Escrow Account Misuse Results In Suspension -Law Ledgers

In Matter of Kayatt, the attorney was found guilty of professional misconduct and suspended for a period of two years. The attorney had been practicing law for over 30 years, primarily focusing on matrimonial matters, when she was charged with misusing her escrow accounts. Specifically, the attorney had improperly used her escrow account as a dual depository for client/third-party funds and her business/personal funds for over 22 years. The escrow account misuse resulted in a suspension.

The Investigation Of The Escrow Account Issues

The investigation began in 2010, when a bank error caused two checks to bounce from the attorney’s escrow account. This triggered a notification to the AGC (Attorney Grievance Committee), leading to an investigation of the attorney’s financial practices. The AGC discovered that the attorney had been using her escrow account in this manner since she first opened it in 1989. The attorney had also failed to open an operating account and had used the master escrow account as her personal account for all these years.

In addition to the misuse of the escrow account, the AGC also charged the attorney with misusing a third party’s personal bank accounts to shield her funds from tax authorities. In 2007, the IRS audited the attorney’s tax returns for the 2005 and 2006 tax years and disallowed most of her claimed business expenses. This resulted in an additional tax liability of approximately $87,000, which has grown significantly with interest and penalties. The attorney had been suffering from serious health issues during the audit, which she stated had interfered with her ability to collect and produce relevant documents. As a result, the attorney had been poorly represented by her accountant. The attorney has since unsuccessfully sought reconsideration of the IRS audit and the exact amount of the attorney’s tax debt is unclear but it is believed to be between $50,000 and $100,000.

Important Lessons From The Case

The case highlights the importance of proper accounting and management of escrow accounts for attorneys. The frequent ground for attorney discipline in New York is escrow violations and an attorney can be disciplined for failing to spot misappropriations from their escrow accounts, even where the account was managed by another law firm partner or bookkeeper. A bounced check will automatically trigger a report to the Attorney Grievance Committee and, in almost every instance, will lead to an audit covering the preceding six months of records. Additionally, discipline can be imposed even where no client is harmed when an attorney commingles personal funds with business funds.

In order to avoid these types of issues, it is a good idea for attorneys to retain an external accountant who can monitor the attorney’s books and ensure compliance with the rules of professional conduct. By having an external accountant in place, the attorney can have peace of mind that their financial records are being properly managed and that they are in compliance with all necessary regulations.

Even if you have no books at all, and have never maintained accurate records, we can help quickly reconstruct your books and automate future processes.

Please note that the information provided on this website is for general informational purposes only and is not intended as legal or tax advice. The information is subject to change, and it is important to consult a specialist before making any decisions. Law Ledgers provides accounting services to New York lawyers and law firms, including escrow protection, tax advice and bookkeeping administration. Contact us today for personalized support.