The Pennsylvania Supreme Court has held that CoreStates Bank, a predecessor to Wachovia, did not violate Article 9 of the Pennsylvania UCC by “sweeping” fees from a lender’s account to set off existing debt created by overdrafts in other accounts held by the lender.

The decision in Pioneer Commercial Funding Corp. v. American Financial Mortgage Corp. 855 A.2d 818 (Pa. S.Ct. 2004) overturns a $352 million award against CoreStates—reportedly one of the largest ever delivered by a Philadelphia jury.

Pioneer brought suit claiming that its business was devastated in 1999 when CoreStates seized $1.7 million from an account held by American Financial, and refused to return the funds even after the bank was informed the money belonged to Pioneer. To prove its case, Pioneer produced a commercial “bailee letter” in which it reserved its rights to the funds at issue.

CoreStates argued the money was seized properly because it discovered large overdrafts in other American Financial accounts and had the right to seize the funds as a setoff against the overdrawn accounts.

A jury determined Pioneer made its case for unlawful conversion, and awarded the plaintiff $1.7 million in direct damages, $13.4 million in consequent damages and $337.5 million in punitive damages. The award later was reduced in an appeal to the Pennsylvania Superior Court.

However, on further appeal, the Commonwealth’s Supreme Court held the trial judge should have granted CoreState’s motion for judgment notwithstanding the verdict. Although the bank’s actions were aggressive, they did not exceed the limit of the law, the
court concluded.