## Facts

- Pioneer operated as a warehouse lender, funding mortgage originators and taking a security interest in mortgage notes and the proceeds from their sale; it financed its operations through Bank One.
- RNG, a loan originator funded by Pioneer, entered bankruptcy; AFMC agreed with Pioneer to take responsibility for selling a portfolio of RNG loans, under a loan and security agreement and a related agreement involving Bank One.
- Promissory notes were endorsed and delivered to AFMC with bailee letters stating Pioneer retained title to the notes and proceeds until paid and directing that sale proceeds be remitted to Bank One for Pioneer’s benefit.
- AFMC arranged sales of the loan portfolios to Norwest; the sale documentation included representations and warranties that conflicted with the bailee letters’ characterization of ownership and control.
- In the first sale, Norwest wired the purchase price to AFMC’s settlement account at CoreStates; AFMC then transferred the funds to Bank One for application to Pioneer, and Pioneer was paid.
- CoreStates was investigating Flatley and a large overdraft in another AFMC account and imposed restraints affecting AFMC accounts, including the settlement account.
- In the second sale, Norwest again wired the purchase price to AFMC’s settlement account at CoreStates; CoreStates refused to release the funds and instead set off the deposit against AFMC’s overdraft indebtedness to CoreStates, leaving Pioneer unpaid.
- Pioneer sued AFMC, Flatley, Norwest, and CoreStates, asserting conversion and related claims; as to CoreStates, Pioneer claimed the wired funds were owned by Pioneer (or held for it) and therefore not subject to setoff.
- CoreStates asserted a common-law right of setoff and argued that, once deposited, the funds became AFMC’s property subject to setoff, including under UCC Article 4A principles governing funds transfers.

## Issues

1. Whether a bank’s common-law right of setoff may be exercised against deposited funds that a third party claims were held by the account holder strictly as a fiduciary or agent for the third party.
2. Whether, if the third party is only a secured creditor with an Article 9 security interest in proceeds, the bank’s setoff right has priority over that security interest.
3. Whether UCC Article 4A expands a bank’s setoff rights so that it may appropriate wired funds notwithstanding common-law limits protecting third-party ownership.
4. Whether the trial court committed reversible error by giving jury instructions that failed to separate ownership/agency theories from security-interest priority theories, creating a risk of a legally incorrect verdict.

## Decision

- The Pennsylvania Supreme Court reversed the judgment against CoreStates and remanded for a new trial.
- The Court held the jury instructions were erroneous and confusing because they did not require the jury to determine whether AFMC held the funds as a fiduciary/agent for Pioneer (ownership theory) or owned the funds subject only to Pioneer's security interest (secured-creditor theory).
- The Court stated that Pennsylvania law generally limits setoff to funds owned by the depositor; if the depositor holds funds strictly as a fiduciary or agent for another, setoff is not permitted.
- The Court did not finally decide whether Pioneer or CoreStates should prevail on the merits; it concluded only that the defective charge could have produced a verdict based on an incorrect legal standard.

## Legal Principles

- A bank’s common-law right of setoff ordinarily reaches only funds owned by the bank’s customer; it does not extend to funds beneficially owned by a third party when the customer holds them strictly as a fiduciary or agent.
- Ownership/agency claims and secured-creditor claims are analytically distinct: a third party’s claim of true ownership of deposited funds differs from a claim based solely on an Article 9 security interest in proceeds.
- A bank’s setoff right may be superior to a third party’s Article 9 security interest when the depositor is the owner of the funds, subject to exceptions where the depositor lacks beneficial ownership due to a fiduciary or agency relationship.
- UCC Article 4A is not read to abrogate common-law limits on setoff absent clear statutory language; claims of expanded setoff authority must be evaluated consistently with established third-party ownership protections.
- In complex priority disputes, the jury must be clearly instructed on the controlling legal theories and the factual findings required to apply them; failure to do so warrants a new trial when the verdict may rest on legal confusion.

## Conclusion

The court ordered a new trial because the jury charge did not clearly distinguish between (a) a theory that the deposited wire-transfer proceeds were owned by Pioneer and merely held by AFMC as a fiduciary or agent, which would bar setoff, and (b) a theory that Pioneer held only a security interest in funds owned by AFMC, where the bank’s setoff may prevail; Article 4A did not clearly eliminate the common-law third-party ownership limitation.


Pioneer Com. Funding Corp. v. Am. Fin. Mortg. Corp., 855 A.2d 818 (Pa. 2004)