The ‘Galasso’ Case and the Duty of Supervision

On Feb. 21, 2012, a unanimous panel of the Appellate Division, Second Department, suspended a Long Island attorney, Peter J. Galasso of Galasso, Langione, Catterson & LoFrumento, for two years due to his failure to adequately supervise his brother, who stole $4 million from the firm’s client escrow account.¹

The decision has since garnered a great deal of media attention and sparked concern among members of the bar over the seemingly high standard for supervision and the severity of the penalty. On May 1, 2012, over the objection of the Grievance Committee for the Ninth Judicial District, the Court of Appeals granted Galasso’s motion for leave to appeal the Second Department’s ruling.

When it comes to attorney discipline, the Court of Appeals historically has been a court of very limited jurisdiction. With a few narrow exceptions, it is confined by the State Constitution to examining questions of law and is precluded from reviewing questions of fact.² Nor will the court review legal issues unless they have some broad significance. The Grievance Committee, in its opposition to Galasso’s motion for leave, argued that the case does not present any legal questions that are novel or of public importance, or that involve a conflict with prior Court of Appeals decisions or amongst the Appellate Divisions.³

Galasso, for his part, claimed that the Appellate Division improperly imposed a novel standard—which amounted to strict liability for the criminal conduct of an employee—thereby depriving him of procedural due process. He also argued that there is a conflict among the four departments of the Appellate Division with respect to the level of discipline for violation of the same disciplinary rules. These arguments foreshadow the claims that will be made on appeal.

Certainly, the concept of disciplining attorneys for failure to supervise their partners’ or employees’ handling of escrow accounts is not new. Both sides cite a number of cases in which an attorney was disciplined for failing to oversee an escrow account, even when another individual committed the misappropriation of funds without the attorney’s involvement or knowledge.⁴ In Matter of Linn, the respondent’s law partner converted client funds from the firm’s joint escrow account. The Second Department found that the respondent, as a signatory on the account, failed to adequately oversee or review the escrow records for the firm’s account and thereby contributed to his law partner’s conversion. The court also found that the respondent failed to maintain the required records of all deposits to and withdrawals from the firm’s escrow account.⁵

Similarly, in  Matter of Sykes, the respondent’s law partner was held directly responsible for shortages in the firm’s escrow account, but the court also found the respondent liable for his partner’s conduct.⁶ In  Matter of Pollack, the First Department determined that the respondent failed to adequately supervise his associate and brother, who disbursed money from a client escrow account for personal and business expenses unrelated to the client’s matter. The court noted that the respondent had not personally examined even one document pertaining to the escrow account during the four-year period in which the client funds were held.⁷ In all three of these matters, the respondents were censured for their failure to supervise. Finally, in Matter of Ponzini, the respondent was suspended for one year for failing to notice the existence of negative balances in his attorney escrow account due to his law partners’ unauthorized withdrawals of client funds.⁸

Factual Questions

An important question for the Court of Appeals, then, is what, if anything, takes the Galasso case outside the heartland of these failure-to-supervise cases and raises a novel legal question. One aspect of the case that may distinguish it is the level of deception engaged in by Galasso’s brother, Anthony. In the criminal proceeding against him in the Nassau County Supreme Court, Justice Daniel Palmieri found that Anthony Galasso prepared and submitted an account application to the Signature Bank wrongfully designating his signature as an authorized signature. He forged the signatures of partners Galasso and Langione to the application and diverted bank statements to a post office box. He withdrew approximately $4 million and created genuine-looking but false computer generated bank statements, which he distributed to [Peter Galasso] and the client’s accountant.⁹

The Nassau County District Attorney’s office likewise concluded that, during the time period in which Anthony Galasso was making unauthorized withdrawals from the client escrow, he, hid the theft and misled the law firm by creating phony bank statements to make it appear the funds were not only present, but earning interest. Representatives of the firm regularly met with Anthony Galasso and received and reviewed the forged documentations. Based on the documentation presented to them, there was nothing to indicate that there was anything amiss in the [client] and law firm’s accounts.

Anthony Galasso was able to perpetrate additional thefts from the law firm and its clients through his manipulation of unauthorized bank accounts, the existence of which remained unknown to the firm due to the defendant’s diversion of the bank account statements to a P.O. Box that he surreptitiously maintained.¹⁰

The special referee who presided over Peter Galasso’s disciplinary hearing, however, had a different take on what occurred. He observed that Peter Galasso “relied upon monthly financial reports and summaries prepared by Anthony Galasso with respect to the firm’s IOLA, and operating and money market accounts and did so without ever reviewing the actual bank statements and records and thereby never learned that the Anthony Galasso-prepared reports and summaries were fabrications.”¹¹

The special referee further found that the “monthly financial reports” were not records generated by the bank(s) at which the firm’s accounts were maintained, nor were they a common record system upon which attorneys customarily rely to oversee their attorney trust accounts.¹² The Grievance Committee characterized the monthly financial reports as part of a system Galasso created, in which he delegated to Anthony Galasso the task of directly reviewing the bank statements and other original records for the firm’s bank accounts, including the IOLA attorney trust account. Galasso also delegated to Anthony Galasso the task of receiving and maintaining the original bank records.¹³ Peter Galasso admitted that during the years in which he was relying on the “monthly financial reports,” he would never review the bank statements for the IOLA account directly.¹⁴

The differences in the way Galasso and the Grievance Committee portrayed the evidence are significant. If, as Galasso suggests, he reviewed falsified bank statements and there was no way he could have known they were false, it does seem as though the Second Department has held him to an unattainable standard of oversight, something akin to strict liability, as he argued. On the other hand, if Galasso delegated to his brother all responsibility for setting up, maintaining and monitoring the escrow account, declining to ever examine original bank statements, it is understandable that the Second Department would have found his supervision lacking.

Galasso puts the issue before the court in terms of legal standards and due process—how could he have known he might be held responsible for the criminal activity of an employee who deceived him? But the heart of the question seems to be one of fact. It is worth noting that the District Attorney’s Office and the criminal court were focused on whether anyone other than Anthony Galasso bore criminal liability for the thefts, not whether the firm’s other partners adhered to their professional obligations. They may, therefore, not have found it necessary to delve so deeply into the facts as to differentiate between original bank statements and summary reports, or investigated whether the thefts could have been uncovered (it is undisputed that Galasso and the firm’s other partners did not have actual knowledge). Thus, it will be interesting to see how the Court of Appeals frames the issues before it so that it does not appear to simply upend the factual findings of the special referee.

Severity of Sanction

The other significant factor in the Galasso case that could have prompted Court of Appeals review is the alleged harshness of the penalty. Much of the “public outrage” that the case has generated, and Galasso highlighted in his motion for leave, likely stems from the fact that he was suspended from the practice of law for two years. Thus, Galasso argues that his sanction is disproportionate, comparing his case to Matter of Gayle, in which the Second Department recently suspended an attorney for two years due to her felony conviction for mortgage fraud.¹⁵ However, in response, the Grievance Committee points to other cases in which attorneys were suspended for longer periods than Galasso, or disbarred, for escrow conversions resulting from lack of oversight.¹⁶ Also, in this case, there was a finding that Galasso did not fully cooperate with the Grievance Committee’s investigation, which likely contributed to the harsher sanction.

As with the finding of misconduct, the sanction seems unduly harsh only if Galasso could not, with the exercise of reasonable care, have discovered his brother’s crimes. That determination is one of fact, an area in which the Court of Appeals generally does not exercise jurisdiction. Nor does the court typically review a disciplinary matter simply based on the severity of the sanction.

Regrettably, the Second Department does not make it easy to assess its reasoning in this case or in any of its earlier opinions where supervision is implicated. Consistent with its customary practice, the court’s Decision and Order simply lays out the charges against Galasso and then affirms the findings of the special referee.¹⁷ The Appellate Division’s rote affirmance does not indicate what it would have considered to be appropriate vigilance in this case, or whether it viewed as significant the degree of Anthony Galasso’s deception. Its prior decisions similarly lack explanation of the court’s reasoning or the underlying facts, which greatly limits their precedential value.

Assuming the accuracy of the special referee’s findings, however, it seems that the concerns of local bar associations that lawyers are being held to impossibly high standards may be overstated. The Matrimonial Bar Association of Suffolk County’s recent roundtable, titled “Your Escrow Account. Can what happened to Peter Galasso happen to you?” underscores the bar’s concern that lawyers may be held responsible for another person’s malfeasance through no fault of their own. But that sentiment may be due to lack of critical information regarding this particular matter, as the Grievance Committee argues.¹⁸

Despite the absence of clarity in the Appellate Division’s decision, and regardless of how the Court of Appeals ultimately rules, there are certain steps all lawyers can take to minimize the risk of being blindsided by a dishonest employee. First, particularly in small firms, lawyers should delegate trust account matters with great caution and supervise carefully. It is a good idea to build in simple controls, such as requiring two signatures, so that one person cannot perpetrate a fraud undetected. Second, attorneys with escrow responsibilities should personally examine original bank statements, and speak with bank representatives from time to time. Third, and finally, all attorneys should adhere strictly to the record-keeping requirements of Rule 1.15(d) of the Rules of Professional Conduct, and see that trust account records are properly maintained at all times.

Hal R. Lieberman, formerly Chief Counsel to the Departmental Disciplinary Committee (First Department), is a partner at Emery Celli Brinckerhoff & Abady LLP.