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    Wisconsin Lawyer
    November 01, 1998

    Wisconsin Lawyer November 1998: What Does the Future Hold for IOLTA?

    Conference of Chief Justices Resolution

    What Does the Future Hold for IOLTA

    By Dianne Molvig

    It was hailed by some as a triumph for property rights, and by others as a threat to the legal rights of low-income Americans. But observers on both sides recognize that the recent U.S. Supreme Court decision, Phillips v. Washington Legal Foundation, commonly referred to as the Phillips decision, left critical questions unanswered as to the fate of IOLTA (Interest on Lawyers' Trust Accounts) programs across the country. Indeed, final answers may be years away.

    A final decision in Phillips v. Washington Legal Foundation may be years away. So, for the time being, it's business as usual for Interest on Lawyers Trust Accounts (IOLTA) programs nationwide. But what of the future? Will Wisconsin's program and other IOLTA programs survive or be disbanded? On what grounds? Who stands to win or lose should IOLTA ultimately be struck down in court?

    In the meantime, "with some very minor exceptions, it's business as usual throughout the 50 states and the District of Columbia," says Herbert Garten, a Baltimore attorney and chair of the American Bar Association's Commission on IOLTA.

    That means lawyers still are placing client trust funds into IOLTA accounts, and IOLTA programs continue to channel grant monies to agencies that provide civil legal services to low-income people. Only Missouri has parted company with other states by deciding to temporarily suspend issuing grants.

    Here in Wisconsin, the state's IOLTA program, managed by the Wisconsin Trust Account Foundation, or WisTAF, carries on. "One thing to remember is that this is a program dictated by the Wisconsin Supreme Court," points out Madison attorney Richard Olson, who spearheaded the effort to create the state's IOLTA program in 1985. "So by continuing to do what we're doing, we are obeying the supreme court rules on ethical conduct."

    So much for the present state of affairs in the immediate aftermath of Phillips. But what of the future of WisTAF and other IOLTA programs? Will they survive or be disbanded? On what grounds? Who stands to win or lose should IOLTA ultimately be struck down in court?

    How IOLTA came to be

    Years ago, whenever lawyers had to hold clients' small or short-term deposits, they placed those funds in noninterest-bearing accounts in banks. Money that had to be readily available for withdrawal couldn't be deposited into longer term accounts that earned interest. For smaller deposits, the attorneys' staff time and bankers' charges involved in opening an interest-bearing account added up to more than the account would earn. Thus, putting the money into an interest-bearing account was only possible or practical if the dollar amount or deposit period warranted such action.

    That all began to change after the federal government passed new federal banking laws in 1980 that led to the creation of NOW (negotiable order of withdrawal) accounts, which pay interest on demand deposits. Still, it wasn't always feasible for individual lawyers to use NOW accounts for clients' deposits because, again, the clients' expenses to set up such accounts often outweighed what they could earn in interest.

    But, some wondered, why not pool those small or short-term deposits into one interest-bearing account, and then target the earned interest to a good purpose - such as funding legal services for people who can't afford lawyers? "The money was sitting there not producing any interest for the clients anyway," Olson points out. "So it was a reasonable use of the money to aggregate it and give the interest to the IOLTA programs."

    In 1981 Florida launched the first IOLTA program in this country (Canada already had such programs). Wisconsin followed suit four years later, creating WisTAF to administer its IOLTA funds. Now such programs exist in every state and the District of Columbia.

    From the beginning of the Wisconsin program, "We had some people who didn't like the idea," Olson says. "They wanted to develop their own internal software so they could deal with the smaller amounts (of interest earned). We said, 'Fine. If you can do that, do it.' So there is a provision in our governing documents that leaves that up to the lawyer. We didn't deny anybody the opportunity to try to do a lot of fine-tuning and get smaller amounts to the client."

    Legal challenges also surfaced in Wisconsin over the years. At one point, a lower court ruling that IOLTA was an impermissible taking came before the Wisconsin Supreme Court, which overturned the decision. Similarly, several challenges to IOLTA have cropped up in courts in various district and appeals courts around the country. The opinion that has prevailed, however, is that no taking exists, because no one whose funds were pooled in IOLTA accounts would otherwise earn any interest from his or her money.

    A closer look at Phillips

    The case that ultimately became known as Phillips is the first IOLTA challenge to make its way to the U.S. Supreme Court. It began in 1994 in Texas, where the Washington Legal Foundation, which bills itself as "an effective advocate of free enterprise," based in Washington, D.C., brought suit against the Texas Equal Access to Justice Foundation, which administers the Texas IOLTA program.

    Crystal BallAttorneys for the Washington Legal Foundation argued that IOLTA funds were an impermissible taking under the Fifth Amendment and a violation of the First Amendment on the grounds that by having their funds deposited in IOLTA accounts clients were being forced to donate to groups they didn't personally support.

    The plaintiffs lost in district court and appealed to the U.S. Court of Appeals for the Fifth Circuit, where they won a reversal, on both the First and Fifth amendment issues. The Texas IOLTA program hence filed an appeal with the U.S. Supreme Court in Phillips v. Washington Legal Foundation (Thomas Phillips is the chief justice of the Texas Supreme Court; the justices were listed among the respondents in the district court suit).

    The U.S. Supreme Court chose to address only the Fifth Amendment portion of the case, for which the justices had to consider three questions to establish an impermissible taking. First, is interest on an IOLTA account the private property of the client? If so, is there a taking of that property for public use? And is just compensation due for the taking of the property?

    On June 15, 1998, the Supreme Court, in a five-to-four vote, ruled only on the first point, finding that interest on IOLTA funds is indeed clients' private property. Joining Chief Justice Rehnquist in the majority were justices O'Connor, Scalia, Kennedy, and Thomas. The Court remanded the second and third issues to the Fifth Circuit Court.

    Thus, while the Court didn't declare IOLTA unconstitutional, it left uncertainty hovering over the program's future. "They didn't address the real gut issues that are involved here," Olson notes. That point didn't miss Justice Souter, who along with dissenting justices Breyer, Ginsburg, and Stevens, wrote:

    "In addressing only the issue of the property interest, leaving the questions of taking and compensation for a later day in the litigation of respondents' action, the Court and the Court of Appeals have, however, postponed consideration of the most salient fact relied upon by petitioners in contesting respondent's Fifth Amendment claim."

    Souter argued that by failing to decide all three issues together, the Supreme Court's decision would place undue emphasis on the property rights question, which could turn out to be only a theoretical matter anyway, depending upon how the other two issues eventually are decided.

    Now what?

    It's anyone's guess what the final outcome will be - or which court will make the ultimate decision. The U.S. Supreme Court remanded the case to the Fifth Circuit Court, which in turn sent the case back to the district court. The case may work its way back up, perhaps even coming before the U.S. Supreme Court once again for a decision, which might be years down the road.

    If the court rules there is no improper taking, IOLTA programs will continue to function as they are. Even an adverse decision wouldn't necessarily mean all states' programs face extinction, according to Olson. "It wouldn't follow that all programs will be struck down," he says, "because there are differences (among states' programs). I expect the Wisconsin Supreme Court would take a look at how the federal decision would affect our specific program." That could result in modifications, such as obtaining client consent to put interest into IOLTA accounts, rather than elimination of the entire program.

    But if in the end all IOLTA programs have to be dismantled, "the losers will be the poor," Olson contends. "And guess who the winners will be? The banks." Olson notes that the interest on what are now IOLTA accounts won't amount to anything for the clients anyway. The result is that the banks won't have to pay anybody any interest on that money. "This is really a strategy that shifts revenues from the poor to the banking industry," Olson says. "Something is basically wrong here."

    In Wisconsin, one of the agencies that would lose is the Center Against Sexual and Domestic Abuse in Superior. The Center provides emergency shelter and other programs, one of which is legal services, for which it receives WisTAF funds. Last year the Center had to dip into reserves to keep operating its legal services program, notes executive director Lynn Andrews. "If WisTAF funds were not available, we'd have to close down our legal services program," she says. "We've been writing grants for years looking at all kinds of different funding sources. But there aren't a lot out there."

    Andrews views the center's legal services component, which serves four northwest Wisconsin counties, as vital. "That program is essential for our victims to be able to move on to a life that is safe from the abuser," she says. "If legal assistance weren't there, it would really create a barrier for folks."

    One of the other Wisconsin programs that would be seriously threatened by the demise of IOLTA is the Portage County Legal Aid Society in Stevens Point, which coordinates pro bono legal services. The agency is able to leverage its $2,150 annual budget into roughly $23,000 worth of legal services each year, says executive director Sue Sippel. "Probably 70 to 80 percent of our cases are family-law related," she says. "It benefits children particularly because (their parents) aren't arguing the matter out on their own."

    About half of the agency's annual budget comes from WisTAF. The key expense is malpractice insurance for those of its volunteer lawyers who aren't covered otherwise, such as attorneys who work in corporate or government offices. "We are a totally volunteer organization," Sippel says. "WisTAF helps us with those basic things we need to provide this pro bono service. Were it not for what we receive from WisTAF, we'd also need volunteers to raise funds. It would be very hard for us to squeeze in that kind of activity."

    While everyone awaits the results of upcoming court battles over Phillips, attention soon will shift to the Ninth Circuit Court of Appeals, where the Washington Legal Foundation is fighting the IOLTA program in Washington state, in Washington Legal Foundation v. Legal Foundation of Washington. Oral arguments may begin in late 1998 or early 1999. Whichever way the ruling comes down, appeals are almost sure to follow. In this case, as in the district and circuit court of appeals proceedings in Phillips, foes argue that the IOLTA program violates both the First and Fifth amendments of the U.S. Constitution.

    Point, counterpoint

    Why go after funds that pay for civil legal services for the poor? "I look at it another way," responds Richard Samp, chief counsel for the Washington Legal Foundation. "Why go after private property without compensation?"

    As Samp sees it, fighting IOLTA is about preserving property rights, not trying to eliminate funding for legal services for the poor. Such services, he points out, already are funded by federal and state governments. "Congress has provided about $285 million (per year) in recent years, and the states have provided another $100 million (total for all states, per year)," Samp points out. "Some would say there have been great cuts, but people who say that point to the high watermark years. In fact, funding has been relatively constant over the last 15 years."

    StemTo those who contend that government funding for legal services is inadequate, and that therefore the extra $100 million a year coming from all IOLTA programs is critical, Samp responds, "If you really need $100 million a year beyond what's being appropriated currently, then go to Congress and state legislatures to make your case."

    If such appeals meet defeat "then the public, speaking through their elected representatives, doesn't think there's a need for more funds," Samp argues. "If it's in the public interest to have more funds for legal services groups, then make your case, and you will get it. Don't use this subterfuge to raise additional funds beyond those you've been able to convince legislators to give you."

    John Ebbott, executive director of Milwaukee-based Legal Action of Wisconsin, says that if WisTAF funds vanish, his agency's staff would drop from 34 lawyers to 20. That would mean turning away about 5,000 more people a year who need legal services. Ebbott characterizes as "absurd" Samp's claim that legal services federal funding has been constant for some time. Not only did legal services groups take a 25 percent hit in the early 1980s, but in 1995 they suffered another 30 percent cut in federal funding, down to $283 million. "You also have to take inflation into account," he adds. "We've never maintained pace with inflation. If we had, we now should be receiving $15 per poor person, and we're at $7.70 per poor person."

    "Current total funding, including IOLTA, for civil legal services provides one attorney for every 15,000 poor people in Wisconsin," Ebbott says. "Count in pro bono work, and the ratio might drop to about 1 in 14,000. That compares to a ratio of 1 lawyer per 450 people in the general population," he notes.

    Ebbott also questions the true motives of IOLTA foes. "It's ironic," he says, "that when we were getting more money from the federal government, conservatives were saying we shouldn't be spending tax dollars for (legal services to the poor), and that there should be other sources of funding. Now the legal profession has found another funding source, and (IOLTA opponents) say we should use tax dollars. And that if the state and federal governments don't want to fund us, then that's the will of the people."

    "But the end of that argument is to hell with justice for poor people - that in this country we only care about justice for the rich. I'm not sure that's the will of the people, especially when you look at who owns legislators with our current campaign financing system."

    Further objections

    Another ground for opposition to IOLTA, according to the Washington Legal Foundation, is that it violates the First Amendment by forcing people to give money to causes they don't support. For instance, clients who are landlords might disapprove of having interest on their deposits being used to help tenants fight eviction notices.

    But there's a larger issue here, Samp points out. When people bemoan the possible loss of IOLTA, what they're concerned about is losing funds that "come with few strings attached," he says. Over the years, Congress and state legislatures have imposed more and more limits on how legal services agencies use their allocations. For instance, federal funds can't be used to represent illegal aliens fighting deportation or to challenge census results in cases attempting to block electoral redistricting. All told, Congress has imposed 15 to 20 restrictions on the use of legal services funds, according to Samp.

    "By and large, the IOLTA funds have far fewer restrictions on them," he says. "That's why IOLTA is looked upon as such a particularly important program by many legal activists. It's money that can be used to do the most controversial projects, such as class actions challenging government policies."

    Ebbott dismisses such statements as "the myth that's always been there," he says, "that we take this money, shop around for plaintiffs who agree with certain ideas, and then we bring lawsuits." Rather, he says, legal services agencies take on cases when an individual client is eligible and has a meritorious case. "This is funding the ability of poor people to have lawyers in court, whereas otherwise they'd have nothing," Ebbott says. "It's funding access to justice, not funding causes."

    Because IOLTA funds do have fewer restrictions, they can be used to help people in need who have nowhere else to go, points out Jennelle Joset, attorney for the Center Against Sexual and Domestic Abuse in Superior. "Yes, there are services for indigent people," she says. "In our area that's Judicare. But before Judicare will accept a divorce case, it requires current, documented proof of physical abuse," which, she adds, excludes many people involved in seriously abusive relationships.

    Joset says that even when a case is Judicare eligible, the client can't always find help. For example, a client who has a child custody matter may get referrals to private attorneys on Judicare's list, but fail to find any who are willing to take on what could become an extremely involved, time-consuming case. Lawyers often feel they can't afford to take on such cases at Judicare's pay rate.

    Clients who fall through those sorts of cracks, who can't begin to pay for an attorney on their own, end up in court unrepresented, Joset says, often facing an abusive spouse who does have legal representation. "So the system these clients are coming to, saying, 'I need help out of this relationship; I can't live like this any more,' only victimizes them further," Joset says. "It's easy for people who are not in that situation to say, 'Well, services are available.'" She adds that anyone who contends that IOLTA funds finance political agendas, rather than helping people in real need, "needs to walk a day in our clients' shoes."

    Bar responses

    As the legal community awaits final word on Phillips, the State Bar of Wisconsin and the WisTAF board of directors are taking a proactive stance. A study committee has been formed - comprised of members from the Taxation Section; Real Property, Probate and Trust Law Section; Legal Assistance Committee; Professional Ethics Committee; and other State Bar sections, committees, and divisions.

    Together, the State Bar and WisTAF "will look at what we might do if in fact there is a ruling that threatens to put IOLTA out of business," says Mary Lynne Donohue, a Sheboygan attorney and president of the WisTAF board. "We'll also be thinking about positive opportunities we can take from this, as opposed to just lamenting the fact that we think (Phillips) is a bad decision."

    As one example, this is a prime time for education about IOLTA, Donohue says. "It's an opportunity to remind lawyers what IOLTA accounts are for: to hold nominal amounts of clients' money for short-term purposes. We all need to be reminded of that from time to time."

    To preserve IOLTA as a source of legal services funding, "We will do what we need to do when we need to do it," says State Bar President Susan Steingass. But, for now, "We're in a study and assessment period," she adds, "and in the meantime, it's business as usual."

    Dianne Molvig operates Access Information Service, a Madison research, writing, and editing service. She is a frequent contributor to area publications.


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