NYS Assembly committee to take 'fresh look' at real estate deposits amid fraud by lawyers

The chairman of the state Assembly Judiciary Committee plans to take a "fresh look" at a system that for two decades has allowed the defrauding of downstate New Yorkers out of real estate escrow funds, following a Newsday investigation.

Experts — deeply troubled by the conduct of dishonest lawyers and a system that has failed to adequately address it — offered a slew of recommendations. But at least one recent recommendation by a committee of the New York City Bar Association to try to address the problem went unanswered.

The proposals include adopting best practices of other states, including random audits. They also include use of surety bonds, other revenue sources and the adoption of methods used upstate and in other states that use brokers, instead of lawyers, in property closings.

"We’re going to take a fresh look at the entire system for compensating people who have been robbed by their attorneys," Judiciary Committee Chair Charles Lavine (D-Glen Cove) said in an interview.

Lavine’s comments and the expert recommendations follow a recent Newsday report on the more than $112 million in stolen real estate escrow money that has been reimbursed by the little-known state Lawyers’ Fund for Client Protection since its 1982 inception.

Lavine said legislators will "try to fashion some new rules and regulations that are going to address that to make sure people are not taken advantage of by unethical conduct."

Lawmakers returned to Albany this week for the annual legislative session.

Stolen real estate escrow funds in recent years have accounted for the majority of claims reimbursed by the fund, which is established under state law and governed by a board of trustees appointed by the court system.

The fund has long prided itself on its ability to reimburse clients who have had their money taken by dishonest lawyers. In 2015, the fund noted that it had raised its maximum payout for a claim to a nation-leading $400,000, a record now shared by other states.

Newsday found that the fund has been unable to fully reimburse vetted claims in recent years. In recent years, the fund reimbursed just over two-thirds of valid claims, down from a typical figure of north of 90%.

No judicial district in the state has had more cases attributed to its lawyers than Long Island — which accounts for more than a quarter of all payouts, or more than $70 million across 2,500 cases.

Kristin Devoe, a spokesperson for Gov. Kathy Hochul, noted in a statement that the Court of Appeals appoints the fund’s board. "The governor is not involved in the operations or finances of the state Lawyers’ Fund," Devoe said in a statement.

Call for audits

Kathryn Donnelly, a former grievance counsel in New York and current chair of the New York City Bar Association’s Professional Discipline Committee, said there’s a clear and reasonable next step to take, a proactive regulatory step — random trust account audits.

This summer, Donnelly and her colleagues authored a 29-page report, "Evaluating Trust Account Oversight Mechanisms."

"Whether a random audit program will lead to uncovering thefts of client funds or, at least, deter an attorney from committing theft, will never be known unless a program is implemented," the report concluded.

The program could move forward at the behest of the First or Second Judicial departments, both downstate — where the problem is most acute — after they adopted a rule decades ago to allow for them to conduct the audits. Part of the problem, Donnelly said, is they have never authorized an audit.

She points to states like New Jersey and Connecticut as gold standards of random audits. New Jersey recently helped California implement its own program, she said. Her data showed a decrease in payouts from client protection funds after the implementation of robust random audit programs.

"What I really tried to impress upon the court is that this is essential," Donnelly said in an interview.

Donnelly also recommended educating lawyers on how to handle their books properly. She has volunteered to run what she called "trust schools" downstate.

Secure accounts

Robert Fonti, founder and chairman of the Long Island Business Council and the Suffolk County Alliance of Chambers, also suggested a "proactive" approach through surety bonds.

In that situation, a real estate lawyer could put the escrow funds into a surety bond through a third-party group like an insurer who would release the money only when closing on the property is complete.

"This isn’t about mistrust," Fonti said, "It’s about accountability and public protection."

Fonti is a longtime real estate professional, property manager and court-appointed fiduciary. He proposed "requiring surety bonds scaled to the amount held" and "implementing independent reconciliation and early-warning alerts."

Brendan Twomey, a Jericho real estate lawyer for more than three decades, said "the single worst thing you can do is mess with someone’s escrow."

If the state is going to take from the pool of money intended for indigent legal services for other uses, Twomey said, it should use some of those funds to help offset people’s losses. Some escrow funds are already held in interest on lawyer account funds (accounts in which interest is accrued).

While some of the interest goes to the state Lawyers’ Fund for Client Protection, it accounts for less than 3% of that fund's revenue.

Nearly all of the money comes from a $60 slice of the $375 lawyers pay every two years for registration to the state. The amount that goes to the fund has been fixed for decades. A bill in 1999 called for raising the amount to $100; its sponsors are no longer alive.

Steve Burton, licensed attorney and broker in New York and Colorado, called for New York to be a "broker-only state," similar to Colorado.

There, he said, brokers have boilerplate contracts for real estate deals, which are backed by the state. And the escrow money is bonded and held by a title company.

"It’s just abhorrent that this is happening," Burton said. "But it would eliminate the temptation and the ability" for lawyers to take the escrow money.

Upstate, brokers already handle the closings instead of real estate lawyers. The lawyers’ fund has long noted that distinction and encouraged a remedy.