handled properly, and that no adjustment would be appropriate. For some reason, the clerk did not learn of the second presentation, the encoding error, etc.
Boston resubmitted its written adjustment request on November 17, 1986. At that point, NYC's account was overdrawn. At no time between September 22, 1986 and November 21, 1986, when NYC's account was closed, did NYC's account contain sufficient collected funds to cover Maxwell's $ 100,000 check, or the balance remaining after the initial payment of $ 10,000.
Because of the unusual nature of several transactions in NYC's account -- a large number of checks drawn against uncollected funds, and a large number of deposits which later proved to be uncollectible -- the account had come to the attention of Fidelity's Security Division in July of 1986. As a result of the investigation, Mr. Donald Ebner, vice-president in charge of security at Fidelity, decided to end Fidelity's banking relationship with NYC. By agreement, all of NYC's accounts at Fidelity were closed, as of the end of business on November 21, 1986.
At the start of business the next banking day, November 24, 1986, Mr. Ebner had in his possession, ready for delivery to NYC, a check representing the combined balances of all of NYC's accounts which had just been closed -- a total of $ 101,383.61. That same morning, Mr. Ebner received from Fidelity's Adjustment Department the adjustment request which had been resubmitted by Boston, seeking the $ 90,000 balance on the Maxwell check. NYC, however, refused to permit Fidelity to use funds from any of its other accounts to make good the Maxwell check; and, since the account on which the check had originally been drawn was insufficient to cover it, Mr. Ebner rejected the adjustment request, and delivered to NYC the $ 101,383.61 check closing out its various accounts.
After this final rejection of Boston's adjustment request, Boston attempted to collect the $ 90,000 from NYC. An agreement was reached for NYC to pay off the balance in installments. NYC paid a total of $ 40,000 on account, but then defaulted and, on July 7, 1987, filed for bankruptcy.
In this action, Boston seeks to recover from Fidelity the $ 50,000 remaining unpaid, and also requests a declaratory judgment which would require Fidelity to indemnify Boston in the event the Bankruptcy Court determines that all or any part of the $ 40,000 previously paid by NYC constitutes a voidable preference.
As the foregoing recital demonstrates, the court is presented with two separate but related sets of questions. The first is the liability of Fidelity as payor bank, for having paid only $ 10,000 when the check was in the amount of $ 100,000, and the effect of Boston's encoding error on that liability. The second area of inquiry centers upon Fidelity's handling of the adjustment request, and its payout to NYC notwithstanding its awareness of Fidelity's adjustment request.
Under the provisions of the Uniform Commercial Code (UCC), the liability of a bank is determined by the law of the jurisdiction in which the bank is located. UCC § 4-102(2). Thus, Boston's liability is governed by Massachusetts law, Fidelity's by Pennsylvania law. Fortunately, the UCC has been adopted in substantially the same form in both jurisdictions. Compare 13 Pa.Cons. Stat.Ann. § 4213(a) (Purdon's 1984) with Mass.Gen.Laws Ann. Ch. 106, § 4-213(1) (West 1958).
Section 4-213(1) of the UCC provides:
". . . An item is finally paid by a payor bank when the bank has done any of the following, whichever happens first: