CHARLOTTE, N.C. — CoreStates Financial Corp. is long gone, after a series of mergers, but an old and potentially damaging lawsuit against the Philadelphia banking company continues to dog its successor, Wachovia Corp.
In the suit, CoreStates was alleged to have improperly seized $1.78 million of funds belonging to one company but mistakenly wired to the account of another company that owed CoreStates money. A Philadelphia jury and a state appeals court have already sided against CoreStates, but Wachovia is hoping to persuade the Pennsylvania Supreme Court to hear an appeal, arguing that if it loses, the decision could threaten the nation’s wire transfer system.
Wachovia may also have several business groups on its side. In the earlier appeals court case, 12 Federal Reserve banks, the Pennsylvania Bankers Association, and several other groups filed briefs in support of the banking company.
In July 2000, a Philadelphia jury ruled that CoreStates improperly seized funds belonging to a small warehouse lender, Pioneer Commercial Funding Corp. The funds had mistakenly been wired to the account of a small mortgage originator, American Commercial Mortgage Co., which owed CoreStates $4 million for overdrafts. When the funds appeared in American Commercial’s account, the bank seized the funds to satisfy the debt, according to court documents.
Pioneer said it was forced out of business because of the loss of those funds and sued CoreStates in April 1998, according to court documents. The Philadelphia jury agreed that the seizure of the funds was improper and ordered the bank to pay $15 million — plus a whopping $337.5 million in punitive damages, the largest award of its kind in Pennsylvania history.
A judge later reduced the punitive damages to $40.5 million. An appeals court upheld the verdict in March but ordered the lower court to reconsider the punitive damage award. The award amount is in limbo pending Wachovia’s appeal.
First Union Corp. of Charlotte bought CoreStates in 1998. And last year, First Union merged with Wachovia Corp. of Winston-Salem, N.C., and took the Wachovia name. But even as the company evolved, the lawsuit remained.
In the original suit, Pioneer alleged that CoreStates knew the money seized from American Financial belonged to Pioneer and that it had violated wire transfer rules. Wachovia argues that it had the right to seize the funds under the federal Uniform Commercial Code, and it has vowed to continue fighting, claiming the outcome could affect “the integrity of the national wire transfer system.”
“We are pursuing the appeal process because we firmly believe that CoreStates acted properly in this business transaction,” said Wachovia spokeswoman Mary Eshet. Ms. Eshet said the bank thought it might have grounds for an appeal when one of three appeals court judges dissented from the court’s decision in March.
Carl Solano, a lawyer at Philadelphia law firm Schnader Harrison Segal & Lewis, which is representing Wachovia, said the issue is who owns the funds in a depositor’s account. Under Article 4 of the UCC, Mr. Solano said, “If a bank receives a wire transfer for payment to the account of a depositor, it may set off the amount that was received was against a debt that was owed to the bank by the depositor, and that is what the bank did here.”
“We plan to stay the course and go the distance, and do whatever we have to do in order to take this to its natural conclusion, which we believe will continue to be in our favor,” said M. Albert Nissim, Pioneer’s chief executive and sole remaining employee.
“We never claimed in the first place that the wire transfer was not legitimate,” Mr. Nissim said. “All we’re saying is that they do not have a right of offset [seizing funds to offset a debt], which is state law, for money that does not belong to them. And the money never did belong to them; all the courts have said that.”
