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Strayer v. Bare

April 28, 2008


The opinion of the court was delivered by: Judge Munley


Before the court are defendants' motions to dismiss the instant case. Having been fully briefed, the matters are ripe for disposition.


This case arises out of defendants' representation of plaintiff Brian Strayer in a personal injury action in the Pennsylvania courts. Defendant Frankel & Associates was a law firm located in York, Pennsylvania and incorporated in 1983 as a Professional Corporation under Pennsylvania law. (Amended Complaint (Doc. 60) (hereinafter "Complt.") at ¶ 13).*fn1 Strayer retained Frankel & Associates to represent him on February 3, 1999. (Id. at ¶ 15). Stephen Stambaugh, an associate in the firm, represented Strayer on the matter in question. (Id. at ¶ 16).

Plaintiff Pennsylvania Lawyers Fund for Client Security (PLFCS) made payments to a number of other former clients of the Frankel firm in exchange for subrogation agreements and assignment of rights. (Id. at ¶ 17).*fn2 Those who assigned their rights to the PLFCS had received awards from personal injury litigation which were placed in the Frankel firm's trust account but the funds were never paid to them. (Id. at ¶¶ 19-37). These persons all filed claims with the PLFCS and received a portion of the funds which the law firm had allegedly misappropriated. (Id.). These payments from the PLFCS ranged from $33 to $75,000, and plaintiffs allege that the total amount of such payments was $767,400.81.*fn3 (Id. at ¶¶ 48, 62). The plaintiffs allege that most of these persons who received payment had formerly been Frankel & Associates clients. (Id. at ¶ 71). Plaintiffs also assert that other individuals have similar claims against the law firm, and bring this action on their behalf. (Id. at ¶ 72). Plaintiff Strayer was involved in personal injury litigation that resulted in a settlement of $530,000. (Id. at ¶ 75). The parties responsible for paying this settlement provided checks in the amounts required to Frankel & Associates. (Id. at ¶ 76).

Defendant Mark David Frankel was disbarred from legal practice on or about May 24, 2004, and control of Frankel & Associates passed to Stephen Frankel.*fn4 (Id. at ¶¶ 73-74). Defendant Wachovia Bank, a professional corporation, is successor by merger to First Union Corporation, which had succeeded by merger to Corestates Bank, N.A. (Id. at ¶ 7). At some time prior to February 2, 1999, Defendant Bare, treasurer of Frankel & Associates, opened a regular banking account and an IOLTA trust account with Corestates Bank. (Id. at ¶ 77). Defendant Wachovia Bank took over the trust account from First Union, and had knowledge that the purpose of an attorney trust account was to hold funds of the clients. (Id. at 78). Wachovia earned monthly fees from this account. (Id.). Wachovia had on its payroll attorneys and accountants, and plaintiffs allege that the bank knew that personal injury claims are not subject to taxation under the United States Internal Revenue Code. (Id. at ¶ 79). Wachovia received financial benefit from the trust account, since the bank paid less interest on this account than on other accounts in the bank. (Id. at ¶ 80).

The bank was aware that interest paid on this trust account, less any charges on the account, were not the property of the law firm. (Id. at ¶ 81). Wachovia also knew that many of the checks deposited in the trust account were drawn on banks located outside Pennsylvania. (Id. at ¶ 82). Wachovia's knew that the trust account held client, not law firm, funds. (Id. at ¶ 83). Nevertheless, the bank allegedly facilitated electronic transfers from the trust account to the Internal Revenue Service (IRS) to satisfy the law firm's tax obligations. (Id.). These transfers were made in interstate commerce. (Id.). From 2001 to 2004, electronic transfers in interstate commerce from the Frankel & Associates trust account to the IRS allegedly totaled $1,463,316.19. (Id. at ¶ 92). All of these transfers were for the firm's benefit, not for the benefit of the firm's clients. (Id.).

Wachovia Bank used the United States Postal Service to mail monthly statements to Frankel & Associates. (Id. at ¶ 93). These monthly statements reflected accurately the unlawful transfers made from the firm's trust account. (Id.). Based on this information, the firm determined the amount it needed to deposit from other client funds to cover past misappropriations. (Id.). Plaintiffs allege that this arrangement constituted a "Ponzi scheme,"*fn5 since the "trust account was in continual need of new deposits to cover checks owing to other clients." (Id. at ¶ 94). Plaintiff Strayer discovered this lack of funds when, after settling his case, he was advised that he would have to wait one month for his checks to clear before he would have access to the funds. (Id. at ¶ 95). Defendants knew that this delay was not for the purpose of clearing the checks, but because of defendants' need for cash to cover past advances. (Id. at ¶ 96). Defendants Cunningham and Bare were aware of these deficiencies in the firm's trust account and did nothing to address the problem. (Id. at ¶ 97). They informed defendant Mark David Frankel of these shortfalls. (Id.). The defendants then used plaintiffs' funds to satisfy outstanding obligations created by misappropriation of client funds. (Id. at 98).

Plaintiffs allege that Defendants Wachovia, Bare, Cunningham and Frankel defrauded plaintiffs using a Ponzi scheme that employed the United States Postal service and interstate commerce in furtherance of their strategy. (Id. at ¶ 99). The defendants intended to deprive plaintiffs of funds which were their property. (Id.). Wachovia, plaintiffs contend, participated directly in the scheme by operating the escrow account and the wire transfers involved in the case. (Id. at ¶ 100). Plaintiffs also allege that the bank "participated directly or indirectly in the conduct or affairs of the enterprise through a pattern of racketeering activity." (Id.). Such participation was essential to the operation of the scheme. (Id.). Defendant Bare, plaintiffs contend, participated in the unlawful enterprise by establishing the trust account in a manner that allowed unlawful wire transfers and by soliciting client funds to be deposited in the trust account. (Id. at ¶ 102). Defendant Cunningham participated in the scheme by misrepresenting his knowledge of the illegal transactions, and by soliciting funds to be placed in the trust account. (Id. at ¶ 103). Defendant Stephen Frankel participated in the unlawful scheme by improperly handling client funds. (Id. at ¶ 104).

Sometime in late October 2004, Steven Stambaugh, who had represented Plaintiff Strayer in his personal injury suit, learned from the firm's bookkeeper that the funds in the trust account were insufficient to pay his client. (Id. at ¶ 118). This insufficiency was a product of the firm's improper use of client funds. (Id.). Once notified of this fact, the York County District Attorney's Office brought criminal charges against Mark David Frankel and Stephen Frankel. (Id.).

Plaintiffs contend that they were never paid proceeds from their settlement by Frankel & Associates. (Id. at ¶ 119). This failure to pay money owed the plaintiffs was not the result of any action or inaction by the plaintiffs. (Id. at ¶ 120). Instead, defendants directed that money from the client trust account to be paid to causes unrelated to plaintiffs' litigation. (Id. at ¶ 121). This misappropriation of client funds caused defendants' inability to pay plaintiffs money from the firm's trust accounts. (Id. at 122). Plaintiffs never consented to the use of their funds held in trust to pay taxes or for any purposes unrelated to their cases. (Id. at ¶¶ 123-27). Strayer has never received the funds from his settlement. (Id. at ¶ 128). The assignors of the claims held by the Pennsylvania Lawyers Fund for Client Security similarly were not paid the proceeds of their claim settlements. (Id. at 130).

Plaintiffs also allege that defendants were aware of the inappropriate and illegal activity of other defendants. The insolvency of the trust account occurred years before Strayer discovered the problem when he asked for his funds. (Id. at ¶ 131). Plaintiffs contend that defendants had knowledge of and acquiesced to improper expenditures from the client trust account by Mark David Frankel. (Id. at ¶ ¶ 132, 134). Those expenditures borrowed against the firm's future earnings, and defendants knew or should have known that those expenditures would cause insolvency in the trust account. (Id. at ¶¶ 133, 135). The Rules of Professional Conduct, plaintiffs contend, required Defendants Bare and Cunningham to report the Frankels' conduct to the Pennsylvania Disciplinary Board. (Id. at ¶ 136). The defendant bank knew of the law firm defendants' illegal electronic transfers, but continued to provide this service. (Id. at ¶ 140).

Plaintiffs filed a complaint in this court on October 20, 2006. (See Doc. 1). The case was first assigned to Chief Judge Yvette Kane. After being served with the complaint, Defendant Cunningham filed a motion to dismiss. (Doc. 9). Before the other parties to the case could respond, plaintiffs on November 16, 2008 filed an amended complaint. (Doc. 15). Defendants Wachovia Bank, Darryl Cunningham and Douglas Bare filed motions to dismiss this version of the complaint. (Docs. 17, 20, 26). Plaintiffs then filed a motion for leave to file an amended complaint. (Doc. 46). On April 16, 2007, Judge Kane issued an order granting plaintiffs' motion to file a second amended complaint and denying defendants' motions to dismiss as moot. (Doc. 59). Plaintiff filed this complaint, and the same defendants again filed motions to dismiss it. (Docs. 60, 61, 63, 66). On October 3, 2007, Judge Kane determined that she had a conflict of interest in the matter and removed herself from the case. (Doc. 81). On October 10, 2007, the case was reassigned to the present judge.

Plaintiffs filed their second amended complaint (Doc. 60), which is the subject of the instant dispute, on April 16, 2007. The complaint raises seven counts. Count I, raised against all the defendants except Frankel & Associates, contends that defendants' conduct violated 18 U.S.C. §§ 1962(c)-(d), the Racketeer Influenced and Corrupt Organizations Act (RICO), and seeks treble damages and attorneys fees. Count II claims fraud against all of the defendants, contending that the defendants cooperated to convince plaintiffs to deposit settlement funds in Frankel & Associates trust accounts to further their corrupt scheme. Count III alleges a breach of fiduciary duty against the individual defendants. Count IV points to a conspiracy between all the individual defendants to operate the trust account illegally. Count V, raised against Wachovia Bank, alleges a breach of the duty of good faith and acting in bad faith for Wachovia's facilitation of Frankel & Associates illegal transactions. Count VI claims conversion against all of the defendants based on their misuse of the client's funds. Count VII raises a claim under the Pennsylvania Unfair Trade Practices and Consumer Protection Law against all of the defendants except Wachovia Bank. The parties have briefed the motions to dismiss the complaint, bringing the case to its present posture.


Because this act arises under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1964, we have jurisdiction pursuant to 28 U.S.C. § 1332. ("The district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States."). We have supplemental jurisdiction over the plaintiffs' state law claims pursuant to 28 U.S.C. § 1367.

Legal Standard

The case is before this court on defendants' motions to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). When a 12(b)(6) motion is filed, the sufficiency of a complaint's allegations are tested. The issue is whether the facts alleged in the complaint, if true, support a claim upon which relief can be granted. In deciding a 12(b)(6) motion, the court must accept as true all factual allegations in the complaint and give the pleader the benefit of all reasonable inferences that can fairly be drawn therefrom, and view them in the light most favorable to the plaintiff. Morse v. Lower Merion Sch. Dist., 132 F.3d 902, 906 (3d Cir. 1997).


Defendants urge that we dismiss the case on a number of different grounds. We will examine each in turn.

A. Federal Claims

Defendants contend that plaintiffs have not stated a claim upon which relief could be granted on their federal claims. We will address each of the claims in turn.

i. RICO Claims

Defendants insist that plaintiffs have not stated a claim for RICO violations, either in terms of a conspiracy or for a more straightforward violation of the Act. To state a civil claim for a RICO violation under 18 U.S.C. § 1962(c), a plaintiff must show "(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity." Sedima v. Imrex Co., 473 U.S. 479, 496 (1985). A "plaintiff only has standing [to make a RICO claim] if he has been injured in his business or property by the conduct constituting the violation." Rehkop v. Berwick Healthcare Corp., 95 F.3d 285, 289 (3d Cir. 1996). Courts have found that "[a] pattern of racketeering activity requires at least two predicate acts of ...

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