By Fred Johnson and Susan Bassi
At the end of 2022, California attorneys held nearly $8 billion in their trust accounts. Interest earned on these accounts is paid into the bar’s Interest on Lawyers Trust Accounts (IOLTA) program, not to the clients whose deposits generate the interest income. Attorney trust accounts, which hold client funds, sends interest earned on the accounts to the bar where the funds are reportedly used for pro bono legal services. Critics claim the program acts as a Robinhood- like scheme, skimming interest income from wealthy clients, to pay lawyers to provide pro bono, free or deeply discounted legal services.
Recently, the state bar implemented the Client Trust Account Practices and Procedures (CTAPP) initiative, which requires attorneys to report their IOLTAs and non-IOLTA trust accounts. As compliance data becomes available, it becomes clear that a lack of oversight has left these accounts ripe for money laundering, tax evasion, theft and corruption, as was seen in the recent Thomas Girardi scandal.
In the state’s middle-class and high asset divorce cases, large retainers, and proceeds from the forced sale of a family home can send hundreds of thousands of dollars to a family law attorney’s trust account. Interest on those funds is then paid to the bar, not to spouses whose equity earned the interest. Further, the state bar’s pro bono programs are typically not available in family law cases where 80% of litigants are involuntarily self- represented.
Compliance and Reporting Data
Over 202,000 attorneys, including both active and inactive licensees, were required to comply with CTAPP by reporting their involvement with IOLTAs and completing a self-assessment. By the April 2023 deadline, nearly 190,000 attorneys had successfully complied with the requirements. Over 100,000 attorneys reported being responsible for at least one trust account, demonstrating the size and scope of client deposits in the state’s attorney trust accounts.
Data collected from banks and attorneys reveals that at year-end 2022, more than 48,000 IOLTAs held over $7.8 billion, representing an increase from $7.1 billion in 2021. These growing balances claim to be a significant boon for the organizations receiving funds through the State Bar’s Legal Services Trust Fund Commission, as the interest generated from these accounts directly supports legal aid initiatives. Monthly balances reached their highest point at over $14.5 billion, demonstrating a substantial increase from the previous year’s $12.3 billion.
However, for indigent clients seeking legal help related to housing, domestic violence, child custody, probate or civil harassment matters, pro bono services are often hard to find, leaving more questions as to how these interest payments collected by the bar are actually being used.
Underreporting and Potential Impact
Approximately 10,000 IOLTAs reported by banks were not reported by attorneys, suggesting potential underreporting. The State Bar believes that non-IOLTA trust accounts may also be subject to underreporting, based on the discrepancy between reported IOLTAs and those identified by banks.
In July, the State Bar took action against a small percentage of attorneys who failed to meet the CTAPP requirements. Approximately 2,000 attorneys, less than 1 percent, were placed on involuntary inactive status for noncompliance. Growing balances within IOLTAs, combined with historic failures of the bar to discipline attorneys misusing client funds, calls for continued oversight and public scrutiny.