Last year, the Lawyers Fund for Client Protection distributed $3.4 million to victims who claimed their real estate escrow accounts had been fraudulently taken over. It’s the most frequently filed type of malpractice claim.
The Manhattan District Attorney recently charged a real estate attorney from New York with grand larceny and scheme to defraud after they are believed to have siphoned $14 Million out of clients’ escrow accounts.
1. Taking a Client’s Earnest Money
Theft by lawyers is illegal and any who engage in this practice should be disbarred immediately.
The thefts were particularly concerning in New York, where 10 percent down payments are often accepted and lawyers typically hold onto escrow funds. Such cases show how fragile an industry reliant on handshake compacts and reputation is; how quickly such an effective system can become compromised.
Mitchell Kossoff, a real estate attorney from Manhattan’s Upper West Side was recently charged by Manhattan District Attorney Cyrus Vance Jr with grand larceny in all three degrees and with engaging in an illegal scheme to defraud clients. He pled guilty in June to all three charges and now faces up to 13 1/2 years of jail time.
Kossoff stands accused of using his now-closed firm to unlawfully take millions in earnest money and escrow funds belonging to 35 clients entrusted to it – often without explanation – transferring it directly from its escrow account into personal bank accounts of his choice without informing clients beforehand, while using that money himself for travel, rent and credit card debt payments.
Real estate transactions can go wrong for various reasons, but lawyers’ responsibility to maintain an accurate escrow account is of the utmost importance. A lawyer cannot take money out without explanation; their responsibilities also include maintaining records and verifying disbursements of funds; in fact, the American Bar Association’s Model Rules of Professional Conduct prohibit using trust or escrow accounts for personal gain.
If an escrow agreement does not state otherwise, the party who owns the escrow property at the time of theft must replace it – typically the home buyer, although sellers may seek compensation from any dishonest lawyers they encounter.
State Lawyers’ Fund for Client Protection tracks and reimburses certain losses, but most aren’t covered. To qualify for compensation, clients must file grievances with the appropriate attorney disciplinary committee and cooperate in its investigation process. Alternatively, civil suits against lawyers may also be filed for breach of fiduciary duty, conversion and other violations.
2. Holding Money for a Third Party
Lawyers must take great care with escrow accounts and the money clients deposit when buying or selling property, or using them for other purchases or sales. Each year, many otherwise honest and reasonably careful lawyers are suspended or disbarred for violations of these rules governing attorney trust accounts; regardless of their specialization such as solo practitioners, partners in large firms, full-time or part-time engagement.
Real estate lawyers often face temptation from clients’ deposits being placed into escrow accounts for homes being purchased, particularly in areas with rising house prices. Buyers in New York City typically put down 10 percent of the purchase price as part of a down payment and their attorneys oversee this escrow account.
But these accounts also contain significant sums of interest that lawyers are legally obliged to distribute according to their contracts with all the parties involved in a home sale, whether that means buyer and seller or even banks or title companies financing it.
Furthermore, when lawyers mix personal funds with client funds in an escrow account, the nature of the escrow account becomes null and void and client assets become vulnerable to attachment by creditors of either themselves or law firms. Furthermore, if lawyers write checks directly out of escrow accounts to themselves or third parties without reporting it promptly to the bar for investigation, it must be reported immediately for investigation.
Some attorneys have proposed methods of guarding against escrow theft, such as having clients put their escrow money in an account managed by an independent party and having clients sign a written authorization form before withdrawals are allowed. Most lawyers agree that the best way to guard against criminal or disciplinary charges or sanctions is finding an attorney you trust – get recommendations from friends and family, or ask the local bar association. In certain instances, insurance policies against lawyer escrow accounts may also provide some coverage; however, for the best cost-efficiency hire someone familiar with its rules well – hiring an expert lawyer should do just the trick
3. Taking a Client’s Money to Pay Other Clients
When accepting advance payments from clients for legal services, attorneys have an ethical duty to provide those services as agreed and return any unearned portion of an advance. Furthermore, attorneys must safeguard these amounts as separate funds or when required by law escrow them separately from their general funds.
This duty applies whether an attorney holds advance funds in a client trust account, an escrow account or has them combined in an ordinary checking or savings account. When lawyers fail to abide by these regulations, it can have disastrous results that result in disciplinary actions from both the State Bar of Georgia and local courts.
If a lawyer violates the rules regarding payout from an escrow or client trust account, that violation could lead to serious disciplinary actions, from suspension and disbarment all the way up to civil lawsuits alleging breach of fiduciary duty and conversion, as well as possible criminal charges against him/her.
Mitchell Kossoff is an New York real estate lawyer accused of misappropriating millions of dollars from over 35 clients who placed their escrow funds with him as part of real estate transactions between 2017 and 2021. Prosecutors allege he used these funds for personal use such as paying credit card bills or expenses related to renting his luxury apartment.
Every year, many otherwise honest and competent lawyers are disciplined for mishandling trust accounts or escrow accounts, leading to suspension or disbarment, legal malpractice allegations or breach of fiduciary duty claims brought by clients – often at considerable financial and emotional expense to themselves, with potential ramifications for their reputations as well.
Associating personal funds with escrow funds voids their purpose and exposes them to attachment by creditors of the attorney. Both the State Bar of Georgia and local bars have strict rules mandating that lawyers carefully pay out from escrow/trust accounts only when mandated by client agreement, trust instructions or law.
4. Taking a Client’s Money to Pay a Debt
Escrow arrangements are frequently employed in real estate transactions, but they also serve a number of other uses. Lawyers might use them when dispersing cash settlements from class action lawsuits or holding funds while disputes between possible owners of land or a business are settled; the escrow process protects clients by guaranteeing that funds will only go where it should when all obligations have been fulfilled.
Whenever funds belonging to clients are stolen, it is critical that lawyers immediately notify and inform affected clients. Affected clients have every right to full disclosure; additionally, lawyers should identify any sources of funds (bank liability and insurance policies) available that might cover losses.
Lawyer has an obligation to exercise reasonable care to prevent third parties from accessing funds held in escrow and to implement appropriate security measures to do so. This may involve verifying disbursement changes by calling seller or checking attorney files for correct phone numbers or email addresses; in this case, Lawyer failed to follow these procedures, which directly resulted in theft occurring as a direct result of failing to heed them.
Once a theft has been reported to a client, it is vital that collection efforts commence as quickly as possible. Anxious clients are likely to become distressed at having had their hard-earned funds stolen without recourse; showing that you take this matter seriously by immediately engaging a debt collection agency instead of waiting months for payment from clients will show your law firm is taking it seriously and cost-cutting.
Mitchell Kossoff of New York City real estate attorney firm Kravet Law Group was recently accused of embezzling $10 Million from their escrow accounts – shocking allegations, yet these incidents occur quite regularly according to Legal Profession Team Co-Chair Trisha Rich who stated, “Theft from escrow accounts often occurs within practice areas in which lawyers handle significant sums, particularly at smaller firms with limited internal controls and less rigorous internal policies.