On September 22, 1986, New York City Shoes (NYCS) issued a check in the amount of $100,000 to the Maxwell Shoe Company (Maxwell). The check was drawn on one of NYCS’s accounts at Pennsylvania Fidelity Bank (http://www.fidelitybk.com/home.htm). Maxwell deposited the check in its account at the First National Bank of Boston (Boston), which credited Maxwell’s account with the face amount of the check and then processed the check through the Federal Reserve system. Checks presently are processed by Magnetic Ink Character Recognition (MICR). Under this procedure, each bank check is preprinted with magnetic characters along the lower left-hand edge. These characters designate the bank upon which the check is drawn and the account number of the drawer. When a check is presented to another bank (the depositary bank), that bank adds additional magnetic encoding, at the lower right-hand side of the check, specifying the amount of the check. From there, the check goes through the bank clearing system to the bank on which the check is drawn (the payor bank) and is charged against the drawer’s account without further human intervention.

In this case, Boston properly encoded NYCS’s check, but NYCS’s account contained insufficient funds; consequently, Fidelity returned the check to Boston. Boston did not charge Maxwell’s account because of the check’s uncollectibility, but instead represented the check to Fidelity. To the bottom of the check, Boston attached a "tape skirt," on which it reencoded the check so that it could be processed through the Federal Reserve system. Boston’s encoder made an error, however, and encoded the amount of the check as $10,000, rather than $100,000. The computers that processed the check did not detect the error. When the check arrived at Fidelity on October 3, 1986, it was charged against NYCS’s account in the amount of $10,000. Boston, which became aware of the error only after that sum was forwarded to it, then made demand on Fidelity for $90,000. Fidelity replied that it was unable to honor the request because NYCS’s account was insufficient to cover it.

Boston filed suit against Fidelity for the $90,000, arguing that Fidelity was liable under the "final payment" rule of the UCC, which provides that "[a]n item is finally paid by a payor bank when the bank ... has completed the process of posting the item to the indicated account of the drawer, maker or other person to be charged therewith. . . . Upon a final payment . . . the payor bank shall be accountable for the amount of the item."

Boston argued that Fidelity did post the check against NYCS’s account on October 3, 1986, and therefore, under the Code, was accountable to Boston for the amount of the check. Boston further argued that it was irrelevant that the check was encoded in the wrong amount, since it was undisputed that Fidelity "completed the process of posting the item to the indicated account of the drawer" on October 3, 1986. Fidelity countered that for purposes of the Code, the "amount of the item" for which the payor bank must account should be the encoded amount of the check rather than its actual face amount. Decide this case.