Negligent Escrow Misappropriation and Failure to Reconcile Warrant Suspension Despite Remedial Steps: Matter of Stutman

Introduction

Matter of Stutman (2025 NY Slip Op 04655) is a per curiam disciplinary decision from the Appellate Division, Second Department, addressing repeated escrow-account mismanagement, inadvertent misappropriation through overdisbursement, improper account titling, and failure to reconcile over an extended period. The respondent, Steven W. Stutman (admitted 1974), faced four charges stemming from shortages in his TD Bank IOLA escrow account and a series of checks drawn against that account when no corresponding funds were on deposit for the relevant matter. The case presents a clear reaffirmation—and a practical, compliance-focused illustration—of New York’s strict escrow-account fiduciary duties under Rule 1.15 of the Rules of Professional Conduct and the “fitness to practice” catch-all under Rule 8.4(h).

The central issues were: (1) whether repeated overdisbursements and cross-matter invasions of client funds, caused by bookkeeping errors and confusion between two separate escrow accounts, constituted misappropriation under Rule 1.15(a); (2) whether the escrow account was properly titled as required by Rule 1.15(b)(2); (3) whether prolonged failure to reconcile constituted conduct adversely reflecting on fitness under Rule 8.4(h); and (4) what sanction is warranted considering admissions, remedial measures, prior disciplinary history, and character evidence.

Summary of the Judgment

• The Grievance Committee charged the respondent with four counts: misappropriation (Rule 1.15[a]), improper titling of the escrow account (Rule 1.15[b][2]), failure to reconcile the escrow account (Rule 8.4[h]), and a global fitness charge (Rule 8.4[h]).
• The Special Referee sustained all four charges; the respondent did not oppose the motion to confirm but argued for a lesser sanction (reprimand, probation, or public censure).
• The Court granted the Grievance Committee’s motion to confirm and, considering the totality of circumstances—including prior discipline, remedial steps taken, and substantial character evidence—imposed a six-month suspension.
• Suspension commences September 12, 2025. The respondent may not apply for reinstatement earlier than February 11, 2026, and must satisfy the compliance and proof requirements set forth in 22 NYCRR 1240.15 and 1240.16.

Key Facts Underlying the Charges

• Respondent maintained two escrow accounts: a TD Bank IOLA escrow account (ending in 9574) and a Capital One escrow account.
• Between September 1, 2018, and December 19, 2019, the TD Bank escrow account experienced repeated overdisbursements, causing client-fund shortages ranging from $25 to $2,724.03.
• On December 19, 2019, the TD Bank escrow should have held $43,346.30 for 13 clients but had $42,018.76 (a $1,327.54 shortage).
• Between December 20 and 24, 2019, three checks totaling $13,950 for the “RH to Ross” matter were paid from the TD Bank escrow when no correlating funds for that matter were on deposit in that account, resulting in use of other clients’ funds.
• By December 26, 2019, the required fiduciary balance was $34,191.30 (for 11 clients), but the TD Bank escrow held $18,913.76—a $15,277.54 shortage.
• Respondent testified he mistakenly deposited the $13,950 check to the Capital One escrow account but then disbursed from the TD Bank escrow account. He ultimately transferred funds to correct the bank-account mismatch nearly a year later, on October 15, 2020.
• He admitted the factual allegations, characterized the errors as inadvertent, expressed remorse, consolidated to a single escrow account, added software controls, and now reconciles at least twice monthly with staff assistance.
• Prior discipline included: admonitions (2008 and 2014), a letter of caution (2009), and a letter of advisement (2020)—with the 2014 admonition for similar misconduct.

Analysis

Precedents and Authorities Cited

The opinion does not cite prior judicial precedents by name. Instead, it proceeds by applying well-established rules and procedures in New York attorney discipline:

• Rule 1.15(a) (22 NYCRR 1200.0): Prohibits misappropriation of funds entrusted to a lawyer as a fiduciary. Any invasion of one client’s funds to pay another client’s obligation constitutes misappropriation, regardless of intent.
• Rule 1.15(b)(2): Requires specific, compliant titling of attorney escrow accounts so that they are clearly identified as attorney trust/escrow/special accounts in the name of the lawyer or law firm.
• Rule 8.4(h): Prohibits conduct that adversely reflects on a lawyer’s fitness; used here for sustained failures in escrow reconciliation over a prolonged period and more generally for the cumulative misconduct.
• Judiciary Law § 90 and 22 NYCRR 1240.15 and 1240.16: Govern the consequences of suspension, compliance obligations during suspension, and procedures and prerequisites for reinstatement.

Although not expressly cited in this particular opinion, the Court’s approach aligns with long-standing New York disciplinary jurisprudence holding that:

• Escrow stewardship is a non-delegable fiduciary duty; intent or personal fault may affect sanction but does not excuse a Rule 1.15 violation when client funds are misapplied or exposed to risk.
• Mislabeling or imprecise titling of escrow accounts is itself a discrete violation because it undermines clarity and bank-level safeguards designed to protect client funds.
• Systemic bookkeeping lapses—especially failure to reconcile and verify deposits prior to disbursement—are treated as serious fitness concerns.

Legal Reasoning

The Court’s reasoning is straightforward and anchored in fiduciary strictness:

• Misappropriation under Rule 1.15(a): The Court accepted the Special Referee’s findings that the respondent disbursed funds for particular matters when the corresponding deposits were either not made or were in another account, thereby invading other clients’ funds. That is misappropriation even if caused by bookkeeping errors or mistaken use of a second escrow account.
• Improper titling under Rule 1.15(b)(2): The Court sustained the charge that the TD Bank escrow account was not properly titled under the rule’s naming requirements, reflecting the judiciary’s insistence on strict conformity in escrow account nomenclature.
• Fitness violations under Rule 8.4(h): The respondent failed to reconcile his escrow account for well over a year, a lapse that both allowed and masked repeated overdisbursements. This persistent failure, combined with the misappropriations and titling deficiency, supported both the specific and global Rule 8.4(h) charges.

Sanction selection reflects a balancing of aggravation and mitigation:

• Aggravating factors:
  • Repetitive nature of the shortages across multiple client matters.
  • Magnitude and escalation of the December 2019 shortfall ($15,277.54).
  • The prolonged delay (nearly one year) in transferring funds to correct the bank-account mismatch.
  • Prior disciplinary history for similar issues (admonition in 2014) and other discipline (2008, 2009, 2020).
• Mitigating factors:
  • Acknowledgment of responsibility and cooperation (no opposition to confirming the report).
  • Implementation of remedial measures: consolidation to a single escrow account, adoption of monitoring software, staff support, and at least twice-monthly reconciliations.
  • Substantial character evidence.

Weighing the “totality of the circumstances,” the Court determined a six-month suspension was appropriate. Notably, the Court declined the respondent’s request for lesser sanctions (reprimand, probation, or public censure), signaling that when prior similar discipline exists and the mismanagement is repeated and unreconciled for long periods, a suspension is the presumptive response—even where the lawyer’s errors are characterized as inadvertent and post-misconduct remediation is robust.

Impact and Forward-Looking Significance

• Sanction baseline for negligent misappropriation with aggravators: This decision reinforces that even non-venal, bookkeeping-based misappropriations—if repeated, cross-matter, and left unreconciled—will likely draw a suspension. Robust remedial measures and favorable character evidence mitigate but do not necessarily avert a suspension where there is significant prior discipline or prolonged lapses.
• Strict compliance with escrow titling: The Court’s willingness to sustain a stand-alone titling violation underscores that escrow account names must track Rule 1.15(b)(2) exactly. “Close enough” designations are risky.
• Multiple escrow accounts are a risk amplifier: The fact pattern highlights the dangers of operating more than one escrow account without airtight controls. Depositing funds for a matter into Bank A while disbursing from Bank B—even if the combined balances would otherwise cover the disbursement—still constitutes an invasion of other clients’ funds in Bank B.
• Reconciliation cadence matters: The Court’s reliance on 8.4(h) for the failure-to-reconcile charge confirms that reconciliation lapses are not merely technical; they are fitness issues that can aggravate sanctions.
• Compliance expectations during suspension and for reinstatement: The decision recites the now-standard conditions under 22 NYCRR 1240.15 and 1240.16, emphasizing that reinstatement depends on strict compliance, proof of nonpractice, and general good conduct during the suspension period.

Complex Concepts Simplified

• Misappropriation: Using client A’s money to pay client B’s expenses, even temporarily or inadvertently, is misappropriation. It is not limited to theft or intent to steal; any invasion of another client’s funds qualifies.
• Overdisbursement: Issuing an escrow check for a client matter in an amount exceeding the funds actually and currently on deposit for that matter. Overdisbursement is a classic pathway to misappropriation.
• Escrow Reconciliation: The routine matching of the bank statement, check register, and individual client ledgers to confirm that the account’s total and the per-client balances align. Regular reconciliation detects and prevents overdisbursements, bank posting errors, and ledger mistakes.
• IOLA Account: Interest on Lawyer Account. New York attorneys often use IOLA-designated trust accounts for nominal or short-term client funds, with interest directed to the IOLA Fund. Despite the IOLA framework, the attorney must still strictly comply with Rule 1.15 safeguards, including precise titling and reconciliation.
• Rule 8.4(h) Fitness: A catch-all disciplinary rule covering conduct that adversely reflects on a lawyer’s fitness. Systemic escrow mismanagement—even if not venal—can trigger fitness concerns.
• Special Referee: In disciplinary proceedings, a Special Referee conducts hearings, makes credibility assessments, and issues a report with findings and conclusions for the Appellate Division’s review.
• Suspension vs. Censure vs. Probation:
  • Public Censure/Reprimand: A public sanction without a practice interruption.
  • Probation: A supervised or conditional practice status, often with compliance monitoring.
  • Suspension: A mandatory cessation of practice for a set period, with strict conditions and a reinstatement process under 22 NYCRR 1240.16.

Practical Compliance Lessons

• Use one escrow account if possible; if multiple are necessary, implement controls that prevent cross-account confusion, including unique matter identifiers, mandatory deposit-origin verification, and disbursement “holds” pending verification.
• Reconcile at least monthly (many firms prudently reconcile more often). Require evidence of cleared deposits before disbursing.
• Title accounts precisely per Rule 1.15(b)(2). Coordinate with your bank and IOLA to ensure the account name exactly matches the rule’s requirements.
• Maintain client-specific ledgers in addition to the master checkbook register; the sum of ledgers must always equal the bank balance.
• Train staff and implement segregation of duties: the person initiating a disbursement should not be the sole person reconciling the account.
• Respond immediately to any notice of dishonor, overdraft, or anomaly; investigate root causes and correct them without delay.
• Document remediation and continue it consistently; prompt, documented corrective action can mitigate—but not erase—sanction exposure.

Conclusion

Matter of Stutman fortifies an enduring message in New York disciplinary law: client escrow funds are sacrosanct, and the fiduciary duty to safeguard them is unforgiving of sloppy systems. The Court sustained misappropriation under Rule 1.15(a) where the respondent repeatedly overdisbursed from one escrow account despite corresponding deposits being made to another, found a stand-alone violation for improper titling under Rule 1.15(b)(2), and treated sustained reconciliation failures as fitness issues under Rule 8.4(h). While the respondent’s admissions, remedial steps, and character evidence were acknowledged, the totality of circumstances—particularly repeated shortages, a significant late-2019 deficit, delayed remediation, and prior discipline—earned a six-month suspension.

The decision’s significance lies less in novel doctrine than in the clarity of its compliance signal: even inadvertent, bookkeeping-driven misappropriation across multiple matters, especially when coupled with reconciliation lapses and prior warnings, will likely result in suspension. Lawyers who manage escrow funds should treat this case as an operational blueprint—consolidate where feasible, title precisely, reconcile rigorously, verify deposits before every disbursement, and act immediately to correct errors. The duty is non-delegable, and the safeguards are non-negotiable.

Key Order Terms (for reference)

• Suspension: Six months, beginning September 12, 2025; earliest reinstatement application: February 11, 2026.
• During suspension: No practice of law, no appearances, no legal advice, no holding out as an attorney; return any secure pass (Judiciary Law § 90; 22 NYCRR 1240.15).
• Reinstatement: Requires proof of nonpractice, compliance with rules and the suspension order, and otherwise proper conduct (22 NYCRR 1240.16).