“IOLTA”:  Interest on Lawyer’s Trust Accounts

Some background:  Before 1980, interest could not be earned by a checking account, at which time Congress amended the law to allow it in a specific type of account called a NOW account.  Florida was the first state to take advantage of the ability of checking accounts to earn interest, establishing its IOLTA program in 1981.   Every other state in the Nation has followed suit, but only 35 have made its use mandatory. 

Checking accounts can now earn interest like investment accounts (i.e., money market accounts, etc.), but even when interest is not actually paid, they can be put on “analysis” by the banking institution, such that aggregate interest earned on the account’s average daily balance be used to offset account charges.  It is the interest generated by this “analysis” that the bar associations seek.

In Brown v. Legal Foundation of Washington, (2003), the US Supreme Court upheld the constitutionality of IOLTA programs, denying claims that the sweep of interest earned by clients represents an unlawful taking of private property without just compensation, basing their reasoning on the Washington statute that barred lawyers from depositing into IOLTA accounts any moneys that might independently generate interest.  Since the money deposited in the accounts couldn’t have otherwise earned interest, the claimants have no claim for damages.  Nothing has been unjustly taken from them.   It is apparently assumed that the interest being sent via the IOLTA program to the bar’s foundation simply arises from thin air. 

The flawed assumption in the Court’s opinion is that there is some money that doesn’t earn interest, except when pooled with other moneys.  It’s as if  zero plus zero plus zero equals three.  The Court’s reasoning perfectly illustrates why Oliver Wendell Holmes observed about a century earlier that “logic is not the life of the law.”  Money either earns interest or it doesn’t.  If it does, the interest belongs to the owner of the money.   Just because exactly whose money earned what interest is not readily discernible, does not mean the owner of the money should necessarily lose the benefit of the interest earned.  But that’s what the Supreme Court decided. 

The real question, and it has nothing to do with logic, but everything to do with whether or not the legal foundations of bar associations get to skim the pennies off the transactions of lawyers, is who the money that is generated by this money that doesn’t generate money belong to?   The bar emphatically denies that it belongs to the lawyer.  Fair enough.  That doesn’t mean it belongs to the bar, or to the bar’s charitable foundation, except that the Supreme Court now says it does.  But the Supreme Court also says there’s a right to abortion in the penumbra of the First Amendment, yet there’s no penumbras nor abortion mentioned anywhere in the document upon which the idea is based.  The Supreme Court can say whatever it damn well pleases, so long as it is politically palatable, never mind whether it’s ethical, moral or even legal.  The Supreme Court decided it was politically desirable to give these pennies per client to the charitable foundations  of the state bar, which isn’t hard to understand.  Concentrated political interests (state bar foundations) always trump diffuse political interests (pennies of interest per client).    Supreme Court rulings are exercises in rationalizing legal and ethical reasons for the politically expedient.   Just because the jurists are brilliant at it, doesn’t make it any more palatable.

Before IOLTA, I had my account under analysis, and never charged any account fees to the buyers or sellers in the real estate transactions I conducted.  Each transaction usually cost at least $20 in wire transfer fees, but I never charged a wire transfer fee at closing, figuring that some minor part of the fee was offset by the contribution to aggregate analysis provided by that transaction.  If the state bar wanted to do so, it could probably sanction me for what I figured was a reasonable solution to the problem of not taking advantage of money that wasn’t mine, but instead using it to offset charges the owners of the money would have otherwise owed.  It was not perfect–some clients surely were jilted out of some interest their money earned while others reaped a bit of reward for not being charged a wire transfer fee, but it was well again more perfect than giving the money to a non-party to the transaction.   When my bar association began requiring IOLTA in 2008, sweeping the analysis interest to its foundation, wire transfer fees had either to be eaten completely by me, or I had to charge the clients.  How is that more fair than the imperfect system I had previously set up?

And here’s another thing:  The whole IOLTA schematic depends on the inability of technology to capture the true owner of interest.  Interest is earned on money every single moment.  IOLTA effectively depends upon the money that earned the interest being unidentifiable.  Isn’t that a shaky premise in this technological day and age, when, for example, I can retrieve Supreme Court cases on an iPhone?    It’s only a matter of time until escrow software will allow the identification of interest earned on every deposit just by noting when the checks clear for each transaction.  Whither then the bar foundations?

The state bar would probably say I had used the client’s money for my own gain.  Which would be a bad thing for me to do.  But it is nigh well a gracious and beautiful thing if they take that same money and give it to a charity of their choosing.  The bar requires lawyers to be so astutely ethical with money entrusted to them–creating for the purpose an arcane and Byzantine code of ethics to be followed–that each practicing lawyer probably violates a half-dozen ethics laws by lunchtime each day.  Thankfully, with IOLTA, there’s no need for lawyers to navigate the tricky shoals of ethics so far as these few pennies per client are concerned.  Just send everything to the bar and voila–anything that happens to it is inherently ethical, because it’s the bar, see?

And the funny thing is, while the bar worries about pennies per lawyer client, it virtually never proactively prevents any lawyer from outright theft of client funds.  I know of three real estate lawyers in my local area that have stolen (although the bar doesn’t call it stealing–they call it “defalcation” defined as “misuse of funds; embezzlement” , but sounds like just what the lawyers did to their clients–shit all over them),  in excess of $2 million all told.  (One wonders if they got disbarred for stealing or for denying the bar foundation a portion of its IOLTA money). 

In the Brown v. Legal Foundation case, it’s interesting to note that the plaintiffs had been forced to use “Limited Practice Officers” or LPO’s to hold their money in escrow.  Washington apparently saw the legal loophole represented by title companies, and moved quickly to close it, so at least in Washington, lawyers subject to IOLTA don’t have to compete with title companies that aren’t.

Which brings up another point.  Far and away the biggest contributors to an IOLTA program have got to be real estate attorneys.  Their practices define the “nominal amounts held for a short period of time” as the law requires.   Perhaps that’s why the foundation was so concerned when it stopped getting deposits from my IOLTA account.  They had to know I was practicing real estate law, i.e., doing closings.

But, that’s thankfully over, and so is my legal career, such as it was.  I never really practiced law anyway.  I just ran a closing factory.  Maybe I’ll go find work in a real factory, this time preferably one that creates items of real, intrinsic value, and not just empty promises agreed upon at a real estate closing table.  And maybe if I do, there won’t be some quasi-government agency requiring me to make a deposit each time I sweep the detritus of creation off the factory floor.  But I won’t count on it.

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