Returns for Duplicate Check Presentments

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Question:

I own a check cashing business. Our industry is faced with an epidemic of returns for duplicate presentments where a payee will deposit an image of their check (using their phone app), then bring the original to the check casher. The check casher takes custody of the check and gives cash to the payee. The check casher then deposits the check to its own account via remote deposit capture (RDC) - this is standard practice today. Keep in mind, the original check remains in possession of the check casher and does not physically go to the bank. Sometime later, the check casher gets a duplicate presentment return because the image deposited by the payee's phone app was first in time. Now, per Check 21, the check casher's bank is the depository and is a warranty recipient entitled to enforce the warranty against the payee's bank so long as the depository (1) sustains a loss and (2) takes the original. Two part question: If the check casher's bank does not take a loss because the check casher itself covers the return, is the bank still able to enforce the warranty? And since the check casher is using RDC, even though it retains custody of the original check, is the bank able to enforce the warranty?

Answer:

There is no question that mobile deposits (a mobile version of remote deposit capture, sometimes abbreviated as mRDC) has resulted in increased duplicate presentment or duplicate payment activity. From your perspective, it really doesn't matter whether the duplicate presentment is the result of fraud or carelessness. It still represents a loss when the item is charged back to you as "duplicate presentment" or "previously paid."

Both remote deposit capture (RDC), which provides your business with the ability to deposit images of checks rather than the checks themselves, thus avoiding a trip to the bank, and mRDC, which provides smaller businesses and individuals the ability to accomplish the same things using a smart phone, are technologies made possible by the Check 21 Act. Under the form of RDC that your business uses, the checks it cashes are stored relatively securely. That helps prevent those checks from being negotiated again in error or fraudulently. With mRDC, however, there is no reliable security preventing checks that have been deposited in image format from being negotiated again, either by mistake or by design.

Until July 2018, there was no hierarchy of responsibility affecting who got "burned" when a multiple-deposited item was returned for duplicate presentment. The paying bank could even choose to return unpaid the first-presented item in some cases. But generally, it was the first presentment that was paid and any later presentments that were returned.

Effective 7/1/2018, Regulation CC was amended to provide a new indemnity (not warranty) with regard to checks deposited in image form via RDC (and mRDC). Let's assume RDC Bank receives an image of a check, but does not receive the paper check, and does not receive a return of the image unpaid. Paper Bank later receives the original paper check for deposit, and sustains a loss resulting from the return of the check unpaid due to a duplicate payment or presentment.

RDC Bank indemnifies Paper Bank to the extent of its loss up to the amount of the check (and related costs). Two conditions are placed on the indemnity -- First, Paper Bank cannot make an indemnity claim if the check, at the time it took it for deposit, had a restrictive indorsement inconsistent with the means of deposit (for example, was indorsed "Mobile deposit only"). And second, there is a one-year limit on pursuit of such claims in court.

The reason the indemnity is given by an RDC-accepting bank in favor of a paper-check accepting bank is that the RDC-accepting bank, by allowing a paper check to remain "out there" rather than pulling it "out of circulation" adds to the risk of duplicate presentments.

Sometimes, a single check may be "image-deposited" via RDC/mRDC multiple times before being deposited in paper form. None of the RDC-accepting banks in such a scenario are indemnified by the rule. Only the paper-check depositary is indemnified. And the paper-check depositary can make a claim against multiple RDC-accepting banks, but can't collect more that the total of its loss (up to the amount of the check) plus interest and costs of collection.

The indemnity is strictly between the banks. It does not protect those banks' customers. And if the bank accepting the paper check recovers the amount of the charge-back from its depositor, that bank does not sustain a loss and cannot make the indemnity claim. The ability of the paper-accepting bank to charge the item back to its depositor is subject to contract and the Uniform Commercial Code.

In the circumstances you describe, however, there is no indemnity provided anyhow, because both banks are accepting images for deposit.