## Facts

- Someone purporting to be a new client contacted attorney Misty McDonald and claimed to need legal help collecting a debt from Accurate Manufactured Products Group, Inc. (AMPG).
- McDonald received a letter and what appeared to be a Citibank “official check” (cashier’s-check style instrument) for nearly $300,000, listing AMPG as remitter and payable to “Misty Y. McDonald, Attorney at Law.”
- McDonald deposited the check into her IOLTA account at First Financial Bank, N.A. (First Financial).
- First Financial endorsed the item and, using electronic presentment, sent an image of the check into the forward-collection stream through J.P. Morgan Chase Bank, N.A. (Chase), which served as First Financial’s intermediary/collecting bank.
- Chase presented the electronic image to Citibank, N.A. (Citibank), the payor bank identified on the item.
- Citibank determined that the account number referenced on the check did not exist (invalid/unknown account) and decided not to pay the item; Citibank also asserted that the depositary bank endorsement information was not readable from the image it received.
- Citibank transmitted notice of nonpayment/return information through the Electronic Advanced Return Notification System (EARNS) to Chase (the bank from which Citibank received presentment).
- Chase received the EARNS notice the next morning and sent notice of nonpayment to First Financial (including by mail, and also by additional communications reflected in the record).
- Before First Financial could stop payment out of McDonald’s account, McDonald—following the fraudster’s instructions—initiated an international wire transfer sending most of the funds to an account in China and moved the remaining portion to her business account as her fee.
- When the item was not paid, First Financial attempted to reverse the wire transfer, but the receiving bank reported the funds had already been paid out to the beneficiary.
- First Financial charged back McDonald’s account but recovered only what remained, leaving First Financial with a substantial loss.
- First Financial sued Citibank, asserting Citibank violated the Expedited Funds Availability Act and Regulation CC by failing to provide proper and timely notice of nonpayment/return, and sought summary judgment holding Citibank liable for the loss.

## Issues

1. Whether Citibank complied with Regulation CC’s notice-of-nonpayment and expeditious-return requirements when it returned the item and sent EARNS notice to Chase, the presenting bank, rather than providing direct notice to First Financial.
2. Whether any alleged defect in Citibank’s notice or return process could make Citibank liable to First Financial for the loss resulting from First Financial’s customer wiring funds out before the check was finally dishonored.

## Decision

- The court denied First Financial’s motion for summary judgment seeking to impose Regulation CC liability on Citibank.
- The court concluded that Citibank’s return/notice routed through EARNS to Chase satisfied Citibank’s obligations in the check-collection chain under the governing rules.
- The court determined Citibank was not responsible for delays or failures in notice transmission after Citibank sent notice to Chase, and the record did not support shifting First Financial’s fraud loss to Citibank on the summary-judgment record.

## Legal Principles

- A payor bank’s Regulation CC obligations concerning return and notice generally run to the bank from which it received the check (the presenting bank in the collection chain), not necessarily to the first depositary bank.
- Regulation CC permits notice of nonpayment to be sent through established interbank channels; when the payor bank cannot reliably identify the depositary bank from the item (such as where endorsement information is unreadable), sending notice to the presenting bank through the return/notice system is an accepted method of giving notice.
- Regulation CC damages are not automatic upon a technical violation; a claimant must show compensable loss caused by the failure of notice/return within the regulatory framework.
- When a depositary bank allows a customer to withdraw or transfer funds based on provisional credit before final payment of a large check, the depositary bank bears the risk that the item may be counterfeit or not payable, absent a return/notice failure that legally caused the loss.

## Conclusion

In First Financial Bank, N.A. v. Citibank, N.A., the court refused to impose Regulation CC liability on Citibank for a depositary bank’s loss from a counterfeit “official check” scheme, holding that Citibank satisfied its return and notice duties by transmitting nonpayment notice through EARNS to Chase, the presenting bank, and that the resulting loss flowed from the fraud and the release and wiring of funds before the item was finally dishonored.


First Financial Bank, N.A. v. Citibank, N.A., 2012 WL 3065546 (2012)