Hello,

 

Our Deposit Ops team posed the following question about restrictive endorsements ----- a check is deposited to Bank A (mRDC) with the proper restrictive endorsement - then, the endorsement specific to Bank A is whitewashed, the endorsement is then rewritten specific to Bank B, and the check is deposited in bank B (mRDC) -Who takes the loss? Who is indemnified?

With the perenniel caveat that I am not a lawyer, my take on this is that Bank A, as the initial bank of deposit/truncation is the one that's on the hook absent some other issues not mentioned. Bank A, however, should have a cause of action against their depositor. Unfortunately the depositor is probably long gone.

There are two questions that I answer in reverse order.
Who is indemnified? As a clarification, the Indemnifying bank, the bank that provides the indemnification, is the first bank that accepts the deposit of an electronic image or electronic information derived from the original check and does not receive the original check. Here are two answers to the question.
First, the anwser according to Reg CC: the Indmenifying bank indemnifes the second Depositary bank that accepts the original check for deposit without a restrictive indorsement inconsistent with the means of deposit. 
Second, the answer according to the scenario provided in the post: both Bank A and Bank B took the deposit through mobile RDC (mRDC). Therefore, of the two banks identified, no bank gets the indemnification because neither bank accepted the original check in paper form.
The other question is "Who takes the loss?" We cannot know from which bank the Paying bank will revoke settlement.
Both Bank A and Bank B make the warranty that they will not ask the Paying bank to make a payment based on an item already paid. That is one of the electronic check warranties. Both Bank A and Bank B breached the warranty to the Paying bank.
The Paying bank must pay one of the items, but it can return or adjust the other item, depending on timing. It is entirely up to the Paying bank and their Drawer customer to choose which item to pay and which to return or adjust.

Interesting string.  My take is this: Bank B accepted a fraudulent item -- they will lose.  I don't see any Reg CC restrictive endorsement benefit applying here as no physical check is in play.  So -- it sounds  like Bank A rightfully processed the deposit and they and their customer have a right to the funds from the maker's bank

Another spin on this: 
Account holder could make a mobile deposit with the front of one check, and the back of another check (which would be restrictively endorsed).  Then takes the first check (which was never restrictively endorsed) and cashes it at the teller window. 

My thoughts:  Perhaps the item in question is fraudulent from the get go? SO both A and B are at a loss?

Here are my thoughts ( not a legal opinion)-

“whitewashed” or altered item
if the original item is a legitimate item with a physical restrictive indorsement and deposited at bank a, that bank is fine. If that item is then altered in any way and deposited anywhere else, bank a is NOT liable. The other banks accepted an altered item, so it would be their loss. The challenge would be to prove the deposit to bank a was legitimate / or the subsequent deposits were indeed fraudulently altered.

Front / back fraud
in the case where the depositor used the front of one item and the back of another in their deposit to bank a, then deposited the physical item to bank b, according to reg cc, bank a indemnifies bank b since bank b holds the legitimate paper item (as long as bank b does not violate any restrictive indorsement on the item).

thoughts?

I'm not so sure about your assumption that Bank A ducks liability because the check was whitewashed. As I understand it, by accepting the item for remote capture Bank A becomes responsbile for any subsequent misuse of the document. Had they taken the item over the counter, the instrument would not have been available for someone to whitewash and fraudulently endorse. This is why Bank A's deposit agreement with their depositor should cover liability, indemnification and contractual obligation to destroy the original item.  Yes, Bank B may have been negligent in accepting a fraudulent item, but they would not have been able to do that absent Bank A's remote capture. I'm sure there will eventually be some definitive case law on exactly this point (if it doesn't already exist). I would love to see it when it occurs..