Suspended Attorney Questions Court’s Strict Approach to Rules Governing Escrow Funds

by Mike Mintz on April 24, 2012 · 0 comments

in Ethics,Law Firms,Legal News and Trends,,Professional Development,Small law firm/solo practice issues

A suspended Long Island attorney is challenging what he claims is the New York Appellate Division, Second Department’s draconian enforcement of disciplinary rules governing attorney escrow accounts.  Attorney Peter Galasso of Garden City, Long Island was suspended by the Second Department for what the court termed was his failure to appropriately oversee his firm’s bank accounts. The firm’s bookkeeper, who also happens to be Galasso’s brother, embezzled four million dollars in client funds.  Galasso cooperated with authorities in the prosecution of his bookkeeping brother who was sentenced to prison for his crimes.

Galasso’s suspensions was supposed to go into effect approximately one month ago, but the Court of Appeals stayed the suspension pending determination of his motion for leave to appeal.

According to Galasso, the Second Department makes attorneys strictly liable and requires them to insure all escrow funds and that, in effect, attorneys’ law licenses acts as additional collateral for an attorney escrow account.  According to Galasso, attorneys will be less willing to hold client escrow funds in light of the Second Department’s position on this issue.  Several bar associations, including the New York State Trial Lawyers Association, planned on filing amicusbriefs to the Court of Appeals in support of Galasso’s motion for leave to appeal.  Some attorneys who learned of the case are horrified that an attorney could lose their law license because of the criminal conduct of a third party which was unknown to the lawyer in question.  They felt that this was an unacceptable burden of liability for an attorney to bear. Other attorneys supporting Galasso point to his sterling reputation as an attorney and his untarnished record.  They suggest that a short one-year suspension would have been more appropriate.

Galasso argued that the liability standard for fiduciaries was much more lenient than the standard the Second Department applied in this case. Liability for fiduciaries is limited to acts of willful misconduct or gross negligence.  Galasso claims that the Second Department found it indicative that such a large sum of money had been stolen, but the attorney maintained that this should not have been a factor in the court’s decision.  The only rules on client escrow funds require attorneys to: maintain records; not co-mingle the client funds with other funds (such as the firm’s funds); and not convert the client funds.

The Second Department for its part maintained that they are guided by the same disciplinary rules on escrow accounts as all the other Appellate Divisions.

The Grievance Committee, of course, paints an entirely different picture of the matter.  It claims that Galasso’s reliance on the monthly financial reports prepared by his brother, along with his own admission that he never reviewed the bank statements for the firm’s Interest on Lawyer Account (“IOLA”) accounts, indicate that he failed to be involved in the task of reviewing the account records because he just could not be bothered with them.  The Grievance Committee also made short shrift of Galasso’s claim that his brother’s shenanigans were so clever that no one could have detected his scheme.  The Committee pointed to the fact that after the brother’s embezzlement was uncovered, the firm implemented new practices, such as partners being involved in reviewing and maintaining the bank records and personally signing checks for bills and operating expenses.  These new practices were not remarkable in the least, and the Committee questioned why they did not exist before the embezzlement was uncovered.

The Committee also pointed out that many cases hold an attorney who is a signatory to an escrow account responsible for a third party’s misappropriation of funds. This is hardly a new issue.  What Galasso is really seeking to do is have the Court of Appeals review how the special referee and Appellate Division weighed the evidence and came to the determination to suspend Galasso.

As the Committee points out, the Court of Appeals affords great weight to Appellate Division decisions on disciplinary matters and finds the fairness of the sanction and weight of the evidence outside the scope of its jurisdiction.  If the Court of Appeals were to grant Galasso’s motion for leave to appeal, the Committee argues, every attorney sanctioned for professional misconduct would seek the Court of Appeals’ review of their case. In other words, they would seek another “bite of the apple”.  The Committee argued that this should not be countenanced.

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