NYC Bar Rips Hochul Plan To Divert Client Trust Interest Cash

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The New York City Bar Association urged Gov. Kathy Hochul Thursday to reconsider her "eleventh-hour" renewed plan to divert $55 million in interest earned on lawyer trust accounts that typically goes toward legal aid for low-income New Yorkers, saying the "deeply troubling" move undermines the independence of the legal profession.

Hochul's initial executive budget proposed diverting $100 million from New York's Interest on Lawyer Account Fund, or IOLA, to the state's general fund in fiscal year 2025, but she withdrew that plan shortly after hundreds of BigLaw attorneys, firm leaders and legal groups in February expressed outrage over the proposal.

But the plan was resurrected during the final hours of budget negotiations, according to the city bar, this time aiming to take $55 million from the IOLA fund for housing programs, with $40 million slated for the Homeowner Protection Program and $15 million for the Emergency Rental Assistance Program.

"The eleventh-hour re-emergence of this proposal is deeply troubling and sets a dangerous precedent — notwithstanding that the money apparently is being directed towards worthy and previously independently funded homeowner protection programs and emergency rental assistance for tenants," the bar said in a statement Thursday.

The IOLA fund's revenue comes from interest earned on attorneys' trust accounts, not from taxes, and the governor's proposal to appropriate millions of that money could lead lawyers to question whether to use IOLA accounts, according to the bar. That would create "an existential threat to a primary funding stream for civil legal services in New York," the bar said.

According to IOLA, its funds support 81 nonprofit legal organizations in every region of the state to serve low-income New Yorkers with civil legal issues affecting their food, shelter, jobs, access to health care and other basic needs.

Over the last year, IOLA noted that its grantees have closed more than 307,000 cases benefiting nearly 640,000 New Yorkers, and generated more than $3.5 billion of economic benefit to the state.

The state's IOLA program requires attorneys to maintain special-interest-bearing trust accounts for "qualified funds," or funds that an attorney determines to be too small or held for too short a time to generate net interest, according to the IOLA website. Those funds are kept together in an IOLA account, and the interest from the account goes to legal aid as well as improvements in the "administration of justice" in the state, according to the program's description.

"Stakeholders can freely and fairly debate whether the universe of IOLA grantees should be expanded or whether changes to the IOLA structure should be considered, but a last-minute sweep of funds to be diverted to a particular cause or causes outside the grant-making purview and integrity of the IOLA governance structure should raise alarm bells for the legal profession and policymakers alike," according to the bar.

NYC Bar President Susan J. Kohlmann expressed the bar's disappointment with the renewed plan to take $55 million from IOLA, saying in a statement Thursday, "This was done despite earlier collective and sustained opposition from the legal profession, which must now direct its efforts toward advocating for measures that will protect IOLA funds from this sort of sweep in the future."

A representative for Hochul's office did not immediately respond to a request for comment late Thursday.

When the initial plan was revealed, the managing partners, CEOs and chairs of Arnold & Porter, Blank Rome LLP, Cooley LLP, Mayer Brown LLP and Paul Weiss Rifkind Wharton & Garrison LLP were among the hundreds of lawyers and groups in February that urged Hochul to rethink the proposal.

"We are deeply concerned that this unprecedented diversion of funds would impose lasting harm on low-income New Yorkers by taking money from legal aid organizations, would severely undermine the stability of a critical source of financial support for legal services and would violate the statute that created IOLA," firm leaders wrote at the time.

In another letter, more than 250 practicing lawyers said the potential "unethical uncertainty that diversion of IOLA funds may occasion could lead members of our profession to question whether they should use IOLA accounts at all." That creates "an existential threat to a primary funding stream for civil legal services in New York," they said.

A slew of social service agencies, veterans groups, healthcare providers, concerned citizens and legal organizations — including Access to Justice Brooklyn, Community Service Society of New York and the City Bar Justice Center — also signed onto a separate letter criticizing the plan.

"Ethics opinions approving attorney use of IOLA accounts were expressly predicated on the IOLA fund enhancing civil legal services to low-income New Yorkers," they said. "Therefore, diversion of any IOLA interest to the general fund could jeopardize the legal profession's ethical basis for participating in the IOLA fund."

--Additional reporting by Hailey Konnath. Editing by Adam LoBelia.

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