The opinion of the court was delivered by: KNAPP
On November 7, 1979 a customer of plaintiff -- a Dallas bank -- deposited with it a $62,500 check and thereby set in motion a clever fraud which would result in his bilking plaintiff out of some $60,000, and in the institution of this lawsuit to determine who should ultimately be left holding the proverbial "bag." The case is before us on defendant Federal Reserve Bank of New York's (FRBNY) motion to dismiss for failure to state a claim and on defendant Federal Reserve Bank of Chicago's (FRBC) motion to dismiss for lack of personal jurisdiction. This opinion deals only with the motion by the FRBNY; the application by the FRBC is considered in a separate opinion reported at 572 F. Supp. 520.
Two features of the modern check collection process are central to the understanding of this fraud. The first is that, notwithstanding the colloquial suggestion to the contrary, checks deposited for collection do not generally "clear." That is, provisional checks -- on the customer's account at the depositary bank and on the accounts of intermediary banks involved in the collection process -- become final by the mere passage of time, rather than by an advice of actual payment. See Uniform Commercial Code (UCC) § 4-213.
See also 6 Reitman Banking Law § 135.08 (1981). It being statistically unlikely that a particular check will not be paid, see UCC § 4-212 comment 1, the practicalities of the process call for giving actual notice (down the chain of collection) only in the event a check is not paid. Accordingly, the temporary hold which a depositary bank customarily places on the withdrawal of proceeds from a check deposited for collection is intended to give the collection chain an opportunity to notify the depositary bank, if it be necessary, that the check has not been paid. Thus, the hallmark of the normal completion of collection -- i.e., the check having been paid -- is the receipt of no notice by the depositary institution.
The second important feature is that the collection process has been, of course, automated by the use of check-sorting computers. See Bank Leumi Trust v. Bally's Park Place (S.D.N.Y. 1981) 528 F. Supp. 349, 350-51. The vast amount of items processed allows no practical alternative. See 68 Annual Report, Board of Gov. of the Fed. Res. Syst. 233, table 9 (1981) (more than 16 billion checks handled in 1981); Aldom, Purdy, Schneider & Whittingham, Automation in Banking 13-15 (1963); UCC § 4-101 comment. Along the bottom of a check's face there are so-called "MICR numbers"
which identify the drawer's bank, branch, and account number. A computer "reads" these numbers and automatically routes the check to the appropriate destination for collection. The initial destination depends, therefore, entirely on the MICR routing number printed on the check.
With the foregoing in mind it is clear how a fraud of this type is accomplished. Its object is to cause a worthless check deposited for collection to take a sufficiently long detour in its progress to the drawee bank, to insure that the notice of non-payment will not arrive at the depositary bank until after the expiration of the hold which is placed on the availability of the proceeds from transit items.
Having received no such notice before the expiration of the hold, the depositary bank supposes the items to have been paid and allows its proceeds to be withdrawn. By the time notice arrives the malefactor has, of course, absconded with the spoils. The crucial detour is caused by imprinting the fraudulent check with the wrong MICR routing number -- i.e., one that does not correspond to the bank designated on the face of the check as the drawee bank, but to a different bank, preferably one that is distant from the institution designated as the drawee bank on the face of the check. The fraudulent check in our case bore the MICR routing number of Bankers Trust Co. in New York and identified the "Bank of Detroit" -- a fictitious institution -- as the drawee bank.
A brief chronology is now in order. The malefactor
deposited the fake check in his account with plaintiff on November 7, 1979. Plaintiff put a 14-day hold -- through November 20 -- on the availability of the check's proceeds. On the next day, November 8, the check was presented to the Republic National Bank of Dallas -- plaintiff's correspondent bank for out-of-state collections -- which, in turn, presented the check on November 9 directly to the FRBNY for collection, without routing the item through the local Federal Reserve Bank of Dallas. See 12 C.F.R. § 210.4 (1983) (allowing "direct send" to Federal Reserve Banks). The complaint goes on to allege that the check bears a stamp showing that it had been presented to Bankers Trust Co. for collection on November 13. The precise timing of events during the next few days has not yet been established. It is clear, however, that at some time after November 13, Bankers Trust determined that the check was not drawn on it and returned the item to the FRBNY. The FRBNY, having now extracted the check from the computer-directed addressing system, then forwarded the check to the FRBC on the strength of the designation "Bank of Detroit" which the check bore on its face.
The complaint states that the check is stamped as having been in the hands of the FRBC on November 20. Meanwhile, back in Dallas, the malefactor withdrew $9,000 from his account on November 21 and an additional $40,250 on Saturday, November 24. The precise schedule of the check's vicissitudes after November 20 is yet undetermined. It must, however, have been sent to the Detroit branch of the FRBC, which branch, in turn, established that the "Bank of Detroit" did not exist. The check must then have followed the self-same route back to the FRBC and then to the FRBNY. The complaint alleges that the FRBNY again received the check on November 29, well after the malefactor had eloped with the plundered funds, leaving -- we suppose -- a barren account. What happened to the check thereafter is immaterial. Suffice it to say that the Federal Reserve Bank of Dallas advised plaintiff some time in December that the check would be returned unpaid, and upon the check's return debited plaintiff's account at the Dallas Fed for the amount of the phony check.
The complaint is altogether parsimonious in describing the legal foundation of the charges against the FRBNY. As developed in its submission in opposition to the FRBNY's motion, the specific legal grounds for plaintiff's claim are that, having received the check unpaid from the FRBC on November 29, the FRBNY (a) failed timely to send notice or timely to forward the check down the collection chain, as required by UCC § 4-212(1)
and, therefore, forfeited its right to charge-back under that provision; that, having received the unpaid check from Bankers Trust on November 13, the FRBNY (b) failed to send notice down the collection chain of the check's delay in transit, as required by UCC § 4-202(1)(e); (c) failed timely to forward the check for presentment to the FRBC, as required by UCC § 4-202(1)(a);
and (d) failed to send notice of non-payment down the collection chain, as required by UCC § 4-202(1)(b). See Plaintiff's Brief at 4-5; Transcript of Hearing of June 17, 1983 [Tr.] at 7-9.
At the outset the parties have vigorously disputed whether the FRBNY is a "collecting bank" for purposes of UCC §§ 4-212 and 4-202 because the strictures of those sections apply only to such banks. Defendant argues, see Defendant's Reply Memorandum at 1-3, that it cannot be a collecting bank because they are defined as "any bank handling the item for collection except the payor bank," UCC § 4-105(d) (emphasis added), and it had no authority to handle the check "for collection," as it was not drawn on a bank located in the geographic district served by the FRBNY. For the latter proposition the FRBNY refers us to 12 U.S.C. § 360 and 5 Fed.Res.Bull. 467 (1919) (Exhibit F to Defendant's Reply Memorandum). This argument is without merit. The purpose of the Federal Reserve Act of 1913, as amended
-- whose section 16 is the forerunner of what is now 12 U.S.C. § 360 -- was to organize the Federal Reserve Bank. There is not the slightest indication that the grant of authority in § 360 was intended as a shield against the application of UCC §§ 4-212 and 4-202 or, conversely, that the drafters of the UCC intended those sections to be read in conjunction with 12 U.S.C. § 360. Section 4-105(d) of the UCC sets out a very practical, commonsensical definition of "collecting" bank as every bank in the collection chain except the payor bank. See, e.g., Southern Cotton Oil Co. v. Merchants Nat. Bank (5th Cir. 1982) 670 F.2d 548; Union Bank of Benton v. First National Bank (5th Cir. 1980) 621 F.2d 790; Engine Parts v. Citizens Bank (1978) 92 N.M. 37, 582 P.2d 809; Wilhelm Foods v. Nat. Bank of North America (S.D.N.Y. 1974) 382 F. Supp. 605; Tubin v. Rabin (N.D.Tex. 1974) 382 F. Supp. 193. The FRBNY was certainly a link in that chain.
Defendant argues further that it is not a collecting bank because it was sent the check by mistake. See Citizens State Bank v. Martin (1980) 227 Kan. 580, 609 P.2d 670, 676 (holding that a bank receiving a check because of a encoding error is not a collecting bank). The check, however, was not sent by mistake. It was properly addressed to the FRBNY in accordance with a MICR routing number which called for such destination. This was, of course, part of a fraudulent scheme but it surely was not a mistake.
Last, the FRBNY argues that it should not be subjected to UCC §§ 4-212 and 4-202 because "plaintiff should not be permitted to impose significant legal obligations on the New York Fed simply by sending it a worthless piece of paper." Defendant's Reply Memorandum at 3. This is yet another strained argument. The check is no less valuable than a check drawn on insufficient funds at an account with an in-district bank. The value of the check is of no consequence to the role which the FRBNY played in the collection process or to the attendant obligations to ...