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May 16, 1984


The opinion of the court was delivered by: HAIGHT


HAIGHT, District Judge:

Plaintiff Union Trust Company of Maryland ("Union Trust") is the victim of a cleverly executed check fraud. *fn1" Claiming that the Federal Reserve Bank of New York ("New York Fed") is at least partially responsible for the success of the scheme, it seeks to hold New York Fed liable for the loss. Defendant moves to dismiss the action for failure to state a claim under Rule 12(b) (6), Fed.R.Civ.P. *fn2"


 On May 6, 1980, one Marvin Goldstein, the perpetrator of the fraud, deposited a check for some $880,000 in a Union Trust account. In hindsight, it is obvious that the check was designed to defraud the bank, for its counterfeit numerals served to turn the mechanized efficiency of the banking system against itself. Explaining its success will require a digression into modern techniques of check processing. *fn3"

 It is common experience that banks "hold" checks deposited for collection for a short period of time after deposit. For that period of time the banks grant only a provisional credit in the depositor's account and do not allow withdrawals of funds against the deposited checks. The purpose of the hold is to permit the depository bank to assure itself that there are sufficient funds in the account on which the check is drawn to permit its payment. Because of the tremendous volume of checks routed through the processing system, however, it is impractical for payor banks, those which hold the account on which the check is drawn, affirmatively to notify depository banks that a particular check has been paid. Instead, actual notice is given only in the event of nonpayment. As a result, depository banks hold a check until a sufficient amount of time passes for notice of nonpayment, if sent, to have reached them. If no notice is received within this time, the check is assumed to have cleared, the provisional credit becomes final and the depositor is permitted to withdraw funds against the check. One sees here an application of the maxim: "No news is good news."

 Quite clearly, time is of the essence. If a check is delayed for a long enough time during its route from the depository to the payor bank, the check may not reach the payor bank for approval before the depository bank, assuming payment, permits funds to be withdrawn against it. As an aid in preventing such occurrences, banks in the chain of transmission are ordinarily required, under the "midnight deadline" rule, to process a check roughly within the day of receipt. See, e.g., N.Y.U.C.C. §§ 4-202(2) and 4-302(a). *fn4" A bank which fails to meet its midnight deadline becomes liable for damages resulting from the delay. Ordinarily, then, any delay in the processing of a check which causes a depository bank prematurely to assume clearance can be attributed to delay at one bank in the chain of transmission, and the dilatory bank becomes liable.

 Compliance with the midnight deadline rule is aided by automated sorting. A number which identifies the payor bank, known as the Magnetic Ink Character Recognition number ("MICR number"), is printed in magnetic ink along the bottom of the check. At each bank a machine is able to read this number and automatically route the check toward the next appropriate bank in the collection chain. An expanded form of this number, referred to as the Routing Number, is repeated in ordinary numerals in the upper right-hand corner of every check. See further, American Bankers Association Key to Routing Numbers (Rand McNally, 1980), at K4-K6; Bank Leumi Trust Co. v. Bally's Park Place, Inc., 528 F. Supp. 349, 350-351 (S.D.N.Y. 1981).

 With this background in mind, it is possible to detail the fraud at hand. On the face of the check Goldstein deposited at Union Trust were specified not one but two payor banks. The name of one payor bank, First Pennsylvania Bank of Philadelphia ("First Penn") was printed in letters in the lower left-hand corner of the check. The other payor bank, the State Bank of Albany ("Albany State"), was not specified by name; rather, it was specified by the Routing Number printed in the upper right-hand corner. Although this number ordinarily corresponds to the MICR number along the bottom of the check, the MICR number of this check was effectively nonsense in that it identified no known bank. In any event, the check bore two inconsistent destinations. The result of this, as is described in more detail below, was that the check was routed through five banks over the course of nearly two weeks.Although every bank handling the check met its midnight deadline, ten days expired before the Union Trust was notified that neither Albany State nor First Penn would honor the check. The day before, however, Union Trust, having taken the silence as an indication that the check had been paid, had permitted Goldstein to withdraw $755,000 against the check. Because his remaining balance amounted to only about $1,000.00, Union Trust was out $754,035.00. Its insurer absorbed all but $100,000 of this loss.

 To understand the alleged basis for liability of the New York Fed, it is necessary to trace the check on its ten day travels across the Northeast.On the day of deposit, May 6, 1980, Union Trust forwarded the check for collection to Philadelphia National Bank ("PNB"), a Pennsylvania bank which must not be confused with the previously-mentioned First Penn. *fn5" PNB apparently selected Albany State as the correct payor bank *fn6" and routed the check to New York Fed on May 7 in anticipation of its being forwarded by New York Fed to Albany State for collection. *fn7" New York Fed did forward the check, but Albany State returned it on May 9 stamped "Sent in Error." Intending either that the check be returned to PNB as dishonored or that it be forwarded to First Penn for collection, New York Fed sent the check on May 12 to the Federal Reserve Bank of Philadelphia ("Philadelphia Fed"). *fn8" The Phildelphia Fed apparently selected the latter course and forwarded the check to First Penn on May 14. Early on May 16, First Penn, apparently having located no account on which the check could be drawn, notified PNB by telephone of the dishonor. PNB promptly passed the word to Union Trust, but the notice came too late to prevent the bank's loss.

 Union Trust claims that in its handling of the check New York Fed breached its UCC-imposed duty to "use ordinary care in sending notice of dishonor or non-payment or returning an item . . . after learning that the item has not been paid or accepted." N.Y.U.C.C. § 4-202(1) (a) and (b) (McKinney 1964). Plaintiff contends that New York Fed failed to exercise ordinary care by 1) failing to notify it of Albany State's return of the check, 2) sending the check to Philadelphia Fed rather than PNB, 3) failing to notify it of the delay caused by the routing to Albany State, and 4) failing to "wire advice" of Albany State's nonpayment. Any one of these actions would likely have prevented Union Trust's loss. New York Fed challenges each of these claims individually. It also asserts the defense of statute of limitations *fn9" and argues that public policy and Federal Reserve regultions bar suits such as this.


 N.Y.U.C.C. § 4-202(1) requires a bank in the collection chain, such as New York Fed, to "use ordinary care in the exercise of its basic collections tasks. . . . If [the bank] forwards the item to be presented [§ 4-202(1)] requires ordinary care with respect to routing . . . and also in the selction of intermediary banks or other agents." Official Comments 1. & 2., N.Y.U.C.C. § 4-202 (McKinney 1964). *fn10" See also N.Y.U.C.C. § 4.103(1) (McKinney 1964) (duty of ordinary care may not be waived). The phrase "ordinary care" in Article 4 of the U.C.C. is not intended to refer to a standard of care unique to the banking world. Instead, it is "used with its normal tort meaning." Official Comment 4., N.Y.U.C.C. § 4-103 (McKinney 1964). Nor is it exhaustively defined by the Code, although "action or non-action approved by [Article 4] or pursuant to Federal Reserve regulations or operating letters constitutes the exercise of ordinary care." Id. As a consequence, in the absence of compliance with an applicable rule of law established by the U.C.C. or the Federal Reserve, ordinary care must be determined from all the surrounding facts and circumstances. Cf. Wilhelm Foods, Inc. v. National Bank of North America, 388 F. Supp. 1376, 1379 (S.D.N.Y. 1974). If a U.C.C. or Federal Reserve regulation is applicable, however, it provides a safe harbor, and a bank may conclusively demonstrate ordinary care by proving compliance with it.


 Plaintiffs first contend that in handling the check New York Fed failed to follow one of its own regulations governing handling of returned checks. Since the particular regulation is paragraph 20 of Federal Reserve Bank of New York Operating Circular No. 4, as revised September 18, 1979, *fn11" the claim sounds in breach of contract rather than tort, for Operating Circulars are treated as contracts binding on parties having an interest in items handled by the Reserve Bank in question. N.Y.U.C.C. §§ 4-103(1) and 4-103(2).

 Paragraph 20 of Operating Circular No. 4 is one of a group of four paragraphs collected under the heading "Uniform instructions regarding protest and advice of nonpayment." It reads in relevant part:

 20. Except as provided in paragraph 21 hereof [a paragraph all agree to be irrelevant here], all Federal Reserve Banks will receive, handle, and forward cash items [such as checks ] subject to the following uniform instructions regarding . . . wire advance of nonpayment . . .: . . .

 (c) WIRE ADVICE of nonpayment of any item of $2,500 or over . . . unless it bears on its face the legend, "DO NOT WIRE ADVICE OF NONPAYMENT," of a Federal Reserve Bank or of a preceding bank endorser. . . .

 (d) DO NOT WIRE ADVICE of nonpayment of: . . .

 (ii) any tiem of $2,500 or over unless such advice is required by subparagraph (c).

 [footnote omitted].

 Because the check in question was over $2,500, the relatively straightforward language of paragraph 20 would appear to have required the New York Fed to wire advice *fn12" of the check's nonpayment by Albany State.

 New York Fed responds by pointing to paragraph 23 of the same operating circular, which is also included under the "Uniform instructions regarding protest and advice of nonpayment" ...

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