Printer Friendly

Will IOLTA survive?

By any measure, funding for legal services for the poor is grossly inadequate. Conservative Republicans in Congress repeatedly have tried to eliminate all federal monies for legal aid. Although they have failed in this effort, due in large part to constant pressure for funding from the organized bar, they have succeeded in greatly limiting the amount spent.

Alternative sources of money have become imperative, and by far the most important supplement to federal funds is state Interest on Lawyers' Trust Account (IOLTA) programs. Nationally, it is estimated that IOLTAs provide more than $100 million annually for legal services.(1) The significance of this is evident from the fact that the entire budget for the federal Legal Services Corp. for the last fiscal year was just $270 million.

Attorneys are required to place client funds in trust accounts. Until 1980, federal law prevented checking accounts from paying interest. Congress then amended federal statutes to authorize interest-bearing checking accounts called NOW accounts (Negotiated Order of Withdrawal).(2) After the creation of NOW accounts, client trust accounts could generate interest. Sometimes, however, the amount of money is too small or it is in the account for too short a time to yield interest.

In 1981, Florida developed the idea of pooling client accounts that individually would not produce interest and using the resulting interest from the larger sum to fund legal services. The idea swept the country, and today IOLTA programs exist in 49 states and the District of Columbia. Only Indiana has not created a program.(3) Texas's law is typical. It provides that client funds that are "nominal" or "held for a short period of time" shall be placed in IOLTA accounts if the lawyer determines that the amount "could not reasonably be expected to earn interest for the client."(4)

Since their inception, there have been many constitutional challenges to IOLTA programs. Courts throughout the country rejected challenges based on the Takings Clause, the Due Process Clauses, and the Equal Protection Clause.(5)

In response to a challenge by the Washington Legal Foundation to Texas's IOLTA program, a federal district court upheld the program and concluded that neither lawyers nor clients have a property right in the interest generated by funds in IOLTA accounts.(6) The U.S. Court of Appeals for the Fifth Circuit reversed, concluding that the interest on a checking account belongs to the person owning the principal.(7)

The U.S. Supreme Court granted certiorari and affirmed the Fifth Circuit.(8) In a 5-4 decision, the Court concluded that the interest is private property for purposes of the Takings Clause. The Court remanded the case for consideration of the remaining constitutional issues, including whether IOLTA programs are a taking and, if so, what just compensation requires.

Some have speculated that the Court's ruling is the death knell for IOLTA programs.(9) Yet, a close reading of the opinion, especially in light of the law concerning the Takings Clause, reveals that this dire prediction is premature.

Chief Justice William Rehnquist wrote the opinion in Phillips v. Washington Legal Foundation for the majority and was joined by Justices Sandra Day O'Connor, Antonin Scalia, Anthony Kennedy, and Clarence Thomas. Rehnquist's opinion can be summarized as a simple syllogism. His major premise is that interest on an account follows the principal. He wrote, "The rule that `interest follows principal' has been established under English common law since at least the mid-1700s."(10) The Court stressed that under Texas law, it is clearly established that the owner of the principal is also the owner of the interest on it.(11) Furthermore, the Court noted that in a case involving interpleader accounts, Webb's Fabulous Pharmacies, Inc. v. Beckwith, it previously had ruled that interest follows principal for purposes of the Takings Clause.(12)

The minor premise of Rehnquist's syllogism was that the principal in IOLTA programs is private property belonging to clients. The Court, at the outset of its opinion, observed, "All agree that under Texas law the principal held in IOLTA trust accounts is the `private property' of the client."(13) Nothing in the law creating the IOLTA program changes the legal status of the principal.

The nature of deductive reasoning is that if the premises are accepted, the conclusion follows. Thus, the Court concluded, "In sum, we hold that the interest income generated by funds held in IOLTA accounts is the `private property' of the owner of the principal."(14) The Court emphasized that it was expressing "no view as to whether these funds have been `taken' by the state; nor do we express an opinion as to the amount of `just compensation,' if any, due respondents."(15) The case was remanded for consideration of those very questions.

Property interest

Contrary to speculation, Phillips need not be the death knell for IOLTA programs. First, states might change their law to make it clear that interest on checking accounts is not private property, belonging to the owner of the principal, at least in circumstances where the principal would not otherwise generate interest.

The Supreme Court long has held that the existence of a property interest is determined by state law. Indeed, in Phillips, Rehnquist declared: "Because the Constitution protects rather than creates property interests, the existence of a property interest is determined by reference to `existing rules or understandings that stem from an independent source such as state law.'"(16) In other words, whether interest is regarded as private property is determined by state, not federal, law.

Therefore, following Phillips, Texas and other states could revise their laws to make it clear that under state law, interest on client accounts should not be regarded as private property. States could make this a general rule about checking accounts, or they could provide that this applies only to client accounts that are too small or too temporary to generate interest. If state law determines that there is no property interest, then none exists, despite the Court's holding in Phillips. Without a property interest, the Takings Clause is inapplicable.

Second, even if interest on lawyer trust accounts is regarded as private property, that does not necessarily mean that IOLTA programs effect a taking. No interest would be generated without state laws creating IOLTA programs. It is the pooling of separate client accounts, as required by state law, that produces the interest. Because state laws are entirely responsible for generating the interest, it is highly questionable whether those same laws should be regarded as a taking.

In his dissenting opinion, Justice Stephen Breyer made exactly this argument in disputing the majority's conclusion that the interest is private property. Breyer wrote, "[T]he client's principal could not generate interest without IOLTA intervention. That is to say, the client could not have had an expectation of receiving interest without that intervention."(17)

Breyer's argument has even more force in the context of determining whether there is a taking. The state has created property that would not exist without the IOLTA program. It seems dubious to say that the same state law that creates the property also is taking it.

Third, and perhaps most important, there is a strong argument that no compensation is required, even if IOLTA programs are deemed to be takings of private property. It is firmly established that the measure of "just compensation" under the Takings Clause is the loss to the owner in terms of the reasonable market value of the property in the owner's hands.(18) The gain to the taker is irrelevant in evaluating the amount of just compensation owed.

For example, if the U.S. government takes a piece of property worth $50,000 but will gain $1 million of benefit from it, the government still only has to pay $50,000 in compensation.

What is the value of the interest in the owner's hands? Absent the state law, the interest is worth zero. Without the states' action in creating IOLTA programs, there would be no interest paid to the clients or their lawyers.

IOLTA programs take absolutely nothing from clients that they otherwise would have had. Only the most nominal compensation, if that, would be required by the Takings Clause. If this is ultimately the Court's conclusion, then IOLTA programs can continue unchanged even after Phillips.

Finally, even if the Court concludes that IOLTA programs violate the Takings Clause, there still might be ways of rescuing efforts to fund legal services. For example, lawyers could ask clients to sign voluntary agreements to place funds that otherwise would not generate interest in IOLTA accounts. With client consent, no longer could such programs be regarded as a taking.

What is most important in assessing Phillips is recognizing the narrow scope of the Supreme Court's decision and margin. The Court decided only one of several issues concerning the Takings Clause, and even that was resolved by a 5-4 margin. It is not at all clear how the Court ultimately will resolve the other issues. Thus, it is wrong to see Phillips as a death blow to IOLTA programs.


(1.) See Julie Delcour, High Court Ruling Could Cut Legal Aid for Poor, TULSA WORLD. July 5, 1998, at 1: Richard Samp, Symposium, INSIGHT ON THE NEWS, Feb. 16, 1998, at 25.

(2.) 12 U.S.C. [sections] 1832 (1994).

(3.) Phillips v. Washington Legal Found., 118 S. Ct. 1925, 1927 n.1 (1998).

(4.) TEX. ST. BAR R. art. XI, [sections] 5(A); Rules 4, 6, 7 of the Tex, Rules Governing the Operation of the Texas Equal Access to Justice Program; Phillips, 118 S. Ct. 1925, 1929.

(5.) See, e.g., Washington Legal Found. v. Massachusetts Bar Found., 993 F.2d 962 (1st Cir. 19931; Cone v. State Bar, 819 F.2d 1002 (11th Cir.), cert. denied, 484 U.S. 91711987); Carroll v. State Bar, 213 Cal. Rptr. 305 (Ct. App. 1985).

(6.) Washington Legal Found. v. Texas Equal Access to Justice Found., 873 F. Supp. 17 (W.D. Tex. 1995), aff'd in part, vacated in part, 94 F.3d 996 (5th Cir. 1996), aff'd, 118 S. Ct. 1925 (1998).

(7.) Washington Legal Found. v. Texas Equal Access to Justice Found., 94 F.3d 996, 1004 (5th Cir. 1996), aff'd, 118 S. Ct. 1925.

(8.) Phillips, 118 S. Ct. 1925.

(9.) See, e.g., Leigh Jones, Ruling Endangers Legal Aid, Law-Related Education Programs, J. REC. (Okla. City. Okla.), July 23, 1998.

(10.) Phillips, 118 S. Ct. 1925, 1930 (citations omitted).

(11.) Id. at 1931.

(12.) Id.; 449 U.S. 155, 162 (1980).

(13.) Phillips, 118 S. Ct. 1925, 1930.

(14.) Id. at 1934.

(15.) Id.

(16.) Id. at 1930 (quoting Board of Regents of State Colleges v. Roth, 408 U.S. 564, 577 (1972)).

(17.) Id. at 1938 (Breyer, J., dissenting).

(18.) See, e.g., Boston Chamber of Commerce v. Boston, 217 U.S. 189, 195 (1910).

Erwin Chemerinsky is Sydney M. Irmas Professor of Law and Political Science at the University of Southern California Law School in Los Angeles.
COPYRIGHT 1999 American Association for Justice
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1999, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
Printer friendly Cite/link Email Feedback
Author:Chemerinsky, Erwin
Article Type:Brief Article
Geographic Code:1USA
Date:Jan 1, 1999
Previous Article:The basics of direct and cross-examination of a fact witness.
Next Article:Our children's destiny.

Related Articles
Estate tax issues under the 1995 Protocol to the U.S.-Canada tax convention.
Behind the Scenes.
TURKEY - May 10 - Court Of Human Rights Hits Ankara.
Online research strategies for the bookish lawyer: lawyers with more legal than technical know-how can still use the many computer tools available to...
Southern Baptists: a Historical, Ecclesiological, and Theological Heritage of a Confessional People.
The Supreme Court's blockbuster term.

Terms of use | Copyright © 2018 Farlex, Inc. | Feedback | For webmasters