IOLTA – The Vanishing Free Lunch

           The February 2009 issue of the California State Bar Journal reports that in the declining economy, revenues of the state IOLTA fund have tanked, plunging from a high of $22.4 million in 1990 to a current $11.5 million, with a projected low of $3.0 million  by the end of 2009. What’s IOLTA, you ask? It’s a gimmick ginned up by the organized bar, intended to fund do-gooder litigation on behalf of the poor without having to pay for it. Neat, eh? Actually, not so neat. As we need not explain, money does not grow on trees – it has to come from somebody’s pocket. And if you are a lawyer, whose pocket can you pick most conveniently? Your clients’ of course. That way, you get the credit for organized do-gooderism, while your clients . . . Wait a minute! If you just do it that way, those clients would complain, wouldn’t they? So how do you solve that little problem?

          Enter the government with a legal scheme that makes three-card Monte look like a game of bridge, and makes it all possible, while giving the appearance of generating something from nothing, so the plucked clients can’t complain.

         In the olden days, if you put your money in a bank checking account, you got no interest on it. But more recently the law authorized the creation of what is called NOW accounts – we are not sure what that acronym stands for, except that it sure isn’t the National Organization of Women. But we digress. 

         Anyway, a NOW account is a checking account that pays interest. The gimmick is that under the regulations that govern such accounts, Joe Sixpack can open one but businesses can’t. And lawyers are in business, so their checking trust accounts in which they keep their clients’ money can’t earn interest as a matter of law. But mirable dictu, under IOLTA regulations they can, except that this interest goes to a bar-operated charitable outfit that uses it for do-gooder litigation. Bingo!

          Mind you, neither we nor any moral person we know of can properly complain when people – whether lawyers or their clients – decide to dip into their own pockets and voluntarily contribute a few shekels to so worthy a charitable activity.  But that is not what’s afoot here. For one thing, this activity is dependent on the lawyers dipping into their clients’ not their own money.

          In Phillips v. Washington Legal Foundation, 524 U.S. 156 (1998) the Supreme Court so held – interest generated by the principal belongs to whoever owns the principal, and that applies to IOLTA accounts.  Now what? Is that the end of the story? One would think that it is, that the interest, having been generated by the clients’ money, belongs to them. But if that’s what you think, you just don’t understand human creativity when it comes to getting one’s mitts on other people’s money. 

         In a later case confusingly named Washington Legal Foundation v. Legal Foundation of Washington, 538 U.S. 216 (2003), the Supreme Court dropped the other shoe and held that private property or not, where small individual amounts are involved, it is legal to have the banks pay the interest on lawyers’ trust accounts as if they were NOW accounts, but instead of paying it to its rightful owners, pay it to the bar’s organized charitable foundations for their do-gooder operations. Since the cost of calculating and processing the interest on small or very short-term deposits on an individual basis is so small, held the court, the cost of handling can exceed their total. Therefore their rightful owners (the clients) do not lose anything even though its diversion to the bar’s charitable organizations is indeed a taking. But this is a taking, said the court, that is for a public use, so it’s OK, and payment of just compensation is not required because the clients are owed no net payments and have not suffered any net loss because if sought to be paid to them, the interest would be consumed by the cost of the transaction.

           All that sounds straightforward, but since there is no such thing as a free lunch, something must be wrong with it. Yes? Yes, indeed. If IOLTA accounts produce a net cash flow in the millions to the bar’s do-gooder organizations – as they do – then obviously they would likewise produce such a cash flow to the clients whose money, after all, is the principal on which the interest is earned. And if the banks’ calculation and payment of the interest is OK when the money goes to the charitable organizations, why wouldn’t it be OK if it went to the clients or to charities of the clients’ choice? Are the individual amounts small? Maybe. But we see class-actions all the time in which the courts require payment of similarly small amounts to large numbers of wronged parties. It seems to us that using modern computer techniques that net cash flow can just as well be calculated and diverted in accordance with the clients’ not their lawyers’ wishes. So if the clients want to spend that money – their money — on funding a charitable activity of their choice, that would be fine. But in our book, making them contribute money for causes they may be individually opposed to, isn’t. 

         Finally, adding insult to injury, the IOLTA rule does not apply to large clients’ deposits. So if General Conglomerates, Inc. sends its lawyers a gazillion dollars to cover expenses in pending litigation, the lawyers are free to put it in a savings trust account, with the entire earned interest being credited to the client. But if Joe Sixpack advances his lawyer a couple of grand for expenses, the (admittedly small) interest on that goes to the bar’s charitable organizations, while the bar leaders preen in public about what great philanthropists they are.  What’s wrong with this picture? 

         Be all that as it may, it now appears that in the declining economy a dramatic shrinkage of IOLTA funds is afoot, and we will see in short order if leaders of the bar who gave us this system will dip into their own pockets to keep so worthy an activity of their creation  going on their own, not their clients’ nickel. Any bets? 

         Stay tuned.

One thought on “IOLTA – The Vanishing Free Lunch

  1. Hardy Parkerson, J.D.

    Interest earned on money
    belongs to the one or ones
    who own the money, not to
    third parties who skim it off
    the principal and use it as
    they see fit…even if for
    worthy causes. IOLTA is
    unethical and immoral. It
    is a legalized form of theft,
    and of all people who should
    not be stealing is the lawyers
    and/or courts that set up and/or
    run the IOLTA schemes. IOLTA
    MUST BE STOPPED!

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