Matter of Spaeth: New York Outlaws Venmo/Zelle and Other Third‑Party Electronic Transfers From Attorney Escrow Accounts; Pandemic Hardships Do Not Excuse Misappropriation

Introduction

In Matter of Spaeth (2025 NY Slip Op 04837), the Appellate Division, Second Department, addressed a modern twist on a perennial problem: the misuse of attorney escrow (IOLA) accounts. Against the backdrop of COVID‑19 disruptions, personal financial hardship, and the ubiquity of peer‑to‑peer payment platforms, the court reaffirmed strict fiduciary norms that govern attorney trust accounts. The Grievance Committee for the Ninth Judicial District brought five charges against Max William Spaeth, a solo practitioner admitted in 2017, for misappropriation, commingling, improper electronic disbursements via Venmo and Zelle, and other escrow violations. The court confirmed all charges and imposed a two‑year suspension.

The decision clarifies two critical points for the digital era: first, withdrawals from an attorney escrow account through third‑party electronic payment services such as Venmo and Zelle violate Rule 1.15(e) of the Rules of Professional Conduct; second, personal hardships—including pandemic‑related banking disruptions and intentions to reimburse—do not excuse misappropriation or commingling. The court also underscored that allowing a third party to access escrow funds is a grave breach of fiduciary duty.

Summary of the Judgment

The court, on its own motion, recalled and vacated its prior opinion and substituted this opinion and order. It granted the Grievance Committee’s motion to confirm the Special Referee’s report sustaining all five charges of professional misconduct. The court found that:

The respondent misappropriated client funds by allowing escrow balances to fall below amounts required to be maintained for identified matters, in violation of Rule 1.15(a).
He commingled personal funds with escrow funds—including depositing personal stimulus and unemployment payments into the IOLA account—in violation of Rule 1.15(a).
He made improper disbursements from the escrow account using Venmo and Zelle and other electronic transfers, in violation of Rule 1.15(e).
He failed to maintain separate accounts for fiduciary funds and personal/business funds, in violation of Rule 1.15(b)(1).
His cumulative conduct adversely reflected on his fitness as a lawyer, in violation of Rule 8.4(h).

In mitigation, the court noted his lack of prior discipline, cooperation, positive character letters, and post‑misconduct remedial efforts. In aggravation, the court emphasized that the misconduct was volitional, personally beneficial, repeated, and that the respondent demonstrated insufficient remorse. Under the totality of the circumstances, the court imposed a two‑year suspension effective September 27, 2025. The respondent may not apply for reinstatement earlier than March 26, 2027, and must demonstrate full compliance with 22 NYCRR 1240.15, satisfy CLE requirements (22 NYCRR 691.11[a]), and otherwise show proper conduct.

Factual Background and Key Issues

The disciplinary petition centered on the respondent’s escrow account at Chase Bank titled “Spaeth & Counsel, LLC, Attorney Trust Account IOLA.” Key facts included:

Between May and June 2020, the escrow account balance repeatedly fell below the amounts required to be maintained for the Prioleau and Fucci real estate matters, producing shortages up to nearly $5,000.
On May 15, 2020, a transfer of $200,147.30 relating to the Marcatoma matter created an over‑disbursement of $1,447.30; a subsequent deposit reduced the shortage but left a deficit for a time.
From April 29 through June 30, 2020, there were approximately 52 deposits of personal funds into the escrow account, totaling about $19,682.92—among them a federal stimulus payment and unemployment benefits. There was even a $0.30 “Google Test” deposit used to link a payment platform to the escrow account.
In May–July 2020, the respondent made dozens of Venmo and Zelle transactions and other electronic transfers for personal purposes—including rent, personal expenses, and payments to friends—and admitted that, at times, he allowed a third party to withdraw from the escrow account.
In July 2020, when he claimed no client funds were on deposit, the respondent still used the escrow account as a personal account.

The respondent attributed his conduct to a hand injury, the ensuing inability to work, the sudden closure of his personal accounts by his bank in February 2020, and the COVID‑19 pandemic’s logistical obstacles. He denied misconduct intent, asserting he planned to reimburse and that client funds were ultimately disbursed as required.

Analysis

Precedents Cited and Authorities Applied

The court anchored its sanction analysis with a reference to Matter of Farkas, 133 AD3d 81, signaling that a two‑year suspension is an established benchmark for significant escrow violations where mitigating factors are present but do not overcome the gravity of misappropriation and commingling. The opinion also applied the governing regulatory framework:

Rule 1.15(a) (22 NYCRR 1200.0): prohibits misappropriation and commingling of client funds, mandates preservation of the identity of funds, and imposes strict fiduciary responsibilities for escrow accounts.
Rule 1.15(e): restricts methods of disbursement from escrow accounts and forbids withdrawals that are not by properly documented means; the court expressly treated Venmo and Zelle withdrawals as improper.
Rule 1.15(b)(1): requires attorneys to maintain separate accounts for fiduciary funds and for personal/business funds, and to use the trust account only for funds held in fiduciary capacity.
Rule 8.4(h): prohibits conduct that adversely reflects on a lawyer’s fitness.
22 NYCRR 1240.8(b)(1): governs reference to a special referee in disciplinary proceedings.
22 NYCRR 1240.15 and 1240.16: outline the obligations of suspended attorneys and reinstatement procedures.
Judiciary Law § 90: authorizes the court to regulate admission and discipline of attorneys and sets forth disabling injunctions during suspension.

Although only Farkas is cited as a case comparator, the decision is firmly consistent with New York’s long‑standing jurisprudence that escrow account shortages constitute misappropriation and that commingling and personal use of trust accounts are serious violations warranting severe discipline.

Legal Reasoning

The court’s reasoning proceeds in three steps: proof of rule violations, evaluation of culpability, and selection of sanction.

Proof of Rule Violations by Documentary Evidence and Admissions. The Grievance Committee introduced 17 exhibits detailing account activity. The respondent admitted the factual allegations, including shortages, personal deposits and withdrawals, and the use of Venmo/Zelle. This satisfied the elements of:
- Misappropriation (Rule 1.15[a]) by proof that escrow balances fell below amounts required for specific clients—New York treats such “shortages” as evidence that client funds were used for non‑client purposes, regardless of intent.
- Commingling (Rule 1.15[a]) by depositing personal funds (stimulus and unemployment payments, test micro‑deposit) into the trust account.
- Improper disbursements (Rule 1.15[e]) by making withdrawals through third‑party payment services (Venmo, Zelle) and other electronic methods not authorized by the rule.
- Failure to segregate accounts (Rule 1.15[b][1]) by using the trust account for personal banking, including in a period when no client funds were purportedly on deposit.
- Fitness violation (Rule 8.4[h]) based on the cumulative pattern of misconduct.
Culpability and Mitigation. While the respondent emphasized accident‑related disability, the bank’s closure of his personal accounts, pandemic limitations, and a lack of intent to steal, the Special Referee—and ultimately the court—found the conduct to be “acts of volition,” personally beneficial, and repeated. The court acknowledged mitigation (cooperation, lack of prior discipline, character letters, remedial efforts), but deemed it outweighed by the seriousness of using client funds for personal expenditures and by insufficient remorse.
Importantly, the court reaffirmed that:
- A plan or intention to reimburse does not excuse misappropriation.
- Personal and systemic hardships (e.g., COVID‑19 disruptions) do not authorize deviation from safekeeping rules.
Sanction Selection. Given the totality of circumstances—documented shortages, extensive personal transactions through Venmo/Zelle, third‑party access to the escrow account, but also absence of prior discipline and some corrective efforts—the court imposed a two‑year suspension. Citing Matter of Farkas, the court placed this case within the range of significant but not necessarily disbarment‑level misconduct, while emphasizing that the fiduciary breaches were serious and intentional enough to warrant a lengthy suspension.

Impact and Prospective Significance

The decision has important, immediate implications for New York practitioners, particularly solos and small firms adapting to digital payment ecosystems:

Digital payments are not trust‑account friendly. Venmo, Zelle, and similar third‑party peer‑to‑peer platforms are categorically improper for escrow disbursements under Rule 1.15(e). This is a clear, forward‑looking guardrail for the digital era.
No “pandemic exception.” Even extraordinary circumstances—injury, unemployment, closed accounts, and COVID‑19‑era challenges—do not excuse using an escrow account as a personal lifeline. The fiduciary duty to safeguard client funds is non‑negotiable.
Shortages equal misappropriation. The court continues to treat escrow “shortages” as misappropriation, regardless of whether clients were ultimately paid. The focus is on the integrity of the fiduciary account at all times.
Third‑party access is a red line. Allowing a third party to withdraw from an escrow account is a severe breach that magnifies risk and culpability.
Sanction calibration. The two‑year suspension—while short of disbarment—signals that substantial, repeated misuse of trust accounts accompanied by personal benefit and limited remorse will draw significant discipline, even for relatively new attorneys with no prior record.
Compliance culture. The decision will likely prompt firms to revisit trust‑account policies, update written procedures, and train staff to avoid digital disbursement channels and to maintain rigid separation between escrow and operating/personal accounts.

Complex Concepts Simplified

IOLA (Interest on Lawyer Account): A special bank account where interest is remitted to a state fund; attorneys place client funds there when amounts are too small or held too briefly to justify a separate interest‑bearing account. Despite the “IOLA” label, it is still a trust account and subject to strict safekeeping rules.
Escrow vs. Operating Account: An escrow (trust) account holds money the lawyer does not own—client or third‑party funds. An operating account holds the law firm’s money (fees already earned, business receipts). Mixing them is commingling, which is prohibited.
Commingling: Combining personal or business money with client money in a trust account. Even small personal deposits—such as a bank “test” micro‑deposit—can constitute commingling unless narrowly authorized (e.g., limited funds for bank charges as permitted by rule).
Misappropriation: Using client funds for non‑client purposes. In New York, if the trust account drops below what should have been held for clients, the law treats that as misappropriation—even absent intent to steal or ultimate client loss.
Rule 1.15(e) Restrictions: Withdrawals from escrow must follow the rule’s permitted methods. ATM/debit card withdrawals, cash withdrawals, and third‑party payment apps (e.g., Venmo, Zelle) are improper. The rule demands traceable, conventional banking instruments and documentation.
Special Referee: An appointed judicial officer who hears evidence in disciplinary proceedings and issues a report with findings and recommendations. The Appellate Division then reviews and may confirm, modify, or reject the report.
“Acts of Volition” vs. Mistake: The court found the respondent’s use of escrow funds for rent, meals, personal purchases, and repayments to friends was intentional, not accidental bookkeeping error—a critical aggravating factor.
Plan to Reimburse: A common but legally insufficient defense. The intent or plan to pay the money back does not negate misappropriation or reduce its seriousness.
Recall and Vacatur of Prior Opinion: On its own motion, the court withdrew its earlier decision and substituted the present opinion and order. This confirms that the substituted decision is the controlling disposition.
Reinstatement Conditions: A suspended attorney must refrain from practice, comply with all rules governing suspended attorneys (22 NYCRR 1240.15), complete CLE obligations, and apply for reinstatement no earlier than the date specified, with proof of full compliance and proper conduct (22 NYCRR 1240.16).

Practical Compliance Notes for Practitioners

Never link a trust account to any third‑party payment app or digital wallet. Do not process Venmo/Zelle/Paypal/other P2P transactions into or out of escrow.
Use escrow accounts only for client or third‑party funds held in a fiduciary capacity; route personal or firm funds exclusively through operating/personal accounts.
Adopt internal controls: dual signatories or approval workflows for trust disbursements; monthly three‑way reconciliations; written policies; and periodic audits.
If a bank closes operating/personal accounts, immediately open replacement non‑trust accounts; do not use escrow as a stopgap. Suspend new matters if necessary until proper accounts are re‑established.
Document every escrow transaction with client matter identification, purpose, payee, and authorization; maintain contemporaneous ledgers and bank records in accordance with Rule 1.15.

Conclusion

Matter of Spaeth is a clear and timely statement from the Second Department that modern payment conveniences do not alter the bedrock fiduciary rules governing attorney escrow accounts. The court expressly identifies Venmo and Zelle withdrawals as improper under Rule 1.15(e) and holds that personal hardship—even in the unusual circumstances of a pandemic—does not excuse commingling or misappropriation. By imposing a two‑year suspension and referencing Matter of Farkas, the court signals that while mitigation may avert disbarment in some cases, significant, repetitive, and volitional misuse of escrow accounts will draw substantial discipline.

The decision’s key takeaways are straightforward but consequential: do not intermingle personal funds with client funds; never use escrow as a personal or operating account; avoid third‑party payment apps entirely for trust transactions; and maintain unwavering, documented compliance with Rule 1.15. In the digital age, the fiduciary duty of safekeeping client property remains as strict—and as enforceable—as ever.