Reciprocal Disbarment For Escrow Violations

The Maryland disbarment of an attorney was accorded reciprocal effect by the New York Appellate Division for the First Judicial Department.

The court described the Maryland findings

Respondent was a law firm principal overseeing the firm’s debt collection and creditors’ rights practice. The firm closed its offices in February 2015 after facing financial difficulties and becoming unable to pay its bills.

The firm maintained several accounts as repositories for collected debts, including a General Collections Account into which funds collected on behalf of the firm’s smaller clients were deposited (other accounts were specifically designated for larger clients). The bank at which these accounts were maintained had also extended a loan to the firm, which was repaid by debits charged to the firm’s operating account. Although the General Collections Account received and held client funds, it was not established as an attorney trust (i.e., escrow) account and was therefore subject to being debited by the bank for repayment of the loan. Respondent and the firm’s other principal had signature authority with respect to the firm’s bank accounts, as did respondent’s wife, who was the firm’s office manager.

The firm’s financial manager testified that within one to two days after deposits of collected funds, the firm’s corresponding legal fee would be withdrawn and the remainder of the collected funds would then be remitted to the designated clients on a monthly basis along with a detailed accounting. The firm’s financial manager also testified that on various occasions she was directed by respondent and others to “borrow” money from the accounts holding the collection clients’ funds on behalf of the firm when it needed money for payroll or its other bills. As a result, the General Collections Account sometimes had insufficient funds to pay the monthly remittances to all of the firm’s smaller collection clients. The financial manager received instructions from the office manager, who had consulted with respondent and the other principal, as to which clients would be paid and which would not.

When the firm began experiencing financial distress in 2014, it opened an account it referred to as “General Collections II Account.” While the account was labeled as an escrow account, in practice it functioned as an operating account into which client funds were periodically transferred from the General Collections Account. At the end of May 2015, more than $50,000 remained in the General Collections Account which, according to the financial manager, consisted entirely of client funds, because the legal fees related to the corresponding collection matters had already been removed from the account as per the above-described procedure. In June 2015, respondent’s wife electronically transferred $24,500 from the General Collections Account to the General Collections II Account. At approximately the same time, respondent issued a check drawn on the General Collections II Account made payable to “Stuart Blatt and/or Blatt Law,” which monies were deposited into an account — not designated as an attorney escrow account — titled “Blatt Law Group, LLC” at a separate bank.

Respondent moved the funds out of the first bank and into the second bank to avoid the possibility that the first bank would claim them to offset the firm’s loan debt. While he testified before the hearing court that the financial manager told him that the entire $24,500 related to the firm’s attorney’s fees, the hearing judge did not find respondent credible in light of the financial manager’s prior testimony that attorney’s fees were withdrawn from collected debt funds within a day or so of each deposit into the General Collections Account.

Shortly after respondent’s transfer of funds from the first bank to the second bank, the firm defaulted on its loan. In September 2015, the lender bank closed various accounts of the firm, including the General Collections Account, General Collections II Account, and the firm’s IOLTA account, and applied the funds remaining therein against the firm’s liability for its loan from the bank. Respondent did not take any action to recover any client funds that may have been held in those accounts.

In addition, respondent obtained a judgment on behalf of client 1 and garnished the judgment debtor’s wages. While respondent initially forwarded collected monies to the client, all communication and monies from respondent ceased after October 2014. When the judgment expired, respondent failed to renew it, yet continued to collect garnishments and place them in the firm’s General Collections Account. When the judgment debtor moved to vacate the garnishments, respondent failed to respond to the motion or inform the client of the motion or the expired judgment. Respondent further failed to inform the client that the firm was closing or that the firm to which he intended to transfer the file had terminated its relationship with respondent. Respondent further failed to provide the client with the file or an accounting.

In August 2014, client 2 retained the firm to collect from a judgment debtor. The firm collected garnished funds, placed them in the General Collections Account, failed to remit the funds to the client, failed to communicate with the client, and failed to respond to her numerous requests for her file and for an accounting. In April 2015, a check from the General Collections Account was sent to the client, without any accompanying explanation. Respondent and the firm failed to inform the client that the firm was closing.

The firm had a longstanding relationship representing a credit union in numerous collection matters, normally remitting collected amounts to this client. After January 2015, the firm continued to collect debts owed to the client, depositing them into the General Collections Account, but failed to send the client any further disbursements or accountings, failed to inform the client that the firm was closing, and failed to provide accurate contact information for respondent, thus impairing the client’s ability to determine the viability of the approximately 200 open matters still assigned to the firm at the time the firm closed. As a result, the client was forced to charge off claims it had referred to the firm.

An insurance subrogation firm referred four collection matters to respondent and the firm between December 2013 and August 2014, and remitted court costs for the contemplated lawsuits, which funds were deposited into the firm’s General Collections Account. (Respondent supervised the attorneys who litigated these matters and signed all complaints.) In three of the four matters, the firm failed to file actions, which permitted the statutes of limitations to lapse. In the fourth matter, the firm filed, but failed to serve, a complaint. In addition, respondent failed to respond to the client’s repeated requests for updates. When respondent did speak to a representative of the client in April 2015, he said that he could not find most of the files and, in any event, was not in charge of the matters. Respondent failed to inform the client that the firm had closed and that he had attempted to transfer the inventory to a new firm, and failed to provide an accounting, update the client, or refund the court costs.

Before the [Maryland] hearing court, respondent asserted that his involvement in the practice was limited due to various health conditions. The hearing judge did not find this claim to be credible, given the testimonial evidence received from multiple witnesses at the hearing, and did not discuss any mitigating factor in reaching her conclusions of law and fact other than the absence of a prior disciplinary history. The hearing court found aggravating factors in that respondent had failed to make restitution or accept responsibility for the client funds deposited in the General Collections Account that should have been paid to the clients, and failed to account for and restore to unpaid clients the monies transferred from the firm’s bank account to respondent’s bank account. The hearing court further found that respondent’s conduct reflected a pattern of violations over an extended period of time.

(Mike Frisch)