Real World Legal Ethics in 2012 – by Joseph Brophy
2012 has been marked by one landmark case, and an unusual number of other interesting and important ethics decisions that give insight into principals to guide our practices, and pitfalls to avoid.
The Big Case of the Year-
It should be no surprise that a large proportion of grievances involve escrow abuses. The Court of Appeals in In re Galasso, __ NY 3d ___, 2012 WL 5199400 (October 23, 2012), has spoken in detail to the high degree of diligence and vigilance required of attorneys in monitoring their escrow accounts.
The case came out of the Ninth Judicial District, and was originally decided as Matter of Galasso, 94 A.D. 3d 30 (2d Dept., 2012. The Committee found, and the Court affirmed, that respondent Peter Galasso (“Peter”) was guilty of professional misconduct based on his failure to supervise a nonlawyer employee of his firm, who happened to be his brother, Anthony Galasso (“Anthony”). In 2004, Peter’s law firm had made an escrow deposit of $4,840,862.32 from the sale of a commercial property, and undertook to hold the funds pending disposition of a pending divorce action. Between 2004 and 2007, without the respondent’s knowledge, Anthony misappropriated $4.3 million of that fund. Some of that money found its way into Peter’s hands, although it was clear that he did not know of their source. Later, Anthony failed to deposit $800,000 in estate funds, as well as another $175,000 from a personal injury settlement into the firm’s IOLA account as instructed, and most of that money vanished, too.
The Second Department found that Peter had failed to properly supervise Anthony and failed to properly review, audit, and reconcile the accounts used in connection with his practice of law. In the exercise of reasonable management and supervisory authority, Peter would have been aware of the unlawful and improper transfers and disbursements funds so that remedial action could have been taken to avoid or mitigate the misappropriations. It further found that Peter had failed to timely and fully comply with the Grievance Committee’s demands for information, thereby impeding the investigation. There were 10 charges, all sustained, none of which involved any knowing misappropriation of funds by attorney himself. Nonetheless, the penalty was a two-year suspension.
The Court of Appeals decision affirmed the Second Department decision, but modified by dismissing the finding that Peter had failed to comply with the demands of the Grievance Committee. Accordingly, the matter was remitted to the Second Department for reconsideration of the penalty imposed. The Court of Appeals decision reveals significant details of Anthony’s fraudulent schemes. He altered the account application to permit himself to make transfers and sign checks. He also fabricated false account statements in order to deceive Peter. It had been Peter’s practice to review monthly financial reports generated by Anthony. The Court of Appeals cited to a letter from the Nassau District attorney’s office concluding that no one else in the firm had had knowledge of the theft and that nothing in the documents presented to the firm by Anthony would have raised any suspicion regarding the accounts. Nevertheless, the Court held that Peter had fallen short of his fiduciary responsibility to his clients:
[R]espondent ceded an unacceptable level of control over the firm accounts to his brother, thereby creating the opportunity for the misuse of client funds. Had respondent been more careful in supervising the accounts and his employee, he would have been aware of the malfeasance at a much earlier time when he could have substantially mitigated the losses.
Every lawyer should read the Court of Appeals decision in Galasso carefully, because it so clearly sets forth what safeguards attorneys should employ in regard to escrow funds. The Court, in my view, has come very close to imposing an absolute liability standard upon attorneys with respect to funds in their escrow accounts.
Retainers, Fee Disputes, and How Not to Get Paid
Everybody loves to receive a referral fee. Nobody likes to pay one. Disputes regarding referral fees and divisions of fees following substitution of attorneys are a fertile field for litigation, and a potential ethics trap. In the past, the courts took little account of arrangements between lawyers regarding fees. Recent decisions have signaled the bar that the provisions of Rule 1.5 will be enforced. The provisions that are most relevant are those that require the client to be clearly informed in writing, not only of the terms of the retainer, but also of the terms of any fee sharing agreement.
(g) A lawyer shall not divide a fee for legal services with another lawyer who is not associated in the same law firm unless:
(1) the division is in proportion to the services performed by each lawyer or, by a writing given to the client, each lawyer assumes joint responsibility for the representation;
(2) the client agrees to employment of the other lawyer after a full disclosure that a division of fees will be made, including the share each lawyer will receive, and the client's agreement is confirmed in writing; and
(3) the total fee is not excessive.
In Matter of Athari, 93 A.D. 3d 153 (4th Dept., 2012), the attorney was censured for numerous offenses, one of which was failure to disclose to clients fee-sharing arrangements with other attorneys in personal injury cases.
How to divide fees in proportion to the services performed by each lawyer is a task that falls to the courts when counsel cannot agree among themselves. Some illustrative cases follow.
In Diakrousis v. Manganga, 61 A.D. 3d 469 (1st Dept., 2009), the outgoing lawyer worked on the case for eight months and obtained a $900,000 offer. The incoming lawyer handled the case for three more years and settled it at the end of a 10-day trial for $3,000,000. The Court apportioned the fee 70-30 in favor of incoming counsel, and both sides appealed. The First Department affirmed.
In Brown v. Governale, 29 A.D. 3d 617 (2d Dept., 2006), a case that settled at mediation, the Second Department found that the trial court had improvidently exercised its discretion by dividing the fee 60-40 between the incoming and outgoing attorneys. The outgoing attorney had only commenced an action, and incoming counsel had done the rest of the work. Considering the time spent, the nature of the work, and the relative contributions of counsel, the court modified the division to 95-5 in favor of the incoming attorney.
In Matter of Queller, Fisher et al. v. Biondi, 94 A.D. 3d 1127 (2d Dept., 2012), the outgoing attorneys had commenced a Court of Claims case, and were substituted. Thereafter, the incoming attorney commenced a Supreme Court action, presumably arising from the same incident. The outgoing attorneys’ claim for a lien on the proceeds of the second case was rejected. Because the outgoing attorneys had not commenced the second action, they had no lien based on Judiciary Law §475. Their only rights to a share of the second fee were based on quantum meruit.
The Courts also take seriously the rules regarding filing of retainer statements in the First (§603.7) and Second Departments (§691.20). In Garrett v. New York City Health and Hosps. Corp., 25 A.D. 2d 424 (1st Dept., 2006), the outgoing attorney was awarded 40% of the fee. The court noted that the outgoing attorneys’ filing of a retainer statement nunc pro tunc was sufficient to preserve their right to fees otherwise earned. Compare the next case, in which a retainer statement came back to haunt the attorney who filed it.
Matter of Shearer, 94 A.D. 3d 128 (1st Dept., 2012), arose from a protracted and brutal fee dispute. The saga began in 1997 when one Margaret Leskinen (“the client”) entered into a written retainer with a Maryland attorney, Dov Apfel, to prosecute a medical malpractice action on behalf of her son alleging brain injuries due to obstetric malpractice. Apfel then retained Shearer’s firm to prosecute the action in New York, and also to secure his admission pro hac vice, presumably so that he could participate, but Shearer never made such application for him. The agreement between Apfel and Shearer provided for a 50-50 division of fees. Shearer eventually secured a $4.25 million settlement and told Apfel that he wasn’t getting his 50%. because he hadn’t been admitted pro hac vice. Thereafter, Shearer filed a retainer statement indicating that there was a 1998 retainer agreement between his firm and the client. This was not true. The Appellate Division ruled that Apfel was entitled to his 50% (Leskinen v. Fusco, 18 A.D.3d 387 (2005) and remanded the matter to Supreme, Bronx for consideration of sanctions. Justice Stinson imposed a $5000 sanction against Shearer payable to the Fund for Client protection, and a $10,000 sanction payable to Apfel personally on account of Shearer’s conduct finding that his refusal to honor his agreement with Apfel was without merit, protracted the litigation, and that he had made materially misleading and false statements to the Court. Those false statements included the allegation that the client had retained Shearer, which she had not, and Shearer filing a false retainer statement. Shearer was also found to have omitted material information from the infant’s compromise application, that there was a dispute as to entitlement to the attorney’s fee. (NOTE- the Bronx now requires affidavits from all attorneys having an interest in the fee in connection with compromise applications). The Committee recommended a five-year suspension and the Referee recommended disbarment. The Appellate Division imposed a 2 ½ year suspension in recognition of Shearer’s previously unblemished record -he had a very good lawyer.
Moses v. Savedoff, 96 A.D. 3d 466 (1st Dept., 2012) was a lawsuit brought by an ambitious young attorney who attempted to bootstrap a mentorship relationship into a partnership for his financial advantage. Nobody has been disciplined or sanctioned – yet- as a result of this escapade. Young Moses originally approached Savedoff, an experienced personal injury practitioner, asking for the opportunity to get same experience. Later, he met another, unnamed attorney, who was looking trial counsel, and introduced him to Savedoff, who accepted a number of cases from him to try. Moses meanwhile worked on some cases for Savedoff, and referred two matters to him. After Savedoff stopped paying Moses for his services, Moses sued for a share of the fees on over one hundred cases, including some of the trial counsel matters Savedoff had received from the third party attorney, claiming he had a partnership with Savedoff, although there was no written agreement. The action survived a dismissal motion based on statute of frauds. After discovery, Savedoff moved for summary judgment and failed on procedural grounds. On appeal, the Appellate Division, First Department, the court dismissed the action to the extent that it had been based on an alleged partnership agreement finding that the record raised no triable issue of fact regarding that issue:
Here, plaintiff does not allege joint control or any agreement to share in any of the losses either of the law practice in general, or appertaining just to the cases plaintiff brought in. Moreover, while the record reflects a $750 payment by plaintiff to defendant (characterized by defendant as contribution towards an expert fee in plaintiff's aunt's case), the record is essentially devoid of any admissible evidence supporting plaintiff's assertion that he contributed $5,000 in capital to the law firm.
In the absence of an agreement, Moses could still recover based on quantum meruit. The case bears study because it explains what makes a law partnership, and rejects the claim that the introduction of a lawyer to a referral source merits a share in fees derived from that source. What is surprising about the decision is that the case was not remanded for sanctions, since it seems to have been based in part upon allegations that were patently frivolous.
Interesting Ways to Get in Trouble and What to Do When You Get Caught
Conflict of Interest
Matter of Berg, 96 A.D. 3d 50 (4th Department, 2012). Attorney Berg was retained by a client in a domestic dispute and related criminal charges. The alleged victim was also charged, and was represented by other counsel. Berg met and spoke with the alleged victim repeatedly without notice to her attorney. Ultimately he met with both parties and had them sign affidavits which he had drafted, stating that they were living together and intended to marry. He then forwarded these affidavits to the prosecutor, who raised the conflict of interest issue to the judge. A referral to the Grievance Committee followed, and Berg was, not surprisingly, found to have violated multiple rules of Professional Conduct. He had an extensive prior disciplinary history, but got off with a six month suspension.
Fraudulent Legal Papers
In Matter of Athari, supra, the attorney also was found to have signed medical authorizations for his clients and notarized them on eleven (11) occasions. There were numerous other ethical violations sustained against him, including mishandling escrow funds. Athari got off with a censure because no clients were harmed; his prior record was unblemished, and he expressed extreme remorse.
In Matter of Bannetis, 97 A.D. 3d 121 (2d Dept. 2012), the attorney made over 20 summary judgment motions in Civil Court seeking reimbursement for medical providers, in which the supporting papers he filed with the court differed materially from what he served upon the respondents. When confronted with these abuses, his response was that the differences were minimal and due to clerical error. The Civil Court rejected his excuses, imposed $34,000 in sanctions, and referred the matter to the Grievance Committee. The Committee and the Appellate Division found his excuses and lack of remorse as offensive as his conduct, and disbarred him.
Matter of Bratkovsky, 99 A.D. 3d 79 (2d Dept., 2012). This is one of those decisions that leave you wondering what really happened. The facts as recited are that one, Pyatesky, a non-lawyer whose exact job and relationship are not mentioned, met with a client in Bratkovsky’s office, agreed to represent her company in a litigation, and accepted a $7,000 legal fee for such work. Pyatesky then prepared a summons and complain in the name of the Bratkovsky’s law firm, and asked Bratkovsky to sign these papers, which he did. Bratkovsky then told Pyatesky that he had no intention of representing this client, whom he had never met nor spoken to and who had not retained the law firm. Nothing daunted, Pyatesky filed the lawsuit in the name of Bratkovsky’s firm. Thereafter, Bratkovsky, true to his word that he did not intend to represent this client, did absolutely nothing to prosecute the lawsuit. When the client retained another lawyer to prosecute her case, Bratkovsky referred that lawyer to Pyatesky.
When the case went to the Grievance Committee, the Referee sustained the charges. On the issue of sanctions:
the respondent asks the Court to consider, in mitigation, the highly aberrational nature of his misconduct, his acceptance of responsibility for his actions, his cooperation in the disciplinary proceedings, his sincere expression of remorse, the remedial action taken by him to prevent future misconduct, his excellent reputation, and the fact that he has learned from his misconduct and presents no risk of repeating his misconduct in the future.
Notwithstanding a prior Letter of Caution, the sanction imposed was a censure.
Improprieties in Real Estate Transactions
Matter of Cusack, 97 A.D. 3d 44 (2d Dept. 2012). Cusack’s principal professional activity since 2000 was as in-house counsel for mortgage companies owned by the Kontogiannis family. The family patriarch, one Thomas Kontogiannis, was sentenced to eleven years in Federal prison in 2011 for bribery and mortgage fraud to the tune of $98 million. Needless, to say, this story ends badly for house counsel, too.
The charges centered on the activities of two mortgage companies owned or controlled by the Kontogiannis family. Many transactions which Cusack closed, or should have closed, involved properties owned by members of that family, and loans to members of that family. Many of those closings were not attended by Cusack, or any lawyer at all. Instead, non-lawyer members of the Kontogiannis family, or their non-lawyer employees, closed numerous loans. Thereafter, many of the transactions were not recorded, permitting the Kontogiannis interests to borrow money repeatedly against the same properties, while their companies sold the very same bogus loans to banks. To make matters worse, Cusack apparently ceded control over his escrow account to his employers, who had a rubber stamp with his signature which they used to sign escrow checks for their own purposes. Needless to say, multiple overdrafts occurred. In addition, Cusack remitted numerous fees paid by borrowers for his professional services to another Kontogiannis controlled company, thereby sharing legal fees with a non lawyer. The conclusion of the Court was that, although he did not financially benefit from it, Cusack enabled a “vast criminal conspiracy” for which he was suspended for four years.
Matter of Grossjung, 97 A.D. 3d 99 (2012) arose from breach of fiduciary duty and deceit in a single loan closing ten years before. Grossjung had no prior disciplinary history and he did not profit personally from the deceit. But in part because he was not truthful in his written answer to the Grievance Committee during its investigation, he was suspended for one year.
Matter of Allesandro, _____ A.D. 2d ____, 2012 WL 4900903 (2d Dept., 2012) is a sad ending to the career of a former Supreme Court justice who sat here in Orange County. As most of you probably know, Justice Allesandro was removed from the bench in 2009 due to “conduct involving dishonesty, fraud, deceit or misrepresentation” in connection with financial disclosure required of judicial candidates. Despite his prior unblemished record and his remorse, “deception is antithetical to the role of a Judge who is sworn to uphold the law and seek the truth.” Accordingly, he was disbarred.
Matter of Dear, 91 A.D.3d 111 (1st Dept., 2011), takes us from dishonesty as tragedy to dishonesty as farce. Dear, a recently admitted attorney, was stopped for speeding by a New Jersey State Trooper. Six days later, he wrote to the traffic court on the letterhead of his law firm, demanding dismissal of the ticket, denying that he was speeding, and alleging that the trooper had called him a particularly offensive anti-Semitic name. During a subsequent telephone interview with the State Police, he backed off from the accusation of that particular slur, but stuck to his story that the trooper who stopped him had displayed contempt for his religion. Thereafter, Dear failed to show up in traffic court, resulting in a contempt of court warrant being sworn out against him. Unknown to him, the entire stop had been captured on camera, with audio, proving that the trooper was entirely innocent of Dear’s accusations. The Departmental Disciplinary Committee brought charges of conduct involving dishonesty, fraud, deceit or misrepresentation. In mitigation, Dear presented testimony from his psychiatrist that he suffered from multiple psychological disorders, including narcissistic personality disorder, and was subject to multiple stressors that made him “vulnerable to impulsive acts.” The Court confirmed the Committee’s recommendation of a six-month suspension.
Matter of Rosenberg, 97 A.D. 3d 189 (1st Dept., 2012) arose from the seminal case of Almalfitano v. Rosenberg, 12 N.Y. 3d 8 (2009), in which the Court of Appeals broadened the reach of Judiciary Law §487, that imposes treble damages upon attorneys guilty of fraud or collusion in court proceedings. Rosenberg had already suffered a substantial financial penalty for prosecuting a fraudulent claim. His fraud also earned him a one-year suspension.
Matter of Solny, 96 A.D. 2d 76 (2d Dept., 2012) arose from the type of scheme Surrogate’s Court practitioners see all too often. A trusted nephew used a power of attorney granted to him by his ailing uncle to surreptitiously transfer $600,000 of his uncle’s funds to himself shortly before his uncle died. Thereafter, he got caught by his law partner who was the co-executor of the uncle’s estate, was removed as co-executor on application to the Surrogate’s Court, and gave the money back. In the disciplinary proceedings that followed, Solny told a series of what can best be described as whoppers, and expressed no remorse for his conduct. In mitigation he pointed to his heavy family burdens, and his charitable and religious activities. He was suspended for two years.
Sex and Violence
Matter of Baker, 98 A.D. 3d 38 (4th Dept., 2012). After making crude sexual references to opposing counsel’s anatomy during a pretrial conference, Baker engaged in sexually inappropriate conduct, including reaching inside her blouse, fondling her breasts and exposing himself. He had previously been censured for securing a divorce for someone he never met or communicated with, and notarized that person’s purported signature (Matter of Baker, 18 A.D. 3d 62). In addition he had received a letter of caution for prior, unspecified inappropriate conduct toward a client. He gave exculpatory testimony at the disciplinary hearing which the Referee discredited. He received a two year suspension.
Matter of Keegan, 95 A.D. 3d 1560 (3d Dept, 2012). Keegan became obsessed with an adolescent whom he had represented, sending numerous e-mails to her family members concerning her alleged drug use and sexual activities, under the guise of concern for her well-being. The girl’s family obtained an order of protection. Later he sent angry and threatening e-mails to his friends and relatives. He was suspended for two years. The decision makes no mention of any psychiatric diagnosis or treatment.
Matter of Wood, 88 A.D. 3d 185 (2d Dept., 2011). Conviction of misdemeanor possession of cocaine results in censure. Previously Wood had been suspended for a year in Connecticut, censured in New York as reciprocal punishment, and given a letter of caution for involvement in a sexual relationship with a matrimonial client immediately upon finalization of her divorce.
Matter of Zulandt, 93 A.D. 3d 77 (1st Dept., 2012). Attorney was convicted of criminally abusing his former girlfriend. At his disciplinary hearing, he offered the testimony of a psychotherapist that his behavior was the result of “intermittent explosive disorder.” In part because he had already served six months in jail, the Hearing Panel recommended a 60 day suspension. Due to the calculated and cruel nature of his acts over a long period of time, the Court discounted the expert testimony and imposed a three year suspension. The Court also cited Matter of Jacoby, 86 A.D. 3d 330 (2011), where respondent had been convicted of the Virginia felony of wounding for similar conduct, and was suspended for three years in New York.
Matter of Sobolefsky, 96 A.D. 3d 60 (1st Dept. 2012). Sobolefsky had been suspended by the Second Circuit Court of Appeals for neglect of seven client matters resulting in the dismissal of their immigration petitions. The Second Circuit had found that:
[R]espondent had submitted briefs of “shockingly poor quality,” replete with defects such as incorrect clients' names, inclusion of irrelevant boilerplate, and reference to evidence that had not been submitted. It observed that respondent's explanation that he had relied on a paralegal for some of his work, and had filed that work without reviewing it, constituted an admission that he had aided the unauthorized practice of law… It also found that most of his filing of petitions in the wrong circuit resulted from a failure to read the records and, in any event, showed a lack of respect for and lack of candor toward the court.
The First Department found that this was an appropriate case for imposition of reciprocal discipline, and adopted the penalty imposed by the Second Circuit.