As a Farmington attorney, Michael J. Daly was well-respected in legal circles. One of only seven bankruptcy trustees in the state, he was on a first-name basis with federal judges and a go-to guy for failing businesses. But he was not what he appeared to be.

Last week, U.S. District Court Judge Alvin Thompson sentenced Daly to 18 months imprisonment and ordered him to pay a $15,000 fine after the Simsbury resident admitted to stealing $11,100 from a print shop’s bankruptcy case. Daly had already voluntarily resigned his law license and waived his right to reapply after an investigation of his practices came to light.

Daly claimed his cancer made him do things he can’t explain now, but there was damaging evidence that he submitted nearly $80,000 in fabricated time sheets in another bankruptcy case. Making matters worse, almost $30,000 in jewelry was reported missing from a Greenwich jeweler in a third bankruptcy he had been overseeing.

At his sentencing, Daly was excoriated by former bankruptcy client Michelle DiLieto, of North Branford. Daly controlled DiLieto’s multi-million dollar medical malpractice case against Yale University for years, because it was an asset in her bankruptcy case. She contended Daly would not let her discharge her bankruptcy, pay her debts, and become the plaintiff in her medical malpractice case because he saw it as a “golden goose” for future legal fees, which he ultimately sought.

“I’m sorry that he’s ill, but that’s no excuse for theft,” DiLieto told the judge.

Daly, his head hairless and wearing a hearing aid in his right ear, told Thompson his troubles started with a melanoma detected on his back, about the time his father became gravely ill, in 2003. He said he was unable to explain taking money, but was under great stress and was suffering from cancer treatment and it side effects. “I still do not fully understand how this happened,” he said.

Last summer, Daly had been prepared to plead guilty to the single count of the $11,100 embezzlement from the print shop’s bankruptcy account. New Haven criminal defense lawyer William Dow, who is not connected with the case, said it would be unusual for a theft-like crime for that amount of money to result in imprisonment. In other words, if Daly had been sentenced a year earlier, on the print shop embezzlement alone, he probably would have escaped prison.

But Daly’s continued attempts to recoup legal fees in DiLieto’s case led to a dramatically different story, unfolding over the past year. Like an Aesop’s fable, his focus on the prize of legal fees not only lost him that money, it led to deep professional embarassment and this year’s harsh sentence.

Just before Daly was about to be sentenced in 2011, DiLieto was alerted of that fact by Hartford Courant investigative reporter Dave Altimari. When DiLieto learned that Daly had specifically reserved the right to apply for legal fees in her bankruptcy case, and had not given up that right as part of his plea, she was furious. She met with federal prosecutors who agreed to reopen the pre-sentence investigation of Daly. Assistant U.S. Attorney Michael J. Gustafson took an interest in her story. “He listened, he was fabulous,” said DiLieto.

On her own, DiLieto and her husband Robert used the federal Freedom of Information Act to dig up prior complaints about Daly as a bankruptcy trustee. “We received a 200-page executive summary, just part of what was available,” DiLieto said in an interview. In a random audit of eight bankruptcy cases Daly was overseeing, DiLieto said, investigators found thefts in five.

“Normally, when a company is in bankruptcy, the bank account is closed down immediately,” she said. But in the case of the New Haven printing company, Lehman Brothers, Daly allowed the debtor in possesssion’s account to remain open. When former customers paid their overdue bills, Daly took $11,100 and transferred it to his own accounts. Similar irregularities allowed withdrawals from other bankrupt organizations and companies. All that information, dug up by FBI investigators, was duly noted in Gustafson’s 2012 pre-sentencing brief arguing for an upward departure from the federal sentencing guidelines.

Cancer Diagnosis

As for DiLieto’s medical malpractice case, Daly was the named plaintiff because DiLieto was in bankruptcy when her right to sue for malpractice arose. In 1995 she was told she had cancer, and had her reproductive organs and lymph nodes removed. The lymph node removal was performed by a young doctor whose incisions were too deep, causing nerve damage. DiLieto, who had been a New Haven city employee, was unable to walk, let alone work. Her husband also suffered an elevator accident, leaving him unemployed. As their bills got out of control, they filed for bankruptcy in 1996. DiLieto subsequently learned that she never had cancer at all, and attempted to interest several Connecticut law firms in taking her case. “I couldn’t get any Connecticut lawyer intersted,” she told the Law Tribune. A friend alerted her to a Florida lawyer, Rodney Margol, who was seen on Court TV. DiLieto contacted Margol, who eventually won medical malpractice trials against a Branford doctor and against Yale (a gynecology professor who had treated DiLieto). A $9.2 million verdict was upheld by the Connecticut Supreme Court in 2010.

Attorney Steven Ecker, of Hartford’s Cowdery, Ecker & Murphy, represented DiLieto in her seemingly-endless appeals. When Daly e-mailed Ecker about his claim for an estimated 497 hours of legal work in the medical malpractice cases, Ecker was skeptical. DiLieto said Daly had never been in court, observing the trials, as he claimed. She demanded to see time records backing up his requests for $80,000 in legal fees. That infuriated Daly, and he let DiLieto’s lawyers know in a series of e-mails in which he calls DiLieto a “witch” and a “sorry sack of trash.”

At Daly’s insistence, a hearing was held last October before U.S. Bankruptcy Judge Albert Dabrowski. As one of seven trustees practicing in the Connecticut system, Daly, even though stripped of his law license at that point, was still a well-regarded personality in Dabrowski’s court. “The judge was calling him Mike – they obviously had a great relationship, and Daly was pretty sure, going in, that he was going to get the fees,” said DiLieto, who represented herself.

She called as witnesses Ecker and New Haven’s William F. Gallagher – a dean of the appellate and trial bar. DiLieto argued that Daly had fabricated his reports that he attended her trail, and said he didn’t deserve to share the winnings from her medical malpractice case. Judge Dabrowski was convinced; he wrote a 50-page decision explaining why Daly was ultimately not entitled to any legal fees from DiLieto’s case.

‘Humilitated Me Deeply’

At last week’s sentencing, even though DiLieto wasn’t technically a victim of any crime with which Daly was charged, Judge Thompson allowed her to talk about the indignities she endured. Dressed in a black top and black skirt, and reading from a yellow pad of handwritten notes, she urged Judge Thompson not to be swayed by Daly’s pleas for leniency.

“This man has insulted and humiliated me deeply,” DiLieto said, emphasizing that Daly was operating in a fiduciary role, and that she had been at one of the lowest periods of her life. Now, of course, she is a multi-millionaire, in a far different position from most other people in bankruptcy court. She said she was shocked at how little supervision Daly received, and said the U.S. bankruptcy trustee system is fertile territory for abuse.

As for Daly, he told Judge Thompson he regretted the vitriolic relationship that developed between him and DiLieto: “I should have been more patient,” he said. Daly argued that all the suffering he had already endured in losing his good name and his law license was punishment enough and that he should not have to serve prison time. “I will not offend again, ” he said.

But Thompson was unflinching in handing down the 18-month sentence. It called for harsher than usual punishment, he said, because Daly was in a position of great trust and abused it. Many people are sick, but that doesn’t make them have to steal, Thompson said.

“We’re not talking about just one bad month or one bad year,” Thompson said, because the three embezzlements at issue covered an eight-year period. “This is not a situation in which a bankruptcy trustee is going to prison because of bookkeeping mistakes. He has seriously betrayed the trust of our legal system.”•