The opinion of the court was delivered by: The Honorable Christina A. Snyder
Proceedings: DEFENDANTS/COUNTER-CLAIMANTS' MOTION FOR AN ORDER DIRECTING THE CLERK TO PAY THE AMOUNT DEPOSITED AND ACCRUED INTEREST TO SUBSTITUTED DEFENDANT OR, ALTERNATIVELY, FOR AN ORDER PRESERVING THE STATUS QUO UNTIL FURTHER ORDER OF COURT (filed 1/23/09)
INTRODUCTION & BACKGROUND
Defendant Shamrock Partners, Ltd. ("Shamrock") was a registered securities broker-dealer. Plaintiff Rafi Khan ("Khan") is a stockbroker who operated a branch office of Shamrock. Defendant James T. Kelly ("Kelly") was the president and resident principal of Shamrock. Pursuant to a Clearing Agreement between Shamrock and Khan, executed on October 21, 1994, Khan was to receive commissions for various types of securities trades. In 1996, Khan referred Modacad Corporation ("Modacad") and Computone Corporation ("Computone") to Shamrock as investment banking consulting clients. Both Modacad and Computone entered agreements with Shamrock pursuant to which they issued 250,000 and 200,000 warrants, respectively, to Shamrock to purchase their stock. On various occasions, Shamrock issued instructions, signed by Kelly, to issue portions of the Modacad and Computone warrants to Khan.
On January 26, 2000, Khan filed suit against Shamrock and Kelly alleging (1) breach of contract with respect to the Modacad warrants; (2) conversion with respect to the Modacad warrants; (3) unjust enrichment with respect to the Modacad warrants; (4) quantum meruit as to the Modacad warrants; (5) common fund with respect to the Modacad warrants; (6) breach of contract with respect to the Computone warrants; (7) breach of the covenant of good faith and fair dealing with respect to the Computone warrants; (8) conversion with respect to the Computone warrants; (9) unjust enrichment with respect to the Computone warrants; (10) quantum meruit as to the Computone warrants; (11) common fund in connection with the Computone warrants; and (12) fraudulent conveyance with respect to the transfer of Shamrock to Phillip Louis Trading, Inc. See Joint Pre-Trial Conference Order ("JPTO") at 5-17. Shamrock and Kelly alleged the following against Khan based on Khan's purported violations of rules and regulations of the NASD, SEC and other governing bodies: (1) declaratory relief with respect to rights under the Clearing Agreement; (2) intentional misrepresentation; (3) fraudulent concealment; (4) equitable indemnity; (5) breach of contract; and (6) breach of fiduciary duty. Id. at 18-35.*fn1
The seven-day trial of this case commenced on June 21, 2005, and concluded on July 7, 2005.*fn2 On July 7, 2005, the jury returned its verdict on a Special Verdict Form which (1) awarded plaintiff damages of $1,963,018.13 for Shamrock's breach of the Clearing Agreement; (2) found Shamrock and Kelly liable for conversion and awarded compensatory damages of $1,963,018.13, punitive damages of $2,000,000 against Shamrock, and punitive damages of $2,000,000 against Kelly; and (3) found that both Shamrock and Kelly were unjustly enriched and awarded damages of $1,952,707.
On September 16, 2005, this Court ruled on the parties' Rule 50 motions for judgment as a matter of law. The Court held that (1) it was not appropriate to pierce the corporate veil and impose alter ego liability on Kelly; (2) an award of prejudgment interest would be improper because Khan elected recovery under a conversion theory rather than a contract theory; (3) the jury's verdicts for conversion against Shamrock and Kelly were not barred by Pennsylvania's "gist of the action doctrine"; (4) the evidence supported the jury's award of punitive damages against Shamrock and Kelly; and (5) Khan was not entitled to an award for unjust enrichment because he elected to recover under a conversion theory.
On September 19, 2005, judgment was entered for Khan in the amount of (1) $1,963,018.13 for conversion against Shamrock and Kelly, jointly and severally; (2) $2,000,000 for punitive damages for conversion against Kelly, individually; and (3) $2,000,000 for punitive damages for conversion against Shamrock. On approximately November 17, 2005, Khan began execution proceedings against Kelly. By March 29, 2006, Khan had received $2,709,558 towards payment of the $3,963,018.13 judgment against Kelly. On March 29, 2006, the Court issued an Order for Posting Cash Security to Stay Enforcement of the Judgment and Release of Liens and Property. This order provides, in pertinent part
If the judgment is reversed as to defendant Kelly, upon presentation of the final decision of the 9th Circuit Court of Appeal[s] on the appeal of the above-referenced matter, the Clerk shall immediately pay all funds to Mr. Kelly. In no event shall any funds be released to Mr. Kelly or his order without prior order of this Court except as provided herein. . . .
Counsel for Defendant Kelly or Plaintiff Khan may apply to this Court on an expedited basis for any further relief necessary to implement the terms of this Order.
On March 30, 2006, Kelly posted a bond of $1,550,575 with the Clerk of Court pursuant to the Court's order.
On September 8, 2008, the Ninth Circuit issued an order which affirmed in part and reversed in part this Court's rulings and remanded the case for a re-election of remedies. The Ninth Circuit held that (1) Pennsylvania's "gist of the action" doctrine barred Khan's conversion claims against Shamrock and Kelly; (2) the Court did not abuse its discretion with respect to its jury instructions regarding Shamrock's breach of the Clearing Agreement; (3) the Court did not abuse its discretion in excluding evidence regarding defendants' state of mind; (4) the Court correctly declined to impose alter ego liability on Kelly; and (5) the Court did not abuse its discretion by staying the judgment enforcement proceedings. Shaub Decl., Ex. E. The Ninth Circuit further declined to reach the issue of whether damages for unjust enrichment may be awarded in addition to damages for conversion because of its ruling that the "gist of the action" doctrine bars recovery for conversion. Id.
On January 23, 2009, defendant, John E. Schmidt,*fn3 Executor of the Estate of James T. Kelly, filed the instant motion for return of funds. On February 9, 2009, plaintiff filed his opposition. On February 17, 2009, defendant filed his reply. The Court held a hearing on February 23, 2009. After carefully ...