Did you know that every time you pay a lawyer a retainer fee, or a lawyer holds money in trust for you, such as when a lawyer does a real estate transaction, that any interest earned on that money–interest that rightfully belongs to you–is siphoned away and “donated” to a charity of the bar association’s choosing? 

The program is referred to by various names–in my state, it’s IOLTA (Interest on Lawyer’s  Trust Accounts).  The state bar associations of about two-thirds of the states have decided, and the US Supreme Court has agreed, that interest earned on lawyer’s trust accounts belongs neither to the lawyer to offset the cost of the account, nor to the lawyer’s clients whose money earned the interest.  Instead it belongs to the Bar. 

Well, as anyone that has read the “about” page on this blog is aware, until last year, I was a real estate attorney, mainly involved in conducting residential real estate transactions.   During busy months, my “trust” or escrow account would turn over several million dollars.  Until mid-2008, IOLTA was voluntary, requiring only a letter to the Bar explaining that you were “opting out”.  After then, there was no opt-out option; participation in IOLTA was  required.  Until 2008, I had applied any interest earned by my account to offset its fees and charges (mainly wire charges).  This benefited the actual owners of the money that had earned the interest, i.e., the owners of the interest, because it allowed me to charge less for my services since my costs were less.  Which I did.  Never in about 6,000 closings did I ever charge anyone a wire transfer fee (the main expense of the account). 

Many of my competitors were title companies, and as such, were not subject to the supervision of the Bar.  After I was forced to send all the interest earned on money in my account to the Bar (or, actually its charitable foundation), title companies were free to continue to use the interest to offset their costs. 

When I quit practicing law last year due to market conditions and my son’s relapsed leukemia, my trust account soon emptied out, as it should, and consequently there was no IOLTA money to send to the the non-profit designee of the Bar’s largesse.  The foundation did not like this one bit (even though about $40 is the most was ever sent–business had been lately very slow), and sent me a nasty letter effectively accusing me of closing my trust account and opening another one somewhere else without telling them.   They wanted to know where their money was.  This was my reply:

Did it occur to you that perhaps the reason you are no longer receiving interest payments from my trust account is not, as your letter insinuated, because I’m hiding my trust operations from the you and the Bar Association, but instead because I’m not holding anyone else’s money in trust anymore? I know it may seem that income streams from the interest earned on other people’s money held temporarily in my escrow account are a perpetuity to which you are eternally entitled, but that doesn’t work if I don’t work.

I shut down my law office when my son was diagnosed with relapsed leukemia in September of 2009 and was scheduled for his second bone marrow transplant. It took a few months (about January 2010) until I was sure that all outstanding checks had cleared and my fees were conclusively earned, that the account reached its zero balance–as trust accounts are supposed to do. According to my conversations with RBC, the account remains open, but inactive. In fact, I considered closing it several months ago, but they talked me out of it because there were no charges for keeping it open and not using it.

I regret how detrimentally my challenging personal situation has affected the Foundation. I understand that the organization relies on the productive efforts of lawyers like me to build its empire of redirecting money from unwitting clients of lawyers to causes it feels deserve support. Sadly, even were I ever to return (not likely) to the business of residential real estate transactions as I was engaged in before, I would do so as a title company, such that I wouldn’t have the frustration of facilitating the unethical IOLTA funding of an organization such as yours.

There are two reasons to hate IOLTA.  First is that, for a real estate attorney competing with title companies, it impedes, rather than enhances competitiveness.  The Bar apparently doesn’t understand that the purpose of trade guilds since their inception is to protect their member’s livelihoods and enhance their ability to compete.  The second is the slimy way it sneakily converts the earnings of others to its own use without any ethical foundation for doing so.  Just because something is legal hardly means it is necessarily ethical.   Neither does Supreme Court sanction save it.  The Supreme Court sanctioned “separate but equal” in Plessy v Ferguson at the turn of the last century, but that didn’t make the policy ethically defensible.

Like I said, it is doubtful I’ll ever return to residential real estate, or for that matter, practicing law at all.  But if I do return, I’ll leave the law license at home and do so in the more competitive stance of a title company.  The satisfaction of denying the money to the IOLTA whores might alone suffice to make it worthwhile.

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