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The Importance of IOLTA Programs: "Interest on Lawyer
Trust Account" (IOLTA) programs generated approximately
$162 million in 2001 to fund essential legal services for
the neediest of all Americans. IOLTA revenues provide about
15% of funding for all legal services to the poor and constitute
an essential funding source for hundreds of legal service
organizations nationwide that provide legal services to hundreds
of thousands of indigent clients and families. IOLTA funds
help these clients avoid unfair evictions, secure life-saving
medical treatment, restrain abusive spouses, and obtain essential
services and benefits. Without IOLTA funding, these clients
would be denied access to court and rendered unable to enforce
basic rights guaranteed by the Constitution and federal, state,
and local laws.
IOLTA programs enjoy overwhelming support from state political
and judicial bodies. All fifty states, the District of Columbia,
and the Virgin Islands now have IOLTA programs - by court
rules in forty-seven jurisdictions and by state legislation
in five.
How IOLTA Programs Work: Lawyers holding money for
clients are obligated to keep such funds safe, immediately
available, and separate from the lawyer's own accounts. Prior
to 1980, federal banking law prohibited banks from paying
interest on such readily accessible "demand accounts."
The result of this intersection of banking law and legal ethics
was that lawyers placed client funds into pooled bank accounts
that paid no interest. This resulted in a windfall to banks,
which were free to generate income from the trust funds with
no interest accruing to the clients. Indeed, prior to IOLTA,
clients were frequently charged significant fees by banks
for the privilege of letting their money sit at the bank without
generating interest.
In 1980, Congress authorized interest-bearing demand accounts,
Negotiable Order of Withdrawal (NOW) accounts, in certain
circumstances. After 1980, lawyers began investing client
trust funds in interest-bearing accounts and paying the interest
to these clients when it was economically feasible to do so.
In many instances, however, the costs of administering an
interest-bearing account exceeded the interest that could
be generated from the funds. In those cases, attorneys continued
to deposit the funds into a non-interest-bearing checking
account, and banks continued to draw windfall profits from
this arrangement.
IOLTA programs were designed to put this otherwise wasted
money to use in providing legal services to the indigent.
State IOLTA rules require lawyers to deposit client funds
in IOLTA accounts (which are a specialized type of NOW account)
when those funds are so small or held for so short a time
that they cannot generate net interest for clients due to
bank fees or other transaction costs. By pooling these funds
and avoiding the transaction costs, IOLTA programs generate
net interest used to fund legal services to those in need.
Procedural History: As part of a national litigation
campaign to eliminate IOLTA programs, the Washington Legal
Foundation (WLF) filed a complaint in federal district court
challenging the Washington program. WLF alleges among other
things that the program "takes" private property
(the interest) without just compensation in violation of the
Fifth Amendment's Just Compensation Clause.
On cross motions for summary judgment, the district court
held that clients had no cognizable claim to IOLTA interest
because their funds could not have generated such interest
in the first instance. While an appeal was pending in the
Ninth Circuit, the U.S. Supreme Court decided Phillips v.
Washington Legal Foundation, a Fifth Amendment challenge to
a Texas IOLTA rule. The Court held that interest earned on
IOLTA accounts is the property of the clients. But the Court
declined to consider whether the Texas IOLTA rule constituted
a taking or, if it did, what compensation, if any, would be
owed. Thereafter, the Ninth Circuit, sitting en banc, upheld
the Washington IOLTA program. The issues left open in Phillips
are now before the high court in WLF v. LFW.
Legal and Equitable Overview: The central legal and
equitable fact in this case is that IOLTA programs cause clients
no economic harm. By definition, absent the IOLTA program,
the principal held by lawyers would earn no net interest for
these clients. If WLF prevails in this case, it will transfer
$160 million annually from legal service providers not to
the clients WLF purports to represent, but to banking institutions
across the country.
Legally, this fact is dispositive. The Just Compensation
Clause does not prohibit takings of private property; it merely
conditions any taking on the payment of just compensation.
Where a taking causes no pecuniary harm, just compensation
for the taking is zero, and no violation of the Just Compensation
Clause occurs. Thus, even assuming that the IOLTA program
"takes" the client's property here (and it does
not), the IOLTA program does not violate the Just Compensation
Clause.
Equitably, this fact makes the claim litigated by WLF in
this case among the most cold-hearted and petty in the annals
of Supreme Court history. As one lower court judge commented,
WLF is acting here as the fabled "dog in the manger,"
spitefully trying to prevent IOLTA recipients from receiving
funds that will never accrue to their client's benefit.
WLF is plain in its political motivations of this suit. A
September 2002 fundraiser seeks donations to help it "deal
a death blow" to IOLTA. WLF calls it "an abomination
that IOLTA can take money that is rightly the property of
Americans like you and me and use that money to support programs
we oppose, that stand in direct opposition to everything we
believe in." This says it all: WLF doesn't want poor
people to get legal help. In the unlikely event that they
succeed in this suit, in far too many instances, they will
have their way.
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