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One of the largest verdicts ever handed up by a Philadelphia jury — the $352 million award against CoreStates Bank in July 2000 — has been completely overturned by the Pennsylvania Supreme Court. While the award had been slashed by every court to review it, the justices’ 6-0 decision in Pioneer Commercial Funding Corp. v. American Financial Mortgage Corp. delivered the coup de grace to the megaverdict. In a 24-page opinion, the high court held that the trial judge erred by allowing the plaintiff to present a tort claim of conversion against CoreStates without allowing CoreStates the right to defend its actions under the Uniform Commercial Code. “The trial court’s ruling that the tenets of commercial law were irrelevant improperly relieved Pioneer of establishing an essential element of its case — the absence of lawful justification — and wrongfully stripped CoreStates of relevant defenses,” Justice Thomas G. Saylor wrote. In the suit, Pioneer, a California mortgage “warehouse” lender, claimed that its business was devastated in 1997 when CoreStates, a predecessor to Wachovia, illegally seized $1.7 million from an account held by American Financial that had been frozen, and then refused to return it even after it became clear that the money belonged to Pioneer. But lawyers for CoreStates argued that the money was properly seized because CoreStates had uncovered a massive check-kiting scheme perpetrated by an American Financial executive and that the bank therefore had the right to seize any funds in the account as a “setoff” against stolen funds. The jury sided with Pioneer and awarded it more than $1.7 million in direct damages, $13.4 million in consequential damages and a whopping $337.5 million in punitive damages. But less than six months later, the verdict was slashed to less than $56 million by the trial judge, Philadelphia Common Pleas Judge Gene D. Cohen. Cohen left standing the jury’s compensatory and consequential damage awards, but slashed the punitive award from $337 million to $40.5 million — three times the compensatory award. But Cohen flatly rejected the bank’s claims that the trial was unfair and the jury was inflamed by improper remarks by Pioneer’s lawyer, Maurice Mitts of Frey Petrakis Deeb Blum Briggs & Mitts. Cohen found 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.” Cohen also found that evidence of discovery violations by CoreStates’ lawyer was properly before the jury and that the comments by Mitts, “though extreme,” were ultimately based upon the evidence. “To the extent that any passion might have slipped into the jury’s deliberations,” Cohen wrote, “that result is cured by the remittitur.” But the Pennsylvania Superior Court concluded that Cohen had not gone far enough in slashing the punitive award. By a 2-1 vote, the appellate panel upheld the jury’s compensatory awards, but it ordered a new trial on the punitive damages. Writing for the majority, Judge Michael T. Joyce said the “unreasonable punitive damage award cannot stand” both because of remarks made by Mitts during his closing argument and because the amount itself violated the bank’s due process rights. But in dissent, Judge Phyllis Beck anticipated the issue that would later doom the entire verdict when the Pennsylvania Supreme Court heard the case. Beck said she would have overturned the entire award because, in her view, Pioneer’s conversion claim was pre-empted by the fund transfer provisions of the Pennsylvania Commercial Code. Now, the state Supreme Court has ruled that Pioneer’s claim was fatally flawed because under the Uniform Commercial Code, CoreStates always had a superior interest in the funds. Saylor, writing for a unanimous six-justice court, (Justice Sandra Schultz Newman did not participate), found that Cohen’s instructions on the law “misled the jury by affirmatively indicating … that a security interest created a sufficient ownership interest to defeat a bank’s right of setoff.” The Superior Court majority also erred, Saylor found, when it held that the jury’s finding that Pioneer owned the funds showed that the jury understood “the distinction between absolute ownership and security interests. According to court papers, the case began as a dispute over more than $1.7 million that was deposited into American Financial’s CoreStates account by Norwest Funding Inc. after American Financial forwarded a group of mortgages to Norwest. At the time, Pioneer was acting as a warehouse lender for American Financial, but it said it was unaware that an American Financial executive had engaged in a check-kiting scheme that left its accounts overdrawn by more than $4 million. Pioneer’s lawyers argued that the $1.7 million deposit was made in error; the money was supposed to have been sent to Pioneer’s account at Banc One in Texas. Mitts told the jury that American Financial was merely a “conduit” in a deal among other parties and never owned the mortgages or the money. As a result, Mitts said, no right of setoff ever existed. But Saylor found that Pioneer’s theory of its case was flawed and that Cohen erred by allowing it to go to the jury under that theory. “Under prevailing Pennsylvania law as it existed at the time of trial, the controlling question in this case should have been whether Pioneer effectuated an absolute reservation of title … in the proceeds … versus whether it possessed a perfected security interest (or something of lesser priority),” Saylor wrote. Since Cohen “failed to make this distinction,” Saylor said, CoreStates was entitled at a minimum to a new trial. But Saylor found that no new trial was necessary because Cohen should have granted CoreStates’ motion for judgment notwithstanding the verdict. Saylor found that although the original financial transactions among Pioneer, Norwest and American Financial were “unique,” they were nonetheless “organized around a loan and security agreement, the cornerstone of a UCC-based security relationship.” As a result, Saylor concluded that “the overall structure of the transaction, therefore, militates strongly in favor of treating the transaction as a sale on credit, subject to a security interest.” Pioneer argued that CoreStates knew the funds were mistakenly sent to American Financial’s account, and that Norwest should have sent them directly to Pioneer. But Saylor found that whether the transfer was mistaken was irrelevant. “The fact that Pioneer desired to be paid directly by Norwest, or even that Norwest may have at various junctures undertaken some post-transfer efforts to vindicate Pioneer’s position … does not represent the kind of error or mistake that would give rise to bank liability in conversion for wrongful setoff,” Saylor wrote. Mitts said in an interview that he intends to file a petition asking the state Supreme Court to reconsider the decision. Saylor’s ruling, he said, ignored key facts from the trial, including significant admissions by CoreStates witnesses. The ruling is a victory for CoreStates’ appellate team, led by attorney Andrew L. Frey of Mayer Brown Rowe & Maw’s New York office, along with attorneys Ralph G. Wellington, Paul H. Titus and Carl Solano of Schnader Harrison Segal & Lewis. It also vindicates the work done by CoreStates’ trial team, Michael M. Baylson (now a federal judge on the Eastern District of Pennsylvania bench) and Nolan N. Atkinson Jr. of Duane Morris.

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