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NORTHPARK NATL. BANK v. BANKERS TRUST CO.

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK


September 26, 1983

NORTHPARK NATIONAL BANK, Plaintiff,
v.
BANKERS TRUST CO., FEDERAL RESERVE BANK OF NEW YORK and FEDERAL RESERVE BANK OF CHICAGO, Defendants

The opinion of the court was delivered by: KNAPP

MEMORANDUM & ORDER

 WHITMAN KNAPP, D.J.

 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.

 BACKGROUND

 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. *fn1" 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" *fn2" 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. *fn3" 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. *fn4"

 A brief chronology is now in order. The malefactor *fn5" 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. *fn6" 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.

 DISCUSSION

 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) *fn7" 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); *fn8" 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. *fn9"

 I

 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 *fn10" -- 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. *fn11"

 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. *fn12" 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 which it should, accordingly, be subjected. We therefore hold that, on the facts of this case, the FRBNY is a collecting bank for the purpose of subjecting it to such duties as are specified in UCC §§ 4-212 and 4-202. *fn13"

 II

 Plaintiff contends that the FRBNY lost its right to charge back plaintiff's account under UCC § 4-212 when it failed, "by its midnight deadline" after receiving the check from the FRBC on November 29, to return it or to send notification of having received it unpaid. *fn14" We observe again that by November 29 any notification -- by whatever means -- would have been futile because the malefactor had completed his fraud on November 24. Accordingly, the question we are asked to decide is whether, in requiring "notification" or the "return" of the item, UCC § 4-212(1) establishes conditions precedent to the right of charge-back or whether it defines a duty of ordinary care relative to the right to charge-back. If it were the former, the non-occurrence of the condition would result in there being no right to charge-back -- i.e., the collecting bank who failed to fulfill the conditions would be absolutely liable for the item. If it were the latter, the right to charge-back would be absolute, at least until settlement became final, but a plaintiff could hold the collecting bank responsible for such damages as were proximately caused by the collecting bank's failure timely to discharge its duty to notify or to return the item. In this case, no damages could be traced by the FRBNY's alleged failure to notify on or after November 29, because the damage could not then have been prevented.

 We hold that UCC § 4-212(1) establishes a duty of care, not a condition to the right to charge-back. At oral argument plaintiff's counsel conceded, see Tr. 23-27, that the only reported case which specifically addresses the question before us is Appliance Buyers Credit Corp. v. Prospect Nat. Bank (7th Cir. 1983) 708 F.2d 290 (Timbers, C.J., of the 2d Cir. in the majority panel). It holds, as do we, that UCC § 4-212(10) imposes a duty, not a condition and that plaintiff, therefore, has the burden of establishing the actual damages caused by the collecting bank's failures. Id. at 294-95. We could safely rest our holding on the persuasive statutory exegesis in Appliance Buyers. In addition, however, we observe that comment 1 to UCC § 4-108 specifically refers to UCC § 4-212 as "prescrib[ing] . . . time limits . . . within which a bank, in fulfillment of its obligation to exercise ordinary care, must handle items entrusted to it for collection . . ." (Emphasis added). Moreover, we would not impute to the drafters of the UCC the intention of imposing a duty the performance of which would make no practical difference whatever. To be sure, the language of UCC § 4-212(10) is far from clear in this regard. Although clarity and consistency have never been the UCC's hallmark, see, e.g., D. Mellinkoff The Language of the Uniform Commercial Code, 77 Yale L.J. 185 (1976), practicality is certainly one of its virtues. We would therefore require a clear indication of legislative intention before reading into UCC § 4-212(1) a collecting bank's obligation to perform an empty gesture. Plaintiff has called to our attention no such indication, nor has our own research uncovered any. *fn15"

 The clearest expression of the purpose to be served by the notification requirement in the charge-back statute is provided by comments 1 and 4 to UCC § 4-207 (1950 Edition). Notification is intended, the comments tell us, promptly to advise an unsuspecting customer and to protect him from having checks (drawn on his account) returned unpaid. See, e.g., First State Bank & Trust Co. v. George (Tex.Civ.App. 1974) 519 S.W.2d 198, 16 UCC Rep. 160. See also UCC § 4-212 comment 5. Even on the plausible assumption that the duty of prompt notification was also intended to allow the customer and a collecting bank to protect their rights against third parties, there is no logical reason to suppose that such intention implies that the violator of the duty be held liable, irrespective of the causal connection between the breach and the plaintiff's inability to collect on the item. Cf. UCC §§ 4-202 (duty) and 4-103(5) (measure of damages). Indeed, all decisions which we have been able to locate denying a defendant's right to charge-back under UCC § 4-212 for failure to notify (or to forward the item), are cases in which causation is established because the defendant's failure led to a detrimental change in plaintiff's position, which change could have been avoided by prompt notification. See, e.g., Manufacturers Hanover Trust Co. v. Akpan (Civ.Ct. 1977) 91 Misc.2d 622, 398 N.Y.S.2d 477; First Sec. Bank of Utah v. Ezra Lundahl, Inc. (1969) 22 Utah 2d 433, 454 P.2d 886. Cf. also State ex rel. Gabalac v. Firestone Bank (1975) 46 Ohio App.2d 124, 346 N.E.2d 326, 329; Benthall v. Washington Hog Market (1962) 257 N.C. 748, 127 S.E.2d 507, 509. But cf. Wells Fargo Bank v. Hartford Nat. Bank & Trust (D.Conn. 1980) 484 F. Supp. 817, 822-23. *fn16"

 Accordingly, we hold the cause of action under UCC § 4-212 to be legally insufficient because plaintiff has pleaded no facts which establish that it is entitled to any damages, even if it prevailed on the issue of liability.

 III

 Plaintiff also charges the FRBNY with violating UCC § 4-202(1)(e) because it did not send a notice of delay in transit after it received the check unpaid from Bankers Trust. Defendant FRBNY contends, on the other than, that UCC § 4-202(1)(e) was not meant to apply to a situation such as this one, but rather to cases in which the physical items are lost or destroyed when transported from one location to another. See Citizens State Bank v. Martin, supra, 227 Kan. at 588, 609 P.2d at 676 (dictum).

 In our view defendant's position is the correct one. The history of UCC § 4-202(1)(e) can be traced at least back to the Proposed Final Drafts Nos. 1 and 2 of Article III on commercial paper. The relevant section in Draft No. 1 was appropriately entitled " Lost Items," see § 715 (Draft No. 1, April 15, 1948) (emphasis added), and in Draft No. 2 it was called " Loss of Cash Items in Transit." See § 713 (Draft No. 2, July 30, 1948) (emphasis added). Their respective notes and comments leave no doubt that the "delays in transit" which the drafters contemplated were those occasioned by mishaps in the mails. See Notes and Comments to Draft No. 1 at 71 (April 15, 1948); Notes & Comments to Draft No. 2 at 17 (August 2, 1948). See also UCC § 3-611(2) (1948 Edition). We have found nothing in the subsequent legislative history to persuade us that the several stylistic mutations which eventually led to UCC § 4-202(1)(e) modified the above described legislative intent. See also N.Y. Law Revision Comm., Study of Unif. Com. Code -- Article 4 at 97 (Leg. Doc. No. 65(E), 1955).

 In this case the physical progress of the fraudulent check was never hindered by an accident, cf. Girard Trust Bank v. Brinks, Inc. (1966) 422 Pa. 48, 220 A.2d 827, or by it being mislaid in the mail. Accordingly, we hold that the FRBNY was under no obligation to give such notice as is specified in UCC § 4-202(1)(e).

 IV

 Plaintiff also contends that the FRBNY violated its duties under UCC § 4-202(1)(a) because it failed to forward the check to the FRBC within the time limits specified in UCC § 4-202(2) after having received it unpaid from Bankers Trust. See Plaintiff's Memorandum at 12-13; Tr. at 8. This claim, for the time being at least, we must sustain.

 In connection with a claim under UCC § 4-202 there is no dispute that the appropriate rule for damages is the "but for" test of UCC § 4-103(5). *fn17" See Marcoux v. VanWyk (8th Cir. 1978) 572 F.2d 651, 653; Wilhelm Foods, Inc. v. National Bank of North America (S.D.N.Y. 1974) 388 F. Supp. 1376, 1380-81; United Kentucky Bank v. Eagle Machine Co., 644 S.W.2d 649, 35 UCC Rep. 564 (Ky.Ct.App. 1983) Wertling v. Manufacturers Hanover Trust Co. (Civ.Ct. 1983) 118 Misc.2d 722, 461 N.Y.S.2d 157, 160-61; Hoffower v. Pennsylvania Exchange Bank (4th Dep't 1962) 16 A.D.2d 1032, 229 N.Y.S.2d 979, 980; 6 Reitman Banking Law § 134.08 at 38-40 (1981) (citing cases). Moreover, this measure of damages for the violation of the duty of care in handling items for collection long antecedes the enactment of the UCC. See American Nat'l Bank v. Bank of Bandon (9th Cir. 1917) 240 F. 624; Balsa Ecuador Lumber Corp. v. Security Nat. Bank (E.D.N.C. 1956) 141 F. Supp. 470, 476; UCC § 4-103 comment 6. With the foregoing in mind it is apparent that, even if it were able to establish that the FRBNY violated UCC § 4-202(1)(a), plaintiff would be hard pressed to prove damages. It is equally clear, however, that in this procedural posture the claim may not be dismissed.

 Defendant FRBNY has submitted an elaborate set of charts purporting to demonstrate that -- given the benchmarks of November 13 and 20 when the check is known to have been in the hands of Bankers Trust and the FRBC respectively -- the very task of physically transporting the check to Chicago compels the conclusions, first, that the FRBNY could not have violated UCC § 4-202(1)(a); and, second, that -- if liability could be established -- any possible delay must have been so short that it could not support damages because, even in the absence of such short delay, plaintiff could not have been notified in time to prevent the November 24 withdrawal. See Defendant's Exhibit 6; Defendant's Reply Memorandum at 3-7. Defendant's presentation is cogent, but inappropriate on a motion to dismiss. On the question of liability the FRBNY's argument is flawless in that it assumed, for instance, that Bankers Trust returned the bogus check just before its midnight deadline on November 14. *fn18" However, the event which starts the clock of UCC § 4-202(2) for the FRBNY is not the end of the period in which Bankers Trust might have lawfully acted, but the moment when it, in fact, returned the check to the FRBNY. On this complaint and in the absence of any discovery on that issue, see Tr. at 4, 7-8, we must allow for the possibility -- unrealistic as it may be -- that Bankers Trust may have returned the check before 2:00 P.M., see UCC § 4-107, on the same day it received it -- November 13. Therefore, we cannot say as a matter of law that the complaint rules out a violation of UCC § 4-202 by the FRBNY.

 On the issue of damages, defendant's argument amounts, in substance, to the contention that the FRBC would have taken nine days to return the check to New York whether or not the FRBNY had forwarded it in time and, therefore, that -- given any plausible delay -- it would have been impossible to notify plaintiff in time to prevent the November 24 withdrawal. Although we are taken by the argument that the timing of events in Chicago is independent of the precise date on which the check arrived from New York, we are not prepared -- on this record -- to say so as a matter of law.

 Accordingly, plaintiff will be allowed discovery for purposes of establishing the timing of the various stages by which the check progressed from New York to Chicago. Should the evidence prove that the FRBNY violated UCC § 4-202(1)(a) by delaying the check's progress beyond the limits specified in UCC § 4-202(2), plaintiff will be allowed -- indeed, required -- further to establish that such delay caused it damage.

 V

 Finally, plaintiff charges that the FRBNY violated UCC § 4-202(1)(b) by failing to send a notice of non-payment after it had received the check from Bankers Trust some time after November 13. *fn19" On the other hand, defendant contends, in substance, that UCC § 4-202(1)(b) does not impose on it the duty to notify about Bankers Trust's non-payment because the drafters of the UCC intended the "notice of dishonor or non-payment" mentioned in UCC § 4-202(1)(b) to originate with the payor bank; and that, accordingly, the FRBNY was not legally obligated to send the appropriate notice until it received it from Chicago. *fn20" See Defendant's Memorandum at 8-9; Defendant's Reply Memorandum at 7-9. We disagree.

 The parties' submissions in this regard have amounted to no more than exchanges of unsupported conclusions. Such (necessarily incomplete) review of the UCC's sprawling legislative history as we were able to perform allows us to state that the drafters of the UCC certainly expected that the last bank in the collection chain would be the wellhead of the notification stream down that chain, such expectation being part of generally shared institutional assumptions. A review of the mutations of UCC § 4-202 -- going back to § 712(1) and § 708(1), both entitled "Responsibility for Collection," of the 1948 Proposed Final Drafts Nos. 1 and 2 of Article III, respectively -- shows, however, no evidence whatever of an affirmative legislative intention in this connection. *fn21" There is, in fact, no indication that any thought was given to the situation before us in this case. This is, of course, not at all surprising. The 1981 edition of a respected treatise on the law of check collections does not even mention "MICR fraud" -- as this fraud has, appropriately, come to be known -- in its sections dealing either with fraud or with the responsibility for losses due to improper encoding. See B. Clarke, The Law of Bank Deposits, Collections & Credit Cards chs. 6 and 10 (rev.ed. 1981). Indeed, the legal problems of loss due to improper encoding, let alone fraud, are of relatively recent vintage. See, e.g., Georgia Railroad Bank & Trust v. First Nat. Bank (1976) 139 Ga. App. 683, 229 S.E.2d 482 (calling itself a case of first impression) (underencoding); State ex rel. Gabalac v. Firestone Bank (1975) 46 Ohio App.2d 124, 346 N.E.2d 326 (overencoding). What we have, therefore, is a statute, UCC § 4-202(1)(b), which -- on the basis of the parties' submissions and our own research -- cannot fairly be said to have been drafted in contemplation of the facts in this case. The question, then, is whether it should be interpreted to cover the situation at hand. We think it should.

 Certain observations are in order concerning Article IV in general and UCC § 4-202 in particular. The history of the UCC makes it abundantly clear that, especially in the context of those provisions which impose a duty of care, the Code's watchword is "flexibility." It is well known that banks' early opposition to what is now Article IV could be traced in considerable measure to the fear that the possibility of any conduct not complying with procedures affirmatively approved would be found to constitute a violation of the obligation of care. See, generally, W. Malcolm, Article 4 -- A Battle with Complexity, 1952 Wisc.L. Rev.265, 280-83 (1952). The Final Text Edition of 1951 crystallized UCC § 4-103(3) and § 4-103(4) which clearly established that approval of certain procedures did not constitute disapproval of other procedures found reasonable in light of sound banking practice. See also UCC § 4-103 comment 5. This observation leads to two conclusions. First, there being no mechanical test for what constitutes ordinary care in a novel situation, the ultimate standard is dictated by the imperatives of sound banking practice, seasoned by the obligation of good faith. See UCC § 1-201(19). *fn22" Second, flexibility is a two way street: just as a new task or procedure will certainly be acceptable if it reflects sound banking practice, so the lack of one -- when such absence violates sound banking practice -- should be actionable.

 Concerning UCC § 4-202 in particular, there are strong indications that the tasks described in UCC § 4-202(1)(a) through(e) are not an exhaustive list of the actions to be taken by a collecting bank in order to satisfy its obligation of ordinary care. See UCC § 4-202 comment 1 (the section described "basic" responsibilities); comment 3 (the section describes "types" of "basic" actions); comment 4 ("ordinary care" is used in its "normal tort meaning" and "no attempt is made . . . to define in toto what constitutes ordinary care of lack of it"). This leads to the further conclusion that the enumeration in UCC § 4-202(1)(a) through (e) should not be deemed -- by negative implication -- a bar to the reinterpretation (or expansion) of the duties owed by a bank in discharging its collection function with ordinary care.

 With the foregoing in mind the specific question before us is: What should be considered good banking practice in a situation where it comes to a banker's attention that the routing code on a check is inconsistent with the address on the face of the item? If day-to-day banking experience should demonstrate that such inconsistencies are usually the result of simple error, there would be no reason to assume that a conscientious banker should become alarmed at learning of an inconsistency or deem it his duty to notify anyone. *fn23" On the other hand, if day-to-day banking experience should establish that such inconsistencies are usually an indication of fraud, *fn24" then it might well be argued that a collecting bank, in satisfying its obligation of ordinary care, should take steps promptly to notify a prospective victim in the collection chain. *fn25"

 If there is a policy implicit in the UCC's rules for the allocation of losses due to fraud, it surely is that the loss be placed on the party in the best position to prevent it. See B. Clarke, The Law of Bank Deposits, Collections & Credit Cards, para. 6.1 (1981). *fn26" At oral argument we suggested that plaintiff should be made to bear -- on policy grounds -- full responsibility for this loss. It is, after all, a bank's business to make certain that it doesn't deal with crooks. *fn27" On further reflection, however, we are not prepared to say that no share *fn28" of the loss should be placed -- on policy grounds -- on a collecting bank which might be shown to have known (or to be on notice) that fraud was afoot and did nothing to stop it, although it had the "last clear chance" to do so. However, on the record before us no facts are pleaded -- let alone proved -- which would shed any light on whether inconsistency between the routing code and the address on the face of the item could reasonably be regarded as a mere mistake or should alert any knowledgeable banker to the probability of fraud.

 CONCLUSION

 The claims based on UCC §§ 4-202(1)(a) and 4-202(1)(b) are, accordingly, held to be legally viable. The plaintiff may, if it be so advised, amend its complaint to allege facts suggesting that routing code inconsistency should be regarded as indicating the probability of fraud; and may conduct appropriate discovery on that issue. The remaining claims against the FRBNY are dismissed for failure to state a cause of action.

 A conference will be held on Thursday, October 27, 1983 at 9:30 A.M. in Courtroom 619 to discuss the further progress of this litigation.

 SO ORDERED.


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