As the court explained, before the Check Clearing for the 21st Century Act (“Check 21 Act’), banks had to receive actual paper checks from depositors and send those paper checks to other banks in order for the checks to be paid. Under the Check 21 Act, paper checks can be converted into electronic forms, which is called “check truncation.” The bank that converts the paper check is referred to as the “truncating bank.” Here, the payee remotely deposited a check with the truncating bank and then used a currency exchange service (the “check casher”) to receive cash in exchange for the physical check. The check casher subsequently deposited the check into its account at its own bank (the “depositary bank”), but the check bounced because of the duplicate presentment. The depositary bank debited the check casher for the amount of the check in accordance with the terms of their agreement, which required indemnification for any losses incurred by dishonored checks. To recover, the check casher sued the truncating bank to enforce a warranty created under the Check 21 Act on the basis that it held a subrogated claim to the depositary bank’s right to indemnification. The truncating bank moved to dismiss pursuant to Fed. R. Civ. Pro. 12(b)(6).
In Garfield-Dan Ryan Currency Exchange., Inc. v. Citibank, N.A., No. 23 C 5033, 2024 WL 2052077, 2024 U.S. Dist. LEXIS 83725 (N.D. Ill. May 8, 2024) (opinion not yet released for publication), the court granted the motion to dismiss without prejudice. The court held that to be entitled to indemnification; the depositary bank must receive the original paper check after another bank accepted the check electronically and truncated it. 12 C.F.R. § 229.34(f). The depository bank here received a truncated check from the check casher, which retained the original and, therefore, the depositary bank was not entitled to indemnification from the truncating bank. Without a right to indemnification, the check casher could not assume the right of indemnity as a subrogee. Further, the court analyzed the plain language of 12 C.F.R. § 229 to conclude that even if the depositary bank held a valid indemnity claim, the check casher still could not recover under equitable subrogation. The statute “require[d] a ‘depositary bank’ to suffer a loss” to be eligible for relief. 12 C.F.R. § 229.34(f)(2). Here, the depositary bank did not suffer a loss because it had charged the check casher’s account for the same amount. Further, the court reasoned that the depositary bank did not have a claim due to the check casher’s loss because the statute did not enumerate check cashing services as a type of entity that could recover losses. 12 C.F.R. § 229.34(f). Ultimately, the court concluded that the check casher “ha[d] no legally cognizable remedy under § 229.34(f).”
By Taylor O’Brien [email protected]
Edited By Jace Brown [email protected]
Edited By Ashley Boyce [email protected]
Edited By Hayden Mariott [email protected]