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.
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."
To 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.
Wisconsin Lawyer