The opinion of the court was delivered by: EDUARDO C. ROBRENO
This case involves the misappropriation of client funds by John R. Kennel, II, an associate, and later partner, at the law firm of Rubin Quinn Moss Heaney & Patterson, P.C. Rubin Quinn made good on the losses to its clients occasioned by Kennel's wrongdoing, and brought the current action to recover these payments. The case was tried to the Court without a jury over the course of five days in February and March of 1993. For the reasons set out below, the Court finds for the Plaintiff.
1. Plaintiff Rubin Quinn Moss Heaney & Patterson, P.C. ("Rubin Quinn" or "Plaintiff"), is a Pennsylvania professional corporation
engaged in the practice of law with its its principal office located at 1800 Penn Mutual Tower, 510 Walnut Street, Philadelphia, PA 19106.
2. Plaintiff is the successor in interest to Rubin Quinn Moss Heaney & Patterson, a partnership engaged in the practice of law with its principal office located at the same address. From February 16, 1986, through March 31, 1991, the partnership operated at various times under the names Rubin Quinn & Moss, Rubin Quinn Moss & Heaney, and Rubin Quinn Moss Heaney & Patterson. Rubin Quinn Moss Heaney & Patterson incorporated its practice and transferred all of its assets and liabilities to Plaintiff as of April 1, 1991.
3. Pursuant to a resolution adopted at a duly constituted meeting of the partners, the corporation's name was changed to Rubin Quinn Moss & Patterson, P.C., ("Rubin Quinn" or "Plaintiff") effective June 1, 1992.
4. Defendant John R. Kennel, II, ("Kennel" or "Defendant") is an individual who is a resident and citizen of the State of Virginia. Defendant is a member of the Pennsylvania bar.
5. Defendant was employed by Rubin Quinn as an associate attorney from approximately February 16, 1986, through December 31, 1987, and was a partner at Rubin Quinn from January 1, 1988, through his termination from the partnership effective July 31, 1990.
7. Defendant's area of practice is real estate law. While at Rubin Quinn, Defendant performed legal services for Rubin Quinn's clients relating primarily to the purchase, sale, lease, and rental of private and commercial properties.
8. While at Rubin Quinn, Defendant also functioned as an approved attorney with Lawyers Title Insurance Corporation. As an approved attorney, Defendant performed the functions of a title agent, including the handling of all receipts and disbursements related to real estate transactions.
9. Shortly after he began working at Rubin Quinn, Defendant developed a program for handling escrow funds generated in closing real estate transactions for Rubin Quinn clients.
10. Defendant's concept regarding the purpose and operation of the real estate accounts was as follows:
a. The accounts would contain escrow funds, entrusted to Defendant and Rubin Quinn by Rubin Quinn's clients, in connection with the real estate transactions to be handled by Defendant;
b. Through these accounts, Rubin Quinn would administer all receipts and disbursements relating to real estate transactions handled by Defendant on behalf of Rubin Quinn's clients, including receipts from and disbursements to buyers, sellers, title companies, Rubin Quinn itself, and other third parties;
c. Defendant would be solely responsible for the operation, maintenance, record-keeping, review, and reconciliation of the accounts;
d. Five accounts were to be established, each one dedicated to a single real estate transaction at a time; and
e. As each real estate transaction was completed, receipts for that transaction would necessarily equal disbursements, so that no funds would remain in the account and the account could be re-used on a rolling basis for the next real estate transaction. The underlying concept was called "zero balancing."
11. Defendant suggested the accounts and explained their purpose and operation to Don P. Foster, a then associate at Rubin Quinn, who had been responsible for recruiting Defendant to Rubin Quinn. Through Mr. Foster's high school roommate, Mark O'Brien, Defendant established contact with John Pickering, II, a Deputy Manager in the Banking Department at Brown Brothers Harriman & Co. ("Brown Bros.").
12. By the end of May 1986, Defendant had obtained the approval of Rubin Quinn to open five accounts at Brown Bros. (collectively, the "Brown Bros. Real Estate Accounts") in accordance with the concept described supra in paragraph 10, as follows:
ACCOUNT NO. DESIGNATION
13. The Brown Bros. Real Estate Accounts were titled in the name of Rubin Quinn, but contained client escrow funds. Defendant, as well as Messrs. Alexander N. Rubin, Jr., and William P. Quinn, two of Rubin Quinn's senior partners, became authorized signatories on the accounts.
14. From November 6, 1986, through December 16, 1988, Defendant made unauthorized disbursements from the Brown Bros. Real Estate Accounts for purposes unrelated to the real estate transactions of Rubin Quinn's clients in the total sum of $ 203,029.36 (the "Unauthorized Disbursements").
Netting this misappropriation against $ 67,832.49 deposited by Defendant, the Brown Bros. Real Estate Accounts suffered a net shortfall of $ 135,196.87.
a. A check, dated November 6, 1986, in the amount of $ 5,000 payable to Defendant himself;
b. A check, dated November 6, 1986, in the amount of $ 1,000 payable to Mr. Foster
to repay a personal loan, which Defendant deposited into Mr. Foster's personal account, without Mr. Foster's endorsement, while Mr. Foster was out of the country;
c. Thirteen checks, dated between December 3, 1986, and July 2, 1987, in the total sum of $ 17,122.08 payable to Queenstown Bank of Maryland, the mortgagee of certain property owned by Prospect Associates, a real estate development partnership in which Defendant was in partnership with Mr. Foster and others;
d. Four checks, dated between December 27, 1986, and October 30, 1987, in the total sum of $ 48,522.30 to satisfy a confessed judgment entered by Stephen Black Builders against Defendant personally;
e. A check, dated January 30, 1987, in the sum of $ 2,150.00 payable to Gerald Keener;
f. Four checks, dated between February 28, 1987, and March 10, 1988, in the total sum of $ 2,645.59 to pay the homeowner's association, sewer, and tax bills of certain property owned by Prospect Associates;
g. Five checks, dated between March 30, 1987, and August 19, 1987, in the total sum of $ 750 involving Robert Booker, a prior owner of certain property owned by Prospect Associates who was also a client of Rubin Quinn;
h. A check, dated June 5, 1987, in the sum of $ 750.00 payable to Steven Barsamian, Esquire, as a retainer paid by Defendant for the benefit of his friend, Mark Blackburn, for legal services relating to immigration work performed by Mr. Barsamian for one of Mr. Blackburn's employees;
i. A check, dated June 11, 1987, in the sum of $ 437.00 payable to Charles Robinson, a tenant on certain property owned by Prospect Associates;
j. A check, dated July 3, 1987, in the sum of $ 21,827.85 payable to Richard J. Bennett, Inc. to pay off a second mortgage on certain property owned by Prospect Associates;
k. A check, dated July 14, 1987, in the sum of $ 10,000 payable to John D. Sauder, Defendant's friend;
l. A check, dated July 27, 1987, in the sum of $ 498.01 payable to Rubin Quinn, involving Defendant's payment of legal fees owed by Ron Swank of Heritage Corporation to Rubin Quinn;
m. Two checks, dated October 20, 1987, and December 1, 1987, in the total sum of $ 18,826.53 representing the down payment and school taxes for Defendant's own personal residence;
n. Four checks, dated between December 14, 1987, and September 2, 1988, in the total sum of $ 55,000 relating to St. Asaph's Associates, a real estate development partnership in which Defendant was in partnership with Mr. Foster and others;
o. A check, dated February 15, 1988, in the sum of $ 13,000 payable to James Thompson, Defendant's friend and partner in Prospect Associates;
p. A check, dated December 16, 1988, in the sum of $ 1,500.00 payable to Thompson and Associates, Inc.; and
q. A shortfall of $ 4,000.00 relating to David Jones's closing.
16. Defendant was given credit for deposits he made to the Brown Bros. Real Estate Accounts as follows:
DATE AMOUNT PAYOR
10/20/86 $ 1,000.00 Prospect Associates
11/6/86 3,000.00 Prospect Associates
11/19/86 1,000.00 Prospect Associates
12/16/86 2,500.00 Prospect Associates
5/4/87 2,500.00 Prospect Associates
6/8/87 1,332.49 Prospect Associates
2/5/88 15,000.00 Prospect Associates
1/21/88 5,000.00 St. Asaph's Associates
1/21/88 20,000.00 St. Asaph's Associates
4/29/88 10,000.00 St. Asaph's Associates
8/8/88 5,000.00 St. Asaph's Associates
12/30/88 1,500.00 St. Asaph's Associates
TOTAL: $ 67,823.49
17. At the end of 1988, Account No. 1013854 was established at Marian Bank by Rubin Quinn, titled in Rubin Quinn's name (the "Marian Bank Real Estate Account," and together with the Brown Bros. Real Estate Accounts, the "Real Estate Accounts").
18. In early 1989, the balance of the funds contained in the Brown Bros. Real Estate Accounts were transferred to the Marian Bank Real Estate Account.
19. The purpose, operation, maintenance, recordkeeping, review, and reconciliation of the Marian Bank Real Estate Account was identical to that of the Brown Bros. Real Estate Accounts, except that all client funds were contained in one account instead of five accounts.
20. The Marian Bank Real Estate Account produced a shortfall of $ 135,196.87. This shortfall was the cumulative result of Defendant's Unauthorized Disbursements from the Real Estate Accounts.
21. Plaintiff first learned of the Unauthorized Disbursements on June 19, 1990, when Alexander N. Rubin, Jr., received a telephone call from an officer at Marian Bank notifying him of an overdraft of approximately $ 60,000.
Auditing of the Real Estate Accounts
22. During the relevant period, Rubin Quinn's financial books and records were examined yearly by Rubin Quinn's outside accountants for the purpose of preparing federal and state income tax returns, K-1 forms, which were distributed to all partners, including Defendant, financial statements, and other financial documents.
23. At all relevant times, Defendant had sole responsibility for the operation, maintenance, record-keeping, review, and ...