Court Vacates $40.5M Punitive Damage Award Against Bank

The Pennsylvania Superior Court on Wednesday vacated and remanded for a new trial a case that had resulted in a punitive damage award of $40.5 million against CoreStates Bank. Writing for the court, Judge Michael T. Joyce said the “unreasonable punitive damage award cannot stand” in Pioneer Commercial Funding Corp. v. American Financial Mortgage Corp., both because of remarks made by the plaintiff’s counsel during its closing argument and because the punitive damage amount itself violated the due process guarantees of the 14th Amendment. The sole issue to be retried in the case is that of punitive damages. The appeals court let stand compensatory damages of $1.79 million, $78,854 in interest and consequential damages of $13.5 million. A jury originally had awarded punitives of $337 million. Although the trial court judge reduced that amount to $40.5 million, Joyce, in his 38-page opinion, said the award is “still excessive and does not bear any reasonable relationship to [CoreStates'] conduct.” Judge Justin M. Johnson and Senior Judge Phyllis W. Beck also heard the case. Beck filed a dissenting opinion. Pioneer and Bank One in 1998 sued CoreStates Bank, American Financial Mortgage Corp., Norwest Funding Inc. and American Financial’s principal, Thomas Flatley, for conversion, alleging that CoreStates wrongfully kept nearly $1.8 million that was incorrectly deposited by Norwest on Pioneer’s behalf. Pioneer, a mortgage funding company, had a loan and security agreement in which Pioneer acted as lender and American acted as borrower. Flatley guaranteed American’s obligations under a complex agreement, according to which American was to endorse notes and send each one with a bailee letter to Norwest. Norwest would then wire funds to Pioneer’s account at Bank One. But according to court papers, American in 1997 sent wiring instructions to Norwest to wire the funds received to American’s own account at CoreStates Bank. Unbeknownst to Pioneer, American had become indebted to Bank One in excess of $4 million for overdrafts, the opinion said. And although American subsequently notified CoreStates that Norwest wrongly deposited nearly $1.8 million there into American’s account — and Norwest requested that the wire transfers be reversed — CoreStates claimed it had a right to use the money deposited to offset the amount it was owed for American’s overdrafts, and it refused to return the money to Pioneer, Joyce said. Flatley and CoreStates then entered into a workout agreement in which CoreStates would keep the money deposited by Norwest, but Pioneer was not informed of the arrangement, the opinion said. In July 2000, a jury found CoreStates liable for conversion and awarded $352 million in damages. CoreStates, now called First Union after a 1998 acquisition, filed post-trial motions seeking a j.n.o.v. and a new trial or remittitur. Bank One dropped out of the case and “came to a resolution” with Pioneer over how it would recover its money, an attorney for Pioneer said Wednesday. In December 2000, Philadelphia Common Pleas Court Judge Gene D. Cohen denied CoreStates’ motion for a new trial and j.n.o.v., but he granted the remittitur, cutting the punitive damage award against CoreStates to $40.5 million, thus reducing the overall award to $55.85 million. Cohen found “the degree of punishment” the jury meted out was “excessive,” but he said that the jury “had every reason to punish the defendant CoreStates[,] having found essentially that the bank took what belonged to the plaintiff, refused to return it to the plaintiff when properly notified and as a result drove the plaintiff’s business into the ground.” DUE PROCESS Cohen’s conclusion that “to the extent that any passion might have slipped into the jury’s deliberations, that result is cured by the remittitur” was wrong, Joyce said. Joyce said that although the U.S. Supreme Court has “explicitly declined to adopt or identify any particular standard of review which provides the level of scrutiny demanded by the 14th Amendment,” the Court has said that awards cannot be the result of “passion and prejudice.” Nor can they be “grossly excessive,” or “against the weight of the evidence.” CoreStates argued in its brief that statements made by counsel for Pioneer in the course of the closing argument suggested that CoreStates committed crimes, repeatedly calling the bank’s witnesses “liars,” comparing the bank to a “thug” and a “gangster,” and telling the jury CoreStates was “a vicious greed machine.” Joyce said he agreed the remarks were inflammatory “only with respect to the jury’s award of punitive damages.” The standard under which punitive damages are measured in Pennsylvania requires analysis of three factors, Joyce said: � The character of the act. � The nature and extent of the harm. � The wealth of the defendant. Judicial review of the size of punitive damage awards provides a safeguard against excessive verdicts and an appellate court can find that a trial court has abused its discretion in either upholding or remitting damages, Joyce said. Quoting several Pennsylvania Supreme Court decisions, Joyce said that “counsel cannot make arguments prejudicial to the opposing party which are not supported by facts in evidence, or which are inflammatory or beyond the limits of fair or sound argument, unduly influencing or distracting the jury.” Joyce said the Superior Court found the allegations made by Pioneer’s counsel “too numerous to be harmless” and “unduly prejudicial,” and enough to justify vacating even the reduced punitive damage award. The court also said the trial court’s remittitur violated the due process guarantees of the 14th Amendment, because the amount “still [bore] no reasonable relationship to the wrongful conduct.” In determining the proper amount for a remittitur, Cohen relied on the Pennsylvania Unfair Trade Practices and Consumer Protection Law and the federal Sherman Antitrust Act, since “there are no state statutes which punish errant conduct by banks.” Since both the UTPCPL and the Sherman Act imposed treble damages for unfair trade practices and predatory business practices respectively, Cohen used them as a guide for valuation and fixed the amount of punitive damages at $40.5 million. Although Joyce said that there “are no mathematical formulae or hard-and-fast rules about the relationship between the tortuous [sic] conduct and the amount of punitive damages,” and that “under Pennsylvania law, punitive damages need bear no proportional relationship to the compensatory damages awarded in a particular case,” the remittitur was invalid, he said. “The remittitur of $40.5 million is still excessive and does not bear any reasonable relationship to [CoreStates'] wrongful conduct. Therefore, this unreasonable punitive damage award cannot stand. … We find that the amount of punitive damages in this case is grossly excessive and shocks our sense of justice,” Joyce said. In the same vein, Joyce said, “our review of the record shows that the punitive damage award of $337 million … bears no reasonable relationship to [CoreStates'] conversion of the fund. “The unreasonableness and gross excessiveness of the jury’s award is buttressed by the fact that $337 million is the highest punitive damage award in Pennsylvania history. It is inconceivable that [CoreStates'] conduct in this case was the most reprehensible and the most blameworthy conduct in Pennsylvania history,” Joyce said. DISSENT Beck’s dissent focused on the more narrow issue that Article 4A-502 of the Uniform Commercial Code should govern the case, preempting a common law tort claim of conversion. Article 4A of the U.C.C. “governs the procedures, rights and liabilities arising out of commercial electronics funds transfers,” she wrote. “Contrary to the majority’s conclusion, I believe that CoreStates acted within its rights under Article 4A-502.” Under that section, the ultimate ownership of funds is not relevant, Beck said. There is good reason to rely on the U.C.C. in cases like this because “common law principles of ownership that vary from state to state are ill-suited for the national regulation of financial institutions,” Beck said. REACTION Maurice R. Mitts of Frey Petrakis Deeb Blum Briggs & Mitts, who represented Plaintiff Pioneer Commercial Funding Corp., spoke with The Legal Intelligencer Wednesday about the decision. “I’m very happy,” he said. “This is a wonderful thing.” First Union was represented locally in its appeal by Ralph G. Wellington, Paul H. Titus and Carl A. Solano of Philadelphia’s Schnader Harrison Segal & Lewis and by Andrew Frey of the New York firm Mayer, Brown & Platt. Michael Baylson of Philadelphia-based Duane Morris represented First Union at trial. Both Baylson and attorneys at Schnader Harrison referred The Legal Intelligencer to a First Union spokesman for comment, who said that the bank is “pleased but not surprised to see that the Superior Court vacated the award of punitive damages. However, we will need to study the entire opinion carefully before commenting further.”