IOLTA: "AND JUSTICE FOR ALL"
by JoLynn Caroline, ATG Law Clerk

What is IOLTA?

Interest on Lawyer Trust Accounts (IOLTA: http://www.legalfoundation.org/iolta/htm) originated in the 1960s in Australia and Canada to fund legal aid agencies, law libraries, scholarships for law students, and projects to improve the administration of justice. Lawyers and law firms establish pooled, interest-bearing accounts for nominal or short-term client deposits (see http://www.maiolta.org; http://www.ltf.org/history.htm). Each IOLTA deposit earns only a small amount of interest; however, the pooled IOLTA accounts accumulate enough interest to make a significant financial contribution toward improving the administration of justice, providing civil legal services to individuals who cannot afford to hire a lawyer, and law-related education (see http://www.abanet.org/legalservices/ioltback.html). Because bank fees are paid from the interest earned on the pooled IOLTA accounts, there is no cost to the clients or taxpayers.

The first IOLTA program in the United States began in Florida in 1978. Id. By 1995, all 50 states and the District of Columbia had IOLTA programs. Prior to 1978, nominal or short-term client funds were held in non-interest bearing checking accounts (see http://www.abanet.org/legalervices/ioltaback.html). Lawyers regularly combined these funds into one account because it was too expensive to open and maintain a separate account for each client. The interest that could have been gained on these accounts benefited only the banks, not the lawyer or the client. Id. Due to changes in banking laws and permission granted by federal regulators, banks may now remit interest on these pooled accounts to a not-for-profit organization like the IOLTA program.

Where Does the Interest Go?

Generally, each state has a board established by the state bar association or by appointment by the state's highest court. In Illinois, the Illinois State Bar Association (ISBA) and the Chicago Bar Association (CBA) incorporated the Lawyers Trust Fund of Illinois, the beneficiary and administrator of Illinois' IOLTA program (see http://www.ltf.org/history.htm). In Wisconsin, the Wisconsin Trust Account Foundation (WisTAF) manages the IOLTA program (see http://www.wisbar.org/newscenter/gennews/iolta615.html). WisTAF consists of three judges appointed by the Supreme Court, nine lawyers, and three non-lawyers appointed by the president of the State Bar of Wisconsin. Id. The board is responsible for setting policy for the corporation and granting funds to agencies providing direct civil legal services to the poor. In some areas of Indiana, local bar associations have established programs (see http://www.state.in.us/isba/iolta/ioltaintro.html). The Indiana Pro Bono Commission is a separate pro bono commission appointed by the Supreme Court and the Indiana Bar Foundation that coordinates the efforts of state pro bono programs (see http://www.state.in.us/judiciary/probono/index.html).

Creation and Types of IOLTA Programs

IOLTA programs are created by order of a jurisdiction's highest court or by state statute (see http://www.abanet.org/legalservices/ioltus.html). State supreme courts created the IOLTA programs in Illinois, Indiana, and Wisconsin. States where IOLTA programs were created by statute include California, Connecticut, Maryland, New York, and Ohio. There are three types of IOLTA programs:

A comprehensive program requires participation from all lawyers in the jurisdiction who maintain client trust accounts. However, state legislatures and courts can provide exemptions to the IOLTA program. (Massachusetts exempts lawyers who do not hold clients' funds, including lawyers who are government employees or employed in a non-legal field. See http://www.maiolta.org. Illinois and Wisconsin have comprehensive forms of IOLTA. Id.

An opt-out program allows lawyers to choose not to participate in the IOLTA program. If lawyers do not affirmatively exercise the opt-out, they are automatically required to participate. Indiana has an opt-out form of IOLTA. Id.

A voluntary program requires lawyers to make an affirmative decision to participate in IOLTA. Id. Only three states have this form of IOLTA.

Objectives of IOLTA

Clinton Lyons, the executive director of the National Legal Aid & Defender Association, reports that "[t]he poor in America have enormous unmet legal needs" (see http://www.nlada.org/n-iolta98.htm). On average, IOLTA programs provide approximately $100 million a year to legal assistance programs. Id. IOLTA is the second largest financial resource that secures equal access to justice for low-income families and individuals. Id. Furthermore, the monies generated from IOLTA accounts support programs pro bono legal services, improvements in the administration of justice, and funding for law-related education (see http://www.nlada.org/iolta/faq.htm). Nationally, IOLTA generated more than $139 million in 1999 (see http://www.abanet.org/legalservices/ioltback.html).

Is IOLTA Constitutional?

Despite IOLTA's noble objectives, some lawyers and clients have raised legitimate concerns and criticisms. Critics of IOLTA complain it is unfair, raising the following concerns: (1) clients do not have control over whether their funds are placed in IOLTA accounts or not (lawyers are not required to give clients notice of their enrollment in the IOLTA program: http://www.maiolta.org); (2) IOLTA programs do not allow clients to decide who the interest goes to; (3) the use of client money to generate interest involves a taking prohibited by the Fifth Amendment; and (4) clients' First Amendment rights are violated when their funds finance activities that they do not support. Washington Legal Foundation, et al v Massachusetts Bar Foundation, et al, 993 F 2d 962 (1993); Washington Legal Foundation, et al v Texas Equal Access to Justice Foundation, et al, 873 F Supp 1 (W D Tex 1995); Washington Legal Foundation, et al v Legal Foundation of Washington, et al, (W D Wash 1998).

In 1994, the Washington Legal Foundation, a lawyer, and a client filed suit against Texas' IOLTA program, the Texas Equal Access to Justice Foundation (TEAJF), alleging that it made grants in violation of the plaintiffs' rights under the First and Fifth Amendments. Washington Legal Foundation, et al v Texas Equal Access to Justice Foundation, et al, 873 F Supp 1 (W D Tex 1995).

First, TEAJF required lawyers to place client funds in pooled state bar IOLTA account if funds met certain requirements. The funds must have been a small amount or been placed in the account for such a short period of time that the client would have no reasonable expectation of property interest in interest on the funds. Plaintiffs filed suit claiming that TEAJF compelled speech and involuntary association in violation of the clients' First Amendment rights.

Second, the plaintiffs claimed that using the interest generated by the client accounts is a taking in violation of the Fifth Amendment. Plaintiffs sought a declaratory judgment finding the IOLTA program unconstitutional, injunctive relief prohibiting mandatory participation in the IOLTA Program, a return of the full amount of interest earned on plaintiffs' money placed in IOLTA trust accounts, and an award of costs and attorneys' fees.

The U.S. District Court for the Western District of Texas, Austin Division, dismissed the plaintiffs' complaint. Id. The court concluded that the interest proceeds would never have been generated but for the IOLTA program. Therefore, the clients did not have a legitimate claim of entitlement to this interest. Since the clients did not have rights to the interest, the IOLTA program did not unconstitutionally burden clients' First Amendment rights concerning the interest, absent any actual compelled association or other link between clients and the recipient organizations.

In addition, the court awarded summary judgment to the defendants, finding that TEAJF is entitled to Eleventh Amendment immunity against all of the plaintiffs' claims since it was created by the Texas Supreme Court, and the Texas Supreme Court was immune under the Eleventh Amendment.

On appeal, the Fifth Circuit Court of Appeals ruled that, under Texas law, clients have a property interest in the funds generated from IOLTA accounts. Washington Legal Foundation, et al v Texas Equal Access to Justice Foundation, et al, 94 F 3d 996 (5th Cir 1996). The Fifth Circuit vacated the district court's award of summary judgment to the defendants and its denial of summary judgment to the plaintiffs. It also remanded the case for reconsideration. First, the court found that for purposes of the plaintiffs' Fifth Amendment takings claim, Texas' traditional rule that interest follows principal applied to client funds placed by attorneys in accounts under Texas' IOLTA program, and any interest generated belonged to clients as owners of the principal (unless they agreed to do otherwise). Second, the court agreed with the district court that the defendants were entitled to Eleventh Amendment immunity to the extent that the plaintiffs sought reimbursement.

In 1998, the U.S. Supreme Court affirmed the Fifth Circuit's ruling in a 5-4 decision. Phillips v Washington Legal Foundation, 524 US 156 (1998). The Court held that clients had a property interest in the interest generated from IOLTA funds (at least under Texas law). It remanded the case back to the Fifth Circuit to determine if these client funds had been "taken" by the state and required just compensation. This ruling does not affect the IOLTA programs in other states. The Court ruled that under Texas law, clients have a property interest in the interest generated from IOLTA accounts. The Court did not rule on the constitutionality of Texas' IOLTA program or IOLTA programs in general.

There was a strong dissent in this 5-4 decision. The dissent argued that the most Texas law could have taken from a client is the right to prevent his or her principal from being put to the productive use of others. Unlike the majority, the dissent found that the client's principal would earn nothing in the absence of the IOLTA program. Thus requiring compensation for the value created by government would create "private claims in a public domain." Since the government created the interest earned, then the interest earned is not the client's private property.

On remand, the district court dismissed with prejudice all constitutional claims against Texas' IOLTA program. Washington Legal Foundation, et al v Texas Equal Access to Justice Foundation, et al, 86 F Supp 2d 624 (W D Tex 2000). The Supreme Court has acknowledged two counterparts to the First Amendment's guarantee of free speech: the right not to speak and the right not to be compelled to subsidize others' speech. The plaintiffs argued that the IOLTA program violated their First Amendment rights by compelling them to financially support programs that they find repugnant. The Court noted that the government did not violate the First Amendment when it forced an individual to subsidize speech but "[r]ather, the First Amendment prohibits the government from forcing an individual to contribute to the ideological expression of other private citizens for the purpose of advancing those citizens' ideological biases rather than substantial public interests." Washington Legal Foundation, 86 F Supp 2d 624 (quoting Hays County Guardian v Supple, 969 F 2d 111, 123 (5th Cir 1992)).

The Court found that the IOLTA program's objectives of helping ensure equal access to the justice system for low-income citizens was not a controversial idea and therefore did not qualify as a political or ideological activity. TEAJF was established for funding legal services for the poor. Its activities were germane to a government interest and not an "ideological expression of other private citizens." Thus, the Court dismissed the plaintiffs' First Amendment claim.

Next, the Court looked at the plaintiffs' Fifth Amendment claim. The Court ruled that if the IOLTA program constituted a taking then just compensation should be based upon what the plaintiffs lost and not on what TEAJF gained. Since TEAJF is a government action, the Court looked at three factors set forth by the Supreme Court in Penn Central Transportation Co.: (1) the economic impact of the regulation; (2) the extent of interference with "distinct investment backed expectations"; and (3) the nature of the governmental action. Penn Central Transportation Co v City of New York, 438 US 104 (1978). Since client funds would be unable to generate net interest absent an IOLTA program like TEAJF, the Court found that the economic impact of such regulation on the plaintiffs was non-existent. Second, in the absence of IOLTA, the client funds could only generate interest for the banks. Therefore, the plaintiffs could not have a legitimate investment-backed expectation of interest because funds placed in IOLTA accounts cannot earn net interest.

Finally, the Court concluded that TEAJF was not in any way unfair to the plaintiffs. "It cannot be said that the Takings Clause is violated whenever legislation requires one person to use his or her assets for the benefit of another." Connolly v Pension Benefit Guar Corp, 475 US 211, 223, (1986). Since the IOLTA program was fair and was the source of the interest used to support its programs, the Court ruled that the plaintiffs' Fifth Amendment claims failed.

The case is currently pending on appeal from the district court's ruling issued on January 28, 2000. Washington Legal Foundation, et al v Texas Equal Access to Justice Foundation, et al, No. 00-50139 (5th Cir appeal filed February 22, 2000).

Conclusion

Currently, every state has an IOLTA program; however, not all programs are thriving. Illinois' IOLTA income declined dramatically in the 1990s (see http://www.ltf.org/legalaid.htm). Low interest rates and substantial bank service charges and handling fees have significantly reduced the amount of IOLTA income available for charitable contributions (see http://www.ltf.org/IOLTAincome.htm). In addition, nationwide cuts in funding from the Federal Legal Services Corporation and the United Way have reduced the financial resources available to low-income families and individuals requiring legal assistance (Id.; see http://www.nlada.org/n-iolta98.htm).

The future of IOLTA is uncertain. Lower courts disagree on the fairness and constitutionality of the IOLTA programs in their states. In his dissent to amending the rules of professional conduct to include an IOLTA program, Justice Heiple of the Illinois Supreme Court stated that:

[n]ot only the Decalogue, but the Illinois Constitution as well, prohibit the taking of private property for public use without just compensation. The IOLTA program is a clear violation of this provision. In plain language, this means that this court [Illinois Supreme Court] has no constitutional authority to take the interest earned on clients' funds and then distribute those funds to other persons, no matter how commendable may be the good works of those persons. If a lawyer were to take these monies and convert them to his own use, he would subject himself to disciplinary action and possible disbarment. That notwithstanding, our supreme court rule mandates the taking of those monies for distribution to others.

Rule 1.15, Code of Professional Conduct, Illinois Supreme Court Rules of Professional Conduct, Article VIII (emphasis added).

The U.S. legal system will eventually have to decide if IOLTA programs are constitutional. If IOLTA is unconstitutional, then replacement programs will have to be implemented to ensure that low-income families and individuals have equal and adequate access to justice.

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