ¶28-29.

RBS Citizens

indemnified First American for the first check, but not the second.

Id., ¶29.

Pursuant to a policy of insurance, Federal Insurance Company “(FIC”) indemnified
First American for a portion of its losses with regard to check No. 191435, First
American assigned FIC the right to pursue recovery of those losses and then FIC
reassigned such rights back to First American.

Id., ¶30.

As a result, First

American is now the sole party in interest for the pursuit of the claims asserted in
this action, and the SAC is filed on behalf of First American alone. Id.
First American sued RBS Citizens and the Federal Reserve Bank of Atlanta.
According to the amended complaint, RBS Citizens 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. SAC [48], ¶7. First American also sued Goodson for his part in the
transaction. The SAC asserts five claims: Count I asserts breach of warranty under
Regulation J, 12 C.F.R. §210.6 against all defendants; Count II asserts an implied

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indemnity claim against the bank defendants; Count III asserts restitution by
mistake under 810 ILCS 5/3-418 against all defendants; Count IV asserts a claim of
negligent spoliation of evidence against RBS Citizens; and Count V asserts a claim
of professional negligence against Goodson. Plaintiff seeks judgment in its favor
against the defendants, jointly and severally, in the amount of $486,750.33, plus
interest, costs, attorneys’ fees and expenses.
The bank defendants moved to dismiss Counts I, II, III and IV under Federal
Rule of Civil Procedure 12(b)(6) for failure to state a claim for which relief may be
granted.

Goodson moved to dismiss Counts I, III and V, joining the bank

defendants’ motion as to Counts I and III.
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
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

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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).
A.

Plaintiff’s Claim for Breach of Warranty in Violation of Regulation J
In Count I, Plaintiff alleges that 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 in their motion that
Count I should be dismissed because Plaintiff has failed to plead a plausible claim
for breach of warranty in violation of Regulation J. Goodson joins the motion.
Just as it did with respect to the motion to dismiss the prior complaint,
resolution of the current motions 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
operative language is unambiguous when read within its context, the Court’s job is
simply to give those words their full force and effect. If the language is ambiguous
or is otherwise reasonably subject to conflicting interpretation, then the Court’s
analysis is more complex.

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Here, the Court’s interpretation of Regulation J “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).
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—

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(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).
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 also 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.
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12 C.F.R. § 210.6 (b)(3).
Plaintiff alleges that check No. 191435 “contained certain physical
characteristics, including ‘MicroPrint’ on signature lines, an ‘Original Document’
watermark, a ‘Padlock’ icon, and preprinted information describing security
characteristics of the check stock,” and that First American Bank personnel are
trained to examine checks to “watch for signs of counterfeiting, such as
irregularities in the physical characteristics” described above. SAC [48], ¶¶37, 39.
Plaintiff further alleges that “the preprinted information describing security
characteristics of the check stock should have survived imaging”; that RBS Citizens
“created a poor image” of check No. 191435; and that, as a result, electronic check
No. 191435 “did not accurately represent all of the information on the front and
back of the original check as of the time the original check was truncated” and “did
not accurately represent preprinted information describing security characteristics
of the check stock.” Id., ¶¶40-41. Plaintiff further alleges that, if the original check
rather than the electronic check had been presented, “First American would not
have paid the check.” Id., ¶42. As such, Plaintiff alleges that its loss “was directly
caused by the decision of [RBS Citizens], as agent for collection of Goodson, and the
Atlanta Fed, as agent for collection of Goodson and sub-agent for collection of
Goodson, to present an electronic image” of check No. 191435 “rather than the
original.” Id., ¶43.
In its earlier complaint, Plaintiff also alleged that the electronic image
portion of the second check did not accurately represent all of the information on
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the front and back of the original check as of the time that the original check was
truncated. Plaintiff alleged that the original check stock “contained certain security
features on each check, including ‘MicroPrint’ on signature lines, an ‘Original
Document’ watermark and a ‘Padlock’ icon”; and that 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.”
Amended Complaint [6], ¶¶36-37.
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, in turn, implements the Expedited Funds Availability Act,
which addresses the issue of delayed availability of funds by banks. 1 Along with its

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.” Board of Governors of the Federal Reserve System, Compliance 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 as noted above, Subpart D contains provisions that pertain
to substitute checks. The Regulation also includes several appendices, including Appendix E to Part
229 – Commentary.
1

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appendices, Subpart D of Regulation CC deals with substitute checks, and states in
Section 229.51, entitled “General provisions governing substitute checks,” 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, but 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
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
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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(A)(3), §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.
Here, Plaintiff’s Regulation J breach of warranty claim is predicated on the absence
of visible security features on the electronic item, and the Court rejected this claim
in connection with the earlier version of Plaintiff’s complaint.
Nonetheless, Plaintiff argues that its claim is different this time because it
has included an allegation that Plaintiff “believes that at least one, and potentially
other, physical characteristics” of check No. 191435 as alleged in Paragraph 37
“would have survived the imaging” of the check.

For example, the preprinted

information describing security characteristics of the check stock should have
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survived imaging.” SAC [48], ¶40. Plaintiff made this same argument in opposition
to defendants’ motion to dismiss its previous Regulation J claim.

Plaintiff

previously argued that the box on the back of the check explaining the security
features was illegible on the electronic image of the check. But, as the Court noted
previously, Plaintiff did not allege that the security box, which was plainly illegible
on the electronic item, was different on the original check. The SAC similarly does
not allege that the security box was legible on the original item. Nor does the SAC
allege that a visible but illegible security box in an effort to support a claim under
Regulation J. There is no question that the security box is visible on the electronic
item. Thus, Plaintiff still cannot show that the electronic item did not accurately
represents all of the information on the front and back of the original check as of the
time the original check was truncated.
Additionally, as the Court noted when it dismissed the earlier claim,
“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.” June 25, 2015 Memorandum
Opinion and Order [43], p. 12 (citing C.F.R. §210.6 (b)(1)). Plaintiff still does not
allege lack of good faith or any failure to exercise ordinary care on the part of the
defendants with respect to its Regulation J breach of warranty claim. In fact, in
response to the motion to dismiss, Plaintiff represents that RBS Citizens took steps
to detect any fraud and then elected to destroy the original of the check “[f]or its
own business convenience.” Response [61], p. 3. Business convenience does not
establish a lack of good faith, and the claim fails for this reason as well.

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B.

Plaintiff’s Implied Indemnity Claim
In Count II of the SAC, Plaintiff alleges an implied indemnity claim against

the bank defendants. Plaintiff alleges that it had a pre-existing relationship with
the bank defendants and that, with respect to the fraudulent checks at issue here,
there is “a qualitative distinction” between the conduct of First American and the
conduct of the bank defendants. SAC [48], ¶46-49. On the one hand, RBS Citizens
took “a large, highly unusual and suspicious check from Goodson for deposit”; wired
funds to Japan before the check cleared; and destroyed the original check. Id., ¶49.
And the Atlanta Fed presented the fraudulent item to Plaintiff for payment as
requested by RBS Citizens. Id., ¶48(E). Plaintiff, on the other hand, “never had the
opportunity to review the original” of check No. 191435 and “reasonably believed
that [RBS Citizens] had taken care to create a proper image of the check before
transferring it for presentment.” Id., ¶48(F). Consequently, Plaintiff alleges, the
bank defendants have a duty, implied at law, to indemnify Plaintiff for its losses
caused by their presentment of electronic check No. 191435. Id., ¶50.
“Under Illinois law, implied indemnity is available to a principal who,
through no fault of its own, is held liable for its agent's negligent tort against a
third party.” Jordan v. Jewel Food Stores, Inc., 83 F. Supp. 3d 761, 772 (N.D. Ill.
2015)(quoting BCS Insurance Company v. Guy Carpenter & Co., 490 F.3d 597, 603
(7th Cir. 2007)). The ultimate purpose of indemnification is to shift the “entire
responsibility from the party who has been compelled to pay the plaintiff's loss to

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another who actually was at fault.’”

BCS Insurance, 490 F.3d at 603 (quoting

Kerschner v. Weiss & Co., 667 N.E.2d 1351, 1355 (Ill. App. Ct. 1996)).
To prevail on a claim for implied indemnity, a plaintiff must establish: (1)
that there was a pre-tort relationship between the indemnitor and the indemnitee;
and (2) that the indemnitee was held derivatively liable for the acts of the
indemnitor. BCS Insurance, 490 F.3d at 603 (citing Kerschner, 667 N.E.2d at 1356).
Illinois courts have been cautious in defining the pre-tort relationship, limiting it to
the following categories: lessor/lessee; employer/employee; owner/lessee; and
master/servant. Jordan, at 772 (citing Van Slambrouck v. Economy Baler Co., 475
N.E.2d 867, 870-71 (Ill. 1985)). 2
In this case, the SAC does not allege a particular relationship between First
American and the bank defendants. Plaintiff simply alleges that “First American
had a preexisting relationship with Atlanta Fed and Citizens.”

SAC [48], ¶46.

Although Plaintiff does allege that both it and RBS Citizens entered into
agreements with the Federal Reserve System, id., ¶47(A), this allegation alone does
not establish any of the requisite categories accepted in Illinois as a basis for
implying a duty to indemnify.
Nor can First American prove the second element of an implied indemnity
claim.

Implied indemnity is available in Illinois “only where the indemnitee is

For example, in Jordan, the alleged pre-tort relationship was that of “wholesaler-retailer” and the
court, noting that the relationship fit into none of the classic pre-tort relationship categories and
emphasizing that “Illinois courts have generally refused to expand the set of qualifying pre-tort
relationships,” rejected the retailer’s indemnification claim. Jordan, 83 F.Supp.3d at 773 (citing
Lohman v. Morris, 497 N.E.2d 143, 146 (Ill. App. Ct. 1986); Friedman, Alschuler & Sincere v.
Arlington Structural Steel Co., 489 N.E.2d 308, 310 (Ill. App. Ct. 1985); Allison v. Shell Oil Co., 495
N.E.2d 496, 498-504 (Ill. 1986)).
2

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‘liable [to the plaintiff] solely on a derivative basis.’” Jordan, F.Supp.3d at 773.
Indeed, the liability must be “wholly derivative, resulting solely out of the agent’s
actions.” BCS Insurance, 490 F.3d at 603. “Stated differently, ‘the party on whom
the duty to indemnify is sought to be imposed must have been in some (though often
an attenuated) sense ‘at fault’ and the other party blameless though liable–that is
to say, only strictly liable, by virtue of respondeat superior, implied warranty, strict
products liability, or some other legal principle that imposes liability regardless of
fault.’” Jordan, 83 F. Supp. 3d at 773 (quoting Jinwoong, Inc. v. Jinwoong, Inc., 310
F.3d 962, 965 (7th Cir. 2002)). First American, however, does not allege that it
faces any potential liability that is in any way derivative.
For these reasons, the Court finds that First American’s implied
indemnification claim fails as a matter of law.
C.

Plaintiff’s Claim for Restitution
In Count III, Plaintiff seeks restitution for payment by mistake under the

Illinois Uniform Commercial Code, 810 ILCS 5/3-418. 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
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
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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).
The statute further 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).
Plaintiff alleges that First American paid check No. 191435 to the Atlanta
Fed, “as agent for Citizens and sub-agent for Goodson under 12 C.F.R. §210.6(a)(1)”;
that, “[u]nder 810 ILCS 5/3-418(a), the Atlanta Fed was ‘the person to whom . . .
payment was made . . . .” by First American”; and that “[u]nder 810 ILCS 5/3418(a), Citizens and Goodson were ‘person[s] for whose benefit payment was made .
. . .’ by First American.” SAC [48], ¶¶55-57. The SAC further alleges that, when
First American paid check No. 191435, it did so upon the mistaken belief that the
signature of the drawer of the check No. 191435, 1st Ayd, “was authorized.” Id., ¶58.
When dismissing the prior version of this claim, the Court noted that
Plaintiff failed to allege that the bank defendants did not take the check in good
faith and for value, and the claim therefore failed under 810 ILCS 5/3-418(c). In the
SAC, Plaintiff has attempted to avoid this pitfall by alleging the following:
Citizens did not take the item from Goodson in good faith because it
did not observe reasonable commercial standards of fair dealing under
810 ILCS 5/3-103(a)(4).
Citizens’ failure to observe reasonable
commercial standards of fair dealing is evidenced by, upon information
and belief, its giving special, favored treatment to Goodson by taking
this large, suspicious item for deposit and collection and then wiring
the funds to Japan before the item was paid. Upon information and
belief, Citizens consciously disregarded its own policies and procedures
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to assist Goodson, whom its branch employees knew and viewed as a
good customer. These actions, upon information and belief, violated
reasonable commercial standards of fairness in [] the banking industry
because they favored one party in the collection chain (Goodson) to the
detriment of another (First American).
SAC [48], ¶59. As to Goodson, First American alleges that “Goodson did not in good
faith change position in reliance on the payment or acceptance” of electronic check
No. 191435, because Goodson “directed Citizens to wire the finds to Japan before
(and without knowledge of) First American’s payment or acceptance of the item.”
Id., ¶60.
As an initial matter, the SAC alleges no facts to support a claim under 418
against the Federal Reserve Bank of Atlanta, and the claim is dismissed as to this
defendant.

Additionally, purportedly giving preferential treatment to a known

customer is not inconsistent with taking the check in good faith and for value.
Indeed, First American alleges that defendant engaged in certain fraud detection
protocols before wiring funds to Japan.

Moreover, the SAC alleges that RBS

Citizens and Goodson wired funds to Japan, and that allegation establishes that the
defendants changed position in reliance on the payment or acceptance of the item.
The commentary to Section 3-418 of the Uniform Commercial Code is
instructive here (this section is identical to the corresponding section in the Illinois
UCC). Noting that a claim like the one First American is attempting to assert here
is rarely successful, the commentary states as follows:
Subsection (a) allows restitution in the two most common cases in
which the problem is presented: payment or acceptance of forged
checks and checks on which the drawer has stopped payment. If the
drawee acted under a mistaken belief that the check was not forged or
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had not been stopped, the drawee is entitled to recover the funds paid
or to revoke the acceptance whether or not the drawee acted
negligently. But in each case, by virtue of subsection (c), the drawee
loses the remedy if the person receiving payment or acceptance was a
person who took the check in good faith and for value or who in good
faith changed position in reliance on the payment or acceptance.
Subsections (a) and (c) are consistent with former Section 3-418 and
the rule of Price v. Neal. The result in the two cases covered by
subsection (a) is that the drawee in most cases will not have a remedy
against the person paid because there is usually a person who took the
check in good faith and for value or who in good faith changed position
in reliance on the payment or acceptance.
§ 3-418, Payment or Acceptance by Mistake, Uniform Commercial Code § 3-418.
Based upon the allegations of the SAC, this case falls within the usual
scenario: RBS Citizens accepted and paid the forged check in good faith and for
value and in good faith changed position in reliance on the payment or acceptance.
The Court could find no case (and First American has cited none) where a
restitution claim was allowed under circumstances similar to those presented here.
Nor has any case been cited suggesting that Goodson’s directions to Citizens RBS
Citizens would be sufficient to establish that he failed to take the instrument in
good faith and for value, or failed in good faith to change position in reliance on the
payment or acceptance. The same is true with respect to the bank defendants: the
Court is not aware of any precedent to support the notion that the alleged conduct
establishes a failure to take in good faith and for value, or that what happened here
was not a good faith change in position in reliance on payment or acceptance.
Plaintiff’s allegations concerning good faith are threadbare recitals of the elements
of the claim, and, as such, are not enough to defeat the well-taken motion to
dismiss. As such, this claim is dismissed as to the bank defendants and Goodson.
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Additionally, as before, the Federal Reserve Board’s Regulation J expressly
limits a Reserve Bank’s liability. Imposing liability on the bank defendants 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)).
Accordingly, the claim is dismissed as to the bank defendants for this additional
reason as well.
D.

Plaintiffs’ Negligent Spoliation Claim
In Count IV of the SAC, Plaintiff alleges negligent spoliation of evidence

against RBS Citizens.

Plaintiff alleges that RBS Citizens 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. Amended Complaint [6], ¶45. “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).

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“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. Based upon the record in this case, as explained above, Plaintiff’s
Regulation J claim fails because it has not, and cannot, show that the defendants
inaccurately represented the original check; its implied indemnification claim fails
because it has not, and cannot, establish the existence of a pre-tort relationship or
that it faces any potential liability that is in any way derivative; and its restitution
claim fails because it has not, and cannot, establish that the defendants failed to
take check No. 191435 in good faith and for value.

In light of this analysis,

Plaintiff’s spoliation claim fails as well, as Plaintiff cannot show that the loss of the
original check prevents it from proving any of its claims.
E.

Plaintiff’s Professional Negligence Claim against Goodson
In Count V of the SAC, Plaintiff alleges that Goodson had a duty to act with

reasonable professional care in handling check No. 191435 and the proceeds thereof
as client funds; that he breached this duty by transacting check No. 191435 for
deposit “notwithstanding facial irregularities on the check and surrounding
circumstances reasonably suggesting that the check was fraudulent”; and that, as a
result, Plaintiff has been damaged. SAC [48], ¶¶69-71.

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Goodson argues that Plaintiff’s professional negligence claim must be
dismissed because Plaintiff has not alleged the existence of an attorney-client
relationship between Goodson and Plaintiff; nor, he argues, does Plaintiff allege
that he owed any duty to 1st Ayd Corporation. Plaintiff argues that the duty arose
not because of any attorney-client relationship, but rather because of the check’s
facially-apparent suspiciousness.
To state a professional negligence claim under Illinois law, a plaintiff must
allege “(1) the existence of a professional relationship, (2) a breach of duty arising
from that relationship, (3) causation, and (4) damages.” Hassebrock v. Bernhoft, No.
10-CV-679-JPG-DGW, 2014 WL 1758884, at *6 (S.D. Ill. May 2, 2014)(quoting SK
Partners I, LP v. Metro Consultants, Inc., 944 N.E.2d 414, 416 (Ill. App. Ct. 2011));
Pelham v. Griesheimer, 440 N.E.2d 96, 99 (Ill. 1982). An attorney “owes a duty to a
third party only where hired by the client specifically for the purpose of benefitting
the third party.” Hassebrock, 2014 WL 1758884, at *6 (quoting Kopka v. Kamensky
& Rubenstein, 821 N.E.2d 719, 723 (Ill. App. Ct. 2004)). “To survive a motion to
dismiss, the non-client third party must allege ‘that the primary intent of the client
was for the professional services to benefit or influence the third party.’” Id.
(quoting Kopka, 821 N.E.2d at 723-24).

First American does not allege that

Goodson’s client had any intent to benefit or influence 1st Ayd. On the contrary, the
SAC alleges that the client’s intent was to defraud 1st Ayd.

Based upon the

allegations the Court cannot infer from this record that Goodson owed any duty to

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1st Ayd or First American. Accordingly, First American’s professional negligence
claim fails.
Plaintiff’s argument that Goodson owed a duty because he saw the check and
should have known it was suspicious is inconsistent with the law in Illinois, which,
as explained, requires an attorney-client relationship before imposing any duty.
Additionally, under this theory, Plaintiff might have a claim against anyone who
came into contact with the check, unreasonably expanding the scope of a
professional negligence claim in Illinois.
Conclusion
For the reasons explained above, the bank defendants’ motion to dismiss [52]
and Goodson’s motion to dismiss [57] are both granted. Plaintiff’s Second Amended
Complaint is dismissed with prejudice.
Dated: December 22, 2015

ENTERED:

________________________________
John Robert Blakey
United States District Judge

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