9 Insights Into Potential RDC Litigation Carrubba...
Transcript of 9 Insights Into Potential RDC Litigation Carrubba...
Insights into Potential RDC Litigation Legal Issues and Reasonable Commercial Standards
October 27, 2015
Paul Carrubba, Adams and Reese
Mary Hockridge, Mobile Strategy Partners
Presentation Content
THIS PRESENTATION IS DESIGNED TO PROVIDE
ACCURATE AND AUTHORITATIVE INFORMATION
REGARDING ITS SUBJECT MATTER. IT IS PRESENTED
WITH THE UNDERSTANDING THAT THE PRESENTER IS
NOT RENDERING LEGAL, ACCOUNTING, OR OTHER
PROFESSIONAL SERVICES. IF LEGAL ADVICE OR OTHER
EXPERT ASSISTANCE IS REQUIRED, THE SERVICES OF A
COMPETENT PROFESSIONAL PERSON SHOULD BE
SOUGHT.
Agenda
• Understanding, Identifying and Resolving Duplicates
• The Impact and Consequences of Duplicates
• Ordinary Care and Reasonable Commercial Standards
• Duplicates and Holder in Due Course Claims
• Proposed Amendment to Reg CC
• Summary & Questions
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Understanding Duplicates Customer initiated duplicate transactions happen when an RDC
depositor accidentally or fraudulently negotiates an RDC
deposited check more than once.
Depositor
Bank - RDC Deposit
Payor Bank
ICL
Bank - ATM Deposit
ICL
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1st Presentment
Duplicate Presentment
Return or Adjustment
Drawer
Impact to Banks:
• New technology and processes to
identify and prevent checks from
paying against their customers’
account more than once
• A growing number of operational
resources are required to research
and adjust duplicates
• Cost of fraud losses and write offs
resulting from duplicates
Where are Duplicates Identified
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Depositary Bank
In-Channel & Cross Channel Duplicate
Detection
Incoming Returns and Adjustments
Payor Bank
Posting System Duplicate Detection
Customer Reported
Duplicates
Proactive - Identify and Prevent the
Duplicate
Reactive - Externally identified
Statistics for Duplicates
• Based on several large financial institutions, rate of duplicates identified in item
processing and day two operations is as follows:
• 2,250 duplicates per 1,000,000 - mobile deposits
• 100 duplicates per 1,000,000 - all debits processed (deposits and
inclearings)
0%
20%
40%
60%
80%
100%
120%
Time Lapse Between Duplicates
% of items
Cumulative %
Payor Bank - Dealing with Duplicates
Using Returns Using Adjustments
• Only an option if returned before the Midnight deadline
• Pros & Cons of Returns vs. Adjustments • Faster settlement and you do not lose
right of return if item is a counterfeit • Adjustment reversal • Potential for negative impact to the
depositor if the duplicate was due to a bank processing error
• Adjustment Options • Paid item (PAID) type (1)
• Within 6 months the adjustment is made with entry
• 6 months to a year - without entry and Fed has 20 days to respond
• Warranty Claim (WIC) type (2) • Must be with one year and it is without
entry and the Fed has up to 80 days to respond
http://www.frbservices.org/operations/checkadjustments/paid.html
http://www.frbservices.org/operations/checkadjustments/wic.html
(1)
(2)
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Operational Best Practices
Establish, document, and follow procedures that meet
reasonable commercial standards
• Consistent with general industry practices
• Can be validated by expert opinions and/or testimony
• Are followed consistently
– Maintain an adequate number of trained resources to perform
procedures
– Utilize and stay current on technology that automates transaction
monitoring
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Lawsuits Against Depositary Financial
Institutions
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Claims
• Conversion • Negligence • Breach of Warranty
Plaintiffs
• Payee • Drawer • Drawee Bank
Defenses
• UCC Displacement • Drawer Preclusion • Authorization • No Delivery • Negligence • Employer Negligence • Entitlement • Joint Payees
Ordinary Care and Reasonable Commercial
Standards
• UCC provides guidelines for what “Ordinary Care” and
“Reasonable Commercial Standards” mean in practice,
but does not specifically define what actions are
required
• In lawsuits, the judge or jury must determine whether a
party’s actions met reasonable commercial standards
• If a party’s action do not meet reasonable commercial
standards, they may be required to bear responsibility
for some or all of the loss
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Case Law Example #1
Continental Casualty Company Inc. v. American National Bank & Trust
• Facts: • Comptroller of Company had Company issue 9 checks payable to ANB
• Comptroller deposited the 9 checks to his personal account via an ATM
• Company sued bank claiming negligence
• Defense: • Bank defended claiming that the checks were deposited by an automated means. It was not
required (UCC 3-103) to examine the checks
• Court Decision: • Court held for Company claiming 3-103 was not applicable to depository Bank applicable only
to Payor Bank
• ANB was negligent for accepting the checks payable to ANB without making an inquiry of the
Company
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Case Law Example #2
Lower Court Case – Plaintiff/Defendant Names not cited*
• Facts: • Secretary of Company deposited checks payable to Company into her personal account
via an ATM over a two year period
• Company sued depository Bank for conversion and negligence
• Defense: • Company was negligent in not supervising employee
• Bank did not fail to exercise ordinary care by not examining the checks (3-103)
• Court Decision: • Court held for bank that 3-103 defense is applicable to a depository bank and deposits to
an ATM is an automated process
• *Source: The Law of Bank Deposits, Collections and Credit Cards, author Barclay Clark
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Holder in Due Course
• Holder Defined 1-201(20) • Bearer in Possession
• Identified Person in Possession
• Holder In Due Course 3-302 • No Evidence of Forgery or Alteration
• Value
• In Good Faith
• Without Notice of
• Overdue or Dishonored
• Unauthorized Signature
• Any Claim
• Defense or Claim
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Holder in Due Course
• Holder In Due Course Takes Free of: • All Claims to the Instrument
• All Defenses
• Holder Not In Due Course Takes Subject to: • Claims to the Instrument
• Defenses
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Regulation CC Amendment
• 229.34 (g) Depositary Bank Indemnification
• Accepts Remote Deposit Capture Image
• Receives Settlement
• Item not Charged Back
• Indemnifies Other Depositary Bank That
Sustains Loss by Taking Original Check for
Deposit
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Summary
• RDC duplicates have a growing impact on financial institutions
• Preventing duplicate on-us items from posting
• Reversing duplicates reported by customers
• Identifying duplicates across deposit channels
• Handling incoming adjustments and returns caused by duplicates
• Banks should consider reasonable commercial standards as they
establish their policies and procedures for RDC
• To strengthen their defense in a lawsuit, an RDC bank should:
• Follow their own procedures
• Be in compliance with applicable regulations and guidance
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About The Presenters
• Paul Carrubba
• Adams and Reese, LLC
• 601-292-0788
• www.arlaw.com
• Mary Hockridge
• Mobile Strategy Partners
• 650-219-4864
• www.mobilestrategypartners.com
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