Wednesday, February 7, 2018

Stiff Sanction For Misuse Of Escrow Account

A two-year suspension has been imposed by the New York Appellate Division for the First Judicial Department

Respondent, who is 74-years-old, began her legal career in 1987 following careers in teaching and journalism. In or about 1989 respondent opened a solo practice focused primarily on matrimonial matters, at which time she went a bank to open a business account and an escrow account. However, the account the bank set up for her was solely an escrow account which was structured such that there was a master account and sub-accounts for each individual client matter. Client/third-party funds were deposited into sub-accounts each with its own account number. Respondent would then have to transfer funds from the individual sub-accounts to the master account in order to disburse them. Respondent did not open an operating account and improperly left her earned legal fees on deposit in the master escrow account which she used as her operating/personal account for about 22 years. In or about the mid-1990's respondent opened another escrow account which she structured and used in the same manner as her initial escrow account.

In August 2010, respondent closed her second escrow account and opened a third escrow account which she structured and used in the same manner as her prior two escrow accounts. Due to a bank error in moving funds from the closed escrow account to the new one, two checks bounced which resulted in notification to the AGC. The ensuing investigation revealed respondent's improper use of her escrow account as a dual depository for client/third-party funds and her business/personal funds.

Respondent testified that she set up and used her escrow accounts in the manner in which she was instructed by the bank in 1989 when she opened her first account, which the Referee noted she appeared never to have questioned thereafter. She only learned of the impropriety of her conduct after the AGC commenced its investigation. After the investigation began, respondent discontinued using her escrow account as her business account and opened a separate operating account at another bank.

The AGC charged respondent with misusing her escrow accounts to shield personal funds from tax authorities. In 2007, the IRS audited respondent's tax returns for the 2005 and 2006 tax years and disallowed most of her claimed business expenses. The audit resulted in an additional tax liability of approximately $87,000 which grew significantly with interest and penalties. At the time of the audit respondent was being treated for stage two breast cancer and stated that her illness interfered with her ability to collect and produce relevant documents. She also testified that she was poorly represented by her accountant. Respondent has unsuccessfully sought reconsideration of the IRS audit. The exact amount of respondent's tax debt is unclear but she appears to owe the IRS and New York State somewhere between $50,000 and $100,000.

In or about 2009, the IRS levied against respondent's monthly Social Security payments (currently 55% of her monthly Social Security payments are garnished by the IRS). As of October 2009, respondent's federal tax debt was over $102,000 and is still in the tens of thousands of dollars.

Also since 2009, because of the IRS levy against her monthly Social Security payments, respondent has deliberately kept the balance of personal funds she improperly maintained in her escrow accounts low. After she deposited her legal fees or other personal funds into the escrow accounts, she would pay business/personal expenses and immediately withdraw most of her funds and hold them in cash because she feared that the IRS would levy against her escrow account, leaving her without funds to live on. Respondent would then use the cash to pay bills, re-deposit it when necessary, or use bank cashier checks.

In addition, the AGC charged respondent with misuse of a third party's personal bank accounts to shield her funds from tax authorities. In November 2012, respondent broke her ankle and suffered other serious injuries requiring a lengthy recuperation. In December 2012, she returned home from a rehabilitation facility but was physically and mentally unable to work or handle her financial affairs. Respondent's close friend and sometime paralegal S.G. testified that, on her own initiative, she laid out $50,000 of her own money as a loan to pay for respondent's rent and other bills. When respondent's mental state improved, S.G. told her what she had been doing and continued to help. Thus, respondent would endorse checks she received from clients and others over to S.G., who deposited them into her personal account, and used the funds to pay respondent's bills.

In March 2013, at the suggestion of their mutual accountant, S.G., who was aware of respondent's tax situation, opened a bank account in her own name for respondent's benefit; the account was opened 11 days after respondent received a Final Notice of Intent to Levy from the IRS. Client payments and other checks to respondent were deposited into the account and were immediately followed by large withdrawals which kept the balance low. The banking arrangement between respondent and S.G. continued until 2014 when respondent was able to resume banking on her own. S.G. charged respondent $100 per day to handle her banking matters (the same rate at which she was compensated for her paralegal services) and of the $50,000 she loaned respondent she is still owed $15,000.

Respondent expressed remorse but it was confined to her failure to maintain separate accounts for client/third-party funds and her personal/business funds.

Sanction

As to sanction, the AGC argues that this Court's case law, in conjunction with respondent's lack of mitigation, makes clear that a two-year suspension is warranted.

Respondent does not challenge the Referee's and Hearing Panel's liability findings but asks this Court to disaffirm their respective sanction recommendations, and instead, impose a public censure. Respondent asserts that the cases cited by the AGC in support of a two-year suspension are distinguishable in that they all involved attorneys who moved their business/personal funds from another location to their escrow accounts to avoid being levied against, whereas here, there was no such shifting by respondent who continuously used her escrow account, albeit under the mistaken belief that it could double as an operating account.

We find that the record supports sustaining charges one, two, three and charge seven (as it relates to those charges). Respondent admitted that from 1989 until 2011, she improperly used her escrow account as a dual depository for client/third-party funds and her business/personal funds in clear violation of rule 1.15(b)(1). In addition, the record fully supports the Hearing Panel's finding that respondent failed to maintain required bookkeeping records for the two escrow accounts at issue. Thus, there is ample basis to sustain charges one and two, neither of which are contested by respondent.

We also find a basis to sustain charge three. Both the Referee and Hearing Panel cited to the fact that, unlike in the cases of Matter of Brodsky (153 AD3d 52 [1st Dept 2017]), Matter of Brown (133 AD3d 7 [1st Dept 2015]), and Matter of Pritikin (105 AD3d 8 [1st Dept 2013]), respondent did not close any non-escrow accounts in favor of her escrow accounts after the IRS levied against her Social Security payments in 2009. Rather, she continuously, albeit improperly, used her escrow account as a dual depository for client/third-party funds and business/ personal funds from 1989 until 2011. While, based on the above case law, this is one factor to be considered, it is not necessarily dispositive, and overlooks the import of the admissions made by respondent during the Referee hearing, that after 2009, she continued to deposit business/personal funds into her escrow account which she promptly removed, and then hoarded the cash because she feared that the IRS would levy against her escrow account, thus leaving her without funds to live on.

In failing to recognize the significance of this admission, the Referee's and Hearing Panel's respective decisions to dismiss charge three are against the weight of the evidence (see Matter of Dalnoky, 90 AD3d 1, 5 [1st Dept 2011][attorney's remorse was belied by his persistence in justifying his deliberate misuse of escrow account by, inter alia, shielding funds from tax authorities]; Matter of Silva, 28 AD3d at 13 [purely circumstantial evidence permitted inference that the attorney intended to defraud creditors by his misuse of escrow account]; Matter of Goldstein, 10 AD3d 174, 176 [1st Dept 2004] [attorney's testimony that his misuse of escrow account as a depository for business/personal funds was to save small monthly fees associated with a business account and at the suggestion of bank officers, rather than to shield funds from tax authorities, was not credible and, in any event, attorney was responsible for his accounts]).

As to charge four which alleged that in using her escrow accounts to shield business/personal funds from the IRS respondent also violated rule 8.4(d)(conduct prejudicial to the administration of justice), the Hearing Panel was correct to dismiss this charge because rule 8.4(d) is more appropriately applied to misconduct which occurs within the context of litigation.

Both the Referee and Hearing Panel were correct in not sustaining charges five and six which pertain to respondent's alleged misuse of the S.G. accounts because: (1) they were not escrow accounts; (2) there is no evidence that the funds withdrawn from these accounts were actually subject to a lien or levied against; (3) the case law relied upon by the AGC involves only escrow accounts, not third-party personal accounts, and it has not presented any case law in which it was found that the manner in which the S.G. accounts were used constituted professional misconduct; and (4) the Referee and Hearing Panel both credited respondent's and S.G.'s testimony that the primary intent of the accounts was to enable respondent to survive, not to defraud the IRS.

Based on our finding sustaining charges one, two, three and charge seven (as it pertains to charges one, two and three), respondent is suspended from the practice of law in the State of New York for a period of two years, and until further order of this Court

http://lawprofessors.typepad.com/legal_profession/2018/02/a-two-year-suspension-has-been-imposed-by-the-new-york-appellate-division-for-the-first-judicial-department.html

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