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.

Attorneys 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.

Next Page