Garfield-Dan Ryan Currency Exchange, Inc. v. Citibank, N.A.
Filing
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MEMORANDUM Opinion and Order: Defendants' motion to dismiss 14 is granted and the complaint is dismissed without prejudice. The court is uncertain that there is any basis for a claim here but will allow Plaintiff leave to file an amended complaint, if any, within 21 days. Please see attached Memorandum Opinion and Order for further details. Signed by the Honorable Rebecca R. Pallmeyer on 5/8/2024. Mailed notice. (cp, )
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
GARFIELD-DAN RYAN CURRENCY
EXCHANGE, INC.,
Plaintiff,
v.
CITIBANK, N.A.,
Defendant.
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No. 23 C 5033
Judge Rebecca R. Pallmeyer
MEMORANDUM OPINION AND ORDER
An innovation in banking practice—electronic or online check depositing—has opened the
door to new fraudulent activity: “Duplicate presentment fraud” occurs when the holder of a check
deposits the check remotely with one bank via a mobile device, and then deposits the physical
check again with a second bank. If the second bank makes funds available to the payee before
the check is dishonored by the paying institution, the second bank may suffer a loss. Federal
Reserve regulations promulgated in 2017 allow this second bank to seek indemnification from the
first bank (the one that accepted the remote deposit), but only if certain conditions are met. See
12 C.F.R. § 229.34(f).
Plaintiff Garfield-Dan Ryan Currency Exchange, Inc., a community currency exchange that
offers check-cashing services, negotiated cash for an $840 check. But the payee was a doubledipper who had already remote-deposited the check with Defendant Citibank, N.A. Plaintiff
deposited the physical check in its account at Republic Bank of Chicago (“Republic”), but the
check bounced. Republic debited the $840 from Plaintiff’s account, and this suit followed. Plaintiff
has sued Citibank under § 229.34(f) to recover the check amount plus costs, claiming it is
subrogated to Republic’s right of indemnification from Citibank. Defendant has moved to dismiss
Plaintiff’s complaint under Federal Rule of Civil Procedure 12(b)(6). For the reasons outlined
below, the motion is granted.
BACKGROUND
Plaintiff first sued Defendant in Illinois state court in June 2023. (Verified Compl. [1-1]
at 1.) Defendant timely removed the case to federal court under 28 U.S.C. § 1441(a) based on
federal-question jurisdiction, and Plaintiff has not contested removal. (Notice of Removal [1].)
The court, too, is satisfied that federal-question jurisdiction exists in this case: Plaintiff is invoking
a private right of action under the Check Clearing for the 21st Century Act of 2003, 12 U.S.C.
§§ 5001–18 (the “Check 21 Act”) to enforce a warranty created by subpart C of Regulation CC,
which implements the Check 21 Act.
See 12 U.S.C. § 5010(a); 12 C.F.R. § 229.34(f).
Accordingly, Plaintiff’s cause of action clearly “aris[es] under” the laws of the United States. 28
U.S.C. § 1331; see Suggs v. C. W. Transp., Inc., 421 F. Supp. 58, 61 (N.D. Ill. 1976) (“[A]n
administrative regulation which has the force of law may give rise to federal question jurisdiction
. . . [if it] present[s] a significant question respecting the construction, validity, or interpretation of
the law”).
As alleged in the complaint, Plaintiff is a licensed community currency exchange based in
Northbrook, Illinois that provides check-cashing services to customers for a fee. (Verified Compl.
¶ 1.) On or around April 8, 2023, Plaintiff accepted a check for $840 made out to Dyonnesha
Woolfolk from the Illinois State Treasurer, and paid Woolfolk $840 in cash in exchange for the
check. (Id. ¶ 4, Ex. A.) The check did not include a restrictive indorsement limiting it to “mobile
deposit only” or any similar language. (Id. ¶ 13.) Plaintiff “took permanent custody of the original
check, truncated it[1] and immediately thereafter deposited same into its bank account at . . .
Republic.” (Id. ¶ 5.) Around five days later, Republic notified Plaintiff that the check had been
dishonored for having already been paid. (Id. ¶ 6.) The Federal Reserve subtracted the amount
of the check from Republic’s account; Republic, in turn, debited this amount from Plaintiff’s
As set forth in further detail below, “truncation” refers to the process of “remov[ing]
an original paper check from the check collection or return process” in lieu of an electronic (or
substitute paper) copy sent to a recipient. See 12 U.S.C. § 5002(18).
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account pursuant to their contractual agreement, which requires Plaintiff to indemnify Republic
for any losses incurred as a result of dishonored checks. (Id. ¶¶ 7–8.)
Plaintiff alleges upon information and belief that Woolfolk “utilized a mobile device to send
an electronic check to [Defendant Citibank], via remote deposit capture, then negotiated the
original check to Plaintiff for a second encashment.” (Id. ¶ 9.) Republic sent notice of the duplicate
presentment to Citibank (after having already debited Plaintiff’s account) and requested payment
under 12 C.F.R. § 229.34(f)—presumably in a belated attempt to seek reimbursement for its
customer (Plaintiff), though the complaint does not make this clear. (Id. ¶ 15.) Citibank did not
remit payment, however, so in late April 2023, Plaintiff’s general counsel reached out to Citibank,
claiming that Plaintiff was subrogated to Republic’s right to recover the loss under § 229.34(f),
plus expenses under § 229.34(i). (Id. ¶¶ 15, 16, Ex. B.) Again, Citibank did not respond. (Id.
¶ 17.) In this lawsuit, Plaintiff seeks to recover the check’s original amount of $840, plus “costs,
interest, attorneys’ fees and expenses as permitted under 12 C.F.R. 229.34(i) . . . .” (Id. at p. 5.)
Defendant moved to dismiss in September 2023 [14] (hereinafter “Mot.”). After the motion
was fully briefed, Judge LaShonda Hunt of this district granted Citibank’s motion to dismiss in a
nearly identical duplicate presentment fraud case filed by a different currency exchange: 63rd &
Morgan Currency Exch., Inc. v. Citibank, N.A., No. 23 C 5048, 2024 WL 245189 (N.D. Ill. Jan. 23,
2024). The court granted Citibank’s motion to consider this case as supplemental authority
[24, 25].
LEGAL STANDARD
Defendant has moved to dismiss Plaintiff’s complaint under Rule 12(b)(6), arguing that
Plaintiff lacks standing under the regulation to pursue this claim. 2 FED. R. CIV. P. 12(b)(6). In
Defendant frames this issue as one of subject-matter jurisdiction, and cites
caselaw dealing with the plaintiff’s burden, as the party invoking the court’s jurisdiction, to
establish standing. (See Mot. at 4–5 (citing United States v. Hays, 515 U.S. 737, 743 (1995), and
Retired Chi. Police Ass’n v. City of Chicago, 76 F.3d 856, 862 (7th Cir. 1996). Such a standing
challenge would properly be brought under Rule 12(b)(1), not 12(b)(6). But Plaintiff has suffered
a cognizable “injury in fact”—its loss of the $840—for purposes of constitutional standing. Hays,
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ruling on such a motion, the court must “construe [the plaintiff’s] complaint in the light most
favorable to them, accepting their factual allegations as true and drawing all reasonable
inferences in their favor.” Russell v. Zimmer, Inc., 82 F.4th 564, 569 (7th Cir. 2023). However,
the complaint “must contain sufficient factual matter, accepted as true, to ‘state a claim to relief
that is plausible on its face.’ ” Hess v. Garcia, 72 F.4th 753, 758 (7th Cir. 2023) (quoting
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)).
DISCUSSION
The dispute in this case is nearly identical to the one adjudicated in 63rd & Morgan—both
cases share the same counsel, and the briefing in that case matches the briefing in this one
almost verbatim. (See [13, 15, 17] in No. 23 C 5048.) While Judge Hunt’s opinion is not binding,
the court finds its reasoning persuasive and largely reaches the same conclusion: the regulatory
regime here does not contemplate relief for an entity like Plaintiff.
The regulation in question is § 229.34(f) of Regulation CC, promulgated by the Federal
Reserve Board of Governors (the “Board”) to implement the Check 21 Act. Before the Check 21
Act, banks needed to both receive physical checks from their customers and send the same
physical checks out to other banks for payment. The Check 21 Act streamlines these traditional
checking practices by allowing original paper checks to be converted into electronic and substitute
paper form, a process known as “check truncation.” See Speedy Check Cashers, Inc. v. U.S.
Postal Serv., 286 F. Supp. 3d 934, 937 (N.D. Ill. 2017). Either the bank or their customer may
“truncate” a check by making this conversion; in either case, the bank that truncates the original
check, or is the first bank to transfer, present or return a substitute version of this check that has
515 U.S. at 742–43. Defendant’s argument is better understood as a question of whether Plaintiff
has a right of action under (or alternatively, is within the “zone of interests” protected by) the
statute and regulations that it seeks to enforce. See Circle City Broad. I, LLC v. AT&T Servs.,
Inc., No. 23-1787, 2024 WL 1634093, at *4 (7th Cir. Apr. 16, 2024) (citing Lexmark Int’l, Inc. v.
Static Control Components, Inc., 572 U.S. 118, 127 (2014)). That question does not implicate
the court’s subject-matter jurisdiction and is properly addressed on a Rule 12(b)(6) motion. Id.;
Cnty. of Cook v. Wells Fargo & Co, 115 F. Supp. 3d 909, 911 (N.D. Ill. 2015).
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already been truncated, is deemed the “truncating bank” under the law.
See 12 C.F.R.
§ 229.2(eee). The Act, as implemented by Regulation CC, establishes a number of warranties
and indemnities that safeguard financial institutions from risks created by check truncation.
Included among the regulatory protections is § 229.34(f), which was added to Regulation CC in
2017 to address situations in which customers inadvertently or fraudulently use banks’ “remote
deposit capture” services to deposit the same check more than once. 3 See Availability of Funds
and Collection of Checks: Final Rule, 82 Fed. Reg. 27,552, 27,582 (June 15, 2017). In these
situations, the second bank that accepts the check for deposit may suffer a loss if the institution
responsible for paying the check has already paid out (or “settled”) its value to the first bank.
Broadly, § 229.34(f) creates a remedy to shift such losses onto the bank that created the risk of
loss by allowing its customers to deposit checks via remote deposit capture. The provision’s full
text reads as follows:
(f) Remote deposit capture indemnity.
(1) The indemnity described in paragraph (f)(2) of this section is provided
by a depositary bank that—
(i) Is a truncating bank under § 229.2(eee)(2) because it accepts
deposit of an electronic image or other electronic information
related to an original check;
(ii) Does not receive the original check;
(iii) Receives settlement or other consideration for an electronic
check or substitute check related to the original check; and
(iv) Does not receive a return of the check unpaid.
(2) A bank described in paragraph (f)(1) of this section shall indemnify, as
set forth in § 229.34(i), a depositary bank that accepts the original check
Other sections of Regulation CC create warranties related to “substitute checks,”
which are “paper reproduction[s] of an original check . . . that [are] suitable for automated
processing in the same manner as an original check.” 12 U.S.C. § 5002(16); see 12 C.F.R. §§
229.2(aaa), 229.52. Defendant makes several arguments in its motion to dismiss for why it is not
liable to Plaintiff for breach of warranty under § 229.52 (either directly or by assignment), but
Plaintiff counters that these points are irrelevant and nonresponsive since it does not claim that
Defendant created a “substitute check” or assert rights under § 229.52. Accordingly, the court
disregards these arguments as moot.
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for deposit for losses incurred by that depositary bank if the loss is due to
the check having already been paid.
(3) A depositary bank may not make an indemnity claim under paragraph
(f)(2) of this section if the original check it accepted for deposit bore a
restrictive indorsement inconsistent with the means of deposit.
12 C.F.R. § 229.34(f).
Section 229.34(f) contemplates a fact pattern involving four parties: the “drawer” (i.e., the
party paying the check), the payee (the party to whom the check is made), the “truncating bank”
(a bank that accepts a “truncated” electronic version of the check that its customer has created
via remote deposit capture), and a second bank that subsequently accepts the original paper
check for deposit. The Federal Reserve’s official commentary on § 229.34(f) notes that in such
situations, “[t]he depositary bank that accepts the original [physical] check . . . may make funds
available to the customer before it learns that the check is being returned unpaid and, in some
cases, may be unable to recover the funds from its customer.” 12 C.F.R. pt. 229, app’x E, §
XX(G)(1). In such circumstances, § 229.34(f) allows the depositary bank that is holding the
physical check to seek indemnification from the “truncating bank” that offered the remote-deposit
service, thus creating the possibility of duplicate presentment.
As the Board noted in its
rulemaking on § 229.34(f), this allocation of risk is based on the assumption that “the bank that
accepts a check via remote deposit capture is in the best position to address the actions of its
own customer and to guard against the subsequent deposit of the paper check.” 82 Fed. Reg. at
27,568.
This case presents a variation on that fact pattern. Not just four, but in this case, five
parties are involved: in addition to the drawer, payee, truncating bank, and subsequent depositary
bank, there is a fifth party: a check casher (or alternatively, “money services business”) that serves
as an intermediary between the payee and the second depositary bank.
In Illinois, such
businesses are licensed as “community currency exchanges” by the state’s Department of
Financial and Professional Services. See 205 ILCS 405/0.1–.30; Currency Exchange and Money
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Transmitters, Ill. Dep’t of Fin. & Pro. Servs., https://idfpr.illinois.gov/dfi/ced/ced-main.html (last
visited May 7, 2024). Check-cashing services offer their customers immediate cash in hand for
their checks (rather than waiting for them to clear at a bank), in exchange for an added fee. See
Services: Check Cashing, Cmty. Currency Exch. Ass’n of Ill., https://mycurrencyexchange.com/
services/check-cashing (last visited May 7, 2024). Only after the cash has already been paid out
does the check-cashing business deposit the check into its own bank account for payment. This
business model means that a check casher will find it inherently difficult to claw back funds from
its customers, who do not necessarily maintain regular accounts and may be difficult to track
down. Check cashers thus face similar risks from duplicate presentment fraud to those faced by
the second depositary bank in the Board’s commentary—but, as explained below, this does not
automatically mean they are covered by the protections of the regulation.
The parties do not dispute that Citibank meets the definition of a “truncating bank.” Plaintiff
alleges that Defendant Citibank accepted an “electronic image” of the check rather than the
original, which was honored and paid by the drawer. (Verified Compl. ¶¶ 6, 9, 11.) The key issue,
rather, is whether Plaintiff can claim paragraph (f)(2)’s indemnity for a “depositary bank that
accepts the original check” and incurs a loss because the check has already been paid. 12 C.F.R.
§ 229.34(f)(2). Plaintiff’s attempt to invoke this indemnity runs into an immediate problem: the
regulation’s plain text only discusses “banks,” not check cashers. “The same basic rules that
apply to statutory interpretation apply to regulatory interpretation.” Bria Health Servs., LLC v.
Eagleson, 950 F.3d 378, 382 (7th Cir. 2020). Under these rules, the court “ask[s] first whether
the language at issue has a plain and unambiguous meaning with regard to the particular dispute
at the case,” based on the regulation’s text, purpose and context, and relevant precedents or
authorities. Id. at 383 (citation and internal quotation marks omitted); see Kisor v. Wilkie, 588
U.S. 558, 575, 139 S. Ct. 2400, 2415 (2019). The regulation at issue here, § 229.34(f), provides
indemnification only for “depositary bank[s]”—a term defined in Regulation CC as “the first bank
to which a check is transferred” for deposit, whether physically or electronically. 12 C.F.R.
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§ 229.2(o). “Bank,” in turn, is defined in the regulation to include both an enumerated list of types
of banks defined in other provisions of the U.S. Code, and “for purposes of subparts C and D of
this part . . . any person engaged in the business of banking . . . .”
§ 229.34(f) falls within subpart C.
12 C.F.R. § 229(e)(7).
A currency exchange offers check-cashing services to
members of the public, but neither party suggests Plaintiff qualifies as a bank. 4 Rather, on these
facts, it is Republic—not Plaintiff—that would fall into the position of the second depositary bank
under § 229.34(f).
Plaintiff acknowledges this point.
(Verified Compl. ¶ 12.)
Accordingly,
Defendant argues that Plaintiff lacks standing under the regulation to pursue this lawsuit.
Plaintiff counters, however, that it became subrogated to Republic’s claim against Citibank
under § 229.34(f) by paying it in full. Subrogation is “[t]he substitution of one person in the place
of another with reference to a lawful claim . . . so that he who is substituted succeeds to the rights
of the other in relation to the . . . claim, and its rights, remedies, or securities.” Gearing v. Check
Brokerage Corp., 233 F.3d 469, 471–72 (7th Cir. 2000) (citation and internal quotation marks
omitted). A party may claim subrogation based on either an express contract, a statute, or by
operation of law. Wilder Corp. of Delaware v. Thompson Drainage & Levee Dist., 658 F.3d 802,
807 (7th Cir. 2011). In the insurance context, an insurer who has paid the entire claim of its
insured becomes subrogated to the insured’s right of recovery and may assert this right in its own
name as the “real party in interest.” Hanover Ins. Co. v. Brandt Constr. Co., No. 4:11-CV-4050SLD-JAG, 2011 WL 6648232, at *2 (C.D. Ill. Dec. 21, 2011) (citing Krueger v. Cartwright, 996 F.2d
928, 931–32 (7th Cir. 1993)).
The Board’s commentary to Regulation CC’s definition of “bank” states that the
phrase “any other person engaged in the business of banking” is “intended to cover entities that
handle checks for collection and payment”—but its list of examples, including “Edge and
agreement corporations, commercial lending companies under 12 U.S.C. 3101, certain industrial
banks, and private bankers,” does not include check cashers. 12 C.F.R. pt. 229, app’x E,
§ II(F)(2). The court will not make this leap itself in light of the broader statutory and regulatory
context, which consistently defines entities like Plaintiff that only offer check-cashing and other
financial services as distinct from traditional “banks” that also accept funds for deposit. See, e.g.,
31 C.F.R. § 1010.100(ff)(2), (8) (defining “money services business” to include “check casher[s]”
but not “bank[s] or foreign bank[s]”).
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Plaintiff pleads no facts that would suggest it has a contractual right of subrogation under
its banking agreement with Republic. 5 Nor does it argue that the statute or regulation provides
an explicit right of subrogation. Rather, Plaintiff appears to argue that it is entitled to legal (or
“equitable”) subrogation. (See Pl.’s Resp. to Def.’s Mot. to Dismiss Compl. [17] (hereinafter
“Resp.”) at 11 (citing Dix Mut. Ins. Co. v. LaFramboise, 149 Ill. 2d 314, 319, 597 N.E.2d 622, 624
(1992)).) This principle allows a party to “step into the shoes of, or be substituted for, the one
whose claim or debt he has paid” if doing so is necessary to avoid an inequitable result. Dix,
149 Ill. 2d at 319, 597 N.E.2d at 624 (equitable subrogation “rests on the principle that substantial
justice should be attained by placing ultimate responsibility for the loss upon the one against
whom in good conscience it ought to fall”).
The Seventh Circuit has described equitable
subrogation as a “troublesomely vague” doctrine. Wilder, 658 F.3d at 807. At minimum, it
requires that (1) the defendant must be primarily liable to the subrogor, that the subrogee must
(2) be compelled to (3) pay this liability in full, and that (4) the subrogee must assert the same
right that the subrogor could have asserted. Am. Nat. Bank & Tr. Co. of Chicago v. Weyerhaeuser
Co., 692 F.2d 455, 461–63 (7th Cir. 1982).
Thus, to evaluate whether Plaintiff has plausibly alleged a claim for relief based on
§ 229.34(f), the court must determine whether its subrogation theory has merit. To do so requires
assessing, first, whether Citibank was ever primarily liable to Republic to begin with, and second,
if Citibank is liable, whether Plaintiff can validly step into Republic’s shoes to pursue this claim.
The complaint only alleges that Plaintiff and Republic have a “contractual
agreement . . . [that] requires Plaintiff to indemnify Republic for losses resulting from checks
deposited into its account which are then dishonored.” (Verified Compl. ¶ 8.) Nor does Plaintiff
attach a copy of this agreement as an exhibit. These allegations do not plausibly state a claim
for contractual subrogation. See Elec. Ins. Co. v. Nat'l Union Fire Ins. Co. of Pittsburgh, 346 F.
Supp. 2d 958, 963 (N.D. Ill. 2004) (contractual subrogation exists where the contract “clearly and
unambiguously states that [subrogee] has a right to recover ‘all or part of any payment’ ”).
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I.
Republic’s Right of Indemnity Against Citibank
Based on the pleadings, the court does not believe that Republic ever had a valid
indemnification claim against Citibank that could have been passed along to Plaintiff. The text of
the regulation provides for indemnification where the second depositary bank has “accept[ed] the
original check for deposit,” after the first depositary bank (or “truncating bank”) has “accept[ed]
deposit of an electronic image of the check or other electronic information related to an original
check.” 12 C.F.R. § 229.34(f)(1), (2). Regulation CC draws a distinction between “original
check[s]” and “truncated checks”; the former refers to “the first paper check issued with respect
to a particular payment transaction,” id. § 229.2(ww), while the latter refers to a check that has
been “remove[d] . . . from the forward collection or return process” and replaced with a paper or
electronic copy, id. § 229.2(ddd). One of the Board’s illustrative examples provided in the
commentary to § 229.34(f) describes a situation involving three banks (Banks A, B, and C), in
which a payee remote-deposits a check at Bank A, then remote-deposits the same check at Bank
B, and finally deposits the original paper check at Bank C.
12 C.F.R. pt. 229, app’x E,
§ XX(G)(2)(c). In this situation, the commentary states that “Depositary Bank B does not have an
indemnity claim against Depositary Bank A because Depositary Bank B did not receive the
original check for deposit. Depositary Bank C, however, would be able to bring an indemnity claim
against Depositary Bank A.” Id.
Here, Plaintiff’s complaint suggests that Republic never received the original paper
check—only a truncated copy. Paragraph 5 states that Plaintiff “took permanent custody of the
original check, truncated it and immediately thereafter deposited same into its bank account at
Republic Bank of Chicago.” (Verified Compl. ¶ 5 (emphasis added).) This puts Republic in the
same position as Bank B, not Bank C, in the Board’s example described above. Taking a step
back, if the goal of the regulation is to protect banks who accept original paper checks for deposit
from the risks of duplicate presentment, it would make little sense to allow Republic to claim
indemnification for a check that it itself accepted via remote deposit or some other form of
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substitution authorized under Check 21. See 63rd & Morgan, 2024 WL 245189, at *5. Because
it does not appear that Defendant was ever primarily liable to Republic under § 229.34(f), there is
no claim to which Plaintiff can be subrogated.
Neither of Plaintiff’s arguments to the contrary are persuasive. First, Plaintiff attempts to
split up the text of § 229.34(f)(2), reasoning that Republic’s acceptance of the check “for deposit”
is sufficient to support a claim brought by Republic against Citibank. This reading effectively
reads out the defined term “original check” from the provision. See 12 C.F.R. § 229.34(f)(2)
(defining the indemnified party as “a depositary bank that accepted the original check for deposit”)
(emphasis added). Next, Plaintiff contends that “the actions of a nonbank [may be] imputed to a
depositary bank” by drawing an analogy to the regulation’s treatment of “truncation.” (Resp. at
9.) Plaintiff notes that a bank may be designated as a “truncating bank” even if its customer is
the one to actually “truncate” a check by removing it from the forward collection process. In the
same way, Plaintiff argues, Republic should be treated as a depositary bank that “accepted the
original check” since its customer (that is, Plaintiff) “accepted” this check from the payee. See 12
C.F.R. § 229.2(eee).
But as the 63rd & Morgan court found, “the word ‘accept’ connotes
something more than simply depositing a check from any payee.” 2024 WL 245189, at *5. It
implies that the bank’s customer must give the original check to the bank for deposit. That is not
what happened here: based on the language of the complaint, Plaintiff accepted the “original
check” from the payee, and gave Republic a truncated copy of this check.
On its own, this would not necessarily be a sufficient basis for dismissal. All inferences
must be drawn in Plaintiff’s favor at the pleading stage, Russell, 82 F.4th at 569, and a single use
of the word “truncated” may not be sufficient to conclude that Plaintiff in fact deposited the check
remotely rather than physically.
(At a minimum, Plaintiff would be permitted to amend its
complaint with this point clarified.) If the facts were different—if Plaintiff had in fact given the
“original check” (i.e., the paper check) to Republic for deposit, and Republic credited this amount
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to Plaintiff’s account—then it is possible that Republic might have accrued a valid right of
indemnity against Citibank under § 229.34(f) when the check bounced.
II.
Garfield-Dan Ryan’s Subrogation Claim
Even assuming arguendo that Republic did possess such a right, however, Plaintiff’s
allegations do not support the conclusion that Plaintiff is subrogated to this right. Subrogation is
a common-law principle that “most commonly arises in relation to insurance policies.”
Subrogation, Black's Law Dictionary (11th ed. 2019); see Dix, 149 Ill. 2d at 319, 597 N.E.2d at
624. Some state court rulings have extended the doctrine beyond the insurance context “to
include every instance in which one person, not a mere volunteer, pays a debt for which another
is primarily liable and which in equity and good conscience should have been discharged by the
latter,” Am. Nat’l Bank & Tr. Co., 692 F.2d at 460 (citing Bost v. Paulson’s Enters., Inc., 36 Ill.
App. 3d 135, 139, 343 N.E.2d 168, 171–72 (2d Dist. 1976)); see 34 Ill. Law & Prac. Subrogation
§ 5, Westlaw (database updated Jan. 2024) (citing cases). But Plaintiff cites no authority to
suggest that a right of indemnity created by federal regulation may be transferred from one party
to another based solely on this equitable doctrine.
Indeed, the text of the regulatory provision at issue here appears logically incompatible
with subrogation. § 229.34(f)(2) requires a “depositary bank” to have suffered a “loss . . . [from]
the check having already been paid” as a precondition for seeking relief.
Subrogation, by
definition, requires any loss by the original party-in-interest to have been “paid in full” by the
subrogee. Cf. James River Ins. Co. v. Canal Ins. Co., 534 F. Supp. 3d 962, 969–70 (N.D. Ill.
2021) (assessing requirements for subrogation under Illinois law) (citation omitted). In this case,
Republic has not suffered a “loss”; it was made whole again by charging the funds back from
Plaintiff’s account.
Plaintiff nevertheless contends that Republic, as a depositary bank, retains a claim that
Plaintiff may pursue as subrogee. Plaintiff urges that it does not matter whether the depositary
bank ultimately suffers a loss—it must only have suffered a loss at some point. In other words,
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the fact that Republic was out $840 (however briefly) created a right of indemnification under
§ 229.34(f), and when this $840 was taken back out of Plaintiff’s account, that right was not
extinguished but instead transferred to Plaintiff.
But nothing in the text of § 229.34(f)
contemplates this kind of risk reallocation—as already stated, the regulation exclusively refers to
indemnification between “banks,” and the word “subrogation” appears nowhere. Significantly,
other provisions of Regulation CC do explicitly provide for subrogation of indemnity rights, such
as those arising from “substitute check” warranties under § 229.52. See 12 C.F.R. § 229.53(c)
(stating that a bank that indemnifies a later recipient of a substitute check for losses arising from
that check “shall be subrogated to the rights of the person that it indemnifies . . . and may attempt
to recover from another person based on a warranty or other claim”); see also 12 C.F.R. pt. 229,
app’x E, § XXV(C)(2) (noting, in commentary to § 229.39(b) concerning claims against closed or
insolvent banks, that “if the bank with a claim under this paragraph recovers from a prior bank or
other party to the check, the prior bank or other party to the check is subrogated to the claim”).
The absence of similar language in § 229.34(f) and its commentary is telling. Cf. Ambassador
Animal Hosp., Ltd. v. Elanco Animal Health Inc., 74 F.4th 829, 831 (7th Cir. 2023) (noting, in
statutory-interpretation context, that “[w]here Congress includes particular language in one
section of a statute but omits it in another section of the same Act, it is generally presumed that
Congress acts intentionally and purposely in the disparate inclusion or exclusion”) (quoting
Russello v. United States, 464 U.S. 16, 23 (1983)).
Similarly, other provisions of Regulation CC that allow for recovery by nonbank parties
specifically list these types of parties. See, e.g., 12 C.F.R. § 229.53(a)(1) (extending “substitute
check” right of indemnity to “any subsequent recipient (including a collecting or returning bank,
the depositary bank, the drawer, the drawee, the payee, the depositor, and any indorser)” who
suffers a loss from a substitute check). Adopting Plaintiff’s reading would essentially expand the
specific term “depositary bank” in § 229.34(f) to impliedly read “depositary bank (or any party that
fully pays the loss sustained by said bank).” The court is unwilling to make this textual leap.
13
The 63rd & Morgan court reached the same conclusion. It reasoned that the business
model of check cashing “necessarily involves a higher risk of nonpayment with little to no recourse
for entities like Plaintiff,” and that “interpreting the statutory provision as broadly as Plaintiff
suggests would produce absurd results and frustrate the purpose of the Check 21 Act.” 63rd &
Morgan, 2024 WL 245189, at *5. This court departs slightly from this reasoning: while it is
certainly plausible that neither the Check 21 Act’s drafters nor Regulation CC’s contemplated
protections for check-cashing services, this is at bottom a policy question beyond the court’s
purview. Plaintiff urges the opposite position: that Regulation CC evinces a clear policy in “favor
[of] the allocation and recovery of losses between banks and financial institutions” (Resp. at 10),
and that the regulation’s purpose of shifting risks created by remote deposit services onto the
banks that offer these services should apply with equal force to losses suffered by banks and
nonbanks alike. But if this is the case, it is not apparent from the plain language of the regulatory
provision at issue. The only hint of the Board’s expressed intent with respect to § 229.34(f) is that
it should protect banks from risks arising from remote deposit capture. See 82 Fed. Reg. at
27,568; 12 C.F.R. pt. 229, app’x E, § XX(G)(1). Whether check cashers should also fall within
that reallocation of risk is a matter that will need to be addressed (if at all) in future rulemaking.
This is not to say that Plaintiff is without recourse. It could seek compensation from the
fraudulent payee, or potentially from the check’s drawer under a UCC holder-in-due-course
theory. See Speedy Check Cashers, 286 F. Supp. 3d at 937–38 (finding that such a claim is not
preempted by the Check 21 Act). To offset future risk going forward, it could perhaps withhold
payment briefly pending an investigation of a check’s history, or else raise the fees it charges for
immediate check-cashing. But in the absence of regulatory action to the contrary, check cashers
like Plaintiff have no legally cognizable remedy under § 229.34(f) for losses arising from remote
deposit capture fraud.
14
CONCLUSION
Because Plaintiff is not within the class of entities contemplated by § 229.34(f)’s right of
indemnity and shows no clear basis for why this right may be subrogated, its suit against
Defendant fails to state a claim upon which relief may be granted. Defendants’ motion to dismiss
[14] is granted and the complaint is dismissed without prejudice. The court is uncertain that there
is any basis for a claim here but will allow Plaintiff leave to file an amended complaint, if any,
within 21 days.
ENTER:
Dated: May 8, 2024
_________________________________________
REBECCA R. PALLMEYER
United States District Judge
15
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