Bad NY Lawyers Ripped Off Clients
 For $8.1 Million Last Year

By John Caher
New York Law Journal
New York Lawyer
April 13, 2006

ALBANY — The Lawyers' Fund for Client Protection — the entity through which honest attorneys reimburse the victims of their crooked colleagues — paid out a five-year high of $8.1 million in 2005 as the fund was rocked by several large thefts of real estate monies.

Disbarred Long Island solo practitioner and convicted felon Jay W. Rosen cost the fund more than $2.4 million, and that is on top of the $1 million he cost the fund in prior years. Mr. Rosen is serving a 2-to-6-year prison term for stealing real estate escrow funds that had been left in his trust by clients.

Additionally, Eric R. Kellerman of Westchester County cost the fund over $807,000, and Samuel B. Dattilo of Buffalo accounted for some $660,000 in losses.

What those three lawyers have in common is that their thefts involved real estate funds, either money held in escrow prior to a sale or proceeds entrusted to the attorney to pay off a mortgage.

Since 1995, 95 percent of fund awards and 98 percent of reimbursements involved losses related to real estate transactions, nearly all of them in the First and Second departments. Downstate, home buyers routinely deposit 10 percent of a home purchase price with their attorneys, creating an attractive target for a handful of thieving lawyers. Upstate, buyers tend to put down only a few hundred dollars and that money is usually held by the broker.

Timothy J. O'Sullivan, the fund's executive director, stressed that a tiny percentage of attorneys are responsible for the losses — a total of only 19 accounted for $5.3 million in real-estate related losses last year — but said those few are tarnishing the reputation of the entire bar, and costing the fund a fortune.

Local bar associations on Long Island have studied the problem, and a task force appointed last year by State Bar President A. Vincent Buzard is also looking into it. In its just-released 2005 annual report, the fund applauded the efforts of the Nassau and Suffolk bars and district attorneys as well as those of the New York State Bar Association, but left little question that reform is crucial.

"Over the past 10 years, the Fund has reimbursed $22.7 million for real estate escrow thefts alone," according to the annual report. "Since 1982, 36 percent of all reimbursements from the fund involved thefts in the sale and purchase of real property."

Escrow Safeguard Proposed

The fund is calling for a new court rule that would safeguard the escrow accounts of suspended and disbarred attorneys. There is now apparently no clear mechanism to ensure those funds are secured and transferred to a trustworthy individual or entity. The fund is also asking for a court rule that would give the Appellate Divisions discretion to freeze the escrow accounts of lawyers it deems a public threat.

"We feel that the harm to the public and profession, and certainly the dollar amounts, justify some remedial action being taken," said Mr. O'Sullivan. "But you don't want to make life unduly burdensome for the clients, or the vast majority of lawyers who are honest. You want to come up with a corrective measure that will address the losses without making it too burdensome."

Ira S. Goldenberg of White Plains, chairman of the state bar task force appointed by Mr. Buzard in November, said the committee began with the assumption that "the system is broken and we need to examine alternatives to attorneys holding escrows."

Mr. Goldenberg expects a report will be released within a few weeks.

He said the practice of attorneys holding home purchase downpayments in escrow is strictly a downstate habit.

"The real estate practice downstate is dramatically different than upstate," Mr. Goldenberg said. "Downstate attorneys are heavily involved in the transaction. Upstate attorneys are minimally involved. Upstate, brokers, not lawyers prepare the contracts. Upstate, it is the brokers who hold the down payment, not the lawyers."

Awards Below Record Levels

Last year's spike in total payouts, which amounted to a 59 percent increase over 2004, continued a three-year trend in which the number of approved awards rose each year. Still, the 227 awards approved last year were far below the record levels of 625 in 1997 and 415 in 1998.

See chart of reimbursement data.

The $8.1 million in losses, though, represented the third highest payout since the fund was established in 1982. The only higher payouts were in 2000, when there were $10.5 million in losses, and 1996, when the fund paid $9.9 million.

Historically, most of the thefts involved white, middle-aged, male solo practitioners, often with drug, alcohol or gambling problems, according to the report.

Mr. O'Sullivan stressed that the number of attorneys responsible for awards has remained fairly constant throughout the history of the agency.

Last year, it was 32 lawyers out of 221,000 in the state who caused the "problems our fund is called upon to address," he said, adding that over the last quarter century, client losses were attributable to far less than 1 percent of the bar.

Fund Structure

The fund, a five-employee state agency, is run without any tax subsidy or Interest on Lawyer Account monies. It relies primarily on a $60 share of each lawyer's biennial $350 registration fee, with a small percentage of its income coming from restitution, judicial sanctions and occasional donations from lawyers and the public.

The board of trustees — a seven-member body that Eleanor Breitel Alter of Kasowitz, Benson, Torres & Friedman in Manhattan has chaired since 1985 — serves without compensation. Mr. O'Sullivan said 91 cents of every dollar that comes in goes directly for client reimbursements.

In its annual report, the agency recommended a number of reforms, including a proposal that would open attorney disciplinary matters to the public once a court has found probable cause that a lawyer stole client funds. Disciplinary proceedings now remain secret until and unless the court actually sustains misconduct charges.

"The Trustees' experience over twenty-three years has demonstrated that dishonest lawyers can and do exploit the laws of confidentiality to conceal dishonest and criminal activity," the fund said in its report.

Additionally, the agency would require mandatory disbarment when an attorney converts escrow accounts, permit the attorney general to prosecute unauthorized practice of law charges and require attorneys to publicly disclose whether they carry malpractice insurance, and to what extent.

Eleven states now consider such a disclosure, although only Oregon requires its lawyers to carry malpractice coverage. The Lawyers' Fund for Client Protection reimburses losses attributable only to theft, not malpractice

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