This appeal is centered on a commercial priority dispute between a banking institution exercising setoff against a general deposit account and a company asserting a third-party interest in the account proceeds, in the nature of absolute ownership and/or a perfected security interest.
In the usual course of affairs, loan originators receiving funding from Pioneer repaid their obligations using the proceeds from bulk sales of the loans to one or more third-party investors comprising a secondary market, thus enabling Pioneer to meet its own obligations to Bank One. Pending such sales, under the terms of loan and security agreements, Pioneer maintained a security interest in, inter alia, the original promissory notes signed by home buyers, as well as proceeds from their sale.
At the center of this litigation is a business arrangement that was markedly different from Pioneer's usual course dealings, involving a California loan originator known as RNG Mortgage Services, Inc.
Both AFMC and RNG thus had an interest in maintaining RNG as a going concern while AFMC considered the acquisition. To accomplish this, they devised an arrangement whereby AFMC would receive an effective assignment of the loans, assume recourse responsibility relative to them, and sell them in the secondary market. Pioneer was also made a party to the discussions, as AFMC and RNG desired to obtain continued funding from Pioneer for loans in the pipeline. Pioneer elected to participate for its own reasons, apparently related to its desire to obtain the existing business and the prospect of a future warehouse lending relationship with AFMC.
The dispositive issue in this appeal concerns the nature of the interest conferred upon AFMC in this arrangement, and, relatedly, the character of the interest reserved to Pioneer. Mechanically, Pioneer and AFMC executed a loan and security agreement and a three-party agreement (with Bank One), thus facially establishing the framework of a debtor/creditor relationship. Pioneer agreed to arrange for the notes to be endorsed and shipped to AFMC, along with a bailee letter indicating that Pioneer held a security interest in the notes and their proceeds, and also, retained title pending full payment.
RNG assembled the first loan portfolio to be administered in this manner, worth approximately $2.3 million, in mid-October of 1997. AFMC proceeded to obtain a purchase commitment from Norwest Funding, Inc. ("Norwest"), an institutional investor that had categorically refused to purchase loans directly from RNG. In connection with the purchase, Norwest required a series of seller representations and warranties, including AFMC's attestation to its absolute and unencumbered ownership of the notes, which facially contradicted the bailee letter transmitted from Pioneer to AFMC. The notes were released to AFMC, endorsed by it, and shipped by AFMC to Norwest.
After the first transaction, Pioneer expressed concern about AFMC's possession of the proceeds from the loan sales and requested that AFMC instruct Norwest to transmit proceeds from future sales directly to Pioneer's account at Bank One. Representatives of Pioneer, RNG, and AFMC all contacted Norwest to convey Pioneer's request.
As it turns out, Pioneer's concern was well founded, since, unbeknownst to it or AFMC, CoreStates was beginning an investigation of account activity of corporations in which AFMC's principal, Thomas Flatley, had an interest. The bank had discovered a substantial overdraft in an AFMC account, in the amount of approximately $4.5 million, and, as a result of its investigation, concluded the overdraft was a consequence of a sustained practice of check kiting, i.e., improper manipulation of accounts to allow the account holder to draw on funds that it did not in fact possess.
Without knowledge of this debit restraint, RNG, Pioneer, AFMC, and Norwest proceeded with the sale of a second portfolio of loans to Norwest, this time valued at approximately $1.78 million, which occurred during the second week of November, 1997. The second transaction initially proceeded much as the first one had. Contrary to Pioneer's expressed wishes, and despite the request that AFMC had previously conveyed on Pioneer's behalf, AFMC again furnished instructions to Norwest to wire the proceeds of the sale to AFMC's self-described settlement account at CoreStates. Norwest complied with those instructions and transmitted the approximately $1.78 million to this account via FedWire in three installments. These funds became frozen as a result of CoreStates' debit restraint, and CoreStates refused requests from the various parties to either return the monies to Norwest or to forward them to Pioneer's account at Bank One.
Later that month, CoreStates consulted a specialist in banking law in connection with the AFMC overdrafts. The attorney advised the bank that it had the right to set off monies credited to AFMC deposit accounts against the overdraft indebtedness.
Pioneer, for its part, would no longer fund RNG, and RNG ceased doing business. Although Pioneer never received payment in relation to the second loan portfolio, it satisfied its own indebtedness to Bank One. Apparently as a result of a downward spiral triggered by its substantial losses in this regard, however, Pioneer itself ceased doing business in the summer of 1999.
Pioneer commenced the present civil action against CoreStates, AFMC, Flatley, and Norwest, in 1998. The primary claim against CoreStates was grounded in a theory of conversion,
The trial court, however, took the view that such distinctions, and other principles of commercial law arising under the Pennsylvania Commercial and Banking Codes, were of little or no relevance to this case, primarily on the basis that Pioneer had grounded its action in the tort of conversion as opposed to commercial law. See, e.g., N.T., June June 30, 2000 (a.m.), at 6 ("The action ... is not in contract. It's absolute tort. Therefore, the UCC ... do[es] not apply to this case. That applies only to contract actions."). Accordingly, as the case proceeded through trial,
In the context of the court's charge, the jury returned a special verdict finding that Pioneer possessed an ownership interest in the funds deposited in the AFMC settlement account. The jurors thus found Corestates and AFMC liable in conversion, and awarded Pioneer the $1.78 million sum that CoreStates had set off.
In response to post-trial motions by Corestates, the trial court sustained the liability findings and the compensatory damages award, but remitted the punitive damages to $40.5 million, resulting in a judgment in favor of Pioneer in the amount of approximately $56 million. In an opinion accompanying its order, the court reiterated its view that the Pennsylvania Commercial and Banking Codes were inapplicable, since Pioneer's claim arose in tort. See Pioneer Commercial Funding Corp. v. American Fin. Mortgage Corp., 50 Pa. D. & C. 4th 31, 46 (C.P.Phila.2000). Further, as in its instructions to the jury, the court also continued to conflate the concept of a security interest with absolute ownership, at various points describing the jury's finding as confirming Pioneer's absolute title to the funds, see, e.g., id. at 35 ("In the view of Pioneer, supported by this jury's verdict, Pioneer enjoyed the exclusive right of ownership in the sums ... wired into AFMC's account."), and at others indicating that the jury's finding of ownership was based on the presence of a perfected security interest. See, e.g., id. at 42-43 ("The plaintiffs correctly characterize this ownership interest as a `perfected security interest' vesting rights independently in Pioneer."). The court at no time cited or discussed the relevance of Pennsylvania National Bank & Trust (which was again highlighted by CoreStates in the post-trial briefing), in light of its acknowledgement that the jury's determination of ownership was based entirely on a finding of a secured status.
Pioneer did not appeal the remittitur, but Corestates lodged an appeal in the Superior Court, where a divided panel affirmed as to liability, but awarded a retrial on the issue of punitive damages. See Pioneer Commercial Funding Corp. v. American Fin. Mortgage Corp., 797 A.2d 269 (Pa.Super.2002). With regard to CoreStates' position that the trial court conflated the absolute-title-retention versus sale-on-credit paradigms, the majority stated as follows:
Id. at 284. The majority did not squarely address CoreStates' contention that the trial court's instructions did not appropriately frame the ownership question; in this respect, it merely characterized CoreStates' argument as nothing more than an invitation to read isolated portions of the jury charge out of their appropriate context. See id.
We allowed CoreStates' subsequent appeal, in which it has maintained, inter alia, that the jury's verdict was tainted by the common pleas court's decision to depart from prevailing principles of commercial law on the basis that such precepts lack relevance to a tort action grounded in conversion theory.
It is apparent from the outset that CoreStates' position in this regard has merit. As noted, the present matter at its core embodies a commercial priority dispute. Pioneer's styling of the action under the rubric of conversion did not undermine the relevance of governing principles of commercial law, since a claim of conversion cannot be sustained in the face of lawful justification on the part of the asserted tortfeasor. See Stevenson v. Economy Bank of Ambridge, 413 Pa. 442, 451, 197 A.2d 721, 726 (1964) ("A conversion is the deprivation of another's right of property in, or use or possession of, a chattel, or other interference therewith, without the owner's consent and without lawful justification." (citation omitted)).
Furthermore, the case was submitted to a jury lacking essential direction. Because of the trial court's approach, the jury never learned of the relevant distinction under Pennsylvania law between the Sherts scenario, involving pure fiduciary or agency relationships entailing absolute retention of title, and a sale-on-credit transaction. Indeed, the trial court misled the jury by affirmatively indicating, contrary to the holding of Pennsylvania National Bank & Trust, that a security interest created a sufficient ownership interest to defeat a bank's right of setoff.
In its brief, Pioneer contends that Pennsylvania National Bank & Trust is not persuasive, and therefore, this Court should take this opportunity to overrule it. First, Pioneer argues that its analysis of the priority question is dictum, because the bank asserting its right of setoff "apparently" had previously relied on the deposit as security in making a loan to the debtor. This asserted fact, however, is neither apparent on the face of the Pennsylvania National Bank & Trust opinion nor is it any part of the Superior Court's express reasoning; therefore, we do not deem it a proper basis to displace the court's holding. Second, Pioneer takes the position that the case should be limited to its facts, as it involved bank setoff in relation to a certificate of deposit as opposed to a deposit account. The certificate of deposit at issue, however, was of the nonnegotiable variety, which has been held to constitute a general deposit account under the prior version of the Uniform Commercial Code, see, e.g., In re Alabama Land and Mineral Corp., 292 F.3d 1319, 1324-25 (11th Cir.2002), and notably, this treatment has been made express under the revised Uniform Commercial Code. See 13 Pa.C.S. § 9102, cmt. 12 (stating that "[t]he revised definition [of deposit account] clarifies the proper treatment of nonnegotiable or uncertificated certificates of deposit," and observing that, unless of a type subject to transfer by delivery only without endorsement or assignment, a non-negotiable certificate of deposit is a deposit account).
We appreciate the complexity of the priority issue resolved in Pennsylvania National Bank & Trust, and acknowledge the strong equities attaching to each of the competing interests as between banking institutions and companies funding purchase transactions in general commerce. We are also aware that the Pennsylvania National Bank & Trust panel afforded little in the way of concrete explanation concerning the balance that it struck in devising a common law priority rule.
Thus, the Pioneer/AFMC arrangement for sale of the second loan portfolio to Norwest was orchestrated at a time when Pennsylvania's common law matched the Uniform Commercial Code's present, statutory priority scheme, and, as reflected in that scheme, and taking due consideration of the respective interests involved, the
In summary, 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 second loan portfolio and its proceeds (i.e., a true bailment), versus whether it possessed a perfected security interest (or something of lesser priority). Since the common pleas court failed to make this distinction, at a minimum, the verdict must be vacated and the case returned for a new trial.
CoreStates also seeks review of the trial court's decision to deny it judgment notwithstanding the verdict on the ground that, as a matter of law, Pioneer's interest should be relegated, at most, to the security-interest category. In this undertaking, we review the record in the light most favorable to Pioneer to assess whether its evidence was sufficient to sustain the bailment theory. See Adamski v. Miller, 545 Pa. 316, 319, 681 A.2d 171, 173 (1996).
As a threshold matter, we recognize that Article 9 of the Uniform Commercial Code was conceived with the goal of minimizing the role of actual, technical title in the governance of commercial transactions. See generally 13 Pa.C.S. § 9202 (stating the general rule that the provisions of Article 9 "apply whether title to collateral is in the secured party or the debtor"); Charles W. Mooney, Jr., The Mystery and Myth of `Ostensible Ownership' and Article 9 Filing, 39 ALA. L.REV. 683, 789 n. 275 (1988) ("one of the basic conceptual underpinnings of Article 9[is] the unification of treatment of all secured transactions that have the same economic effect without making unnecessary distinctions based on the form of the transaction or the location of `title.'"); 9B HAWKLAND UNIFORM COMMERCIAL CODE SERIES § 9-202:1. Significantly, parties are not constrained, however, in all instances to conduct their affairs under the Uniform Commercial Code's regime; for example, a true bailment relationship (a directed-purpose transfer to an agent of possession only, subject to absolute retention of title), is not covered by Article 9. Accord 8 HAWKLAND UNIFORM COMMERCIAL CODE SERIES § 9-102:3 (citing Rohweder v. Aberdeen Prod. Credit Ass'n, 765 F.2d 109, 112 (8th Cir. 1985)). In distinguishing between transactions governed by the Uniform Commercial Code versus those controlled by other law (here, a sale on credit versus a true bailment), the intention of the parties is obviously the preeminent consideration. To assess intent, courts will look not to any particular document or the form of the transaction, but rather, to the overall transaction and its substance. See generally 13 Pa.C.S. § 9-102, cmt. 3b.
In the present case, Pioneer, RNG, and AFMC participated in an unusual transaction designed to invest in AFMC the accouterments
The strongest evidence of an intention on the part of Pioneer to retain absolute title is reflected in the bailee letter.
Accordingly, based on the evidence viewed in the light most favorable to Pioneer, we hold as a matter of law, that the transfer of the second loan portfolio to AFMC was in the nature of a sale-on-credit transaction, subject to a security interest, as opposed to a true bailment.
In considering whether there is any other reason to return the matter for a jury determination, we observe that the case had many facets. For example, the parties maintain a vigorous dispute concerning whether Norwest's transfer of the proceeds from the sale of the second loan portfolio to the AFMC account occurred by design or mistake. Along another line, the trial court's opinion is replete with criticisms of CoreStates' conduct giving rise to the litigation. See, e.g., Pioneer, 50 Pa. D. & C. 4th at 34-35 (stating that "CoreStates, in a desperate attempt to recoup its negligently incurred losses, seized the funds pursuant to its alleged right of setoff"); id. at 35 (indicating that "AFMC and Thomas Flatley entered into a workout agreement with the bank whereby the parties conspired to keep Pioneer's money and to keep the matter secret."). Although the case was not originally framed by the trial court for the jury determination to depend on such considerations, the question arises whether they may be relevant to the case as it could or should have been framed.
On the matter of CoreStates' conduct, it is significant that Pioneer did not undertake in the liability proceedings to establish any prevailing standards in the banking community that would support the characterization of the bank's conduct as negligent. This sort of perspective on the case, therefore, appears to arise more from a visceral reaction based on generalized notions concerning the relative equities of the parties' positions than from an application of governing legal principles. In this regard, although CoreStates' act of setting off the AFMC account was aggressive, particularly in light of the character of the underlying debt owed to it by its depositor, it simply did not exceed the limits of existing law. Similarly, the fact that CoreStates entered into a confidential agreement with Flatley to satisfy AFMC's remaining indebtedness after the setoff does not serve as a predicate for liability in conversion.
Regarding the aspect of whether or not the transfers to the AFMC settlement account occurred by mistake, there was some conflict in the evidence presented at trial, and therefore, fact finding would be implicated if the question were material to the outcome of the case. We conclude, however, that it is not. In terms of the lawful justification for its conduct, CoreStates was not bound by any particular party's characterization of the transfer as mistaken. At most, the bank was on inquiry notice of a potential third-party interest (inter alia by virtue of AFMC's denomination of the relevant account as a "settlement account," see supra note 15), and was therefore bound to conduct a reasonable investigation. The undisputed evidence, however, is that CoreStates did, in fact, conduct that investigation, and, in the course of it learned of the transaction structured by Pioneer, RNG, and AFMC. Corestates thus discovered the facts underlying our conclusions that AFMC had been placed into the chain of title with respect to the second loan portfolio, and that Pioneer possessed at most a perfected security interest. Further, Corestates learned that AFMC had instructed Norwest to transfer the proceeds from the sale of the second loan portfolio to its settlement account. In view of these circumstances, 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 in this regard,
Having considered these and other facets of the case, we conclude that a new trial is not implicated.
Finally, we observe that CoreStates has raised a number of other important legal issues in this appeal. Most significantly, the framing of the case in terms of Article 4A of the Uniform Commercial Code and the incorporating provisions of Federal Reserve Board Regulation J, 12 C.F.R. 210.25(a), (b), governing fund transfers, has attracted the attention of multiple amici, including the Federal Reserve Banks. In this regard, CoreStates has maintained throughout the litigation that Article 4A's express authorization of bank setoff, see 13 Pa.C.S. § 4A502(c) (providing, inter alia, that "the amount credited [via wire transfer] may be set off against an obligation owed by the beneficiary to the bank"), as incorporated into Regulation J, preempts common law distinctions based on ownership or secured status external to Article 4A as they might otherwise pertain to the lawfulness of bank setoff. In this regard, CoreStates' position appears to encompass the assertion that the Sherts holding has been preempted (or at least substantially displaced) by statute. This, in turn, has given rise to concerns on the part of another amicus, whose interests are representative of a substantial body of persons and organizations that are beneficiaries of statutory trusts arising by operation of federal law, for example, in proceeds from the sale of perishable agricultural commodities. See 7 U.S.C. § 499e(c). This amicus presents the counter argument that Article 4A's setoff provision was intended to incorporate existing setoff and priority rules into the funds transfer arena, not to supplant them. Given our determination, above, however, there is simply is no conflict between Article 4A (or Regulation J) and Pennsylvania common law concerning any material point of the present dispute. Therefore, although we acknowledge the importance of this issue and the respective merits of the competing positions, according to the general principles by which we address controversies, resolution will be reserved for a case in which the question would be of controlling significance.
Justice NEWMAN did not participate in the consideration or decision of this case.
In light of our disposition, below, we need not proceed further with an analysis of the appropriateness of conversion theory to Pioneer's averments in this case, which, in any event, is beyond the scope of the questions framed by CoreStates for our review in its statement of questions involved. See Pa.R.A.P. 2116(a).