Title agents, lawyers disagree on trust interest Right to keep funds is center of battle

December 30, 1990|By David Conn | David Conn,Annapolis Bureau of The Sun

ANNAPOLIS -- A classic legislative and business turf battle is brewing between law firms and title companies. At stake is millions of dollars each year that title agents say is their rightfully earned fees and that lawyers say should go to charity.

If the lawyers win in the General Assembly, the millions of dollars probably will go to legal services for the poor. The state would take the money away from title agents, who say they are feeling the economic pressures of a weak real estate market and can't afford the loss.

Giving rise to the fight is a seldom seen byproduct of real estate settlements: interest on trust accounts, known as IOTA.

Because title companies and real estate attorneys handle money, if only briefly, as it passes from a buyer to a seller, they can earn small amounts of interest as the funds move through a bank account.

Even if the money stays in an account for only a day, some interest is earned. The amount may not mean much to any one client, but when a firm does thousands of commercial and residential settlements a year for deals worth billions of dollars, it can mean real money.

The interest, except when it reaches large amounts, seldom goes to the buyer or seller because it is almost impossible to track how much each client earned unless separate accounts are maintained. But lawyers for years have been barred by legal ethics and court-ordered practices from keeping the interest earned on client trust accounts, even when it totals less than $50. The idea was to remove any temptation a lawyer might have to delay the payment of money in a client's account.

Before this year, law firms either maintained non-interest bearing accounts, allowing the banks to keep the money, or donated it to the Maryland Legal Services Corp., which funds the Legal Aid Bureau and other legal programs for the poor.

In 1989, the General Assembly passed a law requiring lawyers to give up whatever banking perks they enjoyed by maintaining non-interest bearing accounts and to donate the interest from their clients' trust accounts to MLSC.

Robert Rhudy, executive director of MLSC, said the amount donated from IOLTA (interest on lawyer trust accounts) went from about $1 million in 1989 to about $4.9 million this year, the first full year the law was in effect.

But title agents are not bound by the law, or by legal ethics. Lawyers argue that title companies should be required to give up their trust account interest for two reasons: Title work is substantially legal work, they say, so title companies should be bound by the same ethical restrictions as lawyers, and if lawyers can't keep the interest money, title companies shouldn't enjoy an unfair economic advantage.

Most of the combatants, particularly the lawyers, are from Montgomery County. Until recently, the real estate settlement work there was dominated by lawyers. Now, title agents say, the Montgomery County lawyers simply are trying to defend their territory. The settlement of a lawsuit by the Montgomery and Prince George's county bar associations against Chicago Title Insurance Co. about a dozen years ago unofficially opened the region to competition from title companies.

Leading the offensive is Sen. Laurence Levitan, D-Montgomery and a partner with law firm Frank, Bernstein, Conaway & Goldman's Bethesda office. He said he will introduce a bill that would require title companies to donate their trust account interest to either legal services for the poor or low-income housing. The title industry worked the last two years to kill a similar measure from Mr. Levitan.

"Though we're not really against supporting these different programs, we feel that gimmick taxes to raise money for these programs are not good for the public," said Joseph Blume, vice president of Ticor Title Insurance Co. "Why should one business be asked to provide a source of revenue for the common good? We feel it should be across the board."

John Bowers, lobbyist for the Maryland Bankers Association, said his group has not been involved in the issue but opposes the idea of forcing the title companies to give up the interest. Mr. Levitan said Mr. Bowers actively fought his bill behind the scenes last year.

Sen. Clarence W. Blount, D-Baltimore, meanwhile, has sponsored bills that would require real estate agents to donate the interest they earn from holding home deposits to the Maryland Housing Resource Corp., which the legislature created 1985 to fund low-income housing projects.

Corporation chairman Alice G. Pinderhughes, a Baltimore attorney, said she has heard that such a law could raise $1 million to $2 million for low-income housing. She said Mr. Blount has indicated he will reintroduce the measure in 1991.)

Mr. Rhudy said he thinks a mandatory IOTA law would produce $5 million to $10 million a year from title companies. "There are a number of title companies currently participating in IOLTA" because they are owned by lawyers, Mr. Rhudy said.

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