author: Hancock, Jr., J. Titone, J.

text:
    In the Matter of New York State Health Facilities Association, Inc., Respondent, v David Axelrod, as Commissioner of Health of the State of New York, et al., Appellants.
    Argued November 14, 1990;
    decided February 19, 1991

      POINTS OF COUNSEL

      Robert Abrams, Attorney-General (Daniel Smirlock, O. Peter Sherwood and Peter H. Schiff of counsel), for appellants.

      Cornelius D. Murray, David M. Cherubin and Bernard Schwartz for respondent.
   OPINION OF THE COURT

Hancock, Jr., J.

In 1988, the Public Health Council, pursuant to the State Administrative Procedure Act, adopted a set of regulations (Medicaid Patient Access Regulations) which require new applicants seeking nursing home approval to agree that the home admit "a reasonable percentage of Medicaid patients”. This admission standard is defined as 75% of the rate of Medicaid nursing home admissions in the county where the home is located; the standard is subject to change for a number of enumerated, or other, factors. In this litigation, the lower courts have declared the regulations to be invalid, essentially on two grounds:

(1) that the regulations go beyond the scope of the delegation of legislative power contrary to Boreali v Axelrod (71 NY2d 1); and

(2) that, in any event, they constitute the establishment of a quota in violation of our decisions in Matter of Broidrick v Lindsay (39 NY2d 641), Matter of Fullilove v Beame (48 NY2d 376) and Subcontractors Trade Assn. v Koch (62 NY2d 422).

For reasons to be explained, we disagree with the lower courts on both propositions. We, accordingly, reverse.

I

Respondent Public Health Council (PHC) is a body within the Department of Health charged with approving the establishment of all residential health care facilities (commonly known as nursing homes) within the State (Public Health Law § 2801-a et seq.). In 1986, the Department of Health issued a report concerning Medicaid patients’ access to nursing homes based on an examination of historical data. The report concluded that "Medicaid patients often experience more difficulty than other patients in obtaining the health care services they require” and urged the development of regulations setting Medicaid admission standards. In 1987, the Department formed an Ad-Hoc Committee on Medicaid Access to further study the access issue. Following a series of open meetings and examination of additional data, the Ad-Hoc Committee concluded that "[s]ome facilities discriminate against Medicaid patients in their admission decisions” and recommended that the PHC adopt regulations to ensure fair access to nursing homes for Medicaid patients. After considering the objections raised by the Office of Business Permits and Regulatory Assistance and conducting a public hearing, the PHC revised its proposed regulations and adopted the regulations now being challenged.

These regulations were set up as a benchmark to assure that nursing homes which voluntarily participate in the Medicaid program satisfy the public need. Specifically, the regulations provide that all applicants must agree to admit a "reasonable percentage of Medicaid patients”, defined as ”75 percent of the annual percentage of all residential health care facility admissions, in the long-term care planning area[ ] in which the applicant facility is located, that are Medicaid patients” (10 NYCRR 670.3 [c] [2] [emphasis added]). They do not fix rigid mínimums but set forth flexible standards (see, 155 AD2d, at 210). An applicant’s admission rate may deviate from the standard based on various factors such as the facility’s patient case mix (including the intensity of care required by the patients) (10 NYCRR 670.3 [c] [3] [iv]) and the financial impact on the facility due to an increase in Medicaid patient admissions (10 NYCRR 670.3 [c] [3] [v]). The regulations require an applicant to submit a written plan for reaching the Medicaid patient standard within two years, giving preference, if necessary, to Medicaid patients (10 NYCRR 670.3 [c] [4] [i]). A facility may, however, request an adjustment of its Medicaid patient admission standard based on the same factors which are permitted in 10 NYCRR 670.3 (c) (2) and (3), or any other factor (10 NYCRR 670.3 [c] [4] [ii]).

After its unsuccessful challenge to the regulations under State Administrative Procedure Act §§ 204 and 205, petitioner brought this litigation as an article 78 proceeding challenging the regulations as beyond the scope of the PHC’s authority under Boreali v Axelrod (71 NY2d 1, supra) and as an unauthorized quota. Supreme Court, Albany County, converted the article 78 proceeding into a declaratory judgment action and declared the regulations invalid. It noted that petitioner’s Boreali claim "appear[s] prima facie to have merit”, and characterized the regulations as "an affirmative action program which through a quota system requires that Medicaid patients be given favored treatment over private paying persons with respect to nursing home admission” (143 Misc 2d, at 872).

In affirming Supreme Court, the Appellate Division, applied the four coalescing circumstances identified in Boreali, and concluded that (155 AD2d, at 211) "the challenged regulations exceeded the [PHC’s] rule-making authority” and that the regulations constituted an unlawful "affirmative action plan” in favor of Medicaid recipients in violation of the statutory proscription contained in Public Health Law § 2801-a (9) (d). We granted PHC’s motion for leave to appeal and now reverse.

II

In Boreali v Axelrod (supra), we held that the PHC overstepped the line between administrative rule making and legislative policy making when it promulgated a comprehensive code regulating indoor smoking in areas open to the public. One year later, in Matter of Campagna v Shaffer (73 NY2d 237, 243), we explained that "[a] key feature of [the Boreali] case * * * was that the Legislature had never articulated a policy regarding the public smoking controversy.” (Emphasis added.) As the Court in Campagna expounded:

"Agencies, as creatures of the Legislature, act pursuant to specific grants of authority conferred by their creator. In discharging responsibilities, an agency is 'clothed with those powers expressly conferred by its authorizing statute, as well as those required by necessary implication * * *. Where an agency has been endowed with broad power to regulate in the public interest, we have not hesitated to uphold reasonable acts on its part designed to further the regulatory scheme’ * * *. It is correspondingly axiomatic, however, that an administrative officer has no power to declare through administrative fiat that which was never contemplated or delegated by the Legislature. An agency cannot by its regulations effect its vision of societal policy choices * * * and may adopt only rules and regulations which are in harmony with the statutory responsibilities it has been given to administer.” (73 NY2d, at 242-243 [citations omitted].)

In this case, the PHC has adopted regulations designed to eliminate discrimination against Medicaid patients seeking access to nursing homes. The legislative authorization given to the PHC to enact these regulations is broad. The Medicaid statute itself declares "[m]edical assistance for needy persons * * * to be a matter of public concern and a necessity in promoting * * * the state’s goal of making available to everyone, regardless of * * * economic standing, uniform high-quality medical care” (Social Services Law § 363; see also, § 364 [2] [a] [to assure that the medical care and service rendered under the Social Services Law be properly rendered, the Department of Health "shall be responsible for establishing and maintaining standards (for nursing homes) pursuant to article twenty-eight of the public health law”]). Significantly, the Legislature has empowered the PHC, when it must decide whether to approve a nursing home for a particular area, to consider the public need in that area (see, Public Health Law § 2801-a [3]; see, Birnbaum v State of New York, 73 NY2d 638, 644-645). In making a determination of public need the PHC is directed to take into account the medical needs of all members of the public and, in particular, the socioeconomic conditions in the area and the requirements of those on public assistance (see, Matter of Chambery v Axelrod, 101 AD2d 610).

These measures for assuring the provision of medical care to indigent persons, it must be noted, are part of a much-debated legislative enactment permitting profit-making business enterprises to engage in the furnishing of health care services (Public Health Law § 2801-a [9], added by L 1971, ch 722). There was opposition to the legislation as "a radical departure from the long-standing State policy of not permitting a medical facility to be operated as a commercial business corporation” (Mem in opposition dated June 25, 1971 from Attorney-General Lefkowitz, Bill Jacket, L 1971, ch 722) and concern that if profit-making institutions were permitted to furnish health services, they should be "required to serve the medically indigent, proportionately to the communities needs, [lest] an undue and impossible burden [be] added to the voluntary hospital system” (Letter of Hospital Association of New York State, May 10, 1971, Bill Jacket, L 1971, ch 722). Public Health Law § 2801-a (9) (d) effectively answers the concern that profit-making establishments, if permitted to furnish health services, might neglect the needs of Medicaid patients. In precise language, the statute provides that such institutions be permitted to operate only with the approval of the Public Health Council in accordance with the public need criteria of section 2801-a (3) and in compliance with the specific proviso that they "not discriminate because of * * * sponsor in admis sion or retention of patients” (Public Health Law § 2801-a [9] [d] [emphasis added]).

These statutory provisions, taken as a whole, amount to an unmistakable legislative direction that the PHC should consider the adequacy of a facility’s responsiveness to the nursing home care needs of Medicaid patients in approving a facility and take steps designed to prohibit nursing homes participating in the Medicaid program from discriminating against Medicaid patients in providing access to nursing home care. Thus, in this case, unlike Boreali, the basic policy decisions underlying the regulations have been made and articulated by the Legislature. Here, the Legislature, not the PHC, has chosen the ends to be accomplished: that participating nursing homes serve the needs pf Medicaid patients and not discriminate against them in admission or retention. The choice of the appropriate means for achieving these ends, including the adoption of regulations, is well within the authority delegated to the agency for the purpose of administering the statute (see, Boreali v Axelrod, 71 NY2d, at 10-11, supra; Public Health Law § 2801-a [10] [a] [directing that the PHC "shall adopt * * * regulations * * * to effectuate the provisions and purposes” of the statute]).

Even assuming that the legislative delegation of authority was proper, petitioner says it should prevail. It contends, and the courts below agreed, that the regulations are invalid because they create an improper "quota remedy” under this Court’s decisions in Matter of Broidrick v Lindsay (39 NY2d 641, supra), Matter of Fullilove v Beame (48 NY2d 376, supra) and Subcontractors Trade Assn. v Koch (62 NY2d 422, supra). We disagree.

This case is unlike Broidrick, Fullilove and Subcontractors which involved executive-imposed affirmative action programs constituting "impermissible infringements upon the legislative power because they utilized a remedial device which, rather than implementing a legislative policy, enacted a new policy not embraced by the [Legislature]” (emphasis added; Under 21 v City of New York, 65 NY2d 344, 358 and 356-357 [discussing Broidrick, Fullilove and Subcontractors]; see generally, Boreali v Axelrod, 71 NY2d, at 11, n 2, supra). Here, the Legislature not the PHC, has made the critical policy decisions: that socioeconomic conditions and the requirements of those on public assistance should be considered as a criteria for licensure and that facilities participating in the Medicaid program should be prohibited from discriminating because of sponsor. The PHC is unquestionably directed to implement these policies (see, supra, at 347-348).

The regulations involved here are not rules imposed by executive fiat without legislative sanction to effectuate some goal of social engineering (cf., City of Richmond v Croson Co., 488 US 469, 499, 502) but regulations duly adopted pursuant to the State Administrative Procedure Act for the purely practical purpose of attempting to make a legislative program work. As the legislative history demonstrates, the statutory provision prohibiting "sponsor” discrimination (see, Public Health Law § 2801-a [9]) merely reflects the legitimate concern that, in permitting for-profit corporations to provide nursing home care, the needs of the economically disadvantaged patients might not be adequately served (see, supra, at 347-348). Contrary to petitioner’s contention, the regulations adopted here to effectuate defined legislative policy choices are not analogous to the sort of affirmative action programs for achieving broad social goals through the use of quotas employed in Broidrick, Fullilove and Subcontractors.

Ill

Petitioner also alleges that the regulations should be invalidated because they are irrational, essentially for two reasons. First, petitioner questions respondent’s reliance on area Medicaid admission rates in setting the standards. Respondent relies on this area rate as an indicator of public need. To be sure, the regulations’ use of three fourths of this rate as representing the need of Medicaid patients in a facility’s area sets a standard that does not have absolute mathematical precision because it may reflect an unduly low rate if discrimination against Medicaid patients prevails in a given area. But, such precision is not required. Reasonableness is the test and it is met here (see, Matter of City of New York v State of New York Commn. on Cable Tel., 47 NY2d 89, 92-93). Second, petitioner argues that the regulations are irrational because they apply only to new applicant facilities and do not redress any discrimination by existing facilities. Merely because respondent has attempted to address part of a perceived concern, however, provides no basis for invalidating the regulations.

Finally, petitioner contends that the regulations, in effect, make a facility’s participation in the Medicaid program involuntary because its license may be revoked for failure to comply with the regulations (see, 10 NYCRR 600.5 [a] [10]). But, the regulations do not have that effect. First, there is no dispute that the law requires that a facility’s participation in the Medicaid program must be voluntary (see, Matter of Daleview Nursing Home v Axelrod, 62 NY2d 30, 32; Matter of Sigety v Ingraham, 29 NY2d 110). Second, and of equal importance, the regulations provide that they apply only to voluntarily participating facilities (see, 10 NYCRR 670.3[c][l]). When a facility withdraws from the Medicaid system, therefore, it no longer is subject to the standards set forth in the regulations and obviously may not have its license revoked on the ground that it fails to comply therewith. The regulations in no way prohibit a facility from withdrawing from the Medicaid program (but cf., 10 NYCRR 401.3).

IV

In sum, the Medicaid Patient Access Regulations do not create rigid requirements or set-asides, but rather set forth standards which represent ideal norms subject to modification. The authority required to enact them is well within the scope of power delegated to the PHC for effectuating the statutory proscription against sponsor discrimination and is in hármony with our established separation of powers doctrine. Accordingly, the order of the Appellate Division should be reversed, with costs, and the Medicaid Patient Access Regulations set forth in 10 NYCRR 600.5, 670.1 and 670.3 declared valid.

Titone, J.

(dissenting). Today, this Court upholds the Public Health Council’s (PHC) adoption of the Medicaid Patient Access Regulations (10 NYCRR 600.5, 670.1, 670.3), which require that newly established nursing homes participating in the Medicaid program agree to maintain a certain percentage of Medicaid patients as a condition of licensure. Because I, like the courts below, would conclude that the PHC, in promulgating those regulations failed to act within the bounds of its lawfully delegated authority and instead attempted to "effect its [own] vision of societal policy choices” (Matter of Campagna v Shaffer, 73 NY2d 237, 242; see, Boreali v Axelrod, 71 NY2d 1), I respectfully dissent.

While, like the majority, I realize that Medicaid patients in this State unfortunately often experience more difficulty in gaining admission to nursing homes than do private paying patients, I am unable to agree that the Legislature intended the PHC to have the power to address this problem through the adoption of a quota system, whereby the limited number of nursing home beds in this State would be rationed between Medicaid and non-Medicaid patients based on a formula devised by that agency. Such a decision, in my view, constitutes an inherently legislative determination that only the people’s elected representatives can make.

Indeed, this case marks the first time that this Court has ever upheld the adoption of a broadly based quota remedy in the absence of a clear grant of authority from the Legislature (see, Subcontractors Trade Assn. v Koch, 62 NY2d 422; Matter of Fullilove v Carey, 48 NY2d 826; Matter of Fullilove v Beame, 48 NY2d 376; Matter of Broidrick v Lindsay, 39 NY2d 641). While our prior cases all concerned quotas established by the fiat of an elected executive (see, Boreali v Axelrod, 71 NY2d 1, 11, n 2, supra), their underlying rationale — that the decision to adopt a quota remedy is itself a "fundamental policy-making” choice that only the Legislature can make (id., at 9) — -is equally relevant in the present context. Thus, unless it may be concluded that the Legislature, either expressly or by necessary implication, intended to confer upon the PHC the power to adopt such a remedy (see, Matter of Campagna v Shaffer, 73 NY2d 237, 242, supra; Matter of Trump-Equitable Fifth Ave. Co. v Gliedman, 57 NY2d 588, 595; see also, Subcontractors Trade Assn. v Koch, 62 NY2d 422, 429, supra), this Court has no choice but to strike down the challenged regulations as ultra vires, no matter how necessary and beneficial the agency may perceive them to be.

The majority, relying principally on section 2801-a (3) (a) of the Public Health Law, holds that adoption of the challenged regulations was "well within” the authority delegated to the PHC. I cannot agree. That section, by its own terms, does nothing more than authorize the PHC to consider, on a case-by-case basis, "the public need for the existence of [an] institution at the time and place and under the circumstances proposed” before approving its establishment. There is no indication in the legislative history or otherwise that the section was, as the majority apparently concludes, intended by the Legislature to supply the PHC with broad powers to adopt whatever measures it deems necessary to "assure that nursing homes which voluntarily participate in the Medicaid program satisfy the public need.” (Majority opn, at 345.)

Nor does the Legislature’s decision to prohibit discrimination against Medicaid patients and its declaration that the providing of "[m]edical assistance for needy persons [is] a matter of public concern” (see, Public Health Law § 2801-a [9] [d]; Social Services Law § 363) supply a basis for inferring that the Legislature contemplated that the PHC would have the power to adopt a Medicaid quota system. As former Chief Judge Breitel stated in Matter of Broidrick v Lindsay: "There is a dramatic distinction between [an] expressed legislative policy of prohibiting * * * discrimination and * * * [a] policy of mandating * * * 'percentages’ ” (39 NY2d 641, 647, supra). Indeed, we have repeatedly stressed that the latter "cannot be viewed as merely one step further along [the] continuum” (Matter of Fullilove v Beame, 48 NY2d 376, 378, supra).

Furthermore, the challenged regulations, in addition to establishing a new and different policy not authorized by the Legislature, actually conflict with the already existing policy that participation in the Medicaid program is completely voluntary and includes the right to withdraw at anytime (Matter of Sigety v Ingraham, 29 NY2d 110; Matter of Kaye v Whalen, 56 AD2d 111, affd 44 NY2d 754; Matter of Blue v Whalen, 57 AD2d 240, lv denied 43 NY2d 642). By providing that those nursing home operators who initially choose to participate in the Medicaid program but later decide to withdraw from it are subject to having their licenses revoked, the regulations, in effect, work to convert what was intended to be a voluntary program into a compulsory one.

In sum, I would conclude that the PHC, in adopting the quota remedy implemented by the Medicaid Patient Access Regulations, has "leap[ed] well beyond th[e] legislative articulation” of policy contained in section 2801-a (3) (a); (9) (d) and (10) (a), and effected its own vision of societal policy choices over subjects not contemplated by the Legislature. Accordingly, I dissent.

Chief Judge Wachtler and Judges Simons, Kaye, Alexander and Bellacosa concur with Judge Hancock, Jr.; Judge Titone dissents and votes to affirm in a separate opinion.

Order reversed, etc.

      . Generally, the county where the facility is located.

      . The remaining Boreali factors do not support an invalidation of the regulations. In Boreali the PHC constructed a regulatory scheme with exceptions based on socioeconomic and not health concerns when acting under its claimed authority to regulate in the field of public health. Additionally, the Boreali Court ruled that the special competence of the PHC in the field of health was not involved in the development of the regulations. In contrast, here, in enacting the challenged regulations, the PHC is specifically empowered to consider public need, which includes socioeconomic factors, in acting in this pervasively regulated nursing home industry (see, Birnbaum v State of New York, 73 NY2d 638). Finally, we ascribe no particular significance to the legislative inaction in this case (see, Brooklyn Union Gas Co. v State Human Rights Appeal Bd., 41 NY2d 84, 89-90; 41 Kew Gardens Rd. Assocs. v Tyburski, 70 NY2d 325, 335; cf., Boreali v Axelrod, 71 NY2d 1, 13).

      . Petitioner contemplates harmful financial consequences if "forced” to comply with the regulations. Notably, the regulations permit consideration of financial factors in deciding whether a participating facility may deviate from the standard or whether the standard itself should be adjusted (see, 10 NYCRR 670.3 [c] [3] [v]; [4] [ii]). We add that, in a given case, if respondent fails to consider adequately a facility’s claim of financial distress in a request to deviate from or to adjust the standard, a facility may challenge that determination as arbitrary, capricious or irrational in an article 78 proceeding. In order to protect Medicaid patients, the State may always adjust the standard so as to discourage a facility from exercising its right to completely opt out of the program. Also, if the Medicaid reimbursement rate set is insufficient, that, too, may be challenged.

      . Although Public Health Law § 2801-a (9) (d) bars discrimination based upon "sponsor,” the term "sponsor” would appear to include those patients whose medical needs are paid for by the Medicaid program.

      . 10 NYCRR 600.5 (a) (10), in no uncertain terms, states that "[a]n approval of establishment may be revoked, limited or annulled by the Public Health Council if the council finds * * * that the established operator has failed to comply fully with any condition, limitation or other requirement imposed as part of, or in conjunction with, the approval of establishment” (emphasis added). In spite of the majority’s conclusion to the contrary, there is absolutely no indication that the PHC intended this regulation not to apply to nursing home operators who voluntarily withdraw from the Medicaid program. While the majority relies upon 10 NYCRR 670.3 (c) (1), that section merely states that "[a]n application by an applicant that is or will be a provider that participates in the medical assistance (Medicaid) program shall not be approved unless the applicant agrees to comply with the requirements of this subdivision. An applicant that, at the time of consideration of its application by the Public Health Council, proposes not to participate in the Medicaid program may be approved, provided all other review criteria have been met” (emphasis added).

      . Matter of Campagna v Shaffer (73 NY2d 237, 243).

      . Public Health Law § 2801-a (10) (a) authorizes the Public Health Council to adopt rules and regulations "to effectuate the provisions and purposes of [section 2801-a].”


source: Caselaw Access Project

author: Hancock, Jr., J.

license: Public Domain

text:
    In the Matter of Anthony Tarquini, Respondent, v Town of Aurora, Respondent, and Buffalo/Rochester Uniform Code Board of Review, Appellant. In the Matter of Town of Aurora, Respondent, v Anthony Tarquini et al., Respondents. Buffalo/Rochester Uniform Code Board of Review, Appellant.
    Argued January 10, 1991;
    decided February 12, 1991

      POINTS OF COUNSEL

      Robert Abrams, Attorney-General (Lisa Joy Robertson, O. Peter Sherwood and Peter H. Schiff of counsel), for appellant.

      John A. Collins for Anthony Tarquini, respondent.

      Frederick J. Marshall for Town of Aurora, respondent.
   OPINION OF THE COURT

Hancock, Jr., J.

This appeal involves the validity and applicability of a State Uniform Fire Prevention and Building Code (Code) provision requiring an enclosure of at least four feet in height around residential outdoor swimming pools (9 NYCRR 1243.7 [f]). There are two questions: (1) whether the State Fire Prevention and Building Code Council has the authority to promulgate the pool enclosure regulation; and, if so, (2) whether the statutory exemption for buildings constructed prior to the Code’s effective date applies to swimming pools. For the reasons stated herein, we conclude that the Council did not exceed its legislatively delegated authority in issuing this regulation, and that the statutory exemption for pre-Code buildings is inapplicable to swimming pools. There should, accordingly, be a reversal.

I

Respondent Tarquini owns an 18-acre residential property in the Town of Aurora. In 1982, Tarquini constructed an unenclosed outdoor swimming pool on his property. Thereafter, the State Fire Prevention and Building Code Council promulgated the State Uniform Fire Prevention and Building Code (9 NYCRR part 600 et seq.) which became effective on January 1, 1984. The new Code included the pool enclosure regulation at issue here (9 NYCRR 1243.7 [f]). Tarquini never built the required enclosure.

In February 1988, the Town of Aurora commenced an enforcement proceeding pursuant to Executive Law §382 against Tarquini and other residential pool owners who were not in compliance with the pool enclosure regulation. Supreme Court ruled in the Town’s favor, rejecting Tarquini’s argument that the regulation did not apply to pools constructed prior to the regulation’s effective date. During the pendency of the enforcement proceeding, Tarquini sought a variance from the Buffalo/Rochester Uniform Code Board of Review. When the Board of Review denied his variance request, Tarquini commenced an article 78 proceeding against both the Town and the Board of Review challenging that determination. The Appellate Division, with two Justices dissenting, reversed Supreme Court’s judgment in the enforcement proceeding and dismissed the article 78 proceeding as moot, concluding that the Council lacked the power to promulgate the pool enclosure regulation.

II

Whether the Council had the authority to promulgate the pool enclosure regulation turns on interpretation of the New York State Uniform Fire Prevention and Building Code Act (Executive Law §§ 370-383). The Board of Review asserts that Executive Law § 378 (2) authorizes the regulation in question. Tarquini counters by arguing that section 378 (2) only permits the Council to promulgate regulations in regard to the hazards of fire and toxic gases and that, therefore, it does not authorize the pool enclosure regulation which has no connection with those hazards.

Section 378 (2) provides:

"The uniform code shall address the following subjects:
"Standards for the condition, occupancy, maintenance, conservation, rehabilitation and renewal of certain existing buildings, structures and premises and for the safeguarding of life and property therein and thereabout from the hazards of fire, explosion or release of toxic gases arising from the storage, handling or use of combustible or hazardous substances, materials or devices.”

In interpreting section 378 (2), we must first " Took to the particular words for their meaning, both as they are used in the section and in their context as part of the entire statute.’ ” (Matter of Ellington Constr. Corp. v Zoning Bd. of Appeals, 77 NY2d 114, 121; Price v Price, 69 NY2d 8, 13.) A fair reading of section 378 (2) reveals that its first part authorizes the Council to establish standards regarding "the condition, occupancy, maintenance, conservation, rehabilitation and renewal of certain existing buildings, structures and premises” (emphasis added) and its second part authorizes the promulgation of regulations with respect to the hazards of fire and toxic gases. The section’s legislative history and the circumstances surrounding its adoption confirm that it serves these two distinct purposes.

Section 378 (2) essentially tracks Executive Law former § 391 (l). Under the terms of that prior provision, there is no question that the Legislature authorized the previous State Building Code Council to promulgate general regulations relating to existing buildings, structures and premises as well as regulations relating to the specific hazards of fire and toxic gases. The Legislature passed section 378 (2) in 1981 as part of the New York State Uniform Fire Prevention and Building Code Act (Executive Law §§ 370-383). Enacted in response to a series of tragic fires that had occurred in New York and elsewhere, the legislation was designed to reconcile and consolidate existing fire prevention and structural regulations into a single, uniform code in order to provide a minimum level of protection for citizens throughout the State (Executive Law §371 [2] [b]; see, Governor’s Approval Mem, L 1981, ch 707, 1981 McKinney’s Cons Laws of NY, at 2610). There is no indication in either the act’s statement of legislative findings and purposes, or in its legislative history, that the Legislature intended to limit the reach of section 378 (2) to the specific hazards of fire and toxic gases (see, Executive Law § 371; Governor’s Approval Mem, op. cit.; Budget Rep on Bills, Bill Jacket, L 1981, ch 707). We accordingly reject Tarquini’s argument that section 378 (2) only authorizes regulations involving those specific hazards.

Tarquini maintains that even if section 378 (2)’s application is not limited to the hazards of fire and toxic gases, the section does not authorize the pool enclosure regulation because a swimming pool is not a structure under the act, notwithstanding that a swimming pool is defined as a structure in the Code (9 NYCRR 606.3 [a] [187]). We disagree. Section 378 (2) authorizes the Council to establish "[standards for the condition [and] maintenance * * * of certain existing buildings, structures and premises” (emphasis added). Although the terms "premises” and "structures” are not defined in the act, the Code defines premises as "[a] lot, plot or parcel of land including the building or structures thereon” (9 NYCRR 606.3 [a] [151]), and structure as "[a]n assembly of materials, forming a construction framed of component structural parts for occupancy or use, including buildings” (9 NYCRR 606.3 [a] [185]). The Code’s definitions of premises and structure are consonant with the generally accepted meanings of these terms (see, Webster’s New Twentieth Century Dictionary 1420, 1806 [2d ed 1979]). Indeed, Tarquini suggests no alternative meanings. We therefore conclude that a swimming pool — an assembly of materials framed of component parts and situated on a parcel of land (9 NYCRR 606.3 [a] [151], [185]) — comes under the "structures and premises” language of section 378 (2).

Finally, Tarquini contends that even if section 378 (2) permits general building and structural regulations, it does not authorize safety regulations such as the pool enclosure requirement, the purpose of which is to obviate hazards unrelated to fire or toxic gases. This argument also fails. Many of the standard Building Code provisions involve safety concerns having little or no apparent connection with the hazards of fire or toxic gases. Indeed, the Code abounds with such regulations (see, e.g., 9 NYCRR 713.1 [f] [requiring handrails or railings on stairs]; 1242.2 [b] [3] [directing electric lighting on stairs]; 1242.6 [mandating railings or parapet walls on the open sides on balconies, mezzanines, and porches]; 1243.9 [a] [elevator, dumbwaiter, and escalator safety]; 1244.1 [b] [fences and exterior walls must be maintained in safe condition]; see also, 9 NYCRR 713.1 [e]; 1242.1 [a] [4]; 1242.2 [b] [1]; 1243.7 [e] [1]). It is not suggested that these traditional Building Code requirements are unauthorized. The regulation requiring enclosure of swimming pools is no different from these other traditional regulations which are designed to prevent injuries from falls and other accidents unrelated to the hazards of fire and toxic gases. Accordingly, we conclude section 378 (2) authorized the Council to promulgate it.

III

Tarquini’s alternative contention is that, if the pool enclosure regulation is valid, the act exempts from the regulation swimming pools, such as his, which were built prior to January 1, 1984. The exemption provision applies to buildings constructed or under construction prior to that date (see, L 1981, ch 707, § 19). The act defines building as "a combination of any materials, whether portable or fixed, having a roof, to form a structure affording shelter for persons, animals or property” (Executive Law § 372 [3] [emphasis added]). A swimming pool is clearly not a building as defined in the act, and the exemption provision, therefore, does not apply.

Accordingly, in Matter of Tarquini v Town of Aurora the judgment of the Appellate Division should be reversed and the matter remitted for consideration of issues not reached by that court, and in Matter of Town of Aurora v Tarquini the order of the Appellate Division should be reversed, and the judgment of Supreme Court, Erie County, reinstated.

Chief Judge Wachtler and Judges Simons, Kaye, Alexander, Titone and Bellacosa concur.

In Matter of Tarquini v Town of Aurora: Judgment reversed, with costs, and matter remitted to the Appellate Division, Fourth Department, for consideration of issues not reached by that court.

In Matter of Town of Aurora v Tarquini: Order reversed, with costs, and judgment of Supreme Court, Erie County, reinstated.

      . 9 NYCRR 1243.7 (f) states: "An approved enclosure, at least four feet in height, shall be provided around outdoor swimming pools, so that such pools are inaccessible to children. The enclosure may surround either the pool area or the property.”

      . The dissenters urged that the Council had the power to promulgate the pool enclosure regulation, and that the exemption provision for buildings constructed prior to the Code’s effective date was inapplicable to swimming pools.

      . Executive Law former § 391 (1) provided: "The state building code council created pursuant to article eighteen of this chapter, after consultation and review by the secretary of state to the extent hereinafter provided, is hereby authorized and empowered to promulgate rules and regulations relating to the condition, occupancy, maintenance, conservation, rehabilitation and renewal of certain existing buildings, structures and premises and to the safeguarding of life and property therein and thereabout and from the hazards of fire, explosion or release of toxic gases arising from the storage, handling or use of combustible or hazardous substances, materials or devices. Such rules and regulations shall comprise and be collectively known as the state building conservation and fire prevention code.”

      . The exemption provision states: "Notwithstanding any other provisions of this act, the provisions of article eighteen of the executive law provided for in section one of this act shall not be applicable to any building constructed or under construction prior to the first day of January, nineteen hundred eighty-four, until the legislature by law expressly provides for financial incentives and assistance for the implementation of such provisions and their applicability to such buildings provided, however, that this section shall not apply to any provision of such article eighteen which is substantially similar to any provision of a code, general, special or local law, or ordinance to which an existing building was subject immediately prior to the effective date of such article.”


author: Alexander, J.

text:
    Banque Worms, Plaintiff, v BankAmerica International, Defendant and Third-Party Plaintiff. Security Pacific International Bank, Third-Party Defendant.
    Argued November 13, 1990;
    decided February 12, 1991

      POINTS OF COUNSEL

      J. Portis Hicks, Gregg J. Borri and E. Allan Farnsworth for plaintiff.

      Sarah L. Reid and Alan R. Kusinitz for third-party defendant.
   OPINION OF THE COURT

Alexander, J.

On April 10, 1989, Security Pacific International Bank (Security Pacific), a Federally chartered banking corporation with offices in New York City, mistakenly wired $1,974,267.97 on behalf of Spedley Securities (Spedley), an Australian corporation, into the account of Banque Worms, a French Bank, maintained with BankAmerica International (BankAmerica), another Federally chartered bank with New York offices. Initially intending to make payment on its debt to Banque Worms under a revolving credit agreement, Spedley instructed Security Pacific, which routinely effected wire transfers for Spedley, to electronically transfer funds from Security Pacific to Banque Worms’ account at BankAmerica.

A few hours after directing this wire transfer, Spedley, by a second telex, directed Security Pacific to stop payment to Banque Worms and to make payment instead to National Westminster Bank USA (Natwest USA) for the same amount. At the time Security Pacific received the telexes, Spedley had a credit balance of only $84,500 in its account at Security Pacific, but later that morning, Security Pacific received additional funds sufficient to cover the transaction and then began to execute the transaction. However, in mistaken disregard of Spedley’s second telex canceling the wire transfer to Banque Worms, Security Pacific transferred the funds into Banque Worms’ account at BankAmerica. The funds were credited to the account after Banque Worms was notified through the Clearing House Interbank Payment System (CHIPS) that the funds had been received. That afternoon, Security Pacific executed Spedley’s second payment order and transferred $1,974,267.97 to Natwest USA. Spedley’s account at Security Pacific was debited twice to record both wire transfers thus producing an overdraft.

Meanwhile, at Security Pacific’s request made prior to the transfer to Natwest USA, BankAmerica agreed to return the funds mistakenly transferred, provided Security Pacific furnished a United States Council on International Banking, Inc. (CIB) indemnity. The indemnity was furnished and the funds returned to Security Pacific on the following day. Banque Worms, however, refused BankAmerica’s request that it consent to its account being debited to reflect the return of the funds. Consequently BankAmerica called upon Security Pacific to perform pursuant to the CIB indemnity and return the funds. Security Pacific’s attempt to obtain funds from Spedley to cover this indemnity was unavailing because by that time, Spedley had entered into involuntary liquidation.

Banque Worms brought suit against BankAmerica in the United States District Court for the Southern District of New York seeking to compel BankAmerica to recredit $1,974,267.97 to Banque Worms’ account. BankAmerica instituted a third-party action against Security Pacific for return of the funds, and Security Pacific counterclaimed against Banque Worms seeking a declaration that neither Bank Worms nor Bank-America were entitled to the $1,974,267.97. Eventually, for reasons not here pertinent, Security Pacific returned the funds to BankAmerica, BankAmerica recredited Banque Worms’ account and was voluntarily dismissed from the case leaving only Banque Worms and Security Pacific as the sole contestants seeking entitlement to the $1,974,267.97.

On their respective motion and cross motion for summary judgment, the District Court, applying the "discharge for value” rule, granted judgment for Banque Worms. Security Pacific appealed to the United States Court of Appeals for the Second Circuit, arguing that New York neither recognized nor applied the "discharge for value” rule in situations such as this; that the controlling rule under New York law was the "mistake of fact” rule pursuant to which, in order to be entitled to retain the mistakenly transferred funds, Banque Worms was required to demonstrate detrimental reliance. The case is before us upon a certified question from the Second Circuit (see, section 500.17 of the Court of Appeals Rules of Practice [22 NYCRR]) inquiring "[w]hether in this case, where a concededly mistaken wire transfer by [Security Pacific] was made to [Banque Worms], a creditor of Spedley, New York would apply the 'Discharge for Value’ rule as set forth at section 14 of the Restatement of Restitution or, in the alternative, whether in this case New York would apply the rule that holds that money paid under a mistake may be recovered, unless the payment has caused such a change in the position of the receiving party that it would be unjust to require the party to refund.”

For the reasons that follow, we conclude that, under the circumstances of this case, the "discharge for value” rule should be applied, thus entitling Banque Worms to retain the funds mistakenly transferred without the necessity of demonstrating detrimental reliance.

I

A

In the area of restitution, New York has long recognized the rule that "if A pays money to B upon the erroneous assumption of the former that he is indebted to the latter, an action may be maintained for its recovery. The reason for the rule is obvious. Since A was mistaken in the assumption that he was indebted to B, the latter is not entitled to retain the money acquired by the mistake of the former, even though the mistake is the result of negligence.” (Ball v Shepard, 202 NY 247, 253.) This rule has been applied where the cause of action has been denominated as one for money had and received (Parsa v State of New York, 64 NY2d 143, 148), for unjust enrichment or restitution (Paramount Film Distrib. Corp. v State of New York, 30 NY2d 414, 421), or upon a theory of quasi contract (Miller v Schloss, 218 NY 400). Where, however, the receiving party has changed its position to its detriment in reliance upon the mistake so that requiring that it refund the money paid would be "unfair,” recovery has been denied (Paramount Film Distrib. Corp. v State of New York, supra, at 422; Ball v Shepard, supra, at 254).

This rule has evolved into the "mistake of fact” doctrine, in which detrimental reliance is a requisite factor, and which provides that "money paid under a mistake of fact may be recovered back, however negligent the party paying may have been in making the mistake, unless the payment has caused such a change in the position of the other party that it would be unjust to require him to refund.” (National Bank v National Mechanics’ Banking Assn., 55 NY 211, 213; see also, Hathaway v County of Delaware, 185 NY 368; Mayer v Mayor of City of N. Y., 63 NY 455, 457 ["general rule that money paid under a mistake of material fact may be recovered back * * * is subject to the qualification that the payment cannot be recalled when the position of the party receiving it has been changed in consequence of the payment, and it would be inequitable to allow a recovery.”].)

The Restatement of Restitution, on the other hand, has established the "discharge for value” rule which provides that "[a] creditor of another or one having a lien on another’s property who has received from a third person any benefit in discharge of the debt or lien, is under no duty to make restitution therefor, although the discharge was given by mistake of the transferor as to his interests or duties, if the transferee made no misrepresentation and did not have notice of the transferor’s mistake” (Restatement of Restitution § 14 [1]).

The question as to which of these divergent rules New York will apply to electronic fund transfers divides the parties and prompts the certified question from the Second Circuit. Security Pacific argues that New York has rejected the "discharge for value” rule and has required that detrimental reliance under the "mistake of fact” rule be demonstrated in all cases other than where the mistake was induced by fraud. Banque Worms, on the other hand, invokes the "discharge for value” rule, arguing that because it is a creditor of Spedley and had no knowledge that the wire transfer was erroneous, it is entitled to keep the funds. It points out, as indicated by the official comment to section 14 (1) of the Restatement of Restitution, that the "discharge for value” rule is simply a "specific application of the underlying principle of bona fide purchase” set forth in section 13 of the Restatement (Restatement of Restitution § 14, comment a).

Banque Worms cites to various decisions of New York courts in support of its contention that New York has adopted and applied the "discharge for value” rule (see, e.g., Ball v Shepard, 202 NY 247, supra; Consolidated Natl. Bank v First Natl. Bank, 199 NY 516, affg 129 App Div 538; Oddie v National City Bank, 45 NY 735). Indeed, both parties rely to a significant degree upon Ball v Shepard in support of their respective positions. Security Pacific relies upon the Court’s observation in the first of two classes of cases discussed, that "the mistake of fact is usually one which arises inter partes, and in order to justify recovery in any such case it must appear that the defendant was not, in the first instance, entitled to receive the money; and that his circumstances have not been so changed through its receipt as to render it unjust to compel him to refund. ” (202 NY, at 256 [emphasis added].) Banque Worms, on the other hand, refers to the same discussion but relies upon the Court’s description of the second class where "the mistake of the payor is usually superinduced by the fraud of a third person and the payee is not only ignorant of the fraud or mistake, but receives the money in good faith in the regular course of business and for valuable consideration. ” (Id. [emphasis added].)

Indeed one may find, as does Banque Worms, language in a myriad of cases that arguably lends support to the proposition that New York, long ago, embraced the "discharge for value” rule (see, e.g., Carlisle v Norris, 215 NY 400, 415 ["If defendants received the proceeds in good faith and without any notice of any wrong and credited them on an indebtedness due them, plaintiff is not entitled to recover them back.”]; White v Continental Natl. Bank, 64 NY 316 [right of a party paying money to another to recover it from one who is not entitled to receive it, is well established]; Smith & McCrorken v Chatham Phenix Natl. Bank & Trust Co., 239 App Div 318, 320 ["where a bank honors and pays a check under a mistake of fact, it may sue for recovery of the money, at least, against one receiving payment thereon, who is not a bona fide holder for value.”]; see also, New York Tit. & Mtge. Co. v Title Guar. & Trust Co., 206 App Div 490, affd 237 NY 626; State Farm Mut. Auto. Ins. Co. v Stokos, 65 Misc 2d 316; see generally, 44 NY Jur, Payment, § 107).

On the other hand, cases can also be cited where the language employed supports the contrary view — that New York not only eschews the "discharge for value” rule, as Security Pacific argues, but also embraces exclusively the detrimental reliance rule-mistake of fact doctrine (see, e.g., Hathaway v County of Delaware, 185 NY 368, supra; Mayer v Mayor of City of N. Y., 63 NY 455, supra; National Bank v National Mechanics’ Banking Assn., 55 NY 211, supra; Citibank v Warner, 113 Misc 2d 748). These cases for the most part, however, present issues involving more traditional aspects of mistake and restitution, and do not satisfactorily address the unique problems presented by electronic funds transfer technology.

While courts have attempted in wire transfer cases to employ, by analogy, the rules of the more traditional areas of law, such as contract law, the law of negotiable instruments and the special relations between banks, these areas are governed by principles codified in articles 3 and 4 of the Uniform Commercial Code. Various commentators found these efforts ineffective and inadequate to deal with the problems presented (see, Official Comment to UCC 4A-102; Revisions of UCC Article 4A Postponed Due to Federal Preemption, ABA is Told, 51 Banking Rep 282 [BNA] [Aug. 15, 1988]). As pointed out by the Official Comment to article 4A, "attempts to define rights and obligations in funds transfers by general principles or by analogy to rights and obligations in negotiable instruments law or the law of check collection have not been satisfactory” (Official Comment to UCC 4A-102, 2A ULA [Master ed], 1990 Supp Pamph; see also, Revisions of UCC Article 4A Postponed Due to Federal Preemption, ABA is Told, 51 Banking Rep 282 [BNA] [Aug. 15, 1988]). Consequently, it was concluded, as the Prefatory Note to the new article 4A of the UCC approved by the National Conference of Commissioners on Uniform State Law and the American Law Institute observes, that a new article was needed because "[t]here is no comprehensive body of law that defines the rights and obligations that arise from wire transfers.” (2A ULA [Master ed], at 143, 1990 Supp Pamph.)

B

Electronic funds transfers have become the preferred method utilized by businesses and financial institutions to effect payments and transfers of a substantial volume of funds. These transfers, commonly referred to as wholesale wire transfers, differ from other payment methods in a number of significant respects, a fact which accounts in large measure for their popularity. Funds are moved faster and more efficiently than by traditional payment instruments, such as checks. The transfers are completed at a relatively low cost, which does not vary widely depending on the amount of the transfer, because the price charged reflects primarily the cost of the mechanical aspects of the funds transfer (Prefatory Note to UCC art 4A). Most transfers are completed within one day and can cost as little as $10 to carry out a multimillion dollar transaction (see generally, Farley, Article 4A: Funds Transfers, NYS 7720-A, NYA 10431-A; Prefatory Note to UCC art 4A). The popularity of wholesale wire transfers is evidenced by the fact that nearly $1 trillion in transactions occur each day, averaging $5 million per transfer and on peak days, this figure often approaches $2 trillion (see generally, Ring, Wholesale Funds Transfers: New Article 4A to the UCC, NYA 10431-A, NYS 7720-A).

Wholesale wire transfers are generally made over the two principal wire payment systems: the Federal Reserve Wire Transfer Network (Fedwire) and the CHIPS. The CHIPS network handles 95% of the international transfers made in dollars, transferring an average of $750 billion per day (see generally, Note, Liability for Lost or Stolen Funds in Cases of Name and Number Discrepancies in Wire Transfers: Analysis of the Approaches Taken in the United States and Internationally, 22 Cornell Inti LJ 91 [1990]). These funds are transferred through participating banks located in New York because all of the banks belonging to the CHIPS network must maintain a regulated presence in New York. As a result, this State is considered the national and international center for wholesale wire transfers.

The low cost of electronic funds transfers is an important factor in the system’s popularity and this is so even though banks executing wire transfers often risk significant liability as a result of losses occasioned by mistakes and errors, the most common of which involve the payment of funds to the wrong beneficiary or in an incorrect amount (see, American Law Institute Approves UCC Article Governing Wire Transfers, 52 Banking Rep 1150 [BNA] [June 5, 1989]). Thus, a major policy issue facing the drafters of UCC article 4A was determining how the risk of loss might best be allocated, while preserving a unique price structure. In order to prevent or minimize losses, the industry had adopted and employed various security procedures designed to prevent losses such as the use of codes, identifying words or numbers, call-back procedures and limits on payment amounts or beneficiaries that may be paid.

As indicated above, it was the consensus among various commentators that existing rules of law did not adequately address the problems presented by these wholesale electronic funds transfers. Thus, the National Conference of Commissioners on Uniform State Laws (NCCUSL) and the American Law Institute (ALI) undertook to develop a body of unique principles of law that would address every aspect of the electronic funds transfer process and define the rights and liabilities of all parties involved in such transfers (Prefatory Note to UCC art 4A, op. cit.). After extensive investigation and debate and through a number of drafts, in 1989, both the NCCUSL and the ALI approved a new article 4A of the Uniform Commercial Code (see generally, Bailen, Baxter, Davenport, Rougeau, and Veltri, Commercial Paper, Bank Deposits and Collections, and Other Payment Systems, 45 Bus Law 2341 [Aug. 1990]). In 1990, the New York State Legislature adopted the new article 4A and incorporated it into the New York Uniform Commercial Code (NY UCC art 4-A). Although the new statute, which became effective January 1, 1991, may not be applied retroactively to resolve the issues presented by this litigation, the statute’s legislative history and the history of article 4A of the Uniform Commercial Code from which it is derived and the policy considerations addressed by this legislation, can appropriately inform our decision and serve as persuasive authority in aid of the resolution of the issue presented in this case (see, Matter of Pell v Coveney, 37 NY2d 494; Matter of Albano v Kirby, 36 NY2d 526; MVAIC v Eisenberg, 18 NY2d 1; see also, Shawmut Worcester County Bank v First Am. Bank & Trust, 731 F Supp 57 [D Mass]).

II

Both the NCCUSL and ALI drafters of article 4A and the New York Legislature sought to achieve a number of important policy goals through enactment of this article. National uniformity in the treatment of electronic funds transfers is an important goal, as are speed, efficiency, certainty (i.e., to enable participants in fund transfers to have better understanding of their rights and liabilities), and finality. Establishing finality in electronic fund wire transactions was considered a singularly important policy goal (American Law Institute Approves UCC Article Governing Wire Transfers, 52 Banking Rep 1150 [BNA] [June 5, 1989]). Payments made by electronic funds transfers in compliance with the provisions of article 4A are to be the equivalent of cash payments, irrevocable except to the extent provided for in article 4A (see, Assn of Bar of City of NY, Committee on Banking Law, Report on proposed New York UCC art 4-A; see also, Delbrueck & Co. v Manufacturers Hanover Trust Co., 609 F2d 1047, 1049-1051 [2d Cir] [once an electronic fund transfer is completed and the funds released, the transaction is final and irrevocable under the CHIPS system]).

This concern for finality in business transactions has long been a significant policy consideration in this State. In a different but pertinent context, we observed in Hatch v Fourth Natl. Bank (147 NY 184, 192) that "to permit in every case of the payment of a debt an inquiry as to the source from which the debtor derived the money, and a recovery if shown to have been dishonestly acquired, would disorganize all business operations and entail an amount of risk and uncertainty which no enterprise could bear”.

A consequence of this concern has been the adoption of a rule which precludes recovery from a third person, who as the result of the mistake of one or both of the parties to an original transaction receives payment by one of them in good faith in the ordinary course of business and for a valuable consideration (see, Ball v Shepard, 202 NY 247, supra). This rule is grounded in "considerations of public policy and convenience for the protection and encouragement of trade and commerce by guarding the security and certainty of business transactions, since to hold otherwise would obviously introduce confusion and danger into all commercial dealings” (44 NY Jur, Payment, § 107; see also, Southwick v First Natl. Bank, 84 NY 420). We have previously held that from these considerations, "[t]he law wisely * * * adjudges that the possession of money vests the title in the holder as to third persons dealing with him and receiving it in due course of business and in good faith upon a valid consideration.” (Stephens v Board of Educ., 79 NY 183, 187-188.)

The "discharge for value” rule is consistent with and furthers the policy goal of finality in business transactions and may appropriately be applied in respect to electronic funds transfers. When a beneficiary receives money to which it is entitled and has no knowledge that the money was erroneously wired, the beneficiary should not have to wonder whether it may retain the funds; rather, such a beneficiary should be able to consider the transfer of funds as a final and complete transaction, not subject to revocation.

We believe such an application accords with the legislative intent and furthers the policy considerations underlying article 4-A of the New York Uniform Commercial Code. Although no provision of article 4-A calls, in express terms, for the application of the "discharge for value” rule, the statutory scheme and the language of various pertinent sections, as amplified by the Official Comments to the UCC, support our conclusion that the "discharge for value” rule should be applied in the circumstances here presented.

Subject to certain exceptions not here relevant, NY UCC 4-A-209 (2) provides that a beneficiary’s bank accepts a payment order when the bank pays the beneficiary by crediting the beneficiary’s account and notifying the beneficiary of the right to withdraw the credit (see, UCC 4-A-209 [2] [a]; 4-A-405 [1] [i]). When a payment order has been accepted by the beneficiary’s bank, cancellation or amendment of that payment order is not effective unless, for example, the order was issued because of a mistake of the sender resulting in a duplicate payment order or an order that directs payment to a beneficiary not entitled to receive the funds (see, UCC 4-A-211 [3] [b] [i], [ii]). Where a duplicate payment order is erroneously executed or the payment order is issued to a beneficiary different from the beneficiary intended by the sender, the receiving bank in either case is entitled to recover the erroneously paid amount from the beneficiary "to the extent allowed by the law governing mistake and restitution” (see, UCC 4-A-303 [1], [3]).

More specifically, UCC 4-A-303 (3) instructs that "[i]f a receiving bank executes the payment order of the sender by issuing a payment order to a beneficiary different from the beneficiary of the sender’s order and the funds transfer is completed on the basis of that error, the sender * * * [is] not obliged to pay the payment order[ ]. The issuer of the erroneous order is entitled to recover from the beneficiary * * * to the extent allowed by the law governing mistake and restitution.” The Official Comment to UCC 4A-303 from which the identical New York statute is derived, explains that although section 4A-402 (3) obligates the sender to pay the transfer order to the beneficiary’s bank if that bank has accepted the payment order, section 4A-303 takes precedence and "states the liability of the sender and the rights of the receiving bank in various cases of erroneous execution” (see, Official Comment to UCC 4A-303, comment 1, 2A ULA [Master ed], 1990 Supp Pamph).

Thus, as in the example discussed in comment 2, where the originator’s bank mistakenly directs payment of $2,000,000 to the beneficiary’s bank but payment of only $1,000,000 was directed by the originator, the originator’s bank is obligated to pay the $2,000,000 if the beneficiary’s bank has accepted the payment, although the originator need only pay its bank the $1,000,000 ordered. The originator’s bank ordinarily would be entitled to recover the excess payment from the beneficiary. The comment points out, however, that "if Originator owed $2,000,000 to Beneficiary and Beneficiary received the extra $1,000,000 in good faith in discharge of the debt, Beneficiary may be allowed to keep it. In this case Originator’s Bank has paid an obligation of Originator and under the law of restitution * * * Originator’s Bank would be subrogated to Beneficiary’s rights against Originator on the obligation paid by Originator’s Bank” (see, Official Comment to UCC 4A-303, comment 2, 2A ULA [Master ed], 1990 Supp Pamph).

A further example discussed in comment 3 of the Official Comment is of a duplicate payment order erroneously made, which transfers a second $1,000,000 payment to beneficiary’s bank and beneficiary’s bank accepts the payment. Although the originator’s bank is only entitled to receive $1,000,000 from the originator, it must pay $2,000,000 to beneficiary’s bank and would be relegated to a remedy the same as "that of a receiving bank that executes by issuing an order in an amount greater than the sender’s order. It may recover the overpayment from Beneficiary to the extent allowed by the law governing mistake and restitution and in a proper case * * * may have subrogation rights if it is not entitled to recover from Beneficiary” (Official Comment to UCC 4A-303, comment 3, 2A ULA [Master ed], 1990 Supp Pamph).

Although it seems clear from these provisions of article 4A and the Official Comments that the drafters of UCC article 4A contemplated that the "discharge for value” rule could appropriately be applied in respect to electronic fund transfers, Security Pacific argues that to do so would undermine the low cost structure of wholesale electronic fund transfers and impose extraordinary risks upon banks implementing these enormously large transactions. This argument is unpersuasive. Article 4A contemplates, in the first instance, that a mistake such as occurred here can be effectively held to a minimum through the utilization of "commercially reasonable” security procedures in effecting wire transfers. These security procedures are for the purpose of verifying the authenticity of the order or detecting error in the transmission or content of the payment order or other communication (see, e.g., NY UCC 4-A-201).

For example, under NY UCC 4-A-202 (2), if a bank accepts a payment order that purports to be that of its customer after verifying its authenticity through an agreed upon security procedure, the customer is bound to pay the order even if the payment order was not authorized. The customer will be liable, however, only if the court finds that the security procedure was a "commercially reasonable” method of providing security against unauthorized payment orders (id.). If the bank accepts an unauthorized payment order without verifying it in compliance with a security procedure, the loss will fall on the bank.

Other mechanisms for preventing loss are also provided for in the statute. A bank may avoid a loss resulting from the insolvency of a sending bank by accepting the payment order on the condition that it first receives payment from the sending bank (see, NY UCC 4-A-209 [2] [a] [ii]; [c]; 4-A-403 [1] [a], [b]; see also, American Law Institute Approves UCC Article Governing Wire Transfers, 52 Banking Rep 1150 [BNA] [June 5, 1989]; Prefatory Note to UCC art 4A [a receiving bank can always avoid this risk by accepting a payment order after the bank has received payment]). Risk of loss can also be minimized by the institution keeping track of all transactions with a particular bank so that over-all debits and credits can be netted.

Application of the "discharge for value” rule to the circumstances presented here is particularly appropriate. The undisputed facts demonstrate that Security Pacific executed Spedley’s initial order directing payment to Banque Worms notwithstanding having already received a cancellation of that order. The District Court also found that the second transfer to Natwest USA was executed despite the fact that Spedley’s account did not have sufficient funds to cover this second transfer. Moreover, it appears that, as a creditor of Spedley, Banque Worms was a beneficiary entitled to the funds who made no "misrepresentation and did not have notice of the transferor’s mistake.”

Accordingly, we conclude, in answer to the certified question, that the "discharge for value” rule as set forth at section 14 of the Restatement of Restitution, should be applied in the circumstances in this case.

Chief Judge Wachtler and Judges Simons, Kaye, Titone, Hancock, Jr., and Bellacosa concur.

Following certification of a question by the United States Court of Appeals for the Second Circuit and acceptance of the question by this Court pursuant to section 500.17 of the Rules of Practice of the New York State Court of Appeals (22 NYCRR 500.17), and after hearing argument by counsel for the parties and consideration of the briefs and the record submitted, certified question answered as follows: New York would apply the "discharge for value” rule as set forth at section 14 of the Restatement of Restitution.

      . The Official Comment to UCC 4A-102 notes that while most payments covered by article 4A are usually referred to as "wire transfers” and involve an electronic transmission, other types of transmissions such as letter, or other written communication or oral communication, are also covered, thus the broader term "funds transfer” is used in preference to the narrower term "wire transfer.” (2A ULA [Master ed], at 147,1990 Supp Pamph.)

      . CHIPS is owned and operated by the New York Clearing House Association and the Federal Reserve Bank owns and operates Fedwire, the largest American wire transfer network.

      . The Official Comment to UCC 4A-201 as drafted by the American Law Institute and National Conference of Commissioners on Uniform State Laws states that "it is standard practice to use security procedures that are designed to assure the authenticity of the message * * * [and] to detect error in the content of messages. * * * The question of whether loss that may result from the transmission of a spurious or erroneous payment order will be borne by the receiving bank or the sender or purported sender is affected by whether a security procedure was or was not in effect and whether there was or was not compliance with the procedure.” (2A ULA [Master ed], at 156-157,1990 Supp Pamph.)

      . The new article 4A will regulate funds transfers other than consumer transactions governed by the Federal Electronic Fund Transfer Act of 1978 (15 USC § 1693 et seq.). It will not apply to consumer transactions such as check payments or credit card payments for the Federal EFTA will continue to govern these transactions. If any part of a fund transfer is covered by the EFTA, the entire funds transfer will be excluded from article 4A.

      . Whether or not a particular security procedure is commercially reasonable is a question of law for the court, while whether the procedure was complied with is a question of fact (see, Official Comment to UCC 4A-203, comment 4, 2A ULA [Master ed], 1990 Supp Pamph).