The opinion of the court was delivered by: Judge Munley
Before the court are defendants' motions for summary judgment (Docs. 146, 149, 151) pursuant to Rule 56 of the Federal Rules of Civil Procedure. Having been fully briefed and argued, the matter is ripe for disposition.
This case stems from the theft and misapplication of entrusted client funds by the York County, PA law firm of Frankel & Associates, P.C. ("the Frankel Firm") run by attorney Mark David Frankel. Plaintiff Brian Strayer was a client of the firm whose settlement proceeds were never distributed to him. Plaintiff Pennsylvania Lawyers Fund for Client Security is a nonprofit fund that is subrogated to the claims of twenty-six other clients whose funds were stolen. Plaintiffs' suit seeks to impose liability on Defendants Douglas Bare and Darryl Cunningham, two former associates of the firm, and on Defendant Wachovia Bank, which maintained the firm's Interest on Lawyer Trust Account ("IOLTA"), for each defendant's alleged role in the scheme.
Mark David Frankel, the firm's sole shareholder, improperly used his firm's IOLTA throughout the 1990s until the scheme was brought to light in October of 2004. (Pl.'s Resp. to Wachovia Bank's Statement of Undisputed Material Facts at ¶ 19 (Doc. 168)). For approximately seven to nine years, in the early 1990s, Frankel would transfer money from the firm's operating account into its IOLTA-- in violation of his professional obligations-- and then transfer that money from the IOLTA to the IRS to pay the firm's taxes. (Id. at ¶ 21; Livaditis Dep. at 50, 76 to 77 (Doc. 146-5 at 11, 37 to 38); see Rule 1.15 of the Pennsylvania Rules of Professional Conduct). Late in the 1990s, however, the firm began to pay its tax obligations with clients' money without prepaying or repaying from the operating account. (Doc. 168 at ¶ 22). In essence, Frankel operated a Ponzi scheme where proceeds from later settlements were used to pay clients owed under earlier settlements.
Eventually, the IOLTA at times had insufficient funds to distribute settlement proceeds to the firm's clients. Anita Livaditis, the firm's bookkeeper from 1979 to 2004, had a policy of never bouncing a check drawn on the IOLTA, so she would hold off on distributing settlement proceeds to clients, or making IRS payments, until a new settlement check was received. (Pl.'s Answer to Def. Cunningham's Statement of Material Facts at ¶ 8 (Doc. 157); Doc. 168 at ¶¶ 25, 26). Livaditis knew that IOLTA funds were being used to pay the firm's taxes. (Doc. 157 at ¶ 17). Generally, firm policy was that settlement proceeds would not be distributed to clients until three weeks after they were initially received. (Frankel Firm Disbursement Policy (Doc. 157-21)).
On February 3, 1999, Plaintiff Brian Strayer ("Strayer") retained Third-Party Defendant Steven Stambaugh ("Stambaugh") of the Frankel Firm to represent him in a personal injury claim. (Pl.'s Answer to Def. Bare's Statement of Material Facts at ¶¶ 12, 13 (Doc. 160)). Stambaugh ultimately settled Strayer's personal injury claim for $530,000.00 in September of 2004. (Id. at ¶¶ 14, 15). Strayer had no contact with Defendants Douglas Bare ("Bare"), Darryl Cunningham ("Cunningham"), or Wachovia. (Doc. 157 at ¶ 3; Doc. 168 at ¶ 71). Though Strayer's settlement proceeds were received by the firm, they were never distributed to him. (Doc. 160 at ¶¶ 16, 17). When Stambaugh learned that the IOLTA did not have enough money to cover Strayer's settlement distribution on October 28, 2004, he notified the York County District Attorney. (Id. at ¶ 48).
The subsequent investigation by the Pennsylvania Attorney General's Office ended in the conviction of Mark David Frankel and his son, attorney Stephen Frankel, in 2006. (Id. at ¶¶ 49, 50). Mark David Frankel was tried and convicted of fifty-seven counts of theft and one count of misapplication and sentenced to a term of four years in prison. (See Mem. on Mot. to Dismiss at 3 n.4 (Doc. 90 at 3)). Stephen Frankel was also convicted of theft and misapplication of entrusted funds and sentenced to two years probation. (Id.) At the criminal trial of Mark David Frankel, Steven Stambaugh testified that he considered Bare and Cunningham "active, knowing, participants in the Ponzi scheme." (Criminal Trial Testimony of Steven Stambaugh at 507-08 (Doc. 157-8)). Prior to the revelation of the IOLTA scheme, Mark David Frankel had been disbarred in May of 2004 for sexual improprieties relating to his practice of law and his shares of the professional corporation had transferred to Stephen Frankel. Office of Disciplinary Counsel v. Frankel, 849 A.2d 1133 (Pa. 2004); (Doc. 168 at ¶ 3).
Besides Plaintiff Strayer, the firm failed to pay settlement proceeds to twenty-six other clients.*fn1 The Plaintiff Pennsylvania Lawyers Fund for Client Security ("the Fund") refunded these clients, whose claims ranged from $33.33 to $75,000.00, in return for an assignment of rights and a subrogation agreement. (Doc. 160 at ¶¶ 18, 19; 2d Am. Compl. at ¶¶ 48, 62 (Doc. 60)). In total, the Fund distributed $767,400.81 to these clients. (See 2d Am. Compl. at ¶¶ 19 to 70 (Doc. 60)). The Fund was made aware of the potential claims against the defendants in October of 2004. (Doc. 160 at ¶ 20; Doc. 157 at ¶ 29).
The firm hired Defendant Bare as an associate in 1985. (Doc. 160 at ¶ 1). Bare did not hold any shares of the firm. (Id.) According to the plaintiffs, however, Bare eventually "became an equal" of Mark David Frankel within the firm. (Criminal Trial Testimony of Mark David Frankel at 1225 (Doc. 157-14 at 4)). Bare did not represent, and had no communications with, Strayer or any of the fund claimants. (Doc. 160 at ¶ 47).
In 1991 or 1992, the firm received automated clearinghouse ("ACH") software from the IRS enabling it to pay its tax obligations electronically. (Bare Dep. at 10 (Doc. 151-2 at 7)). Bayer installed this software on Livaditis's computer. (Id.) Livaditis and Mark David Frankel each testified that Bayer designated the IOLTA as the account from which the ACH would transmit payments to the IRS, as opposed to the operating account. (Criminal Trial Testimony of Anita Livaditis at 144, 147 (Doc. 157-6 at 9, 11); Criminal Trial Testimony of Mark David Frankel at 1230 (Doc. 157-14 at 6)). Bayer averred that he only installed the software and modem, and did not know which accounts were being used. (Bare Dep. at 10 (Doc. 151-2 at 7)). At various times in the 1990s, Bare served at least nominally as the secretary, treasurer, and vice president of the professional corporation. (Id. at 29 (Doc. 151-2 at 11)). Bare denies knowing that IOLTA funds were being used to pay the firm's tax obligations. (Bare Dep. at 13 (Doc. 151-2 at 7)).
Defendant Cunningham was another non-shareholding associate at the Frankel Firm. (Doc. 157 at ¶ 35). Cunningham represented one of the fund claimants-- Patricia A. Thompson. (Criminal Trial Testimony of Patricia Thompson (Doc. 157-10)). Cunningham settled Thompson's claim in June of 2003, at which time Thompson indicated she preferred not to receive her distribution immediately. (Id.) According to Thompson, Cunningham assured her that her money could be kept in the IOLTA until she wanted it and that it would not be accessible to anyone else. (Id.) Cunningham denies knowing that IOLTA funds were being used to pay the firm's tax obligations. (Cunningham Dep. at 14 (Doc. 146-9 at 7)). Cunningham signed checks payable to the IRS that were drawn on the IOLTA, but did not prepare these checks. (Doc. 157 at ¶ 40; Check Copies (Doc. 157-13)).
According to Livaditis, while some attorneys, such as Steven Stambaugh, were kept in the dark about the existence of the IOLTA's insufficiencies, others were aware of it, including Bare and Cunningham. (Doc. 168 at ¶ 14). Livaditis states that on numerous occasions Cunningham's clients' funds were short. (Doc. 157 at ¶ 9). Unlike when Stambaugh's clients were short, Livaditis would plainly tell Cunningham that his clients would have to wait to be paid. (Livaditis Dep. at 15 (Doc. 146-4 at 16)). Livaditis testified in Mark David Frankel's criminal trial that Cunningham was told that the deficiencies were due to withdrawals from the IOLTA that went to the IRS. (Criminal Trial Testimony of Anita Livaditis at 229-332 (Doc. 157-6 at 52 to 53)). According to her deposition in this case, however, she never explicitly told Cunningham the cause of the deficiencies. (Livaditis Dep. at 15 to 16 (Doc. 146-4 at 16 to 17)). Cunningham denies that Livaditis would come to him when his clients were due money missing from the escrow account. (Cunningham Dep. at 13 (Doc. 146-9 at 6)).
With respect to Bare, Livaditis testified that, while Cunningham clearly knew about the missing IOLTA funds, Bare only might have known. (Criminal Trial Testimony of Anita Livaditis at 276 to 77 (Doc. 157-6 at 75 to 76)). Livaditis did acknowledge several innocent reasons that a client's settlement proceeds could be delayed, such as untimely insurance checks, settlements from multiple sources, or delayed receipt of a settlement check. (Livaditis Dep. at 15 to 16 (Doc. 146-4 at 16 to 17)). She went on to say, however, that Bare and Cunningham knew that the funds were not missing for innocent reasons, such as the arrival of the settlement check at issue, and that these attorneys knew the shortage would not be resolved until the receipt of a settlement check from another client. (Livaditis Dep. at 17 (Doc. 157-6 at 18)).
Bare resigned from the firm on July 19, 2002. (Doc. 160 at ¶ 11).
Cunningham submitted a resignation letter, dated December 22, 2003, in which he said, "[b]usiness decisions and moral issues have caused conflict with my values and affect my ability to participate in the operation of the firm." (Cunningham Resignation Letter (Doc. 66-2 at 3)).
Defendant Wachovia Bank ("Wachovia") succeeded to First Union, which had succeeded to Corestates Bank, N.A., as the holder of the Frankel Firm's IOLTA. (2d Am. Compl. at ¶¶ 77, 78 (Doc. 60)). It is undisputed that Wachovia made no express agreement with the Frankel Firm to defraud clients of their settlement proceeds. (Doc. 168 at ¶ 32). Wachovia did not know the identities of the firm's clients or to what amount any of them was entitled. (Id. at ¶¶ 42, 43). Wachovia was not involved in the process by which the firm set up its ACH payment mechanism. (Id. at ¶ 60). According to one Wachovia employee, electronic transfers from IOLTAs are common. (Patrick Eley-Durbin Dep. at 39 (Doc. 149-12 at 13)). Wachovia was not aware that the firm was delaying settlement distributions to its clients for twenty-one days. (Id. at ¶ 44).
According to Wachovia employees, the bank does not substantially oversee the activities within its IOLTAs, and conducts only "product level" reviews, as opposed to "individual level" reviews. (Patrick Eley-Durbin Dep. at 18 to 19, 41 (Doc. 149-12 at 8, 13)). The only investigatory action the bank takes with respect to an IOLTA, in particular, is to generate a letter to the offending attorney and to the Pennsylvania Bar Association any time a check drawn on an IOLTA is bounced. (Doc. 168 at ¶ 28). Wachovia was generally aware that IRS payments from an IOLTA would be improper. (Elizabeth Torres Dep. at 16 (Doc. 149-21 at 13)).
In 2001 or 2002, Mark David Frankel's personal loans were moved from the private banking area of Wachovia to the special assets group because the loans "were getting slow pay." (Patrice Hoenninger Dep. at 19 to 20 (Doc. 149-22 at 8)). At least one Wachovia employee was aware of the lawsuits and newspaper articles between 1999 and 2002 involving Mark David Frankel's sexual improprieties. (Elizabeth Torres Dep. at 10 (Doc. 149-21 at 9)). Another Wachovia employee stated that if Wachovia is aware that a customer has been accused or convicted of a crime that could put one of its loans at risk, the bank may put an alert on that customer's accounts. (Jan Heller Dep. at 22 to 23 (Doc. 149-13)). Plaintiffs' banking expert, Stuart Greenberg, opines that by failing to detect the IRS payments Wachovia recklessly disregarded standards in the banking industry and committed gross negligence. (Greenberg Letter of March 2, 2009 (Doc. 157-4)).
Plaintiff Strayer filed his complaint in this court on October 20, 2006. (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 could respond, plaintiffs filed an amended complaint. (Doc. 15). Defendants Wachovia Bank, Darryl Cunningham and Douglas Bare filed motions to dismiss this amended complaint. (Docs. 17, 20, 26). On January 11, 2007, plaintiffs then filed a motion for leave to file a second amended complaint, which included the Fund as plaintiff. (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). Plaintiffs filed their second amended complaint, and the 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 and removed herself from the case. (Doc. 81). On October 10, 2007, the case was reassigned to the undersigned judge.
Plaintiffs' second amended complaint (Doc. 60) raises seven counts.
Count I, raised against all defendants except the firm, contends that defendants' conduct violated 18 U.S.C. §§ 1962(c)-(d), the Racketeer Influenced and Corrupt Organizations Act (RICO). Count II claims fraud against all of the defendants. Count III alleges a breach of fiduciary duty against the individual defendants. Count IV, raised against all defendants except the firm, claims a conspiracy. Count V, raised against Wachovia Bank, alleges a breach of the duty of good faith and acting in bad faith pursuant to the Uniform Fiduciaries Act. Count VI claims conversion against all of the defendants. Count VII raises a claim under the Pennsylvania Unfair Trade Practices and Consumer Protection Law against all of the defendants except Wachovia Bank.
Defendants Bare, Cunningham, and Wachovia each filed motions to dismiss plaintiffs' second amended complaint. (Docs. 63, 66, 61). On April 28, 2008 this court granted the motions with respect to plaintiffs' Pennsylvania Unfair Trade Practices and Consumer Protection Law count, and denied them in all other respects. (Doc. 90). On June 2, 2008, this court granted default judgment against Defendants Stephen M. Frankel and Frankel & Associates, P.C. (Doc. 105). Defendants Bare and Cunningham filed a third-party complaint against Third Party Defendants Anita Livaditis and Steven Stambaugh on August 11, 2008. (Doc. 120). These third-party defendants answered on October 1 and 21, 2008, respectively. (Docs. 122, 125).
Defendants Cunningham, Bare, and Wachovia have separately moved for summary judgment on the remaining six counts of plaintiffs' second amended complaint. (Docs. 146, 151, 149). The parties have briefed and argued the motions for summary judgment, bringing the case to its present posture.
Because this case 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.
The granting of summary judgment is proper "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. See Knabe v. Boury, 114 F.3d 407, 410 n.4 (3d Cir. 1997) (citing FED. R. CIV. P. 56(c)). "[T]his standard provides that the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986) (emphasis in original). When considering a motion for summary judgment, the court must examine the facts in the light most favorable to the party opposing the motion. Int'l Raw Materials, Ltd. v. Stauffer Chem. Co., 898 F.2d 946, 949 (3d Cir. 1990). The burden is on the moving party to demonstrate that the evidence is such that a reasonable jury could not return a verdict for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A fact is material if it might affect the outcome of the suit under the governing law. Id. Where the non-moving party will bear the burden of proof at trial, the party moving for summary judgment may meet its burden by showing that the evidentiary materials of record, if reduced to admissible evidence, would be insufficient to carry the ...