A lawyer who steals escrow funds commits a crime, an ethical violation, and a tort. If the lawyer is a partner in a firm, the firm itself may be liable for damages and disciplinary sanctions. But what of partners in the firm who were not complicit in the theft but made it possible by failing to supervise the firm’s escrow accounts? While these partners are unlikely to face criminal prosecution, a recent decision by the Court of Appeals suggests they may face severe disciplinary sanctions. Another decision by the First Department suggests they may be liable to the victim in damages.

Disciplinary Repercussions

Disciplinary committees have a long history of prosecuting lawyers in small firms who fail to safeguard escrow funds, whether or not the failure was intentional. These lawyers have been charged with violating the Rules of Professional Conduct for making escrow money vulnerable to thefts by negligently supervising the account. See, e.g., Matter of Ponzini (partner disbarred for failing to monitor small firm’s escrow account, a sanction later modified to suspension). Such prosecutions no longer are controversial: Lawyers must and do accept that they have a duty to monitor their firm’s escrow accounts. Yet, few lawyers were prepared for the Court of Appeals’ decision in Matter of Galasso, 19 N.Y.3d 688, (2012), a case that imposes (or appears to impose) a heavy new burden of financial oversight on lawyers who practice in small firms.

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