Pioneer Commercial Funding Corp. v. American Financial Mortgage Corp.

Pioneer Commercial Funding Corp. (Pioneer) (plaintiff) was a real estate warehouse lender that funded companies originating loans to home buyers. The companies repaid Pioneer by selling the loans to third-party investors in a secondary market. Pioneer obtained its own funding from a financial institution called Bank One Texas, N.A. (Bank One). Pioneer entered into an atypical business arrangement with RNG Mortgage Services, Inc. (RNG) and American Financial Mortgage Corporation (AFMC). Pioneer initially agreed to be RNG’s warehouse lender. However, RNG subsequently filed for bankruptcy. AFMC, which was considering acquiring RNG’s assets, agreed to assume responsibility of RNG’s loans and sell them. Pioneer and AFMC executed a loan and security agreement, as well as a three-party agreement involving Bank One. Pioneer arranged for RNG’s loans to be endorsed and sent to AFMC for sale. Pioneer included a bailee letter indicating Pioneer’s security interest in the notes and their proceeds and stating that Pioneer retained title pending full payment. AFMC procured Norwest Funding, Inc. (Norwest) to buy RNG’s first loan portfolio. Considering RNG’s bankruptcy, Norwest required and AFMC executed representations and warranties contradicting the bailee letter. Norwest sent payment to AFMC’s settlement account with CoreStates Bank, N.A. (CoreStates). AFMC sent the payment to Bank One to credit Pioneer’s account. Pioneer nevertheless expressed concern that AFMC possessed the proceeds at all and requested that next time, payment be made directly to Bank One. Meanwhile, CoreStates investigated AFMC’s principal, Thomas Flatley, and a substantial overdraft in an AFMC account, which resulted in unknown restraints on Flatley’s accounts, including the AFMC settlement account. Norwest purchased another portfolio and again paid AFMC’s settlement account. CoreStates setoff the money received against the overdraft indebtedness. Pioneer sued CoreStates, AFMC, Flatley, and Norwest (defendants). CoreStates argued that a bank’s common-law setoff right has priority over a perfected secured interest in collateral. Pioneer cited caselaw granting priority to third-party owners over a bank’s setoff right if the bank account holder possesses the third-party’s funds strictly as a fiduciary or agent. The trial court rejected CoreStates’ proposed jury instructions and issued instructions that failed to differentiate between these arguments.