Vol. 71, No. 11, November 1998
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.
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